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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2001
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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
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4Kids Entertainment, Inc.
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(Exact name of registrant as specified in its charter)
New York 13-2691380
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1414 Avenue of the Americas, New York, New York 10019
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 758-7666
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the Common Stock on March 26, 2002
as reported on the New York Stock Exchange Market, was approximately
$203,582,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value 12,580,658
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(Title of Class) (No. of Shares Outstanding at March 26, 2002)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2002 are incorporated by reference into Part
III of this Form 10-K Report.
PART I
Item 1. Business
(a) General Development of Business. 4Kids Entertainment, Inc., (the
"Company") is a vertically integrated children's entertainment company. The
Company acquires through representation agreements, intellectual property rights
to children's properties from around the world. Through its subsidiaries, the
Company seeks to maximize the economic returns on the properties through
television production and distribution and merchandise licensing. The Company
also provides media buying and planning, toy design and development and web site
development.
To increase its ability to reach children in the mass market, the Company, in
January 2002, licensed the right to program four hours on the Fox Broadcast
Network's ("Fox") Saturday morning children's block. Beginning in September 2002
and continuing for an initial term of four years, the Company will provide all
television programs for the weekly four-hour children's block. In addition to
providing new programming for the Fox children's block, the Company anticipates
it will continue to provide the Kids WB! television network with current
programming including Pokemon and Cubix. As a result, the Company will become
one of the largest suppliers of children's television programming to network
television.
The Company currently operates through five wholly-owned subsidiaries, 4Kids
Entertainment Licensing, Inc. ("4Kids Licensing") which was formerly known as
Leisure Concepts, Inc., 4Kids Entertainment International, LTD. ("4Kids
International"), formerly known as LCI UK Ltd., The Summit Media Group, Inc.
("Summit Media"), 4Kids Productions, Inc. ("4Kids Productions") and Websites
4Kids, Inc. ("Websites 4Kids").
1. 4Kids Licensing provides domestic and international licensing of the
merchandising rights to properties, personalities, and product concepts. 4Kids
Licensing typically acts as exclusive agent in connection with the grant to
third parties of licenses to manufacture and sell all types of merchandise based
on such properties, personalities and concepts. The licensing of these rights
has been primarily in the areas of toys, electronic games, trading cards, food,
toiletries, apparel, house-wares, footwear and publishing. 4Kids Licensing also
licenses merchandising rights in connection with the production of television
shows and motion pictures.
In addition, Technology 4Kids, a division of 4Kids Licensing, develops new toy
ideas and concepts which integrate new and existing technologies with
traditional play patterns.
2. 4Kids International, based in the Company's London office, provides hands-on
management of children's properties in the important United Kingdom and European
marketplace.
3. Summit Media provides media planning, buying and marketing services primarily
for toy and video game companies. Summit Media also provides television
distribution services.
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4. 4Kids Productions is a television, film, home video and music production
company specializing in entertainment programming directed towards children aged
6-14.
5. Websites 4Kids, is a website development company specializing in creating
websites designed to enhance and support the marketing of children's properties
represented by the Company.
(b) Financial Information About Industry Segments.
Financial information regarding industry segments can be found in note 11 to
Notes to the Company's Consolidated Financial Statements.
(c) Narrative Description of the Business.
(1) Licensing. The Company's licensing activities are conducted through
its subsidiary, 4Kids Licensing. The Company typically licenses fictional and
fanciful characters and established properties often from the entertainment
field. 4Kids Licensing is typically appointed the merchandising agent
representing such owners, usually exclusively, and then grants such rights on
behalf of the owners to third parties. 4Kids Licensing negotiates licensing
arrangements directly with manufacturers or users and supervises the
implementation of the agreements.
A license agreement offered to manufacturers in the industry or industries
that 4Kids Licensing considers appropriate, may provide the right to manufacture
and sell a broad range of products in various categories (a "master toy
license") or it may be limited to the right to manufacture and sell a specific
product or product line. The typical licensing agreement provides for the
licensee to pay royalties based upon a percentage of the licensee's aggregate
net sales, at wholesale, of the licensed products in question. 4Kids Licensing
usually retains as a commission between 10% and 50% of the licensing royalties,
which generally range from 4% to 20% of net wholesale sales.
As part of the standard licensing agreement, the licensee usually pays a
nonrefundable advance which is applied in most cases against a guaranteed
minimum royalty. The percentage of sales or royalty rate, and any nonrefundable
advance against a guaranteed minimum payment, are negotiated for each
transaction and vary from industry to industry and from property to property.
Generally, the term of a license ranges from one to three years, and may be
renewed by the licensee if certain minimum annual payments are received under
the license agreement. In addition, the license agreement usually provides that
the rights under license will revert to the owner unless the licensee commences
its marketing activities by a specified date and continues to market the
products thereafter on a regular basis. The average start-up or lead time
necessary for product manufacture and marketing ranges from six and eighteen
months. 4Kids Licensing does not assist in financing the manufacturing,
advertising and marketing by licensees.
-4-
When the Company licenses the right to exhibit motion pictures or
broadcast television productions, the licensees pay fees for each production,
sometimes preceded by option payments, and, usually in connection with
television series, per episode payments and rerun payments for multiple
exhibitions. In some cases, owners participate in the "net profits" (that is,
income less deduction of fees and chargeable expenses and production costs) that
may be realized from the exploitation of the property in question.
Licensing revenues accounted for approximately 68%,74% and 83% of
consolidated net revenues for the years ended December 31, 2001, 2000 and 1999,
respectively.
(2) Certain Licensed Properties Represented Exclusively by 4Kids
Licensing. Among the properties represented exclusively by 4Kids Licensing are
the following:
o "Pokemon"; Nintendo's popular Video game. The Company
represents all merchandising and television and film
distribution rights outside of Asia. The term of the
representation agreement for "Pokemon" expires on December 31,
2005. "Pokemon" started in Japan as a Nintendo Game Boy
cartridge that involves finding, capturing, collecting and
training 250 different "Pokemon" characters. 4Kids Licensing
has signed Hasbro, Inc. as the master toy licensee and over
500 licensees worldwide including Kraft, General Mills,
Kelloggs, Welch's, Danone, Colgate-Palmolive, Scholastic and
American Greetings for a wide range of licensed products. For
more information regarding 4Kids Licensing's agreement with
Hasbro, Inc., please see Note 10g. to the Notes to
Consolidated Financial Statements.
o Nintendo of America Inc. ("Nintendo"). The Company has
exclusive rights for the various characters, trademarks, and
copyrights arising out of the software for the video games
developed and owned by Nintendo including, the Super Mario
Bros., Donkey Kong, Zelda, GameBoy and Nintendo GameCube.
These video games have consistently ranked among the top
sellers. The Company had represented Nintendo since 1988 under
a renewable one year agreement. In 2001, the Company entered
into a new five year agreement for exclusive representation of
Nintendo for merchandise licensing and television rights to
such classic Nintendo characters on a worldwide basis, other
than Japan.
o Rare; one of Nintendo's most important game developers
providing Nintendo with hit video game titles such as
Goldeneye and Donkey Kong. The
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Company's representation of Rare includes the video games
"Perfect Dark" and "Jet Force Gemini". The Company represents
Rare on a worldwide basis, excluding Japan through December
31, 2002 with one year extensions thereafter.
o "Cubix"; a new computer animated television series being
produced by the Company which began domestic broadcast on
Kids' WB in 2001. The Company is a co-producer of "Cubix" in
conjunction with Daiwon C & A Holdings Co., Ltd, and Cinepix,
two Korean companies.
o "Tama and Friends"; a Japanese animated television series
produced by TBS Service, Inc. and based on a property owned by
Sony Creative Products, Inc. "Tama" was originally broadcast
in Japan. The Company's 4Kids Productions subsidiary is
adapting "Tama" for broadcast outside Japan and the Company
represents all television and merchandise licensing rights
outside of Japan with an initial term expiring March 2007.
"Tama" began domestic broadcast in first run syndication
beginning September 2001.
o "Ultraman Tiga"; this live action television series created
and produced by Tsuburaya Productions in Japan has been a
perennial favorite in Japan for thirty years. The Company
represents all television and merchandise licensing rights for
Ultraman Tiga outside of Asia through August 31,2008.
o "Kinniku-man"; an animated television program produced by Toei
Animation in Japan. "Kinniku-man", which combines comedy with
wrestling, began in Japan over fifteen years ago. The Company
represents all television and merchandise licensing rights for
"Kinniku-man" outside of Asia through August 31, 2008.
o "Monster Jam"; Monster Jam, which is produced by Clear Channel
Entertainment's Pace Motor Sports Division, includes over
three hundred live Monster Truck events each year and a weekly
cable television series. The Company represents worldwide
merchandise licensing rights for Monster Jam through December
31, 2003.
o Cabbage Patch Kids; The Company represents all merchandise
licensing rights for the Cabbage Patch Kids through December
31, 2003.
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o Yu-Gi-Oh!; Yu-Gi-Oh! began in Japan as a successful comic book
which was later developed into a successful television series,
video game and card game. During 2001, the Company was
appointed the exclusive representative for all television and
merchandise licensing (exclusive of trading cards and
videogames) outside of Asia through August 31, 2008. The
Company, however, receives certain marketing fees with respect
to the Yu-Gi-Oh! trading cards and videogames.
(3) Company-Owned Properties. The Company developed and owns World Martial
Arts Council ("WMAC") and "Charlie Chan". WMAC is a television based property
utilizing skilled martial arts professionals. The WMAC Masters television series
was broadcast domestically from September 1995 through September 1997.
"Charlie Chan" is the fictional Asian detective who has been the subject
of numerous films based on the character created by Earl DeBiggers. In March
2001, the Company optioned the film rights to "Charlie Chan" to Twentieth
Century Fox Film Corporation.
