FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 1996
---------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NO. 0-7843
4KIDS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its Charter)
NEW YORK
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(State of Incorporation)
13-2691380
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(I.R.S. Employer Identification Number)
1414 Avenue of the Americas, New York, New York
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(Address of Principal Executive Offices)
10019
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(Zip Code)
(212) 758-7666
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(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
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(Former Name, Former Address and Former Fiscal Year if changed since last
report)
Indicate by a check mark whether the registrant: (1) has filed all annual,
quarterly and other reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or 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
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Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the close of the latest practicable date.
Class Outstanding at May 13, 1996
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Common Stock, $.01 Par Value 2,944,831
<PAGE>
4KIDS ENTERTAINMENT, INC.
AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets 1
March 31, 1996 (Unaudited) and
December 31, 1995.
Consolidated Statements of Operations 2
Three Months Ended
March 31, 1996 and 1995 (Unaudited)
Consolidated Statements of Cash Flows 3
Three Months Ended
March 31, 1996 and 1995 (Unaudited)
Notes to Consolidated Financial 4
Statements (Unaudited)
Item 2: Management's Discussion and Analysis 6
of Financial Condition and Results of Operations
PART II: OTHER INFORMATION 9
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1996 1995
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ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 3,104,385 $ 3,505,777
Accounts receivable, net 4,923,130 14,668,829
Film inventory-net 1,923,740 1,210,918
Prepaid refundable income taxes 923,561 448,442
Prepaid expenses and other current assets 962,103 704,215
Current deferred tax asset 34,445 34,445
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Total current assets 11,871,364 20,572,626
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FURNITURE, FIXTURES AND COMPUTER EQUIPMENT- (Net) 319,025 347,772
FILM INVENTORY - Noncurrent 2,531,703 2,531,703
ACCOUNTS RECEIVABLE - Noncurrent, net 2,346,656 2,317,639
SECURITY DEPOSITS AND OTHER ASSETS 336,294 198,835
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TOTAL ASSETS $17,405,042 $25,968,575
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to licensors $ 1,762,776 $ 1,613,606
Media payable 3,266,551 11,428,185
Accounts payable and accrued expenses 713,698 636,017
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Total current liabilities 5,743,025 13,677,808
NONCURRENT DEFERRED TAX LIABILITY 661,859 661,859
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Total liabilities 6,404,884 14,339,667
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STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value - authorized,
3,000,000 shares; none issued
Common stock, $.01 par value - authorized,
10,000,000 shares; issued, 2,944,831 shares 29,448 29,448
Additional paid-in capital 4,429,906 4,429,906
Retained earnings 6,540,804 7,169,554
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Total stockholders' equity 11,000,158 11,628,908
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,405,042 $25,968,575
=========== ===========
See notes to consolidated financial statements
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<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
MARCH 31, MARCH 31,
1996 1995
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NET REVENUES: $743,923 $933,542
COST AND EXPENSES:
Selling, general and administrative cost 1,708,870 1,883,805
Amortization of capitalized film cost 187,486 13,632
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Total cost and expenses 1,896,356 1,897,437
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(1,152,433) (963,895)
INTEREST INCOME 49,683 112,024
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LOSS BEFORE INCOME
TAX BENEFIT (1,102,750) (851,871)
INCOME TAX BENEFIT (474,000) (366,000)
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NET LOSS ($628,750) ($485,871)
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PER SHARE AMOUNTS
Loss per common and dilutive
common equivalent share ($0.21) ($0.16)
=========== ===========
Loss per common share-
assuming full dilution ($0.21) ($0.16)
=========== ===========
Weighted average number of common and
common equivalent shares outstanding 3,004,658 2,985,572
=========== ===========
See notes to consolidated financial statements.
