FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 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 _______________
Commission File No. 0-7843
4Kids Entertainment, Inc.
(Exact name of registrant as specified in its charter)
New York 13-2691380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1414 Avenue of the Americas, New York, New York 10019
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 758-7666
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant: $3,331,247 (based upon the average of the high and low prices
of Registrant's Common Stock, $.01 par value, as of March 17, 1997).
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value 2,944,831
(Title of Class) (No. of Shares Outstanding
at March 17, 1997)
DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement on
Schedule 14A for Annual Meeting of Shareholders to be Held April 30, 1997
<PAGE>
PART I
Item 1. Business
(a) General Development of Business. 4Kids
Entertainment, Inc.,(the "Company" ) is a vertically integrated entertainment
based company. The Company provides a comprehensive range of services including
toy design and development, domestic and international merchandise licensing,
media buying and planning, international and domestic television distribution
and television production.
The Company operates through four wholly owned subsidiaries, Leisure Concepts,
Inc., Leisure Concepts International, Inc., The Summit Media Group, Inc. and
4Kids Productions, Inc.
Leisure Concepts, Inc. is engaged primarily in the business of domestic and
international licensing of the commercial rights to properties, personalities,
and product concepts. Leisure Concepts typically acts as exclusive agent in
connection with the grant to third parties of licenses to manufacture and sell
all types of merchandise based on such properties, personalities and concepts.
The licensing of these rights has been primarily in the areas of toys, games and
other juvenile merchandise, although grants have also been made in other fields,
including the food, toiletries, apparel and footwear industries. These rights
are also licensed in connection with the production of television shows, motion
pictures and publications such as magazines, juvenile books and comic strips.
Leisure Concepts International, Inc. based in the Company's
London office, provides hands-on management of properties in the important
United Kingdom and European marketplace.
The Summit Media Group, Inc. provides media planning, buying and marketing
services primarily for toy and video game companies. Summit Media also provides
television distribution services.
4Kids Productions, Inc. is a television and home video production
company specializing in youth-oriented entertainment programming.
(b) Financial Information About Industry Segments. For the
past three fiscal years, the Company has been engaged in only one industry
segment. Substantially all its revenue, operating profit or loss and
identifiable assets during such fiscal years were attributable to that segment.
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(c) Narrative Description of the Business.
(1) Licensing (Other Than Product Concepts). The
Company's licensing activities are conducted through its subsidiary, Leisure
Concepts, Inc. ("LCI"). The licenses in this category of activity are typically
based upon well-known personalities, fictional and fanciful characters, and
established properties often from the entertainment field. These rights in some
cases may be licensed from the owners of such properties and sublicensed to
others, or LCI may acquire the right to represent such owners, usually
exclusively, in the granting of such rights to third parties, negotiating
licensing arrangements directly with manufacturers or users and supervising the
implementation of the agreements.
A license agreement offered to manufacturers in the industry
or industries LCI considers appropriate, may provide the right to manufacture
and sell a broad range of toy products of various categories (a "master toy
license") or it may be limited to the right to manufacture and sell a specific
product or product lines. The typical licensing arrangement provides for the
payment of royalties based upon a percentage of the manufacturer's aggregate net
sales, at wholesale, of the products in question. LCI usually retains between
15% and 50% of the owner's licensing royalties, which generally range from 4% to
12% of net wholesale sales.
As part of the standard licensing arrangements, the
manufacturer usually pays LCI a nonrefundable advance which is applied in most
cases against a guaranteed minimum royalty. The percentage of sales or royalty
rate, and any nonrefundable advance on guaranteed minimum payment, are
negotiated for each transaction and vary from industry to industry and from
property to property. Generally the term of the license runs for one to three
years, and may be renewed if certain minimum annual payments are received under
the license agreement. In addition, the agreements usually provide that the
rights under license will revert to the owner unless the manufacturer commences
its marketing activities by a specified date and continues to market the
products thereafter on a regular basis. The average start-up or lead time
necessary for product manufacture and marketing is between approximately six and
eighteen months. LCI does not assist in financing any of these endeavors.
In the case of licenses for motion picture and television
productions, the licensees pay fees for each production, sometimes preceded by
option payments, and, usually in connection with television series, rerun
payments for multiple exhibitions in the United States. In some cases LCI
participates in the "net profits" (that is, income less deduction of fees and
chargeable expenses and production costs) that may be realized from the
exploitation of the property in question.
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Licensing revenues accounted for approximately 32%, 41% and
60% of consolidated net revenues for the years ended December 31, 1996, 1995 and
1994, respectively.
(2) Certain Licensed Properties Represented Exclusively
by Leisure Concepts, Inc. Among the licensed properties represented exclusively
by LCI are the following:
o The animated weekly television series "Mr.
Men" scheduled for September, 1997
syndication in the United States and the
development of a line of toys based on the
characters.
o Nintendo of America Inc. ("Nintendo"), for
the various characters, trademarks, and
copyrights arising out of the software for
the video cartridge games developed and
owned by Nintendo. LCI represents Nintendo
on a worldwide basis, other than Japan.
These video games ranked among the top toy
sellers in the United States in 1994, 1995
and 1996.
o The syndicated weekly TV show, "WMAC
Masters", which features the nation's first
live action martial arts competition series.
o James Bond 007, US and UK representation for
this classic character of seventeen action
films.
o Borden, including Borden's well known brands
Crackers Jacks, Elmer's Glue and Elsie the
Cow.
o The "Polly Pocket" miniature playsets for
girls distributed by Mattel.
(3) Company-Owned Properties. World Martial Arts Council
("WMAC") is an entertainment-based property utilizing skilled martial arts
professionals that was developed and is owned by the Company. The WMAC Masters
television series was launched in September of 1995. The Company has entered
into a master toy license agreement under which Bandai has the right to market
and distribute toys and video games for the WMAC.
"Charlie Chan" the fictional Asian detective who has been the
subject of numerous films based on the character created by Earl DeBiggers.
Charlie Chan movie rights have been optioned to Miramax films.
(4) Product Concepts. The product concepts developed by
LCI usually consist of a novel theme for a line of merchandise. LCI may
conceive of an idea and then develop it at
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its expense by preparing drawings or models of the products or examples of
various uses of the concepts, including descriptions or illustrations of plans
for the marketing and merchandising of the product lines in question. LCI will
then seek to license the product concept to manufacturers for which LCI will
typically receive a royalty based upon the manufacturer's wholesale sales. Other
times, although LCI has not created the original concept, it will assist in
developing a concept, initially conceived by others, into a commercially viable
product line, in which case LCI may act as the licensor, as the agent for the
rights holder of the concept in question or may simply receive a royalty for
services rendered. LCI does not typically finance the activities of the
manufacturers to which it licenses product concepts. However, LCI sometimes
enters into arrangements under which it defers its royalties until after the
manufacturer has recouped its cost of production. Furthermore, because the
overhead associated with the development of product concepts is relatively low,
this activity has generally been profitable for LCI. There can be no assurance,
however, that the development of product concepts will be successful in the
future.
Examples of product concepts are "Quiz Wiz", "2-XL," "Toby
Terrier" and "Grave Danger," which the Company represents on a worldwide basis.