(4) Product Concepts. The product concepts developed by Technology 4Kids
usually consist of a novel approach to integrating existing technology with a
toy concept. The Company may conceive of an idea and then develop it at its own
expense by preparing drawings or models of the products or examples of various
uses of the concepts, including descriptions or illustrations of plans for the
marketing and merchandising of potential toy product lines using such
technology. The Company will then seek to license the product concept to
manufacturers or retailers for which the Company will typically receive a
royalty based upon the licensee's sales. In other instances, although the
Company has not created the original concept, it will assist in developing a
concept, initially conceived by others, into a commercially viable product line,
in which case the Company may act as the licensor, as the agent for the rights
holder of the concept in question or may simply receive a royalty for services
rendered. The Company does not typically finance the activities of the
manufacturers to which it licenses product concepts. Furthermore, because the
costs associated with the development of product concepts are relatively low,
this activity does not involve a significant investment by the Company. Since
many of these product concepts are developed first before there is a license
deal in place, there can be no assurance, however, that the development of
product concepts will be successful.
(5) Media Buying Planning and Television Distribution. Summit Media
provides clients with media planning, buying and marketing services and
television distribution services. These services accounted for 10%, 4% and 5% of
consolidated net revenues for the years ended December 31, 2001, 2000 and 1999,
respectively. Summit Media serves as the current television distributor for
"Pokemon", "Yu-Gi-Oh!", "Cubix" and "Tama and Friends".
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(6) Television, Film, Music and Home Video Production. 4Kids Productions
is a television, film, music and home video production company specializing in
youth-oriented entertainment programming. Entertainment production and
programming accounted for 22%, 22% and 12% of consolidated net revenues for the
years ended December 31, 2001, 2000 and 1999, respectively. 4Kids Productions is
currently producing the American adaptation of the Japanese hit "Pokemon" which
debuted in the United States in September 1998. After having adapted episodes
1-208 of the hit television series and the first three "Pokemon" movies, 4Kids
is currently adapting episodes 208-260 and the fourth "Pokemon" feature film
which is anticipated to be released in the fall of 2002. Additionally, 4Kids is
producing the English language adaptation of 52 episodes of "Yu-Gi-Oh!", 26
episodes of "Tama and Friends", 52 episodes of "Ultraman", 52 episodes of
"Kinniku-man" and 26 episodes of "Cubix".
(7) Dependence on a Few Sources of Revenues. The Company typically derives
a substantial portion of its 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 property will be
commercially successful, if at all. Popularity of properties can vary from
months to years. In addition, the Company has little control over the timing of
payments made by licensees of various rights to the properties, some of which
are made upon the execution and delivery of license agreements and some of which
are made in quarterly royalty payments reported by the licensees. Due to these
factors, the Company must continually seek new properties from which it can
derive revenues.
One property, "Pokemon", contributed revenues of approximately 66% of
consolidated net revenues for fiscal 2001. In 2001, two licensees contributed
15% and 11% of consolidated net revenues, respectively. For more information on
Revenues/Major Customers, please see Note 5 to the Notes to Consolidated
Financial Statements.
(8) Trademarks and Copyrights. The Company generally does not own any
trademarks or copyrights in properties which it licenses. These rights are
typically owned by the creator or by the entity, such as a television producer,
which may expend substantial amounts in developing or promoting the concept.
However, the Company does own the copyrights and trademarks to "Charlie Chan",
"WMAC Masters" and is a joint copyright holder of "Cubix".
(9) Seasonal Aspects. A substantial portion of the Company's revenues and
net income are subject to the seasonal and trend variations of the toy and game
industry. Typically, a majority of toy orders are shipped in the third and
fourth calendar quarters. As a result, in the Company's usual experience, its
net income from toy and game royalties during the second half of the year has
generally been greater than during the first half of the year. However, the
Company's revenues in fiscal 2001 were influenced more by
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the popularity trends of "Pokemon" than the historical seasonal trends of toy
and game sales.
(10) Competition. The principal competitors of the Company's licensing
activities (including product concepts) are the product development,
merchandising, marketing and advertising departments of toy and other juvenile
merchandise manufacturers and motion picture studios as well as independent
advertising agencies, licensing companies and numerous individuals acting as
licensing representatives. There are also many independent product development
firms with which the Company competes. Many of these companies have
substantially greater resources than the Company and represent properties which
have been commercially successful for longer periods than properties represented
by the Company. The Company believes it would be relatively easy for a potential
competitor to enter its market in light of the relatively small investment
required to commence operations. However, the ultimate success of a new entrant
in the field would depend on its access to toy and other manufacturers, access
to distribution of television based properties, access to properties to be
licensed and retail market acceptance of the properties in question, and its
know-how in the negotiation and subsequent administration of licenses.
The Company's media buying, planning and television distribution
activities as well as its television, music, film and home video production
activities operate in highly competitive industries and face as competitors many
companies with substantially greater resources and distribution networks than
the Company.
(11) Employees. As of March 26, 2002, the Company had a total of 119
full-time employees consisting of 76 employees in licensing, 20 in media and
Television distribution and 23 in Television and film production.
Item 2. Properties
The following table sets forth, with respect to properties leased (none
are owned) by the Company at March 26, 2002, the location of the property, the
date on which the lease expires and the use which the Company makes of such
facilities:
Approximate
Expiration Square
Address of Lease Use Feet
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1414 Avenue of the Americas April 30, 2010 Executive and Sales 21,000
New York, New York Office, Media Buying
and Television Production
116 Putney Bridge Road January 6, 2005 International Sales 4,000
Alice Court Office
London, England
53 West 23rd Street December 31, 2006 Production Facilities 20,000
New York, New York
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The Company considers that, in general, its physical properties are well
maintained, in good operating condition and adequate for its purposes.
Item 3. Legal Proceedings
The Company is currently a defendant in the following two
litigations:
(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. On June 21, 2000, the court dismissed the
RICO claims with prejudice and all other claims without prejudice.
Plaintiffs filed a notice of appeal on July 24,2000 from the District
Court's June 21, 2000 dismissal, and the appeal is pending.
(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.,
4Kids 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 alleges trademark dilution, unfair
competition, and a breach of implied contract. The complaint seeks
injunctive relief as well as monetary damages. On August 6, 2001, the
United States District Court granted summary judgment dismissing the suit.
Plaintiff has filed a notice of appeal from the United States District
Court's dismissal and the appeal is pending.
While it is impossible to predict the eventual outcome of the litigation
discussed above, the Company believes these litigations will not have a
material adverse effect on the Company's financial condition and results
of operations.
Item 4. Submission of Matters to a Vote of Security Holders
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During the Company's fiscal quarterly period ended December 31, 2001,
there were no matters submitted to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's Common Stock became listed for trading on the New York
Stock Exchange as of September 20, 2000 after having been previously quoted on
the NASDAQ National Market System. The following table indicates high and low
sales quotations for the periods indicated based upon information supplied by
NASDAQ and the New York Stock Exchange.
2001 Low High
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First Quarter 8.31 16.99
Second Quarter 10.97 19.20
Third Quarter 16.94 29.30
Fourth Quarter 17.77 22.04
2000 Low High
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First Quarter 18.50 37.31
Second Quarter 15.38 28.13
Third Quarter 16.63 34.38
Fourth Quarter 8.44 17.06
(b) Number of Holders of Common Stock. The number of holders of record of
the Company's Common Stock on December 31, 2001 was 341, which does not include
individual participants in security position listings.
(c) Dividends. There were no dividends or other distributions made by the
Company during 2001 or 2000. Future dividend policy will be determined by the
Board of Directors based on the Company's earnings, financial condition, capital
requirements and other existing conditions. It is anticipated that cash
dividends will not be paid to the holders of the Company's Common Stock in the
foreseeable future.
(d) Stock Purchases. The Board of Directors has authorized the Company,
from time to time, to acquire up to 495,000 shares of its Common Stock in
open-market purchases. Such purchases are to be made out of the Company's
surplus. No such purchases were made by the Company during 2001.
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Item 6. Selected Financial Data
Year Ended December 31,
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2001 2000 1999 1998 1997
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Total Net Revenues $41,537,621 $87,997,468 $60,482,369 $14,767,429 $10,116,800
Net Income 12,243,787 38,772,580 23,638,426 2,743,069 739,135
Net Income Per Common $1.01 $3.25 $2.20 $.31 $.08
Share-Basic
Net Income Per Common .92 2.96 1.91 .27 .08
Share- Diluted
Weighted Average Common 12,163,927 11,947,217 10,741,082 8,982,738 8,834,493
Shares Outstanding-Basic
Weighted Average Common 13,381,073 13,092,653 12,366,349 10,227,081 9,509,637
Shares Outstanding-Diluted
The amounts shown above give effect to the April 1999 three for two and the
September 1999 two for one stock splits described in Note 8 to the Notes to
Consolidated Financial Statements included herein. The Company did not declare
or pay any cash dividends during the five-year period ended December 31, 2001.
At Year End 2001 2000 1999 1998 1997
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Total Assets $143,739,037 $176,144,339 $127,103,647 $ 34,961,155 $ 39,319,077
Working Capital 106,330,320 96,350,798 56,982,147 10,823,815 6,823,466
Stockholders' Equity 118,458,126 101,907,764 60,942,916 15,405,255 12,128,739
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company receives revenues from a number of sources, principally
licensing, television programming and media buying. The Company typically
derives a substantial portion of its licensing revenues from a small number of
properties, which properties usually generate revenues only for a limited period
of time. Because the Company's licensing revenues are highly subject to changing
fashion in the toy and entertainment business, its licensing revenues from year
to year from particular sources are subject to dramatic increases and decreases.
It is not possible to anticipate precisely the length of time a property 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 licensing
revenues have
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historically been primarily derived from the license of toy and game concepts.
Thus, a substantial portion of the Company's licensing revenues and net income
are subject to the seasonal variations and popularity trends of the toy and game
industry. Typically, a majority of toy orders are shipped in the third and
fourth calendar quarters. In addition, the Company's media buying subsidiary
concentrates its activities on the youth-oriented market. As a result, most of
its revenue is earned in the third and fourth quarters when the majority of toy
and video game advertising occurs. In the Company's usual experience, its net
income during the second half of the year will generally be greater than during
the first half of the year. However, the Company's revenues in fiscal 2001 were
influenced more by the popularity trend and movie release dates of "Pokemon"
than the historical seasonal trends of toy and game sales. Further, the Company
has little control over the timing of royalty payments it receives, some of
which are made upon the execution and delivery of license agreements.
