UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-K





(Mark
One)


x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the Fiscal Year Ended December 31, 2009o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the transition period from ____________ to ____________





Commission
File Number 0-28104




JAKKS
PACIFIC, INC.


(Exact
name of registrant as specified in its charter)





Delaware
            95-4527222(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      or organization)
            Identification
      No.)





22619
      Pacific Coast HighwayMalibu,
      California
            90265(Address
      of principal executive offices)
            (Zip
      Code)





Registrant’s
telephone number, including area code: (310) 456-7799





Securities
registered pursuant to Section 12(b) of the Exchange Act:





Title
      of each class
              Name
      of each exchange
                on
      which registeredCommon
      Stock, $.001 par value per share
              Nasdaq
      Global Select





Securities
registered pursuant to Section 12(g) of the Exchange Act:





Title of
Class





Common
Stock, $.001 par value per share





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈ No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15 of the Act.  Yes  ̈ No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes  ̈No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.     ̈





Indicate
by a check mark whether the registrant is a large accelerated filer, an
accelerated filer,  a non-accelerated filer or a smaller reporting
company. See the definition of “large accelerated filer,”  “large
accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (check one):




 ̈    Large Accelerated Filer
            x    Accelerated Filer
             ̈    Non-Accelerated Filer
             ̈    Smaller Reporting Company(Do not check if a smaller Reporting Company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈ No x





The
aggregate market value of the voting and non-voting common equity (the only such
common equity being Common Stock, $.001 par value per share) held by
non-affiliates of the registrant (computed by reference to the closing sale
price of the Common Stock on March 15, 2010 of $12.97)
is $355,780,926.





The
number of shares outstanding of the registrant’s Common Stock, $.001 par value
(being the only class of its common stock), is 27,900,319(as of March 15, 2010).




Documents
Incorporated by Reference





None.









JAKKS
PACIFIC, INC.





INDEX
TO ANNUAL REPORT ON FORM 10-K





For
the Fiscal Year ended December 31, 2009





Items
in Form 10-K





PagePART
      IItem
      1.
                  Business
                  2Item
      1A.
                  Risk
      Factors
                  11Item
      1B.
                  Unresolved
      Staff Comments
                  NoneItem
      2.
                  Properties
                  16Item
      3.
                  Legal
      Proceedings
                  17Item
      4.
                  ReservedPART
      IIItem
      5.
                  Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                  19Item
      6.
                  Selected
      Financial Data
                  22Item
      7.
                  Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  24Item
      7A.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  35Item
      8.
                  Financial
      Statements and Supplementary Data
                  37Item
      9.
                  Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                  NoneItem
      9A.
                  Controls
      and Procedures
                  67Item
      9B.
                  Other
      Information
                  NonePART
      IIIItem
      10.
                  Directors,
      Executive Officers and Corporate Governance
                  69Item
      11.
                  Executive
      Compensation
                  71Item
      12.
                  Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                  82Item
      13.
                  Certain
      Relationships and Related Transactions, and Director
      Independence
                  84Item
      14.
                  Principal
      Accountant Fees and Services
                  84PART
      IVItem 15.
                  Exhibits
      and Financial Statement Schedules
                  86Signatures
                  
                  88Certifications





DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS





This
report includes “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. For example, statements included in this report regarding our financial
position, business strategy and other plans and objectives for future
operations, and assumptions and predictions about future product demand, supply,
manufacturing, costs, marketing and pricing factors are all forward-looking
statements. When we use words like “intend,” “anticipate,” “believe,”
“estimate,” “plan” or “expect,” we are making forward-looking statements. We
believe that the assumptions and expectations reflected in such forward-looking
statements are reasonable, based on information available to us on the date
hereof, but we cannot assure you that these assumptions and expectations will
prove to have been correct or that we will take any action that we may presently
be planning. We have disclosed certain important factors that could cause our
actual results to differ materially from our current expectations elsewhere in
this report. You should understand that forward-looking statements made in this
report are necessarily qualified by these factors. We are not undertaking to
publicly update or revise any forward-looking statement if we obtain new
information or upon the occurrence of future events or otherwise.




1




PART
I





Item 1. Business





In this
report, “JAKKS,” the “Company,” “we,” “us” and “our” refer to JAKKS Pacific,
Inc. and its subsidiaries.





Company
Overview





We are a
leading multi-line, multi-brand toy company that designs, produces, markets and
distributes toys and related products, writing instruments and related products,
pet toys, consumables and related products, electronics and related products,
kids indoor and outdoor furniture, and other consumer products. We focus our
business on acquiring or licensing well-recognized trademarks and brand names,
most with long product histories (“evergreen brands”). We seek to acquire these
evergreen brands because we believe they are less subject to market fads or
trends. We also develop proprietary products marketed under our own trademarks
and brand names, and have historically acquired complementary businesses to
further grow our portfolio.  Our products include:





Traditional
Toys





•
            Action
      figures and accessories, including licensed characters, principally based
      on Ultimate Fighting Champion (“UFC), Pokemon® and until
      December 31, 2009 World
      Wrestling Entertainment® (“WWE”)
  franchises;




•
            Toy
      vehicles, including Road
      Champs®, NASCAR®  and MXS®  toy
      vehicles and accessories;





•
            Electronics
      products, including Plug
      It In & Play TV GamesTM, EyeClopsTM Bionic Eye
      products, and Laser
      Challenge®, as well as others based on Disney® and Discovery Kids®
      brands;





•
            Role-play,
      dress-up, pretend play and novelty products for boys and girls based on
      well known brands and entertainment properties such as Black & Decker®,
      McDonalds®, Dirt Devil®, Subway®, Pizza Hut® Disney Princess®,
      Disney Fairies®, Hannah
      MontanaTM, Barbie® and Dora the Explorer®, as
      well as those based on our own proprietary
  brands;





•
            Dolls
      and accessories, plush, infant and pre-school toys based on our Child
      Guidance®, TollyTots brands, as well as licenses, including Barney®, The Wiggles®, Disney Fairies®, Cabbage Patch Kids®,
      Taylor Swift, Fancy
      Nancy, Hello Kitty®, Hannah Montana, Puppy in My Pocket and
      FriendsTM, Disney
      Princess®, Disney Babies, Graco® and Fischer
  Price®;





•
            Indoor
      and outdoor kids’ furniture, room décor; kiddie pools and pool toys,
      kites, seasonal and outdoor products, including Kids Only!, Go Fly A
      Kite®, Funnoodle® and Laser
      Challenge;





•
            Halloween
      and everyday costumes for all ages based on licensed and proprietary
      non-licensed brands, including Spiderman® , Iron Man, Toy
      Story®, Sesame Street®, Power Rangers® and Disney
      Princesses® , and
      related Halloween accessories;





•
            Private
      label products as “exclusives” for a myriad of retail customers in many
      product categories.





Prior to
2007, we had accounted for seasonal and outdoor products as a separate category.
During 2007, we restructured our internal operations and have consolidated this
product group within the Traditional Toy category. These products share key
characteristics, including common management, distribution and marketing
strategies. We have restated our prior segment reporting to reflect this
change.





Craft,
Activity and Writing Products





•
            Food
      play, activity kits, reusable compounds, writing instruments and
      stationery products, including Girl GourmetTM, Creepy CrawlersTM, The Spa FactoryTM, Flying Colors®, Blopens®, Vivid Velvet®, and
      Pentech®




2


Pet
Products





•
            Pet
      products, including toys, consumables, beds, clothing and accessories,
      branded JAKKS Pets®, some of which also feature licenses, including American Kennel Club®
      and The Cat Fanciers’
      AssociationTM.





We
continually review the marketplace to identify and evaluate popular and
evergreen brands and product categories that we believe have the potential for
growth. We endeavor to generate growth within these lines by:





•
            creating
      innovative products under our established licenses and brand
      names;





•
            adding
      new items to the branded product lines that we expect will enjoy greater
      popularity;





•
            infusing
      simple innovation and technology when appropriate to make them more
      appealing to today’s kids;





•
            linking
      them with our evergreen portfolio of brands;
and





•
            focusing
      our marketing efforts to enhance consumer recognition and retailer
      interest.





Our
Business Strategy





In
addition to developing our proprietary brands and marks, licensing popular
brands enables us to use these high-profile marks at a lower cost than we would
incur if we purchased these marks or developed comparable marks on our own. By
licensing marks, we have access to a far greater range of marks than would be
available for purchase. We also license technology produced by unaffiliated
inventors and product developers to improve the design and functionality of our
products.





We sell
our products through our in-house sales staff and independent sales
representatives to toy and mass-market retail chain stores, department stores,
office supply stores, drug and grocery store chains, club stores, toy specialty
stores and wholesalers. Our three largest customers are Wal-Mart, Target and
Toys ‘R’ Us, which accounted for approximately 27.3%, 16.9% and 11.4%,
respectively, of our net sales in 2009. No other customer accounted for more
than 10.0% of our net sales in 2009.





Our
Growth Strategy





The
execution of our growth strategy has normally resulted in increased levels
of revenues and earnings. However, in 2009, we experienced a decline in
sales mainly due to declines in a few key product lines and a challenging
economy and had various one-time charges which resulted in a net loss for the
year.  In 2008 and 2009, we generated net sales of $903.4 million and
$803.7 million, respectively, and net income of $76.1 million and net loss of
$385.5 million, respectively. Approximately 1.2% and 21.0% of our net sales in
2008 and 2009, respectively, were attributable to our acquisitions since 2008.
Key elements of our growth strategy include:





•      
Expand Core
Products.    We manage our existing and new brands through
strategic product development initiatives, including introducing new products,
modifying existing products and extending existing product lines to maximize
their longevity. Our marketing teams and product designers strive to develop new
products or product lines to offer added technological, aesthetic and functional
improvements to our extensive portfolio. For example, we use multiple methods
including real-scan technology, articulated joints and a flexible rubberized
coating to enhance the life-like feel of our action figures, and feature special
techniques such as vinyl and sound chips in our lines of dolls and figures.
These innovations appeal to collectors and/or produce higher quality and better
likenesses of the representative characters.





•      
Enter New
Product Categories.    We use our extensive experience in
the toy and other consumer product industries to evaluate products and licenses
in new product categories and to develop additional product lines. We began
marketing licensed classic video games for simple plug-in use with television
sets and expanded into several related categories by infusing additional
technologies such as motion gaming and through the licensing of this category
from our current licensors, such as Disney and MTV Networks which owns Nickelodeon.





•      
Pursue
Strategic Acquisitions.    We supplement our internal
growth with selected strategic acquisitions. Most recently, in October 2008 we
acquired the businesses of Tollytots Limited, a leading manufacturer of licensed
baby doll accessories and Kids Only, a leading manufacturer of licensed indoor
and outdoor kids’ furniture, and in December 2008, we acquired the business of
Disguise, Inc. a leading Halloween costume and related accessories
company.  We will continue focusing our acquisition strategy on
businesses or brands that have compatible product lines and offer valuable
trademarks or brands.




3




•      
Acquire
Additional Character and Product Licenses.    We have
acquired the rights to use many familiar brand and character names and logos
from third parties that we use with our primary trademarks and brands.
Currently, among others, we have license agreements with Nickelodeon, Disney®, UFC and Warner Bros®, as well as with
the licensors of the many popular licensed children’s characters previously
mentioned, among others. We intend to continue to pursue new licenses from these
entertainment and media companies and other licensors. We also intend to
continue to purchase additional inventions and product concepts through our
existing network of inventors and product developers.





•      
Expand
International Sales.    We believe that foreign markets,
especially Europe, Australia, Canada, Latin America and Asia, offer us
significant growth opportunities. In 2009, our sales generated outside the
United States were approximately $132.5 million, or 16.5% of total net sales. We
intend to continue to expand our international sales and in 2009 opened a sales
office and distribution center in Europe to capitalize on our experience and our
relationships with foreign distributors and retailers. We expect these
initiatives to continue to contribute to our international growth in
2010.





•      
Capitalize
On Our Operating Efficiencies.    We believe that our
current infrastructure and operating model can accommodate growth without a
proportionate increase in our operating and administrative expenses, thereby
increasing our operating margins.





The
execution of our growth strategy, however, is subject to several risks and
uncertainties and we cannot assure you that we will continue to experience
growth in, or maintain our present level of net sales (see “Risk Factors,”
beginning on page 12). For example, our growth strategy will place additional
demands on our management, operational capacity and financial resources and
systems. The increased demand on management may necessitate our recruitment and
retention of additional qualified management personnel. We cannot assure you
that we will be able to recruit and retain qualified personnel or expand and
manage our operations effectively and profitably. To effectively manage future
growth, we must continue to expand our operational, financial and management
information systems and to train, motivate and manage our work force. There can
be no assurance that our operational, financial and management information
systems will be adequate to support our future operations. Failure to expand our
operational, financial and management information systems or to train, motivate
or manage employees could have a material adverse effect on our business,
financial condition and results of operations.





Moreover,
implementation of our growth strategy is subject to risks beyond our control,
including competition, market acceptance of new products, changes in economic
conditions, our ability to obtain or renew licenses on commercially reasonable
terms and our ability to finance increased levels of accounts receivable and
inventory necessary to support our sales growth, if any.





Furthermore,
we cannot assure you that we can identify attractive acquisition candidates or
negotiate acceptable acquisition terms, and our failure to do so may adversely
affect our results of operations and our ability to sustain growth.





Finally,
our acquisition strategy involves a number of risks, each of which could
adversely affect our operating results, including difficulties in integrating
acquired businesses or product lines, assimilating new facilities and personnel
and harmonizing diverse business strategies and methods of operation; diversion
of management attention from operation of our existing business; loss of key
personnel from acquired companies; and failure of an acquired business to
achieve targeted financial results.





Recent
Acquisitions





In
October 2008, we acquired substantially all of the assets of Tollytots
Limited.  The total initial consideration of $26.8 million consisted
of $12.0 million in cash and the assumption of liabilities in the amount of
$14.8 million, and resulted in goodwill of $4.1 million, all of which has been
determined to be impaired and was written off in the quarter ended June 30,
2009. In addition, we agreed to pay an earn-out of up to an aggregate amount of
$5.0 million in cash over the three calendar years following the acquisition
based on the achievement of certain financial performance criteria, which will
be recorded as goodwill when and if earned.  In the first earn-out
period ended December 31, 2009, no portion of the earn-out was
earned.  Tollytots is a leading designer and producer of licensed baby
dolls and baby doll pretend play accessories based on well-known brands and was
included in our results of operations from the date of acquisition.





In
October 2008, we acquired substantially all of the stock of Kids Only, Inc. and
a related Hong Kong company, Kids Only Limited (collectively, “Kids
Only”).  The total initial consideration of $23.8 million consisted of
$20.4 million in cash and the assumption of liabilities in the amount of $3.4
million, and resulted in goodwill of $13.2 million, all of which has been
determined to be impaired and was written off in the quarter ended June 30,
2009. In addition, we agreed to pay an earn-out of up to an aggregate amount of
$5.6 million in cash over the three calendar years following the acquisition
based on the achievement of certain financial performance criteria, which will
be recorded as goodwill when and if earned. The first earn-out period ended
September 30, 2009 is under review.  Kids Only is a leading designer
and producer of licensed indoor and outdoor kids’ furniture, and has an
extensive portfolio which also includes baby dolls and accessories, room décor
and a myriad of other children’s toy products  and was included in our
results of operations from the date of acquisition.




4


In
December 2008, we acquired certain assets of Disguise, Inc. and a related Hong
Kong company, Disguise Limited (collectively, “Disguise”).  The total
initial consideration of $60.6 million consisted of $38.6 million in cash and
the assumption of liabilities in the amount of $22.0 million, and resulted in
goodwill of $30.6 million, all of which has been determined to be impaired and
was written off in the quarter ended June 30, 2009. We finalized our purchase
price allocation for Disguise and engaged a third party to perform studies and
valuations to the estimated fair value of assets and liabilities
assumed.  Disguise is a leading designer and producer of Halloween and
everyday costume play and was included in our results of operations from the
date of acquisition.




Industry
Overview





According
to Toy Industry Association, Inc., the leading toy industry trade group, the
United States is the world’s largest toy market, followed by Japan and Western
Europe. Total retail sales of toys, excluding video games, in the United States,
were approximately $21.5 billion in 2009. We believe the two largest United
States toy companies, Mattel and Hasbro, collectively hold a dominant share of
the domestic non-video toy market. In addition, hundreds of smaller companies
compete in the design and development of new toys, the procurement of character
and product licenses, and the improvement and expansion of previously introduced
products and product lines. In the United States video game segment, total
retail sales of video game software were approximately $10.5 billion in
2009.





Over the
past few years, the toy industry has experienced substantial consolidation among
both toy companies and toy retailers. We believe that the ongoing consolidation
of toy companies provides us with increased growth opportunities due to
retailers’ desire to not be entirely dependent on a few dominant toy companies.
Retailer concentration also enables us to ship products, manage account
relationships and track retail sales more effectively and
efficiently.





Products





We focus
our business on acquiring or licensing well-recognized trademarks or brand
names, and we seek to acquire evergreen brands which are less subject to market
fads or trends. Generally, our license agreements for products and concepts call
for royalties ranging from 1% to 14% of net sales, and some may require minimum
guarantees and advances. Our principal products include:





Traditional
Toys





Electronics
Products





Our
electronic products category includes our Plug It In & Play TV Games,
EyeClopsTM Bionic Eye products and Laser Challenge® product
lines. Our current Plug It In
& Play TV
Games titles include licenses from Namco®, Disney, Marvel® and Nickelodeon , and feature
such games as SpongeBob
SquarePants®, Big Buck Hunter® Pro, Dora the Explorer, Disney Princess®, Ms. Pac-Man® and Pac-Man®.





We
regularly release new Plug It
In & Play TV
Games titles for the pre-school and leisure gamer segments including
Wheel of Fortune®,
Price Is Right®, Deal or No Deal®, Jeopardy®
and Star
Wars®.





Wheels
Division Products





•
            Motorized
      and plastic toy vehicles and
accessories.





Our
extreme sports offerings include our MXS line of motorcycles with
riders and other vehicles include GXTM cars, off-road vehicles and skateboards,
which are sold individually and with playsets and accessories.





Action
Figures and Accessories





We had an
extensive toy license with the WWE pursuant to which we had the right, until
December 31, 2009, to develop and market a full line of toy products based on
the popular WWE
professional wrestlers. At the end of 2009, we had a limited amount of inventory
remaining which we expect to sell during the first quarter of 2010.




We also
develop, manufacture and distribute other action figures and action figure
accessories including those based on the animated series Pokemon.In 2009,
we launched a line of action figures and accessories based on Ultimate Fighting
Championship and, in 2010, we expect to launch a product line of action figures
and accessories based on TNA (“Total Non-stop Action”) wrestling, capitalizing
on the expertise we built in the action figure category.




5


Role-play
and Dress-up Products





Our line
of role-play and dress-up products for boys and girls features entertainment and
consumer products properties such as Disney Princess, Disney Fairies, Sesame Street, Hannah Montana, Dora the
Explorer and Black
& Decker.  These products generated a significant amount of
sales in 2009, and we expect that level of sales to continue in
2010.





Infant
and Pre-school Toys





Our
pre-school toys include plush and electronic toys based on The Wiggles
and  Barney licenses and more, some branded under Child Guidance® and others
under Play
Along®.





Dolls





Dolls
include large, fashion and mini dolls and related accessories based on Cabbage Patch Kids®, Hannah Montana, The Cheetah Girls, Puppy in My Pocket and
Friends, Taylor Swift and Disney Princess and Fairies dolls and private
label fashion dolls for other retailers and sold to Disney Stores and Disney
Parks and Resorts.





Seasonal/
Outdoor Products





We have a
wide range of seasonal toys and outdoor and leisure products. Our Go Fly A Kite product line
includes youth and adult kites and a wide array of decorative flags, windsocks,
and windwheels. Our Funnoodle pool toys include
the basic Funnoodle pool floats and a variety of other pool toys.





Baby
Dolls and Baby Doll Pretend Play Accessories





We have
an extensive line of licensed baby dolls and baby doll pretend play accessories
based on Graco®, Fischer-Price®, Disney Princess® and other
known brands. The high-quality realistic-looking lines feature baby doll
strollers, high chairs, bouncers, play yards, doll swings, travel seats and
travel bags, along with other accessories that emulate real baby products that
mothers today use.





Indoor
and Outdoor Kids’ Furniture





We
produce licensed indoor and outdoor kids' furniture, with an extensive portfolio
which includes baby dolls and accessories and room decor.  Our
licensed portfolio includes character licenses, including Disney Princesses®,
Toy Story®, Mickey
Mouse®, SpongeBob
Squarepants®, Dora the
Explorer®, Batman® and many others, as well as
several licenses new to JAKKS' portfolio. Products include children’s puzzle
furniture, tables and chairs to activity sets, trays, stools and
more.  In 2010, we expect to launch a line of licensed molded kiddie
pools.




Halloween
and Everyday Costume Play





We
produce an expansive and innovative line of Halloween costumes and accessories
with which includes non-licensed Halloween costumes based on everything from
horror, pirates, historical figures and aliens to animals, vampires, angels and
more, as well as popular licensed characters from top intellectual property
owners including Disney®, Hasbro®, Marvel®, Sesame Workshop®, Mattel®, and many
others.





Craft,
Activity and Writing Products





We market
products into the toy activity category which contain a broad range of
activities, such as food play, make and paint your own characters, jewelry
making, art studios, posters, puzzles and other projects.  Our product
lines also include stationery, back-to-school and office pens, pencils, markers,
notebooks and craft products such as Blopens and Vivid Velvet activities.
These products are primarily marketed under our Flying Colors and Pentech brands, in addition
to various private label and other brands.





Pet
Products





We
entered the Pet Products category with our acquisition of Pet Pal, whose
products include pet toys, treats, beds, clothes and related pet products. These
products are marketed under JAKKS Pets® and licenses include American Kennel Club and
The Cat Fanciers’
Association, as well as numerous other entertainment and consumer product
properties.




6


World
Wrestling Entertainment Video Games





In June
1998, we formed a joint venture with THQ, a developer, publisher and distributor
of interactive entertainment software for the leading hardware game platforms in
the home video game market. The joint venture entered into a license agreement
with the WWE under which it acquired the exclusive worldwide right to publish
WWE video games on all
hardware platforms. Pursuant to a Settlement Agreement and Mutual Release dated
December 22, 2009, the joint venture was terminated on December 31,
2009 and we will receive fixed payments from THQ of $6.0 million on
each of June 30, 2010 and 2011 and $4.0 million on each of
June 30, 2012 and 2013 which we will record as income on a cash basis
over the term (see “Legal Proceedings”).




The joint
venture published titles for the Sony, Nintendo and Microsoft consoles, Sony®
and Nintendo® hand-held platforms, mobile/wireless and personal computers. It
also published titles for new hardware platforms when, and as they are
introduced to the market and have established a sufficient installed base to
support new software. These titles were marketed to our existing customers
as well as to game, electronics and other specialty stores, such as Electronics
Boutique and Best Buy.





The
following table presents our results with the joint venture for the five years
ended December 31, 2009:




New Game Titles
                      
                      
                      Profit fromConsole
                        Platforms
                      
                      
                      Hand-
                        held
                        Platforms
                      
                      
                      video
                        game joint
                        venture (1)(In millions)2005
                      
                      
                      3
                      
                      
                      
                      1
                      
                      
                      $
                      9.42006
                      
                      
                      2
                      
                      
                      
                      1
                      
                      
                      
                      13.22007
                      
                      
                      4
                      
                      
                      
                      2
                      
                      
                      
                      21.22008
                      
                      
                      4
                      
                      
                      
                      2
                      
                      
                      
                      17.12009
                      
                      
                      7
                      
                      
                      
                      1
                      
                      
                      
                      7.4
                      (2)





(1)
            Profit
      from the video game joint venture reflects our preferred return on joint
      venture revenue less certain costs incurred directly by us and payments
      made by us to THQ for their share of the profit on Plug It In & Play
      TV Games based on WWE
      content.(2)
            Excludes a
      cumulative reduction of $23.5 million to our accrued receivable from
      the joint venture that resulted from the arbitration setting the preferred
      return rate at 6%, instead of the 10% rate that had been
      accrued.




Sales,
Marketing and Distribution





We sell
all of our products through our own in-house sales staff and independent sales
representatives to toy and mass-market retail chain stores, department stores,
office supply stores, drug and grocery store chains, club stores, toy specialty
stores and wholesalers. Our three largest customers are Wal-Mart, Target and
Toys ‘R’ Us, which accounted for approximately 56.5% of our net sales in 2008
and 55.6% of our net sales in 2009. With the addition of the Pet Pal® product line, we
began to distribute pet products to key pet supply retailers Petco and Petsmart
in addition to many other pet retailers and our existing customers. Except for
purchase orders relating to products on order, we do not have written agreements
with our customers. Instead, we generally sell products to our customers
pursuant to letters of credit or, in some cases, on open account with payment
terms typically varying from 30 to 90 days. From time to time, we allow our
customers credits against future purchases from us in order to facilitate their
retail markdown and sales of slow-moving inventory. We also sell our products
through e-commerce sites, including Toysrus.com and Amazon.com.





We
contract the manufacture of most of our products to unaffiliated manufacturers
located in The People’s Republic of China (“China”). We sell the finished
products on a letter of credit basis or on open account to our customers, many
of whom take title to the goods in Hong Kong or China. These methods allow us to
reduce certain operating costs and working capital requirements. A portion of
our sales originate in the United States, so we hold certain inventory in our
warehouse and fulfillment facilities. To date, a significant portion of all of
our sales has been to domestic customers. We intend to continue expanding
distribution of our products into foreign territories and, accordingly, we
have:





•
            engaged
      representatives to oversee sales in certain
  territories,





•
            engaged
      distributors in certain
territories,





•
            established
      direct relationships with retailers in certain territories,
      and




7





•
            expanded
      in-house resources dedicated to product development and marketing of our
      lines internally.





Outside
of the United States, we currently sell our products primarily in Europe,
Australia, Canada, Latin America and Asia. Sales of our products abroad
accounted for approximately $161.9 million, or 17.9% of our net sales, in 2008
and approximately $132.5 million, or 16.5% of our net sales, in 2009. We believe
that foreign markets present an attractive opportunity, and we plan to intensify
our marketing efforts and further expand our distribution channels
abroad.




We
establish reserves for sales allowances, including promotional allowances and
allowances for anticipated defective product returns, at the time of shipment.
The reserves are determined as a percentage of net sales based upon either
historical experience or on estimates or programs agreed upon by our customers
and us.





We
obtain, directly, or through our sales representatives, orders for our products
from our customers and arrange for the manufacture of these products as
discussed below. Cancellations generally are made in writing, and we take
appropriate steps to notify our manufacturers of these cancellations. We may
incur costs or other losses as a result of cancellations.





We
maintain a full-time sales and marketing staff, many of whom make on-site visits
to customers for the purpose of showing product and soliciting orders for
products. We also retain a number of independent sales representatives to sell
and promote our products, both domestically and internationally. Together with
retailers, we occasionally test the consumer acceptance of new products in
selected markets before committing resources to large-scale
production.





We
publicize and advertise our products in trade and consumer magazines and other
publications, market our products at international, national and regional toy,
stationery and other specialty trade shows, conventions and exhibitions and
carry on cooperative advertising programs with toy and mass market retailers and
other customers which include the use of print and television ads and in-store
displays. We also produce and broadcast television commercials for several of
our product lines, including our Disney large role playsets,
Plug It In & Play
TV Games, Puppy in My Pocket and Friends,
EyeClops, Hannah Montana and Cabbage Patch Kids. We may
also advertise some of our other products on television, if we expect that the
resulting increase in our net sales will justify the relatively high cost of
television advertising.





Product
Development





Each of
our product lines has an in-house manager responsible for product development.
The in-house manager identifies and evaluates inventor products and concepts and
other opportunities to enhance or expand existing product lines or to enter new
product categories. In addition, we create proprietary products to fully exploit
our concept and character licenses. Although we do have the capability to create
and develop products from inception to production, we also use third-parties to
provide a portion of the sculpting, sample making, illustration and package
design required for our products in order to accommodate our increasing product
innovations and introductions. Typically, the development process takes from
three to nine months from concept to production and shipment to our
customers.





We employ
a staff of designers for all of our product lines. We occasionally acquire our
other product concepts from unaffiliated third parties. If we accept and develop
a third party’s concept for new toys, we generally pay a royalty on the toys
developed from this concept that are sold, and may, on an individual basis,
guarantee a minimum royalty. In addition, we engage third party developers to
program our line of Plug it in
& Play TV Games. Royalties payable to inventors and developers
generally range from 1% to 5% of the wholesale sales price for each unit of a
product sold by us. We believe that utilizing experienced third-party inventors
gives us access to a wide range of development talent. We currently work with
numerous toy inventors and designers for the development of new products and the
enhancement of existing products.





Safety
testing of our products is done at the manufacturers’ facilities by quality
control personnel employed by us or by independent third-party contractors
engaged by us. Safety testing is designed to meet or exceed regulations imposed
by federal and state, as well as applicable international governmental
authorities, our retail partners, licensors and the Toy Industry Association. We
also closely monitor quality assurance procedures for our products for safety
purposes. In addition, independent laboratories engaged by some of our larger
customers and licensors test certain of our products.




8


Manufacturing
and Supplies





Most of
our products are currently produced by overseas third-party manufacturers, which
we choose on the basis of quality, reliability and price. Consistent with
industry practice, the use of third-party manufacturers enables us to avoid
incurring fixed manufacturing costs, while maximizing flexibility, capacity and
production technology. Substantially all of the manufacturing services performed
overseas for us are paid for on open account with the manufacturers. To date, we
have not experienced any material delays in the delivery of our products;
however, delivery schedules are subject to various factors beyond our control,
and any delays in the future could adversely affect our sales. Currently, we
have ongoing relationships with over eighty different manufacturers. We believe
that alternative sources of supply are available to us, although we cannot be
assured that we can obtain adequate supplies of manufactured
products.





Although
we do not conduct the day-to-day manufacturing of our products, we are
extensively involved in the design of the product prototype and production
tools, dyes and molds for our products and we seek to ensure quality control by
actively reviewing the production process and testing the products produced by
our manufacturers. We employ quality control inspectors who rotate among our
manufacturers’ factories to monitor the production of substantially all of our
products.





The
principal raw materials used in the production and sale of our toy products are
plastics, zinc alloy, plush, printed fabrics, paper products and electronic
components, all of which are currently available at reasonable prices from a
variety of sources. Although we do not manufacture our products, we own the
tools, dies and molds used in the manufacturing process, and these are
transferable among manufacturers if we choose to employ alternative
manufacturers. Tools, dyes and molds represent a substantial portion of our
property and equipment with a net book value of $19.6 million in 2008 and $12.9
million in 2009. Substantially all of these assets are located in
China.




Trademarks
and Copyrights





Most of
our products are produced and sold under trademarks owned by or licensed to us.
We typically register our properties, and seek protection under the trademark,
copyright and patent laws of the United States and other countries where our
products are produced or sold. These intellectual property rights can be
significant assets. Accordingly, while we believe we are sufficiently protected,
the loss of some of these rights could have an adverse effect on our business,
financial condition and results of operations.





Competition





Competition
in the toy industry is intense. Globally, certain of our competitors have
greater financial resources, larger sales and marketing and product development
departments, stronger name recognition, longer operating histories and benefit
from greater economies of scale. These factors, among others, may enable our
competitors to market their products at lower prices or on terms more
advantageous to customers than those we could offer for our competitive
products. Competition often extends to the procurement of entertainment and
product licenses, as well as to the marketing and distribution of products and
the obtaining of adequate shelf space. Competition may result in price
reductions, reduced gross margins and loss of market share, any of which could
have a material adverse effect on our business, financial condition and results
of operations. In each of our product lines we compete against one or both of
the toy industry’s two dominant companies, Mattel and Hasbro. In addition, we
compete in our Flying
Colors and Pentech product categories,
with Mega Brands (Rose Art®), Hasbro (Play-Doh®) and Binney & Smith
(Crayola®), in our Halloween costume lines with Rubies and in our toy vehicle
lines, with RC2. We also compete with numerous smaller domestic and foreign toy
manufacturers, importers and marketers in each of our product
categories.





Seasonality
and Backlog





In 2009,
approximately 68.5% of our net sales were made in the third and fourth quarters.
Generally, the first quarter is the period of lowest shipments and sales in our
business and the toy industry generally and therefore the least profitable due
to various fixed costs. Seasonality factors may cause our operating results to
fluctuate significantly from quarter to quarter. However, our writing instrument
and activity products generally are counter-seasonal to the traditional toy
industry seasonality due to the higher volume generally shipped for
back-to-school beginning in the second quarter. In addition, our seasonal
products are primarily sold in the spring and summer seasons. Our results of
operations may also fluctuate as a result of factors such as the timing of new
products (and related expenses) introduced by us or our competitors, the
advertising activities of our competitors, delivery schedules set by our
customers and the emergence of new market entrants. We believe, however, that
the low retail price of most of our products may be less subject to seasonal
fluctuations than higher priced toy products.





We ship
products in accordance with delivery schedules specified by our customers, which
usually request delivery of their products within three to six months of the
date of their orders for orders shipped FOB China or Hong Kong and within three
days on orders shipped domestically. Because customer orders may be canceled at
any time without penalty, our backlog may not accurately indicate sales for any
future period.




9


Government
and Industry Regulation





Our
products are subject to the provisions of the Consumer Product Safety Act
(“CPSA”), the Federal Hazardous Substances Act (“FHSA”), the Flammable Fabrics
Act (“FFA”) and the regulations promulgated thereunder. The CPSA and the FHSA
enable the Consumer Products Safety Commission (“CPSC”) to exclude from the
market consumer products that fail to comply with applicable product safety
regulations or otherwise create a substantial risk of injury, and articles that
contain excessive amounts of a banned hazardous substance. The FFA enables the
CPSC to regulate and enforce flammability standards for fabrics used in consumer
products. The CPSC may also require the repurchase by the manufacturer of
articles. Similar laws exist in some states and cities and in various
international markets. We maintain a quality control program designed to ensure
compliance with all applicable laws.





Employees





As of
March 15, 2010, we employed 711 persons, all of whom are full-time employees,
including three executive officers. We employed 338 people in the United States,
11 people in Canada, 255 people in Hong Kong, 104 people in China and 3 people
in the United Kingdom. We believe that we have good relationships with our
employees. None of our employees are represented by a union.





Environmental
Issues





We are
subject to legal and financial obligations under environmental, health and
safety laws in the United States and in other jurisdictions where we operate. We
are not currently aware of any material environmental liabilities associated
with any of our operations.




Available
Information





We make
available free of charge on or through our Internet website,
www.jakkspacific.com, our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.





Our
Corporate Information





We were
formed as a Delaware corporation in 1995. Our principal executive offices are
located at 22619 Pacific Coast Highway, Malibu, California 90265. Our telephone
number is (310) 456-7799 and our Internet Website address is
www.jakkspacific.com. The contents of our website are not incorporated in or
deemed to be a part of this Annual Report or Form 10-K.




10


Item 1A. Risk
Factors





From time
to time, including in this Annual Report on Form 10-K, we publish
forward-looking statements, as disclosed in our Disclosure Regarding
Forward-Looking Statements, beginning immediately following the Table of
Contents of this Annual Report. We note that a variety of factors could cause
our actual results and experience to differ materially from the anticipated
results or other expectations expressed or anticipated in our forward-looking
statements. The factors listed below are risks and uncertainties that may arise
and that may be detailed from time to time in our public announcements and our
filings with the Securities and Exchange Commission, such as on Forms 8-K, 10-Q
and 10-K. We undertake no obligation to make any revisions to the
forward-looking statements contained in this Annual Report on Form 10-K to
reflect events or circumstances occurring after the date of the filing of this
report.





Our
inability to redesign, restyle and extend our existing core products and product
lines as consumer preferences evolve, and to develop, introduce and gain
customer acceptance of new products and product lines, may materially and
adversely impact our business, financial condition and results of
operations.





Our
business and operating results depend largely upon the appeal of our products.
Our continued success in the toy industry will depend on our ability to
redesign, restyle and extend our existing core products and product lines as
consumer preferences evolve, and to develop, introduce and gain customer
acceptance of new products and product lines. Several trends in recent years
have presented challenges for the toy industry, including:





•
            The
      phenomenon of children outgrowing toys at younger ages, particularly in
      favor of interactive and high technology
  products;





•
            Increasing
      use of technology;





•
            Shorter
      life cycles for individual products;
and





•
            Higher
      consumer expectations for product quality, functionality and
      value.





We cannot
assure you that:





•
            our
      current products will continue to be popular with
    consumers;





•
            the
      product lines or products that we introduce will achieve any significant
      degree of market acceptance; or





•
            the
      life cycles of our products will be sufficient to permit us to recover
      licensing, design, manufacturing, marketing and other costs associated
      with those products.




Our
failure to achieve any or all of the foregoing benchmarks may cause the
infrastructure of our operations to fail, thereby adversely affecting our
business, financial condition and results of operations.





The
failure of our character-related and theme-related products to become and/or
remain popular with children may materially and adversely impact our business,
financial condition and results of operations.





The
success of many of our character-related and theme-related products depends on
the popularity of characters in movies, television programs, live wrestling
exhibitions, auto racing events and other media. We cannot assure you
that:





•
            media
      associated with our character-related and theme-related product lines will
      be released at the times we expect or will be
  successful;





•
            the
      success of media associated with our existing character-related and
      theme-related product lines will result in substantial promotional value
      to our products;





•
            we
      will be successful in renewing licenses upon expiration on terms that are
      favorable to us; or





•
            we
      will be successful in obtaining licenses to produce new character-related
      and theme-related products in the
future.





Our
failure to achieve any or all of the foregoing benchmarks may cause the
infrastructure of our operations to fail, thereby adversely affecting our
business, financial condition and results of operations.




11


There
are risks associated with our license agreements.





•
            Our
      current licenses require us to pay minimum
  royalties





Sales of
products under trademarks or trade or brand names licensed from others account
for substantially all of our net sales. Product licenses allow us to capitalize
on characters, designs, concepts and inventions owned by others or developed by
toy inventors and designers. Our license agreements generally require us to make
specified minimum royalty payments, even if we fail to sell a sufficient number
of units to cover these amounts. In addition, under certain of our license
agreements, if we fail to achieve certain prescribed sales targets, we may be
unable to retain or renew these licenses.




•
            Some
      of our licenses are restricted as to
use





Under the
majority of our license agreements the licensors have the right to review and
approve our use of their licensed products, designs or materials before we may
make any sales. If a licensor refuses to permit our use of any licensed property
in the way we propose, or if their review process is delayed, our development or
sale of new products could be impeded.





•
            New
      licenses are difficult and expensive to
obtain





Our
continued success will depend substantially on our ability to obtain additional
licenses. Intensive competition exists for desirable licenses in our industry.
We cannot assure you that we will be able to secure or renew significant
licenses on terms acceptable to us. In addition, as we add licenses, the need to
fund additional royalty advances and guaranteed minimum royalty payments may
strain our cash resources.





•
            A
      limited number of licensors account for a large portion of our net
      sales





We derive
a significant portion of our net sales from a limited number of licensors. If
one or more of these licensors were to terminate or fail to renew our license or
not grant us new licenses, our business, financial condition and results of
operations could be adversely affected. Our toy license with the WWE expired on
December 31, 2009.





The
toy industry is highly competitive and our inability to compete effectively may
materially and adversely impact our business, financial condition and results of
operations.





The toy
industry is highly competitive. Globally, certain of our competitors have
financial and strategic advantages over us, including:





•
            greater
      financial resources;





•
            larger
      sales, marketing and product development
  departments;




•
            stronger
      name recognition;





•
            longer
      operating histories; and





•
            greater
      economies of scale.





In
addition, the toy industry has no significant barriers to entry. Competition is
based primarily on the ability to design and develop new toys, to procure
licenses for popular characters and trademarks and to successfully market
products. Many of our competitors offer similar products or alternatives to our
products. Our competitors have obtained and are likely to continue to obtain
licenses that overlap our licenses with respect to products, geographic areas
and markets. We cannot assure you that we will be able to obtain adequate shelf
space in retail stores to support our existing products or to expand our
products and product lines or that we will be able to continue to compete
effectively against current and future competitors.




12


We
may not be able to sustain our growth, which may prevent us from continuing to
increase our net revenues.





