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Two thousand and four was a year of growth for JAKKS Pacific. Many of our peers experienced a challenging retail environment, yet we increased our sales by 82%, realizing record sales of $574.3 million. Our net income was $45.8 million, an increase of over 100% from 2003, and diluted earnings per share for the year was $1.49. We set out at the beginning of 2004 to execute on several key initiatives. We were determined to increase our focus on our existing lines; to leverage our extensive portfolio of brands along with today’s and yesterday’s most popular licenses; and to empower our product development teams to create new, proprietary products, based on proven play patterns and exciting new trends. We aimed to further strengthen our relationships with our diverse customer base, and increase our shelf space and the types of retail channels into which we sell. We also committed to expanding our marketing and advertising efforts for our licensed and non-licensed products. We believe our dedication to these areas has led to our strong revenue growth and an increasingly diversified portfolio of top-selling products. Several stars shined amongst the JAKKS Pacific portfolio in 2004. One area of significant growth was our award-winning Plug It In & Play TV Games line. We continued to lead the industry in this area, and what started out as a single item in 2002 grew into over a dozen in 2004. While units based on classic titles, such as Namco’s Pac-Man and Ms. Pac-Man and Atari’s Pong, were the big drivers, the play pattern and technology also proved to be a perfect fit for today’s top licenses. As a prime example, our SpongeBob SquarePants unit, with its unique toy-like controller and fun, original content, sold like a classic title. The Disney, Spider-Man and World Poker Tour TV Games units, to name a few, reached different demographics and contributed to the story. With Plug It In & Play TV Games, we believe we have truly created a long-term product category for all ages by combining top licenses, quality games, unique controllers and a low retail price point of approximately $20. We have established and expanded our presence at traditional toy and electronic outlets such as Wal-Mart, Toys “R” Us, Target, Best Buy, Circuit City and Game Stop. We have continued to grow our distribution in non-traditional outlets such as Walgreens, Bed Bath & Beyond, Robinsons-May and Urban Outfitters, and today we sell TV Games units to more than 500 different retail customers in over 35 countries worldwide. In 2005, we expect to ship over twenty new exciting titles, including Star Wars Episode III: Revenge of the Sith, Dragon Ball Z, Wheel of Fortune, Mortal Kombat, Care Bears and Dora the Explorer. In addition, throughout the year we will further expand the line with new TV Games technology, highlighted by wireless versions, GAMEKEY expansion packs and AC adapters. In 2004, we also strategically reached into the archives and re-launched well-loved brands from prior years. Products that young parents and grandparents can identify with not only bring generations together with play patterns that transcend time, but they also translate into solid sales for JAKKS Pacific in 2004 and beyond. Key items from our most recent acquisition, Play Along were big contributors in this area. We acquired Florida-based Play Along in June 2004, which contributed $165.5 million in sales in 2004, and is comprised of a portfolio of nostalgic and well-known brands. Play Along has proven to be a tremendous resource for these re-introductions with Care Bears plush, (the number one licensed plush brand at retail in 2004), Teletubbies, (a top preschool brand at retail), and the giant phenomenon, Cabbage Patch Kids dolls. Play Along further diversified our product offerings and immediately positioned JAKKS Pacific as one of the industry leaders in the plush toy and soft body doll categories. New lines that we’ll see from Play Along in 2005 are Sky Dancers and Doodle BearsÑa small action doll line and plush bear lineÑboth of which were big hits in the 1990s, and which we believe will be loved by a new generation of young kids today. In boys’ action, our WWE Classic Superstar assortment brought old wrestling superstars to toy aisles today, and, once again, old favorites meant increased year over year sales for JAKKS. For our Dragon Ball action figure line, we partnered with Bandai in late 2004 to distribute authentic Japanese consumer-packaged Dragon Ball action figures in the U.S. to maximize the opportunities for that brand by further tapping into the collector market. In our stationery area, we have been working to expand our Vivid Velvet activities by adding licenses, new play patterns and special features, and have seen increases in sales of velvet. Additionally, we’re marketing new revolutionary pencil and paper products, and our new marketing and product development team has already made inroads to grow the business with strategic partnerships with Office Depot and other key retailers for this category. In seasonal, we expanded distribution of our kite business in 2004 into dollar stores, club stores, drug store chains and specialty channels, and we added licensed characters, such as SpongeBob SquarePants, Tigger and Shrek, to our poly and nylon kites. We also set out to redesign our water guns under The Storm brand, and in early 2005 we re-launched the line into the specialty and international markets. We expect to further expand the line to mass retailers in 2006. We sought out and secured increased International business during the year, and grew our International sales by over 50% from $44.7 million to $68.5 million, year over year. We began to streamline our International operations, which included securing a new distributor in the UK region. We believe this move will improve our International efficiencies and prove to be more cost-effective for the long-term expansion of our International division. During the year, profit from our World Wrestling Entertainment video game joint venture was approximately $7.9 million, up $0.5 million from same period last year. We continue to work with WWE and THQ to develop WWE video games for Xbox, PlayStation2 and GameCube consoles, in addition to PC games, hand-held units, mobile gaming and online gaming. We are also very proud of being recognized for our dedication to customer service, on-time shipping and for our stellar product portfolio by our esteemed retail partners, Wal-Mart, Wal-Mart Canada and Toys “R” Us, as Toy Vendor of the Year, Vendor Partner of the Year, and Boys Toys Vendor of the Year, respectively. We believe our product lines are well positioned for continued growth in 2005 and beyond, and our financial position remains strong. As of December 31, 2004, our working capital was approximately $225.4 million, including cash and equivalents and marketable securities of $195.6 million. We continue to grow our business by executing on internal growth initiatives, securing new licenses that provide both near- and longterm market share expansion opportunities, and actively pursuing accretive and complementary acquisitions. We believe the future is bright for JAKKS Pacific. We have an extremely diverse product portfolio of toys, writing instruments, stationery, outdoor products and other consumer products, and are proud of the company we have built today. We believe we truly have Something for Everyone. We work day-in and dayout to increase the value of JAKKS Pacific, and we thank you, our Stockholders, for the ongoing support we receive from you. Very sincerely,
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