Significant Accounting Policies and Estimates
In the ordinary course of business, the Company has made a number of estimates
and assumptions relating to the reporting of operations and financial condition
in the preparation of its financial statements in conformity with accounting
policies generally accepted in the United States of America. Actual results
could result in the Company reporting financial results that differ
significantly from the estimates previously used by the Company which were based
on different assumptions and conditions. The Company believes that the following
discussion addresses the Company's most critical accounting policies, which
require managements' most difficult, subjective and complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain.
Our accounting policies are more fully described in Note 1 to the Notes to the
Financial Statements, located elsewhere in this annual report filing. We have
identified certain critical accounting policies which are described below.
Description and Accounting Basis for Revenues - 4Kids Entertainment, Inc. and
subsidiaries (the "Company") is an integrated entertainment and media
company consisting of three segments; 1)licensing, 2)television and film
production and 3)distribution and media planning and buying services. All
three segments are focused on the youth oriented market.
Licensing Business- License agreements often include nonrefundable minimum
guaranteed royalties which are payable by the licensee. The Company
records as commission revenue its proportionate share of the minimum
guarantee when all material terms of the contracts have been agreed to by
the parties, a cash payment or reasonable assurance of collectability is
received and any performance contingencies have been met. It is at this
point that the Company has substantially performed all of its obligations
under the contract.
For contracts not providing minimum guaranteed royalties and for royalty
amounts in excess of the minimum guarantee, the Company records commission
revenue based upon its share of earned royalties from the sales of the
related products.
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Television, Film and Video Productions - Through the Company's wholly-owned
subsidiary, 4Kids Productions, Inc., the Company accounts for its
activities associated with the production of entertainment programming in
accordance with Statement of Position 00-2 ("SOP 00-02"), Accounting by
Producers or Distributors of Films which superceded Financial Accounting
Standards No. 53 ("SFAS No. 53"), Financial Reporting by Producers and
Distributors of Motion Picture Films. The SOP establishes, among other
things, how an entity should recognize revenue from a sale or licensing
arrangement of a film. This SOP is effective for financial statements for
fiscal years beginning after December 15, 2000. The adoption of this SOP
did not have a material effect on the consolidated financial position of
the Company. Under SOP 00-02, the Company capitalizes costs associated
with each individual production and such costs are classified as
non-current assets. Such costs are amortized against the related revenue
as such revenue is recognized. In determining amortization rates, the
Company must make estimates of future expected revenue from various
sources including domestic television broadcasts, international television
broadcasts, home video sales and licensing revenues from products related
to the television programs. While the Company believes its estimates are
reasonable, future amortization rates may change as a result of changes in
estimated future revenues from such films. Periodically, the Company
evaluates the anticipated future revenue of such films produced by the
Company against the net realizable value of the capitalized film costs
and, where appropriate, the Company reduces the carrying value of such
film costs to their estimated net realizable amount. Any reduction in the
carrying value of capitalized film costs would result in a corresponding
charge to earnings.
Media Buying, Planning and Distribution Services- Through the Company's
wholly-owned subsidiary, The Summit Media Group, Inc. ("Summit Media"),
the Company provides media planning and buying services for both print and
broadcast. Summit Media is compensated based on a percentage of the media
it places. Such revenue is recognized at the time the related media runs.
Summit Media also provides television distribution services for which it
receives a fee based on a percentage of the license fee paid by the
broadcaster or, in the case of syndicated programming, a percentage of the
advertising sales generated by the related program. Such revenue is
recognized at the time the distribution services are completed and the
license fee or the advertising sales of the related program are reasonably
known. Summit Media will reflect a liability for media payable and a
corresponding receivable from its clients in circumstances where Summit
Media assumes the payment obligation for advertising media commitments.
Fox Broadcast License Agreement- In January 2002, the Company entered into a
multi-year agreement with Fox to lease the television network's Saturday
morning four hour programming block. Beginning with the September 2002
broadcast year, the Company will provide all programming content for Fox's
Saturday morning broadcast block, which airs from 8am to 12pm ET/PT (7am
to 11am CT). Under the terms of the agreement, the Company will also have
the right to retain all revenue from network advertising sales during the
four-hour time period. The agreement has an initial term of four broadcast
years. The Company will have an option to extend the term for up to two
additional broadcast years. The Company will pay a license fee of
approximately $25.3 million for each broadcast year during the initial
term of the agreement. The agreement provides for 50%
-14-
of the fee for the first broadcast season to be paid on execution of the
agreement, which occurred in January 2002, with the balance of the fee for
the first broadcast season to be paid in four equal installments in
September, December, February and April of the broadcast year (which
begins in September). Fees for each subsequent broadcast year are payable
50% in the June preceding the beginning of the broadcast year with the
balance of the fee for the broadcast year payable in four equal
installments in September, December, February and April. The agreement
further provides that, at the Company's option, up to $10.3 million of
each year's fee may be paid in the Company's common stock. Over the
initial four year term of the agreement, the Company will pay Fox
aggregate license fees of $101,200,000.
The Company's ability to recover the cost of its license fees payable to
Fox will depend on the popularity of the television programs the Company
runs and the general market demand for and pricing of advertising time for
Saturday morning children's broadcast television. The popularity of such
programs impacts audience levels and the value of the network advertising
rates the Company can charge. Additionally, the success of merchandise
licensing programs and home video sales based on such television programs
is dependent on consumer acceptance of the properties. If the Company is
unable to generate sufficient future revenue from advertising sales, home
video sales and merchandising licensing at levels to cover the cost of its
contractual obligation to Fox Broadcasting, it would record a charge to
earnings to reflect a write down in the future value of the Fox license
agreement in the period in which the deficiency or factors affecting the
recoverability of the license fee payable become known. The Company will
be required to make certain assumptions and estimates about future events
such as advertising rates and audience viewing levels in evaluating its
ability to recover the cost of the Fox license fee. Such estimates and
assumptions are subject to market forces and factors beyond the control of
the Company and inherently subject to change. There can be no assurance
that the Company will be able to recover the full cost of the Fox license
fee and in the event it cannot, the resulting charges to reflect a write
down in the future value of the Fox license fee could be significant.
New Accounting Pronouncements - In July 2001, the Financial Accounting
Standards Board issued SFAS No. 141, "Business Combinations" (effective
July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions.
SFAS No. 142 specifies that goodwill and some intangible assets will no
longer be amortized but instead will be subject to periodic impairment
testing. The Company believes that the adoption of SFAS No. 141 and SFAS
No. 142 will not have a significant impact on its financial statements. In
August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires entities to record the fair
value of a liability for an asset retirement obligation in the period in
which it is incurred. The provisions of SFAS No. 143 are effective for
fiscal years beginning after June 15, 2002. The Company will adopt SFAS
No. 143 beginning in the first fiscal quarter of fiscal 2003. The Company
believes that the adoption of SFAS No. 143 will not have a material impact
on its results of operations or financial position. In October 2001, the
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of". The primary
-15-
objectives of SFAS No. 144 were to develop one accounting model based on
the framework established in SFAS No. 121, and to address significant
implementation issues. The provisions of SFAS No. 144 are effective for
fiscal years beginning after December 15, 2001. The Company will adopt
SFAS No. 144 beginning in the first fiscal quarter of fiscal 2002. The
Company believes that the adoption of SFAS No. 144 will not have a
material impact on its results of operations or financial position.
Results of Operations
The following table sets forth our results of operations expressed as a
percentage of total net sales for the period indicated.
Net Revenues 100.0% 100.0% 100.0%
----- ----- -----
Selling, general & admin 54.2% 30.4% 27.3%
Amortization of film costs 7.4% 3.8% 6.4%
----- ----- -----
Total Costs and Expenses 61.6% 34.2% 33.7%
----- ----- -----
Income from Operations 38.4% 65.8% 66.3%
Interest income 10.9% 7.5% 1.9%
----- ----- -----
Income before income tax 49.3% 73.3% 68.2%
Income tax provision 19.9% 29.2% 29.2%
----- ----- -----
Net Income 29.4% 44.1% 39.0%
===== ===== =====
Twelve Months Ended December 31, 2001 compared to Twelve Months Ended December
31, 2000 ("000").
Net revenues for the year ended December 31, 2001 decreased 53% or $46,459
to $41,538 in 2001 from $87,997 in 2000. The decrease resulted primarily from
lower licensing commission revenue from the "Pokemon" license. Sales of
"Pokemon" licensed products slowed considerably as the spike in popularity for
all products tied to Pokemon transitioned from a white hot fad into a children's
entertainment brand focused in key categories. Sales of "Pokemon" cards and
Hasbro toys suffered particularly steep declines even though the Pokemon
television series continues to rank as the number one rated children's
television show in domestic broadcast television. Pokemon accounted for 66% of
net revenues in 2001 compared to 95% in 2000. New properties introduced by the
Company in 2001 including Cubix, Yu-Gi-Oh! and Cabbage Patch Kids contributed to
revenue in the second half of 2001.
-16-
Revenues from the Company's media sales and television syndication
services increased from 2000 levels primarily due to media buying activities.
Media sales and television distribution activities totaled $4,147 or 10% of
total net revenue for 2001 as compared to $3,514 or 4% in 2000. Commissions
earned on media placed increased as a result acquiring new clients in the media
business.
Revenues from the Company's television, film and home video production
activities decreased $10,129 to $9,245 in 2001, a decrease of 52%. Revenues in
this segment of the Company's business accounted for approximately 22% of total
net revenue in both 2001 and 2000. The decrease is primarily attributable to
lower sales of Pokemon television home videos and decreased consumer demand for
the third Pokemon movie theatrical release and home video.
Selling, general and administrative expenses decreased 16% or approximately
$4,298 compared to 2000 primarily as a result of lower costs associated with
performance-based bonus payments which are tied to pre-tax earnings of the
Company. Additionally, for the fiscal year ended December 31, 2001, the Chairman
and CEO of the Company voluntarily reduced the amount of his bonus compensation
to $370 a reduction of approximately $1,809 from the amount he would otherwise
have been entitled to receive for 2001 under his employment agreement. This
decrease in selling general and administrative costs was partially offset by
increased marketing costs incurred by the Company in launching its new
television properties. Launched in the third quarter of 2001, these new
television properties accounted for approximately $4,696 in increased marketing
costs incurred to build awareness for the new programs. Additionally, during
2001, the Company incurred additional expense for marketing, creative services,
sales, and legal costs in connection with its expanded licensing and production
activities associated with its new properties. As a result of the additional
expenses referred to above and the substantial decrease in revenue in 2001,
while the Company's selling, general and administrative expenses decreased 16%
from the prior year, selling, general and administrative expenses as a percent
of revenue increased to 54% in fiscal 2001 from 30% in fiscal 2000.
