Good morning, ladies and gentlemen. Thank you for joining the JAKKS Pacific Third Quarter 2012 Earnings Call with management. Today, JAKKS will review the results for the third quarter ended September 30, 2012, which the company released earlier this morning. On the call today are Stephen Berman, President and Chief Executive Officer; and Joel Bennett, Executive Vice President and Chief Financial Officer. Mr. Berman will first provide an overview of the quarter, and then Mr. Bennett will provide detailed comments regarding JAKKS Pacific's financial and operational results. Mr. Berman will then conclude the prepared portion of the call with highlights of product lines and current business trends prior to opening up the call for your question. [Operator Instructions] Before we begin, the Company would like to point out that any comments made about JAKKS Pacific's future performance, events or circumstances, including the estimate of sales and earnings per share for 2012, as well as any other forward-looking statements concerning 2012 and beyond are subject to Safe Harbor protection under Federal Security laws. These statements reflect the Company's best judgment based on current market trends and conditions today, and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in forward-looking statements. For details concerning these and other such risks and uncertainties, you should consult JAKKS' most recent 10-K and 10-Q filings with the SEC, as well as the Company's other reports subsequently filed with the SEC from time to time. With that, I'll turn the call over to Mr. Berman.

Thank you for joining us today. I would like to start off by saying our core business continues to be very strong. With our diversity, no one product will drive our year and our expectations and contributions come from a broad range of evergreen products for all ages. Our diverse portfolio spans a wide spectrum that includes Action Figures, Electronics, and Dolls, Dress-up and Role Play from our CDI division; Halloween costumes from our Disguise division; Kids Furniture and seasonal products from our Kids Only! division; Infant and Pre-school products from our Tollytots division; Ride-on Vehicles, Wagons, and Inflatable Environments and Tents from Moose Mountain; Outdoor and Junior sports products; and Impulse Toys from Maui toys; and even pet products from JAKKS Pets. These are the core product lines that make up our business and remain solid with little fluctuation. We are the leader in many of these product categories with our retailers viewing us as a dependable partner in these product segments. Our products stem from organic and non-licensed innovative products developed right here at JAKKS, while others are innovative initiatives based on our stellar licensing portfolio. The bottom line is there are exciting initiatives with solid potential coming from every area at JAKKS. Highlights of our third quarter include Monsuno, the Winx Club, Cabbage Patch Kids, Disney Princess and our Disguised Halloween costumes and accessories. We have a strong lineup of evergreen products including our Disney Princess and Disney Fairy Dolls, dress-up and role play based on upcoming Disney entertainment, and our boys' role-play based on superhero licenses such as The Avengers, Spiderman and Batman. Traditional core product lines such as our Big Wheels ride-on and outdoor Kids Only furniture from Kids Only!, doll and doll accessories from Tollytots. And now, our Outdoor, Seasonal, and Impulse products from Maui toys help drive our business. This evergreen philosophy continues to be the core for JAKKS' success. We recently announced the completed agreements with networks to form the DreamPlay Toys joint venture, which provides us exclusive access to groundbreaking technology that we believe will have a profound impact on the play value and marketing of toys products in the future. We are excited with the new opportunities that will present themselves with this partnership, which we will discuss further on the call. I would like to now turn the call over to Joel Bennett to review our financial results for the third quarter of 2012, and then I will give a further update of our third quarter. Joel?

Thank you, Stephen, and good morning, everyone. Net sales for the third quarter of 2012 were $314.5 million, compared to $332.4 million reported in the comparable period in 2011. The reported net income for the third quarter was $30.4 million, or $1.10 per diluted share, which reflects $1 million, or $0.03 per diluted share related to financial and legal advisory fees and expenses associated with the letter of interest and activist shareholder activities. This compares to net income of $34.8 million, or $1.10 per diluted share, reported in the comparable period in 2011, which included $700,000, or $0.01 per diluted share of financial and legal advisory fees and expenses. Excluding these advisory fees and expenses in 2011 and 2012, the third quarter net income would have been $31.2 million, or $1.13 per diluted share, compared to net income of $35.3 million, or $1.11 per diluted share in 2011. Net sales for the 9 months were $533.3 million compared to $536.7 million in 2011. The net earnings reported for the 9-month period was $14.7 million or $0.59 per diluted share, which included $4.1 million, or $0.12 per diluted share of financial and legal advisory fees and expenses. This compares to net income for the first 9 months of 2011 of $28.5 million, or $0.97 per diluted share, which included $1.8 million, or $0.04 per diluted share of financial and legal advisory fees and expenses. Excluding the financial and legal advisory fees and expenses, the 9-month earnings would've been $17.7 million, or $0.68 (sic) [$0.69] per diluted share. Worldwide sales of products in our Traditional Toys and Electronics segment, which includes dolls, action figures, vehicles, electronics, plush and pet products were $171.2 million for the third quarter of 2012, compared to $163.2 million for the third quarter of 2011. And sales for…

