Note 12—Convertible Senior Notes

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

	December 31,
	2011		2012
4.50% Convertible senior notes (due 2014)	$	100,000	$	100,000
	$	100,000	$	100,000

In November 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 the Company, will pay interest semi-annually at a rate of 4.50% per annum and will mature on November 1, 2014. The initial conversion rate was 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 under certain circumstances. As a result of the cash dividend of $0.10 per share declared by the Board of Directors paid on October 3, 2011, January 3, 2012, April 2, 2012, July 2, 2012, October 1, 2012 and January 2, 2013 the new conversion rate will be 67.9486 shares of JAKKS common stock per $1,000 principal amount of notes (or approximately $14.72 per share). Prior to August 1, 2014, holders of the Notes may convert their Notes only upon the occurrence of specified events. Upon conversion, the Notes may be settled, at the Company’s 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 that the Company repurchase for cash all or some of their Notes upon the occurrence of a fundamental change (as defined in the Notes).

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 as 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, 2012 based upon their November 1, 2014 maturity date. Debt issuance costs of approximately $3.7 million are also 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,
	2011			2012
Principal amount of notes	$	100,000		$	100,000
Unamortized equity component		(7,812	)		(5,082	)
Net carrying amount of the convertible notes	$	92,188		$	94,918

	Years Ended December 31,
	2010		2011		2012
Contractual interest expense on the coupon	$	4,500	$	4,500	$	4,500
Amortization of equity component and debt issuance costs recognized as interest expense		3,466		3,466		3,468
	$	7,966	$	7,966	$	7,968