FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended March 31, 1999
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 May 14, 1999
----- ---------------------------
Common Stock, $.01 Par Value 5,343,727
<PAGE>
4KIDS ENTERTAINMENT, INC.
AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets 1
March 31, 1999 (Unaudited) and
December 31, 1998.
Consolidated Statements of Income 2
Three Months Ended March 31, 1999 and 1998 (Unaudited)
Consolidated Statements of Cash Flows 3
Three Months Ended
March 31, 1999 and 1998 (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
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $16,202,265 $ 9,749,956
Accounts receivable, net 8,532,829 17,694,262
Film inventory-net 1,241,530 1,079,677
Prepaid refundable income taxes 366,095 324,864
Prepaid expenses and other current assets 1,107,840 1,151,974
----------- -----------
Total current assets 27,450,559 30,000,733
----------- -----------
FURNITURE, FIXTURES AND COMPUTER EQUIPMENT - (Net) 165,603 174,783
FILM INVENTORY - Noncurrent 1,875,000 1,875,000
ACCOUNTS RECEIVABLE - Noncurrent, net 2,429,442 2,627,680
SECURITY DEPOSITS AND OTHER ASSETS 307,955 282,959
----------- -----------
TOTAL ASSETS $32,228,559 $34,961,155
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to licensors $ 6,850,592 $ 3,690,582
Media payable 3,732,689 11,460,913
Accounts payable and accrued expenses 739,893 1,285,624
Taxes payable 1,195,154 1,750,799
Current Deferred Tax Liability 989,000 989,000
----------- -----------
Total current liabilities 13,507,328 19,176,918
NONCURRENT DEFERRED TAX LIABILITY 379,012 379,012
----------- -----------
Total liabilities 13,886,340 19,555,930
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value - authorized,
3,000,000 shares; none issued
Common stock, $.01 par value - authorized,
20,000,000 shares; issued, 5,027,153 and
4,594,103 shares 50,271 45,941
Additional paid-in capital 7,134,864 4,946,830
Retained earnings 11,157,084 10,412,454
----------- -----------
Total stockholders' equity 18,342,219 15,405,225
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $32,228,559 $34,961,155
=========== ===========
See accompanying notes to consolidated financial statements
-1-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
----------- ------------
NET REVENUES: $ 3,251,941 $ 2,403,378
COST AND EXPENSES:
Selling, general and administrative cost 2,090,886 1,535,853
Amortization of capitalized film cost 0 455,680
----------- -----------
TOTAL COST AND EXPENSES 2,090,886 1,991,533
----------- -----------
1,161,055 411,845
INTEREST INCOME 145,575 76,458
----------- -----------
INCOME BEFORE INCOME
TAX PROVISION 1,306,630 488,303
INCOME TAX PROVISION (562,000) (210,000)
----------- -----------
NET INCOME $ 744,630 $ 278,303
=========== ===========
PER SHARE AMOUNTS
Basic Earnings per share $ 0.16 $ 0.06
=========== ===========
Diluted Earnings per share $ 0.13 $ 0.05
=========== ===========
See accompanying notes to consolidated financial statements.
-2-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998
------------- ------------
OPERATING ACTIVITIES:
Net income $ 744,630 $ 278,303
Adjustments to reconcile net
income to net
cash (used in)/provided
by operating activities:
Depreciation and amortization 21,577 19,341
Amortization of capitalized film cost -- 455,680
Changes in assets and liabilities
(using)/providing cash:
Accounts receivable 9,359,671 18,750,261
Film inventory (161,853) (90,761)
Prepaid expenses and other current assets 44,134 (154,636)
Prepaid/Refundable income taxes (41,231) (7,461)
Security deposits and other assets (24,996) 6,983
Due to licensors 3,160,010 540,105
Accounts payable and accrued expenses (545,731) 259,199
Taxes payable (555,645) 158,672
Media payable (7,728,224) (15,202,669)
------------ ------------
Net cash (used in) provided by
operating activities 4,272,342 5,013,017
------------ ------------
INVESTING ACTIVITIES:
Purchase of furniture and fixtures (12,397) (33,561)
------------ ------------
Net cash (used in)
investing activities (12,397) (33,561)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options
and related tax benefit 2,192,364 --
------------ ------------
Net cash provided by
financing activities 2,192,364 --
------------ ------------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 6,452,309 4,979,456
CASH AND CASH EQUIVALENTS, BEGINNING PERIOD 9,749,956 2,805,573
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,202,265 $ 7,785,029
============ ============
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1999
Note 1
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes as required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation of the interim financial information have been included. Operating
results for three months ended March 31, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999. 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, 1998.
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,
1998.
Note 3
NET INCOME PER SHARE:
The Company applies Statement of Accounting Standards("SFAS") No. 128 "Earnings
per Share" which requires the computation and presentation of earnings per share
("EPS")to include basic and diluted EPS. 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. For the three
months ended March 31, 1999, the weighted average number of common shares
outstanding for basic and diluted EPS was 4,770,213 and 5,679,156 respectively.
For the three months ended March 31, 1998, the weighted average number of common
shares outstanding for basic and diluted EPS was 4,417,247 and 5,105,912
respectively.
