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, 1998
------------------------------
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, 1998
----- --------------------------------
Common Stock, $.01 Par Value 3,042,435
<PAGE>
4KIDS ENTERTAINMENT, INC.
AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets 1
September 30, 1998 (Unaudited) and
December 31, 1997.
Consolidated Statements of Operations 2
Nine Months Ended September 30, 1998 and 1997 (Unaudited)
Consolidated Statements of Cash Flows 3
Nine Months Ended
September 30, 1998 and 1997 (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 11
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $7,811,522 $2,805,573
Accounts receivable, net 6,233,430 28,173,085
Film inventory-net 1,122,964 1,456,009
Prepaid refundable income taxes 220,829 3,279
Prepaid expenses and other current assets 1,385,492 1,061,999
----------- -------------
Total current assets 16,774,237 33,499,945
----------- -------------
FURNITURE, FIXTURES AND COMPUTER EQUIPMENT- (Net) 220,039 197,649
FILM INVENTORY - Noncurrent 2,296,522 3,060,000
ACCOUNTS RECEIVABLE - Noncurrent, net 4,648,731 2,270,021
SECURITY DEPOSITS AND OTHER ASSETS 283,647 291,462
=========== =============
TOTAL ASSETS $24,223,176 $39,319,077
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to licensors $3,967,195 $3,480,768
Media payable 4,356,493 21,591,172
Accounts payable and accrued expenses 859,520 927,954
Taxes payable 859,362 307,030
Current Deferred Tax Liability 369,555 369,555
----------- -------------
Total current liabilities 10,412,125 26,676,479
NONCURRENT DEFERRED TAX LIABILITY 513,859 513,859
----------- -------------
Total liabilities 10,925,984 27,190,338
----------- -------------
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, 3,030,935 and 2,944,831 shares 30,309 29,448
Additional paid-in capital 4,797,624 4,429,906
Retained earnings 8,469,259 7,669,385
----------- -------------
Total stockholders' equity 13,297,192 12,128,739
----------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,223,176 $39,319,077
=========== =============
See notes to consolidated financial statements
-1-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES: 2,756,488 1,400,123 $7,357,997 $3,034,602
COST AND EXPENSES:
Selling, general and
administrative cost 1,953,682 1,449,478 5,161,452 4,790,149
Amortization of capitalized
film cost 171,919 135,490 1,018,231 599,945
-------------- ------------- ------------- -------------
TOTAL COST AND EXPENSES 2,125,601 1,584,968 6,179,683 5,390,094
-------------- ------------- ------------- -------------
630,887 (184,845) 1,178,314 (2,355,492)
INTEREST INCOME 81,665 11,629 224,973 57,794
-------------- ------------- ------------- -------------
INCOME/(LOSS) BEFORE INCOME
TAX BENEFIT/(PROVISION) 712,552 (173,216) 1,403,287 (2,297,698)
INCOME TAX BENEFIT/(PROVISION) (306,397) 74,483 (603,413) 988,010
-------------- ------------- ------------- -------------
NET INCOME/(LOSS) $406,155 ($98,733) $799,874 ($1,309,688)
============== ============= ============= =============
PER SHARE AMOUNTS
Basic Earnings/(Loss) per share $0.13 ($0.03) $0.27 ($0.44)
============== ============= ============= =============
Diluted Earnings/(Loss) per
share $0.11 ($0.03) $0.22 ($0.44)
============== ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) NINE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
-------------- --------------
OPERATING ACTIVITIES:
Net income/(loss) $799,874 ($1,309,688)
Adjustments to reconcile net income/(loss) to
net cash provided by/(used in) operating activities:
Depreciation and amortization 82,796 83,419
Amortization of capitalized film cost 1,018,231 599,945
Changes in assets and liabilities provided
by/(used in) cash:
Accounts receivable 19,560,945 7,021,362
Film inventory 78,292 (108,827)
Prepaid expenses and other current assets (323,493) (275,234)
Prepaid/Refundable income taxes (217,550) (994,782)
Security deposits and other assets 7,815 (44,888)
Due to licensors 486,427 219,057
Accounts payable and accrued expenses (68,434) (197,372)
Taxes payable 552,332
Media payable (17,234,679) (7,701,854)
-------------- --------------
Net cash provided by/(used in) operating
activities 4,742,556 (2,708,862)