"Quiz Wiz" is an electronic hand-held computer answer game. "2-XL" is an
interactive toy robot that questions and teaches children about a variety of
educational subjects. Grave Danger is a board game licensed to Pressman Toys.
"Toby Terrier" is a toy dog which interacts with specially programmed
videotapes. LCI licenses these properties to Tiger Electronics Inc.
("Tiger"), which is a major shareholder of the Company.
The Company's agreements with Tiger are on substantially
similar terms and conditions as other agreements for similar properties
represented by the Company. For a description of certain agreements among Tiger,
Mr. Randy Rissman, the President and controlling shareholder of Tiger and Alfred
R. Kahn, the Company's Chairman, see "Business Experience", "Executive
Compensation", "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Relationships and Related Transactions" below.
(5) Media Buying, Planning and Television Syndication. The
Company's subsidiary The Summit Media Group, Inc. ("Summit Media"), provides
clients, including among others, Tiger, with media planning, buying and
marketing services, and television syndication services. Media buying accounted
for 42%, 33% and 26% of consolidated net revenues for the years ended December
31, 1996, 1995 and 1994, respectively. Summit Media's current syndications
include "Oscar's Orchestra," the animated television series designed to
introduce children to classical music, "WMAC Masters", the weekly live action
martial arts competition and "Mega Man," an animated series based on the popular
video game character. Summit Media also syndicates certain animated holiday
specials for Sony Music Entertainment.
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(6) Television and Home Video Production. The Company's
subsidiary 4Kids Productions, Inc. ("4Kids Productions") is a television and
home video production company specializing in youth-oriented entertainment
programming. In 1996, 4Kids Productions completed a series of nine one-half hour
programs for the Atlanta Committee for the 1996 Olympic Games which ran on the
NBC television network. In addition, 4Kids Productions produced the second
season of "WMAC Masters".
(7) Dependence on a Few Sources of Licensing Revenues. The
Company typically derives a substantial portion of its licensing revenues from a
small number of properties, which properties usually generate revenues only for
a limited period of time. Because the Company's licensing 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. In addition, 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. Because of this, the
Company must continually seek new properties from which it can derive revenues.
The only property which contributed licensing revenues
individually in excess of 10% of consolidated net revenues for fiscal 1996 was
Nintendo. The only client/licensee which contributed revenues individually in
excess of 10% of consolidated net revenues for fiscal 1996 was Tiger.
(8) Trademarks and Copyrights. The Company generally does not
own any trademarks or copyrights in properties which it licenses. These rights
are typically owned by the creator or by the entity, such as a master toy
licensee or television producer, which may expend substantial amounts in
developing or promoting the concept. The Company does own the copyrights and
trademarks to "Charlie Chan" and the Company's project "WMAC Masters".
(9) Seasonal Aspects. 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. 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. In addition, Summit Media's business is also
seasonal as the majority of toy and video game advertising occurs in the second
half of the year.
(10) Competition. The principal competitors of the Company's
licensing activities (including product concepts) are the product development,
merchandising, marketing and advertising departments of toy and other juvenile
merchandise manufacturers and motion picture studios as well as independent
advertising
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<PAGE>
agencies, licensing companies and numerous individuals acting as licensing
representatives. There are also many independent product development firms with
which the Company competes. Many of these companies have substantially greater
resources than the Company and represent properties which have been commercially
successful for longer periods than properties represented by the Company. The
Company believes it would be relatively easy for a potential competitor to enter
its market in light of the relatively small investment required to commence
operations. However, the ultimate success of a new entrant in the field would
depend on its access to toy and other manufacturers, sources of properties to be
licensed, its know-how in the negotiation and subsequent administration of
licenses, and the retail market acceptance of the property in question.
The Company's media buying, planning and television
syndication activities as well as its television and home video production
activities operate in highly competitive industries and face as competitors many
companies with substantially greater resources and distribution networks than
the Company.
(11) Employees. As of March 21, 1997, the Company had a
total of 47 full-time employees.
Item 2. Properties
The following table sets forth, with respect to properties
leased (none are owned) by the Company at March 21, 1997, the location of the
property, the date on which the lease expires and the use which the Company
makes of such facilities:
<TABLE>
<CAPTION> Approximate
Square
Address Expiration of Lease Use Feet
<S> <C> <C>
1414 Avenue of the Americas May 31, 2004 Executive and 13,900
New York, New York Sales Office,
Media Buying
and Television
Production
11400 West Olympic Boulevard March 18, 1999 Subleased 2,460
Los Angeles, California
403-404 The Plaza November 22, International 1,200
535 Kings Road 1997 Sales Office
London, England
</TABLE>
The Company considers that, in general, its physical
properties are well maintained, in good operating condition and adequate for its
purposes.
Item 3. Legal Proceedings
In November, 1996, the Company commenced an action in New York
Supreme Court against Toymax, H.K. Ltd., and its wholly owned subsidiary,
Toymax, Inc. in connection with the Company's licensing of the "Creepy Crawlers"
property to the Farley Candy Company. In response, the defendants brought
counterclaims
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<PAGE>
alleging misrepresentation against the Company. The Company believes that it has
meritorious defenses to the counterclaims and that they have been brought in
retaliation for the primary suit.
Except for this lawsuit, as of March 17, 1997, there were no
legal proceedings pending against the Company other than routine litigation
incidental to its business. Some matters involve claims for large amounts as
well as other relief. Although the consequences are not presently known, in the
opinion of management, they will not materially affect the Company's liquidity,
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the Company's fiscal quarterly period ended December
31, 1996, there were no matters submitted to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
(a) The Company's Common Stock is traded on the Nasdaq
National Market System. The following table indicates high and low sales
quotations for the periods indicated based upon information supplied by Nasdaq,
Inc. Such over-the-counter market quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
1996 Low High
First Quarter 2 1/8 3 5/8
Second Quarter 2 3
Third Quarter 1 2 3/8
Fourth Quarter 1 2 1/8
1995 Low High
First Quarter 2 1/2 4
Second Quarter 2 1/2 4 1/4
Third Quarter 3 4
Fourth Quarter 2 1/8 4 1/4
(b) Number of Holders of Common Stock. The number of
holders of record of the Company's Common Stock on March 17, 1997
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was 150, which does not include individual participants in security position
listings.
(c) Dividends. There were no dividends or other distributions
made by the Company during 1996 or 1995. Future dividend policy will be
determined by the Board of Directors based on the Company's earnings, financial
condition, capital requirements and other existing conditions. It is anticipated
that cash dividends will not be paid to the holders of the Company's Common
Stock in the foreseeable future.
(d) Stock Purchases. The Board of Directors has
authorized the Company to acquire up to 165,000 shares of its Common Stock on
Nasdaq or elsewhere. Such purchases are to be made out of the Company's
surplus. No such purchases were made by the Company during 1996.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994 1993 1992
--------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Total Net $6,977,327 $6,617,279 $9,191,582 $10,909,024 $8,620,860
Revenues
Income (Loss) (239,304) (947,850) 135,250 2,524,688 2,254,410
from Continuing
Operations
Net Income (.08) (.32) .04 .77 .73
(Loss) Per
Common Share
from Continuing
Operations
Net Income (.08) (.32) .04 .76 .72
(Loss) Per
Common Share
from Continuing
Operations
Assuming Full
Dilution
Weighted 2,964,178 2,990,514 3,070,815 3,273,176 3,099,463
Average Number
of Common
Shares
Outstanding
The Company did not declare or pay any cash dividends during the five-year
period ended December 31, 1996.