We have
experienced rapid growth in our product lines resulting in higher net sales over
the last years, which was achieved through acquisitions of businesses, products
and licenses. For example, revenues associated with companies we acquired since
2008 were approximately $10.5 million and $169.0 million, in 2008 and 2009,
respectively, representing 1.2% and 21.0% of our total revenues for those
periods. As a result, comparing our period-to-period operating results may not
be meaningful and results of operations from prior periods may not be indicative
of future results. We cannot assure you that we will continue to experience
growth in, or maintain our present level of, net sales.





Our
growth strategy calls for us to continuously develop and diversify our toy
business by acquiring other companies, entering into additional license
agreements, refining our product lines and expanding into international markets,
which will place additional demands on our management, operational capacity and
financial resources and systems. The increased demand on management may
necessitate our recruitment and retention of qualified management personnel. We
cannot assure you that we will be able to recruit and retain qualified personnel
or expand and manage our operations effectively and profitably. To effectively
manage future growth, we must continue to expand our operational, financial and
management information systems and to train, motivate and manage our work force.
There can be no assurance that our operational, financial and management
information systems will be adequate to support our future operations. Failure
to expand our operational, financial and management information systems or to
train, motivate or manage employees could have a material adverse effect on our
business, financial condition and results of operations.





In
addition, implementation of our growth strategy is subject to risks beyond our
control, including competition, market acceptance of new products, changes in
economic conditions, our ability to obtain or renew licenses on commercially
reasonable terms and our ability to finance increased levels of accounts
receivable and inventory necessary to support our sales growth, if any.
Accordingly, we cannot assure you that our growth strategy will be
successful.





If
we are unable to acquire and integrate companies and new product lines
successfully, we will be unable to implement a significant component of our
growth strategy.





Our
growth strategy depends in part upon our ability to acquire companies and new
product lines. Revenues associated with our acquisitions since 2008 represented
approximately 1.2% and 21.0% of our total revenues in 2008 and 2009,
respectively. Future acquisitions will succeed only if we can effectively assess
characteristics of potential target companies and product lines, such
as:





•
            attractiveness
      of products;





•
            suitability
      of distribution channels;





•
            management
      ability;





•
            financial
      condition and results of operations;
and





•
            the
      degree to which acquired operations can be integrated with our
      operations.





We cannot
assure you that we can identify attractive acquisition candidates or negotiate
acceptable acquisition terms, and our failure to do so may adversely affect our
results of operations and our ability to sustain growth. Our acquisition
strategy involves a number of risks, each of which could adversely affect our
operating results, including:





•
            difficulties
      in integrating acquired businesses or product lines, assimilating new
      facilities and personnel and harmonizing diverse business strategies and
      methods of operation;





•
            diversion
      of management attention from operation of our existing
      business;





•
            loss
      of key personnel from acquired companies;
and





•
            failure
      of an acquired business to achieve targeted financial
    results.




13




A
limited number of customers account for a large portion of our net sales, so
that if one or more of our major customers were to experience difficulties in
fulfilling their obligations to us, cease doing business with us, significantly
reduce the amount of their purchases from us or return substantial amounts of
our products, it could have a material adverse effect on our business, financial
condition and results of operations.





Our three
largest customers accounted for 55.6% of our net sales in 2009. Except for
outstanding purchase orders for specific products, we do not have written
contracts with or commitments from any of our customers. A substantial reduction
in or termination of orders from any of our largest customers could adversely
affect our business, financial condition and results of operations. In addition,
pressure by large customers seeking price reductions, financial incentives,
changes in other terms of sale or for us to bear the risks and the cost of
carrying inventory also could adversely affect our business, financial condition
and results of operations. If one or more of our major customers were to
experience difficulties in fulfilling their obligations to us, cease doing
business with us, significantly reduce the amount of their purchases from us or
return substantial amounts of our products, it could have a material adverse
effect on our business, financial condition and results of operations. In
addition, the bankruptcy or other lack of success of one or more of our
significant retailers could negatively impact our revenues and bad debt
expense.





We
depend on our key personnel and any loss or interruption of either of their
services could adversely affect our business, financial condition and results of
operations.




Our
success has been largely dependent upon the experience and continued services of
Jack Friedman, our Chairman and Co-Chief Executive Officer, and Stephen G.
Berman, our President and Co-Chief Executive Officer and Chief Operating
Officer. Effective April 1, 2010, Mr. Friedman is retiring as Co-Chief Executive
Officer but will continue as our non-executive Chairman and will also serve in
the newly created role of Chief Strategist. Mr. Berman is continuing as
President and Chief Executive Officer. At this time, we do not believe Mr.
Friedman’s retirement as Co-Chief Executive Officer will have a material adverse
impact on our business, financial condition and results of operations. We cannot
assure you that we would be able to find an appropriate replacement for Mr.
Berman if the need should arise, and any loss or interruption of the services of
Mr. Berman could adversely affect our business, financial condition and results
of operations.




We
depend on third-party manufacturers, and if our relationship with any of them is
harmed or if they independently encounter difficulties in their manufacturing
processes, we could experience product defects, production delays, cost overruns
or the inability to fulfill orders on a timely basis, any of which could
adversely affect our business, financial condition and results of
operations.





We depend
on many third-party manufacturers who develop, provide and use the tools, dies
and molds that we own to manufacture our products. However, we have limited
control over the manufacturing processes themselves. As a result, any
difficulties encountered by the third-party manufacturers that result in product
defects, production delays, cost overruns or the inability to fulfill orders on
a timely basis could adversely affect our business, financial condition and
results of operations.





We do not
have long-term contracts with our third-party manufacturers. Although we believe
we could secure other third-party manufacturers to produce our products, our
operations would be adversely affected if we lost our relationship with any of
our current suppliers or if our current suppliers’ operations or sea or air
transportation with our overseas manufacturers were disrupted or terminated even
for a relatively short period of time. Our tools, dies and molds are located at
the facilities of our third-party manufacturers.





Although
we do not purchase the raw materials used to manufacture our products, we are
potentially subject to variations in the prices we pay our third-party
manufacturers for products, depending on what they pay for their raw
materials.





We
have substantial sales and manufacturing operations outside of the United States
subjecting us to risks common to international operations.





We sell
products and operate facilities in numerous countries outside the United States.
For the year ended December 31, 2009 sales to our international customers
comprised approximately 16.5% of our net sales. We expect our sales to
international customers to account for a greater portion of our revenues in
future fiscal periods. Additionally, we utilize third-party manufacturers
located principally in China which are subject to the risks normally associated
with international operations, including:





•
            currency
      conversion risks and currency
fluctuations;





•
            limitations,
      including taxes, on the repatriation of
  earnings;





•
            political
      instability, civil unrest and economic
  instability;




14





•
            greater
      difficulty enforcing intellectual property rights and weaker laws
      protecting such rights;





•
            complications
      in complying with laws in varying jurisdictions and changes in
      governmental policies;





•
            greater
      difficulty and expenses associated with recovering from natural
      disasters;




•
            transportation
      delays and interruptions;





•
            the
      potential imposition of tariffs;
and





•
            the
      pricing of intercompany transactions may be challenged by taxing
      authorities in both Hong Kong and the United States, with potential
      increases in income taxes.





Our
reliance on external sources of manufacturing can be shifted, over a period of
time, to alternative sources of supply, should such changes be necessary.
However, if we were prevented from obtaining products or components for a
material portion of our product line due to medical, political, labor or other
factors beyond our control, our operations would be disrupted while alternative
sources of products were secured. Also, the imposition of trade sanctions by the
United States against a class of products imported by us from, or the loss of
“normal trade relations” status by China, could significantly increase our cost
of products imported from that nation. Because of the importance of our
international sales and international sourcing of manufacturing to our business,
our financial condition and results of operations could be significantly and
adversely affected if any of the risks described above were to
occur.





Our
business is subject to extensive government regulation and any violation by us
of such regulations could result in product liability claims, loss of sales,
diversion of resources, damage to our reputation, increased warranty costs or
removal of our products from the market, and we cannot assure you that our
product liability insurance for the foregoing will be sufficient.





Our
business is subject to various laws, including the Federal Hazardous Substances
Act, the Consumer Product Safety Act, the Flammable Fabrics Act and the rules
and regulations promulgated under these acts. These statutes are administered by
the CPSC, which has the authority to remove from the market products that are
found to be defective and present a substantial hazard or risk of serious injury
or death. The CPSC can require a manufacturer to recall, repair or replace these
products under certain circumstances. We cannot assure you that defects in our
products will not be alleged or found. Any such allegations or findings could
result in:





•
            product
      liability claims;





•
            loss
      of sales;





•
            diversion
      of resources;





•
            damage
      to our reputation;





•
            increased
      warranty costs; and





•
            removal
      of our products from the market.





Any of
these results may adversely affect our business, financial condition and results
of operations. There can be no assurance that our product liability insurance
will be sufficient to avoid or limit our loss in the event of an adverse outcome
of any product liability claim.





We
depend on our proprietary rights and our inability to safeguard and maintain the
same, or claims of third parties that we have violated their intellectual
property rights, could have a material adverse effect on our business, financial
condition and results of operations.





We rely
on trademark, copyright and trade secret protection, nondisclosure agreements
and licensing arrangements to establish, protect and enforce our proprietary
rights in our products. The laws of certain foreign countries may not protect
intellectual property rights to the same extent or in the same manner as the
laws of the United States. We cannot assure you that we or our licensors will be
able to successfully safeguard and maintain our proprietary rights. Further,
certain parties have commenced legal proceedings or made claims against us based
on our alleged patent infringement, misappropriation of trade secrets or other
violations of their intellectual property rights. We cannot assure you that
other parties will not assert intellectual property claims against us in the
future. These claims could divert our attention from operating our business or
result in unanticipated legal and other costs, which could adversely affect our
business, financial condition and results of operations.


15


Market
conditions and other third-party conduct could negatively impact our margins and
implementation of other business initiatives.





Economic
conditions, such as rising fuel prices and decreased consumer confidence, may
adversely impact our margins. In addition, general economic conditions were
significantly and negatively affected by the September 11th terrorist attacks
and could be similarly affected by any future attacks. Such a weakened economic
and business climate, as well as consumer uncertainty created by such a climate,
could adversely affect our sales and profitability. Other conditions, such as
the unavailability of electronics components, may impede our ability to
manufacture, source and ship new and continuing products on a timely basis.
Significant and sustained increases in the price of oil could adversely impact
the cost of the raw materials used in the manufacture of our products, such as
plastic.




We
may not have the funds necessary to purchase our outstanding convertible senior
notes upon a fundamental change or other purchase date, as required by the
indenture governing the notes.





On June
15, 2010, holders of the remaining $20.3 million of our 4.625% convertible
senior notes may require us to purchase their notes, which repurchase may be
made for cash. In addition, holders may also require us to purchase their notes
for cash upon the occurrence of certain fundamental changes in our board
composition or ownership structure, if we liquidate or dissolve under certain
circumstances or if our common stock ceases being quoted on an established
over-the-counter trading market in the United States. We intend to use the
remaining proceeds from the offering of our 4.50% convertible senior notes
issued on November 10, 2009 to repurchase the remaining $20.3 million of our
4.625% convertible senior notes in June 2010.





On
November 10, 2009, we sold an aggregate of $100.0 million of 4.50% Convertible
Senior Notes due 2014 (the “Notes”). The Notes are senior unsecured obligations
of JAKKS, will pay interest semi-annually at a rate of 4.50% per annum and will
mature on November 1, 2014. Prior to August 1, 2014, holders of the Notes may
convert their Notes only upon specified events. Upon conversion, the Notes may
be settled, at our election, in cash, shares of our common stock, or a
combination of cash and shares of our common stock. Holders of the Notes may
require us to repurchase for cash all or some of their Notes upon the occurrence
of a fundamental change (as defined in the Notes).




Item 2. Properties





The
following is a listing of the principal leased offices maintained by us as of
March 15, 2010:





Property
                    
                    Location
                    
                    Approximate
                      Square Feet
                    
                    Lease Expiration
                      DateDomesticCorporate
      Office
                    
                    Malibu,
      California
                    
                    
                    29,500
                    
                    February
      28, 2015Design
      Center
                    
                    Malibu,
      California
                    
                    
                    13,400
                    
                    August,
      31, 2015Showroom
                    
                    Santa
      Monica, California
                    
                    
                    18,400
                    
                    August
      31, 2015Distribution
      Center
                    
                    City
      of Industry, California
                    
                    
                    800,000
                    
                    January
      31, 2013Sales
      Office / Showroom
                    
                    New
      York, New York
                    
                    
                    11,700
                    
                    November
      1, 2015Creative
      Designs Office
                    
                    Trevose,
      Pennsylvania
                    
                    
                    14,700
                    
                    June
      30, 2011Sales
      Office
                    
                    Bentonville,
      Arkansas
                    
                    
                    9,000
                    
                    September
      30, 2014Sales
      Office
                    
                    Palatine,
      Illinois
                    
                    
                    2,100
                    
                    March
      31, 2010Distribution
      Center
                    
                    Newton,
      North Carolina
                    
                    
                    109,000
                    
                    October,
      9, 2011Disguise
      Office
                    
                    Poway,
      California
                    
                    
                    24,200
                    
                    December
      31, 2012InternationalDistribution
      Center
                    
                    Brampton,
      Ontario, Canada
                    
                    
                    105,700
                    
                    December
      31, 2014Hong
      Kong Headquarters
                    
                    Kowloon,
      Hong Kong
                    
                    
                    36,600
                    
                    June
      30, 2010Hong
      Kong Showroom
                    
                    Kowloon,
      Hong Kong
                    
                    
                    21,000
                    
                    May
      31, 2011Production
      Inspection Office
                    
                    Shanghai,
      China
                    
                    
                    1,200
                    
                    April
      30, 2010Production
      Inspection and Testing Office
                    
                    Shenzhen,
      China
                    
                    
                    5,400
                    
                    May
      14, 2010Tollytots  Limited
      Warehouse
                    
                    Tuen
      Mun, Hong Kong
                    
                    
                    5,500
                    
                    October
      9, 2011Production
      Inspection Office
                    
                    Nanjing,
      China
                    
                    
                    2,000
                    
                    September
      15, 2010








16


Item
3. Legal Proceedings





On
October 12, 2006, World Wrestling Entertainment, Inc. (“WWE”) commenced a
lawsuit in Connecticut state court against THQ/JAKKS Pacific LLC, alleging that
sales of WWE video games in Japan and other countries in Asia were not lawful
(the “Connecticut Action”).  The lawsuit sought, among other things, a
declaration that WWE is entitled to terminate the video game license and
monetary damages. In 2007, WWE filed an amended complaint in the Connecticut
Action to add the principal part of the state law claims present in the action
filed by WWE in the Southern District of New York (the “WWE Action”) to the
Connecticut Action; the WWE Action was finally dismissed in 2009. THQ filed a
cross-complaint that asserted claims by THQ and Mr. Farrell, THQ’s Chief
Executive Officer, for indemnification from the Company in the event that WWE
prevailed on its claims against THQ and Farrell and also asserted claims by THQ
that the Company breached its fiduciary duties to THQ in connection with the
videogame license between WWE and the THQ/Jakks Pacific joint venture and sought
equitable and legal relief, including substantial monetary and exemplary damages
against the Company in connection with its claim.  Thereafter, the WWE
claims and the THQ cross-claims in the Connecticut Action were all dismissed
with prejudice pursuant to settlement agreements that the Company entered into
with WWE and THQ dated December 22, 2009 (the “Settlements”).




In
November 2004, several purported class action lawsuits were filed in the United
States District Court for the Southern District of New York: (1) Garcia v. JAKKS
Pacific, Inc. et al., Civil Action No. 04-8807 (filed on November 5, 2004), (2)
Jonco Investors, LLC v. JAKKS Pacific, Inc. et al., Civil Action No. 04-9021
(filed on November 16, 2004), (3) Kahn v. JAKKS Pacific, Inc. et al., Civil
Action No. 04-8910 (filed on November 10, 2004), (4) Quantum Equities L.L.C. v.
JAKKS Pacific, Inc. et al., Civil Action No. 04-8877 (filed on November 9,
2004), and (5) Irvine v. JAKKS Pacific, Inc. et al., Civil Action No. 04-9078
(filed on November 16, 2004) (the “Class Actions”). The complaints in the Class
Actions alleged that defendants issued positive statements concerning increasing
sales of our WWE licensed products which were false and misleading because the
WWE licenses had allegedly been obtained through a pattern of commercial
bribery, our relationship with the WWE was being negatively impacted by the
WWE’s contentions and there was an increased risk that the WWE would either seek
modification or nullification of the licensing agreements with us. Plaintiffs
also alleged that we misleadingly failed to disclose the alleged fact that the
WWE licenses were obtained through an unlawful bribery scheme. The plaintiffs in
the Class Actions were described as purchasers of our common stock, who
purchased from as early as October 26, 1999 to as late as October 19, 2004. The
Class Actions sought compensatory and other damages in an undisclosed amount,
alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Rule 10b-5 promulgated thereunder by each of the defendants
(namely the Company and Messrs. Friedman, Berman and Bennett), and violations of
Section 20(a) of the Exchange Act by Messrs. Friedman, Berman and Bennett. On
January 25, 2005, the Court consolidated the Class Actions under the caption In
re JAKKS Pacific, Inc. Shareholders Class Action Litigation, Civil Action No.
04-8807. On May 11, 2005, the Court appointed co-lead counsels and provided
until July 11, 2005 for an amended complaint to be filed; and a briefing
schedule thereafter with respect to a motion to dismiss. The motion to dismiss
was fully briefed and argument occurred on November 30, 2006. The motion was
granted in January 2008 to the extent that the Class Actions were dismissed
without prejudice to plaintiffs’ right to seek leave to file an amended
complaint based on statements that the WWE licenses were obtained from the WWE
as a result of the long-term relationship with WWE. A motion seeking leave to
file an amended complaint was granted and an amended complaint filed. Briefing
was completed with respect to a motion to dismiss that was scheduled for
argument in October 2008. The Court adjourned the argument date.  The
parties notified the Court that an agreement to resolve this action was
reached.  In November 2009, a motion was filed by plaintiffs’ counsel
for preliminary approval of this agreement, which provides for the matter to be
settled for $3.9 million, without any admission of liability on the part of the
Company, or its officers and directors.





On December 2, 2004, a
shareholder derivative action was filed in the Southern District of New York by
Freeport Partner, LLC against us, nominally, and against Messrs. Friedman,
Berman and Bennett, Freeport Partners v. Friedman, et al., Civil Action No.
04-9441 (the “Derivative Action”). The Derivative Action seeks to hold the
individual defendants liable for damages allegedly caused to us by their actions
and in particular to hold them liable on a contribution theory with respect to
any liability we incur in connection with the Class Actions. On or about
February 10, 2005, a second shareholder derivative action was filed in the
Southern District of New York by David Oppenheim against us, nominally, and
against Messrs. Friedman, Berman, Bennett, Blatte, Glick, Miller and Skala,
Civil Action 05-2046 (the “Second Derivative Action”). The Second Derivative
Action seeks to hold the individual defendants liable for damages allegedly
caused to us by their actions as a result of alleged breaches of their fiduciary
duties. On or about March 16, 2005, a third shareholder derivative action was
filed. It is captioned Warr v. Friedman, Berman, Bennett, Blatte, Glick, Miller,
Skala, and JAKKS (as a nominal defendant), and it was filed in the Superior
Court of California, Los Angeles County (the “Third Derivative Action”). The
Third Derivative Action seeks to hold the individual defendants liable for (1)
damages allegedly caused to us by their alleged breaches of fiduciary duty,
abuse of control, gross mismanagement, waste of corporate assets and unjust
enrichment; and (2) restitution to us of profits, benefits and other
compensation obtained by them. Agreement to resolve the Derivative
Actions has been reached, but it is also subject to Court approval. A
Company insurer has agreed to provide the $4.1 million that will be used to
settle the Class Action and the Derivative Actions.




17


In order
to exercise the joint venture's right to renew the WWE videogame license for the
renewal period running from January 1, 2010 through December 31, 2014, the
Company, on behalf of the joint venture, sent out a Notice of Renewal to WWE on
June 30, 2009 (the “Renewal Notice”).  THQ commenced an action in
California Superior Court (the “California Action”) seeking a declaratory
judgment that JAKKS could not renew the videogame license without THQ's consent
and that THQ was not obligated to consent.  THQ also sought a
declaratory judgment that the restrictive covenant contained in the joint
venture agreement was unenforceable.  The Company filed a demurrer in
the California Action which was fully briefed and ready for argument. THQ
brought a summary judgment motion seeking a declaration that the restrictive
covenant was not enforceable. In the event that the demurrer would be denied,
the Company sought an adjournment of THQ’s summary judgment motion pending
discovery. WWE also commenced an action in California seeking the same relief as
THQ, namely, to declare THQ’s restrictive covenant unenforceable, and the
Company filed a demurrer seeking to dismiss the action on the grounds that WWE
had no standing and the relief was otherwise not available. THQ also filed an
arbitration in California seeking a declaratory judgment that the same
restrictive covenant was unenforceable (the “California
Arbitration”).  The Company commenced an arbitration in New
York  (the “New York Arbitration”) seeking, among other things, a
declaratory judgment that (a) it was empowered to serve the Renewal Notice and
(b) THQ’s restrictive covenant was enforceable. In the New York
Arbitration, the Company also sought to hold THQ liable for its breach of
fiduciary duty with respect to its dealings with the Company and the
LLC.  The Company also commenced an action in New York Supreme Court
to enjoin the California Arbitration.  The application to enjoin the
California Arbitration was argued.  The Company requested of the
American Arbitration Association that the New York Arbitration proceed and the
California Arbitration not proceed and those proceedings were successively
adjourned by stipulation between the parties.  As set forth above, all
of these proceedings were, pursuant to the Settlements, dismissed with
prejudice.





The
settlement agreement with THQ provides for payments to the Company of
$6.0 million, $6.0 million, $4.0 million and $4.0 million in
2010, 2011, 2012 and 2013, respectively.





We are a
party to, and certain of our property is the subject of, various other pending
claims and legal proceedings that routinely arise in the ordinary course of our
business, but we do not believe that any of these claims or proceedings will
have a material effect on our business, financial condition or results of
operations.





18




PART
II





Item 5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities





Market
Information





Our
common stock is traded on the Nasdaq Global Select exchange under the symbol
“JAKK.” The following table sets forth, for the periods indicated, the range of
high and low sales prices for our common stock on this exchange.





Price Range of
                        Common StockHigh
                      
                      
                      Low2008:First
      quarter
                      
                      $
                      29.70
                      
                      
                      $
                      20.18Second
      quarter
                      
                      
                      30.55
                      
                      
                      
                      21.65Third
      quarter
                      
                      
                      27.12
                      
                      
                      
                      20.10Fourth
      quarter
                      
                      
                      25.99
                      
                      
                      
                      15.462009:First
      quarter
                      
                      
                      21.30
                      
                      
                      
                      10.17Second
      quarter
                      
                      
                      14.24
                      
                      
                      
                      10.66Third
      quarter
                      
                      
                      15.15
                      
                      
                      
                      10.55Fourth
      quarter
                      
                      
                      16.26
                      
                      
                      
                      10.99





Performance
Graph





The graph
and tables below display the relative performance of our common stock, the
Russell 2000 Price Index (the “Russell 2000”) and a peer group index, by
comparing the cumulative total stockholder return (which assumes reinvestment of
dividends, if any) on an assumed $100 investment in our common stock, the
Russell 2000 and the peer group index over the period from January 1, 2005 to
December 31, 2009.





In
accordance with recently enacted regulations implemented by the Securities and
Exchange Commission, we retained the services of an expert compensation
consultant.  In the performance of its services, such consultant used
a peer group index for its analysis of our compensation
policies.   We believe that these companies represent a
cross-section of publicly-traded companies with product lines and businesses
similar to our own throughout the comparison period and, accordingly, we are
using the same peer group for purposes of the performance graph. Our peer group
index includes the following companies: Activision, Inc., Electronic Arts,
Inc., EMak Worldwide, Inc., Hasbro, Inc., Leapfrog Enterprises, Inc., Mattel,
Inc., Kid Brands, Inc., RC2 Corp., Take-Two Interactive, Inc. and THQ
Inc.  Please note that our peer group no longer includes Marvel
Enterprises, Inc. inasmuch as it was acquired during 2009 and has been
consolidated into the acquiring entity and Russ Berrie and Company, Inc. changed
its name during 2009 to Kid Brands, Inc.




19




The
historical performance data presented below may not be indicative of the future
performance of our common stock, any reference index or any component company in
a reference index.











Annual
Return Percentage




December 31,
                    2005
                  
                  
                  December 31,
                    2006
                  
                  
                  December 31,
                    2007
                  
                  
                  December 31,
                    2008
                  
                  
                  December 31,
                    2009JAKKS
      Pacific
                  
                  
                  (5.3
                  )%
                  
                  
                  4.3
                  %
                  
                  
                  8.1
                  %
                  
                  
                  (12.6
                  )%
                  
                  
                  (41.3
                  )%Peer
      Group
                  
                  
                  (9.5
                  )
                  
                  
                  16.02
                  
                  
                  
                  10.2
                  
                  
                  
                  (48.2
                  )
                  
                  
                  23.3Russell
      2000
                  
                  
                  4.6
                  
                  
                  
                  18.4
                  
                  
                  
                  (1.6
                  )
                  
                  
                  (33.8
                  )
                  
                  
                  (27.2
                  )




Indexed
Returns





January 1,
                    2005
                  
                  
                  December 31,
                    2005
                  
                  
                  December 31,
                    2006
                  
                  
                  December 31,
                    2007
                  
                  
                  December31,
                    2008
                  
                  
                  December 31,
                    2009JAKKS
      Pacific
                  
                  $
                  100.00
                  
                  
                  $
                  94.7
                  
                  
                  $
                  98.8
                  
                  
                  $
                  106.8
                  
                  
                  $
                  93.3
                  
                  
                  $
                  54.8Peer
      Group
                  
                  
                  100.00
                  
                  
                  
                  90.5
                  
                  
                  
                  105.0
                  
                  
                  
                  115.7
                  
                  
                  
                  60.0
                  
                  
                  
                  73.9Russell
      2000
                  
                  
                  100.00
                  
                  
                  
                  104.6
                  
                  
                  
                  123.8
                  
                  
                  
                  121.8
                  
                  
                  
                  80.7
                  
                  
                  
                  102.6





Security
Holders





To the
best of our knowledge, as of March 12, 2010, there were 148
holders of record of our common stock. We believe there are numerous beneficial
owners of our common stock whose shares are held in “street name.”





Dividends





We have
never paid any cash dividends on our common stock. We currently intend to retain
our future earnings, if any, to finance the growth and development of our
business and/or buy back in the market some of our outstanding common stock, but
may consider implementing a plan to pay cash dividends on our common stock in
the future.




20




Equity
Compensation Plan Information





The table
below sets forth the following information as of the year ended December 31,
2009 for (i) all compensation plans previously approved by our stockholders and
(ii) all compensation plans not previously approved by our stockholders, if
any:





(a) the
number of securities to be issued upon the exercise of outstanding options,
warrants and rights;





(b) the
weighted-average exercise price of such outstanding options, warrants and
rights; and





(c) other
than securities to be issued upon the exercise of such outstanding options,
warrants and rights, the number of securities remaining available for future
issuance under the plans.





Plan Category
                      
                      Number of
                        Securities to
                        be Issued
                        upon
                        Exercise of
                        Outstanding
                        Options,
                        Warrants
                        and Rights
                        (a)
                      
                      
                      Weighted-
                        Average Exercise
                        Price of
                        Outstanding
                        Options,
                        Warrants and
                        Rights
                        (b)
                      
                      
                      Number of
                        Securities
                        Remaining
                        Available for
                        Future Issuance
                        Under
                        Equity
                        Compensation
                        Plans (Excluding
                        Securities Reflected
                        in
                        Column (a))
                        (c)Equity
      compensation plans approved by security holders
                      
                      
                      444,715
                      
                      
                      $
                      19.63
                      
                      
                      
                      560,919Equity
      compensation plans not approved by security holders
                      
                      
                      100,000
                      
                      
                      
                      11.35
                      
                      
                      
                      —Total
                      
                      
                      544,715
                      
                      
                      $
                      18.11
                      
                      
                      
                      560,919





Equity
compensation plans approved by our stockholders consists of the 2002 Stock Award
and Incentive Plan. Equity compensation plans not approved by our security
holders consist of a fully-vested warrant issued by us in 2003 (and expiring in
2013) in connection with license costs relating to our video game joint
venture.




21




Item 6. Selected
Financial Data





You
should read the financial data set forth below in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
our consolidated financial statements and the related notes (included in Item
7).





Years
      Ended December 31,2005
                                                
                                                
                                                2006
                                                
                                                
                                                2007
                                                
                                                
                                                2008
                                                
                                                
                                                2009(In
      thousands, except per share data)Consolidated
      Statement of Income Data:Net
      sales
                                                
                                                $
                                                661,536
                                                
                                                
                                                $
                                                765,386
                                                
                                                
                                                $
                                                857,085
                                                
                                                
                                                $
                                                903,397
                                                
                                                
                                                $
                                                803,704Cost
      of sales
                                                
                                                
                                                394,829
                                                
                                                
                                                
                                                470,592
                                                
                                                
                                                
                                                533,435
                                                
                                                
                                                
                                                582,184
                                                
                                                
                                                
                                                600,776Gross
      profit
                                                
                                                
                                                266,707
                                                
                                                
                                                
                                                294,794
                                                
                                                
                                                
                                                323,650
                                                
                                                
                                                
                                                321,213
                                                
                                                
                                                
                                                202,928Selling,
      general and administrative expenses
                                                
                                                
                                                178,722
                                                
                                                
                                                
                                                202,482
                                                
                                                
                                                
                                                216,652
                                                
                                                
                                                
                                                241,301
                                                
                                                
                                                
                                                227,036Write-down
      of intangible assets
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                9,076
                                                
                                                
                                                
                                                8,221Write-down
      of goodwill
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                407,125Reorganization
      charges
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                12,994Income
      (loss) from operations
                                                
                                                
                                                87,985
                                                
                                                
                                                
                                                92,312
                                                
                                                
                                                
                                                106,998
                                                
                                                
                                                
                                                70,836
                                                
                                                
                                                
                                                (452,248
                                                )Profit
      (loss) from video game joint venture
                                                
                                                
                                                9,414
                                                
                                                
                                                
                                                13,226
                                                
                                                
                                                
                                                21,180
                                                
                                                
                                                
                                                17,092
                                                
                                                
                                                
                                                (16,128
                                                )Other
      expense
                                                
                                                
                                                (1,401
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Interest
      income
                                                
                                                
                                                5,183
                                                
                                                
                                                
                                                4,930
                                                
                                                
                                                
                                                6,819
                                                
                                                
                                                
                                                3,396
                                                
                                                
                                                
                                                318Interest
      expense
                                                
                                                
                                                (4,544
                                                )
                                                
                                                
                                                (4,533
                                                )
                                                
                                                
                                                (5,456
                                                )
                                                
                                                
                                                (2,425
                                                )
                                                
                                                
                                                (7,930
                                                )Income
      (loss) before provision (benefit) for income taxes
                                                
                                                
                                                96,637
                                                
                                                
                                                
                                                105,935
                                                
                                                
                                                
                                                129,541
                                                
                                                
                                                
                                                88,899
                                                
                                                
                                                
                                                (476,188
                                                )Provision
      (benefit) for income taxes
                                                
                                                
                                                33,144
                                                
                                                
                                                
                                                33,560
                                                
                                                
                                                
                                                40,550
                                                
                                                
                                                
                                                12,842
                                                
                                                
                                                
                                                (90,678
                                                )Net
      income (loss)
                                                
                                                $
                                                63,493
                                                
                                                
                                                $
                                                72,375
                                                
                                                
                                                $
                                                88,991
                                                
                                                
                                                $
                                                76,057
                                                
                                                
                                                $
                                                (385,510
                                                )Basic
      earnings (loss) per share
                                                
                                                $
                                                2.37
                                                
                                                
                                                $
                                                2.66
                                                
                                                
                                                $
                                                3.22
                                                
                                                
                                                $
                                                2.78
                                                
                                                
                                                $
                                                (14.02
                                                )Basic
      weighted average shares outstanding
                                                
                                                
                                                26,738
                                                
                                                
                                                
                                                27,227
                                                
                                                
                                                
                                                27,665
                                                
                                                
                                                
                                                27,379
                                                
                                                
                                                
                                                27,502Diluted
      earnings (loss) per share
                                                
                                                $
                                                2.06
                                                
                                                
                                                $
                                                2.30
                                                
                                                
                                                $
                                                2.77
                                                
                                                
                                                $
                                                2.42
                                                
                                                
                                                $
                                                (14.02
                                                )Diluted
      weighted average shares and equivalents outstanding
                                                
                                                
                                                32,193
                                                
                                                
                                                
                                                32,714
                                                
                                                
                                                
                                                33,149
                                                
                                                
                                                
                                                32,637
                                                
                                                
                                                
                                                27,502





During
the fourth quarter of 2009, we incurred reorganization charges of $13.0
millionrelated to
office space consolidations and headcount reductions to right-size our general
and administrative expenses, given the decrease in sales in 2009.





During
the second and third quarters of 2009, we booked an aggregate cumulative
write-down of $23.5 million related to our Preferred Return Receivable from our
THQ joint venture as a result of the arbitration ruling which lowered the
preferred return payment from a rate of 10% of net sales of the WWE video games
sold by the joint venture to a rate of 6% of net sales.





During
the second quarter of 2009, we booked a charge of $24.0 million related to the
write-down of certain excess and impaired inventory.  We also booked a
charge of $33.2 million related to the write-down of license advances and
minimum guarantees that are not expected to be earned through sales of that
licensed product.





During
the second quarter of 2009, we determined that the tradenames “Child
Guidance,”  “Play Along” and certain tradenames associated with our
Crafts and Activities product lines would either be discontinued, or were
under-performing.   Consequently, the intangible assets
associated with these tradenames were written off to “Write-down of Intangible
Assets”, resulting in a non-cash charge of $8.2 million.  During the
second quarter of 2009, we determined that the significant decline in our
market capitalization is likely to be sustained.   Our market
capitalization did not change significantly despite the dismissals subject to
appeal of the WWE lawsuit, and the lower revenue expectations for 2009 versus
2008 were factors that indicated that an interim goodwill impairment test was
required. As a result, we determined that $407.1 million, or all of the goodwill
related to previous acquisitions, including the acquisition of Disguise in
December 2008, was impaired. This amount is included in “Write-down of Goodwill”
in the accompanying condensed consolidated statements of
operations.




22


During
the fourth quarter of 2008, we acquired Tollytots, Kids Only and
Disguise.





During
the third quarter of 2008, we decided to discontinue the use of the “Toymax” and
“Trendmaster” tradenames on products and market these products under the JAKKS
Pacific trademark . Consequently, the intangible assets associated with these
tradenames were written off to write-down of intangible assets, resulting in a
charge of $3.5 million. Also, we adjusted the value of the Child Guidance
trademark to reflect lower sales expectations for this tradename, resulting in a
charge to Write-down of Intangible Assets of $5.6 million.





In
February 2006, we acquired Creative Designs.  Also, effective January
1, 2006, we implemented the new share-based compensation guidance, which
required the expensing of share-based compensation.





In June
2005, we acquired the Pet
Pal line of products.





At
      December 31,2005
                    
                    
                    2006
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2009(In
      thousands)Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
                    
                    $
                    240,238
                    
                    
                    $
                    184,489
                    
                    
                    $
                    241,250
                    
                    
                    $
                    169,520
                    
                    
                    $
                    254,837Working
      capital
                    
                    
                    301,454
                    
                    
                    
                    280,363
                    
                    
                    
                    352,452
                    
                    
                    
                    325,061
                    
                    
                    
                    349,365Total
      assets
                    
                    
                    753,955
                    
                    
                    
                    881,894
                    
                    
                    
                    983,664
                    
                    
                    
                    1,028,124
                    
                    
                    
                    634,093Short-term
      debt
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    20,262Long-term
      debt
                    
                    
                    98,000
                    
                    
                    
                    98,000
                    
                    
                    
                    98,000
                    
                    
                    
                    98,000
                    
                    
                    
                    86,728Total
      stockholders’ equity
                    
                    
                    524,651
                    
                    
                    
                    609,288
                    
                    
                    
                    690,997
                    
                    
                    
                    746,953
                    
                    
                    
                    372,109




23




Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors. You should
read this section in conjunction with our consolidated financial statements and
the related notes (included in Item 8).





Critical
Accounting Policies





The
accompanying consolidated financial statements and supplementary information
were prepared in accordance with accounting principles generally accepted in the
United States of America. Significant accounting policies are discussed in Note
2 to the Consolidated Financial Statements, Item 7. Inherent in the application
of many of these accounting policies is the need for management to make
estimates and judgments in the determination of certain revenues, expenses,
assets and liabilities. As such, materially different financial results can
occur as circumstances change and additional information becomes known. The
policies with the greatest potential effect on our results of operations and
financial position include:





Allowance for
Doubtful Accounts.    Our allowance for doubtful accounts
is based on management’s assessment of the business environment, customers’
financial condition, historical collection experience, accounts receivable
aging, customer disputes and the collectability of specific customer accounts.
If there were a deterioration of a major customer’s creditworthiness, or actual
defaults were higher than our historical experience, our estimates of the
recoverability of amounts due to us could be overstated, which could have an
adverse impact on our operating results. The allowance for doubtful accounts is
also affected by the time at which uncollectible accounts receivable balances
are actually written off.





Major
customers’ accounts are monitored on an ongoing basis; more in depth reviews are
performed based on changes in customer’s financial condition and/or the level of
credit being extended. When a significant event occurs, such as a bankruptcy
filing by a specific customer, and on a quarterly basis, the allowance is
reviewed for adequacy and the balance or accrual rate is adjusted to reflect
current risk prospects.





Revenue
Recognition.Our revenue recognition policy is to recognize revenue when
persuasive evidence of an arrangement exists, title transfer has occurred
(product shipment), the price is fixed or readily determinable, and
collectability is probable. Sales are recorded net of sales returns and
discounts, which are estimated at the time of shipment based upon historical
data. JAKKS routinely enters into arrangements with its customers to provide
sales incentives, support customer promotions, and provide allowances for
returns and defective merchandise. Such programs are based primarily on customer
purchases, customer performance of specified promotional activities, and other
specified factors such as sales to consumers. Accruals for these programs are
recorded as sales adjustments that reduce gross revenue in the period the
related revenue is recognized.





Goodwill and
other indefinite-lived intangible assets.  Goodwill and
indefinite-lived intangible assets are not amortized, but are tested for
impairment at least annually at the reporting unit level.





Factors
we consider important which could trigger an impairment review include the
following:


·
            significant
      underperformance relative to expected historical or projected future
      operating results;·
            significant
      changes in the manner of our use of the acquired assets or the strategy
      for our overall business; and·
            significant
      negative industry or economic
trends.





Due to
the subjective nature of the impairment analysis significant changes in the
assumptions used to develop the estimate could materially affect the conclusion
regarding the future cash flows necessary to support the valuation of long-lived
assets, including goodwill. The valuation of goodwill involves a high degree of
judgment and consists of a comparison of the fair value of a reporting unit with
its book value. Based on the assumptions underlying the valuation, impairment is
determined by estimating the fair value of a reporting unit and comparing that
value to the reporting unit’s book value. If the implied fair value is more than
the book value of the reporting unit, an impairment loss is not indicated. If
impairment exists, the fair value of the reporting unit is allocated to all of
its assets and liabilities excluding goodwill, with the excess amount
representing the fair value of goodwill. An impairment loss is measured as the
amount by which the book value of the reporting unit’s goodwill exceeds the
estimated fair value of that goodwill.




During
the third quarter of 2008, we decided to discontinue the use of the “Toymax” and
“Trendmaster” tradenames on products and market these products under the JAKKS
Pacific trademark. Consequently, the intangible assets associated with these
tradenames were written off to Write-down of Intangible Assets, resulting in a
charge of $3.5 million. Also, we adjusted the value of the Child Guidance
trademark to reflect lower sales expectations for this tradename, resulting in a
charge to Write-down of Intangible Assets of $5.6 million.




24





During
the second quarter of 2009, the Company determined that the significant decline
in its market capitalization is likely to be sustained.   The
Company’s market capitalization was not significantly affected by the
substantial resolution of the WWE lawsuit, and the lower revenue expectations
for 2009 versus 2008 were factors that indicated that an interim goodwill
impairment test was required. As a result, the Company determined that $407.1
million, or all of the goodwill related to previous acquisitions, including the
acquisition of Disguise in December 2008, was impaired. This amount is included
in Write-down of Goodwill in the accompanying consolidated statements of
operations.





