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 September 30, 1997
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 November 13, 1997
- -------------------------- ------------------------------------
Common Stock, $.01 Par Value 2,944,831
<PAGE>
4KIDS ENTERTAINMENT, INC.
AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets 1
September 30, 1997 (Unaudited) and
December 31, 1996.
Consolidated Statements of Operations 2
Three and Nine Months Ended September 30, 1997
and 1996 (Unaudited)
Consolidated Statements of Cash Flows 3
Nine Months Ended
September 30, 1997 and 1996 (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
SEPTEMBER 30, DECEMBER 31,
1997 1996
-------------- --------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $484,622 $2,830,270
Accounts receivable, net 10,866,113 17,625,331
Film inventory-net 1,361,321 1,852,439
Prepaid refundable income taxes 1,517,545 522,763
Prepaid expenses and other current assets 1,283,534 1,008,300
-------------- --------------
Total current assets 15,513,135 23,839,103
-------------- --------------
FURNITURE, FIXTURES AND COMPUTER EQUIPMENT- (Net) 190,593 237,226
FILM INVENTORY - Noncurrent 3,845,000 3,845,000
ACCOUNTS RECEIVABLE - Noncurrent, net 2,001,878 2,264,022
SECURITY DEPOSITS AND OTHER ASSETS 291,667 246,779
============== ==============
TOTAL ASSETS $21,842,273 $30,432,130
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to licensors $1,636,016 $1,416,959
Media payable 8,336,720 16,038,574
Accounts payable and accrued expenses 590,207 787,579
Notes payable to bank 400,000 0
Current Deferred Tax Liability 253,555 253,555
-------------- --------------
Total current liabilities 11,216,498 18,496,667
NONCURRENT DEFERRED TAX LIABILITY 545,859 545,859
-------------- --------------
Total liabilities 11,762,357 19,042,526
-------------- --------------
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 5,620,562 6,930,250
-------------- --------------
Total stockholders' equity 10,079,916 11,389,604
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $21,842,273 $30,432,130
============== ==============
See notes to consolidated financial statements
-1-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
NET REVENUES: 1,400,123 995,434 $3,034,602 $2,689,498
COST AND EXPENSES:
Selling, general and administrative cost 1,449,478 1,314,138 4,790,149 4,573,488
Amortization of capitalized film cost 135,490 171,264 599,945 682,937
------------- ------------- ------------- ------------
TOTAL COST AND EXPENSES 1,584,968 1,485,402 5,390,094 5,256,424
------------- ------------- ------------- ------------
(184,845) (489,968) (2,355,492) (2,566,927)
INTEREST INCOME 11,629 5,443 57,794 78,838
------------- ------------- ------------- ------------
(LOSS) BEFORE INCOME
TAX BENEFIT (173,216) (484,525) (2,297,698) (2,488,089)
INCOME TAX BENEFIT/(PROVISION) (74,483) (208,378) (988,010) (1,069,878)
------------- ------------- ------------- ------------
NET INCOME/(LOSS) ($98,733) ($276,147) ($1,309,688) ($1,418,211)
============= ============= ============= ============
PER SHARE AMOUNTS
Loss per common and dilutive
common equivalent share ($0.03) ($0.09) ($0.42) ($0.48)
============= ============= ============= ============
Loss per common share-
assuming full dilution ($0.03) ($0.09) ($0.42) ($0.48)
============= ============= ============= ============
Weighted average number of common and
common equivalent shares outstanding 3,281,544 2,944,831 3,128,130 2,970,627
============= ============= ============= ============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss) ($1,309,688) ($1,418,211)
Adjustments to reconcile net income/(loss) to net
cash (used in)/provided by operating activities:
Depreciation and amortization 83,419 111,334
Amortization of capitalized film cost 599,945 682,937
Changes in assets and liabilities (using)/providing cash:
Accounts receivable 7,021,362 8,695,943
Film inventory (108,827) (2,655,166)
Prepaid expenses and other current assets (275,234) 136,454
Prepaid/Refundable income taxes (994,782) (1,070,678)
Security deposits and other assets (44,888) (36,391)
Due to licensors 219,057 (142,502)
Accounts payable and accrued expenses (197,372) (278,413)
Media payable (7,701,854) (5,323,721)
-------------- ---------------
Net cash (used in) provided by operating activities (2,708,862) (1,298,414)
-------------- ---------------
INVESTING ACTIVITIES:
Purchase of furniture and fixtures (36,786) (22,036)
-------------- ---------------
Net cash used in investing activities (36,786) (22,036)
-------------- ---------------
FINANCING ACTIVITIES:
Proceeds from short-term bank note 400,000 0
-------------- ---------------
Net cash provided by financing activities 400,000 0
-------------- ---------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (2,345,648) (1,320,450)
CASH AND CASH EQUIVALENTS, BEGINNING PERIOD 2,830,270 3,505,777
-------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $484,622 $2,185,327
============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
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 nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997. 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, 1996.
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, 1996.
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.
Note 4
STOCK OPTIONS:
In January 1997, the Chairman and the Company entered into an agreement
cancelling 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 two outside directors at $1.375 per share, the
market price of the Company's common stock at that time.
-4-
<PAGE>
Concurrently, the Company granted options to purchase 197,500 shares of the
Company's common stock at $1.375, to seven employees, four of which are
executive officers.