At December 31, 2001, there were approximately $4,182 of capitalized film
production costs relating primarily to various stages of production on 26
episodes of "Cubix", 26 episodes of "Tama and Friends", 52 episodes of
"Yu-Gi-Oh!" and 52 episodes of "Ultra-Man". Amortization of capitalized film
costs decreased by $235 for the year ended December 31, 2001 as compared to the
prior year. At December 31, 2001, the percentage of unamortized film cost
expected to be amortized within the next three years is over 80%.
Interest income decreased $2,067 in 2001, compared to 2000. Although the
Company maintained higher levels of invested cash during 2001, the declining
interest rate environment resulted in decreased earned interest.
-17-
Income tax expense decreased $17,465, or 68%, to $8,270 in 2001, compared
to $25,735 in 2000, due to lower pre-tax income. The Company's effective tax
rate remained relatively consistent at approximately 40% for both 2001 and 2000.
As a result of the above, the Company had net income for 2001 of $12,244
as compared to net income in 2000 of $38,773.
Twelve Months Ended December 31, 2000 compared to Twelve Months Ended December
31, 1999 ("000").
Consolidated net revenue for the year ended December 31, 2000 increased
45% or $27,515 to $87,997 in 2000 from $60,482 in 1999. Increased licensing
commission revenue resulted primarily from the strength of the "Pokemon"
license. "Pokemon" licensed products maintained their strength as top selling
toy items during 2000 as the popularity spread to international markets in
Europe. Particularly strong were sales of "Pokemon" cards and Hasbro toys as
well as many other licensees' products involved in a wide array of licensing
activities.
Revenue from the Company's media sales and television distribution
services increased from 1999 performance. These activities totaled $3,514 or 4%
of total net revenue for 2000 as compared to $3,111 or 5% in 1999. Commissions
earned on media placed increased as a result acquiring new clients in the media
business. The Company also realized its second year of distribution revenues
earned on the license of the "Pokemon" television series to Warner Bros. for
broadcast on Kids' WB.
The Company's television, film and home video production activities
accounted for approximately 22% and 12% of total net revenue in 2000 and 1999,
respectively. Revenue in this segment increased $11,896 to $19,374 in 2000, an
increase of 159%. This increase is primarily attributable to the successful
theatrical and home video releases of the first two "Pokemon" movies.
Selling, general and administrative expenses increased 62% or
approximately $10,296 compared to 1999 primarily as a result of increased costs
associated with performance-based bonus payments which are tied to pre-tax
earnings of the Company. Additionally, the Company's expanded licensing
activities during 2000 required additional resources including, marketing,
creative services, sales, and legal costs. Overall selling, general and
administrative expenses increased slightly as a percentage of net revenue to 30%
in 2000 from 27% in 1999.
At December 31, 2000, there were approximately $2,428 of capitalized film
production costs relating primarily to 26 episodes of "Cubix" and 26 episodes of
-18-
"Tama and Friends", which are currently in production. Amortization of
capitalized film costs decreased by $561 for the year ended December 31, 2000 as
compared to the prior year. At December 31, 2000, the percentage of unamortized
film cost expected to be amortized within the next three years is over 80%.
As a result of the above, the Company had net income for 2000 of $38,773
as compared to net income in 1999 of $23,638.
Liquidity and Capital Resources ("000")
At December 31, 2001, the Company had working capital of $106,330 as
compared to working capital of $96,351 at December 31, 2000. Cash, cash
equivalents and investments decreased by $35,161 to $113,600 from December 2000.
The decrease in cash, cash equivalents and investments is primarily due to the
decreased levels of the licensor's share of royalties collected by the Company
which are paid by the Company to the licensors after the close of each quarter.
This trend can be seen in our current liability "Due to Licensors", which
decreased $39,884 at December 31, 2001 from 2000.
Accounts receivable, net (current and non-current) decreased to $14,315 at
December 31, 2001 from $16,193 at December 31, 2000. This decrease is primarily
due to lower fourth quarter 2001 licensing revenues as compared to the fourth
quarter 2000 for the "Pokemon" property. The decrease was partially offset by
increased receivables on the Cabbage Patch Kids and Yu-Gi-Oh! Properties.
Amounts due to licensors, which represent the owners' share of royalties
collected by the Company during the quarter ended December 31, 2001 and payable
to property owners, decreased by $39,884 to $16,912 from December 31, 2000. The
decrease is due to lower royalties collected on the Pokemon property during the
fourth quarter of 2001 as compared to 2000, which were paid to licensors in the
first quarter of 2002.
The Company's new license agreement with Fox to program the network's four
hour Saturday morning children's block beginning in September 2002, will require
the Company to pay an annual fee of $25,300. Under the terms of the agreement,
on January 28, 2002, the Company paid $12,625 which represents 50% of the first
year's fee to Fox. Fees for each subsequent broadcast year are payable 50% in
the June preceding the beginning of the broadcast year (which begins in
September) with the balance of the fee for the broadcast year payable in four
equal installments in September, December, February and April. Additionally, the
Agreement requires the Company to establish a $25,000 Letter of Credit for the
benefit of Fox, which Letter of Credit may be reduced by the Company as
installments of the final year's license fee are paid. The agreement further
provides that, at 4Kids option, up to $10,300 of each year's fee may be paid in
the Company's common stock. Further, the Company will incur additional costs to
program the four hour block and to sell the related network
-19-
advertising time. These costs will include direct programming costs to acquire,
adapt and deliver programming for broadcast during the weekly four hour block as
well as additional indirect costs of advertising sales, promotion and
administration.
The Company's contractual cash obligations for leases and the Fox license
agreement are as follows:
Year ending Fox
December 31, Leases License Total
------------ ------ ------- -----
2002 $1,088 $18,975 $20,063
2003 1,100 25,300 26,400
2004 1,293 25,300 26,593
2005 1,412 25,300 26,712
2006 1,445 6,325 7,770
2007 and thereafter 3,468 -- 3,468
------ -------- --------
Total $9,806 $101,200 $111,006
====== ======== ========
The Company anticipates it will be able to meet its payment obligations
under the license agreement and will be able to finance its business as
currently conducted from its working capital. Accordingly, in March 2001, it
terminated its $5,000 credit facility with the Chase Manhattan Bank. However, as
the Company explores new and expanded opportunities in the children's
entertainment market, it may seek additional financing alternatives.
Forward-looking Statements
Sections of this Annual 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.
-20-
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable
Item 8. Financial Statements and Supplementary Data
Financial Statements and Supplementary Data are attached hereto.
Item 9. Changes in and Disagreements With Accountants in Accounting and
Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Company
Information concerning directors and officers of the Company is
incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A to be filed with the Securities and Exchange Commission within 120
days after the end of the Company's fiscal year.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated by reference
to the Company's Definitive Proxy Statement on Schedule 14A to be filed with the
Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year.
-21-
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of each person known by the Company to
own beneficially more than 5% of the outstanding shares of Common Stock, of each
director of the Company and all officers and directors as a group is
incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A to be filed with the Securities and Exchange Commission within 120
days after the end of the Company's fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions is
Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A to be filed with the Securities and Exchange Commission within 120
days after the end of the Company's fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
The following Consolidated Financial Statements of 4Kids Entertainment, Inc. and
Subsidiaries are included in Item 8:
Page
Number
Independent Auditors' Report F-1
Consolidated Balance Sheets -December 31, 2001 and 2000 F-2
Consolidated Statements of Income - Years Ended
December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of F-4
Stockholders' Equity - Years
Ended December 31, 2001, 2000
and 1999
Consolidated Statements of F-5
Cash Flows - Years Ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements F-6 to F-18
(a) 2. and (d) Financial Statement Schedules:
-22-
All schedules have been omitted because they are inapplicable, not required, or
the information is included in the financial statements or notes thereto.
(a) 3. and (c) Exhibits. See Index of Exhibits annexed hereto.
(b) Reports on Form 8-K
No reports on Form 8-K were filed in the final quarter of the Company's
fiscal year ended December 31, 2001. The Company filed a report on Form 8-K on
January 18, 2002.
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 2002 4KIDS ENTERTAINMENT, INC.