During
the second quarter of 2009, the Company determined that the tradenames “Child
Guidance” and “Play Along” and certain tradenames associated with our Craft and
Activity product lines would either be discontinued, or were under
performing.   Consequently, the intangible assets associated with
these tradenames were written off to Write-down of Intangible Assets, resulting
in a non-cash charge of $8.2 million.




Goodwill
and intangible assets amounted to $40.9 million as of December 31,
2009.





Reserve for
Inventory Obsolescence.  We value our inventory at the lower of
cost or market. Based upon a consideration of quantities on hand, actual and
projected sales volume, anticipated product selling prices and product lines
planned to be discontinued, slow-moving and obsolete inventory is written down
to its net realizable value.





Failure
to accurately predict and respond to consumer demand could result in the Company
under producing popular items or overproducing less popular items. Furthermore,
significant changes in demand for our products would impact management’s
estimates in establishing our inventory provision.





Management
estimates are monitored on a quarterly basis and a further adjustment to reduce
inventory to its net realizable value is recorded, as an increase to cost of
sales, when deemed necessary under the lower of cost or market
standard.





Income Allocation
for Income Taxes. Our annual income tax provision and related
income tax assets and liabilities are based on actual income as allocated to the
various tax jurisdictions based upon our transfer pricing study, US and foreign
statutory income tax rates, and tax regulations and planning opportunities in
the various jurisdictions in which the Company operates.  Significant
judgment is required in interpreting tax regulations in the US and foreign
jurisdictions, and in evaluating worldwide uncertain tax
positions.  Actual results could differ materially from those
judgments, and changes from such judgments could materially affect our
consolidated financial statements.





Income taxes and
interest and penalties related to income tax payable. We do
not file a consolidated return with our foreign subsidiaries.  We file
federal and state returns and our foreign subsidiaries each file Hong Kong
returns, as applicable.  Deferred taxes are provided on a liability
method whereby deferred tax assets are recognized as deductible temporary
differences and operating loss and tax credit carry-forwards and deferred tax
liabilities are recognized for taxable temporary
differences.  Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax
basis.  Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.  Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.





As of
January 1, 2007, we adopted a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected
to be taken in a tax return.  As of the date of adoption, tax benefits
that are subject to challenge by tax authorities are analyzed and accounted for
in the income tax provision.  The cumulative effect of the potential
liability for unrecognized tax benefits prior to the adoption of a recognition
threshold and measurement process for recording in the financial statements
uncertain tax positions taken or expected to be taken in a tax return, along
with the associated interest and penalties, are recognized as a reduction in the
January 1, 2007 balance of retained earnings.





We
accrue a tax reserve for additional income taxes and interest, which may become
payable in future years as a result of audit adjustments by tax
authorities.  The reserve is based on management’s assessment of all
relevant information, and is periodically reviewed and adjusted as circumstances
warrant.  As of December 31, 2009, our income tax reserves are
approximately $16.8 million and relate to the potential income tax audit
adjustments, primarily in the areas of income allocation, foreign depreciation
allowances and transfer pricing.





We
recognize current period interest expense and the reversal of previously
recognized interest expense that has been determined to not be assessable due to
the expiration of the related audit period or other compelling factors on the
income tax liability for unrecognized tax benefits as interest expense, and
penalties and penalty reversals related to the income taxes payable as other
expense in our consolidated statements of operations.




25


Share-Based
Compensation. We grant restricted stock and options to purchase our
common stock to our employees (including officers) and non-employee directors
under our 2002 Stock Award and Incentive Plan (the “Plan”), which incorporated
the shares remaining under our Third Amended and Restated 1995 Stock Option
Plan. The benefits provided under the Plan are share-based payments. We estimate
the value of share-based awards on the date of grant using the Black-Scholes
option-pricing model. The determination of the fair value of share-based payment
awards on the date of grant using an option-pricing model is affected by our
stock price, as well as assumptions regarding a number of complex and subjective
variables. These variables include our expected stock price volatility over the
term of the awards, actual and projected employee stock option exercise
behaviors, cancellations, terminations, risk-free interest rates and expected
dividends.




Recent
Developments




In
October 2008, we acquired substantially all of the assets of Tollytots
Limited.  The total initial consideration of $26.8 million consisted
of $12.0 million in cash and the assumption of liabilities in the amount of
$14.8 million, and resulted in goodwill of $4.1 million, all of which has been
determined to be impaired and was written off in the quarter ended June 30,
2009. In addition, we agreed to pay an earn-out of up to an aggregate amount of
$5.0 million in cash over the three calendar years following the acquisition
based on the achievement of certain financial performance criteria, which will
be recorded as goodwill when and if earned. In the first earn-out period ended
December 31, 2009, no portion of the earn-out was
earned.  Tollytots is a leading designer and producer
of licensed baby dolls and baby doll pretend play accessories based on
well-known brands and was included in our results of operations from the date of
acquisition.





In
October 2008, we acquired substantially all of the stock of Kids Only, Inc. and
a related Hong Kong company, Kids Only Limited (collectively, “Kids
Only”).  The total initial consideration of $23.8 million consisted of
$20.4 million in cash and the assumption of liabilities in the amount of $3.4
million, and resulted in goodwill of $13.2 million, all of which has been
determined to be impaired and was written off in the quarter ended June 30,
2009. In addition, we agreed to pay an earn-out of up to an aggregate amount of
$5.6 million in cash over the three calendar years following the acquisition
based on the achievement of certain financial performance criteria, which will
be recorded as goodwill when and if earned. The first earn-out period ended
September 30, 2009 is under review.  Kids Only is a leading designer
and producer of licensed indoor and outdoor kids’ furniture, and has an
extensive portfolio which also includes baby dolls and accessories, room décor
and a myriad of other children’s toy products  and was included in our
results of operations from the date of acquisition.





In
December 2008, we acquired certain assets of Disguise, Inc. and a related Hong
Kong company, Disguise Limited (collectively, “Disguise”).  The total
initial consideration of $60.6 million consisted of $38.6 million in cash and
the assumption of liabilities in the amount of $22.0 million, and resulted in
goodwill of $30.6 million, all of which has been determined to be impaired and
was written off in the quarter ended June 30, 2009. We finalized our purchase
price allocation for Disguise and engaged a third party to perform studies and
valuations to the estimated fair value of assets and liabilities
assumed.  Disguise is a leading designer and producer of Halloween and
everyday costume play and was included in our results of operations from the
date of acquisition





On
November 10, 2009, we sold an aggregate of $100.0 million of 4.50% Convertible
Senior Notes due 2014 (the “Notes”). The Notes are senior unsecured obligations
of JAKKS, will pay interest semi-annually at a rate of 4.50% per annum and will
mature on November 1, 2014. The conversion rate will initially be 63.2091 shares
of our common stock per $1,000 principal amount of notes (equivalent to an
initial conversion price of approximately $15.82 per share of common stock),
subject to adjustment in certain circumstances. Prior to August 1, 2014, holders
of the Notes may convert their Notes only upon specified events. Upon
conversion, the Notes may be settled, at our election, in cash, shares of our
common stock, or a combination of cash and shares of our common stock. Holders
of the Notes may require us to repurchase for cash all or some of their Notes
upon the occurrence of a fundamental change (as defined in the
Notes).





We used a
portion of the net proceeds from the offering to repurchase $77.7 million of our
4.625% convertible senior notes due in 2023 and intend to repurchase the
remaining $20.3 million of our 4.625% convertible senior notes in June
2010.




On
December 22, 2009 we entered into a Settlement Agreement and Mutual Release
pursuant to which our joint venture with THQ was terminated as of December 31,
2009 and we will receive fixed payments from THQ of $6.0 million on each of June
30, 2010 and 2011 and $4.0 million on each of June 30, 2012 and 2013 which we
will record as income on a cash basis over the term.




26




Results
of Operations





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





Years Ended December 31,2007
                                                    
                                                    
                                                    2008
                                                    
                                                    
                                                    2009Net
      Sales
                                                    
                                                    
                                                    100.0
                                                    %
                                                    
                                                    
                                                    100.0
                                                    %
                                                    
                                                    
                                                    100.0
                                                    %Cost
      of Sales
                                                    
                                                    
                                                    62.2
                                                    
                                                    
                                                    
                                                    64.4
                                                    
                                                    
                                                    
                                                    74.8Gross
      profit
                                                    
                                                    
                                                    37.8
                                                    
                                                    
                                                    
                                                    35.6
                                                    
                                                    
                                                    
                                                    25.2Selling,
      general and administrative expenses
                                                    
                                                    
                                                    25.3
                                                    
                                                    
                                                    
                                                    26.7
                                                    
                                                    
                                                    
                                                    28.2Write-down
      of intangible assets
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    1.0
                                                    
                                                    
                                                    
                                                    1.0Write-down
      of goodwill
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    50.7Reorganization
      charges
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    1.6Income
      (loss) from operations
                                                    
                                                    
                                                    12.5
                                                    
                                                    
                                                    
                                                    7.9
                                                    
                                                    
                                                    
                                                    (56.3
                                                    )Profit
      (loss) from video game joint venture
                                                    
                                                    
                                                    2.5
                                                    
                                                    
                                                    
                                                    1.9
                                                    
                                                    
                                                    
                                                    (2.0
                                                    )Other
      expense
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    —Interest
      income
                                                    
                                                    
                                                    0.7
                                                    
                                                    
                                                    
                                                    0.4
                                                    
                                                    
                                                    
                                                    —Interest
      expense
                                                    
                                                    
                                                    (0.6
                                                    )
                                                    
                                                    
                                                    (0.3
                                                    )
                                                    
                                                    
                                                    (1.0
                                                    )Income
      (loss) before provision (benefit) for income taxes
                                                    
                                                    
                                                    15.1
                                                    
                                                    
                                                    
                                                    9.9
                                                    
                                                    
                                                    
                                                    (59.3
                                                    )Provision
      (benefit) for income taxes
                                                    
                                                    
                                                    4.7
                                                    
                                                    
                                                    
                                                    1.4
                                                    
                                                    
                                                    
                                                    (11.3
                                                    )Net
      income (loss)
                                                    
                                                    
                                                    10.4
                                                    %
                                                    
                                                    
                                                    8.5
                                                    %
                                                    
                                                    
                                                    (48.0
                                                    )%





The
following table summarizes, for the periods indicated, certain income statement
data by segment (in thousands).




Years Ended December 31,2007
                          
                          
                          2008
                          
                          
                          2009Net
      SalesTraditional
      Toys
                          
                          $
                          792,998
                          
                          
                          $
                          816,852
                          
                          
                          $
                          713,984Craft/Activity/Writing
      Products
                          
                          
                          39,632
                          
                          
                          
                          65,888
                          
                          
                          
                          73,513Pet
      Products
                          
                          
                          24,455
                          
                          
                          
                          20,657
                          
                          
                          
                          16,207857,085
                          
                          
                          
                          903,397
                          
                          
                          
                          803,704Cost
      of SalesTraditional
      Toys
                          
                          
                          490,279
                          
                          
                          
                          526,989
                          
                          
                          
                          531,647Craft/Activity/Writing
      Products
                          
                          
                          26,970
                          
                          
                          
                          38,693
                          
                          
                          
                          54,652Pet
      Products
                          
                          
                          16,186
                          
                          
                          
                          16,502
                          
                          
                          
                          14,477533,435
                          
                          
                          
                          582,184
                          
                          
                          
                          600,776Gross
      MarginTraditional
      Toys
                          
                          
                          302,719
                          
                          
                          
                          289,862
                          
                          
                          
                          182,337Craft/Activity/Writing
      Products
                          
                          
                          12,662
                          
                          
                          
                          27,196
                          
                          
                          
                          18,861Pet
      Products
                          
                          
                          8,269
                          
                          
                          
                          4,155
                          
                          
                          
                          1,730$
                          323,650
                          
                          
                          $
                          321,213
                          
                          
                          $
                          202,928





Comparison
of the Years Ended December 31, 2009 and 2008





Net Sales





Traditional Toys.
  Net sales of our Traditional Toys segment were $714.0 million in
2009, compared to $816.9 million in 2008, representing a decrease of $102.9
million, or 12.6%.  The decrease in net sales was primarily due to
lower unit sales of our WWE®, Narnia® and Pokemon® action figures and
accessories, JAKKSTM dolls based on Hannah Montana® and Camp RockTM, electronics
based on JAKKSTM Plug It In & Play TV GamesTM, G2 Game GirlTM, UltimotionTM and
EyeClops® brands, role-play and dress-up toys, including those based on Disney
characters Hannah Montana®, classic princesses and fairies, and other JAKKS
products, including Neopets®, Doodle Bears® and Care Bears® plush, Cabbage Patch
Kids®, In My Pocket & FriendsTM and junior sports products. This
was offset in part by increases in unit sales of some
products, including Club PenguinTM, Hello Kitty®, Smurfs® and SkelanimalsTM
plush, SpongeBob SquarePants®, Lucky BeeBeeTM activities, Fly Wheels®, JAKKS
vehicles and Discovery Kids® toys and the contribution to sales from
our Tollytots, Kids Only and Disguise acquisitions of $169.0
million.




27





Craft/Activity/Writing
Products.  Net sales of our Craft/Activity/Writing Products
were $73.5 million in 2009, compared to $65.9 million in 2008, representing an
increase of $7.6 million, or 11.5%.  The increase in net sales was
primarily due to increases in unit sales of our Girl GourmetTM and JAKKS activity
toys, offset in part by decreases in unit sales of our Spa FactoryTM line of
products, Creepy Crawlers® activities products, our SpinzTM writing instruments
and our PentechTM and Color Workshop® writing instruments and related
products.





Pet Products.  Net
sales of our Pet Products were $16.2 million in 2009, compared to $20.7 million
in 2008, representing a decrease of $4.5 million, or 21.7%.  The
decrease is mainly attributable to the less available shelf space for pet
products at some of our major customer retail stores, and lower unit sales of
consumable pet products. Sales of pet products were led by our AKC® licensed
line of products.




Cost of
Sales




Traditional
Toys.  Cost of sales of our Traditional Toys segment was $531.6
million, or 74.5% of related net sales, in 2009, compared to $527.0 million, or
64.5% of related net sales, in 2008, representing an increase of $4.6 million,
or 0.9%.  This percentage margin increase is primarily due
to charges of $18.8 million related to the write-down of certain excess and
impaired inventory and $32.6 million related to the write-down of license
advances and minimum guarantees that are not expected to be earned through sales
of that licensed product. Excluding these one time charges, cost of sales
decreased by $46.8 million to $480.3 million, or 67.3% of net
sales, which primarily consisted of a decrease in product costs of $34.0
million, which is in line with the lower volume of sales.  Product
costs as a percentage of sales increased primarily due to the mix of the product
sold and higher sales of closeout product.  Excluding the one time
charges, royalty expense for our Traditional Toys segment decreased by $14.4
million due to lower volume of sales and to changes in the product mix to
more products with lower royalty rates or proprietary products with no royalty
rates from products with higher royalty rates.  Royalty expense as a
percentage of net sales was comparable year-over-year. Our depreciation of molds
and tools increased by $1.7 million primarily due to increased purchases of
molds and tools in this segment.





Craft/Activity/Writing
Products.  Cost of sales of our Craft/Activity/Writing Products
segment was $54.7 million, or 74.4% of related net sales, in 2009, compared to
$38.7 million, or 58.7% of related net sales, in 2008, representing an increase
of $16.0 million, or 41.3%.  This percentage margin increase is
partially due to charges of $4.5 million related to the write-down of certain
excess and impaired inventory and $0.3 related to the write-down of license
advances and minimum guarantees that are not expected to be earned out
through sales of that licensed product.  Excluding these one time
charges, cost of sales increased by $11.2 million to $49.9 million, or 67.9% of
net sales, which primarily consisted of an increase in product costs of $5.1
million, which is in line with the higher volume of sales and higher sales of
closeout product.  Product costs as a percentage of net sales
increased primarily due to the mix of the product sold and higher sales of
closeout product.  Excluding the one time charges, royalty expense
increased by $4.5 million and 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 royalty rates. Our depreciation of
molds and tools increased by $1.6 million primarily due to increased purchases
of molds and tools in this segment.





Pet Products.  Cost
of sales of our Pet Pal line of products was $14.5 million, or 89.5% of related
net sales, in 2009, compared to $16.5 million, or 79.9% of related net sales, in
2008, representing a decrease of $2.0 million, or
12.1%.  This percentage margin increase is primarily due to
charges of $0.8 million related to the write-down of certain excess and impaired
inventory and $0.4 related to the write-down of license advances and minimum
guarantees that are not expected to be earned out through sales of that
licensed product.  Excluding these one time charges, cost of sales
decreased by $3.2 million to $13.4 million, or 82.7% of net sales, which
primarily consisted of a decrease in product costs of $2.7 million, which is in
line with the lower volume of sales.    Product costs as a
percentage of net sales increased primarily due to the mix of the product sold
and higher sales of closeout product.  Royalty expense decreased by
$0.7 million due to the lower volume of sales and as a percentage of sales due
to changes in the product mix to more products with lower royalty rates or
proprietary products with no royalty rates from products with higher royalty
rates.  Our depreciation of molds and tools increased by $0.2 million
primarily due to increased purchases of molds and tools in this
segment.





Selling, General and
Administrative Expenses




Selling,
general and administrative expenses were $227.0 million in 2009 and $241.3
million in 2008, constituting 28.2% and 26.7% of net sales,
respectively.  The overall decrease of $14.3 million in such costs was
primarily due to decreases in general and administrative expenses ($18.8
million), product development ($9.9 million), share-based compensation ($2.9
million) and direct selling expenses ($25.3 million), off set in part by the
addition of overhead related to the operations of Tollytots, Kids Only and
Disguise ($40.5 million) and an increase in depreciation and amortization
($2.1million).   The decrease in general and administrative expenses
is primarily due to decreases in bonus expense ($9.0 million), travel and
entertainment expense ($3.0 million), temporary help expense ($2.6 million),
donations expense ($3.2 million) and legal expense ($3.6 million), net of
insurance reimbursements, offset in part by increases in, the reversal of
penalty reserves ($1.9 million) in 2008 with no such reversals in 2009, a loss
incurred from disposal of molds and tools used for production of our inventory
($2.3 million) and foreign currency expense ($1.9 million).  Product
development expenses decreased as a result of tighter control of spending on
product development, offset in part by higher product testing
expenses.  The decrease in direct selling expenses is primarily due to
decreases in advertising and promotional expenses of $16.2 million in 2009 in
support of several of our product lines, sales commissions ($1.9 million) and
other direct selling expenses of $7.3 million that support our domestic
operations.  From time to time, we may increase or decrease our
advertising efforts, if we deem it appropriate for particular
products.  The increase in depreciation and amortization is mainly due
to an increase in amortization expensed related to intangible assets other than
goodwill ($3.6 million), offset in part by a decrease in depreciation of
tangible assets.


28




Write-down of Intangible
Assets




As of
June 30, 2009, we determined that the tradenames “Child Guidance,” “Play Along”
and certain tradenames associated with our Crafts and Activities product lines
would either be discontinued, or were under-performing. Consequently, the
intangible assets associated with these tradenames were written off to
“Write-down of Intangible Assets”, resulting in a non-cash charge of $8.2
million. During the third quarter of 2008, the Company discontinued the use of
the “Toymax” and “Trendmaster” tradenames on products and market these products
under the JAKKS Pacific trademark. Consequently, the intangible assets
associated with these tradenames were written off to Write-down of Intangible
Assets, resulting in a charge of $3.5 million. Also, the Company adjusted the
value of the Child Guidance trademark to reflect lower sales expectations for
this tradename, resulting in a charge to Write-down of Intangible Assets of $5.6
million.





Write-down of
Goodwill




During
the three months ended June 30, 2009, we determined that the significant decline
in our market capitalization is likely to be
sustained.   Our market capitalization did not change
significantly despite the dismissals subject to appeal of the WWE lawsuit, and
the lower revenue expectations for 2009 versus 2008 were factors that indicated
that an interim goodwill impairment test was required. As a result, we
determined that $407.1 million, or all of the goodwill related to previous
acquisitions, including the acquisition of Disguise in December 2008, was
impaired. This amount is included in “Write-down of Goodwill” in the
accompanying condensed consolidated statements of operations.




Reorganization
Charges





We
incurred reorganization charges in 2009 to consolidate and stream-line our
existing business functions.  This was especially necessary given the
decreased volume of consolidated sales in 2009 from 2008 and the added general
and administrative expenses from the three acquisitions made at the end of
2008.  We had no reorganization charges in
2008.  Restructuring charges relate to the termination of lease
obligations, one-time severance termination benefits, fixed asset write-offs and
other contract terminations and are accounted for in accordance with “Exit and
Disposal Cost Obligations”, ASC 420-10.  We established a liability
for a cost associated with an exit or disposal activity when a liability is
incurred, rather than at the date we commit to an exit plan.





These
reorganization charges relate to our Traditional segment and are included in
Reorganization Charges in the consolidated statements of
operations.  The components of the reorganization charges are as
follows (in thousands):




Accrued Balance
                        
                        
                        
                        
                        
                        
                        
                        
                        Accrued BalanceDecember 31, 2008
                        
                        
                        Accrual
                        
                        
                        Actual
                        
                        
                        December 31, 2009Lease
      abandonment costs
                        
                        $
                        —
                        
                        
                        $
                        10,164
                        
                        
                        $
                        (322
                        )
                        
                        $
                        9,842Employee
      severance
                        
                        
                        —
                        
                        
                        
                        1,541
                        
                        
                        
                        (1,538
                        )
                        
                        
                        3Fixed
      asset write-off
                        
                        
                        —
                        
                        
                        
                        1,017
                        
                        
                        
                        (883
                        )
                        
                        
                        134Other
                        
                        
                        —
                        
                        
                        
                        272
                        
                        
                        
                        (107
                        )
                        
                        
                        165Total
      reorganization charges
                        
                        $
                        —
                        
                        
                        $
                        12,994
                        
                        
                        $
                        (2,850
                        )
                        
                        $
                        10,144




Profit from Video Game Joint
Venture




We
incurred a loss from our video game joint venture in 2009 of $16.1 million, as
compared to a profit of $17.1 million in 2008, primarily due to a cumulative
$23.5 million write-down as a result of the arbitration ruling which lowered the
preferred return payment from a rate of 10% of net sales of the WWE video games
sold by the joint venture to a rate of 6% of net sales and to legal fees of $3.7
million which was partially offset by profit of $11.1
million.   Net profit for 2009 was $7.4 million before the
cumulative write-down to the receivable.  Pursuant to a Settlement
Agreement and Mutual Release dated December 22, 2009, the joint venture was
terminated on December 31, 2009 and we will receive fixed
payments from THQ of $6.0 million on each of June 30, 2010 and
2011 and $4.0 million on each of June 30, 2012 and 2013 which we
will record as income on a cash basis over the term (see “Legal
Proceedings”).




29


Interest
Income




Interest
income in 2009 was $0.3 million, as compared to $3.4 million in
2008.  The decrease is due to lower interest rates during 2009
compared to 2008 and lower average cash balances.




Interest
Expense




Interest
expense was $7.9 million in 2009, as compared to $2.4 million in 2008. In 2009,
we booked interest expense of $7.1 million related to our convertible senior
notes payable and net interest expense of $0.8 million related to uncertain tax
positions taken or expected to be taken in a tax return.  In 2008, we
booked interest expense of $4.5 million related to our convertible senior notes
payable, off set in part by a net benefit of $2.2 million related to uncertain
tax positions taken or expected to be taken in a tax return.





Provision for Income
Taxes




Our
income tax benefit, which includes federal, state and foreign income taxes, and
discrete items, was $90.7 million, or an effective tax benefit rate of 19.0% for
2009. During 2008, the income tax provision was $12.8 million, or an effective
tax provision rate of 14.4%.





In 2009,
the impairment of goodwill and trademarks, totaling $90.7 million, the
correction of purchase accounting of $6.2 million, and write-down of NOLs and
tax credits of $6.1 million were reductions to the tax benefit rate realized,
partially offset by discrete adjustments for uncertain tax positions of $3.2
million (see Note 12 of the Notes to Condensed Consolidated Financial
Statements, supra).  Exclusive
of the discrete items, the 2009 effective tax benefit rate would be 40.1%. In
2008, the discrete adjustments were mainly the 2007 income tax provision to the
actual income tax liability of $4.0 million, and the recognition of a previously
recorded potential income tax liability of $9.3 million for uncertain tax
positions that are no longer subject to audit due to the closure of the audit
period.  Exclusive of the discrete items, the 2008 effective tax
provision rate would be 30.5%.





As of
December 31, 2009, we had net deferred tax assets of approximately $73.0
million for which an allowance of $0.9 million has been provided since, in the
opinion of management, realization of the future benefit is
uncertain.





Comparison
of the Years Ended December 31, 2008 and 2007





Net
Sales





Traditional
Toy.  Net sales of our Traditional Toys segment were $816.9
million in 2008, compared to $793.0 million in 2007, representing an increase of
$23.9 million, or 3.0%.  The increase in net sales was primarily due
to the contribution to sales from our Tollytots and Kids Only acquisitions of
$10.4 million and strong sales of JAKKSTM dolls based on Hannah Montana®, Camp
RockTM, Puppy In My Pocket & FriendsTM and Narnia®, electronics based on
JAKKS’ Eye Clops®, G2 Game GirlTM and UltiMotionTM brands, role-play and dress-up
toys, including those based on Disney characters Hannah Montana® and classic
princesses, and other products including Neopets® plush, offset in part by
decreases in sales of some products, including WWE® and Pokemon® action figures
and accessories, and other JAKKS products, including Plug It In & Play TV
GamesTM, Fly Wheels® XPV products®, Doodle Bears®, Care Bears®, Cabbage Patch
Kids®, Speedstacks®, The Cheetah GirlsTM toys and junior sports
products.




Craft/Activity/Writing
Product.  Net sales of our Craft/Activity/Writing Products were
$65.9 million in 2008, compared to $39.6 million in 2007, representing an
increase of $26.3 million, or 66.4%.  The increase in net sales was
primarily due to increases in sales of our Girl GourmetTM and Spa FactoryTM
activity toys and our SpinzTM writing instruments, offset in part by decreases in
sales of our Flying Colors® and Vivid Velvet® activities products and our
PentechTM and Color Workshop® writing instruments and related
products.





Pet Products.  Net
Sales of our Pet Products were $20.7 million in 2008, compared to $24.5 million
in 2007, representing a decrease of $3.8 million, or 15.5%.  The
decrease is mainly attributable to the less available shelf space for pet
products at some of our major customer retail stores, and lower sales of
consumable pet products. Sales of pet products were led by our AKC licensed line
of products.





Cost of
Sales





Traditional
Toys.  Cost of sales of our Traditional Toys segment was $527.0
million, or 64.5% of related net sales, in 2008, compared to $490.3 million, or
61.8% of related net sales, in 2007, representing an increase of $36.7 million,
or 7.5%.  The increase primarily consisted of an increase in product
costs of $26.9 million, which is in line with the higher volume of
sales.  Product costs as a percentage of sales increased primarily due
to the mix of the product sold with higher product cost.  Furthermore,
royalty expense for our Traditional Toys segment increased by $3.6 million, but
remained consistent  as a percentage of net sales. Our depreciation of
molds and tools increased by $6.2 million due to the increased number of new
products being sold in this segment in 2008.




30


Craft/Activity/Writing
Products.  Cost of sales of our Craft/Activity/Writing Products
segment was $38.7 million, or 58.7% of related net sales, in 2008, compared to
$27.0 million, or 68.1% of related net sales, in 2007, representing an increase
of $11.7 million, or 43.3%.  Product costs increased by $13.7 million,
which is in line with the higher volume of sales.  Product costs as a
percentage of net sales decreased primarily due to the mix of the product sold
and lower sales of closeout product.  Royalty expense decreased by
$2.3 million and as a percentage of net sales due to changes in the product mix
to more products with lower royalty rates or proprietary products with no
royalty rates from products with higher royalty rates. Our depreciation of molds
and tools increased by $0.4 million due to the increased number of new products
being sold in this segment in 2008.





Pet Products.  Cost
of sales of our Pet Pal line of products was $16.5 million, or 79.9% of related
net sales, in 2008, compared to $16.2 million, or 66.2% of related net sales, in
2007, representing an increase of $0.3 million, or
1.9%.   Product costs as a percentage of net sales increased
primarily due to the mix of the product sold and sell-off of closeout
product.  Royalty expense decreased by $0.1 million and as a
percentage of sales. Additionally, our depreciation of molds and tools decreased
by $0.3 million in 2008 due to less new products requiring molds and
tools.





Selling, General and
Administrative Expenses





Selling,
general and administrative expenses were $241.3 million in 2008 and $216.7
million in 2007, constituting 26.7% and 25.3% of net sales,
respectively.  The overall increase of $24.6 million in such costs was
primarily due to the addition of overhead related to the operations of
Tollytots, Kids Only and Disguise ($3.4 million) and increases in general and
administrative expenses ($5.3 million), product development ($11.4 million), and
other selling expenses ($11.0 million), offset in part by decreases in
amortization expense related to intangible assets other than goodwill ($5.1
million) and share-based compensation expense ($1.8 million).  The
increase in general and administrative expenses is primarily due to increases in
salary and payroll taxes ($4.7 million) to support our growing business, travel
and entertainment expense ($1.1 million), legal expense ($5.7 million), net of
insurance reimbursements, bad debt expense ($1.0 million) due to refunds in 2007
of customer bankruptcies that had been previously written off and rent expense
($1.1 million), offset in part by offset in part by the reversal of FIN 48
penalty reserves ($1.4 million) related to income taxes and bonus expense ($9.1
million) due to the Company achieving a lower EPS growth. The increase in direct
selling expenses is primarily due to an increase in advertising and promotional
expenses of $7.5 million in 2008 in support of several of our product lines and
other direct selling expenses of $4.4 million to support the increase in
domestic sales, offset in part by decreases in sales commissions ($1.0
million).  From time to time, we may increase or decrease our
advertising efforts, if we deem it appropriate for particular
products.





Write-down of Intangible
Assets





Write-down
of intangible assets was $9.1 million in 2008, as compared to nil in 2007. We
decided to discontinue the use of the “Toymax” and “Trendmaster” tradenames on
products and market these products under the JAKKS Pacific trademark.
Consequently, the intangible assets associated with these tradenames were
written off to Write-down of Intangible Assets, resulting in a charge of $3.5
million. Also, we adjusted the value of the Child Guidance trademark to reflect
lower sales expectations for this tradename, resulting in a charge to write-down
of intangible assets of $5.6 million.





Profit from Video Game Joint
Venture





Profit
from our video game joint venture in 2008 decreased to $17.1 million, as
compared to $21.2 million in 2007, due to the lower sales of video
games.  In 2008, the Smackdown vs. Raw 2008 game and video games on
the new WII game platform were introduced.  The amount of the
preferred return we will receive from the joint venture after June 30, 2006
became subject to change (see “Risk Factors” and “World Wrestling Entertainments
Video Games”).




Interest
Income





Interest
income in 2008 was $3.4 million, as compared to $6.8 million in
2007.  The decrease is due to lower interest rates during 2008
compared to 2007 and lower average cash balances.





Interest
Expense





Interest
expense was $2.4 million in 2008, as compared to $5.5 million in 2007. In 2008,
we booked interest expense of $4.5 million related to our convertible senior
notes payable, off set in part by a net benefit of $2.2 million related to FIN
48 pursuant to our January 1, 2007 adoption of the provisions of FIN 48. In
2007, we booked interest expense of $4.5 million related to our convertible
senior notes payable and net interest expense $0.9 million related to FIN 48
pursuant to our January 1, 2007 adoption of the provisions of FIN
48.




31


Provision for Income
Taxes





Provision
for income taxes includes federal, state and foreign income taxes at effective
tax rates of 31.3% in 2007, and 14.4% in 2008, benefiting from a flat tax rate
of 17.5% and 16.5% for 2007 and 2008, respectively, on the Company’s income
arising in, or derived from, Hong Kong.  The decrease in the effective
rate in 2008 is primarily due to the recognition of certain discrete income tax
adjustments recognized in the quarter ended September 30, 2008 and a change in
the federal tax code which reduced the amount of foreign income includible on
the federal income tax return. These discrete adjustments included the
reconciliation of the 2007 income tax provision to the actual income tax
liability as reflected in the Company’s income tax return in the amount of $5.0
million, and the reduction in income tax expense due to the recognition of a
previously recorded potential income tax liability for uncertain tax positions
that are no longer subject to audit due to the closure of the audit
period.  As of December 31, 2008, the Company had net deferred tax
liability of approximately $8.2 million, inclusive of an allowance of $0.9
million that has been provided since, in the opinion of management, realization
of the future benefit is uncertain.




Quarterly
Fluctuations and Seasonality





We have
experienced significant quarterly fluctuations in operating results and
anticipate these fluctuations in the future. The operating results for any
quarter are not necessarily indicative of results for any future period. Our
first quarter is typically expected to be the least profitable as a result of
lower net sales but substantially similar fixed operating expenses. This is
consistent with the performance of many companies in the toy
industry.





The
following table presents our unaudited quarterly results for the years
indicated. The seasonality of our business is reflected in this quarterly
presentation.





2008
                    
                    
                    2009First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    Fourth
                    
                    
                    First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    FourthQuarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    QuarterNet
      sales
                    
                    $
                    130,935
                    
                    
                    $
                    145,291
                    
                    
                    $
                    357,824
                    
                    
                    $
                    269,347
                    
                    
                    $
                    108,685
                    
                    
                    $
                    144,809
                    
                    
                    $
                    351,438
                    
                    
                    $
                    198,772As
      a % of full year
                    
                    
                    14.5
                    %
                    
                    
                    16.1
                    %
                    
                    
                    39.6
                    %
                    
                    
                    29.8
                    %
                    
                    
                    13.5
                    %
                    
                    
                    18.1
                    %
                    
                    
                    43.7
                    %
                    
                    
                    24.7
                    %Gross
      Profit
                    
                    
                    47,441
                    
                    
                    
                    52,058
                    
                    
                    
                    129,065
                    
                    
                    
                    92,649
                    
                    
                    
                    36,981
                    
                    
                    
                    (6,076
                    )
                    
                    
                    115,709
                    
                    
                    
                    56,314As
      a % of full year
                    
                    
                    14.8
                    %
                    
                    
                    16.2
                    %
                    
                    
                    40.2
                    %
                    
                    
                    28.8
                    %
                    
                    
                    18.2
                    %
                    
                    
                    (3.0
                    )%
                    
                    
                    57.0
                    %
                    
                    
                    27.8
                    %As
      a % of net sales
                    
                    
                    36.2
                    %
                    
                    
                    35.8
                    %
                    
                    
                    36.1
                    %
                    
                    
                    34.4
                    %
                    
                    
                    34.0
                    %
                    
                    
                    (4.2
                    )%
                    
                    
                    32.9
                    %
                    
                    
                    28.3
                    %Income
      (loss) from operations
                    
                    
                    (894
                    )
                    
                    
                    5,568
                    
                    
                    
                    57,338
                    
                    
                    
                    8,824
                    
                    
                    
                    (17,573
                    )
                    
                    
                    (475,178
                    )
                    
                    
                    52,346
                    
                    
                    
                    (12,043
                    )As
      a % of full year
                    
                    
                    (1.3
                    )%
                    
                    
                    7.9
                    %
                    
                    
                    80.9
                    %
                    
                    
                    12.5
                    %
                    
                    
                    3.9
                    %
                    
                    
                    105.0
                    %
                    
                    
                    (11.6
                    )%
                    
                    
                    2.7
                    %As
      a % of net sales
                    
                    
                    (0.7
                    )%
                    
                    
                    3.8
                    %
                    
                    
                    16.0
                    %
                    
                    
                    3.3
                    %
                    
                    
                    (16.2
                    )%
                    
                    
                    (328.1
                    )%
                    
                    
                    14.9
                    %
                    
                    
                    (6.1
                    )%Income
      (loss) before provision (benefit) for income taxes
                    
                    
                    1,300
                    
                    
                    
                    5,994
                    
                    
                    
                    60,803
                    
                    
                    
                    20,802
                    
                    
                    
                    (15,765
                    )
                    
                    
                    (499,276
                    )
                    
                    
                    49,188
                    
                    
                    
                    (10,335
                    )As
      a % of net sales
                    
                    
                    1.0
                    %
                    
                    
                    4.1
                    %
                    
                    
                    17.0
                    %
                    
                    
                    7.7
                    %
                    
                    
                    (14.5
                    )%
                    
                    
                    (344.8
                    )%
                    
                    
                    14.0
                    %
                    
                    
                    (5.2
                    )%Net
      income (loss)
                    
                    
                    877
                    
                    
                    
                    4,156
                    
                    
                    
                    54,145
                    
                    
                    
                    16,879
                    
                    
                    
                    (10,799
                    )
                    
                    
                    (406,562
                    )
                    
                    
                    33,708
                    
                    
                    
                    (1,857
                    )As
      a % of net sales
                    
                    
                    0.7
                    %
                    
                    
                    2.9
                    %
                    
                    
                    15.1
                    %
                    
                    
                    6.3
                    %
                    
                    
                    (9.9
                    )%
                    
                    
                    (280.8
                    )%
                    
                    
                    9.6
                    %
                    
                    
                    (0.9
                    )%Diluted
      (loss) earnings per share
                    
                    $
                    0.03
                    
                    
                    $
                    0.15
                    
                    
                    $
                    1.70
                    
                    
                    $
                    0.55
                    
                    
                    $
                    (0.40
                    )
                    
                    $
                    (14.96
                    )
                    
                    $
                    1.06
                    
                    
                    $
                    (0.07
                    )Weighted
      average shares and equivalents outstanding
                    
                    
                    28,453
                    
                    
                    
                    32,594
                    
                    
                    
                    32,257
                    
                    
                    
                    32,312
                    
                    
                    
                    27,194
                    
                    
                    
                    27,175
                    
                    
                    
                    32,505
                    
                    
                    
                    27,491





During
the third quarter of 2008, we decided to discontinue the use of the “Toymax” and
“Trendmaster” tradenames on products and market these products under the JAKKS
Pacific trademark. Consequently, the intangible assets associated with these
tradenames were written off to Write-down of Intangible Assets, resulting in a
charge of $3.5 million. Also, we adjusted the value of the Child Guidance
trademark to reflect lower sales expectations for this tradename, resulting in a
charge to Write-down of Intangible Assets of $5.6 million.




32


Effective
January 1, 2009, we changed our depreciation methodology for molds and tools
used in the manufacturing of its products from a straight-line basis to a usage
basis, which is more closely correlated to production of goods.  For
the year-ended December 31, 2009, depreciation expense with the useful estimated
life for molds and tools was comparable to the depreciation expense using the
straight-line method, but varied at each quarter-end during 2009.





During
the second quarter of 2009, we booked a charge of $24.0 million related to the
write-down of certain excess and impaired inventory.  We also booked a
charge of $33.2 million related to the write-down of license advances and
minimum guarantees that are not expected to be earned through sales of that
licensed product.





During
the second quarter of 2009, we determined that the significant decline in its
market capitalization is likely to be sustained.   Our market
capitalization was not significantly affected by the substantial resolution of
the WWE lawsuit, and the lower revenue expectations for 2009 versus 2008 were
factors that indicated that an interim goodwill impairment test was required. As
a result, we determined that $407.1 million, or all of the goodwill related to
previous acquisitions, including the acquisition of Disguise in December 2008,
was impaired. This amount is included in “Write-down of Goodwill” in the
accompanying consolidated statements of operations.





During
the second quarter of 2009, we determined that the tradenames “Child Guidance”
and “Play Along” and certain tradenames associated with our Craft and Activity
product lines would either be discontinued, or were under
performing.   Consequently, the intangible assets associated with
these tradenames were written off to “Write-down of Intangible Assets”,
resulting in a non-cash charge of $8.2 million.





During
the second and third quarters of 2009, we booked an aggregate cumulative
write-down of $23.5 million related to our Preferred Return Receivable from our
THQ joint venture as a result of the arbitration ruling which lowered the
preferred return payment from a rate of 10% of net sales of the WWE video games
sold by the joint venture to a rate of 6% of net sales.