Thank you, Joe. We finished the quarter with good performance by a number of product lines, including good sell-through at retail. However, due to the continuing shift we are experiencing in the buying patterns of some of our key U.S. retailers, and a shift we feel occurring in the consumer buying habits for the holiday season happening later in the year, we have taken a more conservative approach for the holiday season. Here are some key highlights and brands for the third quarter. Monsuno Core Packs continue to drive the majority of the sales for the brand. And the TV commercials are on-air at the U.S. all fall, which we hope will drive sales of this product. Our Monsuno products have been honored on a multiple retail top holiday toy list including Toys"R"Us, Holiday Hot Toy List, and Kmart's Fab 15 Toy List. The Monsuno TV series continues to show increased ratings each week despite the reruns currently airing. New Monsuno episodes started airing this month, which kicked off with a marathon of existing episodes followed by a brand new episode airing weekly until Thanksgiving. Domestically, Monsuno sales in the third quarter came in lower than we had expected. However, internationally, Monsuno sales are exceeding the expectations. We have retail distribution partners in over 40 international markets, and Monsuno is the #1 action figure brand in Australia and the top 3 action figure property in Italy, Greece and Turkey. Currently in the U.K., top retailer Argos is consistent with week-on-week sell-through increases. And the demand continues in Israel with 90% sell-through in the first week on the shelf. We recently signed an exclusive agreement allowing Mattel to distribute Monsuno toys to Eastern European territories, including Hungary, Czech Republic, Slovakia and Poland beginning this spring 2013. Partnering with Mattel shows the…

[Operator Instructions] The first question comes from Drew Crum from Stifel, Nicolaus.

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

On that first question, as we don't break out the actual delta, I could say that the increase internationally versus the -- I'd say, the moderate sales that we've had which were consistent pretty much with our forecast for the U.S. were quite dramatic, compared to what we originally forecasted internationally. The reason for the dramatic increase internationally, it is on free TV in the majority of the countries where it's performed extremely well, which we've seen, as its on free TV, in these major territories, the sales have been exceptional. We even heard from the company in Israel, in the last 15 years, they've never seen another boys property perform as well. Then you take it to the U.S., where we have spent a good amount of marketing dollars and have it on Nicktoons. The viewership of Nickelodeon itself, or Nicktoons has dropped last year, as well as dropped significantly over the last few years. So we're not getting the retention of the boys here. So it's more working based off of advertising. So while it's extremely growing on a rapid basis all overseas, it's doing well here, but not as to what we expected before.

And in terms of international distribution on television, are you fully distributed at this point in time? And when would you expect the toy roll-out to catch up with the television distribution?

As the television is still expanding throughout major territories as you see -- as I expressed earlier, Mattel acquired the rights for our Eastern European territories. It's in the process of expansion. So it's not -- it's in its immaturity state. So it's growing throughout the fall and we'll pick up, we believe, from listening to our retails and distributors, throughout next year. While the show has just recently been launched during the fall, it has a longer lifespan right now as it started later in international territories, or not even started in some and started earlier in North America.

Got it, okay. And then as far as your Role Play and Novelty toys are concerned, I think you mentioned that the Halloween business had a decent quarter along with the sell-in for Big Wheel, yet the business was down 15%. What happened with the business? What was weak? What did not do well?

I'd say a couple of things. One is on Halloween, it's primarily based off of some of the strong licenses, as well as when it comes during the year, so I believe it lands on Wednesday. So you don't get the same impact of the sales of more accessories and products for when it lands on a Friday, Saturday, or Sunday, because people utilize the costumes for holiday parties, both adult and children. But now that it lies on a Wednesday, you have a drop-off. And then, in addition, some of the people -- our retailers had some direct response, direct from the licensor. So as we shifted with some retailers and lost a little business, we picked up in others. And I think it's just been more of licenses and when Halloween falls. But it wasn't a dramatic decrease. It's pretty much, Halloween fluctuates within the ranges that we've had over the last 4 years. We're very happy that we're right on track to our forecast internally, or slightly above. So we're internally very happy with their performance.

