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, 2000
--------------
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 12, 2000
- ------------------------------- --------------------------------------
Common Stock, $.01 Par Value 11,865,376
<PAGE>
4KIDS ENTERTAINMENT, INC.
AND SUBSIDIARIES
INDEX
PAGE NUMBER
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets 1
March 31, 2000 (Unaudited) and
December 31, 1999.
Consolidated Statements of Income 2
Three Months Ended March 31, 2000 and 1999 (Unaudited)
Consolidated Statements of Cash Flows 3
Three Months Ended
March 31, 2000 and 1999 (Unaudited)
Notes to Consolidated Financial 4
Statements (Unaudited)
Item 2: Management's Discussion and Analysis 8
of Financial Condition and Results of Operations
PART II: OTHER INFORMATION 11
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ -----------
ASSETS (UNAUDITED)
- ------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $211,921,450 $74,427,126
Accounts receivable - net 32,435,906 45,543,575
Film inventory - net 690,398 155,353
Prepaid/refundable income taxes 1,815,434 1,815,434
Prepaid expenses and other current assets 2,836,695 1,201,390
------------ -----------
Total current assets 249,699,883 123,142,878
------------ -----------
FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS -
Net of accumulated depreciation and amortization
of $1,519,242 and $1,484,020 500,334 217,025
ACCOUNTS RECEIVABLE - Noncurrent, net 1,602,119 1,785,810
FILM INVENTORY - Noncurrent, net 760,582 760,582
DEFERRED INCOME TAXES - Noncurrent 535,553 535,553
SECURITY DEPOSITS AND OTHER ASSETS 661,799 661,799
------------ -----------
TOTAL ASSETS $253,760,270 $127,103,647
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Due to licensors $153,287,048 $57,034,991
Media payable 1,945,062 2,353,732
Accounts payable and accrued expenses 7,832,767 5,564,361
Income taxes payable 6,895,960 34,841
Deferred revenue (Note 6) 12,353,712 -
Deferred tax liability 1,172,806 1,172,806
------------ -----------
Total current liabilities 183,487,355 66,160,731
------------ -----------
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, 11,857,755 shares 118,578 118,578
Additional paid-in capital 26,773,458 26,773,458
Retained earnings 43,380,879 34,050,880
------------ -----------
Total stockholders' equity 70,272,915 60,942,916
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $253,760,270 $127,103,647
============ ============
</TABLE>
See notes to consolidated financial statements
-1-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
--------- ---------
NET REVENUES: $20,699,519 $3,251,941
COST AND EXPENSES:
Selling, general and administrative cost 5,517,969 2,090,886
Amortization of capitalized film cost 758 -
----------- ----------
TOTAL COST AND EXPENSES 5,518,727 2,090,886
----------- ----------
15,180,792 1,161,055
INTEREST INCOME 1,041,207 145,575
----------- ----------
INCOME BEFORE INCOME
TAX PROVISION 16,221,999 1,306,630
INCOME TAX PROVISION (6,892,000) (562,000)
----------- ----------
NET INCOME $ 9,329,999 $ 744,630
=========== ==========
PER SHARE AMOUNTS
Basic Earnings per share $0.79 $0.08
=========== ==========
Diluted Earnings per share $0.71 $0.07
=========== ==========
Weighted average common shares
outstanding - basic 11,857,755 9,540,428
=========== ==========
Weighted average common share
outstanding - diluted 13,087,712 11,358,312
=========== ==========
See notes to consolidated financial statements.
-2-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 9,329,999 $ 744,630
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 44,087 21,577
Amortization of capitalized film cost 758 -
Changes in operating assets and liabilities:
Accounts receivable - net 13,291,360 9,359,671
Film inventory - net (535,803) (161,853)
Prepaid/refundable income taxes - (41,231)
Prepaid expenses and other current assets (1,635,305) 44,134
Security deposits and other assets - (24,996)
Due to licensors 96,252,057 3,160,010
Media payable (408,670) (7,728,224)
Accounts payable and accrued expenses 2,268,406 (545,731)
Income taxes payable 6,861,119 (555,645)
Deferred revenue 12,353,712 -
------------ -----------
Net cash provided by operating activities 137,821,720 4,272,342
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (327,396) (12,397)
------------ -----------
Net cash used in investing activities (327,396) (12,397)
------------ -----------
CASH FLOWS FROM 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 137,494,324 6,452,309
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 74,427,126 9,749,956
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $211,921,450 $16,202,265
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE QUARTER FOR:
Interest $ - $ -
============ ===========
Income Taxes $ 88,125 $ 199,221
============ ===========
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2000
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, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. 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, 1999.
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,
1999.
Note 3
NET INCOME PER SHARE:
he 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, 2000, the weighted average number of common shares
outstanding for basic and diluted EPS was 11,857,755 and 13,087,712
respectively. For the three months ended March 31, 1999, the weighted average
number of common shares outstanding for basic and diluted EPS was 9,540,428 and
11,358,312 respectively.
