<PAGE>
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 June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO. 0-7843
4KIDS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its Charter)
NEW YORK
(State of Incorporation)
13-2691380
(I.R.S. Employer Identification Number)
1414 Avenue of the Americas, New York, New York
(Address of Principal Executive Offices)
10019
(Zip Code)
(212) 758-7666
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(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 _______
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 August 12, 1996
Common Stock, $.01 Par Value 2,944,831
<PAGE>
4KIDS ENTERTAINMENT, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
PART I: FINANCIAL INFORMATION
<S> <C>
Item 1: Financial Statements
Consolidated Balance Sheets 1
June 30, 1996 (Unaudited) and
December 31, 1995.
Consolidated Statements of Operations 2
Six and Three Months Ended
June 30, 1996 and 1995 (Unaudited)
Consolidated Statements of Cash Flows 3
Six Months Ended
June 30, 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
JUNE 30, DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $1,294,770 $3,505,777
Accounts receivable, net 2,039,248 14,668,829
Film inventory-net 1,941,645 1,210,918
Prepaid refundable income taxes 1,310,799 448,442
Prepaid expenses and other current assets 543,836 704,215
Current deferred tax asset 34,445 34,445
----------- -----------
Total current assets 7,164,743 20,572,626
----------- -----------
FURNITURE, FIXTURES AND COMPUTER EQUIPMENT- (Net) 290,704 347,772
FILM INVENTORY - Noncurrent 3,731,703 2,531,703
ACCOUNTS RECEIVABLE - Noncurrent, net 2,365,325 2,317,639
SECURITY DEPOSITS AND OTHER ASSETS 215,061 198,835
----------- -----------
TOTAL ASSETS $13,767,536 $25,968,575
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to licensors $985,083 $1,613,606
Media payable 1,352,676 11,428,185
Accounts payable and accrued expenses 281,075 636,017
----------- -----------
Total current liabilities 2,618,834 13,677,808
NONCURRENT DEFERRED TAX LIABILITY 661,859 661,859
----------- -----------
Total liabilities 3,280,693 14,339,667
----------- -----------
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 6,027,489 7,169,554
----------- -----------
Total stockholders' equity 10,486,843 11,628,908
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,767,536 $25,968,575
=========== ===========
</TABLE>
See notes to consolidated financial statements
-1-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1995 1996 1995
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
NET REVENUES: $950,141 $773,545 $1,694,064 $1,707,087
COST AND EXPENSES:
Selling, general and administrative cost 1,550,480 1,737,668 3,259,350 3,621,473
Amortization of capitalized film cost 324,187 50,334 511,673 63,966
--------- -------- ---------- ----------
Total cost and expenses 1,874,667 1,788,002 3,771,023 3,685,439
--------- -------- ---------- ----------
(924,526) (1,014,457) (2,076,959) (1,978,352)
INTEREST INCOME 23,712 74,973 73,395 186,997
--------- -------- ---------- ----------
LOSS BEFORE INCOME
TAX BENEFIT (900,814) (939,484) (2,003,564) (1,791,355)
INCOME TAX BENEFIT (387,500) (404,000) (861,500) (770,000)
--------- -------- ---------- ----------
NET LOSS ($513,314) ($535,484) ($1,142,064) ($1,021,355)
========= ========== ============ ============
PER SHARE AMOUNTS
Loss per common and dilutive
common equivalent share ($0.17) ($0.18) ($0.38) ($0.34)
========= ========== ============ ============
Loss per common share-
assuming full dilution ($0.17) ($0.18) ($0.38) ($0.34)
========= ========== ============ ============
Weighted average number of common and
common equivalent shares outstanding 2,962,392 2,984,978 2,983,525 2,985,275
========= ========== ============ ============
See notes to consolidated financial statements.