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</TABLE>
<TABLE>
<CAPTION>
At Year End 1996 1995 1994 1993 1992
- ----------- -------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Total Assets $30,432,130 $25,968,575 $29,376,396 $20,933,958 $13,556,781
Working Capital 5,342,436 6,894,818 8,159,128 8,713,842 8,780,095
Stockholders Equity 11,389,604 11,628,908 12,576,758 12,367,458 9,334,335
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
General
The Company receives revenues from a number of sources,
principally licensing and media buying. The Company typically derives a
substantial portion of its licensing revenues from a small number of properties,
which properties usually generate revenues only for a limited period of time.
Because the Company's licensing 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. 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.
However, 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.
Results of Operation
Twelve Months Ended December 31, 1996 compared to Twelve Months Ended December
31, 1995.
Consolidated net revenue for the year ended December 31, 1996 increased
5% or $360,048 as compared to the year ended December 31, 1995. Increase in
revenue was recognized from the
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Nintendo property based on the strength of the launch of Nintendo's new N64 game
system in September 1996. Increased revenue was also recognized from the "Mr.
Men" property. This classic English property is the subject of a new animated
television program which has been distributed in the U.S. by the Company's
Summit Media Group and will begin airing in the fall of 1997. The Company
negotiated a license with Playmates Toys for the master toy license for Mr. Men.
Offsetting these gains were decreased licensing revenue from some of the
Company's more mature properties including Polly Pocket and Creepy Crawlers and
international licensing revenue received from the Company's network of
independent subagents, which has not yet benefitted from the Company's newer
licensing properties.
Revenue from the Company's media and television syndication services
increased over 1995 performance. These activities comprised 42% of total net
revenue for 1996 as compared to 33% in 1995. Commissions earned on the media
placed increased from the addition of new clients including Direct Connect,
Erector, Thinkway Toys and Trendmaster. Increased syndication revenue was
recognized from the Monday through Friday television program Mega Men
distributed by the Company. The Company's television and home video activities
comprised approximately 15% of total net revenue for 1996 and 1995. This revenue
related primarily to the 1996 Olympic specials produced for the Atlanta
Committee for the Olympic Games which ran on the NBC television network and the
"WMAC Masters" sayndicated television program which began airing in September
1995.
Selling, general and administrative expenses decreased 16% or
$1,181,232 compared to 1995 primarily as a result of staff reductions. Overall
selling, general and administrative expenses decreased as a percentage of net
revenue from 114.5 % in 1995 to 91.6% in 1996 due to the decline in SG & A
expenses and an increase in net revenues. The Company will continue to seek
effective cost reductions without adversely impacting the Company's business.
At December 31, 1996 there were approximately $5,697,439 of capitalized
film production costs, which relate to 26 episodes of "WMAC Masters" and 22
episodes of "Monster Wars". "WMAC Masters" is a weekly syndicated television
program which began airing in September, 1995 produced by the Company's 4Kids
Productions subsidiary. The first thirteen episodes of WMAC Masters were
produced in cooperation with Renaissance Atlantic Films. Monster Wars began
syndication in October 1993.
Amortization of capitalized film costs remained approximately the same for the
year ended December 31, 1995 as compared to the prior year. Included in
amortization expense for 1995 is an additional expense in the fourth quarter of
$280,000 relating to "Monster Wars" weekly television show. The charge occurred
as a result of the Company's periodic evaluation of net realizable value of its
capitalized costs. Amortization rates may change as a result of changes in
estimated future revenue. At December 31,
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1996 the percentage of unamortized film cost expected to be amortized within the
next three years exceeds 70%.
As a result of the above, the Company reported a net loss for 1996 of
$239,304, as compared to the reported net loss in 1995 of $947,850.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.
Consolidated net revenue for the year ended December 31, 1995 decreased
28% ($2,574,303) as compared to the year ended December 31, 1994. Decrease in
revenue was recognized from the James Bond 007 and "WMAC Masters" properties. In
1994, the Company recognized approximately $1.6 million from the master toy and
video game license agreement for the WMAC to be marketed and distributed by
Bandai. Bandai was expected to begin shipping WMAC toys and related products in
the 2nd quarter of 1996. Additionally, in 1994 the Company recognized $600,000
from a licensing agreement with Nintendo which acquired the video game rights in
connection with James Bond 007. In addition, there were substantial decreases in
the Swan Princess and Shadow properties. Both the Swan Princess and the Shadow
were tied to the success of theatrical motion pictures in 1994 which were not
sufficiently successful to provide sustained interest in associated merchandise.
This decline in licensing revenue was partially offset by licensing revenue from
new licensing agreements related to the properties Polly Pocket, Santo Bugito
and Carlo Collodi's Pinocchio.
Revenue from the Company's media and television syndication services
decreased over 1994 performance. These activities comprised 33% of total net
revenue for 1995 as compared to 26% in 1994. Commissions earned on the media
placed for the theatrical releases, the Swan Princess and Street Fighter in 1994
were non recurring in 1995. These reduced commissions were partially offset by
increased commissions earned from Happiness Express and Tiger Electronics. The
Company's television and home video production activities comprised 15% of total
net revenue for 1995 as compared to 7% in 1994. This revenue related primarily
to the 1996 Olympic specials produced for the Atlanta Committee for the Olympic
games to run on the NBC television network and the "WMAC Masters" syndicated
television program which began airing in September 1995.
Selling, general and administrative expenses remained relatively stable
during the two fiscal years, although a higher percentage of such expenses were
attributable to the Company's media and syndication operations which accounted
for a increasing percentage of revenue. Overall selling, general and
administrative expenses increased as a percentage of net revenue from 82.7% in
1994 to 114.5% in 1995 due to the decline in net revenues.
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At December 31, 1995 there were approximately $3,742,641 of capitalized film
production costs, which relate to "WMAC Masters," a weekly syndicated
television program which began airing in September, 1995, and is produced by
the Company's 4Kids Productions subsidiary in cooperation with Renaissance
Atlantic Films and "Monster Wars" a syndicated television show which began
airing in October 1993.
Amortization of capitalized film costs decreased by approximately 34% ($559,000)
for the year ended December 31, 1995 as compared to the prior year. The decrease
is primarily due to amortization charges in 1994 related to "Monster Wars".
Included in amortization expense for 1995 is an additional expense in the fourth
quarter of $280,000 relating to "Monster Wars" weekly television show. The
charge occurred as a result of the Company's periodic evaluation of net
realizable value of its capitalized costs. Amortization rates may change as a
result of changes in estimated future revenue. At December 31, 1995 the
percentage of unamortized film cost expected to be amortized within the next
three years exceeds 70%.
As a result of the above, the Company reported a net loss for 1995 of
$947,850, as opposed to the reported net income in 1994 of $135,250.