By
Alfred R. Kahn,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Date: March 27, 2002
Alfred R. Kahn,
Chairman of the Board,
Chief Executive Officer and
Director
Date: March 27, 2002
Jay Emmett,
Director
Date: March 27, 2002
Steven M. Grossman,
Director
Date: March 27, 2002
Joel Cohen,
Director
Date: March 27, 2002
Joseph P. Garrity,
Executive Vice President,
Treasurer, Principal Financial
Officer, Principal Accounting
Officer and Director
INDEX OF EXHIBITS
Exhibit Page
Number Description Number
- ------ ----------- ------
(3) (a) Certificate of Incorporation of the Registrant, as amended (13)
(b) By-Laws of the Registrant adopted by the Board of Directors on March
28, 1991 (2)
(c) Resolution of the Board of Directors of the Registrant adopted March
12, 1991 reducing the size of the Board from six directors to three
directors (2)
(4) (a) Form of Common Stock Certificate (3)
(10)(a) Bonus Plan of the Registrant (*)(4)
(b) 1985 Non-Qualified Stock Option Plan, as amended (*)(4)
(c) 1986 Stock Option Plan, as amended (*)(4)
(d) 1992 Stock Option Plan (*)(5)
(e) 1993 Stock Option Plan (*)(6) (f) 1994 Stock Option Plan (*)(10)
(g) 1995 Stock Option Plan (*)(11)
(h) 1996 Stock Option Plan (*)(15)
(i) 1997 Stock Option Plan (*)(17)
(j) 1998 Stock Option Plan (*)(18)
(k) 1999 Stock Option Plan (*)(19)
(l) 2000 Stock Option Plan (*)(20)
(m) 2001 Stock Option Plan (*)(21)
(n) Stock Option Agreement, dated June 10, 1992, between the Registrant
and Randy O. Rissman (*)(7)
(n) Stock Option Agreement, dated June 10, 1992, between the Registrant
and Gerald Rissman (*)(7)
(o) Agreement between Nintendo of America, Inc. and the Registrant dated
December 17, 1987 (4)
(p) Agreement of Lease, dated March 28, 1988, between the Registrant and
1414 Americas Company (2)
(q) Amendment, dated July 8, 1994, to Agreement of Lease between the
Registrant and 1414 Americas Company. (12)
(r) Agreement of Lease, dated June 30, 1991, between the Registrant and
Olympic Purdue Associates (the "Olympic Lease") (7)
(s) First Amendment, dated January 3, 1994, to the Olympic Lease (7)
(t) Agreement of Lease, dated March 23, 1993, between Leisure Concepts
International, Inc. and Svenska Handelsbanken (7)
(u) Employment Agreement, dated March 12, 1991 between the Registrant
and Alfred R. Kahn(*)(8)
(v) Employment Agreement, dated June 3, 1991, between the Registrant and
Joseph Garrity (*)(9)
(w) Amendment, dated as of October 17, 1994, to the Employment Agreement
between the Registrant and Joseph Garrity (*)(12)
Exhibit Page
Number Description Number
- ------ ----------- ------
(x) Employment Agreement, dated January 1, 1995 between The Summit Media
Group, Inc. and Sheldon Hirsch.(*)(13)
(y) Employment Agreement, dated January 1, 1995 between The Summit Media
Group, Inc. and Thomas J. Kenney. (*)(13)
(z) Employment Agreement, dated January 9, 1996 between 4 Kids
Productions, Inc. and Norman Grossfeld. (*)(13)
(aa) Note, dated May 29, 1997, between the Registrant and Chemical Bank.
(16)
(bb) Security Agreement, dated May 29, 1996, by and between Leisure
Concepts, Inc. and Chemical Bank (16)
(cc) Security Agreement, dated May 29, 1996, by and between 4Kids
Productions, Inc. and Chemical Bank (16)
(dd) Security Agreement, dated May 29, 1996, by and between The Summit
Media Group, Inc. and Chemical Bank (16)
(ee) Amendment, dated as of January 1, 1997, to the Employment Agreement
between the Registrant and Joseph P. Garrity(*)(16)
(ff) Amendment, dated as of January 1, 1997, to the Employment Agreement
between The Summit Media Group, Inc. and Sheldon Hirsch(*)(16)
(gg) Amendment, dated as of January 1, 1997, to the Employment Agreement
between The Summit Media Group, Inc. and Thomas Kenney(*)(16)
(hh) Amendment, dated as of February, 1997, to the Employment Agreement
between the Registrant and Alfred R. Kahn(*)(16).
(21) List of Subsidiaries of the Registrant
(24) Consent of Deloitte & Touche LLP, Certified Public Accountants
- ----------
(*) Denotes a management contract or compensatory plan, contract or
arrangement.
(1) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1989.
(2) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1990.
(3) Incorporated by reference to Registration Statement on Form S-1 (File
No. 33-3056) declared effective March 7, 1986.
(4) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1987.
(5) Incorporated by reference to 1992 Proxy Statement.
(6) Incorporated by reference to 1993 Proxy Statement.
(7) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1992.
(8) Incorporated by reference to Amendment No. 1 to Schedule 13D of Alfred
Kahn, Tiger Electronics Inc. and Owen Randall Rissman dated February 22, 1991.
(9) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1991.
(10) Incorporated by reference to 1994 Proxy Statement.
(11) Incorporated by reference to 1995 Proxy Statement.
(12) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1994.
(13) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1995.
(14) Incorporated by reference to Current Report on Form 8-K dated May 29,
1997.
(15) Incorporated by reference to 1996 Proxy Statement.
(16) Incorporated by reference to Annual Report on Form 10-K for the year
ended December 31, 1996.
(17) Incorporated by reference to 1997 Proxy Statement for Annual Meeting
of Shareholders held April 30, 1997.
(18) Incorporated by reference to 1998 Proxy Statement for Annual Meeting
of Shareholders held April 29, 1998.
(19) Incorporated by reference to 1999 Proxy Statement for Annual Meeting
of Shareholders held April 29, 1999.
(20) Incorporated by reference to 2000 Proxy Statement for Annual Meeting
of Shareholders held May 17, 2000.
(21) Incorporated by reference to 2001 Proxy Statement for Annual Meeting
of Shareholders held May 23, 2001.
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in Registration
Statement Nos. 33-11718, 33-60928, 333-02289, 333-58555, 333-83153,333-45094 and
333-69696 of 4Kids Entertainment, Inc. on Form S-8 of our report dated March 25,
2002 appearing in this Annual Report on Form 10-K of 4Kids Entertainment, Inc.
for the year ended December 31, 2001.
Deloitte & Touche LLP
New York, New York
March 25, 2002
---------------------------------------------
4Kids Entertainment,
Inc. and Subsidiaries
Consolidated Financial Statements for the
Years Ended December 31, 2001, 2000 and 1999,
and Independent Auditors' Report
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
4Kids Entertainment, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of 4Kids
Entertainment, Inc. and subsidiaries (the "Company") as of December 31, 2001 and
2000, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of 4Kids Entertainment, Inc. and
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche, LLP
New York, New York
March 25, 2002
F-1
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
ASSETS 2001 2000
CURRENT ASSETS:
Cash and cash equivalents $104,445,499 $117,749,331
Investments 9,154,504 31,011,401
Accounts receivable - net 9,652,554 14,927,485
Prepaid/refundable income taxes 3,584,392 4,524,131
Prepaid expenses and other
current assets 4,042,835 2,166,578
------------ ------------
Total current assets 130,879,784 170,378,926
FURNITURE, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS -
Net of accumulated depreciation
and amortization of $1,469,858
and $712,352 2,098,758 1,302,548
ACCOUNTS RECEIVABLE - Noncurrent, net 4,662,130 1,265,159
INVESTMENT IN EQUITY SECURITIES 725,631 --
FILM INVENTORY - net 4,182,372 2,428,407
OTHER ASSETS, NET 1,190,362 769,299
------------ ------------
TOTAL ASSETS $143,739,037 $176,144,339
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to licensors $ 16,911,596 $ 56,795,577
Media payable 1,588,162 2,999,603
Accounts payable and accrued
expenses 4,455,011 9,217,532
Income taxes payable -- 1,977,000
Deferred revenue 96,889 2,544,610
Deferred income taxes 1,497,806 493,806
------------ ------------
Total current liabilities 24,549,464 74,028,128
DEFERRED INCOME TAXES - Noncurrent 731,447 208,447
------------ ------------
Total liabilities 25,280,911 74,236,575
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value -
authorized, 3,000,000 shares;
none issued -- --
Common stock, $.01 par value -
authorized, 40,000,000 shares;
issued, 12,546,708 and
12,080,493 shares 125,467 120,805
Additional paid-in capital 33,265,412 28,963,499
Retained earnings 85,067,247 72,823,460
------------ ------------
Total stockholders' equity 118,458,126 101,907,764
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $143,739,037 $176,144,339
============ ============
See notes to consolidated financial statements.
F-2
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Net revenues $41,537,621 $87,997,468 $60,482,369
----------- ----------- -----------
COSTS AND EXPENSES:
Selling, general and
administrative 22,481,608 26,779,377 16,483,390
Amortization of capitalized
film costs 3,090,542 3,325,943 3,887,350
----------- ----------- -----------
Total costs and
expenses 25,572,150 30,105,320 20,370,740
----------- ----------- -----------
INCOME FROM OPERATIONS 15,965,471 57,892,148 40,111,629
INTEREST INCOME 4,548,316 6,615,432 1,159,797
----------- ----------- -----------
INCOME BEFORE INCOME TAX
PROVISION 20,513,787 64,507,580 41,271,426
INCOME TAX PROVISION 8,270,000 25,735,000 17,633,000
----------- ----------- -----------
NET INCOME $12,243,787 $38,772,580 $23,638,426
=========== =========== ===========
PER SHARE AMOUNTS
Basic earnings per common
share $ 1.01 $ 3.25 $ 2.20
=========== =========== ===========
Diluted earnings per common
share $ 0.92 $ 2.96 $ 1.91
=========== =========== ===========
Weighted average common
shares outstanding -
basic 12,163,927 11,947,217 10,741,082
=========== =========== ===========
Weighted average common
shares outstanding -
diluted 13,381,073 13,092,653 12,366,349
=========== =========== ===========
See notes to consolidated financial statements.
F-3
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
BALANCE, DECEMBER 31, 1998 3,062,735 30,627 4,962,144 10,412,454 15,405,225
3 for 2 and 2 for 1
stock splits 6,125,470 61,255 (61,255) -- --
Proceeds from exercise of
stock options 2,669,550 26,696 3,472,655 -- 3,499,351
Tax benefit from exercise of
stock options -- -- 18,399,914 -- 18,399,914
Net income -- -- -- 23,638,426 23,638,426
---------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 11,857,755 $ 118,578 $ 26,773,458 $ 34,050,880 $ 60,942,916
Proceeds from exercise of
stock options 222,738 2,227 372,054 -- 374,281
Tax benefit from exercise of
stock options -- -- 1,817,987 -- 1,817,987
Net income -- -- -- 38,772,580 38,772,580
---------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 12,080,493 $ 120,805 $ 28,963,499 $ 72,823,460 $101,907,764
Proceeds from exercise of
stock options 466,215 4,662 883,202 -- 887,864
Tax benefit from exercise of
stock options -- -- 3,418,711 -- 3,418,711
Net income -- -- -- 12,243,787 12,243,787
---------- ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2001 12,546,708 $ 125,467 $ 33,265,412 $ 85,067,247 $118,458,126
========== ============ ============ ============ ============
See notes to consolidated financial statements.
