UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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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
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
Securities registered pursuant to Section 12(b) of the Act: None
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. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes X No ___
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 June 28, 2002 as
reported on the New York Stock Exchange Market, was approximately $163,792,455.
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 13,135,008
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(Title of Class) (No. of Shares Outstanding at March 26, 2003)
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2003 are incorporated by reference into Part
III of this Form 10-K Report.
PART I
Item 1. Business
(a) General Development and Narrative Description of Business. 4Kids
Entertainment, Inc., together with the subsidiaries through which the Company's
businesses are conducted (the "Company"), is a diversified entertainment and
media company specializing in the youth oriented market with operations in the
following business segments: Licensing, Advertising Media and Broadcast,
Television and Film Production/Distribution. The Company was organized as a New
York Corporation in 1970.
Licensing - The Company's wholly-owned subsidiaries, 4Kids Entertainment
Licensing, Inc. ("4Kids Licensing") and 4Kids International, Ltd. ("4Kids
International"), are engaged in the business of licensing the commercial rights
to popular children's television and film 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, housewares, footwear and publishing
rights. 4Kids Licensing also licenses merchandising rights in connection with
certain television shows and motion pictures produced by the Company. 4Kids
International, which is based in London, manages the Company's properties in the
United Kingdom and European marketplace. Licensing revenues accounted for
approximately 54%, 68% and 74% of consolidated net revenues for the years ended
December 31, 2002, 2001 and 2000, respectively.
Among the properties represented exclusively by 4Kids Licensing are the
following:
o "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 video games) outside of Asia through
August 31, 2008. The Company, however, receives certain marketing
fees with respect to the "Yu-Gi-Oh!" trading cards and video games.
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" began
in 1998 and expires on December 31, 2005. "Pokemon" started in Japan
as a Nintendo Game Boy cartridge that involves finding, capturing,
collecting and training over 250 different "Pokemon" characters.
o "Teenage Mutant Ninja Turtles" was launched in 1984 as a 40-page
comic book created by Peter Laird and Kevin Eastman. From the late
1980s through the early 1990s, children's entertainment was
dominated by the original animated adventures of the "Teenage Mutant
Ninja Turtles" ("TMNT"). During 2002, the Company was appointed the
exclusive worldwide licensing agent as well as, co-owner and
co-producer of a new animated series featuring all new TMNT episodes
which began broadcasting on the Saturday morning programming block
("Fox Box") the Company leases from Fox Broadcasting Company
("Fox").
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., Kirby, Donkey Kong,
Zelda video games and the GameBoy and Nintendo GameCube video
platforms. These video games have historically 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 "Cubix"; a 26 episode computer animated television series featuring
robots being produced by the Company began domestic broadcast on the
Kids' WB network in 2001. The Company is a co-owner and 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 had adapted "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" had its first domestic
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broadcast in first run syndication in September 2001.
o "Ultimate Muscle"; an animated television program produced by Toei
Animation in Japan. "Ultimate Muscle", which combines comedy with
wrestling, began in Japan over fifteen years ago. The Company
represents all television and merchandise licensing rights for
"Ultimate Muscle" outside of Asia through August 31, 2008.
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 "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"; Twenty years after their original launch, the
"Cabbage Patch Kids" are back. The one-of-a-kind "Cabbage Patch
Kids" owned by Original Appalachian Artworks, Inc., are not
purchased, they are adopted. Each "Kid" comes with a name, birth
certificate, and adoption papers, which includes an oath to be a
good parent. The Company represents all merchandise licensing rights
for the "Cabbage Patch Kids" through December 31, 2003.
o "Fighting Foodons"; is a wacky comedy adventure that launched on the
Fox Box in September 2002. This animated series is all about the
secret art of culinary combat, where food monsters battle for
supremacy. The Company represents the worldwide merchandise and
broadcast rights for "Fighting Foodons" outside of Asia through July
2009.
o "Cramp Twins"; an animated television program produced by
T.V.Loonland, is the #1 rated series among kids 4-15 in the United
Kingdom. The Company represents all television and merchandise
rights for "Cramp Twins" in the United States through September 2006
and the worldwide master toy license rights through September 2004.
o "Pirate Islands"; a live-action adventure program produced by Tele
Images International. The Company represents all television and
merchandise rights for "Pirate Islands" in the United States through
2007.