During
the fourth quarter of 2009, we incurred reorganization charges of $13.0
millionrelated to
office space consolidations and headcount reductions to right-size our general
and administrative expenses, given the decrease in sales in 2009.





Recent
Accounting Standards





The
provisions of ASC 470-20, “Debt with Conversion and Other
Options” are applicable to the 4.5% convertible notes. ASC 470-20
requires us to separately account for the liability (debt) and equity
(conversion feature) components of the Notes in a manner that reflects our
nonconvertible debt borrowing rate at the date of issuance when interest cost is
recognized in subsequent periods. We allocated $13.7 million of the $100.0
million principal amount of the Notes to the equity component, which represents
a discount to the debt and will be amortized into interest expense through
November 1, 2014.  Accordingly, our effective annual interest rate on
the Notes will be approximately 7.9%. The Notes are classified as long-term debt
in the balance sheet at December 31, 2009 based on their November 1, 2014
maturity date.   Debt issuance costs of approximately $3.5
million are being amortized to interest expense over the five year term of the
Notes.




Liquidity
and Capital Resources





As of
December 31, 2009, we had working capital of $352.2 million, compared to $325.1
million as of December 31, 2008. This increase was primarily attributable to the
net proceeds from the sale of our convertible notes and the cash provided by our
operating activities, offset in part by the retirement of our convertibles
notes.





Operating
activities provided net cash of $98.8 million in 2009, as compared to $60.8
million in 2008. Net cash was provided primarily by changes in working capital.
Our accounts receivable turnover as measured by days sales for the quarter
outstanding in accounts receivable for the three months ended December 31, 2009
increased from approximately 49 days as of December 31, 2008 to approximately 59
days as of December 31, 2009. Other than open purchase orders issued in the
normal course of business, we have no obligations to purchase finished goods
from our manufacturers. As of December 31, 2009, we had cash and cash
equivalents of $254.8 million.





Our
investing activities used net cash of $30.5 million in 2009, as compared to
$104.9 million in 2008, consisting primarily of cash paid for the Creative
Designs earn-out of $5.7 million, and working capital adjustment for Tollytots
of $1.8 million, Kids Only of $3.5 million, and Disguise of $1.2
million; and the purchase of office furniture and equipment and molds and
tooling of $16.3 million used in the manufacture of our products and other
assets. In 2008, our investing activities consisted primarily of cash paid for
the Creative Designs earn-out of $6.7 million, the Play Along earn-out of $6.7
million, the Pet Pal earn-out of $1.7 million and the purchase of office
furniture and equipment and molds and tooling of $22.3 million used in the
manufacture of our products and other assets. As part of our strategy to develop
and market new products, we have entered into various character and product
licenses with royalties generally ranging from 1% to 14% payable on net sales of
such products. As of December 31, 2009, these agreements required future
aggregate minimum guarantees of $91.0 million, exclusive of $60.0 million in
advances already paid. Of this $91.0 million future minimum guarantee, $62.3
million is due over the next twelve months.


33


Our
financing activities provided net cash of $17.0 million in 2009, consisting of
net proceeds from the sale of convertible notes, offset in part by the partial
retirement of previously existing convertible notes. In 2008, financing
activities used cash of $27.6 million, consisting of cash paid for the
repurchase of our common stock and restricted shares, partially offset by
proceeds from the exercise of stock options and the tax benefit from the stock
options exercised.





The
following is a summary of our significant contractual cash obligations for the
periods indicated that existed as of December 31, 2009 and is based on
information appearing in the notes to the consolidated financial statements (in
thousands):





Less than
                        1 year
                      
                      
                      1 – 3
                        years
                      
                      
                      3 – 5
                        years
                      
                      
                      More Than
                        5 years
                      
                      
                      TotalLong-term
      debt
                      
                      $
                      20,262
                      
                      
                      $
                      —
                      
                      
                      $
                      100,000
                      
                      
                      $
                      —
                      
                      
                      $
                      120,262Interest
      on long-term debt
                      
                      
                      8,867
                      
                      
                      
                      26,601
                      
                      
                      
                      7,770
                      
                      
                      
                      —
                      
                      
                      
                      43,238Operating
      leases
                      
                      
                      14,000
                      
                      
                      
                      26,353
                      
                      
                      
                      5,644
                      
                      
                      
                      2,868
                      
                      
                      
                      48,865Minimum
      guaranteed license/royalty  payments
                      
                      
                      62,284
                      
                      
                      
                      27,214
                      
                      
                      
                      —
                      
                      
                      
                      1,500
                      
                      
                      
                      90,998Employment
      contracts
                      
                      
                      3,280
                      
                      
                      
                      1,000
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      4,280Total
      contractual cash obligations
                      
                      $
                      108,693
                      
                      
                      $
                      81,168
                      
                      
                      $
                      113,414
                      
                      
                      $
                      4,368
                      
                      
                      $
                      307,643





The above
table excludes any potential uncertain income tax liabilities that may become
payable upon examination of the Company’s income tax returns by taxing
authorities. Such amounts and periods of payment cannot be reliably estimated.
See Note 12 to the financial statements for further explanation of the Company’s
uncertain tax positions. The above table also excludes our contractual
obligation with one of our executives regarding his retirement plan. Such
amounts and periods of payment cannot be reliably estimated. See Note 15 to the
financial statements for further explanation of the Company’s retirement plan
commitment.





In
February 2008, our Board of Directors authorized us to repurchase up to $30.0
million of our common stock. In April and May 2008, we repurchased a total of
1,259,300 shares of our common stock at an average price of $23.82 per share for
a total cost of $30.0 million. The stock repurchased represents approximately
4.4% of our outstanding shares of common stock.





In
October 2008, we acquired substantially all of the assets of Tollytots
Limited.  The total initial consideration of $26.8 million consisted
of $12.0 million in cash and the assumption of liabilities in the amount of
$14.8 million, and resulted in goodwill of $4.1 million, all of which has been
determined to be impaired and was written off in the quarter ended June 30,
2009. In addition, we agreed to pay an earn-out of up to an aggregate amount of
$5.0 million in cash over the three calendar years following the acquisition
based on the achievement of certain financial performance criteria, which will
be recorded as goodwill when and if earned.  In the first earn-out
period ended December 31, 2009, no portion of the earn-out was
earned.  Tollytots is a leading designer and producer of licensed baby
dolls and baby doll pretend play accessories based on well-known brands and was
included in our results of operations from the date of acquisition.





In
October 2008, we acquired substantially all of the stock of Kids Only, Inc. and
a related Hong Kong company, Kids Only Limited (collectively, “Kids
Only”).  The total initial consideration of $23.5 million consisted of
$20.4 million in cash and the assumption of liabilities in the amount of $3.4
million, and resulted in goodwill of $13.2 million, all of which has been
determined to be impaired and was written off in the quarter ended June 30,
2009. In addition, we agreed to pay an earn-out of up to an aggregate amount of
$5.6 million in cash over the three calendar years following the acquisition
based on the achievement of certain financial performance criteria, which will
be recorded as goodwill when and if earned.  The first earn-out period
ended September 30, 2009 is under review.  Kids Only is a leading
designer and producer of licensed indoor and outdoor kids’ furniture, and has an
extensive portfolio which also includes baby dolls and accessories, room décor
and a myriad of other children’s toy products  and was included in our
results of operations from the date of acquisition.




In
December 2008, we acquired certain assets of Disguise, Inc. and a related Hong
Kong company, Disguise Limited (collectively, “Disguise”).  The total
initial consideration of $60.6 million consisted of $38.6 million in cash and
the assumption of liabilities in the amount of $22.0 million, and resulted in
goodwill of $30.6 million, all of which has been determined to be impaired and
was written off in the quarter ended June 30, 2009. We finalized our purchase
price allocation for Disguise and engaged a third party to perform studies and
valuations to the estimated fair value of assets and liabilities
assumed.  Disguise is a leading designer and producer of Halloween and
everyday costume play and was included in our results of operations from the
date of acquisition


34


On
November 10, 2009, we sold an aggregate of $100.0 million of 4.50% Convertible
Senior Notes due 2014 (the “Notes”). The Notes are senior unsecured obligations
of JAKKS, will pay interest semi-annually at a rate of 4.50% per annum and will
mature on November 1, 2014. The conversion rate will initially be 63.2091 shares
of our common stock per $1,000 principal amount of notes (equivalent to an
initial conversion price of approximately $15.82 per share of common stock),
subject to adjustment in certain circumstances. Prior to August 1, 2014, holders
of the Notes may convert their Notes only upon specified events. Upon
conversion, the Notes may be settled, at our election, in cash, shares of our
common stock, or a combination of cash and shares of our common stock. Holders
of the Notes may require us to repurchase for cash all or some of their Notes
upon the occurrence of a fundamental change (as defined in the
Notes).





We used a
portion of the net proceeds from the offering to repurchase $77.7 million of our
4.625% convertible senior notes due in 2023 and intend to repurchase the
remaining $20.3 million of our 4.625% convertible senior notes in June
2010.





In June
2003, we sold an aggregate of $98.0 million of 4.625% Convertible Senior Notes
due June 15, 2023, of which $20.3 million remain outstanding. The notes may be
converted into shares of our common stock at an initial conversion price of
$20.00 per share, or 50 shares per note, subject to certain circumstances. The
notes may be converted in each quarter subsequent to any quarter in which the
closing price of our common stock is at or above a prescribed price for at least
20 trading days in the last 30 trading day period of the quarter.  The
prescribed price for the conversion trigger is $24.00 through June 30, 2010, and
increases nominally each quarter thereafter.  Cash interest is payable
at an annual rate of 4.625% of the principal amount at issuance, from the issue
date to June 15, 2010, payable on June 15 and December 15 of each year,
commencing on December 15, 2003. After June 15, 2010, interest will accrue at
the same rate on the outstanding notes until maturity. At maturity, we will
redeem the notes at their accreted principal amount, which will be equal to
$1,811.95 (181.195%) per $1,000 principal amount at issuance, unless redeemed or
converted earlier.  The notes were not convertible as of December 31,
2009.





We may
redeem the notes at our option in whole or in part beginning on June 15, 2010,
at 100% of their accreted principal amount plus accrued and unpaid interest, if
any, payable in cash. Holders of the notes may also require us to repurchase all
or part of their notes on June 15, 2010, for cash, at a repurchase price of 100%
of the principal amount per note plus accrued and unpaid interest, if any.
Holders of the notes may also require us to repurchase all or part of their
notes on June 15, 2013 and June 15, 2018 at a repurchase price of 100% of the
accreted principal amount per note plus accrued and unpaid interest, if any. Any
repurchases at June 15, 2013 and June 15, 2018 may be paid in cash, in shares of
common stock or a combination of cash and shares of common stock. We intend to
repurchase the remaining $20.3 million of our 4.625% convertible senior notes in
June 2010.





We
believe that our cash flows from operations and cash and cash equivalents will
be sufficient to meet our working capital and capital expenditure requirements
and provide us with adequate liquidity to meet our anticipated operating needs
for at least the next 12 months. Although operating activities are expected to
provide cash, to the extent we grow significantly in the future, our operating
and investing activities may use cash and, consequently, this growth may require
us to obtain additional sources of financing. There can be no assurance that any
necessary additional financing will be available to us on commercially
reasonable terms, if at all. We intend to finance our long-term liquidity
requirements out of net cash provided by operations and net cash and cash
equivalents.  As of December 31, 2009, we do not have any off-balance
sheet arrangements.





Exchange
Rates





Sales
from our United States and Hong Kong operations are denominated in U.S. dollars
and our manufacturing costs are denominated in either U.S. or Hong Kong dollars.
Operations and operating expenses of all of our operations are denominated in
local currency, thereby creating exposure to changes in exchange rates. Changes
in the Hong Kong dollar/U.S. dollar exchange rate may positively or negatively
affect our operating results. The exchange rate of the Hong Kong dollar to the
U.S. dollar has been fixed by the Hong Kong government since 1983 at HK$7.80 to
US$1.00 and, accordingly, has not represented a currency exchange risk to the
U.S. dollar. We cannot assure you that the exchange rate between the United
States and Hong Kong currencies will continue to be fixed or that exchange rate
fluctuations between the United States and Hong Kong currencies will not have a
material adverse effect on our business, financial condition or results of
operations.





Item 7A. Quantitative and
Qualitative Disclosures About Market Risk





Market
risk represents the risk of loss that may impact our financial position, results
of operations or cash flows due to adverse changes in financial and commodity
market prices and rates. We are exposed to market risk in the areas of changes
in United States and international borrowing rates and changes in foreign
currency exchange rates. In addition, we are exposed to market risk in certain
geographic areas that have experienced or remain vulnerable to an economic
downturn, such as China. We purchase substantially all of our inventory from
companies in China, and, therefore, we are subject to the risk that such
suppliers will be unable to provide inventory at competitive prices. While we
believe that, if such an event were to occur we would be able to find
alternative sources of inventory at competitive prices, we cannot assure you
that we would be able to do so. These exposures are directly related to our
normal operating and funding activities. To date, we have not used derivative
instruments or engaged in hedging activities to minimize our market
risk.


35


Interest
Rate Risk





In June
2003, we issued convertible senior notes payable of $98.0 million with a fixed
interest rate of 4.625% per annum of which $20.3 million remain outstanding as
of December 31, 2009. In November 2009, we issued new convertible senior notes
payable of $100.0 million with a fixed interest rate of 4.50% per annum.
Accordingly, we are not generally subject to any direct risk of loss arising
from changes in interest rates.





Foreign
Currency Risk





We have
wholly-owned subsidiaries in Hong Kong and China. Sales are made by these
operations on FOB China or Hong Kong terms and are denominated in U.S. dollars.
However, purchases of inventory and Hong Kong operating expenses are typically
denominated in Hong Kong dollars and local operating expenses in China are
denominated in local currency, thereby creating exposure to changes in exchange
rates. Changes in the Chinese Yuan or Hong Kong dollar/U.S. dollar exchange
rates may positively or negatively affect our gross margins, operating income
and retained earnings.  A gain in Hong Kong dollars gave rise to the
other comprehensive loss in the balance sheet at December 31, 2007. The exchange
rate of the Hong Kong dollar to the U.S. dollar has been fixed by the Hong Kong
government since 1983 at HK$7.80 to US$1.00 and, accordingly, has not
represented a currency exchange risk to the U.S. dollar. We do not believe that
near-term changes in these exchange rates, if any, will result in a material
effect on our future earnings, fair values or cash flows, and therefore, we have
chosen not to enter into foreign currency hedging transactions. We cannot assure
you that this approach will be successful, especially in the event of a
significant and sudden change in the value of the Hong Kong dollar or Chinese
Yuan.


36


Item 8. Consolidated
Financial Statements and Supplementary Data




Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders


JAKKS
Pacific, Inc.


Malibu,
California





We have
audited the accompanying consolidated balance sheets of JAKKS Pacific, Inc. (the
“Company”) as of December 31, 2009 and 2008 and the related consolidated
statements of operations, other comprehensive income (loss), stockholders’
equity and cash flows for each of the three years in the period ended December
31, 2009. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of JAKKS Pacific, Inc. as of December
31, 2009 and 2008, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), JAKKS Pacific, Inc.’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 16, 2010 expressed an
unqualified opinion thereon.





/s/
      BDO Seidman, LLPBDO
      Seidman, LLPLos
      Angeles, CaliforniaMarch
      16, 2010




37


JAKKS
PACIFIC, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





December
      31,2008
                                      
                                      
                                      2009(In
      thousands, exceptshare
      data)AssetsCurrent
      assetsCash
      and cash equivalents
                                      
                                      $
                                      169,520
                                      
                                      
                                      $
                                      254,837Marketable
      securities
                                      
                                      
                                      195
                                      
                                      
                                      
                                      202Accounts
      receivable, net of allowance for uncollectible accounts of $2,005 and
      $2,543, respectively
                                      
                                      
                                      147,587
                                      
                                      
                                      
                                      129,930Inventory
                                      
                                      
                                      87,944
                                      
                                      
                                      
                                      34,457Income
      tax receivable
                                      
                                      
                                      22,288
                                      
                                      
                                      
                                      35,015Deferred
      income taxes
                                      
                                      
                                      17,993
                                      
                                      
                                      
                                      19,467Prepaid
      expenses and other
                                      
                                      
                                      29,670
                                      
                                      
                                      
                                      34,259Total
      current assets
                                      
                                      
                                      475,197
                                      
                                      
                                      
                                      508,167Property
      and equipmentOffice
      furniture and equipment
                                      
                                      
                                      12,390
                                      
                                      
                                      
                                      12,218Molds
      and tooling
                                      
                                      
                                      63,075
                                      
                                      
                                      
                                      55,054Leasehold
      improvements
                                      
                                      
                                      5,947
                                      
                                      
                                      
                                      6,540Total
                                      
                                      
                                      81,412
                                      
                                      
                                      
                                      73,812Less
      accumulated depreciation and amortization
                                      
                                      
                                      52,914
                                      
                                      
                                      
                                      52,598Property
      and equipment, net
                                      
                                      
                                      28,498
                                      
                                      
                                      
                                      21,214Deferred
      income taxes
                                      
                                      
                                      —
                                      
                                      
                                      
                                      53,502Intangibles
      and other, net
                                      
                                      
                                      33,061
                                      
                                      
                                      
                                      40,604Investment
      in video game joint venture
                                      
                                      
                                      53,184
                                      
                                      
                                      
                                      6,727Goodwill,
      net
                                      
                                      
                                      427,693
                                      
                                      
                                      
                                      1,571Trademarks,
      net
                                      
                                      
                                      10,491
                                      
                                      
                                      
                                      2,308Total
      assets
                                      
                                      $
                                      1,028,124
                                      
                                      
                                      $
                                      634,093Liabilities
      and Stockholders’ EquityCurrent
      liabilitiesAccounts
      payable
                                      
                                      $
                                      57,432
                                      
                                      
                                      $
                                      37,613Accrued
      expenses
                                      
                                      
                                      61,780
                                      
                                      
                                      
                                      64,051Reserve
      for sales returns and allowances
                                      
                                      
                                      23,317
                                      
                                      
                                      
                                      33,897Capital
      lease obligation
                                      
                                      
                                      417
                                      
                                      
                                      
                                      155Income
      taxes payable
                                      
                                      
                                      7,190
                                      
                                      
                                      
                                      —Convertibles
      senior notes
                                      
                                      
                                      —
                                      
                                      
                                      
                                      20,262Total
      current liabilities
                                      
                                      
                                      150,136
                                      
                                      
                                      
                                      155,978Convertible
      senior notes, net
                                      
                                      
                                      98,000
                                      
                                      
                                      
                                      86,728Other
      liabilities
                                      
                                      
                                      2,112
                                      
                                      
                                      
                                      2,490Income
      taxes payable
                                      
                                      
                                      4,686
                                      
                                      
                                      
                                      16,788Deferred
      income taxes
                                      
                                      
                                      26,237
                                      
                                      
                                      
                                      —Total
      liabilities
                                      
                                      
                                      281,171
                                      
                                      
                                      
                                      261,984Commitments
      and contingenciesStockholders’
      equityPreferred
      shares, $.001 par value; 5,000,000 shares authorized; nil
      outstanding
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Common
      stock, $.001 par value; 100,000,000 shares authorized
      27,521,278  and 27,638,769 shares issued and outstanding,
      respectively
                                      
                                      
                                      28
                                      
                                      
                                      
                                      28Additional
      paid-in capital
                                      
                                      
                                      292,809
                                      
                                      
                                      
                                      303,474Retained
      earnings
                                      
                                      
                                      458,345
                                      
                                      
                                      
                                      72,835Accumulated
      other comprehensive loss
                                      
                                      
                                      (4,229
                                      )
                                      
                                      
                                      (4,228
                                      )Total
      stockholders’ equity
                                      
                                      
                                      746,953
                                      
                                      
                                      
                                      372,109Total
      liabilities and stockholders’ equity
                                      
                                      $
                                      1,028,124
                                      
                                      
                                      $
                                      634,093




See
notes to consolidated financial statements.


38


JAKKS
PACIFIC, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS





Years
      Ended December 31,2007
                            
                            
                            2008
                            
                            
                            2009(In thousands, except per share amounts)Net
      sales
                            
                            $
                            857,085
                            
                            
                            $
                            903,397
                            
                            
                            $
                            803,704Cost
      of sales
                            
                            
                            533,435
                            
                            
                            
                            582,184
                            
                            
                            
                            600,776Gross
      profit
                            
                            
                            323,650
                            
                            
                            
                            321,213
                            
                            
                            
                            202,928Selling,
      general and administrative expenses
                            
                            
                            216,652
                            
                            
                            
                            241,301
                            
                            
                            
                            227,036Write-down
      of intangible assets
                            
                            
                            —
                            
                            
                            
                            9,076
                            
                            
                            
                            8,221Write-down
      of goodwill
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            407,125Reorganization
      charges
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            12,994Income
      (loss) from operations
                            
                            
                            106,998
                            
                            
                            
                            70,836
                            
                            
                            
                            (452,448
                            )Profit
      (loss) from video game joint venture
                            
                            
                            21,180
                            
                            
                            
                            17,092
                            
                            
                            
                            (16,128
                            )Interest
      income
                            
                            
                            6,819
                            
                            
                            
                            3,396
                            
                            
                            
                            318Interest
      expense
                            
                            
                            (5,456
                            )
                            
                            
                            (2,425
                            )
                            
                            
                            (7,930
                            )Income
      (loss) before provision (benefit) for income taxes
                            
                            
                            129,541
                            
                            
                            
                            88,899
                            
                            
                            
                            (476,188
                            )Provision
      (benefit) for income taxes
                            
                            
                            40,550
                            
                            
                            
                            12,842
                            
                            
                            
                            (90,678
                            )Net
      income (loss)
                            
                            $
                            88,991
                            
                            
                            $
                            76,057
                            
                            
                            $
                            (385,510
                            )Basic
      earnings (loss) per share
                            
                            $
                            3.22
                            
                            
                            $
                            2.78
                            
                            
                            $
                            (14.02
                            )Basic
      weighted number of shares
                            
                            
                            27,665
                            
                            
                            
                            27,379
                            
                            
                            
                            27,502Diluted
      earnings (loss) per share
                            
                            $
                            2.77
                            
                            
                            $
                            2.42
                            
                            
                            $
                            (14.02
                            )Diluted
      weighted number of shares
                            
                            
                            33,149
                            
                            
                            
                            32,637
                            
                            
                            
                            27,502





See
notes to consolidated financial statements.


39


JAKKS
PACIFIC, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)





Years
      Ended December 31,2007
                                  
                                  2008
                                  
                                  2009(In
      thousands)Other
      comprehensive income (loss):Net
      income (loss)
                                  $
                                  
                                  88,991
                                  
                                  $
                                  
                                  76,057
                                  
                                  $
                                  
                                  (385,510
                                  )Foreign
      currency translation adjustment
                                  
                                  
                                  (19
                                  )
                                  
                                  
                                  (783
                                  )
                                  
                                  
                                  1Other
      comprehensive income (loss)
                                  $
                                  
                                  88,972
                                  
                                  $
                                  
                                  75,274
                                  
                                  $
                                  
                                  (385,509
                                  )





See
notes to consolidated financial statements.


40


JAKKS
PACIFIC, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


YEARS
ENDED DECEMBER 31, 2007, 2008 AND 2009


(In
thousands)





Common
      Stock
                            
                            
                            
                            
                            
                            
                            
                            
                            AccumulatedAdditional
                            
                            
                            
                            
                            
                            Other
                            
                            
                            TotalNumber
                            
                            
                            
                            
                            
                            Paid-in
                            
                            
                            Retained
                            
                            
                            Comprehensive
                            
                            
                            Stockholders’of
      Shares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            Earnings
                            
                            
                            Loss
                            
                            
                            EquityBalance,
      December 31, 2006
                            
                            
                            27,777
                            
                            
                            $
                            28
                            
                            
                            $
                            300,255
                            
                            
                            $
                            312,432
                            
                            
                            $
                            (3,427
                            )
                            
                            $
                            609,288Adoption
      of uncertain tax positions
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (19,135
                            )
                            
                            
                            —
                            
                            
                            
                            (19,135
                            )Exercise
      of options
                            
                            
                            391
                            
                            
                            
                            —
                            
                            
                            
                            6,470
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            6,470Stock
      option income tax benefit
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,053
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,053Restricted
      stock grants
                            
                            
                            323
                            
                            
                            
                            —
                            
                            
                            
                            8,082
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            8,082Compensation
      for vested stock options
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            972
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            972Retirement
      of common stock
                            
                            
                            (191
                            )
                            
                            
                            —
                            
                            
                            
                            (4,675
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (4,675
                            )Retirement
      of Restricted Stock
                            
                            
                            (25
                            )
                            
                            
                            —
                            
                            
                            
                            (30
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (30
                            )Net
      income
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            88,991
                            
                            
                            
                            —
                            
                            
                            
                            88,991Foreign
      currency translation adjustment
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (19
                            )
                            
                            
                            (19
                            )Balance,
      December 31, 2007
                            
                            
                            28,275
                            
                            
                            
                            28
                            
                            
                            
                            312,127
                            
                            
                            
                            382,288
                            
                            
                            
                            (3,446
                            )
                            
                            
                            690,997Exercise
      of  options
                            
                            
                            315
                            
                            
                            
                            —
                            
                            
                            
                            4,171
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            4,171Stock
      option income tax benefit
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,338
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1,338Restricted
      stock grants
                            
                            
                            318
                            
                            
                            
                            1
                            
                            
                            
                            7,764
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            7,765Compensation
      for vested stock options
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            537
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            537Retirement
      of common stock
                            
                            
                            (1,259
                            )
                            
                            
                            (1
                            )
                            
                            
                            (30,000
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (30,001
                            )Retirement
      of Restricted Stock
                            
                            
                            (128
                            )
                            
                            
                            —
                            
                            
                            
                            (3,128
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (3,128
                            )Net
      income
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            76,057
                            
                            
                            
                            —
                            
                            
                            
                            76,057Foreign
      currency translation adjustment
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (783
                            )
                            
                            
                            (783
                            )Balance,
      December 31, 2008
                            
                            
                            27,521
                            
                            
                            
                            28
                            
                            
                            
                            292,809
                            
                            
                            
                            458,345
                            
                            
                            
                            (4,229
                            )
                            
                            
                            746,953Exercise
      of  options
                            
                            
                            3
                            
                            
                            
                            —
                            
                            
                            
                            40
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            40Stock
      option income tax write-off
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (487
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (487
                            )Restricted
      stock grants
                            
                            
                            483
                            
                            
                            
                            —
                            
                            
                            
                            4,179
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            4,179Compensation
      for vested stock options
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            173
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            173Retirement
      of Restricted Stock
                            
                            
                            (368
                            )
                            
                            
                            —
                            
                            
                            
                            (1,498
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (1,498
                            )Net
      loss
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (385,510
                            )
                            
                            
                            —
                            
                            
                            
                            (385,510
                            )Debt
      discount
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            13,650
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            13,650Deferred
      tax liability on debt discount
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (5,392
                            )
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            (5,392
                            )Foreign
      currency translation adjustment
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            1
                            
                            
                            
                            1Balance,
      December 31, 2009
                            
                            
                            27,639
                            
                            
                            $
                            28
                            
                            
                            $
                            303,474
                            
                            
                            $
                            72,835
                            
                            
                            $
                            (4,228
                            )
                            
                            $
                            372,109





See
notes to consolidated financial statements.


41




JAKKS
PACIFIC, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Years
      Ended December 31,2007
                                    
                                    
                                    2008
                                    
                                    
                                    2009(In
      thousands)Cash
      flows from operating activitiesNet
      income (loss)
                                    
                                    $
                                    88,991
                                    
                                    
                                    $
                                    76,057
                                    
                                    
                                    $
                                    (385,510
                                    )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activitiesDepreciation
      and amortization
                                    
                                    
                                    26,663
                                    
                                    
                                    
                                    27,566
                                    
                                    
                                    
                                    35,964Share-based
      compensation expense
                                    
                                    
                                    9,054
                                    
                                    
                                    
                                    7,302
                                    
                                    
                                    
                                    4,352(Profit)
      loss from video game joint venture
                                    
                                    
                                    (21,856
                                    )
                                    
                                    
                                    (17,507
                                    )
                                    
                                    
                                    46,119Loss
      on disposal of property and equipment
                                    
                                    
                                    1,781
                                    
                                    
                                    
                                    99
                                    
                                    
                                    
                                    3,317Write-down
      of intangible assets
                                    
                                    
                                    —
                                    
                                    
                                    
                                    9,076
                                    
                                    
                                    
                                    8,221Write-down
      of goodwill
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    407,125Write-down
      of deferred offering costs
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,973Deferred
      income taxes
                                    
                                    
                                    2,644
                                    
                                    
                                    
                                    14,367
                                    
                                    
                                    
                                    (88,663
                                    )Changes
      in operating assets and liabilities, net of acquisitionsAccounts
      receivable
                                    
                                    
                                    (21,334
                                    )
                                    
                                    
                                    46,204
                                    
                                    
                                    
                                    17,657Inventory
                                    
                                    
                                    1,329
                                    
                                    
                                    
                                    (6,553
                                    )
                                    
                                    
                                    50,848Prepaid
      expenses and other
                                    
                                    
                                    9,019
                                    
                                    
                                    
                                    (6,329
                                    )
                                    
                                    
                                    (578
                                    )Income
      tax receivable
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (22,288
                                    )
                                    
                                    
                                    (12,727
                                    )Accounts
      payable
                                    
                                    
                                    (13,061
                                    )
                                    
                                    
                                    (31,324
                                    )
                                    
                                    
                                    (19,819
                                    )Accrued
      expenses
                                    
                                    
                                    14,493
                                    
                                    
                                    
                                    (6,573
                                    )
                                    
                                    
                                    14,619Income
      taxes payable
                                    
                                    
                                    (891
                                    )
                                    
                                    
                                    (21,415
                                    )
                                    
                                    
                                    4,913Reserve
      for sales returns and allowances
                                    
                                    
                                    (6,489
                                    )
                                    
                                    
                                    (2,718
                                    )
                                    
                                    
                                    10,580Other
      liabilities
                                    
                                    
                                    1,519
                                    
                                    
                                    
                                    (5,169
                                    )
                                    
                                    
                                    378Total
      adjustments
                                    
                                    
                                    2,871
                                    
                                    
                                    
                                    (15,262
                                    )
                                    
                                    
                                    484,279Net
      cash provided by operating activities
                                    
                                    
                                    91,862
                                    
                                    
                                    
                                    60,795
                                    
                                    
                                    
                                    98,769Cash
      flows from investing activitiesPurchases
      of property and equipment
                                    
                                    
                                    (18,116
                                    )
                                    
                                    
                                    (22,274
                                    )
                                    
                                    
                                    (16,330
                                    )Change
      in other assets
                                    
                                    
                                    (4,208
                                    )
                                    
                                    
                                    (2,155
                                    )
                                    
                                    
                                    (2,434
                                    )Change
      in deposits
                                    
                                    
                                    17
                                    
                                    
                                    
                                    (901
                                    )
                                    
                                    
                                    529Cash
      paid for net assets of businesses acquired
                                    
                                    
                                    (15,605
                                    )
                                    
                                    
                                    (79,598
                                    )
                                    
                                    
                                    (12,253
                                    )Net
      (purchases) sales of marketable securities
                                    
                                    
                                    (7
                                    )
                                    
                                    
                                    23
                                    
                                    
                                    
                                    (7
                                    )Net
      cash used in investing activities
                                    
                                    
                                    (37,919
                                    )
                                    
                                    
                                    (104,905
                                    )
                                    
                                    
                                    (30,495
                                    )Cash
      flows from financing activitiesProceeds
      from stock options exercised
                                    
                                    
                                    6,471
                                    
                                    
                                    
                                    4,171
                                    
                                    
                                    
                                    40Common
      stock surrendered
                                    
                                    
                                    (4,706
                                    )
                                    
                                    
                                    (3,128
                                    )
                                    
                                    
                                    (1,498
                                    )Common
      stock repurchased
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (30,001
                                    )
                                    
                                    
                                    —Repayment
      of capital lease obligations
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (261
                                    )Retirement
      of convertible notes
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (77,738
                                    )Proceeds
      from sale of convertible notes
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    100,000Bank
      fees related to sale of convertible notes
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    (3,500
                                    )Tax
      benefit from stock options exercised
                                    
                                    
                                    1,053
                                    
                                    
                                    
                                    1,338
                                    
                                    
                                    
                                    —Net
      cash provided by (used in) financing activities
                                    
                                    
                                    2,818
                                    
                                    
                                    
                                    (27,620
                                    )
                                    
                                    
                                    17,043Net
      increase (decrease) in cash and cash equivalents
                                    
                                    
                                    56,761
                                    
                                    
                                    
                                    (71,730
                                    )
                                    
                                    
                                    85,317Cash
      and cash equivalents, beginning of year
                                    
                                    
                                    184,489
                                    
                                    
                                    
                                    241,250
                                    
                                    
                                    
                                    169,520Cash
      and cash equivalents, end of year
                                    
                                    $
                                    241,250
                                    
                                    
                                    $
                                    169,520
                                    
                                    
                                    $
                                    254,837Cash
      paid during the period for:Interest
                                    
                                    $
                                    4,533
                                    
                                    
                                    $
                                    4,610
                                    
                                    
                                    $
                                    4,213Income
      taxes
                                    
                                    $
                                    32,198
                                    
                                    
                                    $
                                    43,408
                                    
                                    
                                    $
                                    5,939





See Notes
5 and 18 for additional supplemental information to consolidated statements of
cash flows.





See
notes to consolidated financial statements.


42




JAKKS
PACIFIC, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2009





Note
1—Principal Industry





JAKKS
Pacific, Inc. (the “Company”) is engaged in the development, production and
marketing of consumer products, including toys and related products, stationery
and writing instruments and pet toys and related products, some of which are
based on highly-recognized entertainment properties and character licenses. The
Company commenced its primary business operations in July 1995 through the
purchase of substantially all of the assets of a Hong Kong toy company. The
Company markets its product lines domestically and internationally.





The
Company was incorporated under the laws of the State of Delaware in January
1995.





Note
2—Summary of Significant Accounting Policies





Principles
of consolidation





The
consolidated financial statements include accounts of the Company and its
wholly-owned subsidiaries. In consolidation, all significant inter-company
balances and transactions are eliminated.





Cash
and cash equivalents





The
Company considers all highly liquid assets, having an original maturity of less
than three months, to be cash equivalents. The Company maintains its cash in
bank deposits which, at times, may exceed federally insured limits. The Company
has not experienced any losses in such accounts. The Company believes it is not
exposed to any significant credit risk of cash and cash
equivalents.





Use
of estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the dates of the
financial statements, and the reported amounts of revenue and expenses during
the reporting periods. Actual future results could differ from those
estimates.





Revenue
recognition





Revenue
is recognized upon the shipment of goods to customers or their agents, depending
on terms, provided that there are no uncertainties regarding customer
acceptance, the sales price is fixed or determinable, and collectability is
reasonably assured and not contingent upon resale.





Generally,
the Company does not allow for product returns. The Company provides a
negotiated allowance for breakage or defects to its customers, which is recorded
when the related revenue is recognized. However, the Company does make
occasional exceptions to this policy and consequently accrues a return allowance
in gross sales based on historic return amounts and management
estimates.





The
Company also will occasionally grant credits to facilitate markdowns and sales
of slow moving merchandise. These credits are recorded as a reduction of gross
sales at the time of occurrence. The Company’s reserve for sales returns and
allowances increased by $10.6 million from $23.3 million as of December 31, 2008
to $33.9 million as of December 31, 2009.  This increase is primarily
due the Company granting additional allowances to certain customers in 2009
compared to 2008.


43




Fair
value measurements





Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. In determining fair value, the Company uses various methods
including market, income and cost approaches. Based on these approaches, the
Company often utilizes certain assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk and/or the
risks inherent in the inputs to the valuation technique. These inputs can be
readily observable, market-corroborated, or generally unobservable inputs. The
Company utilizes valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs. Based upon observable inputs used
in the valuation techniques, the Company is required to provide information
according to the fair value hierarchy. The fair value hierarchy ranks the
quality and reliability of the information used to determine fair values into
three broad levels as follows:





Level
      1:
                
                Valuations
      for assets and liabilities traded in active markets from readily available
      pricing sources for market transactions involving identical assets or
      liabilities.Level
      2:
                
                Valuations
      for assets and liabilities traded in less active dealer or broker markets.
      Valuations are obtained from third-party pricing services for identical or
      similar assets or liabilities.Level
      3:
                
                Valuations
      incorporate certain assumptions and projections in determining the fair
      value assigned to such  assets or
  liabilities.





In
instances where the determination of the fair value measurement is based on
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its
entirety. The Company’s assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers
factors specific to the asset or liability.





The
following table summarizes the Company’s financial assets measured at fair value
on a recurring basis as of December 31, 2009 (in thousands):





Fair
      Value MeasurementsCarrying Amount as of
                        
                        
                        As of December 31, 2009December
      31, 2009
                        
                        
                        Level
      1
                        
                        
                        Level
      2
                        
                        
                        Level
      3Cash
      equivalents
                        
                        $
                        162,125
                        
                        
                        $
                        162,125
                        
                        
                        $
                        —
                        
                        
                        $
                        —Marketable
      securities
                        
                        
                        202
                        
                        
                        
                        202
                        
                        
                        
                        —
                        
                        
                        
                        —$
                        162,327
                        
                        
                        $
                        162,327
                        
                        
                        $
                        —
                        
                        
                        $
                        —





The
Company’s accounts receivable, accounts payable and accrued expenses represent
financial instruments. The carrying value of these financial instruments is a
reasonable approximation of fair value.





The fair
value of the $98.0 million of convertible senior notes payable at December 31,
2008 was approximately $103.8 million, based on the most recent quoted market
price.  The fair value of the $120.3 million of convertible senior
notes payable at December 31, 2009 was approximately $123.2 million, based on
the most recent quoted market price.





The
Company’s non-financial assets, such as goodwill and intangible assets are
measured at fair value when there is an indicator of impairment and recorded at
fair value only when an impairment charge is recognized. The following table
summarizes the Company’s
financial assets measured at fair value on a nonrecurring basis as of December
31, 2009 (in thousands):





Fair
      Value MeasurementsAs of December 31, 2009Carrying Amount as of
                    December 31, 2009
                  
                  
                  Level 1
                  
                  
                  Level 2
                  
                  
                  Level 3
                  
                  
                  Impairment
                    RecognizedLong-lived
      assets held and used:Intangible
      assets other than goodwill
                  
                  $
                  39,281
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  39,281
                  
                  
                  $
                  8,221Goodwill
                  
                  
                  1,571
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  1,571
                  
                  
                  
                  407,125$
                  40,852
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  40,852
                  
                  
                  
                  415,346




44


As of
June 30, 2009, a review of the Company’s “Child Guidance”, “Play Along” and
other divisions associated with its Craft and Activity product lines’ historic,
current and forecasted operating results indicated that the carrying amount of
these finite-lived intangible assets may not be recoverable from the sum of
future undiscounted cash flows. As a result, the tradenames “Child Guidance” and
“Play Along” and certain tradenames associated with its Craft and Activity
product lines were written down to their fair value of zero, resulting in an
impairment charge of approximately $8.2 million included in write-down of
intangible assets in the consolidated statements of
operations.  Goodwill was tested by estimating the fair value of the
reporting unit using a consideration of market multiples and a discounted cash
flow model and was written down to its implied fair value, which was zero as of
June 20, 2009, resulting in an impairment charge of approximately $407.1 million
included in write-down of goodwill in the consolidated statements of operations.
See Note 6, Goodwill and Other Intangible Assets, and Note 7, Intangible Assets
Other Than Goodwill, for additional information.





Inventory





Inventory,
which includes the ex-factory cost of goods, capitalized warehouse costs and
in-bound freight and duty, is valued at the lower of cost (first-in, first-out)
or market, net of inventory obsolescence reserve, and consists of the following
(in thousands):





December
      31,2008
                              
                              2009Raw
      materials
                              $
                              
                              3,778
                              
                              $
                              
                              6,995Finished
      goods
                              
                              
                              84,166
                              
                              
                              
                              27,462$
                              
                              87,944
                              
                              $
                              
                              34,457





Property
and equipment





Property
and equipment are stated at cost and are being depreciated using the
straight-line method over their estimated useful lives as follows:





Office
      equipment
              5
      yearsAutomobiles
              5
      yearsFurniture
      and fixtures
              5 -
      7 yearsMolds
      and tooling
              2
      yearsLeasehold
      improvements
              Shorter
      of length of lease or 10
years





Effective
January 1, 2009, the Company changed its depreciation methodology for molds and
tools used in the manufacturing of its products from a straight-line basis to a
usage basis, which is more closely correlated to production of
goods.  While both methods of depreciation allocation are acceptable,
the Company believes that the usage method more accurately matches costs with
revenues.  Furthermore, the useful estimated life of molds and tools
was maintained at two years.   As a result of the accounting
method change, there was a minimal cumulative effect to the Company’s
retained earnings as of January 1, 2009.  For the year-ended December
31, 2009, depreciation expense with the useful estimated life for molds and
tools was comparable to the depreciation expense using the straight-line method,
but varied at each quarter-end during 2009.