Liquidity and Capital Resources
At December 31, 1996, the Company had working capital of $5,342,436, as
compared to working capital of $6,894,818 at December 31, 1995. The decrease in
working capital of $1,552,382 is primarily due to the cost of funding 13
episodes for Season 2 of WMAC Masters.
Cash and cash equivalents decreased by $676,507 from December 31, 1995.
The decrease in cash and cash equivalents is due to cash expenditures associated
with funding the production of "WMAC Masters" which had completed production of
the second thirteen episodes by December 31, 1996. This reduction in cash
produced an increase in film inventory-net. Additionally, cash expenditures were
required to fund the operating losses for the year ended December 31, 1996.
Accounts receivable, net (current and non-current) increased from
$16,986,468 at December 31, 1995 to $19,889,353 at December 31, 1996. This
decrease is primarily due to the higher revenue in the media businesss. Media
payable primarily represents obligations to television stations for advertising
time purchased on behalf of clients. Media payable increased from $11,428,185 at
December 31, 1995 to $16,038,574 at December 31, 1996. This increase is due to
the timing of receipts and subsequent payments to television stations as well as
higher levels of media buying activities. Amounts due to licensors, which
represent the owners share of royalties collected, decreased by $196,647 to
$1,416,959 from December 31, 1995. The decrease is primarily due to lower
royalties collected during the
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fourth quarter as compared to the prior year which are paid to licensors after
the close of the quarter.
In the opinion of management, the Company will be able to finance its
business as currently conducted from its current working capital and the
$2,000,000 credit facility with The Chase Manhattan Bank, formerly Chemical
Bank, discussed in Note 8 to the financial statements. As of March 17, 1997
there have been no borrowings under this credit facility. As the Company
explores new and expanded opportunities in the youth oriented entertainment
market, including television production, it will seek additional financing
alternatives.
Item 8. Financial Statements and Supplementary Data
Financial Statements and Supplementary Data are attached hereto.
PART III
Item 10. Directors and Executive Officers of the Company
Incorporated by reference to the Company's Definitive Proxy
Statement on Schedule 14A with respect to Annual Meeting of Shareholders to be
held April 30, 1997.
Item 11. Executive Compensation
Incorporated by reference to the Company's Definitive Proxy
Statement on Schedule 14A with respect to Annual Meeting of Shareholders to be
held April 30, 1997.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Incorporated by reference to the Company's Definitive Proxy Statement
on Schedule 14A with respect to Annual Meeting of Shareholders to be held April
30, 1997.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Definitive Proxy Statement
on Schedule 14A with respect to Annual Meeting of Shareholders to be held April
30, 1997.
- 14 -
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) 1. Financial Statements:
The following Consolidated Financial Statements of 4Kids
Entertainment, Inc. and Subsidiaries are included in Item 8:
Page
Number
Independent Auditors' Report F-1
Consolidated Balance Sheets - F-2
December 31, 1996 and 1995
Consolidated Statements of F-3
Income - Years Ended
December 31, 1996, 1995
and 1994
Consolidated Statements of F-4
Stockholders' Equity - Years
Ended December 31, 1996, 1995
and 1994
Consolidated Statements of F-5
Cash Flows - Years Ended
December 31, 1996, 1995
and 1994
Notes to Consolidated F-6 to F-14
Financial Statements
(a) 2. and (d) Financial Statement Schedules:
All schedules have been omitted because they are inapplicable,
not required, or the information is included in the financial statements or
notes thereto.
(a) 3. and (c) Exhibits. See Index of Exhibits annexed hereto.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K
during the quarterly period ended December 31, 1996.
- 15 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
4Kids Entertainment, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of 4Kids
Entertainment, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of 4Kids Entertainment, Inc. and
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
March 18, 1997
F-1
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,830,270 $ 3,505,777
Accounts receivable - net (Notes 2 and 6) 17,625,331 14,668,829
Film inventory - net (Note 3) 1,852,439 1,210,918
Prepaid refundable income taxes (Note 5) 522,763 448,442
Prepaid expenses and other current assets 1,008,300 704,215
Current deferred tax asset (Note 5) - 34,445
Total current assets 23,839,103 20,572,626
FURNITURE, FIXTURES AND COMPUTER EQUIPMENT -
Net of accumulated depreciation of $1,174,260 and $1,060,065 237,226 347,772
ACCOUNTS RECEIVABLE - Noncurrent, net
(Notes 2 and 6) 2,264,022 2,317,639
FILM INVENTORY - Noncurrent (Note 3) 3,845,000 2,531,703
SECURITY DEPOSITS AND OTHER ASSETS 246,779 198,835
TOTAL ASSETS $ 30,432,130 $ 25,968,575
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to licensors (Note 2) $ 1,416,959 $ 1,613,606
Media payable (Note 2) 16,038,574 11,428,185
Accounts payable and accrued expenses 787,579 636,017
Current deferred tax liability (Note 5) 253,555 -
Total current liabilities 18,496,667 13,677,808
NONCURRENT DEFERRED TAX LIABILITY (Note 5) 545,859 661,859
Total liabilities 19,042,526 14,339,667
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY (Notes 7, 8 and 9):
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 6,930,250 7,169,554
Total stockholders' equity 11,389,604 11,628,908
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,432,130 $ 25,968,575
See notes to consolidated financial statements.
F - 2
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C>
REVENUES:
Net revenues (Notes 4 and 6) $ 6,977,327 $ 6,617,279 $ 9,191,582
COSTS AND EXPENSES:
Selling, general and administrative (Note 8) 6,392,411 7,573,643 7,602,063
Amortization of capitalized film cost (Note 3) 1,070,477 1,080,889 1,640,234
Total costs and expenses 7,462,888 8,654,532 9,242,297
(485,561) (2,037,253) (50,715)
INTEREST INCOME 122,257 334,403 334,965
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) (363,304) (1,702,850) 284,250
INCOME TAX PROVISION (BENEFIT) (Note 5) (124,000) (755,000) 149,000
NET INCOME (LOSS) $ (239,304) $ (947,850) $ 135,250
PER SHARE AMOUNTS:
Earnings (loss) per common and dilutive common
equivalent share $ (0.08) $ (0.32) $ 0.04
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES
OUTSTANDING 2,964,178 2,990,514 3,070,815
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1993 2,924,831 $ 29,248 $ 4,356,056 $ 7,982,154 $ 12,367,458
Proceeds from exercise of stock options 20,000 200 62,300 - 62,500
Tax benefit from exercise of stock options - - 11,550 - 11,550
Net income - - - 135,250 135,250
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 2,944,831 29,448 4,429,906 8,117,404 12,576,758
Net loss - - - (947,850) (947,850)
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 2,944,831 29,448 4,429,906 7,169,554 11,628,908
Net loss - - - (239,304) (239,304)
-----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 2,944,831 $ 29,448 $ 4,429,906 $ 6,930,250 $ 11,389,604
=============================================================================
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (239,304) $ (947,850) $ 135,250
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 143,135 216,514 207,803
Amortization of capitalized film cost 1,070,477 1,080,889 1,640,234
Provision for losses on accounts receivable 100,000 183,420 (106,398)
Deferred income taxes 137,555 (632,252) 596,949
Changes in operating assets and liabilities (using) providing cash:
Accounts receivable (3,002,885) 793,392 (8,128,754)
Film inventory (3,025,295) (2,610,944) (1,487,859)
Prepaid refundable income taxes (39,876) 117,051 1,223,899
Prepaid expenses and other current assets (304,085) (288,073) (281,628)
Security deposits and other assets (47,944) 194,750 (221,102)
Due to licensors (196,647) (186,429) (1,515,298)
Media payable 4,610,389 (1,679,000) 8,930,715
Accounts payable and accrued expenses 151,562 3,266 220,773
Net cash (used in) provided by operating activities (642,918) (3,755,266) 1,214,584
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and computer equipment (32,589) (110,268) (192,469)
Net cash used in investing activities (32,589) (110,268) (192,469)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and
related tax benefit - - 74,050
Net cash provided by financing activities - - 74,050
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (675,507) (3,865,534) 1,096,165
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,505,777 7,371,311 6,275,146
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,830,270 $ 3,505,777 $ 7,371,311
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of all wholly-owned subsidiaries. All related
significant intercompany balances and transactions have been eliminated in
consolidation.