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

Yes. So what we did earlier in -- I believe it was this month, is we looked at -- our sell-throughs are doing terrific. So it's kind of unique that our sell-throughs are well, but there's been a lot of lay away starting earlier from the Walmart and Toys"R"Us. Our retail inventory is very low. And what's coming is we're not going to have what occurred for us last year -- not just for us, for many people in our industry, and not just in our industry, out of our industry, is we don't want to hold the inventory for the late orders that are coming in from retailers. Retailers are ordering later and later as consumers are coming in later and later. And we've learned from last year is by watching our sell-throughs and watching what's occurring with lay away and the consumer habits, we are looking at consumer habits in addition to retailer habits, as they are -- they're not taking high inventory levels. And they're ordering when needed. And, as an example , I think it was this week, one of our major retailers has sold out on an area of our Halloween costumes and were asking for an immediate order of a nice quantity, but we don't keep that inventory. So we're trying to keep the inventory levels, have the right inventory for the fall season and then the appropriate inventory going into the first quarter. So we are being cautious. We have a -- that being said, our core business is very strong. We're not dropping off in one segment, that is really impacting us. It's a lot of different areas and segments that are adding up to what we did in lowering our forecast. So as a company, our business is extremely solid, we're very proud of it. But as the retail-buying patterns are changing as we saw last year and what we're seeing this year, data that we used 3 years ago cannot help us looking forward right now. So that's the reason for our decision in the pre-announcement and looking at our inventory levels at retail and in-house. Hope that answered your question, Drew.

The next question comes from Ed Woo from Ascendiant Capital.

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

First, we have not disclosed the financial terms of DreamPlay. But I will tell you a few things to elaborate on what kind of -- the reaction has been to DreamPlay is. One, we will be having a, I would say, medium-to-significant investment, building what we are doing for next year fall. We have been spending money on R&D but more of it will come into next year for the DreamPlay initiatives. We have met with some of the largest retailers around the world, as well as some of the major content holders from around the world, and there is extremely strong interest and we're in the process of engagement with these retailers, as well as content providers. In addition, because of the structure of DreamPlay, we have the exclusive technology for JAKKS itself. And with that exclusivity, we are also in the process with meetings with some of the largest kids and consumer products companies from around the world to sublicense the technology where we see appropriate. So where JAKKS feels there is a great connection with companies that will enhance the playability and engagement, we will then utilize the technology to sublicense, so we can actually build this complete DreamPlay environment for the future. Remember, this DreamPlay or NantWorks technology is proprietary to NantWorks, it's been worked on for over 12 years, it's already been proven. There's well over 1,000 claims in this various technology. So we will be announcing it, we believe, at CES this year with our partnerships.

Great. And the other question I had is on the retail environment. Have you seen any particular differences in the U.S. retailer versus international retailers particularly...

Yes. We see a dramatic difference on domestic compared to international. On international, majority of our business is on an FOB basis and a lot of it has been booked, and we have exceeded our forecast. Domestically, and what we saw last year that happened after, I call it Black Friday, we were still waiting for the orders to come in and consumers to come in. And what we're seeing now is our sales rate picked up during the layaway programs that have occurred through some of our retailers with some of the discounting. But the pattern of the retailers' buying inventory, which they did much earlier last year, they're holding off on releasing orders until the November, December time. And since that is occurring, as a company, we made a decision. We do not want to go through the liabilities that happened at retail. If you are stuck with inventory, as occurred with us last year, and we think it's better to play it safe and be with our solid business, not have heavy inventory at retail and not caught -- handle heavy inventory internally. So we know what we're going into 2013 with a great amazing portfolio of basic evergreen products, which is -- our portfolio is -- the diversity of it is from the Disguise area business, where we're leaders in the licensed costumes business, from Kids Only!, which is a leader in the kids outdoor; Play Environment; scooter business; the Moose Mountain, which is the leader in the foot-to-floor, ride-on and outdoor ball pits, Maui toys, which is a new family member of this company, which has a strong evergreen product of outdoor and non-licensed products from our Tollytots preschool area, which is the leading area of preschool with Disney, My First Disney Princess, JAKKS girls and CDI's, they're the leaders in role play. And JAKKS Boys, as you know, with the Spy Net electronics and action figures. So if you just take those areas of business, it's extremely solid. Then you take what we're looking at going into 2013, which is truly transformative and we're not just saying it based off of our own opinion, it's the opinions of the people that have seen it, and these people that have seen it are some of the largest retailers in the world, as well as content providers in the world. And for them to come out and their CEOs and chairmans and their tech people, their belief in it has given us stronger initiatives to make sure that this is really where the toy industry and consumer product industry is going. As we all know, smart devices are part of everyone's life, whether the kids have it their own, or they have the accessibility to it, they utilize a smart devices of their parents. So incorporating the physical products, which we do great, with the smart devices and the digital world, we think we have the combination to change our industry going forward.