For the
years ended December 31, 2007, 2008, and 2009, the Company’s aggregate
depreciation expense related to property and equipment was $11.4 million, $17.7
million and $22.2 million, respectively.


45


Advertising





Production
costs of commercials and programming are charged to operations in the period
during which the production is first aired. The costs of other advertising,
promotion and marketing programs are charged to operations in the period
incurred. Advertising expense for the years ended December 31 2007, 2008 and
2009, was approximately $22.3 million, $28.0 million and $18.4 million,
respectively.





The
Company also participates in cooperative advertising arrangements with some
customers, whereby it allows a discount from invoiced product amounts in
exchange for customer purchased advertising that features the Company’s
products. Typically, these discounts range from 1% to 6% of gross sales, and are
generally based on product purchases or on specific advertising campaigns. Such
amounts are accrued when the related revenue is recognized or when the
advertising campaign is initiated. These cooperative advertising arrangements
are accounted for as direct selling expenses.





Income
taxes





The
Company does not file a consolidated return with its foreign subsidiaries. The
Company files federal and state returns and its foreign subsidiaries each file
Hong Kong returns, as applicable. Deferred taxes are provided on an asset and
liability method whereby deferred tax assets are recognized as deductible
temporary differences and operating loss and tax credit carry-forwards and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax basis. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.





Foreign
Currency Translation Exposure





The
Company’s reporting currency is the US dollar. The translation of its net
investment in subsidiaries with non-US dollar functional currencies subjects the
Company to currency exchange rate fluctuations in its results of operations and
financial position. Assets and liabilities of subsidiaries with non-US dollar
functional currencies are translated into US dollars at year-end exchange rates.
Income, expense, and cash flow items are translated at average exchange rates
prevailing during the year. The resulting currency translation adjustments are
recorded as a component of accumulated other comprehensive loss within
stockholders’ equity. The Company’s primary currency translation exposures in
2009 were related to its net investment in entities having functional currencies
denominated in the Hong Kong dollar.





Foreign
Currency Transaction Exposure





Currency
exchange rate fluctuations may impact the Company’s results of operations and
cash flows. The Company’s currency transaction exposures include gains and
losses realized on unhedged inventory purchases and unhedged receivables and
payables balances that are denominated in a currency other than the applicable
functional currency. Gains and losses on unhedged inventory purchases and other
transactions associated with operating activities are recorded in the components
of operating income in the consolidated statement of operations. Inventory
purchase transactions denominated in the Hong Kong dollar were the primary
transactions that cause foreign currency transaction exposure for the Company in
2009.





Accounting
for the impairment of finite-lived intangible assets





Long-lived
assets with finite lives, which include property and equipment and intangible
assets other than goodwill, are evaluated at least annually for impairment when
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted future cash
flows from the use of these assets. When any such impairment exists, the related
assets will be written down to fair value.  Finite-lived intangible
assets consist primarily of product technology rights, acquired backlog,
customer relationships, product lines and license agreements. These intangible
assets are amortized over the estimated economic lives of the related assets.
Accumulated amortization as of December 31, 2008 and 2009 was $72.5 million and
$84.2 million, respectively.





Goodwill
and other indefinite-lived intangible assets





Goodwill
and indefinite-lived intangible assets are not amortized, but are tested for
impairment at least annually at the reporting unit level. Losses in value are
recorded when material impairment has occurred in the underlying assets or when
the benefits of the identified intangible assets are
realized.  Indefinite-lived intangible assets other than goodwill
consist of trademarks.


46


During
the third quarter of 2008, the Company decided to discontinue the use of the
“Toymax” and “Trendmaster” tradenames on products and market these products
under the JAKKS Pacific trademark. Consequently, the intangible assets
associated with these tradenames were written off to Write-down of Intangible
Assets, resulting in a charge of $3.5 million. Also, the Company adjusted the
value of the Child Guidance trademark to reflect lower sales expectations for
this tradename, resulting in a charge to Write-down of Intangible Assets of $5.6
million.





During
the second quarter of 2009, the Company determined that the significant decline
in its market capitalization is likely to be sustained.   The
Company’s market capitalization was not significantly affected by the
substantial resolution of the WWE lawsuit, and the lower revenue expectations
for 2009 versus 2008 were factors that indicated that an interim goodwill
impairment test was required. As a result, the Company determined that $407.1
million, or all of the goodwill related to previous acquisitions, including the
acquisition of Disguise in December 2008, was impaired. This amount is included
in Write-down of Goodwill in the accompanying consolidated statements of
operations.





During
the second quarter of 2009, the Company determined that the tradenames “Child
Guidance” and “Play Along” and certain tradenames associated with our Craft and
Activity product lines would either be discontinued, or were under
performing.   Consequently, the intangible assets associated with
these tradenames were written off to Write-down of Intangible Assets, resulting
in a charge of $8.2 million.





The
carrying value of goodwill and trademarks are based on cost which is subject to
management’s current assessment of fair value. Management evaluates fair value
recoverability using both objective and subjective factors. Objective factors
include management’s best estimates of projected future earnings and cash flows
and analysis of recent sales and earnings trends. Subjective factors include
competitive analysis and the Company’s strategic focus.





Share-based
Compensation





The
Company measures all employee stock-based compensation awards using a fair value
method and records such expense in its consolidated financial
statements.  The Company recorded $1.0 million, $0.5 million and
$0.2 million of stock option expense in 2007, 2008 and 2009, respectively, and
$8.1 million, $6.8 million and $4.2 million of restricted stock expense,
respectively, in 2007, 2008 and 2009. See Note 16 for further details relating
to share based compensation.





Earnings
per share





The
following table is a reconciliation of the weighted-average shares used in the
computation of basic and diluted earnings per share (“EPS”) for the periods
presented (in thousands, except per share data):





2007WeightedAverageIncome
                            
                            
                            Shares
                            
                            
                            Per
      ShareBasic
      EPSIncome
      available to common stockholders
                            
                            $
                            88,991
                            
                            
                            
                            27,665
                            
                            
                            $
                            3.22Effect
      of dilutive securitiesAssumed
      conversion of convertible senior notes
                            
                            
                            2,946
                            
                            
                            
                            4,900Options
      and warrants
                            
                            
                            —
                            
                            
                            
                            328Unvested
      restricted stock grants
                            
                            
                            —
                            
                            
                            
                            256Diluted
      EPSIncome
      available to common stockholders plus assumed exercises and
      conversion
                            
                            $
                            91,937
                            
                            
                            
                            33,149
                            
                            
                            $
                            2.77





47





2008WeightedAverageIncome
                              
                              
                              Shares
                              
                              
                              Per
      ShareBasic
      EPSIncome
      available to common stockholders
                              
                              $
                              76,057
                              
                              
                              
                              27,379
                              
                              
                              $
                              2.78Effect
      of dilutive securitiesAssumed
      conversion of convertible senior notes
                              
                              
                              2,946
                              
                              
                              
                              4,900Options
      and warrants
                              
                              
                              —
                              
                              
                              
                              134Unvested
      restricted stock grants
                              
                              
                              —
                              
                              
                              
                              224Diluted
      EPSIncome
      available to common stockholders plus assumed exercises and
      conversion
                              
                              $
                              79,003
                              
                              
                              
                              32,637
                              
                              
                              $
                              2.42





2009WeightedAverageLoss
                                
                                
                                Shares
                                
                                
                                Per
      ShareBasic
      EPSLoss
      available to common stockholders
                                
                                $
                                (385,510
                                )
                                
                                
                                27,502
                                
                                
                                $
                                (14.02
                                )Effect
      of dilutive securitiesAssumed
      conversion of convertible senior notes
                                
                                
                                —
                                
                                
                                
                                —Options
      and warrants
                                
                                
                                —
                                
                                
                                
                                —Unvested
      restricted stock grants
                                
                                
                                —
                                
                                
                                
                                —Diluted
      EPSLoss
      available to common stockholders plus assumed exercises and
      conversion
                                
                                $
                                (385,510
                                )
                                
                                
                                27,502
                                
                                
                                $
                                (14.02
                                )





Basic
earnings per share has been computed using the weighted average number of common
shares outstanding. Diluted earnings per share has been computed using the
weighted average number of common shares and common share equivalents
outstanding (which consist of warrants, options, restricted stock and
convertible debt to the extent they are dilutive). For the year ended December
31, 2009, the convertible notes interest and related common share equivalent of
5,236,733, diluted options and warrants of 24,333 and unvested restricted stock
grants outstanding of 376,886 were excluded from the diluted earnings per
share calculation because they were anti-dilutive.  Potentially
dilutive stock options of nil, 14,892 and 394,150 for the years ended December
31, 2007, 2008 and 2009, respectively, were not included in the computation
of diluted earnings per share as the average market price of the Company’s
common stock did not exceed the weighted average exercise price of such options
and to have included them would have been anti-dilutive. Potentially dilutive
restricted stock of 13,907, nil and 14,918 for the years ended December 31,
2007, 2008 and 2009, respectively, were not included in the computation of
diluted earnings per share as the average market price of the Company’s common
stock did not exceed the weighted average exercise price of such restricted
stock and to have included them would have been anti-dilutive.





Recent
Accounting Standards





The
provisions of ASC 470-20, “Debt with Conversion and Other
Options” are applicable to the 4.5% convertible notes. ASC 470-20
requires the Company to separately account for the liability (debt) and equity
(conversion feature) components of the Notes in a manner that reflects the
Company’s nonconvertible debt borrowing rate at the date of issuance when
interest cost is recognized in subsequent periods. The company allocated $13.7
million of the $100.0 million principal amount of the Notes to the equity
component, which represents a discount to the debt and will be amortized into
interest expense through November 1, 2014.  Accordingly, the company’s
effective annual interest rate on the Notes will be approximately 7.9%. The
Notes are classified as long-term debt in the balance sheet at December 31, 2009
based on their November 1, 2014 maturity date.   Debt issuance
costs of approximately $3.5 million are being amortized to interest expense over
the five year term of the Notes.





Reclassifications





Certain
reclassifications have been made to prior year balances in order to conform to
the current year presentation.


48


Note
3—Business Segments, Geographic Data, Sales by Product Group, and Major
Customers





The
Company is a worldwide producer and marketer of children’s toys and other
consumer products, principally engaged in the design, development, production,
marketing and distribution of its diverse portfolio. The Company’s reportable
segments are Traditional Toys, Craft/Activity/Writing Products, and Pet
Products, each of which includes worldwide sales.





The
Traditional Toys segment includes action figures, vehicles, playsets, plush
products, dolls, accessories, pretend play products, electronic products,
novelty toys, construction toys, compounds, infant and pre-school toys, water
toys, kites, squirt guns, and related products.





Craft/Activity/Writing
Products include pens, pencils, stationery products and drawing, crayons,
markers, paints, and other do-it-yourself related products.





Pet
Products include pet toys, treats, apparel and related pet
products.





Segment
performance is measured at the operating income level. All sales are made to
external customers, and general corporate expenses have been attributed to the
various segments based on sales volumes. Segment assets are comprised of
accounts receivable and inventories, net of applicable reserves and allowances,
goodwill and other assets.





Results
are not necessarily those that would be achieved were each segment an
unaffiliated business enterprise. Information by segment and a reconciliation to
reported amounts for the three years in the period ended December 31, 2009 are
as follows (in thousands):





Years
      Ended December 31,2007
                        
                        
                        2008
                        
                        
                        2009Net
      SalesTraditional
      Toys
                        
                        $
                        792,998
                        
                        
                        $
                        816,852
                        
                        
                        $
                        713,984Craft/Activity/Writing
      Products
                        
                        
                        39,632
                        
                        
                        
                        65,888
                        
                        
                        
                        73,513Pet
      Products
                        
                        
                        24,455
                        
                        
                        
                        20,657
                        
                        
                        
                        16,207$
                        857,085
                        
                        
                        $
                        903,397
                        
                        
                        $
                        803,704




Years
      Ended December 31,2007
                      
                      
                      2008
                      
                      
                      2009Operating
      Income (Loss)Traditional
      Toys
                      
                      $
                      100,227
                      
                      
                      $
                      65,133
                      
                      
                      $
                      (351,498
                      )Craft/Activity/Writing
      Products
                      
                      
                      4,079
                      
                      
                      
                      4,604
                      
                      
                      
                      (89,126
                      )Pet
      Products
                      
                      
                      2,692
                      
                      
                      
                      1,099
                      
                      
                      
                      (11,824
                      )$
                      106,998
                      
                      
                      $
                      70,836
                      
                      
                      $
                      (452,448
                      )





Years
      Ended December 31,2007
                      
                      
                      2008
                      
                      
                      2009Depreciation
      and Amortization ExpenseTraditional
      Toys
                      
                      $
                      25,339
                      
                      
                      $
                      26,199
                      
                      
                      $
                      32,167Craft/Activity/Writing
      Products
                      
                      
                      829
                      
                      
                      
                      1,182
                      
                      
                      
                      3,227Pet
      Products
                      
                      
                      495
                      
                      
                      
                      185
                      
                      
                      
                      570$
                      26,663
                      
                      
                      $
                      27,566
                      
                      
                      $
                      35,964




December
      31,2008
                      
                      
                      2009AssetsTraditional
      Toys
                      
                      $
                      877,606
                      
                      
                      $
                      565,516Craft/Activity/Writing
      Products
                      
                      
                      128,036
                      
                      
                      
                      57,022Pet
      Products
                      
                      
                      22,482
                      
                      
                      
                      11,555$
                      1,028,124
                      
                      
                      $
                      634,093


49


The
following tables present information about the Company by geographic area as of
and for the three years ended December 31, 2009 (in thousands):





December
      31,2008
                      
                      
                      2009Long-lived
      AssetsUnited
      States
                      
                      $
                      26,179
                      
                      
                      $
                      19,917Hong
      Kong
                      
                      
                      2,319
                      
                      
                      
                      1,297$
                      28,498
                      
                      
                      $
                      21,214





Years
      Ended December 31,2007
                      
                      
                      2008
                      
                      
                      2009Net
      Sales by Geographic AreaUnited
      States
                      
                      $
                      730,971
                      
                      
                      $
                      741,486
                      
                      
                      $
                      671,182Europe
                      
                      
                      37,585
                      
                      
                      
                      46,832
                      
                      
                      
                      33,603Canada
                      
                      
                      29,155
                      
                      
                      
                      36,929
                      
                      
                      
                      34,977Hong
      Kong
                      
                      
                      30,175
                      
                      
                      
                      38,318
                      
                      
                      
                      34,342Other
                      
                      
                      29,199
                      
                      
                      
                      39,832
                      
                      
                      
                      29,600$
                      857,085
                      
                      
                      $
                      903,397
                      
                      
                      $
                      803,704





Major
Customers





Net sales
to major customers were as follows (in thousands, except for
percentages):





2007
                      
                      
                      2008
                      
                      
                      2009Percentage of
                      
                      
                      
                      
                      
                      Percentage of
                      
                      
                      
                      
                      
                      Percentage ofAmount
                      
                      
                      Net
      Sales
                      
                      
                      Amount
                      
                      
                      Net
      Sales
                      
                      
                      Amount
                      
                      
                      Net
      SalesWal-Mart
                      
                      $
                      219,145
                      
                      
                      
                      25.5
                      %
                      
                      $
                      272,211
                      
                      
                      
                      30.1
                      %
                      
                      $
                      219,226
                      
                      
                      
                      27.3
                      %Target
                      
                      
                      142,026
                      
                      
                      
                      16.6
                      
                      
                      
                      118,850
                      
                      
                      
                      13.2
                      
                      
                      
                      136,334
                      
                      
                      
                      16.9Toys
      ‘R’ Us
                      
                      
                      140,387
                      
                      
                      
                      16.4
                      
                      
                      
                      119,125
                      
                      
                      
                      13.2
                      
                      
                      
                      91,298
                      
                      
                      
                      11.4$
                      501,558
                      
                      
                      
                      58.5
                      %
                      
                      $
                      510,186
                      
                      
                      
                      56.5
                      %
                      
                      $
                      446,858
                      
                      
                      
                      55.6
                      %





No other
customer accounted for more than 10% of our total net sales.





At
December 31, 2008 and 2009, the Company’s three largest customers accounted for
approximately 74.0% and 50.7%, respectively, of net accounts receivable. The
concentration of the Company’s business with a relatively small number of
customers may expose the Company to material adverse effects if one or more of
its large customers were to experience financial difficulty. The Company
performs ongoing credit evaluations of its top customers and maintains an
allowance for potential credit losses.




Note
4—Joint Venture





The
Company owned a fifty percent interest in a joint venture with THQ Inc. (“THQ”),
which developed, published and distributed interactive entertainment software
for the leading hardware game platforms in the home video game
market.





The
Company’s joint venture partner retained the financial risk of the joint venture
and was responsible for the day-to-day operations, for which they were entitled
to any remaining profits. In addition, THQ was entitled to receive a preferred
return based on the sale by the Company of its WWE-themed TV Games.





During
2007, 2008 and 2009, the Company earned a profit of $21.2 million and $17.1
million, and incurred a loss of $16.1 million, respectively, from the joint
venture.  The losses in 2009 were due to the reduction from
approximately $56.2 million to approximately $32.7 million in the accrual of the
receivable from the joint venture that resulted from the arbitration setting the
preferred return rate at 6%, instead of the 10% rate that had been
accrued.  Pursuant to a Settlement Agreement and Mutual Release dated
December 22, 2009, the joint venture was terminated on December 31,
2009 and the Company will receive fixed payments from THQ of
$6.0 million on each of June 30, 2010 and 2011 and $4.0 million
on each of June 30, 2012 and 2013 which the Company will record as income
on a cash basis over the term (see Note 20).


50


As of
December 31, 2008 and 2009, the balance of the investment in the video game
joint venture includes the following components (in thousands):




December
      31,2008
                      
                      
                      2009Preferred
      return receivable
                      
                      $
                      52,845
                      
                      
                      $
                      6,727Investment
      costs, net
                      
                      
                      339
                      
                      
                      
                      —$
                      53,184
                      
                      
                      $
                      6,727





Note 5—Business
Combinations





The
Company acquired the following entities to further enhance its existing product
lines and to continue diversification into other toy categories and seasonal
businesses:





In
October 2008, the Company acquired substantially all of the assets of Tollytots
Limited.  The total initial consideration of $26.8 million consisted
of $12.0 million in cash and the assumption of liabilities in the amount of
$14.8 million, and resulted in goodwill of $4.1 million, all of which has been
determined to be impaired and was written off in the quarter ended June 30,
2009. In addition, the Company agreed to pay an earn-out of up to an aggregate
amount of $5.0 million in cash over the three calendar years following the
acquisition based on the achievement of certain financial performance criteria,
which will be recorded as goodwill when and if earned.  In the first
earn-out period ended December 31, 2009, no portion of the earn-out was
earned.  Tollytots is a leading designer and producer of licensed baby
dolls and baby doll pretend play accessories based on well-known brands and was
included in our results of operations from the date of
acquisition.  Pro forma results of operations are not provided since
the amounts are not material to the consolidated results of
operations.





In
October 2008, the Company acquired substantially all of the stock of Kids Only,
Inc, and a related Hong Kong company, Kids Only Limited (collectively, “Kids
Only”).  The total initial consideration of $23.8 million consisted of
$20.4 million in cash and the assumption of liabilities in the amount of $3.4
million, and resulted in goodwill of $13.2 million, all of which has been
determined to be impaired and was written off in the quarter ended June 30,
2009. In addition, the Company agreed to pay an earn-out of up to an aggregate
amount of $5.6 million in cash over the three calendar years following the
acquisition based on the achievement of certain financial performance criteria,
which will be recorded as goodwill when and if earned.  The first
earn-out period ended September 30, 2009 is under review.  Kids Only
is a leading designer and producer of licensed indoor and outdoor kids’
furniture, and has an extensive portfolio which also includes baby dolls and
accessories, room décor and a myriad of other children’s toy
products  and was included in our results of operations from the date
of acquisition.  Pro forma results of operations are not provided
since the amounts are not material to the consolidated results of
operations.





In
December 2008, the Company acquired certain assets of Disguise, Inc. and a
related Hong Kong company, Disguise Limited (collectively,
“Disguise”).  The total initial consideration of $60.6 million
consisted of $38.6 million in cash and the assumption of liabilities in the
amount of $22.0 million, and resulted in goodwill of $30.6 million, all of which
has been determined to be impaired and was written off in the quarter ended June
30, 2009. The Company finalized its purchase price allocation for Disguise and
engaged a third party to perform studies and valuations to the estimated fair
value of assets and liabilities assumed.  Disguise is a leading
designer and producer of Halloween and everyday costume play and was included in
our results of operations from the date of acquisition.  Pro forma
results of operations are not provided since the amounts are not material to the
consolidated results of operations.





Refer to
Note 6 for information on the write-down of goodwill.





Note
6—Goodwill





The
changes in the carrying amount of goodwill for the years ended December 31, 2008
and 2009 are as follows (in thousands):





Traditional
                        Toys
                      
                      
                      Craft/Activity
                        /Writing
                        Products
                      
                      
                      Pet
                        Products
                      
                      
                      TotalBalance,
      December 31, 2007
                      
                      $
                      262,390
                      
                      
                      $
                      82,826
                      
                      
                      $
                      8,124
                      
                      
                      $
                      353,340Adjustments
      to goodwill during the year
                      
                      
                      72,693
                      
                      
                      
                      —
                      
                      
                      
                      1,660
                      
                      
                      
                      74,353Balance,
      December 31, 2008
                      
                      
                      335,083
                      
                      
                      
                      82,826
                      
                      
                      
                      9,784
                      
                      
                      
                      427,693Adjustments
      to goodwill during the year
                      
                      
                      (18,997
                      )
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (18,997
                      )Write-down
      of goodwill
                      
                      
                      (314,515
                      )
                      
                      
                      (82,826
                      )
                      
                      
                      (9,784
                      )
                      
                      
                      (407,125
                      )Balance
      December 31, 2009
                      
                      $
                      1,571
                      
                      
                      $
                      —
                      
                      
                      $
                      —
                      
                      
                      $
                      1,571




51


The
Company applies a fair value-based impairment test to the net book value of
goodwill and indefinite-lived intangible assets on an annual basis and, if
certain events or circumstances indicate that an impairment loss may have been
incurred, on an interim basis. The analysis of potential impairment of goodwill
requires a two-step process. The first step is the estimation of fair value. If
step one indicates that an impairment potentially exists, the second step is
performed to measure the amount of impairment, if any. Goodwill impairment
exists when the estimated fair value of goodwill is less than its carrying
value.




During
2009, the Company reclassified $20.9 million from goodwill to intangibles and
other assets for its Disguise acquisition.  The Company finalized its
purchase price allocation for its Disguise Acquisition and used to a third party
to perform studies and valuations to the estimated fair value of assets and
liabilities assumed.  Furthermore, the Company increased goodwill for
its Kids Only and Tollytots acquisitions by $0.3 million for acquisition related
costs.




During
the second quarter of 2009, the Company determined that the significant decline
in its market capitalization is likely to be sustained.   The
Company’s market capitalization was not significantly affected by the dismissals
subject to appeal of the WWE lawsuit, and the lower revenue expectations for
2009 versus 2008 were factors that indicated that an interim goodwill impairment
test was required. As a result, the Company determined that $407.1 million, or
all of the goodwill related to previous acquisitions, including the acquisition
of Disguise in December 2008, was impaired. This amount is included in
Write-down of Goodwill in the accompanying condensed consolidated statements of
operations.





At
December 31, 2009, the Company recorded deferred tax liabilities related to the
Tollytots and Kids Only acquisitions that resulted in Goodwill of $1.6
million.




Note
7—Intangible Assets Other Than Goodwill





Intangible
assets other than goodwill consist primarily of licenses, product lines, debt
offering costs from the Company’s convertible senior notes and trademarks.
Amortized intangible assets are included in the Intangibles and other, net, in
the accompanying balance sheets. Trademarks are disclosed separately in the
accompanying balance sheets. Intangible assets are as follows (in
thousands):





December
      31, 2008
                                
                                
                                December
      31, 2009Weighted
                                  Useful
                                  Lives
                                
                                
                                Gross
                                  Carrying
                                  Amount
                                
                                
                                Accumulated
                                  Amortization
                                
                                
                                Net
                                  Amount
                                
                                
                                Gross
                                  Carrying
                                  Amount
                                
                                
                                Accumulated
                                  Amortization
                                
                                
                                Net
                                  Amount(Years)Amortized
      Intangible Assets:Acquired
      order backlog
                                
                                
                                0.50
                                
                                
                                $
                                2,393
                                
                                
                                $
                                (2,165
                                )
                                
                                $
                                228
                                
                                
                                $
                                2,393
                                
                                
                                $
                                (2,393
                                )
                                
                                $
                                —Licenses
                                
                                
                                4.84
                                
                                
                                
                                67,088
                                
                                
                                
                                (46,638
                                )
                                
                                
                                20,450
                                
                                
                                
                                85,788
                                
                                
                                
                                (57,396
                                )
                                
                                
                                28,392Product
      lines
                                
                                
                                3.62
                                
                                
                                
                                17,700
                                
                                
                                
                                (17,700
                                )
                                
                                
                                —
                                
                                
                                
                                19,100
                                
                                
                                
                                (18,285
                                )
                                
                                
                                815Customer
      relationships
                                
                                
                                5.33
                                
                                
                                
                                4,096
                                
                                
                                
                                (2,301
                                )
                                
                                
                                1,795
                                
                                
                                
                                6,296
                                
                                
                                
                                (2,912
                                )
                                
                                
                                3,384Non-compete/Employment
      contracts
                                
                                
                                3.84
                                
                                
                                
                                2,748
                                
                                
                                
                                (2,703
                                )
                                
                                
                                45
                                
                                
                                
                                3,133
                                
                                
                                
                                (2,823
                                )
                                
                                
                                310Debt
      offering costs
                                
                                
                                5.74
                                
                                
                                
                                3,705
                                
                                
                                
                                (1,033
                                )
                                
                                
                                2,672
                                
                                
                                
                                4,444
                                
                                
                                
                                (372
                                )
                                
                                
                                4,072Total
      amortized intangible assets
                                
                                
                                
                                
                                
                                
                                97,730
                                
                                
                                
                                (72,540
                                )
                                
                                
                                25,190
                                
                                
                                
                                121,154
                                
                                
                                
                                (84,181
                                )
                                
                                
                                36,973Unamortized
      Intangible Assets:Trademarks
                                
                                indefinite
                                
                                
                                
                                10,491
                                
                                
                                
                                —
                                
                                
                                
                                10,491
                                
                                
                                
                                2,308
                                
                                
                                
                                —
                                
                                
                                
                                2,308$
                                108,221
                                
                                
                                $
                                (72,540
                                )
                                
                                $
                                35,681
                                
                                
                                $
                                123,462
                                
                                
                                $
                                (84,181
                                )
                                
                                $
                                39,281





During
the third quarter of 2008, the Company decided to discontinue the use of the
“Toymax” and “Trendmaster” tradenames on products and market these products
under the JAKKS Pacific trademark. Consequently, the intangible assets
associated with these tradenames were written off to write-down of intangible
assets, resulting in a charge of $3.5 million. Also, the Company adjusted the
value of the Child Guidance trademark to reflect lower sales expectations for
this tradename, resulting in a charge to Write-down of Intangible Assets of $5.6
million.





During
the second quarter of 2009, the Company determined that the tradenames “Child
Guidance” and “Play Along” and certain tradenames associated with our Craft and
Activity product lines would either be discontinued, or were under
performing.   Consequently, the intangible assets associated with
these tradenames were written off to Write-down of Intangible Assets, resulting
in a non-cash charge of $8.2 million.


52


For the
years ended December 31, 2007, 2008, and 2009, the Company’s aggregate
amortization expense related to intangible assets was $14.6 million, $9.5
million and $13.1 million, respectively. The Company currently estimates
continuing amortization expense for the next five years to be approximately (in
thousands):





2010
                
                $
                10,4392011
                
                
                8,8602012
                
                
                5,6662013
                
                
                5,3872014
                
                
                2,555





Note
8—Concentration of Credit Risk





Financial
instruments that subject the Company to concentration of credit risk are cash
and cash equivalents and accounts receivable. Cash equivalents consist
principally of short-term money market funds. These instruments are short-term
in nature and bear minimal risk. To date, the Company has not experienced losses
on these instruments.





The
Company performs ongoing credit evaluations of its customers’ financial
conditions, but does not require collateral to support domestic customer
accounts receivable. Most goods shipped FOB Hong Kong or China are secured with
irrevocable letters of credit.





At
December 31, 2008 and 2009, the Company’s three largest customers accounted for
approximately 74.0% and 50.7%, respectively, of net accounts receivable. The
concentration of the Company’s business with a relatively small number of
customers may expose the Company to material adverse effects if one or more of
its large customers were to experience financial difficulty. The Company
performs ongoing credit evaluations of its top customers and maintains an
allowance for potential credit losses.




Note 9—Accrued
Expenses





Accrued
expenses consist of the following (in thousands):





2008
                    
                    
                    2009Royalties
                    
                    $
                    24,691
                    
                    
                    $
                    31,859Bonuses
                    
                    
                    8,352
                    
                    
                    
                    685Acquisition
      earn-out
                    
                    
                    5,667
                    
                    
                    
                    —Employee
      salaries and benefits
                    
                    
                    1,832
                    
                    
                    
                    1,770Unearned
      revenue
                    
                    
                    554
                    
                    
                    
                    431Sales
      commissions
                    
                    
                    2,502
                    
                    
                    
                    2,051Accrued
      interest expense
                    
                    
                    526
                    
                    
                    
                    1,855Molds
      and tools
                    
                    
                    3,024
                    
                    
                    
                    1,989Acquisition
      license transfer fees
                    
                    
                    1,640
                    
                    
                    
                    —Acquisition
      working capital adjustment
                    
                    
                    4,983
                    
                    
                    
                    —Reorganization
      charges
                    
                    
                    —
                    
                    
                    
                    10,144Advertising
      commitment
                    
                    
                    —
                    
                    
                    
                    3,000Inventory
      liabilities
                    
                    
                    1,224
                    
                    
                    
                    6,811Other
                    
                    
                    6,785
                    
                    
                    
                    3,456$
                    61,780
                    
                    
                    $
                    64,051





The
Company incurred reorganization charges at the end of 2009 to consolidate and
stream-line its existing business functions.  This was especially
necessary given the decreased volume of consolidated sales in 2009 from 2008 and
the added general and administrative expenses from the three acquisitions made
at the end of 2008.  Restructuring charges relate to the termination
of lease obligations, one-time severance termination benefits, fixed asset
write-offs and other contract terminations and are accounted for in accordance
with “Exit and Disposal Cost Obligations”, ASC 420-10.  The Company
established a liability for a cost associated with an exit or disposal activity
when a liability is incurred, rather than at the date the Company commits to an
exit plan.


53


These
reorganization charges relate to the Company’s Traditional segment and are
included in Reorganization Charges in the consolidated statements of
operations.  The components of the reorganization charges are as
follows (in thousands):





Accrued Balance
                  
                  
                  
                  
                  
                  
                  
                  
                  Accrued BalanceDecember 31, 2008
                  
                  
                  Accrual
                  
                  
                  Actual
                  
                  
                  December 31, 2009Lease
      abandonment costs
                  
                  $
                  —
                  
                  
                  $
                  10,164
                  
                  
                  $
                  (322
                  )
                  
                  $
                  9,842Employee
      severance
                  
                  
                  —
                  
                  
                  
                  1,541
                  
                  
                  
                  (1,538
                  )
                  
                  
                  3Fixed
      asset write-off
                  
                  
                  —
                  
                  
                  
                  1,017
                  
                  
                  
                  (883
                  )
                  
                  
                  134Other
                  
                  
                  —
                  
                  
                  
                  272
                  
                  
                  
                  (107
                  )
                  
                  
                  165Total
      reorganization charges
                  
                  $
                  —
                  
                  
                  $
                  12,994
                  
                  
                  $
                  (2,850
                  )
                  
                  $
                  10,144




Note
10—Related Party Transactions





A
director of the Company is a partner in a law firm that acts as counsel to the
Company. The Company incurred legal fees and expenses to the law firm in the
amount of approximately $1.9 million in 2007, $2.5 million in 2008 and $2.5
million in 2009. As of December 31, 2008 and 2009, legal fees and reimbursable
expenses of $1.5 million and $1.2 million, respectively, were payable to this
law firm.





Note
11—Convertible Senior Notes





Convertible
senior notes consist of the following (in thousands):





December
      31,2008
                      
                      
                      20094.625%
      Convertible senior notes
                      
                      $
                      98,000
                      
                      
                      $
                      20,2624.50%
      Convertible senior notes
                      
                      
                      —
                      
                      
                      
                      100,000$
                      98,000
                      
                      
                      $
                      120,262





On
November 10, 2009 the Company sold an aggregate of $100.0 million of 4.50%
Convertible Senior Notes due 2014 (the “Notes”). The Notes are senior unsecured
obligations of JAKKS, will pay interest semi-annually at a rate of 4.50% per
annum and will mature on November 1, 2014. The conversion rate will initially be
63.2091 shares of JAKKS common stock per $1,000 principal amount of notes
(equivalent to an initial conversion price of approximately $15.82 per share of
common stock), subject to adjustment in certain circumstances. Prior to August
1, 2014, holders of the Notes may convert their Notes only upon specified
events. Upon conversion, the Notes may be settled, at the Company’s election, in
cash, shares of its common stock, or a combination of cash and shares of its
common stock. Holders of the Notes may require the Company to repurchase for
cash all or some of their Notes upon the occurrence of a fundamental change (as
defined).





The
Company used a portion of the net proceeds from the offering to repurchase $77.7
million of its 4.625% convertible senior notes due in 2023 and intends to
repurchase the remaining $20.3 million of its 4.625% convertible senior notes in
June 2010.  In the event the Company is unable to repurchase such
Notes on satisfactory terms, it may use such proceeds for general corporate
purposes.





The
provisions of ASC 470-20, “Debt with Conversion and Other
Options” are applicable to the 4.50% convertible notes. ASC 470-20
requires the Company to separately account for the liability (debt) and equity
(conversion feature) components of the Notes in a manner that reflects the
company’s nonconvertible debt borrowing rate at the date of issuance when
interest cost is recognized in subsequent periods. The Company allocated $13.7
million of the $100.0 million principal amount of the Notes to the equity
component, which represents a discount to the debt and will be amortized into
interest expense through November 1, 2014.  Accordingly, the company’s
effective annual interest rate on the Notes will be approximately 7.9%. The
Notes are classified as long-term debt in the balance sheet at December 31, 2009
based on their November 1, 2014 maturity date.   Debt issuance
costs of approximately $3.5 million are being amortized to interest expense over
the five year term of the Notes.





Key
components of the 4.50% convertible senior notes consist of the following (in
thousands):





December 31, 2009Principal amount
      of notes
                          
                          $
                          100,000Unamortized
      discount
                          
                          
                          (13,272
                          )Net
      carrying amount of the convertible notes
                          
                          $
                          86,728





54





Year ended
                                December 31, 2009Contractual interest expense on
      the coupon
                              
                              $
                              641Amortization
      of the discount component and debt issue fees recognized as interest
      expense
                              
                              
                              498Total
      interest expense on the convertible notes
                              
                              $
                              1,139





As of
December 31, 2009, the unamortized discount was $13.3 million, which will be
amortized over approximately 4.9 years, and the carrying amount of the equity
component was $13.7 million. As of December 31, 2009, the conversion rate was
equal to the initial conversion price of approximately $15.82 per share and the
if-converted value of the Notes was $100.0 million.





In June
2003, the Company sold an aggregate of $98.0 million of 4.625% Convertible
Senior Notes due June 15, 2023 of which $20.3 million remain outstanding. The
notes may be converted into shares of the Company’s common stock at an initial
conversion price of $20.00 per share, or 50 shares per note, subject to certain
circumstances. The notes may be converted in each quarter subsequent to any
quarter in which the closing price of the Company’s common stock is at or above
a prescribed price for at least 20 trading days in the last 30 trading day
period of the quarter.  The prescribed price for the conversion
trigger is $24.00 through June 30, 2010, and increases nominally each quarter
thereafter.  Cash interest is payable at an annual rate of 4.625% of
the principal amount at issuance, from the issue date to June 15, 2010, payable
on June 15 and December 15 of each year, commencing on December 15, 2003. After
June 15, 2010, interest will accrue at the same rate on the outstanding notes.
At maturity, the Company will redeem the notes at their accreted principal
amount, which will be equal to $1,811.95 (181.195%) per $1,000 principal amount
at issuance, unless redeemed or converted earlier.  The notes were not
convertible as of December 31, 2009.





The
Company may redeem the notes at its option in whole or in part beginning on June
15, 2010, at 100% of their accreted principal amount plus accrued and unpaid
interest, if any, payable in cash. Holders of the notes may also require the
Company to repurchase all or part of their notes on June 15, 2010, for cash, at
a repurchase price of 100% of the principal amount per note plus accrued and
unpaid interest, if any. Holders of the notes may also require the Company to
repurchase all or part of their notes on June 15, 2013 and June 15, 2018 at a
repurchase price of 100% of the accreted principal amount per note plus accrued
and unpaid interest, if any. Any repurchases at June 15, 2013 and June 15, 2018
may be paid in cash, in shares of common stock or a combination of cash and
shares of common stock.  The Company intends to repurchase the
remaining $20.3 million of its 4.625% convertible senior notes in June
2010.




Note
12—Income Taxes





The
Company does not file a consolidated return with its foreign subsidiaries. The
Company files federal and state returns and its foreign subsidiaries file Hong
Kong returns.





The
Company’s income tax benefit, which includes federal, state and foreign income
taxes, and discrete items, was $90.7 million, or an effective tax benefit rate
of 19.0 % for the year ended 2009. For the years ended 2007 and 2008, the
provision for income taxes, which included Federal, state and foreign income
taxes was $40.6 million and $12.8 million, an effective tax provision rates of
31.3% and 14.4% respectively.





In 2009,
the tax effect of the impairment of goodwill and trademarks, totaling $90.7
million, the purchase accounting adjustment of $6.2 million, write-down of
foreign NOLs and tax credits of $6.1 million, and uncertain tax positions
(described separately below), were adjustments to the tax benefit rate
realized.  Exclusive of these discrete items, the 2009 effective tax
benefit rate would be 40.1%.





For the
years ended 2007 and 2008, provision for income taxes includes Federal, state
and foreign income taxes at effective tax rates of 31.3% and 14.4% respectively
The effective tax rate benefits from a tax rate of 17.5% and 16.5% for 2007 and
2008, respectively, on the Company’s income arising in, or derived from, Hong
Kong. The decrease in the effective rate in 2008 is primarily due to the
recognition of certain discrete income tax adjustments recognized in the quarter
ended September 30, 2008 and a change in the federal tax code which reduced the
amount of foreign income includible on the federal income tax return. These
discrete adjustments included the reconciliation of the 2007 income tax
provision to the actual income tax liability as reflected in the Company’s
income tax return, and the reduction in income tax expense due to the
de-recognition of a previously recorded potential income tax liability for
uncertain tax positions that are no longer subject to audit due to the closure
of the audit period. Exclusive of these discrete items, the effective tax
provision rate would be 33.2% in 2007 and 30.5% in 2008.





For year
ended 2009, the Company had net deferred tax assets of approximately $73.0
million for which an allowance of $0.9 million has been provided since, in the
opinion of management, realization of the future benefit is
uncertain.