-------------- --------------
INVESTING ACTIVITIES:
Purchase of furniture and fixtures (105,186) (36,786)
-------------- --------------
Net cash used in investing activities (105,186) (36,786)
-------------- --------------
FINANCING ACTIVITIES:
Proceeds from short-term bank note 400,000
Proceeds from exercise of stock options
and related tax benefit 368,579
-------------- --------------
Net cash provided by financing activities 368,579 400,000
-------------- --------------
NET INCREASE/(DECREASE) IN CASH AND
CASH EQUIVALENTS 5,005,949 (2,345,648)
CASH AND CASH EQUIVALENTS, BEGINNING PERIOD 2,805,573 2,830,270
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $7,811,522 $484,622
============== ==============
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
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, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. 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, 1997.
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,
1997.
Note 3
NET INCOME PER SHARE:
The Company adopted Statement of Accounting Standards ("SFAS") No. 128 "Earnings
per Share" which required a change in the computation and presentation of
earnings per share ("EPS")to include basic and diluted EPS in place of primary
and fully diluted EPS, respectively. Basic EPS is computed based solely on the
weighted average number of common shares outstanding during the period. Diluted
EPS reflects all potential dilution of common stock. Prior periods have been
restated to reflect the new standard. The weighted average number of common
shares outstanding was 2,944,831 for the three and nine months ended September
30, 1997. For the three and nine months ended September 30, 1998, the weighted
average number of common shares
-4-
<PAGE>
outstanding was 3,030,935 and 2,975,651 respectively. For the three and nine
months ended September 30, 1998, the number of common shares outstanding giving
effect to all potential dilution was 3,848,690 and 3,654,572 respectively. For
1997 the effect of stock options was antidilutive.
Note 4
STOCK OPTIONS:
In January 1998, the Company granted options to purchase 40,000 shares to the
Chairman and 20,000 shares to each of the outside directors at $2.75 per share,
the market price of the Company's common stock at that time. In addition, the
Company granted options to purchase 96,000 shares of the Company's common stock
at $2.75, the market price of the Company's common stock on the date of grant,
to five employees, three of whom are executive officers. During the quarter and
nine months ended September 30, 1998 32,104 and 86,104 shares of common stock
respectively, were issued pursuant to the exercise of stock options at prices
ranging from $1.375 to $2.625, the market price of the Company's common stock on
the grant dates of such options.
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
and was renewed on June 30, provides for an interest rate of 1% over the bank's
prime rate and an annual commitment fee of 3/4%. As of November 13, 1998 the
Company had no borrowings under the facility.
-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 fourth
quarter 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 royalty
payments, some of which are made upon the execution and delivery of license
agreements.
Three and Nine Months Ended September 30, 1998 Compared to the three and Nine
Months Ended September 30, 1997
Consolidated net revenue increased 97% ($1,356,365) for the three month period
ended September 30, 1998 as compared to the same period in 1997. The nine month
period increased 142% or $4,323,395 as compared to the nine month period ended
September 30, 1997. The increase in net revenue for the three and nine month
periods was primarily due to increased revenue related to licensing activities.
Increased licensing revenue was recognized in the three month period from the
World Championship Wrestling "WCW/NWO" and "Pokemon" properties. Additionally,
during the nine month period the Company signed a master toy agreement with
Hasbro, Inc. for the "Pokemon" property and Electronic Arts for the video game
rights relating to the "WCW/NWO" property as well as many new licensees involved
in a wide array of licensing categories.