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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.
"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.
As noted previously, the Company is a co-owner of the "Cubix" and the new
"Teenage Mutant Ninja Turtles" television series.
Product Concepts. 4Kids Technology, Inc., a wholly-owned subsidiary, was
established in 2002 to develop ideas and concepts for licensing which integrate
new and existing technologies with traditional game and toy play patterns.
Websites 4Kids, Inc., a wholly-owned subsidiary, also established in 2002,
specializes in website development by creating websites designed to enhance and
support the marketing of children's properties represented by the Company.
Advertising Media and Broadcast - The Company, through a multi-year agreement
with the Fox Broadcasting Company, leases Fox's Saturday morning programming
block. The Company provides all programming content to be broadcast on the Fox
Box, which airs on Saturday mornings from 8am to 12pm eastern/pacific time (7am
to 11am central time); and retains all of the revenue from network advertising
sales for the four-hour time period. During 2002, the Company created a new
wholly-owned subsidiary, 4Kids Ad Sales, Inc. to manage and account for the
revenue and costs associated with the Fox Box.
The Company's wholly-owned subsidiary, The Summit Media Group, Inc. ("Summit
Media"), provides media planning and buying services for clients in both print
and broadcast media. Summit Media is compensated by receiving a percentage of
the media it places. 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.
Advertising Media and Broadcast services accounted for 21%, 7%, and 3% of
consolidated net revenues for the years ended December 31, 2002, 2001 and 2000,
respectively.
Television and Film Production/Distribution - The Company's wholly-owned
subsidiary, 4Kids Productions, Inc. ("4Kids Productions"), produces and acquires
animated and live-action television programs and theatrical motion pictures for
distribution to the television, home video and theatrical markets. 4Kids
Productions adapts foreign programming for the United States market and also
produces original animated television programming for domestic and international
broadcast. Additionally, 4Kids Productions will typically produce original music
compositions for use with its television and film production activities.
Television and film
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production and programming/distribution accounted for 25%, 25% and 23% of
consolidated net revenues for the years ended December 31, 2002, 2001 and 2000,
respectively.
The Company created two additional wholly-owned subsidiaries in 2002, 4Kids
Entertainment Music, Inc. ("4Kids Music") and 4Kids Entertainment Home Video,
Inc. ("4Kids Home Video"). 4Kids Music was formed to market and administer the
musical operations for the Company on certain existing and newly created music
associated with its television programming. 4Kids Home Video was formed to
market and administer the Company's home video operations associated with its
television programming.
(b) Financial Information About Industry Segments.
Financial information regarding industry segments can be found in note 13 to
Notes to the Company's Consolidated Financial Statements.
(c) 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 revenues are highly subject to changing trends in the toy, game
and entertainment business, its 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.
Two properties "Yu-Gi-Oh!" and "Pokemon", contributed revenues of approximately
64% of consolidated net revenues for fiscal 2002. In 2002, Warner Bros., a
division of Time Warner Entertainment Company, L.P. and Konami Corporation
contributed a combined 40% of consolidated net revenues. For more information on
Revenues/Major Customers, please see Note 7 to the Notes to Consolidated
Financial Statements.
(d) 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" and the new "Teenage
Mutant Ninja Turtles" television episodes being co-produced.
(e) 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
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second half of the year has generally been greater than during the first half of
the year. Additionally, advertising revenues derived from the sale of commercial
time on the Fox Box will be higher in the fourth quarter commensurate with the
demand for commercial time by children's advertisers for the holiday season.