55


Provision
(benefit) for income taxes reflected in the accompanying consolidated statements
of operations are comprised of the following (in thousands):





2007
                      
                      
                      2008
                      
                      
                      2009Federal
                      
                      $
                      23,931
                      
                      
                      $
                      (6,978
                      )
                      
                      $
                      (11,103
                      )State
      and local
                      
                      
                      6,016
                      
                      
                      
                      (435
                      )
                      
                      
                      (980
                      )Foreign
                      
                      
                      8,719
                      
                      
                      
                      5,230
                      
                      
                      
                      3,105Total
      Current
                      
                      
                      38,666
                      
                      
                      
                      (2,183
                      )
                      
                      
                      (8,978
                      )APIC
                      
                      
                      1,053
                      
                      
                      
                      1,338
                      
                      
                      
                      (487
                      )Deferred
                      
                      
                      831
                      
                      
                      
                      13,687
                      
                      
                      
                      (81,213
                      )Total
                      
                      $
                      40,550
                      
                      
                      $
                      12,842
                      
                      
                      $
                      (90,678
                      )





The
components of deferred tax assets/(liabilities) are as follows (in
thousands):





2008
                            
                            
                            2009Net
      deferred tax assets/(liabilities):Current:Reserve
      for sales allowances and possible losses
                            
                            $
                            2,752
                            
                            
                            $
                            12,250Accrued
      expenses
                            
                            
                            8,339
                            
                            
                            
                            5,856Restricted
      stock grant
                            
                            
                            2,974
                            
                            
                            
                            2,617Federal
      and state net operating loss carryforwards
                            
                            
                            920
                            
                            
                            
                            2,905Uncertain
      tax positions
                            
                            
                            715
                            
                            
                            
                            612Foreign
      tax and other credits
                            
                            
                            1,709
                            
                            
                            
                            —State
      income taxes
                            
                            
                            1,712
                            
                            
                            
                            (5,115
                            )Other
                            
                            
                            (208
                            )
                            
                            
                            1,262Gross  current
                            
                            
                            18,913
                            
                            
                            
                            20,387Valuation
      allowance related to state net operating loss
carryforwards
                            
                            
                            (920
                            )
                            
                            
                            (920
                            )Net
      Current
                            
                            
                            17,993
                            
                            
                            
                            19,467Long
      Term:Property
      and equipment
                            
                            
                            4,555
                            
                            
                            
                            2,880Original
      issue discount interest
                            
                            
                            (16,623
                            )
                            
                            
                            (25,870
                            )Goodwill
      and intangibles
                            
                            
                            1,506
                            
                            
                            
                            68,527Minimum
      guarantees
                            
                            
                            —
                            
                            
                            
                            9,554Foreign
      net operating loss carryforward
                            
                            
                            2,718
                            
                            
                            
                            —Stock
      options
                            
                            
                            818
                            
                            
                            
                            825Section
      481(a) adjustments
                            
                            
                            (1,266
                            )
                            
                            
                            (331
                            )Income
      from joint venture
                            
                            
                            (17,945
                            )
                            
                            
                            (2,820
                            )Uncertain
      tax positions
                            
                            
                            723
                            
                            
                            
                            737Other
                            
                            
                            (723
                            )
                            
                            
                            —Total
      long-term
                            
                            
                            (26,237
                            )
                            
                            
                            53,502Total
      net deferred tax assets/(liabilities)
                            
                            $
                            (8,244
                            )
                            
                            $
                            72,969




Provision
(benefit) for income taxes varies from the U.S. federal statutory rate. The
following reconciliation shows the significant differences in the tax at
statutory and effective rates:





2007
                    
                    
                    2008
                    
                    
                    2009Federal
      income tax expense (benefit)
                    
                    
                    35.0
                    %
                    
                    
                    35.0
                    %
                    
                    
                    (35.0
                    )%State
      income tax expense, net of federal tax effect
                    
                    
                    3.3
                    
                    
                    
                    2.6
                    
                    
                    
                    (2.4
                    )Effect
      of differences in U.S. and Foreign statutory rates
                    
                    
                    (5.1
                    )
                    
                    
                    (6.5
                    )
                    
                    
                    (0.6
                    )Uncertain
      tax positions
                    
                    
                    —
                    
                    
                    
                    (10.4
                    )
                    
                    
                    (0.5
                    )Filed
      return to provision
                    
                    
                    —
                    
                    
                    
                    (5.6
                    )
                    
                    
                    —Goodwill
      write-down
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    17.1Foreign
      NOLs
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    0.6Other
                    
                    
                    (1.9
                    )
                    
                    
                    (0.7
                    )
                    
                    
                    1.831.3
                    %
                    
                    
                    14.4
                    %
                    
                    
                    (19.0
                    )%




56


Deferred
taxes result from temporary differences between tax bases of assets and
liabilities and their reported amounts in the consolidated financial statements.
The temporary differences result from costs required to be capitalized for tax
purposes by the U.S. Internal Revenue Code (“IRC”), and certain items accrued
for financial reporting purposes in the year incurred but not deductible for tax
purposes until paid.





As of
December 31, 2009, the Company has state net operating loss carryforwards of
$12.3 million expiring through 2023 and 2024. These carryforwards resulted from
the acquisitions of Toymax. As of December 31, 2009, the Company’s management
concluded that a deferred tax asset valuation allowance was necessary for $0.9
million of the state net operating loss carryforwards due to uncertainty about
the ability to utilize these losses prior to expiration.





The
components of income (loss) before provision (benefit) for income taxes are as
follows (in thousands):





2007
                    
                    
                    2008
                    
                    
                    2009Domestic
                    
                    $
                    73,115
                    
                    
                    $
                    57,787
                    
                    
                    $
                    (488,182
                    )Foreign
                    
                    
                    56,426
                    
                    
                    
                    31,112
                    
                    
                    
                    11,994$
                    129,541
                    
                    
                    $
                    88,899
                    
                    
                    $
                    (476,188
                    )





As of
January 1, 2007, the Company adopted a recognition threshold and measurement
process for recording in the financial statements uncertain tax positions
(“UTP”) taken or expected to be taken in a tax return. As a result, the Company
recognized a liability for UTP of $22.8 million, which was accounted for as a
reduction to the January 1, 2007 balance of retained earnings. These UTPs are
primarily due to income allocation issues between the United States and Hong
Kong, and fixed asset depreciation in Hong Kong. The Company has also recognized
an additional liability of $2.5 million for penalties and $2.8 for interest on
the potential tax liability. These amounts were also accounted for as a
reduction in the January 1, 2007 balance of retained earnings.





Approximately
$8.9 million of United States based and $0.8 million of Hong Kong based
unrecognized tax positions (UTPs) were recognized in 2009. In addition,
approximately $1.7 million of United States based UTPs and $3.1 million of Hong
Kong based UTPs became de-recognized during 2009 as they related to income tax
years for which the audit period had expired. These items are included in the
2009 income tax provision.  These new UTPs are primarily a result of a
2009 tax court case and ongoing audits.  During 2008, approximately
$1.5 million of the liability for UTP relating to Hong Kong fixed asset
depreciation was recognized.





Current
interest on uncertain income tax liabilities is recognized as interest expense
and penalties are recognized in selling, general and administrative expenses in
the consolidated statement of operations. During 2009, the Company recognized
$0.8 million of current year interest expense relating to UTPs.





The
following table provides further information of UTPs that would affect the
effective tax rate, if recognized, as of December 31, 2009 (in
millions):





Balance,
      January 1, 2007
                        
                        $
                        22.8Current
      year additions
                        
                        
                        0.3Current
      year reduction due to lapse of applicable statute of
      limitations
                        
                        
                        (2.8
                        )Balance,
      January 1, 2008
                        
                        
                        20.3Current
      year additions
                        
                        
                        1.5Current
      year reduction due to lapse of applicable statute of
      limitations
                        
                        
                        (9.9
                        )Balance,
      January 1, 2009
                        
                        
                        11.9Current
      year additions
                        
                        
                        9.7Current
      year reduction due to lapse of applicable statute of
      limitations
                        
                        
                        (4.8
                        )Balance,
      December 31, 2009
                        
                        $
                        16.8





Tax years
2005 through 2008 are still subject to examination in the United States and tax
years 2005 through 2008 are still subject to examination in
California.  The tax years 2000 through 2006 are still subject to
examination in Hong Kong. In the normal course of business, the Company is
audited by federal, state, and foreign tax authorities.  The U.S.
Internal Revenue Service is performing a limited examination related to the 2005
and 2006 U.S. federal income tax returns.  The Company was under
examination for various state jurisdictions during 2009.  The ultimate
resolution of these U.S. and state examinations, including matters that may be
resolved within the next twelve months, is not yet determinable.




57




Note
13—Leases





The
Company leases office, warehouse and showroom facilities and certain equipment
under operating leases. Rent expense for the years ended December 31, 2007, 2008
and 2009 totaled $10.4 million, $11.5 million and $15.1 million, respectively.
The following is a schedule of minimum annual lease payments (in
thousands).





2010
                  
                  $
                  14,0002011
                  
                  
                  10,5482012
                  
                  
                  9,7362013
                  
                  
                  6,0702014
                  
                  
                  5,644Thereafter
                  
                  
                  2,868$
                  48,866





Note
14—Common Stock, Preferred Stock and Warrants





The
Company has 105,000,000 authorized shares of stock consisting of 100,000,000
shares of $.001 par value common stock and 5,000,000 shares of $.001 par value
preferred stock.





In
January 2009, the Company issued an aggregate of 240,000 shares of restricted
stock at an aggregate value of approximately $5.0 million to two of its
executive officers, which were to vest, subject to certain Company financial
performance criteria, in January 2010 (which criteria were not met so the shares
did not vest), an aggregate of 30,340 shares of restricted stock to its five
non-employee directors, which vest in January 2010, at an aggregate value of
approximately $0.6 million, and an aggregate of 206,500 shares of restricted
stock to its employees at an aggregate value of approximately $3.8 million,
which vest over a three to five-year period. Additionally, 74,836 shares of
restricted stock previously received by two executive officers were surrendered
at a value of $1.4 million to cover their income taxes due on the 2009 vesting
of the restricted stock granted to them in 2007 and 2008.  This
restricted stock was subsequently retired by the Company.  Also, in
January 2009, an employee surrendered 551 shares of restricted stock at a value
of $11,367 to cover his income taxes due on the December 31, 2008 vested
shares.  In February 2009, the Company issued 3,000 shares of
restricted stock at a value of approximately $0.05 million to an employee, which
vest over a five-year period.





In June
2009, the Company issued 2,500 shares of restricted stock at a value of
approximately $0.03 million to an employee, which vest over a five-year
period.  In August 2009, certain employees surrendered an aggregate of
920 shares of restricted stock at a value of $10,608 to cover their income taxes
due on the 2009 vesting of the restricted shares granted to them in
2006.





In
October 2009, the Company issued 3,000 shares of common stock on the exercise of
options at a value of $40,440.  Also, in October 2009, and employee
surrendered 2,717 shares of restricted stock at a value of $40,701 to cover his
income taxes due on the October 22, 2009 vested shares.  In December
2009, certain employees surrendered an aggregate of 4,725 shares of restricted
stock at a value of $58,118 to cover their income taxes due on the 2009 vesting
of the restricted shares granted them in 2009.





In
January 2008, the Company issued an aggregate of 240,000 shares of restricted
stock at an aggregate value of $5.7 million to two of its executive officers,
which vest 50% in each of January 2009 and 2010 subject to acceleration based on
the Company achieving certain financial performance criteria, and an aggregate
of 25,340 shares of restricted stock to its five non-employee directors, which
vest in January 2009, at an aggregate value of approximately $0.6 million. In
February 2008, the Company issued an aggregate of 41,134 shares of restricted
stock as 2007 bonus compensation to two of its executive officers, which vested
immediately, at an aggregate value of approximately $1.0 million. In February
2008, the Company issued 3,593 shares of restricted stock as 2007 bonus
compensation at a value of $0.1 million to an executive officer, which vests 50%
on each of March 1, 2009 and 2010. During the twelve months
ended December 31, 2008, the Company also issued 315,517 shares of
common stock on the exercise of options at a value of $4.2 million, and 122,202
shares of restricted stock previously received by two executive officers were
surrendered at a value of $3.0 million to cover their income taxes due on the
2008 vesting of the restricted shares granted to them in 2006, 2007 and 2008.
This surrendered restricted stock was subsequently retired by the
Company.





The
Company also issued $100.0 million of convertible senior notes payable that may
be converted (at their initial conversion rate of $15.82 per share) into an
aggregate of 6.3 million shares of the Company’s common stock (Note
11).





In
February 2008, the Company’s Board of Directors authorized it to repurchase up
to $30.0 million of its common stock. In April and May 2008, the Company
repurchased an aggregate of 1,259,300 shares of its common stock at an average
price of $23.82 per share for a total cost of $30.0 million. The repurchased
stock represented approximately 4.4% of the Company’s outstanding shares of
common stock at the time of the repurchase and was subsequently retired by the
Company.


58


In July
2008, the Company issued 7,500 shares of restricted stock at a value of $0.2
million to an employee, which vests 15% on July 1, 2008, 15% on each of December
2008 and 2009, 25% on December 31, 2010, and 30% on December 2011. This employee
surrendered 489 shares at a value of $10,484 to cover his income taxes due on
the July 1, 2008 vested shares. During 2008, certain employees surrendered
an aggregate of 5,151 shares of restricted stock at a value of $112,593 to
cover their income taxes due on the 2008 vesting of the restricted shares
granted to them in 2006.





During
2007, the Company issued an aggregate of 240,000 shares of restricted stock to
two of its executive officers, which vest 50% in each of January 2008 and 2009
subject to acceleration based on the Company achieving certain financial
performance criteria, and an aggregate of 27,340 shares of restricted stock to
its five non-employee directors, which vest in January 2008, at an aggregate
value of approximately $5.8 million. In July 2007, the Company issued 15,000
shares of restricted stock at a value of $0.5 million to an executive officer,
which vests one-third on each of December 31, 2007, 2008 and
2009.  During 2007, the Company also issued 216,200 shares of common
stock on the exercise of options at a value of $3.6 million, and 83,644 shares
of restricted stock previously received by two executive officers were
surrendered at a value of $1.8 million to cover their income taxes due on the
2007 vesting of the restricted shares granted them in 2006. This surrendered
restricted stock was subsequently retired by the
Company.   Additionally, one executive officer surrendered
107,637 shares of common stock of the Company at a value of $2.8 million to
cover his exercise of options to purchase 175,000 shares of common stock of the
Company.   During 2007, certain employees surrendered an
aggregate of 1,340 shares of restricted stock at a value of $29,931 to cover
their income taxes on the 2007 vesting of the restricted shares granted them in
2006. The Company granted and issued an aggregate of 41,000 shares of restricted
stock to its employees at an aggregate value of approximately $1.1
million.  As of December 31, 2007, 536,977 shares of the restricted
stock remained unvested, of which $2.9 million remained
unamortized.




During
2003, the Company awarded 2,760,000 shares of restricted stock to four executive
officers of the Company pursuant to its 2002 Stock Award and Incentive Plan
(“the Award’), of which 636,000 were earned during 2003, 396,000 were earned
during 2004, 288,000 were canceled upon the termination of employment of one of
our executive officers in October 2004, and the balance may be earned through
2010 based upon the achievement of certain financial criteria and continuing
employment (see Note 16.)





During
2003, the Company issued 100,000 fully vested warrants, expiring in 2013, in
connection with license costs relating to its video game joint venture. The fair
value of these warrants was approximately $1.1 million and has been included in
the basis of the joint venture (Note 4). The Company also issued $98.0 million
of convertible senior notes payable that may be converted (at their initial
conversion rate of $20.00 per share) into an aggregate of 4.9 million shares of
the Company’s common stock (Note 11).





There has
been no warrant activity since the issuance of the 100,000 warrants in
2003.  As of December 31, 2009, there are 100,000 warrants outstanding
at a weighted average exercise price of $11.35.





Note
15—Commitments





The
Company has entered into various license agreements whereby the Company may use
certain characters and intellectual properties in conjunction with its products.
Generally, such license agreements provide for royalties to be paid at 1% to 14%
of net sales with minimum guarantees and advance payments.





Future
annual minimum royalty guarantees as of December 31, 2009 are as follows (in
thousands):





2010
                  
                  $
                  62,2842011
                  
                  
                  20,3802012
                  
                  
                  6,6252013
                  
                  
                  2092014
                  
                  
                  —Thereafter
                  
                  
                  1,500$
                  90,998


59


The
Company has entered into employment and consulting agreements with certain
executives expiring through December 31, 2011. The aggregate future annual
minimum guaranteed amounts due under those agreements as of December 31, 2009
are as follows (in thousands):





2010
                  
                  $
                  3,2802011
                  
                  
                  1,000$
                  4,280




The
Company has entered into a retirement plan agreement with one of its executives.
Upon meeting the eligibility criteria for retirement, the executive can elect to
retire and receive a single-life annuity retirement payment of approximately
$1.0 million per year for a period of ten years following his
retirement.  Furthermore, in the event of his death during such
period, his estate will receive a death benefit equal to the difference between
approximately $2.9 million and retirement benefits previously paid to
him.  This retirement benefit is conditioned upon the executive
agreeing to accept the position of Chairman Emeritus of our Board of Directors,
if so requested by the Board.  Mr. Friedman has given notice that he
plans to retire as of April 1, 2010, but will accept the position of Chairman
Emeritus.




Note
16—Share-Based Payments





Under its
2002 Stock Award and Incentive Plan (“the Plan”), which incorporated its Third
Amended and Restated 1995 Stock Option Plan, the Company has reserved 6,525,000
shares of its common stock for issuance upon the exercise of options granted
under the Plan, as well as for the awarding of other securities. Under the Plan,
employees (including officers), non-employee directors and independent
consultants may be granted options to purchase shares of common stock and other
securities (Note 14). The vesting of these options and other securities may
vary, but typically vest on a step-up basis over a maximum period of 5 years and
restricted shares typically vest in the same manner, with the exception of
certain awards vesting over one to two years.  Share-based
compensation expense is recognized on a straight-line basis over the requisite
service period.





Restricted
Stock





Under the
Plan, share-based compensation payments may include the issuance of shares of
restricted stock.  Two executive officers are each entitled to be
awarded 120,000 shares of restricted stock annually on each January 1 (through
and including January 1, 2010); such awards typically vest 50% each on the
first and second anniversaries of issuance, subject to
acceleration.  Five non-employee directors (Board of Directors), beginning in
January 2006, receive grants of restricted stock at a value of $120,000 annually
which vest after one year.  Lastly, and at the discretion of
Management and approval of the Board, non-executive employees also receive
restricted stock awards, which occurs approximately once per year.





During
2007 the Company issued 267,340 shares of restricted stock at a value of $5.8
million to two executive officers and five non-employee directors of the
Company.  Also, during 2007, the Company granted and issued an
aggregate of 41,000 shares of restricted stock to its employees at an aggregate
value of approximately $1.1 million.  In July 2007, the Company issued
15,000 shares of restricted stock at a value of $0.5 million to an executive
officer, which vests one-third on each of December 31, 2007, 2008 and
2009.





During
2008, the Company issued 310,067 shares of restricted stock at a value of
$7.4 million to three executive officers and five non-employee directors of the
Company. Also, during 2008, the Company granted and issued an aggregate of
27,500 shares of restricted stock to its employees at an aggregate value of
approximately $0.6 million; of which, 20,000 shares were cancelled prior to vest
at an aggregate value of $0.5 million and all expense related was reversed as of
December 31, 2008 based on the one-year vest schedule associated with said
restricted award.





During
2009, the Company issued a total of 482,340 shares of restricted
stock.  240,000 shares of restricted stock were issued to two
executive officers; however, as of December 31, 2009 the Company will incur no
expense related to this grant as the vest was contingent upon performance goals
that were not achieved.  Additionally, the Company issued 6,068 shares
to its five non-employee directors.  Lastly, the Company granted and
issued an aggregate of 212,000 shares of restricted stock to its non-executive
employees.  As of December 31, 2009, 436,443 shares of the restricted
stock remained unreleased, representing a weighted average grant date fair value
of $8.8 million.


60


The table
below summarizes the grant activity for the year ended December 31, 2009 and is
broken down in the following three distinct groups because each group has unique
characteristics: executives, board of directors, and employees:





Group
      Type
                            
                            # Shares
                              Granted
                            
                            
                            Average Grant Date
                              Value
                            
                            Vest Schedule RangeExecutives
                            
                            
                            240,000
                            
                            
                            $
                            20.63
                            
                            1
      yearBoard
      of directors
                            
                            
                            30,340
                            
                            
                            
                            20.63
                            
                            1
      yearEmployees
                            
                            
                            212,000
                            
                            
                            
                            18.11
                            
                            1 -
      5 yearsTotal
                            
                            
                            482,340
                            
                            
                            
                            
                            
                            1 –
      5 years





The
following tables summarize the restricted stock award activity, annually, for
the years ended December 31, 2007, 2008 and 2009:





Restricted Stock AwardsNumber of
                              Shares
                            
                            
                            WeightedAverage
                              ExercisePriceOutstanding,
      December 31, 2006
                            
                            
                            473,160
                            
                            
                            $
                            19.10Awarded
                            
                            
                            323,340
                            
                            
                            $
                            22.87Released
                            
                            
                            (236,410
                            )
                            
                            $
                            20.44Forfeited
                            
                            
                            (23,750
                            )
                            
                            $
                            16.66Outstanding,
      December 31, 2007
                            
                            
                            536,340
                            
                            
                            $
                            20.89Awarded
                            
                            
                            337,567
                            
                            
                            $
                            23.71Released
                            
                            
                            (387,549
                            )
                            
                            $
                            22.03Forfeited
                            
                            
                            (31,600
                            )
                            
                            $
                            21.12Outstanding,
      December 31, 2008
                            
                            
                            454,758
                            
                            
                            $
                            22.00Awarded
                            
                            
                            482,340
                            
                            
                            $
                            19.55Released
                            
                            
                            (228,155
                            )
                            
                            $
                            22.24Forfeited
                            
                            
                            (272,500
                            )
                            
                            $
                            20.28Outstanding,
      December 31, 2009
                            
                            
                            436,443
                            
                            
                            $
                            20.24





Stock
Options





Share-based
compensation cost is measured at the grant date, based on the estimated fair
value of the award, and is recognized as expense over the employee's requisite
service period.





The
Company uses the Black-Scholes method of valuation for share-based option
awards. In valuing the stock options, the Black-Scholes model incorporates
assumptions about stock volatility, expected term of stock options, and risk
free interest rate. The valuation is reduced by an estimate of stock option
forfeitures.





The
amount of share-based compensation expense recognized in the years ended
December 31, 2007, 2008 and 2009 is based on options granted prior to January 1,
2006 and restricted stock issued during the years ended December 31, 2007, 2008
and 2009, and ultimately expected to vest, and it has been reduced for estimated
forfeitures. The revised shared-based compensation guidance requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.




The
following table summarizes the total share-based compensation expense and
related tax benefits recognized (in thousands):





Year
      Ended December 31,2007
              
              
              2008
              
              
              2009Stock
      option compensation expense
              
              $
              972
              
              
              $
              537
              
              
              $
              173Tax
      benefit related to stock option compensation
              
              $
              314
              
              
              $
              180
              
              
              $
              58Restricted
      stock compensation expense
              
              $
              8,082
              
              
              $
              6,765
              
              
              $
              4,179Tax
      benefit related to restricted stock compensation
              
              $
              2,859
              
              
              $
              2,522
              
              
              $
              1,522




61





As of
December 31, 2009, 560,919 shares were available for future grant. Additional
shares may become available to the extent that options or shares of restricted
stock presently outstanding under the Plan terminate or expire. Stock option
activity pursuant to the Plan is summarized as follows:




WeightedAverageNumber
                        
                        
                        Exerciseof
      Shares
                        
                        
                        PriceOutstanding,
      December 31, 2006
                        
                        
                        1,462,378
                        
                        
                        $
                        17.05Granted
                        
                        
                        —
                        
                        
                        
                        —Exercised
                        
                        
                        (391,200
                        )
                        
                        
                        16.54Canceled
                        
                        
                        (235,000
                        )
                        
                        
                        17.10Outstanding,
      December 31, 2007
                        
                        
                        836,178
                        
                        
                        $
                        17.27Granted
                        
                        
                        —
                        
                        
                        
                        —Exercised
                        
                        
                        (315,513
                        )
                        
                        
                        13.22Canceled
                        
                        
                        (43,150
                        )
                        
                        
                        21.60Outstanding,
      December 31, 2008
                        
                        
                        477,515
                        
                        
                        $
                        19.55Granted
                        
                        
                        —
                        
                        
                        
                        —Exercised
                        
                        
                        (3,000
                        )
                        
                        
                        13.48Canceled
                        
                        
                        (29,800
                        )
                        
                        
                        18.99Outstanding,
      December 31, 2009
                        
                        
                        444,715
                        
                        
                        
                        19.63





The
following characteristics apply to the Plan stock options that are fully vested,
or expected to vest, as of December 31, 2009:





Aggregate
      intrinsic value of options outstanding
                
                $
                32,344Weighted-average
      contractual term of options outstanding
                
                
                2.37Number
      of options currently exercisable
                
                
                395,815Weighted-average
      exercise price of options currently exercisable
                
                $
                19.33Aggregate
      intrinsic value of options currently exercisable
                
                $
                32,344Weighted-average
      contractual term of currently exercisable
                
                
                2.51





The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2009:





Outstanding
                      
                      
                      ExercisableWeighted
                      
                      
                      Weighted
                      
                      
                      
                      
                      
                      WeightedAverage
                      
                      
                      Average
                      
                      
                      
                      
                      
                      AverageOption
      Price
                      
                      Number
                      
                      
                      Life
                      
                      
                      Exercise
                      
                      
                      Number
                      
                      
                      ExerciseRange
                      
                      of
      Shares
                      
                      
                      in
      Years
                      
                      
                      Price
                      
                      
                      of
      Shares
                      
                      
                      Price$11.56
      – 19.27
                      
                      
                      148,271
                      
                      
                      
                      3.13
                      
                      
                      $
                      16.21
                      
                      
                      
                      148,271
                      
                      
                      $
                      16.21$19.85
      – 22.01
                      
                      
                      258,944
                      
                      
                      
                      1.56
                      
                      
                      $
                      21.23
                      
                      
                      
                      210,044
                      
                      
                      $
                      21.04$22.11
      – 22.11
                      
                      
                      37,500
                      
                      
                      
                      5.00
                      
                      
                      $
                      22.11
                      
                      
                      
                      37,500
                      
                      
                      $
                      22.11




Note 17—Employee Benefits
Plan





The
Company sponsors for its U.S. employees, a defined contribution plan under
Section 401(k) of the Internal Revenue Code. Through December 31, 2009, the plan
provided that employees may defer up to 50% of their annual compensation subject
to annual dollar limitations, and that the Company will make a matching
contribution equal to 100% of each employee’s deferral, up to 5% of the
employee’s annual compensation. Effecting January 1, 2010, employees may defer
up to 50% of their annual compensation subject to annual dollar limitations, but
the Company will not make a matching contribution.  Company matching
contributions, which vest immediately, totaled $0.9 million, $1.2 million and
$1.5 million for 2007, 2008 and 2009, respectively.


62


Note
18—Supplemental Information to Consolidated Statements of Cash
Flows





In 2009,
two executive officers surrendered an aggregate of 74,836 shares of restricted
stock at a value of $1.4 million to cover their income taxes due on the 2009
vesting of the restricted stock granted to them in 2007 and
2008.  During 2009, certain employees surrendered an aggregate of
8,913 shares of restricted stock at a value of $0.1 million to cover their
income taxes due on the 2009 vesting of the restricted shares granted them in
2006 and 2009.  Additionally, the Company recognized a $0.5 million
tax benefit from the exercise of stock options.





In 2008,
two executive officers surrendered an aggregate of 122,202 shares of restricted
stock at a value of $3.0 million to cover their income taxes due on the 2008
vesting of the restricted shares granted them in 2007. During 2008, certain
employees surrendered an aggregate of 5,640 shares of restricted stock at a
value of $0.1 million to cover their incomes taxes on the 2008 vesting of the
restricted shares granted them in 2006.  Additionally, the Company
recognized a $1.3 million tax benefit from the exercise of stock
options.





In 2007,
two executive officers surrendered an aggregate of 83,644 shares of restricted
at a value of $1.8 million to cover their income taxes due on the 2007 vesting
of the restricted shares granted them in 2006. This surrendered restricted stock
was subsequently retired by the Company.   Additionally, one
executive officer surrendered 107,637 shares of common stock of the Company at a
value of $2.8 million to cover his exercise of options to purchase 175,000
shares of common stock of the Company.   During 2007, certain
employees surrendered an aggregate of 1,340 shares of restricted stock at a
value of $29,931 to cover their incomes taxes on the 2007 vesting of the
restricted shares granted them in 2006.  Additionally, the Company
recognized a $1.1 million tax benefit from the exercise of stock
options.





Note
19—Selected Quarterly Financial Data (Unaudited)





Selected
unaudited quarterly financial data for the years 2008 and 2009 are summarized
below:





2008
                    
                    
                    2009First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    Fourth
                    
                    
                    First
                    
                    
                    Second
                    
                    
                    Third
                    
                    
                    FourthQuarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter
                    
                    
                    Quarter(in
      thousands, except per share data)Net
      sales
                    
                    $
                    130,935
                    
                    
                    $
                    145,291
                    
                    
                    $
                    357,824
                    
                    
                    $
                    269,347
                    
                    
                    $
                    108,685
                    
                    
                    $
                    144,809
                    
                    
                    $
                    351,438
                    
                    
                    $
                    198,772Gross
      profit
                    
                    $
                    47,441
                    
                    
                    $
                    52,058
                    
                    
                    $
                    129,065
                    
                    
                    $
                    92,649
                    
                    
                    $
                    36,981
                    
                    
                    $
                    (6,076
                    )
                    
                    $
                    115,709
                    
                    
                    $
                    56,314Income
      (loss) from operations
                    
                    $
                    (894
                    )
                    
                    $
                    5,568
                    
                    
                    $
                    57,338
                    
                    
                    $
                    8,824
                    
                    
                    $
                    (17,573
                    )
                    
                    $
                    (475,178
                    )
                    
                    $
                    52,346
                    
                    
                    $
                    (12,043
                    )Income
      (loss) before provision (benefit) for income taxes
                    
                    $
                    1,300
                    
                    
                    $
                    5,994
                    
                    
                    $
                    60,803
                    
                    
                    $
                    20,802
                    
                    
                    $
                    (15,765
                    )
                    
                    $
                    (499,276
                    )
                    
                    $
                    49,188
                    
                    
                    $
                    (10,335
                    )Net
      income (loss)
                    
                    $
                    877
                    
                    
                    $
                    4,156
                    
                    
                    $
                    54,145
                    
                    
                    $
                    16,879
                    
                    
                    $
                    (10,799
                    )
                    
                    $
                    (406,562
                    )
                    
                    $
                    33,708
                    
                    
                    $
                    (1,857
                    )Basic
      earnings (loss) per share
                    
                    $
                    0.03
                    
                    
                    $
                    0.15
                    
                    
                    $
                    2.01
                    
                    
                    $
                    0.62
                    
                    
                    $
                    (0.40
                    )
                    
                    $
                    (14.96
                    )
                    
                    $
                    1.24
                    
                    
                    $
                    (0.07
                    )Weighted
      average shares outstanding
                    
                    
                    28,060
                    
                    
                    
                    27,288
                    
                    
                    
                    26,981
                    
                    
                    
                    27,065
                    
                    
                    
                    27,194
                    
                    
                    
                    27,175
                    
                    
                    
                    27,183
                    
                    
                    
                    27,491Diluted
      earnings (loss) per share
                    
                    $
                    0.03
                    
                    
                    $
                    0.15
                    
                    
                    $
                    1.70
                    
                    
                    $
                    0.55
                    
                    
                    $
                    (0.40
                    )
                    
                    $
                    (14.96
                    )
                    
                    $
                    1.06
                    
                    
                    $
                    (0.07
                    )Weighted
      average shares and equivalents outstanding
                    
                    
                    28,453
                    
                    
                    
                    32,594
                    
                    
                    
                    32,257
                    
                    
                    
                    32,312
                    
                    
                    
                    27,194
                    
                    
                    
                    27,175
                    
                    
                    
                    32,505
                    
                    
                    
                    27,491





During
the fourth quarter of 2009, the Company incurred reorganization charges of $13.0
millionrelated to
office space consolidations and headcount reductions to right-size our general
and administrative expenses, given the decrease in sales in 2009.





During
the second and third quarters of 2009, the Company booked an aggregate
cumulative write-down of $23.5 million related to our Preferred Return
Receivable from our THQ joint venture, as a result of the arbitration ruling
which lowered the preferred return payment from a rate of 10% of net sales of
the WWE video games sold by the joint venture to a rate of 6% of net
sales.





During
the second quarter of 2009, the Company determined that the tradenames “Child
Guidance,”  “Play Along” and certain tradenames associated with our
Crafts and Activities product lines would either be discontinued, or were
under-performing.   Consequently, the intangible assets
associated with these tradenames were written off to “Write-down of Intangible
Assets”, resulting in a non-cash charge of $8.2 million.


63


During
the second quarter of 2009, the Company determined that the significant decline
in its market capitalization is likely to be
sustained.   The Company’s market capitalization did not change
significantly despite the dismissals subject to appeal of the WWE lawsuit, and
the lower revenue expectations for 2009 versus 2008 were factors that indicated
that an interim goodwill impairment test was required. As a result, the Company
determined that $407.1 million, or all of the goodwill related to previous
acquisitions, including the acquisition of Disguise in December 2008, was
impaired. This amount is included in “Write-down of Goodwill” in the
accompanying condensed consolidated statements of operations.





During
the second quarter of 2009, the Company booked a charge of $24.0 million related
to the write-down of certain excess and impaired inventory.  The
Company also booked a charge of $33.2 million related to the write-down of
license advances and minimum guarantees that are not expected to be earned
through sales of that licensed product.





Effective
January 1, 2009, the Company changed its depreciation methodology for molds and
tools used in the manufacturing of its products from a straight-line basis to a
usage basis, which is more closely correlated to production of
goods.  For the year-ended December 31, 2009, depreciation expense
with the useful estimated life for molds and tools was comparable to the
depreciation expense using the straight-line method, but varied at each
quarter-end during 2009.





During
the fourth quarter of 2008, the Company acquired Tollytots, Kids Only and
Disguise.





During
the third quarter of 2008, the Company decided to discontinue the use of the
“Toymax” and “Trendmaster” tradenames on products and market these products
under the JAKKS Pacific trademark . Consequently, the intangible assets
associated with these tradenames were written off to write-down of intangible
assets, resulting in a charge of $3.5 million. Also, the company adjusted the
value of the Child Guidance trademark to reflect lower sales expectations for
this tradename, resulting in a charge to Write-down of Intangible Assets of $5.6
million.




Note
20 — Litigation





On
October 12, 2006, World Wrestling Entertainment, Inc. (“WWE”) commenced a
lawsuit in Connecticut state court against THQ/JAKKS Pacific LLC, alleging that
sales of WWE video games in Japan and other countries in Asia were not lawful
(the “Connecticut Action”).  The lawsuit sought, among other things, a
declaration that WWE is entitled to terminate the video game license and
monetary damages. In 2007, WWE filed an amended complaint in the Connecticut
Action to add the principal part of the state law claims present in the action
filed by WWE in the Southern District of New York (the “WWE Action”) to the
Connecticut Action; the WWE Action was finally dismissed in 2009. THQ filed a
cross-complaint that asserted claims by THQ and Mr. Farrell, THQ’s Chief
Executive Officer, for indemnification from the Company in the event that WWE
prevailed on its claims against THQ and Farrell and also asserted claims by THQ
that the Company breached its fiduciary duties to THQ in connection with the
videogame license between WWE and the THQ/Jakks Pacific joint venture and sought
equitable and legal relief, including substantial monetary and exemplary damages
against the Company in connection with its claim.  Thereafter, the WWE
claims and the THQ cross-claims in the Connecticut Action were all dismissed
with prejudice pursuant to settlement agreements that the Company entered into
with WWE and THQ dated December 22, 2009 (the “Settlements”).





In
November 2004, several purported class action lawsuits were filed in the United
States District Court for the Southern District of New York (the “Class
Actions”), alleging damages associated with the facts alleged in the WWE Action
that was finally dismissed in 2009. A motion to dismiss the Class Actions was
filed, was fully briefed and argument occurred on November 30, 2006. The motion
was granted without prejudice to seeking leave to amend; such leave was granted
to plaintiffs, an amended complaint was filed and briefing was completed with
respect to a motion to dismiss, which was scheduled for argument in October
2008. That date was adjourned by the Court. The parties thereafter reached an
agreement to settle this matter. In November 2009, a motion was filed by
plaintiffs’ counsel for preliminary approval of this agreement, which provided
for the matter to be settled for $3.9 million, without any admission of
liability on the part of the Company, or its officers and
directors.  Three shareholder derivative actions pertaining to the WWE
Action and the Class Actions were also filed against the Company, nominally, and
against certain of the Company’s Board members (the “Derivative Actions”). The
Derivative Actions seek to hold the individual defendants liable for damages
allegedly caused to the Company by their actions, and, in one of the Derivative
Actions, seeks restitution to the Company of profits, benefits and other
compensation obtained by them. Agreement to resolve the Derivative Actions has
been reached, but it is also subject to Court approval. A Company insurer has
agreed to provide the $4.1 million that will be used to settle the Class
Action and the Derivative Actions.


64


In order
to exercise the joint venture's right to renew the WWE videogame license for the
renewal period running from January 1, 2010 through December 31, 2014, the
Company, on behalf of the joint venture, sent out a Notice of Renewal to WWE on
June 30, 2009 (the “Renewal Notice”).  THQ commenced an action in
California Superior Court (the “California Action”) seeking a declaratory
judgment that JAKKS could not renew the videogame license without THQ's consent
and that THQ was not obligated to consent.  THQ also sought a
declaratory judgment that the restrictive covenant contained in the joint
venture agreement was unenforceable.  The Company filed a demurrer in
the California Action which was fully briefed and ready for argument. WWE also
commenced an action in California seeking the same relief as THQ, namely, to
declare THQ’s restrictive covenant unenforceable, and the Company filed a
demurrer seeking to dismiss the action on the grounds that WWE had no standing
and the relief is otherwise not available. THQ also filed an arbitration in
California seeking a declaratory judgment that the same restrictive covenant was
unenforceable (the “California Arbitration”).  The Company commenced
an arbitration in New York (the “New York Arbitration”) seeking, among
other things, a declaratory judgment that (a) it was empowered to serve the
Renewal Notice and (b) THQ’s restrictive covenant was enforceable. In the
New York Arbitration, the Company also sought to hold THQ liable for its breach
of fiduciary duty with respect to its dealings with the Company and the
LLC.  The Company also commenced an action in New York Supreme Court
to enjoin the California Arbitration.  All of the above proceedings were,
pursuant to the Settlements, dismissed with prejudice.





The
Company is a party to, and certain of its property is the subject of, various
other pending claims and legal proceedings that routinely arise in the ordinary
course of its business.  The Company does not believe that any of
these claims or proceedings will have a material effect on its business,
financial condition or results of operations.


65


Report
of Independent Registered Public Accounting Firm




The Board
of Directors and Stockholders


JAKKS
Pacific, Inc.


Malibu,
California





The
audits referred to in our report dated March 16, 2010 relating to the
consolidated financial statements of JAKKS Pacific, Inc., which is contained in
Item 8 of this Form 10-K also included the audit of the accompanying
financial statement schedule. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based upon our audits.





In our
opinion such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.




/s/
      BDO Seidman, LLPBDO
      Seidman, LLPLos
      Angeles, CaliforniaMarch
      16, 2010




66


JAKKS
PACIFIC, INC. AND SUBSIDIARIES


SCHEDULE
II—VALUATION AND QUALIFYING ACCOUNTS


YEARS
ENDED DECEMBER 31, 2007, 2008 and 2009





Allowances
are deducted from the assets to which they apply, except for sales returns and
allowances.