F-4
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 12,243,787 $ 38,772,580 $ 23,638,426
Adjustments to reconcile net
income to net cash (used
in) provided by operating
activities:
Depreciation and
amortization 766,437 356,679 108,699
Amortization of
capitalized film costs 3,090,542 3,325,943 3,887,350
Provision for losses on
accounts receivable -- 200,000 827,840
Deferred income taxes 1,527,000 65,000 (892,759)
Changes in operating
assets and liabilities:
Accounts receivable - net 1,877,960 30,936,741 (27,835,283)
Film inventory (4,844,507) (4,838,415) (1,848,608)
Prepaid/refundable income
taxes 939,739 (2,708,697) (1,490,570)
Prepaid expenses and
other current assets (1,876,257) (965,188) (49,416)
Other assets (429,994) (107,500) (378,840)
Due to licensors (39,883,981) (239,414) 53,344,409
Media payable (1,411,441) 645,871 (9,107,181)
Accounts payable and
accrued expenses (4,762,521) 3,653,171 4,278,737
Income taxes payable (1,977,000) 1,942,159 (1,715,958)
Deferred revenue (2,447,721) 2,544,610 --
------------ ------------ ------------
Net cash (used in)
provided by
operating
activities (37,187,957) 73,583,540 42,766,846
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from maturities of
commercial paper 62,097,800 -- --
Purchase of commercial paper (40,240,903) (31,011,401) --
Investment in equity
securities (725,631) -- --
Purchase of property and
equipment (1,553,716) (1,442,202) (150,941)
------------ ------------ ------------
Net cash provided by
(used in)
investing
activities 19,577,550 (32,453,603) (150,941)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from exercise of
stock options and related
tax benefit 4,306,575 2,192,268 22,061,265
------------ ------------ ------------
Net cash provided by
financing
activities 4,306,575 2,192,268 22,061,265
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (13,303,832) 43,322,205 64,677,170
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 117,749,331 74,427,126 9,749,956
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $104,445,499 $117,749,331 $ 74,427,126
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Income Taxes $ 1,105,033 $ 24,583,711 $ 3,324,329
============ ============ ============
See notes to consolidated financial statements.
F-5
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED December 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of all wholly-owned subsidiaries. All related
intercompany balances and transactions have been eliminated in
consolidation.
Description and Accounting Basis for Revenues - 4Kids Entertainment, Inc.
and subsidiaries (the "Company") is an integrated entertainment and media
company specializing in the youth oriented market.
Licensing Business - The Company's wholly-owned subsidiaries of 4Kids
Entertainment Licensing, Inc. (fka Leisure Concepts, Inc.) and 4Kids
Entertainment International, Ltd. (fka Leisure Concepts International,
Inc.), are engaged primarily in the business of licensing the commercial
rights to properties, personalities, and product concepts. 4Kids
Entertainment Licensing ("4Kids Licensing") typically acts as exclusive
agent in connection with the grant to third parties of licenses to
manufacture and sell all types of merchandise based on such properties,
personalities and concepts. The licensing of these rights has been
primarily in the areas of toys, electronic games, trading cards, food,
toiletries, apparel, house-wares, footwear and publishing rights. 4Kids
Licensing also licenses merchandising rights in connection with the
production of television shows and motion pictures. 4Kids Licensing also
has a division, Technology 4Kids, which was established to develop toy
ideas and concepts for licensing which integrate new and existing
technologies with traditional play patterns.
4Kids International, based in London, provides hands-on management of
properties in the important United Kingdom and European marketplace.
License agreements often include nonrefundable minimum guaranteed
royalties which are payable by the licensee. The Company records as
commission revenue its proportionate share of the minimum guarantee when
all material terms of the contracts have been agreed to by the parties, a
cash payment or reasonable assurance of collectability is received and any
performance contingencies have been met. It is at this point that the
Company has substantially performed all of its obligations under the
contract.
For contracts not providing minimum guaranteed royalties and for royalty
amounts in excess of the minimum guarantee, the Company records commission
revenue based upon its share of earned royalties from the sales of the
related products.
Television, Film and Video Productions - Through the Company's
wholly-owned subsidiary, 4Kids Productions, Inc., the Company accounts for
its activities associated with the production of entertainment programming
in accordance with Statement of Position 00-2 ("SOP 00-02"), Accounting by
Producers or Distributors of Films which as a result of SFAS No.139,
superseded Financial Accounting Standards No. 53 ("SFAS No. 53"),
Financial Reporting by Producers and Distributors of Motion Picture Films.
SOP 00-02 establishes, among other things, how an entity should recognize
revenue from a sale or licensing arrangement of a film and is effective
for financial statements for fiscal years beginning after December 15,
2000. The adoption of SOP 00-02 did not have a material effect on the
consolidated financial position of the Company. Under SOP 00-02, the
Company capitalizes costs associated with each individual production and
such costs are classified as non-current assets. Such costs are amortized
against the related revenue as such revenue is recognized. Amortization
rates may change as a result of changes in estimated future revenue.
Periodically, the Company evaluates the anticipated future revenue of such
films produced by the Company against the net realizable value of the
capitalized film costs and, where appropriate, reduces the carrying value
of such capitalized film costs to their estimated net realizable amount.
Any such reduction in the carrying value of such capitalized film costs
would result in a corresponding charge to earnings.
F-6
Media Buying, Planning and Distribution Services - Through the Company's
wholly-owned subsidiary, The Summit Media Group, Inc. ("Summit Media"),
the Company provides media planning and buying services for clients in
both print and broadcast media. Summit Media is compensated based on a
percentage of the media it places. Such revenue is recognized at the time
the related media runs. Summit Media also provides television distribution
services for which it receives a fee based on a percentage of the license
fee paid by the broadcaster or, in the case of syndicated programming, a
percentage of the advertising sales generated by the program that is
syndicated. Such revenue is recognized at the time the distribution
services are completed and the license fee or the advertising sales of the
related program are reasonably known. Summit Media will reflect a
liability for media payable and a corresponding receivable from its
clients in circumstances where Summit Media assumes the payment obligation
for advertising media commitments.
Furniture, Equipment and Leasehold Improvements - Furniture, equipment and
leasehold improvements are recorded at cost less accumulated depreciation.
Depreciation is computed using various methods over the estimated lives of
the assets or in the case of leasehold improvements, the shorter of the
estimated useful life or the remaining lease term.
Imputed Interest - The Company imputes interest on the noncurrent portion
of accounts receivable at an average rate of 5 % for 2001 and 7 % for
2000.
Cash and Cash Equivalents - At December 31, 2001 and 2000 respectively,
the Company had cash equivalents consisting primarily of funds invested in
A-1, P-1 rated commercial paper and Treasury bills of approximately
$87,059,173 and $103,298,786 respectively, with original maturities of 90
days or less. Included in cash and cash equivalents are accounts in
various banks which maintain balances in excess of the FDIC insured limit
of $100,000 per bank. At December 31, 2001 and 2000, respectively, the
excess cash amounted to a total of $17,286,326 and $14,350,545.
Investments - Management determines the appropriate classification of its
debt securities at the time of purchase. Debt securities for which the
Company has both the intent and ability to hold to maturity are classified
as held to maturity. These securities are carried at amortized cost. At
December 31, 2001, the Company had no investments that qualified as
trading or available for sale.
At December 31, 2001 the Company's investments in debt securities were
classified as short-term investments. The Company maintains these balances
principally in money market funds and A-1, P-1 rated commercial paper with
various financial institutions. These financial institutions are located
in different areas of the U.S. and Company policy is designed to limit
exposure to any one institution. The Company performs periodic evaluations
of the relative standing of those financial institutions that participate
in the Company's investment strategy.
Investment in Equity Securities - During the quarter ended September 30,
2001, the Company completed its purchase of a 3% equity interest in the
Pokemon Company, a closely held Japanese company, which was organized in
1998 by Nintendo Co. Ltd, Creatures, Inc. and Game Freak, Inc., the
creators of Pokemon, to manage and control all rights throughout the world
to Pokemon. The Company accounts for this investment on the cost basis and
has classified it as a non-current asset on the accompanying balance
sheets.
Fair Value of Financial Instruments - Carrying amounts of certain of the
Company's financial instruments, including cash and equivalents, accrued
payroll, and other accrued liabilities, approximate fair value because of
their short maturities. The fair values of investments are determined
using quoted market prices for those securities or similar financial
instruments.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
F-7
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from
those estimates.
Reclassifications - Certain amounts have been reclassified in year 2000 to
conform to the current year's presentation.
New Accounting Pronouncements - In July 2001, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 141, "Business Combinations"
(effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 prohibits pooling-of-interests accounting for
acquisitions initiated after June 30, 2001. SFAS No. 142 specifies that
goodwill and some intangible assets will no longer be amortized but
instead will be subject to periodic impairment testing. The Company
believes that the adoption of SFAS No. 141 and SFAS No. 142 will not have
a significant impact on its financial statements. In August 2001, the FASB
issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS
No. 143 requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is incurred. The
provisions of SFAS No. 143 are effective for fiscal years beginning after
June 15, 2002. The Company will adopt SFAS No. 143 beginning in the first
fiscal quarter of fiscal 2003. The Company believes that the adoption of
SFAS No. 143 will not have a material impact on its results of operations
or financial position. In October 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No.
144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". The primary
objectives of SFAS No. 144 were to develop one accounting model based on
the framework established in SFAS No. 121, and to address significant
implementation issues. The provisions of SFAS No. 144 are effective for
fiscal years beginning after December 15, 2001. The Company will adopt
SFAS No. 144 beginning in the first fiscal quarter of fiscal 2002. The
Company believes that the adoption of SFAS No. 144 will not have a
material impact on its results of operations or financial position.
2. INVESTMENTS
Details as to investments are as follows:
December 31,
2001 2000
Amortized Cost Fair Value Amortized Cost Fair Value
Held-to-maturity:
Commercial paper $ 6,873,656 $ 6,873,656 $31,011,401 $31,011,401
Corporate bond $ 2,280,848 $ 2,253,623 $ -- $ --
----------- ----------- ----------- -----------
Investments $ 9,154,504 $ 9,127,279 $31,011,401 $31,011,401
=========== =========== =========== ===========
3. ACCOUNTS RECEIVABLE AND MEDIA PAYABLE/DUE TO LICENSORS
Generally, licensing contracts provide for the Company to collect, on
behalf of the licensor, royalties including minimum guarantees from the
licensees. The Company records as accounts receivable its proportionate
share of such minimum guarantees and its share of earned royalties in
excess of guarantees.