However, the Company's revenues in fiscal 2002 were influenced more by the
popularity trends of "Yu-Gi-Oh!" and "Pokemon", and advertising revenue derived
from the sale of commercial time on the Fox Box (which commenced operations in
2002), than the historical seasonal trends of toy and game sales.
(f) 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 Advertising Media and Broadcast activities as well as its
Television and Film Production/Distribution activities operate in highly
competitive industries and compete with many companies with substantially
greater resources and distribution networks than the Company.
The Company's ability to derive advertising revenue from the sale of commercial
time on the Fox Box will depend on the popularity of the television shows the
Company broadcasts. The Company faces significant competition, including
competition from shows it produced ("Pokemon", "Yu-Gi-Oh!" and "Cubix"), which
are broadcast on a competing network.
(g) Employees. As of March 26, 2003, the Company had a total of 188
full-time employees consisting of 76 employees in licensing, including the
corporate office, 30 in Advertising Media and Broadcast and 82 in Television and
Film Production/Distribution.
Item 2. Properties
The following table sets forth, with respect to properties leased (none are
owned) by the Company at March 26, 2003, 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 25,000
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
Pokemon trading cards, challenged longstanding practices in the trading
card industry, including the practice of randomly inserting premium cards
in packages of Pokemon cards. The lawsuit claimed that these practices
constitute illegal gambling activity in violation of California and
federal law, including the Federal Racketeer Influenced and Corrupt
Organization Act ("RICO") and sought an unspecified amount of monetary
damages.
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 appealed the June 21, 2000 dismissal
to the United States Court of Appeals for the Ninth Circuit. On August 20,
2002, the United States Court of Appeals for the Ninth Circuit affirmed
the United 'States District Court's dismissal of the RICO claims with
prejudice, and all other state law claims without prejudice.
(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 alleged
that the Pokemon trademark infringes upon the Plaintiff's "Monster in my
Pocket" trademark. The complaint also alleged trademark dilution, unfair
competition, and a breach of implied contract. The complaint sought
injunctive relief as well as monetary damages. On August 6, 2001, the
United States District Court granted summary judgment dismissing the suit.
Plaintiff appealed the dismissal of the case by the U.S. District Court.
On February 4, 2003, the U.S. Court of Appeals for the Ninth Circuit
affirmed the decision by the U.S. District Court to dismiss the suit.
The Company believes these litigations will not have a material adverse
effect on the Company's financial condition and results of operation.
The Company from time to time is involved in litigation arising in the
ordinary course of its business. The Company does not believe that such
litigation to which the Company or any subsidiary of the Company is a
party or of which any of their property is the subject will, individually
or in the aggregate, have a material adverse effect on the Company's
financial position or the results of its operations.
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Item 4. Submission of Matters to a Vote of Security Holders
During the Company's fiscal quarterly period ended December 31, 2002, 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 is listed for trading on the New York Stock
Exchange under the symbol "KDE". The following table indicates high and low
sales quotations for the periods indicated based upon information supplied by
the New York Stock Exchange.
2002 Low High
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First Quarter $15.06 $20.99
Second Quarter 16.50 21.42
Third Quarter 17.25 24.15
Fourth Quarter 21.69 29.86
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
(b) Number of Holders of Common Stock. The number of holders of record of
the Company's Common Stock on March 26, 2003 was 352, which does not include
individual participants in security position listings.
(c) Dividends. There were no dividends or other distributions made by the
Company during 2002 or 2001. 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) Equity Compensation Plan. Information regarding the Company's equity
compensation plan is incorporated by reference into Item 12 in Part III of this
Form 10-K.
(e) 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 2002.