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<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ($628,750) ($485,871)
Adjustments to reconcile net loss to net
(used in) provided by operating by operating activity
Depreciation and amortization 38,137 52,562
Amortization of capitalized film cost 187,486 13,632
Changes in assets and liabilities (using)
providing cash:
Accounts receivable 9,716,682 11,678,597
Film inventory (900,308) (653,018)
Prepaid expenses and other current assets (257,888) 106,785
Prepaid/Refundable income taxes (475,119) (335,324)
Security deposits and other assets (137,459) 250,088
Due to licensors 149,170 1,050,145
Accounts payable and accrued expenses 77,681 (97,118)
Media payable (8,161,634) (8,713,037)
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Net cash (used in) provided by operating activities (392,002) 2,867,441
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INVESTING ACTIVITIES:
Purchase of furniture and fixtures (9,390) (38,021)
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Net cash used in investing activities (9,390) (38,021)
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NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (401,392) 2,829,420
CASH AND CASH EQUIVALENTS, BEGINNING PERIOD 3,505,777 7,371,311
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CASH AND CASH EQUIVALENTS, END OF PERIOD $3,104,385 $10,200,731
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
Note 1
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes as required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation of the interim financial information have been included.
Operating results for three months ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996. For further information, refer to the consolidated financial
statements and footnotes thereto included in 4Kids Entertainment, Inc.'s (the
"Company") Form 10-K for the year ended December 31, 1995.
Note 2
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: For a summary of significant
accounting policies reference is made to the Company's report on Form 10-K
previously filed for the year ended December 31, 1995.
Note 3
PER SHARE AMOUNTS: Earnings per common and dilutive common equivalent share
are based on the weighted average number of shares and common equivalent
shares outstanding during the period. Common shares issuable upon the exercise
of options are included as common equivalent shares when their inclusion is
dilutive using the treasury stock method.
-4-
<PAGE>
Note 4
STOCK OPTIONS:
In accordance with the provisions of the 1994 stock option plan, options to
purchase 100,000 shares of the Company's common stock were granted in the
first quarter of 1996 to the Chairman and Chief Executive Officer of the
Company and options to purchase 50,000 shares were granted to each of the two
outside directors. All such options were at an exercise price of $2.3125 the
market price of the Company's common stock at the time of grant.
Note 5
COMMITMENTS AND CONTINGENCIES:
Credit Facility- The Company's line of credit (the "Credit Facility") from
Chemical Bank which was scheduled to expire on June 30, 1996 has been
renegotiated and renewed through June 30, 1997. Under the new terms the
Company may borrow from time to time for general working capital purposes up
to $2 million. Any borrowings under the credit facility would be secured by
the Company's receivables. The Credit Facility provides for an interest rate
of 1% over the bank's prime rate and an annual commitment fee of 3/4%. As of
March 31, 1996 the Company had no borrowings under the Credit Facility.
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
The Company typically derives a substantial portion of its revenues from a
small number of properties, which properties usually generate revenues only
for a limited period of time. Because the Company's revenues are highly
subject to changing fashion in the toy and entertainment business, its
licensing revenues from year to year from particular sources are subject to
dramatic increases and decreases. It is not possible to precisely anticipate
the length of time a project will be commercially successful, if at all.
Popularity of properties can vary from months to years. As a result, the
Company's revenues and net income may fluctuate significantly between
comparable periods. The Company's revenues have historically been primarily
derived from the license of toy and game concepts. Thus a substantial portion
of the Company's revenues and net income are subject to the seasonal
variations of the toy and game industry. Typically, a majority of toy orders
are shipped in the third and fourth calendar quarters. In addition the
Company's media buying subsidiary concentrates its activities on the youth
oriented market. As a result, most of its revenue is earned in the third and
fourth quarters when the majority of toy and video game advertising occurs. As
a result, in the Company's usual experience, its net income during the second
half of the year will generally be greater than during the first half of the
year. Furthermore, the Company has little control over the timing of guarantee
and minimum payments, some of which are made upon the execution and delivery
of license agreements.
Three Months Ended March 31, 1996 Compared to Three Months Ended
March 31, 1995
Consolidated net revenue decreased 20% ($190,000) for the three month period
ended March 31, 1996 as compared to the same period in 1995. The decline in
net revenue was primarily due to decreased licensing revenue from some of the
Company's more mature properties. Revenue from the Company's media buying and
syndication business increased as compared to the same period in 1995. Due to
the seasonal nature of the media buying and syndication service business
however, the majority of such revenue will be recognized during the second
half of the year.