The next question comes from Sean McGowan from Needham & Company.

I'm hoping that you could maybe describe -- I mean, I saw one application, the EyeClops kind of brought back with that extra technology, and I could see how that could work. But you...

That is a -- I would say, a nominal portion of it. And to explain, the people that we've shown from retail to content providers have had the sign NDAs due to the proprietary technology that NantWorks has developed. And what we're doing now is we've been working on this for quite some time. And now, it's matured internally, as well as the maturity with our retail partners and our -- some of our content providers. And at that time, we decided at the appropriate time, because it's still physical products, but it truly is going into the technology world like never before. And I know it sounds hard to understand, but we will be showing this at CES because it's much more of a technology-driven segmentation of our world as you see it today. But I will tell you, some of the top CEOs from some of the top Fortune 100 companies, their CMOs, their CTOs, their head of technologies, have flown out, reviewed the technology, has checked everything within the technology. So as much as we want to show the world, we want to show it when it's ready to be able to explain of exactly the use, the use cases that will be used by JAKKS in its toy world, as well as some of the sublicensing partners that we're engaging in today. So CES will be the first time that we are launching this with some partners that we are in the midst of signing. But I will tell you, again, from some of the top Fortune 100 companies, we've had Chairmans, CEOs, some of the board members, come out to look at this technology. And these companies that are very heavily driven in technology, I would say, were mesmerized of this complete ecosystem of technology. It's not bits and pieces, it's a totality of a ecosystem of technology that really has the right use cases for children of all ages to even adults. And I know, Sean, it's hard when I'm explaining it. And that's why these people have come out to meet us, cause to explain it over a phone or conference call, they've had to fly out and we've had to present them the technology.

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

That's where I could've just grabbed you. I'm sorry that I didn't get to see you and explain it to you myself while you were here. I didn't know...

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

The physical toy that a child will be able to play at home versus the actual product in store, first of all, you'll not be utilizing, there's no QR codes, there's no UPC codes and there's no markers. So the engagement at store with a parent, with a child, they'll be able to see either how the toy works or animation that is provided by us or our content provider. It could be an item that will actually link you to a preview of a movie that is from one of the items that we're making. It could actually show you some of the virtual environments that when you bring the product home, you'll be able to have this virtual world. And then while you're at home, this three-dimensional object, which is the regular toy product, again, with no QR codes, markers, it's all based off this patented recognition technology, you'll be able to have the environment that you have from a physical object and create a complete virtual world that a child could play in continuously. They could film it, they could take pictures. And that virtual world, based on whoever the content provider is, can change on a weekly basis, a monthly basis, a yearly basis.

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

Actually, the line is for $75 million, but it's an asset-based line, so the availability was in the $70 million range. We used $80 million for -- actually, there were assorted things. We did the tender, we also did the Maui acquisition. But most of the cash that we have is in Hong Kong and so as not to trigger repatriation, we did the line. In the quarter, there was probably a $600,000 tax expense for the portion that wasn't repaid timely. Again, because of the significant use of cash during the third quarter. The terms are basically, it's a LIBOR-based line, LIBOR plus 2. But basically, it's standard, pretty standard commercial rates.

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

So -- I can answer your question, because it's very simplistic. We brought domestic inventory in versus FOB as some of the retailers were looking at doing on a domestic basis. So the inventory levels are up on the domestic basis because we're doing more domestic sales for the fourth quarter. I think you even saw even in Hasbro's release, that they're expecting much more in fourth quarter. We're not expecting a dramatic amount. We've come out with our forecast, we're being very conservative. Also, we brought in specific goods as we have first quarter shipments on different areas of our business. So the inventory we brought in is fresh inventory. What inventory we have, the majority of it is fresh. But we won't go through what we did last year of building up inventory and not selling it. So we brought in because a couple of our customers have delayed and they have requested from an October shift to November shift to sell the inventory. So that's the reason for it.

Your next question comes from Jonathan Fite from KMS Investments.