Due to licensors represents amounts collected by the Company on behalf of
licensors, which are generally payable to such licensors after the close
of the quarter.
Additionally, accounts receivable include amounts due from clients for
earned commissions and the cost of related media placed on their behalf in
circumstances where the Company has assumed the payment obligation for
such media. In such circumstances, the Company will record a corresponding
liability for media payable. Accounts receivable consist of the following:
F-8
December 31,
2001 2000
Gross accounts receivable $ 14,835,479 $ 16,713,439
Allowance for doubtful accounts (520,795) (520,795)
------------ ------------
14,314,684 16,192,644
Less long-term portion 4,662,130 1,265,159
------------ ------------
$ 9,652,554 $ 14,927,485
============ ============
4. FILM INVENTORY
At December 31, 2001, there was $4,182,372 of capitalized film costs.
Amortization of capitalized film costs were $3,090,542, $3,325,943 and
$3,887,350 in 2001, 2000 and 1999, respectively. Inclusive in the amortization
above, the Company recorded charges of approximately $592,000 and $2,031,000 in
2000 and 1999 respectively, to reduce the carrying value of film inventory
primarily related to producing "WMAC Masters" and "Monster Wars" television
programs. These reductions of carrying values were based on the Company's
periodic evaluation of anticipated future revenue against the net realizable
value of capitalized cost. At December 31, 2001, the percentage of unamortized
film cost expected to be amortized within the next three years is over 80%.
Film inventory consists of the following components:
December 31,
2001 2000
Opening balance $ 2,428,407 $ 915,935
Additions 4,844,507 4,838,415
----------- -----------
7,272,914 5,754,350
Amortization (3,090,542) (3,325,943)
----------- -----------
Ending Balance $ 4,182,372 $ 2,428,407
=========== ===========
Development/Preproduction $ 1,277,465 $ 2,134,281
Production 973,181 125,848
Completed not released 215,291 --
Completed released 1,716,435 168,278
----------- -----------
$ 4,182,372 $ 2,428,407
=========== ===========
5. REVENUES/MAJOR CUSTOMERS
Licensing commission revenues included on the Statements of Income are net
of licensor participations of approximately $67,272,000, $183,030,000 and
$142,433,000 in 2001, 2000 and 1999, respectively.
F-9
The percentages of revenue from major properties and customers/licensees
are as follows:
Year Ended December 31,
2001 2000 1999
Percentage of revenue derived from
major properties (revenue in
excess of 10 percent of
total revenue) 66% 95% 82%
Number of major properties 1 1 1
Percentage of revenue derived
from major customers/licensees
(revenue in excess of 10 percent
of total revenue) 26% 53% 39%
Number of major customers/licensees 2 2 1
Additionally, through the Company's London office and network of
international subagents, which allow it to license its properties through
the world, the Company recognized approximately $5,772,000, $9,446,000 and
$673,000 in net revenue from international sources, primarily in Europe,
for 2001, 2000 and 1999, respectively.
6. INCOME TAXES
The Company has provided for deferred income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," whereby deferred income taxes are determined based upon
the enacted income tax rates for the years in which these taxes are
estimated to be payable or recoverable. Deferred income taxes arise from
temporary differences resulting from a difference between the tax basis of
an asset or liability and its reported amount in the financial statements.
The income tax provision/(benefit) includes the following:
Years Ended December 31,
2001 2000 1999
Current:
Federal $ 4,886,000 $ 18,214,000 $ 13,507,000
State and local 1,543,000 5,480,000 5,019,000
Foreign 314,000 1,977,000 --
------------ ------------ ------------
6,743,000 25,671,000 18,526,000
------------ ------------ ------------
Deferred:
Federal 1,304,000 55,000 (727,000)
State and local 223,000 9,000 (166,000)
------------ ------------ ------------
1,527,000 64,000 (893,000)
------------ ------------ ------------
$ 8,270,000 $ 25,735,000 $ 17,633,000
============ ============ ============
F-10
The provision for taxes as reported is different than the tax provision
computed by applying the statutory Federal rate of 35 percent. The
differences are as follows:
Years Ended December 31,
2001 2000 1999
Income before income
tax provision $ 20,513,787 $ 64,507,580 $ 41,271,426
============ ============ ============
Provision at the
statutory Federal rate $ 7,180,000 $ 22,578,000 $ 14,445,000
Provision for state and
local income taxes net of
Federal income tax benefit 1,136,000 3,568,000 3,154,000
Effect of lower foreign
tax rate (52,000) (329,000) --
Other 6,000 (82,000) 34,000
------------ ------------ ------------
$ 8,270,000 $ 25,735,000 $ 17,633,000
============ ============ ============
Income tax benefits, which related to the exercise of non-qualified stock
options reduced current taxes payable and increased additional paid-in
capital by approximately $3,419,000, $1,818,000 and $18,400,000 in 2001,
2000 and 1999, respectively.
The Company's deferred tax liabilities are net of deferred tax assets of
approximately $888,000 and $317,000 at December 31, 2001 and 2000,
respectively. The components of the deferred tax balances at December 31,
2001 and 2000 are as follows:
Years Ended December 31,
2001 2000
Commissions not currently
recognized for tax
reporting purposes $(2,760,000) $(1,019,000)
State and Local taxes
deductible for tax
reporting (357,000) --
Provision for doubtful
accounts not currently
deductible for tax
reporting purposes 214,000 223,000
Film inventory valuation
adjustment not currently
deductible for tax reporting
purposes 255,000 57,000
Depreciation and rent expense
not currently deductible
for tax reporting purposes 225,000 --
Other 194,000 37,000
----------- -----------
$(2,229,000) $ (702,000)
=========== ===========
The Company has determined that earnings for 2001 of approximately
$1,047,000 of its foreign subsidiary will remain invested overseas for the
indefinite future. It is impractical to determine the ultimate tax effects
of remittance of these earnings.
F-11
7. STOCK OPTIONS
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its stock option plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans. Had compensation cost
for the Company's stock option plans been determined based upon the fair
value at the grant date for awards under these plans consistent with the
methodology prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the Company's net income
and net income per share would have decreased by approximately $2,138,000,
$1,637,000 and $2,745,000, or $.18, $.14 and $.23 basic earnings per
share, $.16, $.13, $.22 diluted earnings per share for 2001, 2000 and
1999, respectively. The weighted average fair value of options granted was
$9.457, $28.375 and $20.77 during 2001, 2000 and 1999, respectively. The
fair value of the options granted during 2001, 2000 and 1999 are estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: dividend yield 0% for all years, volatility of 56%,
124% and 114% for 2001, 2000 and 1999, respectively, risk-free interest
rate of 4.81%, 4.40% and 6.55% for 2001, 2000 and 1999, respectively, and
an expected life of three years based on the estimated holding period
giving consideration to past experience and current stock price levels.
The Company has various stock option plans (the "Plans"). Options may be
exercised for a period of not more than ten years after the date of grant.
Unless otherwise determined by the Company's Stock Option Committee or by
contract with the recipient of the stock option grant, each option is
immediately exercisable with respect to 50 percent of the shares subject
to the option and becomes exercisable with respect to the other 50 percent
on the first anniversary of the date of grant. Certain of the Plans permit
the Committee to grant nonqualified options, with an exercise price of not
less than 85 percent of the fair market value of the common stock; all
other options must be at 100 percent of the fair market value.
The Company has outstanding stock options as follows:
Options Per Share Price
Outstanding at
December 31, 1998 4,944,288 0.458 - 3.104 1.433
========= ======= ======= =======
Options granted 265,000 10.313 - 33.280 29.380
Options expired (15,000) 3.250 - 3.250 3.250
Options exercised (2,669,550) 0.528 - 3.104 1.310
--------- ------- ------- -------
Outstanding at
December 31, 1999 2,524,738 0.458 - 33.281 4.500
========= ======= ======= =======
Options granted 50,000 28.375 - 28.375 28.375
Options exercised (222,738) 0.458 - 10.313 1.680
--------- ------- ------- -------
Outstanding at
December 31, 2000 2,352,000 0.458 - 33.281 5.278
========= ======= ======= =======
Options granted 738,000 8.938 - 19.760 9.457
Options exercised (466,215) 0.458 - 8.938 1.904
--------- ------- ------- -------
Outstanding at
December 31, 2001 2,623,785 $ 0.771 - $33.281 $ 7.054
========= ======= ======= =======
Exercisable at
December 31, 2001 2,329,785 $ 0.771 - $33.281 $ 6.734
========= ======= ======= =======
Under the Company's various stock option plans, 552,000 of the Company's
common stock were available at December 31, 2001 for future issuance.
F-12
Additionally, on January 2, 2002 the Company granted 548,500 non-qualified
stock options to various employees, executive officers and Directors at an
exercise price of $20.03 the market price of the Company's common stock on
that date.
At December 31, 2001, there were 3,175,785 shares of the Company's common
stock reserved for issuance upon the exercise of stock options. The
following table summarizes information about fixed-price stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------------- ------------------------
Weighted Weighted
Number Weighted Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/01 Contractual Life Price at 12/31/01 Price
$ 0.4583 - $ 1.8958 1,101,300 2.8 years $ 1.21 1,101,300 $ 1.21
$ 2.6875 - $10.3125 1,212,485 4.1 years $ 6.34 938,485 $ 5.58
$17.2500 - $33.2813 310,000 5.3 years $30.59 290,000 $31.42
--------- ---------
2,623,785 3.7 years $ 7.05 2,329,785 $ 6.73
========= =========
8. STOCK SPLITS
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. On August 12, 1999, the Company's Board of Directors
approved the declaration of a 2 for 1 stock split effective for
shareholders of record on September 1, 1999.
The effect of the stock splits has been recognized retroactively in the
stockholders' equity accounts on the balance sheets as of December 31,
1999 and in all share and per share data in the accompanying consolidated
financial statements, notes to financial statements and supplemental
financial data. Stockholders' equity accounts have been restated to
reflect the reclassification of an amount equal to par value of the
increase in issued common shares from the additional paid-in capital
account.
9. EARNINGS 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. The following table reconciles Basic EPS with Diluted EPS
for the three years ended December 31, 2001.