Balance
      at
                            
                            
                            Charged to
                            
                            
                            
                            
                            
                            BalanceBeginning
                            
                            
                            Costs
      and
                            
                            
                            
                            
                            
                            at
      Endof
      Period
                            
                            
                            Expenses
                            
                            
                            Deductions
                            
                            
                            of
      Period(In
      thousands)Year
      ended December 31, 2007:Allowance
      for:Uncollectible
      accounts
                            
                            $
                            1,206
                            
                            
                            $
                            (269
                            )
                            
                            $
                            417
                            
                            
                            $
                            1,354Reserve
      for potential product obsolescence
                            
                            
                            7,355
                            
                            
                            
                            2,788
                            
                            
                            
                            (5,072
                            )
                            
                            
                            5,071Reserve
      for sales returns and allowances
                            
                            
                            32,589
                            
                            
                            
                            40,193
                            
                            
                            
                            (46,746
                            )
                            
                            
                            26,036$
                            41,150
                            
                            
                            $
                            42,712
                            
                            
                            $
                            (51,401
                            )
                            
                            $
                            32,461Year
      ended December 31, 2008:Allowance
      for:Uncollectible
      accounts
                            
                            $
                            1,354
                            
                            
                            $
                            812
                            
                            
                            $
                            (161
                            )
                            
                            $
                            2,005Reserve
      for potential product obsolescence
                            
                            
                            5,071
                            
                            
                            
                            3,943
                            
                            
                            
                            (3,906
                            )
                            
                            
                            5,108Reserve
      for sales returns and allowances
                            
                            
                            26,036
                            
                            
                            
                            60,274
                            
                            
                            
                            (62,993
                            )
                            
                            
                            23,317$
                            32,461
                            
                            
                            $
                            65,029
                            
                            
                            $
                            (67,060
                            )
                            
                            $
                            30,430Year
      ended December 31, 2009:Allowance
      for:Uncollectible
      accounts
                            
                            $
                            2,005
                            
                            
                            $
                            918
                            
                            
                            $
                            (380
                            )
                            
                            $
                            2.543Reserve
      for potential product obsolescence
                            
                            
                            5,108
                            
                            
                            
                            28,795
                            (a)
                            
                            
                            (24,031
                            )
                            
                            
                            9,872Reserve
      for sales returns and allowances
                            
                            
                            23,317
                            
                            
                            
                            61,557
                            
                            
                            
                            (50,977
                            )
                            
                            
                            33,897$
                            30,430
                            
                            
                            $
                            91,270
                            
                            
                            $
                            (75,388
                            )
                            
                            $
                            46,312










(a)
            During
      the second quarter of 2009, the Company booked a charge of $24.0 million
      related to the write-down of certain excess and impaired
      inventory.





Item 9A. Controls and
Procedures




Evaluation
of Disclosure Controls and Procedures.




Our Chief
Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
Annual Report, have concluded that as of that date, our disclosure controls and
procedures were adequate and effective to ensure that information required to be
disclosed by us in the reports we file or submit with the Securities and
Exchange Commission is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and
forms.




Changes
in Internal Control over Financial Reporting.




There
were no changes in our internal control over financial reporting identified in
connection with the evaluation required by Exchange Act Rules 13a-15(d) and
15d-15 that occurred during the fourth quarter period covered by this Annual
Report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.





Management’s
Annual Report on Internal Control over Financial Reporting.





We, as
management, are responsible for establishing and maintaining adequate “internal
control over financial reporting” (as defined in Exchange Act Rule 13a-15(f)).
Our internal control system was designed by or is under the supervision of
management and our board of directors to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of published
financial statements.





All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.


67




Our
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our internal control over financial reporting as
of December 31, 2009. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal
Control — Integrated Framework . We believe that, as of December 31,
2009, our internal control over financial reporting is effective based on those
criteria.





Our
independent auditors have issued a report on our internal controls over
financial reporting. This report appears below.





Report of the Independent Registered
Public Accounting Firm.





Report
of Independent Registered Public Accounting Firm




The Board
of Directors and Stockholders


JAKKS
Pacific, Inc.


Malibu,
California





We have
audited JAKKS Pacific, Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the “COSO criteria”). JAKKS Pacific, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Item 9A, “Management’s Annual Report on
Internal Control over Financial Reporting.” Our responsibility is to express an
opinion on the Company’s internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.





In our
opinion, JAKKS Pacific, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the
COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of JAKKS
Pacific, Inc. as of December 31, 2009 and 2008 and the related consolidated
statements of operations, other comprehensive income (loss), stockholders’
equity and cash flows for each of the three years in the period ended December
31, 2009 and our report dated March 16, 2010 expressed an unqualified opinion
thereon.




/s/
      BDO Seidman, LLPBDO
      Seidman, LLPLos
      Angeles, California


March 16,
2010




68





PART
III





Item 10. Directors,
Executive Officers, and Corporate Governance





Directors
and Executive Officers





Our
directors and executive officers are as follows:





Name
                          
                          Age
                          
                          Positions
      with the CompanyJack
      Friedman
                          
                          70
                          
                          Chairman
      and Co-Chief Executive OfficerStephen
      G. Berman
                          
                          45
                          
                          Co-Chief
      Executive Officer, Chief Operating Officer, President, Secretary and
      DirectorJoel
      M. Bennett
                          
                          48
                          
                          Executive
      Vice President and Chief Financial OfficerDan
      Almagor
                          
                          56
                          
                          DirectorDavid
      C. Blatte
                          
                          45
                          
                          DirectorRobert
      E. Glick
                          
                          64
                          
                          DirectorMichael
      G. Miller
                          
                          62
                          
                          DirectorMurray
      L. Skala
                          
                          63
                          
                          Director





Jack Friedman has been our
Chairman and Chief Executive Officer since co-founding JAKKS with Mr. Berman in
January 1995 and was our Chief Executive Officer from such time until February
17, 2009 when he became Co-Chief Executive Officer. Until December 31, 1998, he
was also our President. From January 1989 until January 1995, Mr. Friedman was
Chief Executive Officer, President and a director of THQ. From 1970 to 1989, Mr.
Friedman was President and Chief Operating Officer of LJN Toys, Ltd., a toy and
software company. After LJN was acquired by MCA/Universal, Inc. in 1986, Mr.
Friedman continued as President until his departure in late 1988.





Stephen G. Berman has been
our Chief Operating Officer and Secretary and one of our directors since
co-founding JAKKS with Mr. Friedman in January 1995. Since February 17, 2009 he
has also been our Co-Chief Executive Officer. Since January 1, 1999, he has also
served as our President. From our inception until December 31, 1998, Mr. Berman
was also our Executive Vice President. From October 1991 to August 1995, Mr.
Berman was a Vice President and Managing Director of THQ International, Inc., a
subsidiary of THQ. From 1988 to 1991, he was President and an owner of Balanced
Approach, Inc., a distributor of personal fitness products and
services.





Joel M. Bennett joined us in
September 1995 as Chief Financial Officer and was given the additional title of
Executive Vice President in May 2000. From August 1993 to September 1995, he
served in several financial management capacities at Time Warner Entertainment
Company, L.P., including as Controller of Warner Brothers Consumer Products
Worldwide Merchandising and Interactive Entertainment. From June 1991 to August
1993, Mr. Bennett was Vice President and Chief Financial Officer of TTI
Technologies, Inc., a direct-mail computer hardware and software distribution
company. From 1986 to June 1991, Mr. Bennett held various financial management
positions at The Walt Disney Company, including Senior Manager of Finance for
its international television syndication and production division. Mr. Bennett
holds a Master of Business Administration degree and is a Certified Public
Accountant.





Dan Almagor has been one of
our directors since September 2004. Since March 1992, Mr. Almagor has served as
the Chairman of ACG Inc., a global private equity organization which provides
equity capital financing primarily to private companies.





David C. Blatte has been one
of our directors since January 2001. From January 1993 to May 2000, Mr. Blatte
was a Senior Vice President in the  specialty retail group of the
investment banking division of Donaldson, Lufkin and Jenrette Securities
Corporation. Since February 2004, Mr. Blatte has been a partner in Centre
Partners, a private equity fund.





Robert E. Glick has been one
of our directors since October 1996. For more than 20 years and until May, 2007,
Mr. Glick was an officer, director and principal stockholder in a number of
privately-held companies which manufacture and market women’s
apparel.  Since May 2007, Mr. Glick has been a consultant to a
publicly-held company which manufactures and markets women’s
apparel.





Michael G. Miller has been
one of our directors since February 1996. From 1979 until May 1998, Mr. Miller
was President and a director of a group of privately-held companies, including a
list brokerage and list management consulting firm, a database management
consulting firm, and a direct mail graphic and creative design firm. Mr.
Miller’s interests in such companies were sold in May 1998. Mr. Miller is
currently retired.





Murray L. Skala has been one
of our directors since October 1995. Since 1976, Mr. Skala has been a partner of
the law firm Feder Kaszovitz LLP (f/k/a Feder, Kaszovitz, Isaacson, Weber,
Skala, Bass & Rhine LLP), our general counsel.




69




A
majority of our directors are “independent,” as defined under the rules of
Nasdaq. Such independent directors are Messrs. Blatte, Glick, Miller and
Almagor. Our directors hold office until the next annual meeting of stockholders
and until their successors are elected and qualified. Our officers are elected
annually by our Board of Directors and serve at its discretion.  All
of our independent directors have served as such for more than the past five
years and were initially selected for their experience as businessmen (Glick and
Miller) or financial expertise (Blatte and Almagor). We believe that our board
is best served by benefiting from this blend of business and financial expertise
and experience. Our remaining directors consist of our co-executive officers who
bring management’s perspective to the board’s deliberations and, our longest
serving director (Skala), who, as an attorney with many years experience
advising businesses, is able to provide guidance to the board from a legal
perspective.





Committees
of the Board of Directors





We have
an Audit Committee, a Compensation Committee and a Nominating and Corporate
Governance Committee.





Audit Committee.
The primary functions of the Audit Committee are to select or to recommend to
our Board the selection of outside auditors; to monitor our relationships with
our outside auditors and their interaction with our management in order to
ensure their independence and objectivity; to review, and to assess the scope
and quality of, our outside auditor’s services, including the audit of our
annual financial statements; to review our financial management and accounting
procedures; to review our financial statements with our management and outside
auditors; and to review the adequacy of our system of internal accounting
controls. Messrs. Blatte, Glick and Miller are the current members of the Audit
Committee and are each “independent” (as that term is defined in NASD Rule
4200(a)(14)), and are each able to read and understand fundamental financial
statements. Mr. Blatte, our audit committee financial expert, is the Chairman of
the Audit Committee and possesses the financial expertise required under Rule
401(h) of Regulation S-K of the Act and NASD Rule 4350(d)(2). He is further
“independent”, as that term is defined under Item 7(d)(3)(iv) of Schedule 14A
under the Exchange Act. We will, in the future, continue to have (i) an Audit
Committee of at least three members comprised solely of independent directors,
each of whom will be able to read and understand fundamental financial
statements (or will become able to do so within a reasonable period of time
after his or her appointment); and (ii) at least one member of the Audit
Committee that will possess the financial expertise required under NASD Rule
4350(d)(2). Our Board has adopted a written charter for the Audit Committee and
the Audit Committee reviews and reassesses the adequacy of that charter on an
annual basis.





Compensation Committee.
   The functions of the Compensation Committee are to make
recommendations to the Board regarding compensation of management employees and
to administer plans and programs relating to employee benefits, incentives,
compensation and awards under our 2002 Stock Award and Incentive Plan (the “2002
Plan”). Messrs. Glick (Chairman), Almagor and Miller are the current members of
the Compensation Committee. The Board has determined that each of them is
“independent,” as defined under the applicable rules of Nasdaq.





Nominating and Corporate Governance
Committee.    The functions of the Nominating and
Corporate Governance Committee are to develop our corporate governance system
and to review proposed new members of our board of directors, including those
recommended by our stockholders. Messrs. Almagor (Chairman), Glick and Miller
are the current members of our Nominating and Corporate Governance Committee.
The Nominating and Corporate Governance Committee operates pursuant to a written
charter adopted by the Board. The full text of the charter is available on our
website at www.jakkspacific.com. The
Board has determined that each member of this Committee is “independent,” as
defined under the applicable rules of Nasdaq.





Section
16(a) Beneficial Ownership Reporting Compliance





Based
solely upon a review of Forms 3 and 4 and amendments thereto furnished to us
during 2009 and Forms 5 and amendments thereto furnished to us with respect to
2009, during 2009, each of our independent directors, and Jack Friedman, one of
our executive officers and a director, untimely filed one report on Form 4
reporting one late transaction and Joel Bennett, one of our executive
officers, also untimely filed one report on Form 4 reporting two late
transactions.  Based solely upon a review of Forms 3 and 4 and
amendments thereto furnished to us during 2009 and Forms 5 and amendments
thereto furnished to us with respect to 2009, all other Forms 3, 4 and 5
required to be filed during 2009 were done so on a timely basis.




Code
of Ethics





We have a
Code of Ethics that applies to all our employees, officers and directors. This
code was filed as an exhibit to our Annual Report on Form 10-K for the fiscal
year ended December 31, 2003. We have posted on our website,
www.jakkspacific.com, the full text of such Code. We will disclose when there
have been waivers of, or amendments to, such Code, as required by the rules and
regulations promulgated by the Securities and Exchange Commission and/or
Nasdaq.




70




Item 11. Executive
Compensation





COMPENSATION
DISCUSSION AND ANALYSIS





Compensation
Philosophy and Objectives





We
believe that a strong management team comprised of highly talented individuals
in key positions is critical to our ability to deliver sustained growth and
profitability, and our executive compensation program is an important tool for
attracting and retaining such individuals. We also believe that our most
important resource is our people. While some companies may enjoy an exclusive or
limited franchise or are able to exploit unique assets or proprietary
technology, we depend fundamentally on the skills, energy and dedication of our
employees to drive our business. It is only through their constant efforts that
we are able to innovate through the creation of new products and the continual
rejuvenation of our product lines, to maintain superior operating efficiencies,
and to develop and exploit marketing channels. With this in mind, we have
consistently sought to employ the most talented, accomplished and energetic
people available in the industry. Therefore, we believe it is vital that our
named executive officers receive an aggregate compensation package that is both
highly competitive with the compensation received by similarly-situated
executive officers at peer group companies, and also reflective of each
individual named executive officer’s contributions to our success on both a
long-term and short-term basis. As discussed in greater depth below, the
objectives of our compensation program are designed to execute this philosophy
by compensating our executives at the top quartile of their peers.





Our
executive compensation program is designed with three main
objectives:





·
            to
      offer a competitive total compensation opportunity that will allow us to
      continue to retain and motivate highly talented individuals to fill key
      positions;





·
            to
      align a significant portion of each executive’s total compensation with
      our annual performance and the interests of our stockholders;
      and





·
            reflect
      the qualifications, skills, experience and responsibilities of our
      executives





Administration
and Process





Our
executive compensation program is administered by the Compensation
Committee.  The Compensation Committee receives legal advice from our
outside general counsel and has retained Frederick W. Cook & Co., Inc.
(“FWC), a compensation consulting firm, that provided advice directly to the
Compensation Committee.  The base salary, bonus structure and the
long-term equity compensation of our executive officers are governed by the
terms of their individual employment agreements (see “-Employment Agreements and
Termination of Employment Arrangements”).  With respect to our chief
executive officer and president (now our co-chief executive officers), the
Compensation Committee, with input from FWC, establishes target performance
levels for incentive bonuses based on a number of factors that are designed to
further our executive compensation objectives, including our performance, the
compensation received by similarly-situated executive officers at peer group
companies, the conditions of the markets in which we operate and the relative
earnings performance of peer group companies.





Pursuant
to the terms of their employment agreements, during the first quarter of each
year, the Compensation Committee establishes the targeted level of our Adjusted
EPS (as defined below) growth and corresponding bonus levels, as a percentage of
base salary, Messrs. Friedman and Berman will earn if the target is
met.  Pursuant to the terms of their employment agreements, this bonus
is capped at a maximum of 200% of base salary, although the Compensation
Committee has the authority, in its discretion, to increase the
maximum.  The Compensation Committee also has wide discretion to set
the target levels of Adjusted EPS and they work together with FWC to establish
target levels that will accomplish the general objectives outlined above of also
promoting growth and alignment with our shareholders’ interests.  The
employment agreements also give the Compensation Committee the authority to
award additional compensation to Messrs. Friedman, Berman and Bennett as it
determines in its sole discretion based upon criteria it
establishes.





Adjusted
EPS is the net income per share of our common stock calculated on a
fully-diluted basis in accordance with GAAP, applied on a basis consistent with
past periods, as adjusted in the sole discretion of the Compensation Committee
to take account of extraordinary or special items.




71


While the
Compensation Committee does not establish target performance levels for our
chief financial officer, it does consider similar factors when determining such
officer’s bonus. The employment agreement for Mr. Bennett authorizes our
Compensation Committee and Board of Directors to award an annual bonus to Mr.
Bennett in an amount up to 50% of his salary as the Committee or Board
determines in its discretion and also gives the Compensation Committee and the
Board the discretionary authority to pay Mr. Bennett additional incentive
compensation as it determines.





The
Compensation Committee also annually reviews the overall compensation of our
named executive officers for the purpose of determining whether discretionary
bonuses should be granted. In 2009, FWC presented a report to the Compensation
Committee comparing our performance, size and executive compensation levels to
those of peer group companies. FWC also reviewed with the Compensation Committee
the base salaries, annual bonuses, total cash compensation, long-term
compensation and total compensation of our senior executive officers relative to
those companies. The performance comparison presented to the Compensation
Committee each year includes a comparison of our total shareholder return,
earnings per share growth, sales, net income (and one-year growth of both
measures) to the peer group companies. The Compensation Committee reviews this
information along with details about the components of each named executive
officer’s compensation.




Peer
Group





One of
the factors considered by the Compensation Committee is the relative performance
and the compensation of executives of peer group companies. The peer group is
comprised of a group of the companies selected in conjunction with FWC that we
believe provides relevant comparative information, as these companies represent
a cross-section of publicly-traded companies with product lines and businesses
similar to our own throughout the comparison period.  The composition
of the peer group is reviewed annually and companies are added or removed from
the group as circumstances warrant. For the last fiscal year, the peer group
companies utilized for executive compensation analysis, which remained the same
as in the previous year, were:





·
              Activision,
      Inc.·
              Electronic
      Arts, Inc.·
              EMak
      Worldwide, Inc.·
              Hasbro,
      Inc.·
              Leapfrog
      Enterprises, Inc.·
              Marvel Enterprises,
      Inc.·
              Mattel,
      Inc.·
              RC2
      Corp.·
              Kid
      Brands, Inc. (f/k/a Russ Berrie and Company, Inc.)·
              Take-Two
      Interactive, Inc.·
              THQ
      Inc.





Elements
of Executive Compensation





The
compensation package for the Company’s senior executives has both
performance-based and non-performance based elements. Based on its review of
each named executive officer’s total compensation opportunities and performance,
and our performance, the Compensation Committee determines each year’s
compensation in the manner that it considers to be most likely to achieve the
objectives of our executive compensation program. The specific elements, which
include base salary, annual cash incentive compensation and long-term equity
compensation, are described below.





The
Compensation Committee has negative discretion to adjust performance results
used to determine annual incentive and the vesting schedule of long-term
incentive payouts to the named executive officers.  The Compensation
Committee also has discretion to grant bonuses even if the performance targets
were not met.




72


Base
Salary





Each of
our named executive officers received compensation in 2009 pursuant to the terms
of his respective employment agreement.  As discussed in greater
detail below, the employment agreements for Messrs. Friedman and Berman expire
on December 31, 2010 and Mr. Bennett’s employment agreement expired on December
31, 2009.  Pursuant to the terms of their employment agreements,
Messrs. Friedman and Berman each receive a base salary which, pursuant to his
employment agreement, is increased automatically each year by $25,000. Mr.
Bennett’s employment agreement does not provide for automatic annual increases
in base salary.  Any increase or additional increase in base salary,
as the case may be, is determined by the Compensation Committee based on a
combination of two factors. The first factor is the Compensation Committee’s
evaluation of the salaries paid in peer group companies to executives with
similar responsibilities. The second factor is the Compensation Committee’s
evaluation of the executive’s unique role, job performance and other
circumstances. Evaluating both of these factors allows us to offer a competitive
total compensation value to each individual named executive officer taking into
account the unique attributes of, and circumstances relating to, each
individual, as well as marketplace factors. This approach has allowed us to
continue to meet our objective of offering a competitive total compensation
value and attracting and retaining key personnel. Based on its review of these
factors, the Compensation Committee determined not to increase any of the base
salaries of Messrs. Friedman and Berman including the contractually required
minimum increase in 2009 as unnecessary to maintain our competitive total
compensation position in the marketplace, nor did it determine to raise Mr.
Bennett’s base salary for 2009.





Annual
Cash Incentive Compensation





The
function of the annual cash bonus is to establish a direct correlation between
the annual incentives awarded to the participants and our financial performance.
This purpose is in keeping with our compensation program’s objective of aligning
a significant portion of each executive’s total compensation with our annual
performance and the interests of our shareholders.





The
employment agreements for Messrs. Friedman and Berman provide for an incentive
cash bonus award based on a percentage of each participant’s base salary if the
performance goals set by the Compensation Committee are met for that
year.  The employment agreements mandate that the specific criteria to
be used is earnings per share and the Compensation Committee sets the various
target thresholds to be met to earn increasing amounts of the bonus up to a
maximum of 200% of base salary, although the Compensation Committee has the
ability to increase the maximum in its discretion.  During the first
quarter of each year, the Compensation Committee meets to establish the target
thresholds for that year.  During 2009, the Company’s EPS declined
so  Messrs. Friedman and Berman were not entitled to a mandated cash
bonus. Mr. Bennett’s employment agreement provides for an annual bonus of up to
50% of his base salary to be awarded in the discretion of the Compensation
Committee or the Board of Directors, upon consideration of such factors as
economic and business conditions affecting us and his personal performance.
Following such consideration, the Compensation Committee determined not to award
Mr. Bennett a cash bonus for 2009.





The
employment agreement for each of our named executive officers contemplates that
the Compensation Committee may grant discretionary bonuses in situations where,
in its sole judgment, it believes they are warranted.  The
Compensation Committee approaches this aspect of the particular executive’s
compensation package by looking at the other components of each executive’s
aggregate compensation and then evaluating if any additional compensation is
appropriate to meet our compensation goals.  As part of this review,
the Compensation Committee, with significant input from FWC, collects
information about the total compensation packages in our peer group and various
indicia of performance by the peer group such as sales, one-year sales growth,
net income, one-year net income growth, market capitalization, size of
companies, one- and three-year stockholder returns, etc. and then compares such
data to our corresponding performance data.  Following consideration
of all of the above as well as input from FWC, the Compensation
Committee did not approve any discretionary bonuses to Messrs. Friedman,
Berman or Bennett for 2009.





Long-Term
Compensation





Long-term
compensation is an area of particular emphasis in our executive compensation
program, because we believe that these incentives foster the long-term
perspective necessary for our continued success.  Again, this emphasis
is in keeping with our compensation program objective of aligning a significant
portion of each executive’s total compensation with our long-term performance
and the interests of our shareholders.





Historically,
our long-term compensation program has focused on the granting of stock options
that vested over time.  However, commencing in 2006 we began shifting
the emphasis of this element of compensation and we currently favor the issuance
of restricted stock awards.  The Compensation Committee believes that
the award of full- value shares that vest over time is consistent with our
overall compensation philosophy and objectives as the value of the restricted
stock varies based upon the performance of our common stock, thereby aligning
the interests of our executives with our shareholders.  The
Compensation Committee has also determined that awards of restricted stock are
anti-dilutive as compared to stock options inasmuch as it feels that less
restricted shares have to be granted to match the compensation value of stock
options.




73


The
employment agreements for Messrs. Friedman and Berman provide for annual grants
of 120,000 shares of restricted stock subject to a one or two-year vesting
period, and in the latter case, all or part of which second year may be
accelerated to one year if we achieve earnings per share growth
targets.  The initial vesting of the restricted stock is subject to
our achieving pre-tax income in excess of $2 million in the fiscal year that the
grant is made.  Since we did not have in excess of $2 million of
pre-tax income for 2009 ,none of the 2009 restricted stock awards to Messrs.
Friedman and Berman vested and all of the restricted shares were forfeited back
to us.  Mr. Bennett’s employment agreement does not provide for any
specified award of restricted shares, rather the Compensation Committee has
discretion to determine if an award of restricted shares (or stock options)
should be granted and if granted, the specific terms of the grant.





After a
review of all of the factors discussed above, the Compensation Committee
determined that, in keeping with our compensation objectives, other than the
contractual amounts no additional restricted stock (or stock option) awards
should be granted to our named executives for fiscal 2009.





Other
Benefits and Perquisites





Our
executive officers participate in the health and dental coverage, life
insurance, paid vacation and holidays, 401(k) retirement savings plans and other
programs that are generally available to all of the Company’s
employees.





The
provision of any additional perquisites to each of the named executive officers
is subject to review by the Compensation Committee.  Historically,
these perquisites include payment of an automobile allowance and matching
contributions to a 401(k) defined contribution plan.  In 2009, the
named executive officers were granted the following
perquisites:  automobile allowance and matching contributions to a
401(k) defined contribution plan.  We value perquisites at their
incremental cost to us in accordance with SEC regulations.





We
believe that the benefits and perquisites we provide to our named executive
officers are within competitive practice and customary for executives in key
positions at comparable companies. Such benefits and perquisites serve our
objective of offering competitive compensation that allows us to continue to
attract, retain and motivate highly talented people to these critical positions,
ultimately providing a substantial benefit to our shareholders.





Change of
Control/Termination Agreements





We
recognize that, as with any public company, it is possible that a change of
control may take place in the future.  We also recognize that the
threat or occurrence of a change of control can result in significant
distractions of key management personnel because of the uncertainties inherent
in such a situation.  We further believe that it is essential and in
our best interest and the interests of our shareholders to retain the services
of our key management personnel in the event of the threat or occurrence of a
change of control and to ensure their continued dedication and efforts in such
event without undue concern for their personal financial and employment
security. In keeping with this belief and its objective of retaining and
motivating highly talented individuals to fill key positions, which is
consistent with our general compensation philosophy, the employment agreements
for our executive officers contain provisions which guarantee the named
executive officers specific payments and benefits upon a termination of
employment as a result of a change of control of the Company.  In
addition, the employment agreements also contain provisions providing for
certain lump-sum payments in the event the executive is terminated without
“cause” or if we materially breach the agreement leading the affected executive
to terminate the agreement for good reason.




Additional
details of the terms of the change of control agreements and termination
provisions outlined above are provided below.





Retirement
Plans





Mr.
Friedman’s employment agreement provides that, commencing at age 67, he may
retire and receive a single-life annuity retirement payment of $975,000 per year
for a period of ten (10) years following his retirement.  Mr. Friedman
is currently 70 years old.  In the event of his death during such
period, his estate will receive a death benefit equal to the difference between
$2,925,000 and retirement benefits previously paid to him.  This
retirement benefit is conditioned upon Mr. Friedman agreeing to accept the
position of Chairman Emeritus of our Board of Directors, if so requested by the
Board.  Mr. Friedman has given notice that he plans to retire as of
April 1, 2010 and will accept the position of Chairman Emeritus.





We
believe that by limiting our retirement benefits to only our senior-most
executive we are striking a fair and reasonable balance between achieving our
compensation objective of retaining a highly-talented individual to fill our
most key position and the best interests of our stockholders.




74


Impact of
Accounting and Tax Treatments





Section
162(m) of the Internal Revenue Code (the “Code”) prohibits publicly held
companies like us from deducting certain compensation to any one named executive
officer in excess of $1,000,000 during the tax year. However, Section 162(m)
provides that, to the extent that compensation is based on the attainment of
performance goals set by the Compensation Committee pursuant to plans approved
by the Company’s shareholders, the compensation is not included for purposes of
arriving at the $1,000,000.





The
Company, through the Compensation Committee, intends to attempt to qualify
executive compensation as tax deductible to the extent feasible and where it
believes it is in our best interests and in the best interests of our
shareholders. However, the Compensation Committee does not intend to permit this
arbitrary tax provision to distort the effective development and execution of
our compensation program. Thus, the Compensation Committee is permitted to and
will continue to exercise discretion in those instances in which mechanistic
approaches necessary to satisfy tax law considerations could compromise the
interests of our shareholders. In addition, because of the uncertainties
associated with the application and interpretation of Section 162(m) and the
regulations issued thereunder, there can be no assurance that compensation
intended to satisfy the requirements for deductibility under Section 162(m) will
in fact be deductible.





Compensation
Committee Report





The
compensation committee has reviewed and discussed the Compensation Discussion
and Analysis (the “CD&A”) for the year ended December 31, 2009 with
management. In reliance on the reviews and discussions referred to above, the
compensation committee recommended to the board, and the board has approved,
that the CD&A be furnished in the annual report on Form 10-K for the year
ended December 31, 2009.




By
      the Compensation Committee of the Board of Directors:
              
              Robert
      E. Glick, Chairman
              Dan
      Almagor, Member
              Michael
      G. Miller, Member





The
following table sets forth the compensation we paid for our fiscal years ended
December 31, 2007, 2008 and 2009 to (i) our Chief Executive Officer; (ii) each
of our other executive officers whose compensation exceeded $100,000 on an
annual basis; and (iii) up to two additional individuals for whom disclosure
would have been provided under the foregoing clause (ii) but for the fact that
the individual was not serving as an executive officer of our Company at the end
of the last completed fiscal year (collectively, the “Named
Officers”).





Summary
Compensation Table


Name and
                                      Principal
                                      Position
                                    
                                    Year
                                    
                                    Salary
                                      ($)
                                    
                                    
                                    Bonus
                                      ($)
                                    
                                    
                                    Stock
                                      Awards
                                      ($)
                                    
                                    
                                    Option
                                      Awards
                                      ($)
                                    
                                    
                                    Non-Equity
                                      Incentive Plan
                                      Compensation
                                      ($)
                                    
                                    
                                    Change in
                                      Pension
                                      Value and
                                      Nonqualified
                                      Deferred
                                      Compensation
                                      Earnings ($)
                                    
                                    
                                    All Other
                                      Compensation
                                      ($) (5)
                                    
                                    
                                    Total
                                      ($)Jack
      Friedman
                                    
                                    2009
                                    
                                    
                                    1,090,000
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    (1)
                                    
                                    —
                                    
                                    
                                    —
                                    
                                    
                                    —
                                    
                                    
                                    
                                    30,250
                                    
                                    
                                    
                                    1,120,250Chairman
      and
                                    
                                    2008
                                    
                                    
                                    1,090,000
                                    
                                    
                                    
                                    250,000
                                    
                                    
                                    
                                    2,833,200
                                    (2)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    33,500
                                    
                                    
                                    
                                    4,206,700Chief
      Executive Officer
                                    
                                    2007
                                    
                                    
                                    1,065,000
                                    
                                    
                                    
                                    2,662,500
                                    
                                    
                                    
                                    3,421,400
                                    (3)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    28,000
                                    
                                    
                                    
                                    7,176,900Stephen
      G. Berman
                                    
                                    2009
                                    
                                    
                                    1,090,000
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    (1)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    30,250
                                    
                                    
                                    
                                    1,120,250Chief
      Operating
                                    
                                    2008
                                    
                                    
                                    1,090,000
                                    
                                    
                                    
                                    250,000
                                    
                                    
                                    
                                    2,833,200
                                    (2)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    29,200
                                    
                                    
                                    
                                    4,202,400Officer,
      President and Secretary
                                    
                                    2007
                                    
                                    
                                    1,065,000
                                    
                                    
                                    
                                    2,662,500
                                    
                                    
                                    
                                    3,421,400
                                    (3)
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    25,500
                                    
                                    
                                    
                                    7,174,400Joel
      M. Bennett
                                    
                                    2009
                                    
                                    
                                    420,000
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    24,250
                                    
                                    
                                    
                                    444,250Executive
      Vice
                                    
                                    2008
                                    
                                    
                                    420,000
                                    
                                    
                                    
                                    125,000
                                    
                                    
                                    
                                    99,993
                                    (4)
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    
                                    23,500
                                    
                                    
                                    
                                    668,493President
      and Chief Financial Officer
                                    
                                    2007
                                    
                                    
                                    400,000
                                    
                                    
                                    
                                    300,000
                                    
                                    
                                    
                                    464,400
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    19,500
                                    
                                    
                                    
                                    1,183,900


____________




75





(1)
            Pursuant
      to the 2002 Plan, on January 1, 2009, 120,000 shares of restricted stock
      were granted to the Named Officer, all of which were scheduled to vest on
      January 1, 2010 if we met certain financial criteria.  This
      criteria was not met and the shares were forfeited back to us on December
      31, 2009.(2)
            Pursuant
      to the 2002 Plan, on January 1, 2008, 120,000 shares of restricted stock
      were granted to the Named Officer, of which 50% vest on January 1, 2009
      and 50% vest on January 1, 2010, subject to acceleration.  The
      amount in this column was calculated as the product of (a) 120,000 shares
      of restricted stock multiplied by (b) $23.61, the last sales price of our
      common stock, as reported by Nasdaq on January 1, 2008, the date the
      shares were granted. See “— Critical Accounting
  Policies.”(3)
            Pursuant
      to the 2002 Plan, on January 1, 2007, 120,000 shares of restricted stock
      were granted to the Named Officer, of which 50% vest on January 1, 2008
      and 50% vest on January 1, 2009, subject to acceleration. Based on the
      Company’s 2007 financial performance, the vesting of 45,000 of the January
      1, 2009 vesting shares were accelerated. The amount in this column
      reflects the expense recorded in the Company’s 2007 financial statements
      and was calculated as the product of (a) 105,000 shares of restricted
      stock multiplied by (b) $21.84, the last sales price of our common stock,
      as reported by Nasdaq on January 1, 2007, the date the shares were
      granted, reflecting the 60,000 shares vested on January 1, 2008 and 45,000
      of the remaining 60,000 shares whose vesting accelerated based on the
      Company’s 2007 financial performance. See “— Critical Accounting
      Policies.” Also reflects the expense recorded in the Company’s 2007
      financial statements and was calculated as the product of (a) 30,000
      shares of restricted stock multiplied by (b) $20.94, the last sales price
      of our common stock, as reported by Nasdaq on January 1, 2006, the date
      the shares were granted, reflecting the 30,000 shares vested on January 1,
      2007. Also includes stock award of $500,000 of restricted stock as
      additional bonus compensation granted on February 14,
  2008.





(4)
            The
      amount in this column was calculated as the product of (a) 3,593 shares of
      restricted stock multiplied by (b) $27.83, the last sales price of our
      common stock, as reported by Nasdaq on February 28, 2008, the date before
      the shares were granted,





(5)
            Represents
      automobile allowances paid in the amount of $18,000 to each of Messrs.
      Friedman and Berman and $12,000 to, Mr. Bennett for 2007, 2008 and 2009;
      amount also includes matching contributions made by us to the Named
      Officer’s 401(k) defined contribution plan in the amount of $7,500, $7,500
      and $12,250, respectively, for 2007, 2008 and 2009 for Messrs. Friedman
      and Berman and $11,200, $11,500 and $12,250, respectively, for Mr.
      Bennett. See “— Employee Pension
Plan.”




The
following table sets forth certain information regarding all equity-based
compensation awards outstanding as of December 31, 2009 by the Named
Officers:





Outstanding
Equity Awards At Fiscal Year-end





Option
      Awards
                        
                        
                        Stock
      AwardsName
                        
                        Number of
                          Securities
                          Underlying
                          Unexercised
                          Options
                          Exercisable
                          (#)
                        
                        
                        Number of
                          Securities
                          Underlying
                          Unexercised
                          Options
                          Unexercisable
                          (#)
                        
                        
                        Equity
                          Incentive
                          Plan
                          Awards:
                          Number of
                          Securities
                          Underlying
                          Unexercised
                          Unearned
                          Options (#)
                        
                        
                        Option
                          Exercise
                          Price
                          ($)
                        
                        
                        Option
                          Expiration
                          Date
                        
                        
                        Number
                          of
                          Shares or
                          Units of
                          Stock
                          that
                          Have
                          Not
                          Vested
                          (#)
                        
                        
                        Market
                          Value of
                          Shares or
                          Units of
                          Stock
                          that
                          Have
                          Not Vested
                          ($) (1)
                        
                        
                        Equity
                          Incentive
                          Plan
                          Awards:
                          Number
                          of
                          Unearned
                          Shares,
                          Units or
                          Other
                          Rights
                          that
                          Have Not
                          Vested
                          (#)
                        
                        
                        Equity
                          Incentive
                          Plan
                          Awards:
                          Market
                          or Payout
                          Value of
                          Unearned
                          Shares,
                          Units or
                          Other
                          Rights
                          That
                          Have Not
                          Vested
                          ($)Jack
      Friedman
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Stephen
      G. Berman
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —Joel
      M. Bennett
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        1,796
                        
                        
                        
                        21,768
                        
                        
                        
                        —
                        
                        
                        
                        —





(1)
            The
      product of (x) $12.12 (the closing sale price of the common stock on
      December 31, 2009) multiplied by (y) the number of unvested restricted
      shares outstanding.




76




The
following table sets forth certain information regarding amount realized upon
the vesting and exercise of any equity-based compensation awards during 2009 by
the Named Officers:





Options
Exercises And Stock Vested





Option Awards
                      
                      
                      Stock AwardsName
                      
                      Number of
                        Shares
                        Acquired on
                        Exercise (#)
                      
                      
                      Value
                        Realized on
                        Exercise
                        ($)
                      
                      
                      Number of
                        Shares
                        Acquired on
                        Vesting (#)
                      
                      
                      Value
                        Realized on
                        Vesting ($)
                        (1)Jack
      Friedman
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Stephen
      G. Berman
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Joel
      M. Bennett
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      5,000
                      
                      
                      
                      60,600





(1)
            Represents
      the product of (x) the closing sale price of the common stock on the date
      of vesting multiplied by (y) the number of restricted shares
      vested.




Potential
Payments upon Termination or Change in Control





The
following tables describe potential payments and other benefits that would have
been received by each Named Officer at, following or in connection with any
termination, including, without limitation, resignation, severance, retirement
or a constructive termination of such Named Officer, or a change in control of
our Company or a change in such Named Officer’s responsibilities on December 31,
2009.  The potential payments listed below assume that there is no
earned but unpaid base salary at December 31, 2009.





Jack
Friedman





Upon
                              Retirement
                            
                            
                            Quits For
                              “Good
                              Reason”
                              (3)
                            
                            
                            Upon
                              Death
                            
                            
                            Upon
                              “Disability”
                              (4)
                            
                            
                            Termination
                              Without
                              “Cause”
                            
                            
                            Termination
                              For “Cause”
                              (6)
                            
                            
                            Involuntary
                              Termination
                              In
                              Connection
                              with Change
                              of
                              Control(7)Base Salary
                            
                            $
                            -
                            
                            
                            $
                            167,500
                            
                            
                            $
                            -
                            
                            
                            $
                            (5)
                            
                            
                            $
                            167,500
                            
                            
                            $
                            -
                            
                            
                            $
                            3,259,100
                            (8)Retirement
      Benefit (1)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Restricted
      Stock - Performance-Based
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            1,454,400
                            (9)Annual
      Cash Incentive Award (2)
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -








Stephen
G. Berman





Upon
                            Retirement
                          
                          
                          Quits For
                            “Good
                            Reason”
                            (3)
                          
                          
                          Upon
                            Death
                          
                          
                          Upon
                            “Disability”
                            (4)
                          
                          
                          Termination
                            Without
                            “Cause”
                          
                          
                          Termination
                            For “Cause”
                            (6)
                          
                          
                          Involuntary
                            Termination
                            In
                            Connection
                            with Change
                            of
                            Control(7)Base Salary
                          
                          $
                          -
                          
                          
                          $
                          167,500
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          167,500
                          
                          
                          $
                          -
                          
                          
                          $
                          3,259,100
                          (8)Restricted Stock - Performance-Based
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,454,400
                          (9)Annual
      Cash Incentive Award (2)
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -




77


Joel
M. Bennett





Upon
                                Retirement
                              
                              
                              Quits
      For
                                “Good
                                Reason”
                                (3)
                              
                              
                              Upon
                                Death
                              
                              
                              Upon
                                “Disability”
                                (4)
                              
                              
                              Termination
                                Without
                                “Cause”
                              
                              
                              Termination
                                For “Cause”
                                (6)
                              
                              
                              Involuntary
                                Termination
                                In
                                Connection
                                with
      Change
                                of
                                Control(7)Base
      Salary
                              
                              $
                              -
                              
                              
                              $
                              420,000
                              
                              
                              $
                              210,000
                              
                              
                              $
                              210,000
                              
                              
                              $
                              420,000
                              
                              
                              $
                              -
                              
                              
                              $
                              210,000Restricted
      Stock - Performance-Based
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -Annual
      Cash Incentive Award (2)
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -




_______________


(1) Mr.
Friedman’s employment agreement with us (see “ - Employment Agreements”)
provides that if he retires and is at least 67 years old, then he is entitled to
be paid an annual retirement benefit of $975,000 (the “Retirement Benefit”)
during the 10-year period following his retirement; provided, however, that Mr.
Friedman must agree to serve as our non-executive Chairman Emeritus for so long
as may be requested by the Board of Directors; and provided further, however,
that if Mr. Friedman dies before the payment of his entire Retirement Benefit,
the remaining Retirement Benefit will be reduced such that his designated
beneficiary or estate, as the case may be, will receive in a lump sum the
positive difference, if any, between $2,925,000 and any Retirement Benefit
already paid to him.  Mr. Friedman was 70 years of age as at December
31, 2009.  Mr. Friedman has given notice that he will retire effective
April 1, 2010 and accept the position of Chairman Emeritus.