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<PAGE>
Licensing revenues from the Company's international subsidiary increased
moderately as compared to the comparable period in 1995. The increase is
primarily due to the success of the property "Tots TV" a British pre-school
program.
Selling, general and administrative expenses decreased by 9% ($175,000) for
the three month period ended March 31, 1996 when compared to the same period
in 1995. The lower level of expenditures in the three month period are
principally due to the effect of cost reductions in the Company's licensing
business. These reductions were offset to some extent by increased costs
associated with expanding the operations of the Company's international
subsidiary to accommodate new business.
At March 31, 1996 there were approximately $4,455,443 of capitalized film
production costs(film inventory). The increase in such costs from December 31,
1995 relates to the production of the second season of the television series
"WMAC Masters". "WMAC Masters" is a weekly syndicated television program
produced by the Company's 4Kids Productions subsidiary. This weekly half hour
TV program which was syndicated by the Company's Summit Media subsidiary
premiered September 16, 1995 in over 80% of the Country.
Amortization of capitalized film cost increased by approximately $174,000 for
the three month period when compared to the same period in 1995. The 1996
amortization relates primarily to the Olympic specials produced for the
Atlanta Committee for the Olympic games to run on the NBC television network.
At March 31, 1996 the percentage of unamortized film cost of $4,455,443
expected to be amortized within the next three years exceeds 80%. The Company
periodically evaluates its anticipated revenue from film production and,
consequently, amortization rates may change as a result of such estimates.
Interest income decreased by approximately 56% ($62,000) for the three month
period ending March 31, 1996 as compared to the same period in 1995. This
decrease is primarily attributable to lower levels of invested cash during the
first three months of the year as compare to the same period in 1995.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 1996 the Company had working capital of $6,128,339 as compared to
working capital of $ 6,894,818 at December 31, 1995. The decrease in working
capital of $766,479 is primarily due to the cost of funding the operating loss
of the Company's activities during the first three months of the year.
Cash and cash equivalents decreased by $401,392 from December 31, 1995. The
decrease in cash and cash equivalents is due primarily to cash expenditures
associated with funding the production of season two of "WMAC Masters" which
will complete production by August 31, 1996. Additional cash expenditures were
required to fund the operating losses for the three month period ended March
31, 1996.
Accounts receivable, net (current and noncurrent) decreased from $16,986,468
at December 31, 1995 to $7,269,786 at March 31, 1996. The decrease is
primarily due to the Company's media buying activities. The seasonality of the
Company's business tends to generate higher receivables in the fourth quarter
which are generally collected in the first quarter. As a result higher
receivables at year end are converted to cash during the first quarter. There
is a corresponding decrease in media payable of approximately $8,161,134.
Amounts due to licensors, which represents the owner's share of royalties
collected, were comparable in amount at March 31, 1996 when compared to
December 31, 1995.
In the opinion of management, the Company will be able to satisfy its
foreseeable financial obligations from its current working capital and credit
facility. As described in Note 5 to the financial statements the Company has
established a $2,000,000 credit facility with Chemical Bank for general
working capital purposes. As of May 13, 1996 there have been no borrowings
under this facility.
-8-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
27 Financial Data Schedule
b. Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements 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: May 15, 1996
4KIDS ENTERTAINMENT, INC.
By: /s/ Alfred R. Kahn
----------------------
Alfred R. Kahn
Chairman of the Board and
Chief Executive Officer
By: /s/ Joseph P. Garrity
----------------------
Joseph P. Garrity
Executive Vice President
Chief Financial Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,104,385
<SECURITIES> 0
<RECEIVABLES> 7,706,943
<ALLOWANCES> 437,157
<INVENTORY> 0
<CURRENT-ASSETS> 11,871,364
<PP&E> 1,396,405
<DEPRECIATION> 1,077,380
<TOTAL-ASSETS> 17,405,042
<CURRENT-LIABILITIES> 5,743,025
<BONDS> 0
0
0
<COMMON> 29,448
<OTHER-SE> 10,970,710
<TOTAL-LIABILITY-AND-EQUITY> 17,405,042
<SALES> 0
<TOTAL-REVENUES> 743,923
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,102,750)
<INCOME-TAX> (474,000)
<INCOME-CONTINUING> (628,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (628,750)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