-4-
<PAGE>
Note 4
CREDIT FACILITY:
The Company's line of credit (the Credit Facility) from Chase Bank expires June
30, 1999. Under the 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 May 14, 1999 the Company had no borrowings under
the Credit Facility.
Note 5
STOCK SPLIT
On March 29, 1999, the Company's Board of Directors approved the
declaration of a 3 for 2 stock split effective for shareholders of
record on April 15, 1999. The accompanying financial statements have
been retroactively restated to reflect the stock split.
Note 6
SEGMENT AND RELATED INFORMATION
The Company applies Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related
Information". The Company has three reportable segments; Licensing, Media
Buying Planning and Television Distribution and Television Production.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company does not have
any inter-segment sales or transfers.
The Company's reportable segments are strategic business units which,
while managed separately, work together as a vertically integrated
Entertainment Company.
<TABLE>
<CAPTION>
MEDIA & TELEVISION
LICENSING TV DISTRIBUTION PRODUCTION TOTAL
--------- --------------- ---------- -----
<S> <C> <C> <C> <C>
3 Months Ended
March 31,
1999
Revenues $ 2,567,720 $ 482,575 $ 201,646 $ 3,251,941
Amortization -- -- -- --
Segment Profit (Loss) 1,391,273 (142,195) 57,552 1,306,630
Segment Assets 18,798,490 9,909,421 3,520,648 32,228,559
1998
Revenues $ 1,876,710 $ 320,988 $ 205,680 $ 2,403,378
Amortization -- -- 455,680 455,680
Segment Profit (Loss) 1,039,072 (273,458) (277,311) 488,303
Segment Assets 10,391,489 10,055,234 4,905,965 25,352,688
</TABLE>
-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 Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998
Consolidated net revenue increased 35% ($848,563)to $3,251,941 for the three
month period ended March 31, 1999 as compared to the same period in 1998. The
increase in net revenue for the
-6-
<PAGE>
three month period 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. The
Company's media buying and television distribution division recognized increased
revenue over the three month period due to an increase in television
distribution activities related to the Pokemon television program. The increase
was partially offset by a decrease in media buying activity due to the loss of
Tiger Electronics media business. Effective January 1, 1999, the Company will no
longer be the media agency for Tiger due to Tiger's acquisition by Hasbro in
1998.
Selling, general and administrative expenses increased 36% or $555,033 three
month period ended March 31, 1999 when compared to the year ago period. These
increases were primarily due to costs associated with an increase in payroll and
marketing costs associated with the Company's expanded licensing activities.
Additionally, bonus accruals, which are contractually based on pre-tax income
levels were higher in 1999 as a result of higher pre-tax income.
At March 31, 1999 there were $3,116,530 of capitalized film production costs
which primarily relate to 26 episodes of "WMAC Masters" and work related to the
adaptation of episodes 53 to 104 of the Pokemon episodes for distribution in the
United States. "WMAC Masters" is a weekly syndicated television program produced
by the Company's 4Kids Productions subsidiary. The 1998 amortization relates to
the "WMAC Masters" television program. At March 31, 1999 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 $250,000 in
additional amortization expense during the three month period ended March 31,
1998 which all related to the WMAC Masters film inventory.
Interest income increased by $69,117 for the three month period ending March 31,
1999 as compared to the same period in 1998. This increase is attributable to
higher levels of invested cash during the first three months of the current year
as compared to the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES:
At March 31, 1999 the Company had working capital of $13,943,231 as compared to
working capital of $10,823,815 at December 31, 1998, an increase in working
capital of $3,119,416. Cash and cash equivalents increased by $6,452,309 to
$16,202,265 from December 31, 1998. 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 in the first quarter.
Accounts receivable, net (current and noncurrent) decreased from $20,321,942 at
December 31, 1998 to $10,962,271 at March 31, 1999. 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
$7,728,224.
Amounts due to licensors, which represents the owner's share of royalties
collected, increased by $3,160,010 to $6,850,592 from December 31, 1998. 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 4 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 May 14, 1999 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.
-9-
<PAGE>
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
June, 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 June 1999 it will substantially
complete its assessment of the status of its significant customers" and
suppliers" compliance with the Year 2000 issues.
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
June 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
1999 and does not expect the total cost to exceed $100,000. 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 the Company"s 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.
Forward-looking Statements
This quarterly report contains forward-looking statements. Due to the fact that
the Company faces competition from toy companies, motion picture studios and
other licensing companies, and the uncertainty of public"s response to the
Company"s properties, actual results or outcomes may differ materially from any
such forward-looking statements.
-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: May 17, 1999
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 THREE MONTHS END MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 16,202,265
<SECURITIES> 0
<RECEIVABLES> 11,478,942
<ALLOWANCES> 516,671
<INVENTORY> 0
<CURRENT-ASSETS> 27,450,559
<PP&E> 1,570,253
<DEPRECIATION> 1,404,650
<TOTAL-ASSETS> 32,228,559
<CURRENT-LIABILITIES> 13,507,328
<BONDS> 0
0
0
<COMMON> 50,271
<OTHER-SE> 18,291,948
<TOTAL-LIABILITY-AND-EQUITY> 32,228,559
<SALES> 0
<TOTAL-REVENUES> 3,251,941
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,306,630
<INCOME-TAX> 562,000
<INCOME-CONTINUING> 744,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 744,630
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.13
</TABLE>