(2)
Assumes that if the Named Officer is terminated on December 31, 2009, they were
employed through the end of the incentive period.





(3)
Defined as (i) our violation or failure to perform or satisfy any material
covenant, condition or obligation required to be performed or satisfied by us,
or (ii) the material change in the nature or scope of the duties, obligations,
rights or powers of the Named Officer’s employment resulting from any action or
failure to act by us.





(4)
Defined as a Named Officer’s inability to perform his duties by reason of any
disability or incapacity (due to any physical or mental injury, illness or
defect) for an aggregate of 180 days in any consecutive 12-month
period.





(5) An
amount equal to 90% of the Retirement Benefit described in footnote (1)
above.





(6)
Defined as (i) the Named Officer’s conviction of, or entering a plea of guilty
or nolo contendere (which plea is not withdrawn prior to its approval by the
court) to, a felony offense and either the Named Officer’s failure to perfect an
appeal of such conviction prior to the expiration of the maximum period of time
within which, under applicable law or rules of court, such appeal may be
perfected or, if he does perfect such an appeal, the sustaining of his
conviction of a felony offense on appeal; or (ii) the determination by our Board
of Directors, after due inquiry, based on convincing evidence, that the Named
Officer has:





(A)
committed fraud against, or embezzled or misappropriated funds or other assets
of, our Company;




(B)
violated, or caused us or any of our officers, employees or other agents, or any
other individual or entity to violate, any material law, rule, regulation or
ordinance, or any material written policy, rule or directive of our Company or
our Board of Directors;




(C)
willfully, or because of gross or persistent inaction, failed properly to
perform his duties or acted in a manner detrimental to, or adverse to our
interests; or




(D)
violated, or failed to perform or satisfy any material covenant, condition or
obligation required to be performed or satisfied by him under his employment
agreement with us;





and that,
in the case of any violation or failure referred to in clause (B), (C) or (D),
above, such violation or failure has caused, or is reasonably likely to cause,
us to suffer or incur a substantial casualty, loss, penalty, expense or other
liability or cost.




78


(7)
Section 280G of the Code disallows a company’s tax deduction for what are
defined as “excess parachute payments” and Section 4999 of the Code imposes a
20% excise tax on any person who receives excess parachute
payments.  As discussed above, Messrs. Friedman and Berman are
entitled to certain payments upon termination of their employment, including
termination following a change in control of our Company.  Under the
terms of their respective employment agreements (see “ - Employment
Agreements”), neither Mr. Friedman nor Mr. Berman are entitled to any payments
that would be an excess parachute payment, and such payments are to be reduced
by the least amount necessary to avoid the excise tax.  Accordingly,
our tax deduction would not be disallowed under Section 280G of the Code, and no
excise tax would be imposed under Section 4999 of the Code.





(8) Under
the terms of Messrs. Friedman’s and Berman’s respective employment agreements
(see “ - Employment Agreements”), if a change of control occurs, then they each
have the right to terminate their employment and receive a payment equal to 2.99
times their then current annual salary (which was $1,090,000 in
2009).





(9) Each
of Messrs. Friedman and Berman were granted and are scheduled to be granted
restricted stock of our Company in accordance with the terms of their respective
employment agreements (see “ – Employment Agreements”).  Pursuant to
the terms of those employment agreements, vesting accelerates for
performance-based restricted stock upon a change in control, whether or not the
relevant performance targets are met.  Furthermore, under our Third
Amended and Restated 1995 Stock Option Plan and 2002 Stock Award and Incentive
Plan, in the event of a change in control, stock options granted under those
plans become immediately exercisable in full and under our 2002 Stock Award and
Incentive Plan, shares of restricted stock granted under that plan are
immediately vested.  The stock price used to calculate values in the
above tables is $12.12 per share, the closing price on the last trading day of
2009.





Compensation
of Directors





Analogous
to our executive compensation philosophy, it is our desire to similarly
compensate our non-employee directors for their services in a way that will
serve to attract and retain highly qualified members.  As changes in
the securities laws require greater involvement by, and places additional
burdens on, a company’s directors it becomes even more necessary to locate and
retain highly qualified directors.  As such, after consulting with
FWC, the Compensation Committee developed and the Board approved a structure for
the compensation package of our non-employee directors so that the total
compensation package of our non-employee directors would be at approximately the
median total compensation package for non-employee directors in our peer
group.





For 2009,
each of our non-employee directors received (i) an annual cash stipend of
$45,000 for serving on the Board, (ii) $1,000 for each board or committee
meeting attended (whether in person or by telephone), and (iii) a grant of
restricted shares of our common stock valued at $125,000 (using the closing
price of our common stock for the last  trading day preceding the
grant date). Directors are also reimbursed for reasonable expenses incurred in
attending meetings.  The Chairman of the Audit Committee received a
cash stipend of $25,000 for serving in such capacity and the Chairmen of the
Compensation Committee and the Nominating and Corporate Governance Committee
each received cash stipends of $10,000 for serving in such
capacities.





Newly-elected
non-employee directors will receive a portion of the foregoing annual
consideration, pro rated according to the portion of the year in which they
serve in such capacity.





In
December 2009, our board of directors, after consulting with FWC, changed the
compensation package  for non-employee directors as of January 1, 2010
by (i) increasing the annual cash stipend to $75,000, (ii) eliminating meeting
fees for attendance at both board and committee meetings, (iii) increasing the
annual fees paid to committee chairs and the members of the audit committee,
(iv) decreasing by $25,000 the value of the annual grant of restricted shares of
our common stock to $100,000 and (v) imposing minimum share holding
requirements.  Specifically, the chair of the audit committee receives
an annual fee of $30,000, each member of the audit committee receives a $15,000
annual fee (including the chair), the chair of the compensation committee and
the nominating and governance committee each receives an annual fee of $15,000
and each member of such committees (including the chair) receives an annual fee
of $10,000. In February 2010 our board determined the terms for the minimum
share holding requirements.





Pursuant
to the new minimum share holding requirements, each director will be required
to  hold shares with a value equal to at least two times the average
annual cash stipend paid to the director during the prior two calendar
years.  In determining the value of a director’s share holdings, each
option, whether or not in the money, will count as 1⁄2 share.  To
illustrate:  if a director wishes to sell shares in 2010, he will have
to hold shares with a market value of at least $90,000 prior to and following
any sale of shares calculated as of the date of the sale, such $90,000 minimum
calculated by taking the average cash stipend of $45,000 paid during the prior
two years ($45,000 in each of 2008 and 2009) multiplied by two




79


The
following table sets forth the compensation we paid to our non-employee
directors for our fiscal year ended December 31, 2009:





Director
Compensation





Name
                          
                          Year
                          
                          Fees
                            Earned
                            or Paid in
                            Cash
                            ($)
                          
                          
                          Stock
                            Awards
                            ($) (1)
                          
                          
                          Option
                            Awards
                            ($)
                          
                          
                          Non-Equity
                            Incentive
                            Plan
                            Compensation
                            ($)
                          
                          
                          Change in
                            Pension Value
                            and
                            Nonqualified
                            Deferred
                            Compensation
                            Earnings
                            ($)
                          
                          
                          All Other
                            Compensation
                            ($)
                          
                          
                          Total
                            ($)Dan
      Almagor
                          
                          2009
                          
                          
                          95,000
                          
                          
                          
                          125,183
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          220,183David
      Blatte
                          
                          2009
                          
                          
                          100,000
                          
                          
                          
                          125,183
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          225,183Robert
      Glick
                          
                          2009
                          
                          
                          104,000
                          
                          
                          
                          125,183
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          229,183Michael
      Miller
                          
                          2009
                          
                          
                          94,000
                          
                          
                          
                          125,183
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          219,183Murray
      Skala
                          
                          2009
                          
                          
                          60,000
                          
                          
                          
                          125,183
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          185,183





(1) For
compensation reporting purposes, the value of the shares was determined by
taking the product of (a) 6,068 shares of restricted stock multiplied by (b)
$20.63, the last sales price of our common stock on December 31, 2008, as
reported by Nasdaq, the date prior to the date the shares were granted, all of
which shares vested on January 1, 2010.





Employment
Agreements and Termination of Employment Arrangements





In March
2003 we amended and restated our employment agreements with each of Messrs.
Friedman and Berman and on July 17, 2007 entered into a new employment agreement
with Joel Bennett.





Mr.
Friedman’s amended and restated employment agreement, pursuant to which he
serves as our Chairman and Co-Chief Executive Officer, provides for an annual
base salary in 2009 of $1,090,000. Mr. Friedman’s agreement expires December 31,
2010. His base salary is subject to annual increases determined by our Board of
Directors, but in an amount not less than $25,000 per annum. For each fiscal
year between 2007 through 2010, Mr. Friedman’s bonus will depend on our
achieving certain earnings per share growth targets, with such earnings per
share growth targets to be determined annually by the Compensation Committee of
our Board of Directors. Depending on the levels of earnings per share growth
that we achieve in each fiscal year, Mr. Friedman will receive an annual bonus
from 0% to up to 200% of his base salary. This bonus will be paid in accordance
with the terms and conditions of our 2002 Stock Award and Incentive Plan. In
addition, in consideration for modifying and replacing the pre-tax income
formula provided in his prior employment agreement for determining his annual
bonus, and for entering into the amended employment agreement, Mr. Friedman was
granted the right to be issued an aggregate of 1,080,000 shares of restricted
stock. The first tranche of restricted stock, totaling 240,000 shares, was
granted at the time the agreement became effective, and 120,000 shares were
granted on each of January 1, 2004, 2005, 2006 and 2007 (or 480,000 shares in
the aggregate). In each subsequent year of the employment agreement term, Mr.
Friedman will receive 120,000 shares of restricted stock. The grant of these
shares is in accordance with our 2002 Stock Award and Incentive Plan, and the
vesting of each tranche of restricted stock is subject to our achieving pre-tax
income in excess of $2,000,000 in the fiscal year that the grant is made. Each
tranche of restricted stock granted or to be granted from January 1, 2004
through January 1, 2008 is subject to a two-year vesting period, which may be
accelerated to one year if we achieve certain earnings per share growth targets.
Each tranche of restricted stock to be granted thereafter through January 1,
2010, is subject to a one-year vesting period. Finally, the agreement provides
that Mr. Friedman upon his retirement at or after age 67 will receive a
single-life annuity retirement payment equal to $975,000 a year for a period of
10 years, or in the event of his death during such retirement period, his estate
will receive a death benefit equal to the difference between $2,925,000 and any
prior retirement benefits previously paid to him; provided, however, that Mr.
Friedman must agree to serve as Chairman Emeritus of our Board of Directors, if
requested to do so by such Board.  Mr. Friedman has given notice that
he will retire effective April 1, 2010.  On February 26, 2010, our
board approved the following with respect to Mr. Friedman’s retirement: (i) the
Board waived the requirement under his employment agreement that we be given 60
days notice of his election to retire; (ii) in addition to serving as
non-executive Chairman Emeritus as provided in his employment agreement, Mr.
Friedman agreed to serve in the role of Chief Strategist to advise the Board and
the Company on acquisitions and other strategy; (iii) Mr. Friedman agreed to
waive any cash bonus for 2010 that he would otherwise have been entitled to
under his employment agreement (he would have been entitled to receive a
pro-rata portion of any cash bonus awarded under the provisions of Section 1(c)
of the employment agreement); (iv)  Mr. Friedman will receive a car
allowance during the period he receives the Retirement Benefit comparable to
what he receives now; (v) we will provide Mr. Friedman with an office and
use of a secretary part time; (vi) the 120,000 shares of restricted stock
granted to him on January 1, 2010 will continue to vest on December 31, 2010
provided the $2 million Pre-Tax Income test required for vesting under Section
2.2 of the Restricted Stock Agreement is met.




80


Mr.
Berman’s amended and restated employment agreement, pursuant to which he serves
as our Co-Chief Executive Officer, President and Chief Operating Officer,
provides for an annual base salary in 2009 of $1,090,000. Mr. Berman’s agreement
expires December 31, 2010. His base salary is subject to annual increases
determined by our Board of Directors, but in an amount not less than $25,000 per
annum. For each fiscal year between 2007 through 2010, Mr. Berman’s bonus will
depend on our achieving certain earnings per share growth targets, with such
earnings per share growth targets to be determined annually by the Compensation
Committee of our Board of Directors. Depending on the levels of earnings per
share growth that we achieve in each fiscal year, Mr. Berman will receive an
annual bonus of from 0% to up to 200% of his base salary. This bonus will be
paid in accordance with the terms and conditions of our 2002 Stock Award and
Incentive Plan. In addition, in consideration for modifying and replacing the
pre-tax income formula provided in his prior employment agreement for
determining his annual bonus, and for entering into the amended employment
agreement, Mr. Berman was granted the right to be issued an aggregate of
1,080,000 shares of restricted stock. The first tranche of restricted stock,
totaling 240,000 shares, was granted at the time the agreement became effective,
and 120,000 shares were granted on each of January 1, 2004, 2005, 2006 and 2007
(or 480,000 shares in the aggregate). In each subsequent year of the employment
agreement term, Mr. Berman will receive 120,000 shares of restricted stock. The
grant of these shares is in accordance with our 2002 Stock Award and Incentive
Plan, and the vesting of each tranche of restricted stock is subject to our
achieving pre-tax income in excess of $2,000,000 in the fiscal year that the
grant is made. Each tranche of restricted stock granted or to be granted from
January 1, 2004 through January 1, 2008 is subject to a two-year vesting period,
which may be accelerated to one year if we achieve certain earnings per share
growth targets. Each tranche of restricted stock to be granted thereafter
through January 1, 2010, is subject to a one-year vesting period.





On July
17, 2007, we entered into a new employment agreement with Mr. Bennett that
expired on December 31, 2009, pursuant to which he received (i) a base salary of
$400,000 per year; (ii) an annual discretionary bonus of up to 50% of his annual
base salary, determined by the Compensation Committee or the Board of Directors;
(iii) a $1,000 per month car allowance; and (iv) a one-time grant of 15,000
shares of restricted stock, vesting over three years in equal annual
installments of 5,000 shares on December 31, 2007, 2008 and 2009, provided he
remains employed by us on each vesting date.





If we
terminate Mr. Friedman’s or Mr. Berman’s employment other than “for cause” or if
such Named Officer resigns because of our material breach of the employment
agreement or because we cause a material change in his employment, we are
required to make a lump-sum severance payment in an amount equal to the sum of
his base salary on the termination date and the performance bonus paid for the
last completed year prior to the termination date multiplied by a fraction the
numerator of which is the number of full months remaining in the balance of the
term of the employment agreement after the termination date and the denominator
of which is 96. In the event of the termination of his employment under certain
circumstances after a “Change of Control” (as defined in each employment
agreement), we are required to make a one-time payment of an amount equal to
2.99 times of the “base amount” of such Named Officer determined in accordance
with the applicable provisions of the Internal Revenue Code.




The
foregoing is only a summary of the material terms of our employment agreements
with the Named Officers. For a complete description, copies of such agreements
are annexed herein in their entirety as exhibits or are otherwise incorporated
herein by reference.





Employee
Benefits Plan





We
sponsor for our U.S. employees (including the Named Officers), a defined
contribution plan under Section 401(k) of the Internal Revenue Code. Through
December 31, 2009, the plan provided that employees may defer up to 50% of their
annual compensation subject to annual dollar limitations, and that we will make
a matching contribution equal to 100% of each employee’s deferral, up to 5% of
the employee’s annual compensation. Effecting January 1, 2010, employees may
defer up to 50% of their annual compensation subject to annual dollar
limitations, but we will not make a matching contribution.  Our
matching contributions, which vest immediately, totaled $0.9 million, $1.2
million and $1.5 million for 2007, 2008 and 2009, respectively.





Compensation
Committee Interlocks and Insider Participation





None of
our executive officers has served as a director or member of a compensation
committee (or other board committee performing equivalent functions) of any
other entity, one of whose executive officers served as a director or a member
of our Compensation Committee.




81




Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matter s





The
following table sets forth certain information as of March 15, 2010 with respect
to the beneficial ownership of our common stock by (1) each person known by us
to own beneficially more than 5% of the outstanding shares of our common stock,
(2) each of our directors, (3) each Named Officer, and (4) all our directors and
executive officers as a group.





Name and Address of
                      Beneficial Owner(1)(2)
                    
                    Amount and
                      Nature of
                      Beneficial
                      Ownership
                      (s)(3)
                    
                    
                    Percent of
                      Outstanding
                      Shares(4)Third
      Avenue Management LLC
                    
                    
                    1,621,960
                    (5)
                    
                    
                    5.8
                    %Black
      Rock, Inc.
                    
                    
                    2,170,013
                    (6)
                    
                    
                    7.8Dimensional
      Fund Advisors LP
                    
                    
                    2,354,200
                    (7)
                    
                    
                    8.4FMR
      LLC
                    
                    
                    3,393,139
                    (8)
                    
                    
                    12.2Deutsche
      Bank AG
                    
                    
                    1,401,350
                    (9)
                    
                    
                    5.0Dreman
      Value Management, L.L.C.
                    
                    
                    1,834,235
                    (10)
                    
                    
                    6.6Franklin
      Resources, Inc.
                    
                    
                    2,315,210
                    (11)
                    
                    
                    8.3Jack
      Friedman
                    
                    
                    286,067
                    (12)
                    
                    
                    1.0Stephen
      G. Berman
                    
                    
                    180,000
                    (13)
                    
                    
                    *Joel
      M. Bennett
                    
                    
                    37,866
                    
                    
                    
                    *Dan
      Almagor
                    
                    
                    48,970
                    (14)
                    
                    
                    *David
      C. Blatte
                    
                    
                    110,026
                    (15)
                    
                    
                    *Robert
      E. Glick
                    
                    
                    65,547
                    (16)
                    
                    
                    *Michael
      G. Miller
                    
                    
                    62,526
                    (17)
                    
                    
                    *Murray
      L. Skala
                    
                    
                    70,026
                    (18)
                    
                    
                    *All
      directors and executive officers as a group (8 persons)
                    
                    
                    861,028
                    (19)
                    
                    
                    3.1
                    %




______________


*
            Less
      than 1% of our outstanding shares.





(1)
            Unless
      otherwise indicated, such person’s address is c/o JAKKS Pacific, Inc.,
      22619 Pacific Coast Highway, Malibu, California
  90265.





(2)
            The
      number of shares of common stock beneficially owned by each person or
      entity is determined under the rules promulgated by the Securities and
      Exchange Commission. Under such rules, beneficial ownership includes any
      shares as to which the person or entity has sole or shared voting power or
      investment power. The percentage of our outstanding shares is calculated
      by including among the shares owned by such person any shares which such
      person or entity has the right to acquire within 60 days after February
      27, 2008. The inclusion herein of any shares deemed beneficially owned
      does not constitute an admission of beneficial ownership of such
      shares.





(3)
            Except
      as otherwise indicated, exercises sole voting power and sole investment
      power with respect to such shares.





(4)
            Does
      not include any shares of common stock issuable upon the conversion of
      $98.0 million of our 4.625% convertible senior notes due 2023, initially
      convertible at the rate of 50 shares of common stock per $1,000 principal
      amount at issuance of the notes (but subject to adjustment under certain
      circumstances as described in the
notes).





(5)
            The
      address of Third Avenue Management LLC is 622 Third Avenue, New York, NY
      10017. All the information presented in this Item with respect to this
      beneficial owner was extracted solely from the Schedule 13G/A filed on
      February 16, 2010.





(6)
            The
      address of Black Rock, Inc. is 40 East 52nd
      Street, New York, NY 10022. All the information presented in this Item
      with respect to this beneficial owner was extracted solely from the
      Schedule 13G/A filed on January 29,
2010.





(7)
            The
      address of Dimensional Fund Advisors LP (formerly known as Dimensional
      Fund Advisors, Inc.) is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA
      90401. All the information presented in this Item with respect to this
      beneficial owner was extracted solely from the Schedule 13G/A filed on
      February 8, 2010.




82





(8)
            The
      address of FMR LLC is 82 Devonshire Street, Boston, MA 02109. Possesses
      sole voting power with respect to only 600,000 of such shares and sole
      dispositive power with respect to all of such 3,393,139 shares. All the
      information presented in this Item with respect to this beneficial owner
      was extracted solely from the Schedule 13G filed on February 16,
      2010.




(9)
            The
      address of Deutsche Bank AG is Theodor-Heuss-Allee 70, 60468 Frankfurt am
      Main, Federal Republic of Germany. All the information presented in this
      Item with respect to this beneficial owner was extracted solely from the
      Schedule 13G/A filed on February 12,
2010.





(10)
            The
      address of Dreman Value Management, L.L.C. is Harborside Financial Center,
      Plaza 10, Suite 800, Jersey City, NJ 07311. Possesses sole voting power
      with respect to 378,025 of such shares and shared voting power with
      respect to 26,885 of such shares. All the information presented in this
      Item with respect to this beneficial owner was extracted solely from the
      Schedule 13G/A filed on February 10,
2010.





(11)
            The
      address of Franklin Resources, Inc. is One Franklin Parkway, San Mateo, CA
      94403.   Franklin Templeton Investments Corp., a subsidiary
      or affiliate of Franklin Resources, Inc. possesses sole voting and
      dispositive power with respect to all of such 2,315,210 shares. All the
      information presented in this Item with respect to this beneficial owner
      was extracted solely from the Schedule 13G filed on February 2,
      2010.





(12)
            Does
      not include 3,186 shares held in trusts for the benefit of children of Mr.
      Friedman. Includes 120,000 shares of common stock issued on January 1,
      2010 pursuant to the terms of Mr. Friedman’s January 1, 2003 Employment
      Agreement, which shares are further subject to the terms of our January 1,
      2010 Restricted Stock Award Agreement with Mr. Friedman (the “Friedman
      Agreement”). The Friedman Agreement provides that Mr. Friedman will
      forfeit his rights to all 120,000 shares unless certain conditions
      precedent are met prior to January 1, 2011, including the condition that
      our Pre-Tax Income (as defined in the Friedman Agreement) for 2010 exceeds
      $2,000,000, whereupon the forfeited shares will become authorized but
      unissued shares of our common stock. Also includes part of 120,000 shares
      granted on January 1, 2008, one-half of which were scheduled to vest
      (subject to acceleration) on January 1, 2009 and the balance on January 1,
      2010, but the vesting schedule was modified by our   Board of
      Directors as a condition to receiving the 20,567 restricted share grant
      described below, further prohibiting Mr. Friedman from selling, assigning,
      transferring, pledging or otherwise encumbering (a) 10,000 of
      such shares until January 1, 2011 and (b) 10,000 shares until January 1,
      2012. Also includes 20,567 shares granted on February 14, 2008 which
      are subject to a three-year restriction on sale and 87,500 shares which
      may not be sold prior to June 11,
2010.





(13)
            Includes
      120,000 shares of common stock issued on January 1, 2010 pursuant to the
      terms of Mr. Berman’s January 1, 2003 Employment Agreement, which shares
      are further subject to the terms of our January 1, 2010 Restricted Stock
      Award Agreement with Mr. Berman (the “Berman Agreement”). The Berman
      Agreement provides that Mr. Berman will forfeit his rights to all 120,000
      shares unless certain conditions precedent are met prior to January 1,
      2010, including the condition that our Pre-Tax Income (as defined in the
      Berman Agreement) for 2009 exceeds $2,000,000, whereupon the forfeited
      shares will become authorized but unissued shares of our common
      stock.  Also includes 60,000 shares granted on January 1, 2008,
      which vest on January 1, 2010, of which Mr. Berman is prohibited from
      selling, assigning, transferring, pledging or otherwise encumbering 10,000
      shares until January 1, 2012, and the balance of 50,000 shares until
      December 20, 2011.





(14)
            Includes
      29,644 shares which Mr. Almagor may purchase upon the exercise of certain
      stock options and 19,326 shares of common stock issued pursuant to our
      2002 Stock Award and Incentive Plan, pursuant to which 8,190 shares may
      not be sold, mortgaged, transferred or otherwise encumbered prior to
      January 1, 2011.





(15)
            Includes
      82,500 shares which Mr. Blatte may purchase upon the exercise of certain
      stock options and 27,526 shares of common stock issued pursuant to our
      2002 Stock Award and Incentive Plan, pursuant to which 8,190 of such
      shares may not be sold, mortgaged, transferred or otherwise encumbered
      prior to January 1, 2011.





(16)
            Includes
      33,021 shares which Mr. Glick may purchase upon the exercise of certain
      stock options and 32,526 shares of Common Stock issued pursuant to our
      2002 Stock Award and Incentive Plan, pursuant to which 8,190 of such
      shares may not be sold, mortgaged, transferred or otherwise encumbered
      prior to January 1, 2011.




83





(17)
            Includes
      30,000 shares which Mr. Miller may purchase upon the exercise of certain
      stock options and 32,526 shares of Common Stock issued pursuant to our
      2002 Stock Award and Incentive Plan, pursuant to which 8,190 of such
      shares may not be sold, mortgaged, transferred or otherwise encumbered
      prior to January 1, 2011.





(18)
            Includes
      37,500 shares which Mr. Skala may purchase upon the exercise of certain
      stock options and 32,526 shares of common stock issued pursuant to our
      2002 Stock Award and Incentive Plan, pursuant to which 8,190 of such
      shares may not be sold, mortgaged, transferred or otherwise encumbered
      prior to January 1, 2010.




(19)
            Excludes
      3,186 shares held in trust for the benefit of Mr. Friedman’s children and
      includes an aggregate of 212,665 shares which the directors and executive
      officers may purchase upon the exercise of certain stock
      options.





Item 13. Certain
Relationships and Related Transactions, and Director
Independence





(a)
            Transactions
      with Related Persons





One of
our directors, Murray L. Skala, is a partner in the law firm of Feder Kaszovitz
LLP (f/k/a Feder, Kaszovitz, Isaacson, Weber, Skala, Weber, Bass & Rhine
LLP), which has performed, and is expected to continue to perform, legal
services for us. In 2009, we incurred approximately $2.5 million for legal fees
and reimbursable expenses payable to that firm. As of December 31, 2008 and
2009, legal fees and reimbursable expenses of $1.5 million and $1.2 million,
respectively, were payable to this law firm.





(b)
            Review,
      Approval or Ratification of Transactions with Related
    Persons





Pursuant
to our Code of Ethics (a copy of which may be found on our website,
www.jakkspacific.com), all of our employees are required to disclose to our
General Counsel, the Board of directors or any committee established by the
Board of Directors to receive such information, any material transaction or
relationship that reasonably could be expected to give rise to actual or
apparent conflicts of interest between any of them, personally, and
us.  In addition, our Code of Ethics also directs all employees to
avoid any self-interested transactions without full disclosure.  This
policy, which applies to all of our employees, is reiterated in our Employee
Handbook which states that a violation of this policy could be grounds for
termination.  In approving or rejecting a proposed transaction, our
General Counsel, Board of Directors or designated committee will consider the
facts and circumstances available and deemed relevant, including but not limited
to, the risks, costs, and benefits to us, the terms of the transactions, the
availability of other sources for comparable services or products, and, if
applicable, the impact on director independence.  Upon concluding
their review, they will only approve those agreements that, in light of known
circumstances, are in or are not inconsistent with, our best interests, as they
determine in good faith





(c)
            Director
      Independence





For a
description of our Board of Directors and its compliance with the independence
requirements therefor as promulgated by the Securities and Exchange Commission
and Nasdaq, see “Item 10- Directors, Executive Officers and Corporate
Governance”.





Item 14. Principal
Accountant Fees and Services.





Before
our principal accountant is engaged by us to render audit or non-audit services,
where required by the rules and regulations promulgated by the Securities and
Exchange Commission and/or Nasdaq, such engagement is approved by the Audit
Committee.





The
following are the fees of BDO Seidman, LLP, our principal auditor, for the three
years ended December 31, 2009, for services rendered in connection with the
audit for those respective years (all of which have been pre-approved by the
Audit Committee):





2007
                  
                  
                  2008
                  
                  
                  2009Audit
      Fees
                  
                  $
                  1,342,000
                  
                  
                  $
                  1,395,000
                  
                  
                  $
                  1,266,000Audit
      Related Fees
                  
                  $
                  4,900
                  
                  
                  $
                  4,400
                  
                  
                  $
                  20,150Tax
      Fees
                  
                  $
                  —
                  
                  
                  $
                  21,200
                  
                  
                  $
                  —All
      Other Fees
                  
                  $
                  23,600
                  
                  
                  $
                  29,000
                  
                  
                  $
                  76,010




84


Audit Fees consist of the
aggregate fees for professional services rendered for the audit of our annual
financial statements and the reviews of the financial statements included in our
Forms 10-Q and for any other services that were normally provided by our
auditors in connection with our statutory and regulatory filings or
engagements.





Audit Related Fees consist of
the aggregate fees billed for professional services rendered for assurance and
related services that were reasonably related to the performance of the audit or
review of our financial statements and were not otherwise included in Audit
Fees.




Tax Fees consist of the
aggregate fees billed for professional services rendered for tax consulting.
Included in such Tax Fees were fees for consultancy, review, and advice related
to our income tax provision and the appropriate presentation on our financial
statements of the income tax related accounts.




All Other Fees consist of the
aggregate fees billed for products and services provided by our auditors and not
otherwise included in Audit Fees, Audit Related Fees or Tax Fees.





Our Audit
Committee has considered whether the provision of the non-audit services
described above is compatible with maintaining our auditors’ independence and
determined that such services are appropriate.




85




PART
IV





Item 15. Exhibits and
Financial Statement Schedules





The
following documents are filed as part of this Annual Report on Form
10-K:





(1)
            Financial
      Statements (included in Item 7):





•
            Reports
      of Independent Registered Public Accounting
Firm





•
            Consolidated
      Balance Sheets as of December 31, 2008 and
2009





•
            Consolidated
      Statements of Operations for the years ended December 31, 2007, 2008 and
      2009





•
            Consolidated
      Statements of Other Comprehensive Income (Loss) for the years ended
      December 31, 2007, 2008 and 2009





•
            Consolidated
      Statements of Stockholders’ Equity for the years ended December 31, 2007,
      2008 and 2009





•
            Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2008 and
      2009





•
            Notes
      to Consolidated Financial
Statements





(2)
            Financial
      Statement Schedules (included in Item
7):





•
            Schedule
      II — Valuation and Qualifying
Accounts





(3)
            Exhibits:





Exhibit
                  Number
                
                Description3.1
                
                Amended
      and Restated Certificate of Incorporation of the Company
    (1)3.2.1
                
                By-Laws
      of the Company (2)3.2.2
                
                Amendment
      to By-Laws of the Company (3)10.1.1
                
                Third
      Amended and Restated 1995 Stock Option Plan (4)10.1.2
                
                1999
      Amendment to Third Amended and Restated 1995 Stock Option Plan
      (5)10.1.3
                
                2000
      Amendment to Third Amended and Restated 1995 Stock Option Plan
      (6)10.1.4
                
                2001
      Amendment to Third Amended and Restated 1995 Stock Option Plan
      (7)10.2
                
                2002
      Stock Award and Incentive Plan (8)10.2.1
                
                2008
      Amendment to 2002 Stock Award and Incentive Plan (9)10.3
                
                Amended
      and Restated Employment Agreement between the Company and Jack Friedman,
      dated as of March 26, 2003 (10)10.4
                
                Amended
      and Restated Employment Agreement between the Company and Stephen G.
      Berman dated as of March 26, 2003 10)10.5
                
                Office
      Lease dated November 18, 1999 between the Company and Winco Maliview
      Partners (11)10.6
                
                Form
      of Restricted Stock Agreement (10)10.7
                
                Employment
      Agreement between the Company and Joel M. Bennett, dated July 17, 2007
      (12)14
                
                Code
      of Ethics (13)21
                
                Subsidiaries
      of the Company (*)31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification of Jack Friedman (*)31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification of Stephen G. Berman
  (*)31.3
                
                Rule
      13a-14(a)/15d-14(a) Certification of Joel Bennett (*)32.1
                
                Section
      1350 Certification of Jack Friedman (*)32.2
                
                Section
      1350 Certification of Stephen G. Berman (*)32.3
                
                Section
      1350 Certification of Joel Bennett
(*)


______________





(1)
            Filed
      previously as Appendix 2 to the Company’s Schedule 14A Proxy Statement,
      filed August 23, 2002, and incorporated herein by
    reference.


86





(2)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      SB-2 (Reg. No. 333-2048-LA), effective May 1, 1996, and incorporated
      herein by reference.




(3)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      SB-2 (Reg. No. 333-22583), effective May 1, 1997, and incorporated herein
      by reference.





(4)
            Filed
      previously as Appendix A to the Company’s Schedule 14A Proxy Statement,
      filed June 23, 1998, and incorporated herein by
  reference.





(5)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      S-8 (Reg. No. 333-90055), filed November 1, 1999, and incorporated herein
      by reference.





(6)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      S-8 (Reg. No. 333-40392), filed June 29, 2000, and incorporated herein by
      reference.





(7)
            Filed
      previously as Appendix B to the Company’s Schedule 14A Proxy Statement,
      filed June 11, 2001, and incorporated herein by
  reference.





(8)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      S-8 (Reg. No. 333-101665), filed December 5, 2002, and incorporated herein
      by reference.





(9)
            Filed
      previously as an exhibit to the Company’s Schedule 14A Proxy Statement,
      filed August 20, 2008, and incorporated herein by
    reference.





(10)
            Filed
      previously as an exhibit to the Company’s Annual Report on Form 10-K for
      its fiscal year ended December 31, 2002, filed March 31, 2003, and
      incorporated herein by reference.





(11)
            Filed
      previously as an exhibit to the Company’s Annual Report on Form 10-K for
      its fiscal year ended December 31, 1999, filed March 30, 2000, and
      incorporated herein by reference.(12)
            Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      July 17, 2007, and incorporated herein by
  reference.





(13)
            Filed
      previously as an exhibit to the Company’s Annual Report on Form 10-K for
      its fiscal year ended December 31, 2003, filed March 15, 2004, and
      incorporated herein by reference.





(*)
            Filed
      herewith.




87


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.





Dated:
      March 16, 2010
              JAKKS
      PACIFIC, INC.By:
              /s/
      JACK FRIEDMANJack
      FriedmanChairman
      andCo-Chief
      Executive Officer





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.





Signature
                                  
                                  Title
                                  
                                  Date/s/
      JACK FRIEDMANJack
      Friedman
                                  
                                  Chairman
      of the Board
                                    of
      Directors and
                                  
                                  March
      16, 2010Co-Chief
      Executive Officer
                                    (Co-Principal
      Executive Officer)/s/
      JOEL M. BENNETTJoel
      M. Bennett
                                  
                                  Chief
      Financial Officer
                                    (Principal
      Financial Officer and
                                  
                                  March
      16, 2010Principal
      Accounting Officer)/s/
      STEPHEN G. BERMANStephen
      G. Berman
                                  
                                  Director
      and
                                    Co-Chief
      Executive Officer
                                    (Co-Principal
      Executive Officer)
                                  
                                  March
      16, 2010/s/
      DAN ALMAGOR
                                  
                                  
                                  
                                  March
      16, 2010Dan
      Almagor
                                  
                                  Director/s/
      DAVID C. BLATTE
                                  
                                  
                                  
                                  March
      16, 2010David
      C. Blatte
                                  
                                  Director/s/
      ROBERT E. GLICK
                                  
                                  
                                  
                                  March
      16, 2010Robert
      E. Glick
                                  
                                  Director/s/
      MICHAEL G. MILLER
                                  
                                  
                                  
                                  March
      16, 2010Michael
      G. Miller
                                  
                                  Director/s/
      MURRAY L. SKALA
                                  
                                  
                                  
                                  March
      16, 2010Murray
      L. Skala
                                  
                                  Director




88




EXHIBIT
INDEX





Exhibit
                  Number
                
                Description3.1
                
                Amended
      and Restated Certificate of Incorporation of the Company
    (1)3.2.1
                
                By-Laws
      of the Company (2)3.2.2
                
                Amendment
      to By-Laws of the Company (3)10.1.1
                
                Third
      Amended and Restated 1995 Stock Option Plan (4)10.1.2
                
                1999
      Amendment to Third Amended and Restated 1995 Stock Option Plan
      (5)10.1.3
                
                2000
      Amendment to Third Amended and Restated 1995 Stock Option Plan
      (6)10.1.4
                
                2001
      Amendment to Third Amended and Restated 1995 Stock Option Plan
      (7)10.2
                
                2002
      Stock Award and Incentive Plan (8)10.2.1
                
                2008
      Amendment to 2002 Stock Award and Incentive Plan (9)10.3
                
                Amended
      and Restated Employment Agreement between the Company and Jack Friedman,
      dated as of March 26, 2003 (10)10.4
                
                Amended
      and Restated Employment Agreement between the Company and Stephen G.
      Berman dated as of March 26, 2003 (10)10.5
                
                Office
      Lease dated November 18, 1999 between the Company and Winco Maliview
      Partners (11)10.6
                
                Form
      of Restricted Stock Agreement (10)10.7
                
                Employment
      Agreement between the Company and Joel M. Bennett, dated July 17, 2007
      (12)14
                
                Code
      of Ethics (13)21
                
                Subsidiaries
      of the Company (*)31.1
                
                Rule
      13a-14(a)/15d-14(a) Certification of Jack Friedman (*)31.2
                
                Rule
      13a-14(a)/15d-14(a) Certification of Stephen G. Berman
  (*)31.3
                
                Rule
      13a-14(a)/15d-14(a) Certification of Joel Bennett (*)32.1
                
                Section
      1350 Certification of Jack Friedman (*)32.2
                
                Section
      1350 Certification of Stephen G. Berman (*)32.3
                
                Section
      1350 Certification of Joel Bennett
(*)





____________





(1)
            Filed
      previously as Appendix 2 to the Company’s Schedule 14A Proxy Statement,
      filed August 23, 2002, and incorporated herein by
    reference.





(2)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      SB-2 (Reg. No. 333-2048-LA), effective May 1, 1996, and incorporated
      herein by reference.





(3)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      SB-2 (Reg. No. 333-22583), effective May 1, 1997, and incorporated herein
      by reference.





(4)
            Filed
      previously as Appendix A to the Company’s Schedule 14A Proxy Statement,
      filed June 23, 1998, and incorporated herein by
  reference.





(5)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      S-8 (Reg. No. 333-90055), filed November 1, 1999, and incorporated herein
      by reference.





(6)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      S-8 (Reg. No. 333-40392), filed June 29, 2000, and incorporated herein by
      reference.





(7)
            Filed
      previously as Appendix B to the Company’s Schedule 14A Proxy Statement,
      filed June 11, 2001, and incorporated herein by
  reference.





(8)
            Filed
      previously as an exhibit to the Company’s Registration Statement on Form
      S-8 (Reg. No. 333-101665), filed December 5, 2002, and incorporated herein
      by reference.




89





(9)
            Filed
      previously as an exhibit to the Company’s Schedule 14A Proxy Statement,
      filed August 20, 2008 and incorporated herein by
    reference..





(10)
            Filed
      previously as an exhibit to the Company’s Annual Report on Form 10-K for
      its fiscal year ended December 31, 2002, filed March 31, 2003, and
      incorporated herein by reference.





(11)
            Filed
      previously as an exhibit to the Company’s Annual Report on Form 10-K for
      its fiscal year ended December 31, 1999, filed March 30, 2000, and
      incorporated herein by reference.




(12)
            Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      July 17, 2007, and incorporated herein by reference.(13)
            Filed
      previously as an exhibit to the Company’s Annual Report on Form 10-K for
      its fiscal year ended December 31, 2003, filed March 15, 2004, and
      incorporated herein by reference.





(*)
            Filed
      herewith.




90