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Item 6. Selected Financial Data (in thousands of dollars, except per share data)
Year Ended December 31,
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2002 2001 2000 1999 1998
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Total Net Revenues $53,140 $41,538 $87,998 $60,482 $14,767
Net Income 6,990 12,244 38,773 23,638 2,743
Net Income Per Common $0.55 $1.01 $3.25 $2.20 $.31
Share-Basic
Net Income Per Common 0.51 0.92 2.96 1.91 0.27
Share- Diluted
Weighted Average Common 12,653,102 12,163,927 11,947,217 10,741,082 8,982,738
Shares Outstanding-Basic
Weighted Average Common 13,726,642 13,381,073 13,092,653 12,366,349 10,227,081
Shares Outstanding-Diluted
At Year End 2002 2001 2000 1999 1998
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Total Assets $162,839 $143,739 $176,144 $127,104 $34,961
Working Capital 114,298 106,570 96,351 56,982 10,824
Stockholders' Equity 132,671 118,458 101,908 60,943 15,405
The amounts shown above give effect to the April 1999 three for two stock split
and the September 1999 two for one stock split. The Company did not declare or
pay any cash dividends during the five-year period ended December 31, 2002.
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
(In thousands of dollars unless otherwise specified)
General
The Company receives revenues from a number of sources, principally Licensing,
Advertising Media and Broadcast and Television and Film Production/Distribution.
Beginning in September 2002, the Company began to recognize revenue from the
sale of advertising time related to its lease of the Fox Saturday morning
television block more fully described in Note 12 to the Company's consolidated
financial statements. 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 the changing trends in the toy, game
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. As a result, the Company's revenues and net income may
fluctuate significantly between comparable periods. The Company's licensing
revenues have historically been primarily derived from the license of toy and
game concepts. Thus, a substantial portion of the Company's revenues and net
income are subject to
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the seasonal variations of the toy and game industry. Typically, a majority of
toy orders are shipped in the third and fourth calendar quarters. In addition,
the Company's media buying subsidiary provides media services to a significant
number of toy and video game companies and the Company's advertising sales
subsidiary sells advertising time where revenues will be higher in the fourth
quarter commensurate with the demand for commercial time by children's
advertisers for the holiday season. As a result, much of their revenues are
earned in the fourth quarter when the majority of toy and video game advertising
occurs. In the Company's usual experience, its revenues during the second half
of the year have generally been greater than during the first half of the year.
However, the Company's revenues in the most recent fiscal years were influenced
more by popularity trends and movie and home video release dates of "Yu-Gi-Oh!"
and "Pokemon" and advertising revenue derived from the sale of commercial time
in the Fox Box (which commenced operations in 2002), than the historical
seasonal trends of toy and game sales. Further, guarantee and minimum royalty
payments may occur throughout the year, some of which are recognized as revenue
upon the execution and delivery of license agreements.
Critical Accounting Policies
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
Company's consolidated financial statements, located elsewhere in this annual
report filing. Below is a summary of the most significant of these policies.
Revenue Recognition - Merchandise licensing revenues are recognized when the
underlying royalties from the sales of the related products are earned. The
Company recognizes guaranteed royalties at the time the arrangement becomes
effective if the Company has no significant direct continuing involvement with
the underlying property or obligation to the licensee. Where the Company has
significant continuing direct involvement with the underlying property or
obligation to the licensee, guaranteed minimum royalties are recognized ratably
over the term of the license or based on sales of the related products, if
greater. Licensing advances and guaranteed payments collected, but not yet
earned by the Company are classified as deferred revenue in the accompanying
consolidated balance sheets.
Broadcast advertising revenues are recognized when the related commercials are
aired and are recorded net of agency commissions and an appropriate reserve when
advertising is sold together with a guaranteed audience delivery. Internet
advertising revenues are recognized on the basis of impression views in the
period the advertising is displayed. Fee-based commissions for media planning
and buying services, for clients in both print and broadcast media, are
recognized at the time the related media runs.
Episodic television series initially produced for networks and first-run
syndication are generally licensed to domestic and foreign markets
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concurrently. The length of the revenue cycle for episodic television varies
depending on the number of seasons a series remains in active production.
Revenues arising from television license agreements are recognized in the period
that the films or episodic television series are available for telecast.