-6-
<PAGE>
The Company also continues to recognize increased revenue from continued strong
sales of the James Bond 007 GoldenEye video game licensed to Nintendo over the
first nine months of 1998. These increases in licensing revenue were partially
offset by a decline in licensing revenue on more mature properties licensed
through the Company's international office in London when compared to the prior
year. The Company's media buying and television distribution division also
recognized decreased revenue over the comparative three and nine month periods
due to a decrease in existing clients' advertising spending in the first three
quarters of 1998. Additionally, lower than anticipated Nielsen ratings on
television properties distributed by the Company lowered revenues for the 3
months ended September 1998 when compared to the prior year period. The
Company's television distribution revenues are generally calculated as a
percentage of advertising revenues generated by the television programs. Such
advertising revenues are directly impacted by the Nielsen ratings.
Selling, general and administrative expenses increased 35% or $504,204 and 8% or
371,303 for the three and nine month periods ended September 30, 1998 when
compared to the year ago periods. These increases were primarily due to costs
associated with an increase during the three month period ended September 30,
1998 to the Company's reserve for uncollectible accounts receivable.
Additionally, bonus accruals, which are contractually based on pre-tax income
levels were higher in 1998 as a result of higher pre-tax income. The comparative
periods in 1997 had pretax losses and accordingly, no bonus expense was
recorded. These increases were partially offset by certain television production
expenses which have been reimbursed by third parties as production work for
hire. During the prior year periods, such expenses were not attributable to
television program production and accordingly were reflected as S,G,&A expenses.
Additionally, due to a reduction in staff levels and overhead, S,G,&A expenses
were lower in the Company's international office in London when compared to the
prior year periods.
At September 30, 1998 there were approximately $3,419,486 of capitalized film
production costs which primarily 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 increased approximately $36,000 and $418,000 for the three
and nine month periods compared to the same respective periods in 1997.
Additionally, $506,780 of capitalized film cost at June 30, 1998 related to the
"Pokemon" property was reimbursed to the Company by the licensor. The 1998
amortization relates to the "WMAC Masters" television program. At September 30,
1998 the percentage of total unamortized film cost expected to be amortized
within the next three years exceeds 70%.
-7-
<PAGE>
The Company periodically evaluates its anticipated revenue from film production
and, consequently, amortization rates may change as a result of such estimates.
In accordance with this policy, the Company recognized approximately $171,000
and $678,000 in additional amortization expense during the three and nine month
periods ended September 30, 1998 as compared to the same respective periods in
1997 which all related to the WMAC Masters film inventory.
Interest income increased by approximately $70,036 and $167,179 for the three
and nine month periods ending September 30, 1998 as compared to the same periods
in 1997. This increase is attributable to higher levels of invested cash during
the first nine months of the current year as compared to the same periods in
1997.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
At September 30, 1998 the Company had working capital of $5,500,130 as compared
to working capital of $6,362,112 at December 31, 1997, a decrease in working
capital of $461,354. Cash and cash equivalents increased by $5,005,949 to
$7,811,522 from December 31, 1997. The increase in cash and cash equivalents is
due primarily to the seasonality of the Company's business and the timing of
advance payments due on new licensing agreements. The Company generates
significantly higher receivables and payables during the fourth quarter of the
year primarily related to its media buying and licensing activities. Such
amounts are collected subsequent to December 31.
Accounts receivable, net (current and noncurrent) decreased from $30,443,106 at
December 31, 1997 to $10,882,161 at September 30, 1998. The decrease is
primarily due to the Company's media buying activities. When the Company assumes
payment obligation 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 $17,234,679.
Amounts due to licensors, which represents the owner's share of royalties
collected, increased by $486,427 to $3,967,195 from December 31, 1997. The
increase is primarily due to higher amounts of royalties and advances collected
during the quarter which are payable to licensors after the close of the
quarter.
-8-
<PAGE>
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, 1998 there were no borrowings under
this facility.