DESCRIPTION AND ACCOUNTING BASIS FOR REVENUES - 4Kids Entertainment, Inc.
and subsidiaries (the "Company") is an integrated entertainment and media
company specializing in the youth oriented market.
LICENSING BUSINESS - The Company's licensing subsidiary is engaged
primarily in the business of licensing the commercial rights to
properties, personalities, and product concepts. The Company typically
acts as exclusive agent in connection with the grant to third parties of
licenses to manufacture and sell all types of merchandise based on
properties, personalities and concepts. The licensing of these rights has
been primarily in the area of toys, games and other juvenile merchandise.
Grants have also been made in other fields, including the food,
toiletries, apparel and footwear industries. Additionally, these rights
are licensed in connection with the production of television shows, motion
pictures and publications such as magazines, juvenile books and comic
strips.
These license agreements often include nonrefundable minimum guaranteed
royalties which are payable by the licensee. The Company records as
revenue its proportionate share of the minimum guarantee when all material
terms of the contracts have been agreed to by the parties and a cash
payment or reasonable assurance of collectability is received. It is at
this point that the Company has substantially performed all of its
obligations under the contract.
For contracts not providing minimum guaranteed royalties and for royalty
amounts in excess of the minimum guarantee, the Company records revenue
based upon its share of earned royalties from the sales of the related
property.
TELEVISION AND VIDEO PRODUCTIONS - The Company accounts for its activities
associated with the production of entertainment programming in accordance
with Statement of Financial Accounting Standards No. 53 ("SFAS No. 53"),
Financial Reporting by Producers and Distributors of Motion Picture Films.
Under SFAS No. 53, the Company capitalizes costs associated with each
individual production. The capitalized costs are classified into current
and noncurrent assets depending on an estimate of when revenues associated
with those costs are anticipated to be recognized. Such costs are
amortized against the related revenue as such revenue is recognized.
Amortization rates may change as a result of changes in estimated future
revenue. Periodically, the Company evaluates the anticipated future
revenue against the net realizable value of the capitalized costs and,
where appropriate, reduces the carrying value of such costs to their
estimated net realizable amount which would result in a corresponding
charge to earnings.
MEDIA BUYING, PLANNING AND SYNDICATION SERVICES - Through the Company's
wholly-owned subsidiary, The Summit Media Group, Inc. ("Summit Media"),
the Company provides media planning and buying services for both print and
broadcast. Summit Media is compensated based on a percentage of the media
F-6
<PAGE>
it places. Such revenue is recognized at the time the related media runs.
Summit Media also provides television syndication services for which it
receives a fee based on a percentage of the advertising sales generated by
the related program. Such revenue is recognized at the time the
syndication services are completed and the advertising sales of the
related program are reasonably known. Summit Media will reflect a
liability for media payable and a corresponding receivable from its
clients in circumstances where Summit Media assumes the payment obligation
for media commitments.
FURNITURE, FIXTURES AND COMPUTER EQUIPMENT - Furniture, fixtures and
computer equipment are recorded at cost. Depreciation is computed using
various methods over the estimated lives of the assets.
IMPUTED INTEREST - The Company imputes interest on the noncurrent portion
of accounts receivable at an average rate of 7%.
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.
CASH AND CASH EQUIVALENTS - At December 31, 1996 and 1995, the Company had
cash equivalents consisting primarily of funds invested in Treasury bills
of approximately $2,472,446 and $2,386,998, respectively, with original
maturities of 90 days or less.
LONG-TERM ASSETS - In fiscal 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The statement requires the recognition of an
impairment loss for an asset held for use when the estimate of
undiscounted future cash flows expected to be generated by the asset is
less than its carrying amount. Measurement of the impairment loss is based
on fair value of the asset. Generally, fair value will be determined using
valuation techniques such as the present value of expected future cash
flows. This statement does not apply to the Company's long term film
inventory whose accounting is prescribed by SFAS No. 53.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. ACCOUNTS RECEIVABLE - MEDIA PAYABLE/DUE TO LICENSORS
Generally, licensing contracts provide for the Company to collect, on
behalf of the licensor, royalties including minimum guarantees from the
licensees. The Company records as accounts receivable its proportionate
share of such minimum guarantees and its share of earned royalties in
excess of guarantees.
Due to licensors represents amounts collected by the Company on behalf of
licensors, which are generally payable to such licensors after the close
of the quarter.
Additionally, accounts receivable include amounts due from clients for
earned commissions and the cost of related media placed on their behalf in
circumstances where the Company has assumed the payment
F-7
obligation for such media. In such circumstances, the Company will record
a corresponding liability for media payable. Accounts receivable consist
of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Gross accounts receivable $ 20,426,510 $ 17,423,625
Allowance for doubtful accounts (537,157) (437,157)
------------------ -------------
19,889,353 16,986,468
Less long-term portion 2,264,022 2,317,639
------------------ -------------
$ 17,625,331 $ 14,668,829
================== =============
</TABLE>
3. FILM INVENTORY
At December 31, 1996, there were $5,697,439 of capitalized film costs,
which relate to two completed works in release and one in progress.
Amortization of capitalized film cost was $1,070,477, $1,080,889 and
$1,640,234 in 1996, 1995 and 1994, respectively. During 1995 and 1994, the
Company recorded charges of approximately $280,000 and $910,000,
respectively, to reduce the carrying value of film inventory primarily
related to producing the "Monster Wars" television program. This reduction
of the carrying value was based on the Company's periodic evaluation of
anticipated future revenue against the net realizable value of capitalized
cost. Film inventory consists of the following components:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Opening balance $ 3,742,621 $ 2,212,566
Additions 3,025,295 2,610,944
--------------- --------------
6,767,916 4,823,510
Amortization (1,070,477) (1,080,889)
----------------- --------------
5,697,439 3,742,621
Less noncurrent portion (3,845,000) (2,531,703)
----------------- --------------
$ 1,852,439 $ 1,210,918
================= ==============
</TABLE>
4. REVENUES/MAJOR CUSTOMERS
Licensing revenue included on the Statements of Operations are net of
licensor participations of approximately $3,610,934 in 1996, $6,068,880 in
1995 and $11,114,000 in 1994.