Production and adaptation costs reimbursed or charged to the licensor are
included in net revenue and the corresponding costs are included in production
service costs in the accompanying consolidated statements of income.
Revenues from home video and DVD sales, net of a reserve for returns, are
recognized on the date that video and DVD units are shipped by our distributor
to wholesalers/retailers. Consistent with the practice in the home video
industry, the Company estimates the reserve for returns based upon its review of
historical returns rates and expected future performance.
Revenues from music sales, net of a reserve for returns, are recognized on the
date units are shipped by the Company's distributor to wholesalers/retailers. In
the case of musical performance revenues, the revenue is recognized when the
musical recordings are broadcast or performed.
Film and Television Costs - Effective January 1, 2001, the Company adopted AICPA
Statement of Position ("SOP") No. 00-2, Accounting by Producers or Distributors
of Films. SOP 00-2 established new accounting standards for producers and
distributors of films, which resulted in changes in revenue recognition and
accounting for exploitation costs, including advertising and marketing expenses
and development and overhead costs. The adoption of SOP 00-2 did not have a
material impact on the Company's financial position or results of operations.
The Company capitalizes and amortizes the cost of production, including
overhead, participations and talent residuals, for television programming using
the individual-film-forecast method under which such costs are amortized for
each television program in the ratio that revenue earned in the current period
for such program bears to management's estimate of the total revenues to be
realized from all media and markets for such program. Management regularly
reviews, and revises when necessary, its total revenue estimates on a
title-by-title basis, which may result in a change in the rate of amortization
applicable to such title and/or a write-down of the value of such title to
estimated fair value. These revisions can result in significant
quarter-to-quarter and year-to-year fluctuations in film write-downs and rates
of amortization. If a total net loss is projected for a particular title, the
associated film and television costs are written down to estimated fair value.
Effective January 1, 2001, all exploitation costs, including advertising and
marketing costs, are expensed as incurred. Television adaptation and production
costs that are adapted and/or produced are stated at the lower of cost, less
accumulated amortization, or fair value.
Fox Broadcast Agreement - In January 2002, the Company entered into a multi-year
agreement with Fox to lease its television network's Saturday morning
programming block. The Company is providing all programming content for the Fox
Box and commenced doing so with the September 2002 broadcast year. 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
fee of $25,312 for each broadcast year during the initial term of the agreement.
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The agreement provided for 50% of the fee for the first broadcast season to be
paid within ten days of the execution of the short form agreement in February,
2002, with the balance of the fee for the first broadcast season to be paid in
four equal installments in the following September 2002, December 2002, February
2003 and April 2003 of the broadcast year. All payments required to be paid on
or prior to March 31, 2003 have been made.
The cost of the Fox Box has been and will be capitalized and amortized over the
broadcast season based on estimated advertising revenue. During 2002, the
Company paid Fox and certain affiliates a total of $19,301, representing a
portion of the first year fees of which $9,444 was amortized as of December 31,
2002. The remaining $9,857 representing the unamortized portion of the first
broadcast season's fee paid is included in "Prepaid Fox broadcast fee" on the
accompanying consolidated balance sheets as of December 31, 2002. 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 the following September,
December, February and April. Additionally, the agreement required 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 fee are
paid. As of December 31, 2002, the Company had received a commitment for the
letter of credit, but the letter of credit has not been issued pending
completion of the long form agreement with Fox. Upon the issuance of the letter
of credit, the Company will grant a security interest in its cash balances to
the issuing bank to secure the amount of such letter of credit and will
appropriately disclose these amounts as restricted cash in its financial
statements.
The agreement further provides that, at the Company's option, up to $10,300 of
each year's fee may be paid by delivering shares of the Company's common stock.