-4-
<PAGE>
Note 4
COMMITMENTS AND CONTINGENCIES:
A. CREDIT FACILITY:The Company's line of credit (the Credit Facility) from
Chase Bank expires June 30, 2000. Under the terms the Company may borrow
from time to time for general working capital purposes up to $5 million.
Any borrowings under the credit facility would be secured by the Company's
receivables. The Credit Facility provides for an interest rate at the
bank's prime rate and an annual commitment fee of 1/2%. As of May 12, 2000
the Company had no borrowings under the Credit Facility.
B. LITIGATION:
(i) Imber v. Nintendo, et al. In September 1999, the Company was named as a
defendant in a lawsuit filed in the United States District Court for the
Southern District of California. Also named as defendants in this lawsuit are
Nintendo of America Inc. and Wizards of the Coast, Inc. The lawsuit purportedly
brought on behalf of a class of all persons who purchased a package of Pokemon
trading cards, seeks to challenge longstanding practices in the trading card
industry, including the practice of randomly inserting premium cards in packages
of Pokemon cards. The lawsuit claims that these practices constitute illegal
gambling activity in violation of California and federal law, including the
Federal Racketeer Influenced and Corrupt Organization Act, and seeks an award of
treble damages. The lawsuit has not specified the amount of damages sought. On
April 18, 2000, the District Court issued an Order to Show Cause in the lawsuit
(and in a number of other lawsuits making similar allegations concerning other
types of trading cards) requiring the plaintiffs in all of the cases to show
cause why the cases should not be dismissed for lack of standing. The parties
have not yet submitted briefs on the Court's Order to Show Cause, nor has the
Court ruled on it. The Company believes that the practices which are subject of
this lawsuit are well accepted business practices in the trading card industry
and intends to defend the lawsuit vigorously. Additionally, the Company is
indemnified by Wizards of the Coast under the Pokemon License Agreement.
ii) Paige v. Nintendo, et al. On March 28, 2000, Jason Paige filed suit in
Supreme Court of the State of New York against Nintendo of America Inc., the
Company, Paradise Music and Entertainment, Inc. ("Paradise") and various other
defendants. The suit alleges that Plaintiff's voice was used for advertising,
trade and commercial purposes without Plaintiff's written consent in violation
of Sections 50 and 51 of the Civil Rights Law of the State of New York and
California Civil Code Section 3344 (a). Plaintiff, was a singer used by Paradise
(a music company hired by the Company to produce Pokemon musical recordings),
to sing one or more songs for the Pokemon television series. Plaintiff alleges
that his written agreement with Paradise did not permit the various defendants
to allegedly use a Pokemon song containing Plaintiff's voice in connection with
other Pokemon related products. Although, Plaintiff was paid $1,000.00 for his
original performance, Plaintiff is claiming that he is due tens of millions of
dollars for the allegedly unauthorized additional uses of Plaintiff's voice.
Under the terms of the Company's agreement with Paradise, the Company is
indemnified against the Paige claim.
-5-
<PAGE>
(ii) Morrison v. Nintendo, et al. On March 29, 2000, Morrison Entertainment
Group, Inc., filed suit in the United States District Court for the Central
District of California against Nintendo of America Inc., 4 Kids Entertainment,
Inc., and Leisure Concepts, Inc. The suit alleges that the Pokemon trademark
infringes upon the Plaintiff's "Monster in my Pocket" trademark. The complaint
also contains counts alleging trademark dilution, unfair competition, and a
breach of implied contract. The complaint seeks injunctive relief as well as
monetary damages.
While it is impossible to predict the eventual outcome of these litigations, the
Company believes these litigations will not have a material adverse effect on
the Company's financial condition.
Note 5
STOCK SPLIT
The March 1999 financial statements have been restated to give effect to the 2
for 1 stock split effective for shareholders of record on September 1, 1999.
Note 6
DEFERRED REVENUE
The master toy licensee ("Licensee") agreement ("Agreement") for Nintendo's
Pokemon property, calls for, among other things, Licensee to pay a minimum
royalty for the period starting January 1, 2000 and ending December 31, 2001.
This minimum guaranteed royalty is subject to reduction if certain conditions
are not met. Because of the conditions and contingencies contained in the
Agreement, the Company will only recognize revenue from the Agreement as
royalties are earned and reported by Licensee. If all of the conditions under
the Agreement are met and the full amount of the minimum guaranteed royalties
are paid by Licensee, the Company's share would be approximately $30,000,000,
which would be paid in two advances, one-half of which would be received on or
before April 1, 2000 and one-half of which would be received on or before April
1, 2001. Accordingly, at March 31, 2000, the Company had deferred revenue of
approximately $12,354,000 related to its share of advanced royalties received
under the Agreement.