F-8
<PAGE>
The percentages of revenue from major properties and customers/licensees
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Percentage of revenue derived from major properties (revenue in
excess of 10 percent of total revenue) 25% - 18%
Number of major properties 2 - 1
Percentage of revenue derived from major customers/licensees
(revenue in excess of 10 percent of total revenue) 31% 32% 35%
Number of major customers/licensees 1 1 2
</TABLE>
Additionally, through the Company's London office and network of
international subagents, which allow it to license its properties through
the world, the Company recognized approximately $554,000, $972,000 and
$982,000 in net revenue from international sources, primarily in Europe,
for 1996, 1995 and 1994, respectively.
5. INCOME TAXES
The Company has provided for deferred income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," whereby deferred income taxes are determined based upon
the enacted income tax rates for the years in which these taxes are
estimated to be payable or recoverable. Deferred income taxes arise from
temporary differences resulting from a difference between the tax basis of
an asset or liability and its reported amount in the financial statements.
The income tax (benefit) provision includes the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $ (326,000) $ (295,000) $ (324,000)
State and local 30,000 31,000 (124,000)
----------------------------------------------
(296,000) (264,000) (448,000)
----------------------------------------------
Deferred:
Federal 248,000 (195,000) 546,000
State and local (76,000) (296,000) 51,000
----------------------------------------------
172,000 (491,000) 597,000
----------------------------------------------
$ (124,000) $ (755,000) $ 149,000
=============================================
</TABLE>
F-9
<PAGE>
The provision for taxes as reported is different than the tax provision
computed by applying the statutory Federal rate of 34 percent. The
differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Income (loss) before income tax provision $ (363,304) $ (1,702,850) $ 284,250
============== ================ ==========
Provision (benefit) at the statutory Federal rate $ (124,000) $ (579,000) $ 97,000
Provision for state and local income taxes net of
Federal income tax benefit (30,000) (175,000) 29,000
Other 30,000 (1,000) 23,000
--------------------------------------- ------
$ (124,000) $ (755,000) $ 149,000
============== ================= ==========
</TABLE>
The Company's deferred tax liabilities are net of deferred tax assets of
approximately $1,272,000 and $1,109,000 at December 31, 1996 and 1995,
respectively. The components of the deferred tax balances at December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
<S> <C> <C>
Commissions on guarantees not currently recognized for
tax reporting purposes $ (1,779,000) $ (1,475,000)
Tax benefit of state and local tax loss carryforwards 428,000 445,000
Provision for doubtful accounts not currently deductible
for tax reporting purposes 231,000 188,000
Film inventory valuation adjustment not currently
deductible for tax reporting purposes 471,000 476,000
Depreciation, amortization and other charges deducted
for tax reporting purposes (150,000) (261,000)
-------------------- ---------
$ (799,000) $ (627,000)
================= ===============
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Company provided certain services to Tiger Electronics, Inc.,
("Tiger") a corporation controlled by an individual who is a director and
major beneficial shareholder of the Company. These transactions totaled
approximately $2,141,000, $2,112,000 and $1,659,000 of net revenue in
1996, 1995 and 1994, respectively.
The Company had receivables from Tiger of approximately $13,156,682 and
$11,712,304 at December 31, 1996 and 1995, respectively.
F-10
<PAGE>
7. STOCK OPTIONS
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its plans. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at
the grant date for awards under these plans consistent with the
methodology prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the Company's net loss
and loss per share would have been increased by approximately $438,000 and
$246,000, or $.15 and $.08 per share for 1996 and 1995 respectively. The
fair value of the options granted during 1996 and 1995 are estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield 0%, volatility of 49%, risk-free
interest rate of 7% and an expected life based on the life of the options.
The Company has various stock option plans (the "Plans"). Options may be
exercised for a period of not more than ten years after the date of grant.
Unless otherwise determined by the Company's Stock Option Committee, each
option will be immediately exercisable with respect to 50 percent of the
shares subject to the option and will become exercisable with respect to
the other 50 percent on the first anniversary of the date of grant.
Certain of the Plans permit the Committee to grant nonqualified options,
with an exercise price of not less than 85 percent of the fair market
value of the common stock; all other options must be at 100 percent of the
fair market value.
Under the 1994 and 1992 Plans, in each of the two years following the
adoption of the plan, the Company's chairman was granted options to
purchase 100,000 shares and each outside director was granted options to
purchase 50,000 shares.
The Company has outstanding employee stock options as follows:
<TABLE>
<CAPTION>
EXERCISE PRICE WEIGHTED AVERAGE
OPTIONS PER SHARE EXERCISE PRICE
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 694,000 $ 2.620 $ 9.75 $ 5.47
Options exercised (20,000) 3.1250 3.125
Options granted 207,500 9.750 10.25 10.23
Options expired (65,000) 6.120 9.75 8.50
-------------- -------------- ---- ----------
Outstanding at December 31, 1994 816,500 2.620 10.25 6.32
============== ============ ===== =========
Options granted 349,500 2.6250 3.81 3.39
Options expired (10,000) 3.120 9.75 8.09
-------------- -------------- ---- --------
Outstanding at December 31, 1995 1,156,000 2.620 10.25 5.43
================ ============ ===== ========
Options granted 265,000 2.3125 2.375 2.33
Options expired 172,000 2.3750 9.75 3.24
-------------- -------------- ---- -------
Outstanding at December 31, 1996 1,249,000 2.315 10.25 5.13
================ ============ ===== =======
Exercisable at December 31, 1996 1,216,500 $ 2.3125 $ 10.25 5.24
============ ============ ========= =======
</TABLE>
F-11
<PAGE>
Under the Company's various stock option plans, 232,000 shares of the
Company's common stock were available at December 31, 1996 for future
issuance.
In addition, in June 1992, the Board of Directors granted to its outside
directors, who receive no cash compensation, options to purchase a total
of 100,000 shares of the Company's common stock at $5.75, the market price
of the Company's common stock on the date of grant. Such options, which
were immediately exercisable, expire five years from the date of grant.
At December 31, 1996, there were 1,581,000 shares of the Company's common
stock reserved for stock options.
The following table summarizes information about fixed-price stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of outstanding Remaining Exercise exercisable Exercise
Exercise Prices at 12/31/96 Contractual Life Price at 12/31/96 Price
<S> <C> <C> <C> <C> <C>
$2.3125-3.8125 612,500 7 years $ 2.91 580,000 $ 2.94
$ 5.00- 6.125 516,500 2.5 years $ 5.59 516,500 $ 5.59
$ 9.75-10.25 220,000 6.5 years $10.20 220,000 $10.20
---------- ----------
1,349,000 1,316,500
========== ==========
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
a. BONUS PLAN - Bonuses are based upon an amount up to 14 percent of
pretax profits. Key officers and employees, as designated by the
Board of Directors, can be included in the Bonus Plan. For 1994, the
Board of Directors, under the Bonus Plan, awarded the Chairman and
Chief Executive Officer of the Company approximately $40,000. An
additional $9,000 under the Bonus Plan was granted to several
employees, including one officer in 1994. Due to the losses in 1995
and 1996, no bonuses were granted under the Bonus Plan.
b. LEASES - The Company is obligated for future leases for office
space. Certain leases provide for escalation clauses and renewal
options.