We've been shareholders of JAKKS for several years now. And given our tenure, just bear with me for a moment. Early in our ownership, we watched you guys impressively navigate the downturn, even while you dealt with the loss of key properties like WWF. But over the past 2 years or so, we've been baffled by some of your capital allocation decisions. And I'd like to understand a little bit better your process, your thought process, behind your capital allocation decisions. Let me give you a few examples. So through the crisis, you managed to cash horde, which was great, but rather than leveraging that cash horde to either pay down or renegotiate your convertible bonds, your refinanced the bonds with lower strike prices, which diluted your shareholders. Next about 18 months ago, you began counting the wonders prospects of Monsuno, but these have failed to deliver. You've severely missed earnings projections in '11 and you've lowered your expectations again for '12. Most recently, you refused to negotiate in good faith with the firm willing to offer shareholders $20-plus, but instead, you decided to spend shareholder money on a tender at the same price. Since that tender took place, you've weakened the balance sheet and had [ph] over a 30% drop in the share price, yet you had your compensation contract renewed at pretty substantial levels. So can you explain to me why you might deserve to have that contract renewed? And why you think your capital allocation record over the past 3 years really deserves to be rewarded?

Sure, I will deal with your capital allocation question first. Yes, first, I think that internally -- and I think by the market it was generally held that we had excess cash. But to your first point regarding the refinance of the last convert, the convert was well under water. And as we were still engaged in a lawsuit at that time, we didn't have access to less dilutive financing. So we did the convert, and again, given the fact pattern at the time, we felt that it was the best way to go and we would probably do the same if we were to have the same fact pattern. So what -- all the information from your question wasn't entirely clear. We had -- in our preference would've been a more standard commercial and certainly, less dilutive financing. With regard to the tender, we view it as a dividend to the shareholders. We expected that because it was above market, that we would've had virtually all shareholders tender. And in essence, they would be holding the same percentage of the company after the tender as they had before, and it was just a unique structure for a dividend. Again, with the excess cash position, we felt it was prudent, we wanted to return value to the shareholders, and we did. We have ample leverage on our balance sheet, so we can still undertake all the activities that we do to build the business, acquisitions, as well as internal development.

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

Well, I mean, it seems that you have taken approach of doing things that keep you and your management team in place running a really nice salary, but kind of do that at the expense of shareholders whether it's -- you have the choice of paying off the convert altogether and being completely debt-free. You would've lowered the cash but you would've been completely debt-free business that earns lots of cash flow, but instead, you diluted shareholders, right? Instead of engaging in the discussion at $20 or north for the entire business...

But Jonathan, I wanted talk about the capital allocation, and then I'll go into your other questions, because you're repetitive on your questions. But I'll go to those questions next. On the capital allocation, I think you gave us an accolade in 2007, 2008. We had all this cash and I think, we were -- some investors wanted us to deploy the cash, but we kept it and tried to build our balance sheet. In 2009, 2010, the crisis came and we -- everyone applauded us for having the clean balance sheet. Then 2011, '12 came, and under the circumstances that the company was facing with regards to different groups, we deployed and did a $80 million buyback. We couldn't bring back our money from Hong Kong due to repatriation, so we got the revolver. On the part of the -- someone giving us an offer, we've never had an offer given to us, it was a letter of interest, Jonathan. So that was subject to many variations. So you keep saying offer, it was a letter of interest that the company received. We've never received a full-blown offer. And in our filings it explains what occurred. So I won't go through that part of the detail, in grave detail. But in the filings that have recently been filed from ourselves or Oaktree, that will explain it to you in the best of detail. To go through of the management, the management is trying -- during the uncertainty of when an investor was looking with interest, there's a lot of uncertainty to this company and it was very difficult to get employees, to keep licenses when they weren't sure of the current management was in place, it was very disruptive. We were moving an office from one state to another,…

The next question comes from Gerrick Johnson from BMO Capital Markets.

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

It was less than $3 million.

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

Yes. It's a -- I don't know if you had a chance to come out Gerrick, because I've been traveling. But it's a great non-licensed summer business. It's like the hula hoops. It's a really great little niche business. And not just a niche business, the gentleman, Brian Caster, who has ran it I think for over 20 years, they are just from our Toy Fair, they're getting new distribution channels that they've never had because they were a very nimble company. So our added distribution just in itself has given them growth besides their creativity. So I've known Brian for along time, he's a great guy. And we think there's a great opportunity for us, especially because it's a summer business.

Okay. I just want to clear up some things on the balance sheet. Your intangibles are up $72 million since December 31. I think the Maui deal was $32 million. So what's the increase in intangibles there? And the other, while you're looking at the balance sheet, the other one was, other liabilities grew by $25 million, and I was wondering what impacted that?

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

And that will be in the intangibles number?

Yes.

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

$18 million.

$18 million?

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

Okay. All right. And in other liabilities, that's $25 million higher?

Yes. That's -- we accrue the earnout to that. So that would be the offset. And the long term because these are 3-year payout.

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

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

Thank you for participating in the JAKKS Pacific Third Quarter 2012 Earnings Call. This concludes the call for today. You may all disconnect at this time.