Note 5
CREDIT FACILITY:
Under the terms of the Company's Credit Facility with Chase Manhattan Bank, the
Company may borrow from time to time up to $2 million for general working
capital purposes. Any borrowings under the Credit Facility would be secured by
the Company's receivables. The Credit Facility, which requires annual renewal on
June 30, provides for an interest rate of 1% over the bank's prime rate and an
annual commitment fee of 3/4%. The only borrowing under this Facility occurred
on September 11, 1997, when the Company borrowed $400,000. The Company
subsequently repaid the full $400,000 on November 4, 1997.
Note 6
RECENTLY ISSUED ACCOUNTING STANDARDS:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share (EPS). This
Statement establishes standards for computing and presenting EPS replacing the
currently required primary EPS with a presentation of Basic EPS. SFAS 128 is
effective for financial statements issued for periods ending after December 15,
1997 including interim periods and early application is not permitted. When
adopted, the Company will be required to restate its EPS data for all prior
periods presented. The Company does not expect the impact of the adoption of
this statement to be material to previously reported EPS amounts.
Note 7
LITIGATION:
In October 1997, the Company settled the litigation it had brought against
Toymax H.K. Ltd. and its affiliate Toymax, Inc., in connection with the
Company's licensing of the "Creepy Crawlers" property. The settlement provided
for a payment to the Company and the exchange of mutual releases including
releases for counterclaims brought against the Company.
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS:
The Company receives revenues from a number of sources, principally licensing,
media buying and television distribution. 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. 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.
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.
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1996
Consolidated net revenue increased 41% ($404,689) for the three month period
ended September 30, 1997, as compared to the same period in 1996. For the nine
month period, consolidated revenues increased 13% ($345,104) compared to the
year ago period. The increase in net revenue for the three month period was
primarily due to an increase in licensing and media buying activities. Revenues
were positively impacted by the Company's settlement of its outstanding
litigation with Toymax (see Note 7 to the financial statements). Additionally,
James Bond 007 and the resurgence of Nintendo's popularity have generated
incremental licensing revenue over prior year amounts. Media buying revenue
increased over comparable prior year amounts due to increased third quarter
advertising campaigns by the Company's clients.
-6-
<PAGE>
While net revenues were positively impacted for the three and nine month periods
of 1997 by the James Bond property, the Company anticipates a decline in revenue
from the James Bond property for 1998 because there will not be a feature film
release in 1998 and because certain of the Company's rights to license new
merchandise have terminated effective December 31, 1997.
Selling, general and administrative expense levels increased by 10% and 5%
($135,340 and $216,661) for the three and nine month periods ended September 30,
1997 respectively compared to the year ago periods. The increase was primarily
due to costs associated with expanded activity in the Company's media buying and
TV distribution activities as well as certain television production expenses
which were not specifically attributable to television program production.
At September 30, 1997 there were $5,206,321 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 produced by the
Company's 4Kids Productions subsidiary. Amortization of capitalized film cost
decreased $35,774 and $82,992 for the three and nine month periods when compared
to the same periods in 1996. The 1997 amortization relates primarily to the
"WMAC Masters" television program while the prior year periods included
non-recurring amortization related to the Olympic Specials produced for the NBC
television network. At September 30, 1997 the percentage of total unamortized
film cost expected to be amortized within the next three years exceeds 70%. The
Company periodically evaluates its anticipated revenue from film production and,
consequently, amortization rates may change as a result of such estimates.
LIQUIDITY AND CAPITAL RESOURCES:
At September 30, 1997 the Company had working capital of $4,296,637 as compared
to working capital of $5,342,436 at December 31, 1996, a decrease in working
capital of $1,045,799. Cash and cash equivalents decreased by $2,345,648 from
December 31, 1996. As described in Note 5 to the financial statements, the
Company borrowed $400,000 against its credit facility on September 11, 1997 to
fund its working capital requirements. This borrowing was repaid in full on
November 4, 1997. The decrease in working capital and cash and cash equivalents
is due primarily to cash expenditures to fund the working capital needs of the
Company during its seasonally slow period.
Accounts receivable, net (current and noncurrent) decreased from $19,889,353 at
December 31, 1996 to $12,867,991 at September 30, 1997. The decrease is
primarily due to the Company's media buying activities. When the Company assumes
payment obligation
-7-
<PAGE>
for the media it places on behalf of its clients, the Company records a
receivable from its clients and a corresponding media payable for the gross
amount of the media due. The seasonality of the Company's business tends to
generate higher receivables in the fourth quarter which are generally collected
in the first quarter. There was a corresponding decrease in media payable of
$7,701,854.
Amounts due to licensors, which represents the owners' share of royalties
collected, increased by $219,057 to $1,636,016 from December 31, 1996. The
increase is primarily due to higher amounts of royalties collected during the
quarter which are payable to licensors 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 Chase Manhattan Bank for general
working capital purposes. As of November 13, 1997 there were no amounts
outstanding 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: November 13, 1997
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 nine months ended September 30, 1997 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 484,622
<SECURITIES> 0
<RECEIVABLES> 11,403,270
<ALLOWANCES> 537,157
<INVENTORY> 0
<CURRENT-ASSETS> 15,513,135
<PP&E> 1,437,857
<DEPRECIATION> 1,247,264
<TOTAL-ASSETS> 21,842,273
<CURRENT-LIABILITIES> 11,216,498
<BONDS> 0
0
0
<COMMON> 29,448
<OTHER-SE> 10,050,468
<TOTAL-LIABILITY-AND-EQUITY> 21,842,273
<SALES> 0
<TOTAL-REVENUES> 3,034,602
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,297,698)
<INCOME-TAX> (988,010)
<INCOME-CONTINUING> (1,309,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,309,688)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