At December 31, 1996, future minimum lease payments were as follows:
YEAR ENDING AMOUNT
1997 $ 400,100
1998 376,518
1999 367,172
2000 364,056
2001 364,056
Thereafter 897,127
------------
$ 2,769,029
============
Rent expense approximated $460,183, $487,544 and $497,000 in 1996,
1995 and 1994, respectively.
c. LITIGATION - In November, 1996, the Company commenced an action in
New York Supreme Court against Toymax, H.K. Ltd., and its wholly
owned subsidiary, Toymax, Inc. in connection with the Company's
licensing of the "Creepy Crawlers" property to the Farley Candy
Company. In response, the defendants brought counterclaims alleging
misrepresentation against the Company. The Company believes that it
has meritorious defenses to the counterclaims and that they have
been brought in retaliation for the primary suit.
Except for this lawsuit, as of March 21, 1997, there were no legal
proceedings pending against the Company other than routine
litigation incidental to its business. Some matters involve claims
for large amounts as well as other relief. Although the consequences
are not presently known, in the opinion of management, they will not
materially affect the Company's liquidity, financial position or
results of operations.
F-12
<PAGE>
d. CREDIT FACILITY -The Company's line of credit (the "Credit
Facility") from Chemical Bank which expired 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 December 31, 1996
the Company had no borrowings under the Credit Facility.
9. SUBSEQUENT EVENTS
In January, 1997, the Chairman and the Company entered into an agreement
canceling an aggregate of 200,000 stock options previously granted to the
Chairman which were due to expire by the end of July, 1997. On January 22,
1997, the Company granted options to purchase 100,000 shares to the
Chairman and 50,000 shares to each of the outside directors at $1.375 per
share, the market price of the Company's stock at that time. In addition,
the company granted options to purchase 197,500 shares of the Company's
common stock at $1.375, the market price of the company's common stock on
that date to seven employees, four of which are executive officers.
******
F-13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 31, 1997 4KIDS ENTERTAINMENT, INC.
By
Alfred R. Kahn,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 31, 1997
Alfred R. Kahn
Chairman of the Board,
Chief Executive Officer and
Director
Date: March 31, 1997
Randy O. Rissman,
Director
Date: March 31, 1997
Gerald Rissman,
Director
Date: March 31, 1997
Joseph P. Garrity,
Executive Vice President,
Treasurer, Principal Financial
Officer and Principal Accounting
Officer
</TABLE>
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
<S> <C> <C>
(3) (a) Certificate of Incorporation of the Registrant,
as amended (13)
(b) By-Laws of the Registrant adopted by the Board
of Directors on March 28, 1991 (2)
(c) Resolution of the Board of Directors of the
Registrant adopted March 12, 1991 reducing the
size of the Board from six directors to three
directors (2)
(4) (a) Form of Common Stock Certificate (3)
(10)(a) Bonus Plan of the Registrant (*)(4)
(b) 1985 Non-Qualified Stock Option Plan, as
amended (*)(4)
(c) 1986 Stock Option Plan, as amended (*)(4)
(d) 1992 Stock Option Plan (*)(5)
(e) 1993 Stock Option Plan (*)(6)
(f) 1994 Stock Option Plan (*)(10)
(g) 1995 Stock Option Plan (*)(11)
(h) 1996 Stock Option Plan (*)(15)
(i) Stock Option Agreement, dated June 10, 1992,
between the Registrant and Randy O. Rissman (*)(7)
(j) Stock Option Agreement, dated June 10, 1992,
between the Registrant and Gerald Rissman (*)(7)
(k) Agreement between Nintendo of America, Inc. and
the Registrant dated December 17, 1987 (4)
(l) Agreement of Lease, dated March 28, 1988,
between the Registrant and 1414 Americas
Company (2)
(m) Amendment, dated July 8, 1994, to Agreement of
Lease between the Registrant and 1414 Americas
Company. (12)
(n) Agreement of Lease, dated June 30, 1991,
between the Registrant and Olympic Purdue
Associates (the "Olympic Lease") (7)
(o) First Amendment, dated January 3, 1994, to the
Olympic Lease (7)
(p) Agreement of Lease, dated March 23, 1993, between
Leisure Concepts International, Inc. and Svenska
Handelsbanken (7)
(q) Employment Agreement, dated March 12, 1991
between the Registrant and Alfred R. Kahn(*)(8)
(r) Employment Agreement, dated June 3, 1991,
between the Registrant and Joseph Garrity
(*)(9)
<PAGE>
Exhibit Page
Number Description Number
(s) Amendment, dated as of October 17, 1994, to the
Employment Agreement between the Registrant and
Joseph Garrity (*)(12)
(t) Employment Agreement, dated January 1, 1995 between The
Summit Media Group, Inc. and Sheldon Hirsch.(*)(13)
(u) Employment Agreement, dated January 1, 1995 between The
Summit Media Group, Inc. and Thomas J. Kenney. (*)(13)
(v) Employment Agreement, dated January 9, 1996 between
4 Kids Productions, Inc. and Norman Grossfeld. (*)(13)
(w) Note, dated May 29, 1997, between the Registrant
and Chemical Bank.
(x) Security Agreement, dated May 29, 1996, by and between
Leisure Concepts, Inc. and Chemical Bank
(y) Security Agreement, dated May 29, 1996, by and between
4Kids Productions, Inc. and Chemical Bank
(z) Security Agreement, dated May 29, 1996, by and between The
Summit Media Group, Inc. and Chemical Bank
(aa) Amendment, dated as of January 1, 1997, to the Employment
Agreement between the Registrant and Joseph P. Garrity
(bb) Amendment, dated as of January 1, 1997, to the Employment
Agreement between The Summit Media Group, Inc. and Sheldon
Hirsch
(cc) Amendment, dated as of January 1, 1997, to the Employment
Agreement between The Summit Media Group, Inc. and Thomas
Kenney
(dd) Amendment, dated as of February, 1997, to the Employment
Agreement between the Registrant and Alfred R. Kahn.
(21) List of Subsidiaries of the Registrant
(24) Consent of Deloitte & Touche, Certified Public
Accountants
</TABLE>
- -----------------------------------------------------------------
(*) Denotes a management contract or compensatory plan,
contract or arrangement.
(1) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1989.
(2) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1990.
(3) Incorporated by reference to Registration Statement on
Form S-1 (File No. 33-3056) declared effective March 7, 1986.
(4) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1987.
(5) Incorporated by reference to 1992 Proxy Statement.
(6) Incorporated by reference to 1993 Proxy Statement.
<PAGE>
(7) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1992.
(8) Incorporated by reference to Amendment No. 1 to
Schedule 13D of Alfred Kahn, Tiger Electronics Inc. and Owen
Randall Rissman dated February 22, 1991.
(9) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1991.
(10) Incorporated by reference to 1994 Proxy Statement.