-6-
<PAGE>
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
--------- --------------- ----------- -----
3 Months Ended
March 31,
2000
<S> <C> <C> <C> <C>
Revenues $ 18,789,962 $ 297,365 $ 1,612,192 $ 20,699,519
Segment Profit (Loss) 15,216,586 (271,450) 1,276,863 16,221,999
Segment Assets 240,571,014 3,723,312 9,465,944 253,760,270
1999
Revenues $ 2,567,720 $ 482,575 $ 201,646 $ 3,251,941
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
</TABLE>
-7-
<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 qarter when the majority of toy and video game advertising occurs. Due to
these factors, the Company's net income during the second half of the year has
generally been 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, 2000 Compared to the Three Months Ended March 31,
1999
Consolidated net revenue increased 537% or $17,447,578 to $20,699,519 for the
three month period ended March 31, 2000 as compared to the same period in 1999.
The increase in net revenue for the three month period was primarily due to
increased revenue related to licensing activities for the Pokemon property.
Selling, general and administrative expenses increased 164% or $3,427,841 to
$5,517,969 for the three month period ended March 31, 2000 when compared to the
year ago period. These increases were primarily due to bonus accruals, which are
based on pre-tax income levels which were higher in 2000 as a result of higher
pre-tax income.
Additionally, higher costs were incurred due to an increase in payroll and
marketing costs related to the Company's expanded licensing activities.
-8-
<PAGE>
At March 31, 2000 there were $1,450,980 of capitalized film production costs
which primarily relate to 26 episodes of "WMAC Masters" and work related to the
adaptation of episodes 105-156 of Pokemon which are currently in production. At
March 31, 2000 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.
Interest income increased by $895,632 for the three month period ending March
31, 2000 as compared to the same period in 1999. 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 1999.
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
At March 31, 2000 the Company had working capital of $66,212,527 as compared to
working capital of $56,982,147 at December 31, 1999, an increase in working
capital of $9,230,380. Cash and cash equivalents increased by $137,494,324 to
$211,921,450 from December 31, 1999. The increase in cash equivalents is
primarily due to the increased levels of royalties collected from the Company's
licensing business. The increased royalty collections also increase the amounts
due to licensors as described below.
Accounts receivable, net (current and non-current) decreased to $34,038,023 at
March 31, 2000 from 47,329,385 at December 31, 1999. This decrease is primarily
due to the collection by the Company in the first quarter of 2000 of royalties
representing the Company's share of royalties due for the fourth quarter of
1999.
Amounts due to licensors, which represent the owners share of royalties
collected at March 31, 2000, increased by $96,252,057 to $153,287,048 from
December 31, 1999. The increase is primarily due to higher royalties collected
during the first quarter of 2000 as compared to the prior year, which are paid
to licensors in the second quarter of 2000.
In the opinion of management, the Company will be able to finance its business
as currently conducted from its current working capital and the $5,000,000
credit facility with The Chase Manhattan Bank, discussed in Note 4 to the
financial statements. The Company expects to renew the credit facility on
substantially the same term. As of March 21, 2000 there were no amounts
outstanding under this facility. As the Company explores new and expanded
opportunities in the youth oriented entertainment market, including television
production, it may seek additional financing alternatives.
-9-
<PAGE>
Forward-looking Statements
- --------------------------
Sections of this Quarterly Report contain forward-looking statements, including,
without limitation, statements concerning possible or assumed future results of
operations of the Company preceded by, followed by or that include the words
"believes," "expects," "anticipates," "estimates," "intends," "plans" or similar
expressions. For those statements, we claim the protection of the safe harbor
for forward-looking statements contained in the U.S. Private Securities
Litigation Reform Act of 1995.
Forward-looking statements are not guarantees of future performance. They
involve risks, uncertainties and assumptions. Due to the fact that the Company
faces competition from toy companies, motion picture studios and other licensing
companies, and the uncertainty of the 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 15, 2000
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 ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-END> Mar-31-2000
<CASH> 211,921,450
<SECURITIES> 0
<RECEIVABLES> 34,358,820
<ALLOWANCES> 320,795
<INVENTORY> 0
<CURRENT-ASSETS> 249,699,883
<PP&E> 2,019,576
<DEPRECIATION> 1,519,242
<TOTAL-ASSETS> 253,760,270
<CURRENT-LIABILITIES> 183,487,355
<BONDS> 0
0
0
<COMMON> 118,578
<OTHER-SE> 70,154,337
<TOTAL-LIABILITY-AND-EQUITY> 253,760,270
<SALES> 0
<TOTAL-REVENUES> 20,699,519
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,221,999
<INCOME-TAX> 6,892,000
<INCOME-CONTINUING> 9,329,999
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,329,999
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.71
</TABLE>