Year 2000 Compliance
Overview
- --------
The Year 2000 issue is primarily the result of computer programs only accepting
a two digit date code, as opposed to four digits, to indicate the year.
Beginning in the Year 2000, and in certain instances prior to the Year 2000,
these date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, the Company's date
critical functions may be adversely affected unless these computer systems and
software products are, or become, able to accept four digit entries.
Internal systems and equipment
- ------------------------------
The Company has commenced a comprehensive program consisting of identifying,
assessing and if necessary, upgrading and/or replacing its systems and equipment
that may be vulnerable to Year 2000 problems. The first stage of this program,
identifying the systems and equipment, has been substantially completed. The
Company has prioritized the identified items as either critical or non-critical
to the operations of the Company. The Company has made substantial progress
through the second and third stages of this program, assessing and upgrading
and/or replacing the equipment it has deemed to be non-compliant. The Company is
also in the beginning stage of developing a plan to test its entire system for
Year 2000 compliance. The Company believes that it will have completed all of
its necessary upgrades and/or replacements and the testing of its systems by
April 1999.
Third party relationships
- -------------------------
The Company has begun to formally communicate with its significant suppliers and
customers to determine if those parties have appropriate plans to remedy Year
2000 issues when their systems may impact the operations of the Company. There
can be no assurance, however, that the systems of other companies on which the
Company's processes rely will be timely converted, or that a failure to
successfully convert by another company, or a conversion that is incompatible
with the Company's systems, would not have an impact on the Company's
operations. The Company believes that by February 1999 it will complete its
assessment of the status of its significant customers' and suppliers' compliance
with the Year 2000 issues.
-9-
<PAGE>
Contingency plans
- ------------------
Based on the assessment effort to date, the Company has focused on three
separate contingency plans (1) if the Company's systems are non-compliant (2) if
the Company's customers are non-compliant and (3) if the Company's suppliers are
non-compliant. The Company is in the early stages of developing these plans and
believes that it will be able to fully determine its worst case scenarios by
April 1999. There can be no assurance that the Company will be able to have a
contingency plan in place for a significant supplier and/or customer that does
not become Year 2000 compliant.
Costs/Risks
- -----------
Management currently estimates that the cost, in connection with bringing its
own systems and equipment into compliance, will be less than $50,000 for fiscal
1998 and does not expect the additional cost to exceed $25,000. Although the
Company is not aware of any material operational issues or costs associated with
preparing its internal systems for the Year 2000, there can be no assurance that
there will not be a delay in, or increased costs associated with, the
implementation of the necessary systems and changes to address the Year 2000.
Potential sources of risk include but are not limited to (1) the inability of
principal clients and licensees to be Year 2000 compliant, which could result in
delays in product deliveries from such clients and licensees, (2) the inability
of our clients and licensees to become compliant, which could impact their
ability to sell product or report royalties in a timely manner resulting in a
disruption of the Company's cash flow, and (3) disruption of television
broadcast signals, including satellite distribution and commercial integration
vendors as a result of the general failure of systems and necessary
infrastructure such as electrical supply.
-10-
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None
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, 1998
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
-11-
<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, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,811,522
<SECURITIES> 0
<RECEIVABLES> 6,697,601
<ALLOWANCES> 464,171
<INVENTORY> 0
<CURRENT-ASSETS> 16,774,237
<PP&E> 1,567,520
<DEPRECIATION> 1,347,481
<TOTAL-ASSETS> 24,223,176
<CURRENT-LIABILITIES> 10,412,125
<BONDS> 0
0
0
<COMMON> 30,309
<OTHER-SE> 13,266,883
<TOTAL-LIABILITY-AND-EQUITY> 24,223,176
<SALES> 0
<TOTAL-REVENUES> 7,357,997
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,403,287
<INCOME-TAX> 603,413
<INCOME-CONTINUING> 799,874
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 799,874
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.22
</TABLE>