(11) Incorporated by reference to 1995 Proxy Statement.
(12) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1994.
(13) Incorporated by reference to Annual Report on Form 10-K
for the year ended December 31, 1995.
(14) Incorporated by reference to Current Report on Form 8-K
dated May 29, 1997.
(15) Incorporated by reference to 1997 Proxy Statement.
<PAGE>
Exhibit 10(aa)
As of January 1, 1997
Mr. Joseph P. Garrity
21 Shoshone Drive
Katonah, New York 10536
Dear Mr. Garrity:
This is to confirm our agreement that, effective as of January 1, 1997,
the Employment Agreement between us dated as of June 3, 1991 and modified
October 7, 1991, October 17, 1994 and January 1, 1996 (the "Agreement") is
further amended as follows:
1. Section 1.01 of the Agreement is hereby deleted in its
entirety and the following substituted therefor:
1.01 Term. Company hereby employs Executive, and Executive
hereby accepts employment with Company with the duties hereinafter set
forth, for a period commencing on June 3, 1991 and ending December 31,
2000 subject, however, to earlier termination in accordance with the
provisions of this Agreement. This Agreement shall automatically renew
on a year-to-year basis unless terminated by either party hereto giving
written notice to the other at least 90 days prior to December 31, 2000
or any December 31 thereafter.
2. In all other respects, the Agreement shall continue in full force and
effect in accordance with its original terms.
If the foregoing sets forth a correct statement of our agreement,
please sign the duplicate hereof in the place indicated and return it to us.
Sincerely,
4KIDS ENTERTAINMENT, INC.
By
Alfred R. Kahn, Chairman
ACCEPTED AND AGREED:
Joseph P. Garrity
<PAGE>
Exhibit 10(bb)
THE SUMMIT MEDIA GROUP, INC.
1414 Avenue of the Americas
New York, New York 10019
As of January 1, 1997
Mr. Sheldon Hirsch
28 Doral Court
New City, New York 10956
Dear Mr. Hirsch:
This is to confirm our agreement that, effective as of January 1, 1997,
the Employment Agreement between us dated as of January 1, 1995 (the
"Agreement") is amended as follows:
1. Section 1.01 of the Agreement is hereby deleted in its entirety and the
following substituted therefor:
1.01 Term. Company hereby employs Executive, and Executive
hereby accepts employment with Company with the duties hereinafter set
forth, for a period commencing on January 1, 1995 and ending December
31, 2000 subject, however, to earlier termination in accordance with
the provisions of this Agreement. This Agreement shall automatically
renew on a year-to-year basis unless terminated by either party hereto
giving written notice to the other at least 90 days prior to December
31, 2000 or any December 31 thereafter.
2. In all other respects, the Agreement shall continue in full force and
effect in accordance with its original terms.
If the foregoing sets forth a correct statement of our agreement,
please sign the duplicate hereof in the place indicated and return it to us.
Sincerely,
THE SUMMIT MEDIA GROUP, INC.
By
Alfred R. Kahn, Chairman
ACCEPTED AND AGREED:
Sheldon Hirsch
<PAGE>
Exhibit 10(cc)
THE SUMMIT MEDIA GROUP, INC.
1414 Avenue of the Americas
New York, New York 10019
As of January 1, 1997
Mr. Thomas Kenney
26 Woodfield Road
Pomona, New York 10970
Dear Mr. Kenney:
This is to confirm our agreement that, effective as of January 1, 1997,
the Employment Agreement between us dated as of January 1, 1995 (the
"Agreement") is amended as follows:
1. Section 1.01 of the Agreement is hereby deleted in its entirety and the
following substituted therefor:
1.01 Term. Company hereby employs Executive, and Executive
hereby accepts employment with Company with the duties hereinafter set
forth, for a period commencing on January 1, 1995 and ending December
31, 2000 subject, however, to earlier termination in accordance with
the provisions of this Agreement. This Agreement shall automatically
renew on a year-to-year basis unless terminated by either party hereto
giving written notice to the other at least 90 days prior to December
31, 2000 or any December 31 thereafter.
2. In all other respects, the Agreement shall continue in full force and
effect in accordance with its original terms.
If the foregoing sets forth a correct statement of our agreement,
please sign the duplicate hereof in the place indicated and return it to us.
Sincerely,
THE SUMMIT MEDIA GROUP, INC.
By
Alfred R. Kahn, Chairman
ACCEPTED AND AGREED:
Thomas Kenney
<PAGE>
Exhibit 10(dd)
February , 1997
Mr. Alfred R. Kahn
205 West 57th Street
New York, New York 10019
Dear Mr. Kahn:
This is to confirm our agreement that, effective as of the date hereof,
the Employment Agreement between us dated as of March 12, 1991 (the "Agreement")
is amended as follows:
1. The first sentence of Section 1 of the Agreement is hereby deleted
in its entirety and the following substituted therefor:
Company employs Executive and Executive accepts employment
with Company, as Chairman of the Board and Chief Executive Officer from
the date hereof to March 31, 1999 (the "Termination Date").
2. Section 2(b) of the Agreement is hereby deleted in its entirety.
3. Section 3(b) of the Agreement is hereby deleted in its entirety and the
following substituted therefor:
(b) Bonuses. In addition to his Fixed Salary, Executive shall
receive, with respect to each full fiscal year during the term hereof,
commencing with the year ending December 31, 1997 an annual bonus (the
"Profit Bonus") equal to ten percent (10% of the Company's annual
"Income Before Income Tax Provision" as stated in the Company's
financial statements in its Annual Report on Form 10-K. The Profit
Bonus shall be payable within 120 days after the end of the Company's
fiscal year.
4. The first sentence of Section 3(c) is hereby deleted in its entirety and the
following substituted therefor:
Executive shall be entitled to receive the sum of One Thousand
Dollars ($1,000) per month as an automobile allowance provided at the
expense of the Company during the term of this Agreement.
<PAGE>
5. In all other respects, the Agreement shall continue in full force and
effect in accordance with its original terms.
If the foregoing sets forth a correct statement of our agreement,
please sign the duplicate hereof in the place indicated and return it to us.
Sincerely,
4KIDS ENTERTAINMENT, INC.
By
Joseph P. Garrity
Executive Vice President
ACCEPTED AND AGREED:
Alfred R. Kahn
<PAGE>
EXHIBIT 21
4 KIDS ENTERTAINMENT, INC.
List of Subsidiaries
The following is a list of all subsidiaries of 4 Kids
Entertainment, Inc. of which all are incorporated in the State of New York. All
of the listed subsidiaries do business under the names presented below:
Leisure Concepts, Inc.
The Summit Media Group, Inc.
4 Kids Productions, Inc.
Leisure Concepts International, Inc.
LCI UK Limited
World Martial Arts Productions, Inc.
<PAGE>
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the incorporation by reference in Registration Statement
Nos. 33-11718 and 33-60928 of 4Kids Entertainment, Inc. on Form S-8 of our
report dated March 18, 1997 appearing in this Annual Report on Form 10-K of
4Kids Entertainment, Inc. for the year ended December 31, 1996.
Deloitte & Touche LLP
New York, NY
March 31, 1997