F-13
For the Year Ended 2001
Income Shares Per Share
Basic earnings per share:
Income available to
common shareholders $12,243,787 12,163,927 $ 1.01
Effect of dilutive security:
Stock options -- 1,217,146 --
----------- ---------- --------
Diluted earnings per share $12,243,787 13,381,073 $ 0.92
=========== ========== ========
For the Year Ended 2000
Income Shares Per Share
Basic earnings per share:
Income available to common
shareholders $38,772,580 11,947,217 $ 3.25
Effect of dilutive security:
Stock options -- 1,145,436 --
----------- ---------- --------
Diluted earnings per share $38,772,580 13,092,653 $ 2.96
=========== ========== ========
For the Year Ended 1999
Income Shares Per Share
Basic earnings per share:
Income available to common
shareholders $23,638,426 10,741,082 $ 2.20
Effect of dilutive security:
Stock options -- 1,625,267 --
----------- ---------- --------
Diluted earnings per share $23,638,426 12,366,349 $ 1.91
=========== ========== ========
10. COMMITMENTS AND CONTINGENCIES
a. Bonus Plan - Bonuses under the Bonus Plan are based upon an amount
of up to 14 percent of pretax profits. Key officers and employees,
as designated by the Board of Directors, can be included in the
Bonus Plan. For 2001, 2000 and 1999, the Board of Directors, under
the Bonus Plan, awarded the Chairman and CEO of the Company
approximately $370,000, $7,561,000 and $4,771,000, respectively. An
additional amount of approximately $907,000, $1,890,000 and
$1,168,000 under the Bonus Plan was granted to employees in 2001,
2000 and 1999, respectively. For the fiscal year ended December 31,
2001, the Chairman and CEO of the Company voluntarily reduced the
amount of his bonus compensation to $370,000, a reduction of
approximately $1,809,000 from the amount he would otherwise have
been entitled to receive for 2001 under his employment agreement.
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b. Leases - The Company leases certain office and administrative
facilities. Commitments for minimum rentals under non-cancellable
leases at the end of 2001 are as follows:
Year Ending
December 31, Amount
2002 $1,088,036
2003 1,099,965
2004 1,292,596
2005 1,412,197
2006 1,444,899
2007 and thereafter 3,468,273
----------
$9,805,966
==========
Rent expense for all operating leases charged against earnings
amounted to $1,477,637, $600,033 and $438,534 in 2001, 2000 and
1999, respectively.
c. 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 United States 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. On June 21, 2000, the United States District Court
dismissed the RICO claims with prejudice and all other claims
without prejudice. Plaintiffs filed a notice of appeal on July 24,
2000 from the District Court's June 21, 2000 dismissal, and the
appeal is pending.
(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., 4Kids 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
alleges trademark dilution, unfair competition, and a breach of
implied contract. The complaint seeks injunctive relief as well as
monetary damages. On August 6, 2001, the United States District
Court granted summary judgement dismissing the suit. Plaintiff has
filed a notice of appeal from the District Court's dismissal and the
appeal is pending.
While it is impossible to predict the eventual outcome of the
litigation discussed above, the Company believes these litigations
will not have a material adverse effect on the Company's financial
condition and results of operations.
d. Credit Facility - The Company's line of credit ("the Credit
Facility") from JP Morgan Chase would have expired on June 30, 2001.
Under the terms of the Credit Facility, the Company could have
borrowed from time to time for general working capital purposes up
to $5 million. The Company terminated this Credit Facility in March
2001 as it considered its current working capital sufficient for its
anticipated liquidity requirements.
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e. Key Man Clause - Under the terms of the Company's representation
agreements (the "Agreements") with Pokemon USA, Inc. ("PUI") with
respect to the Pokemon property and Nintendo of America, Inc.
("NOA") with respect to the Nintendo properties, in the event that
Mr. Alfred Kahn becomes unavailable due to death, disability,
termination or a major change of duties and an acceptable
replacement for Mr. Kahn is not found within a specified period of
time, or there is a change in control of the Company resulting in a
major change of duties for Mr. Kahn, PUI and NOA have the option to
terminate their respective agreements. The Company would, however,
continue to be paid on license agreements in place at the time such
options were exercised.
f. Employment Contracts - The Company has employment agreements and
arrangements with its executive officers and certain management
personnel. The agreements generally continue until terminated by the
executive or the Company, and provide for severance payments under
certain circumstances. The majority of the agreements and
arrangements provide the employees with certain additional rights
after a Change of Control (as defined) of the Company occurs. The
agreements include a covenant against competition with the Company,
which extends for a period of time after termination for any reason.
As of December 31, 2001, if all of the employees under contract were
terminated by the Company without good cause or following a Change
of Control, (as defined) under these contracts, the Company's
liability would be approximately $10,903,000.
These employment agreements provide for an aggregate minimum annual
base compensation of $1,645,000 expiring on various dates through
2003.
g. Deferred Revenue - Master Toy Licensee - 4Kids Entertainment
Licensing, Incorporated, (formally known as Leisure Concepts,
Incorporated), a wholly owned subsidiary of the Company, is the
exclusive Merchandise Licensing Agent for the "Pokemon" property
outside Asia. The master toy licensee ("Licensee") for the "Pokemon"
property and The Pokemon Company LLC, (the assignee of certain
rights and obligations of Nintendo of America Inc. with respect to
the "Pokemon" property) have entered into a new agreement (the
"Agreement") effective January 1, 2001. The Agreement supersedes the
original Merchandise License Agreement, dated as of May 14, 1998 as
amended in September, 1999.
Under the revised terms of the Agreement, the parties have agreed,
inter alia, that Licensee will pay a minimum royalty for the period
starting January 1, 2001 and ending December 31, 2003. 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 not less than $7,500,000 over the period of the
Agreement.
Additionally, Licensee has agreed that any amounts paid by the
Licensee under the original Merchandise License Agreement including
the advance paid in April, 2000 are non-refundable and
non-recoupable against any future royalties. Accordingly,
approximately $2,300,000 of deferred revenue at December 31, 2000
related to the original Merchandise License Agreement was recognized
as revenue in the quarter ended March 31, 2001.
11. 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 and Film
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.
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The Company's reportable segments are strategic business units which,
while managed separately, work together as a vertically integrated
Entertainment Company.
The Company's headquarters and major sales office are located in the
United States, with one sales office located in the United Kingdom.
Substantially all consolidated revenue and assets are derived and held
within the United States operations.
Financial information by business segments follows:
MEDIA & TV & FILM
LICENSING TV DISTRIBUTION PRODUCTION TOTAL
2001
Revenues $ 28,145,703 $ 4,146,924 $ 9,244,994 $ 41,537,621
Amortization -- -- 3,090,542 3,090,542
Segment Profit 17,046,813 788,941 2,678,033 20,513,787
Segment Assets 126,434,447 8,983,786 8,320,804 143,739,037
Interest Income 4,357,519 190,797 -- 4,548,316
2000
Revenues $ 65,109,607 $ 3,513,791 $ 19,374,070 $ 87,997,468
Amortization -- -- 3,325,943 3,325,943
Segment Profit 51,767,974 121,466 12,618,140 64,507,580
Segment Assets 160,788,003 6,797,824 8,558,512 176,144,339
Interest Income 6,461,208 154,224 -- 6,615,432
1999
Revenues $ 49,892,732 $ 3,111,305 $ 7,478,332 $ 60,482,369
Amortization -- -- 3,887,350 3,887,350
Segment Profit 38,613,609 234,809 2,423,008 41,271,426
Segment Assets 110,752,722 5,132,882 11,218,043 127,103,647
Interest Income 959,591 200,206 -- 1,159,797
12. SUMMARIZED QUARTERLY DATA (UNAUDITED):
Following is a summary of the quarterly results of operation for the years ended
December 31, 2001, and 2000:
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Fiscal Quarter
First Second Third Fourth Total
- ------------------------------------------------------------------------------------------------------------------------------------
2001
Net sales $12,263,708 $9,148,269 $9,875,681 $10,249,963 $41,537,621
Net earnings 5,289,493 3,259,459 1,494,712 2,200,123 12,243,787
Basic earnings per share $0.44 $0.27 $0.12 $0.18 $1.01
Diluted earnings per share $0.40 $0.24 $0.11 $0.16 $0.92
2000
Net sales $20,699,519 $23,398,277 $24,740,549 $19,159,123 $87,997,468
Net earnings 9,329,999 10,177,591 10,722,620 8,542,370 38,772,580
Basic earnings per share $0.79 $0.86 $0.90 $0.71 $3.25
Diluted earnings per share $0.71 $0.78 $0.82 $0.65 $2.96
13. SUBSEQUENT EVENTS
In January 2002, The Company entered into a multi-year agreement with Fox
Broadcasting Company ("Fox") to lease the television network's Saturday
morning programming block. Beginning with the September 2002 broadcast
year, the Company will provide all programming content for Fox's Saturday
morning broadcast block, which airs from 8am to 12pm ET/PT (7am to 11am
CT). Under the terms of the agreement, the Company will also have the
right to retain all revenue from the network advertising sales during the
four-hour time period. The agreement has an initial term of four broadcast
years, with the Company having the option to extend the term for up to two
additional broadcast years. 4Kids will pay a license fee of approximately
$25.3 million for each broadcast year during the initial term of the
agreement. The agreement provides for 50% of the fee for the first
broadcast season to be paid within ten days of the execution of the
Agreement, with the balance of the fee for the first broadcast season to
be paid in four equal installments in September, December, February and
April of the broadcast year. Accordingly, on January 28, 2002, the Company
paid $12,625,000, which represents 50% of the first year's fee to Fox.
Fees for each subsequent broadcast year are payable 50% in the June
preceding the beginning of the broadcast year (which is September) with
the balance of the fee for the broadcast year payable in four equal
installments in September, December, February and April. Additionally, the
Agreement requires the Company to establish a $25,000,000 Letter of Credit
for the benefit of Fox, which Letter of Credit may be reduced by the
Company as installments of the final year's license fee are paid. The
agreement further provides that, at the Company's option, up to $10.3
million of each year's fee may be paid in the Company's common stock. Over
the initial four year term of the agreement, the Company will pay Fox
aggregate license fees of $101,200,000.
******
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