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ($1,142,064) ($1,021,355)
Adjustments to reconcile net loss to net
(used in) provided by operating by operating activity
Depreciation and amortization 76,062 104,530
Amortization of capitalized film cost 511,673 63,966
Changes in assets and liabilities (using) providing cash:
Accounts receivable 12,581,895 11,583,897
Film inventory (2,442,400) (1,598,676)
Prepaid expenses and other current assets 160,379 (159,918)
Prepaid/Refundable income taxes (862,357) (749,987)
Security deposits and other assets (16,226) 277,142
Due to licensors (628,523) (17,534)
Accounts payable and accrued expenses (354,942) (184,707)
Media payable (10,075,509) (11,742,585)
------------ ------------
Net cash (used in) provided by operating activities (2,192,012) (3,445,227)
------------ ------------
INVESTING ACTIVITIES:
Purchase of furniture and fixtures (18,995) (74,236)
------------ ------------
Net cash used in investing activities (18,995) (74,236)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (2,211,007) (3,519,463)
CASH AND CASH EQUIVALENTS, BEGINNING PERIOD 3,505,777 7,371,311
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $1,294,770 $3,851,848
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 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 six
months ended June 30, 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. Additionally, the
Compensation Committee of the Board of Directors granted options on June 5, 1996
to purchase 63,000 shares of the Company's common stock at an exercise price of
$2.375, the market price of the Company's common stock at that date, to
employees of the Company including four executive officers.
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 June 30,
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 AND SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE AND
SIX MONTHS ENDED JUNE 30, 1995
Consolidated net revenue increased 23% ($177,000) for the three month period
ended June 30, 1996 as compared to the same period in 1995. Revenue levels for
the six month period ended June 30, 1996 were consistent with those of the
comparable period in 1995. The increase in net revenue for the three month
period was primarily due to increased revenue related to the Company's
television production activities. This increase was offset by a decline in
licensing revenue from some of the Company's more mature properties during the
comparable six month periods. Revenue from the Company's media buying and
syndication business were comparable to the same periods in 1995.
-6-
<PAGE>
Licensing revenues from the Company's international subsidiary increased
moderately as compared to the comparable periods 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 10% ($187,000) and 10%
($362,000) for the three and six month periods ended June 30, 1996 when compared
to the same periods in 1995. The lower level of expenditures in the three and
six month periods 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 June 30, 1996 there were approximately $5,673,348 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 $274,000 and
$448,000 for the three and six month periods 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 which ran on the NBC television
network and WMAC Masters. At June 30, 1996 the percentage of unamortized film
cost of $5,673,348 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 68% ($51,000) and 61% ($114,000) for
the three and six month periods ending June 30, 1996 as compared to the same
periods in 1995. This decrease is primarily attributable to lower levels of
invested cash during the first six months of the year as compare to the same
period in 1995.
-7-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
At June 30, 1996 the Company had working capital of $4,545,909 as compared to
working capital of $ 6,894,818 at December 31, 1995, a decrease in working
capital of $2,348,909. Cash and cash equivalents decreased by $2,211,007 from
December 31, 1995. The decrease in working capital and 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
six month period ended June 30, 1996. The decrease in working capital was offset
to some extent by an increase in prepaid taxes. The prepaid taxes primarily
reflect the anticipated tax benefit based on the six month loss.
Accounts receivable, net (current and noncurrent) decreased from $16,986,468 at
December 31, 1995 to $4,404,573 at June 30, 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 $10,075,509.
Amounts due to licensors, which represents the owner's share of royalties
collected, decreased by $628,523 to $985,083 from December 31, 1995. The
decrease is primarily due to lower amounts of royalties collected during the
quarter which are payable to the licensor after the close of the quarter.
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 August 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: August 14, 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
-9-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMPANY'S
UNAUDITED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,294,770
<SECURITIES> 0
<RECEIVABLES> 4,841,730
<ALLOWANCES> 437,157
<INVENTORY> 0
<CURRENT-ASSETS> 7,164,743
<PP&E> 1,403,057
<DEPRECIATION> 1,112,353
<TOTAL-ASSETS> 13,767,536
<CURRENT-LIABILITIES> 2,618,834
<BONDS> 0
0
0
<COMMON> 29,448
<OTHER-SE> 10,457,395
<TOTAL-LIABILITY-AND-EQUITY> 13,767,536
<SALES> 0
<TOTAL-REVENUES> 1,694,064
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,003,564)
<INCOME-TAX> (861,500)
<INCOME-CONTINUING> (1,142,064)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,142,064)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
</TABLE>