Over the initial four year term of the agreement, the Company will pay Fox an
aggregate fee of $101,250. Further, the Company will incur additional costs to
program the four hour block and to sell the related network 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 ability to recover the cost of its fees payable to Fox will depend
on the popularity of the television programs the Company broadcasts on the Fox
Box and the general market demand and pricing of advertising time for Saturday
morning children's broadcast television. The popularity of such programs impacts
audience levels and the level of the network advertising rates that the Company
can charge. Additionally, the success of merchandise licensing programs and home
video sales based on such television programs broadcast on the Fox Box is
dependent on consumer acceptance of the properties. If the Company estimates
that it will be 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, the Company would record a charge to
earnings to reflect an expected loss on the Fox agreement in the period in which
the deficiency or factors affecting the recoverability of the fee payable become
known. The Company will be required to make certain assumptions and estimates
about future events such as advertising rates, audience viewing levels and
licensing revenue in evaluating its ability to recover the cost of the Fox fee.
Such estimates and assumptions are subject to market forces and factors beyond
the control of the Company and are inherently subject to change.
There can be no assurance that the Company will be able to recover the full cost
of the Fox fee and in the event it cannot, it would record the resulting charge
to earnings to reflect an expected loss on the Fox fee, which could be
significant.
- 13 -
Recently Issued Accounting Pronouncements - Costs Associated with Exit or
Disposal Activities. In June 2002, Financial Accounting Standards Board ("FASB")
issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. Such standard requires costs associated with exit or disposal
activities (including restructurings) to be recognized when the costs are
incurred, rather than at a date of commitment to an exit or disposal plan. SFAS
No. 146 nullifies Emerging Issue Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). Under SFAS No.
146, a liability related to an exit or disposal activity is not recognized until
such liability has actually been incurred whereas under EITF Issue No. 94-3 a
liability was recognized at the time of a commitment to an exit or disposal
plan. The provisions of this standard are effective for exit or disposal
activities initiated after December 31, 2002. The Company does not believe that
the adoption of this standard will have a material impact on the Company's
financial statements.
Guarantees - In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. Such Interpretation elaborates on
the disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation apply to guarantees issued or
modified after December 31, 2002. The disclosure provisions of this
Interpretation are effective for financial statements with annual periods ending
after December 15, 2002. The Company does not believe that the adoption of this
standard will have a material effect on its financial position or results of
operations.
Stock-Based Compensation - On December 31, 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation--Transition and Disclosure. This
standard amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method (expense treatment) of accounting for stock-based employee
compensation. This standard also requires prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company adopted the disclosure requirements of this statement as of December 31,
2002 (see Note 9 to the Company's consolidated financial statements). Should the
Company elect to utilize the fair value based method for its stock-based
compensation in the future, it must adopt the remaining provisions of SFAS No.
148.
Consolidation of Variable Interest Entities - On January 17, 2003, the FASB
issued Interpretation No. 46, Consolidation of Variable Interest Entities. Such
Interpretation addresses consolidation of entities that are not controllable
through voting interests or in which the equity investors do not bear the
residual economic risks and rewards. These entities have been commonly referred
to as special purpose entities. The Interpretation provides guidance related to
identifying variable interest entities and determining whether such entities
should be consolidated. It also provides guidance related to the initial and
subsequent measurement of assets, liabilities and noncontrolling interests in
newly consolidated variable interest entities and requires disclosures for both
the primary beneficiary of a variable interest entity and other beneficiaries of
the entity. FASB
- 14 -
Interpretation No. 46 is effective for newly created Variable Interest Entities
beginning February 1, 2003 and for existing Variable Interest Entities as of the
third quarter of 2003. The Company does not expect this interpretation to have
any impact on its financial position or results of operations.
Results of Operations
The following table sets forth our results of operations expressed as a
percentage of total net revenues for the periods indicated.
Fiscal Year Ended December 31,
2002 2001 2000
Net Revenues 100.0% 100.0% 100.0%
---- ---- ----
Selling, general & administrative 47.7% 54.1% 30.4%
Production service costs 6.4% 3.4% 1.5%
Amortization of television
and film costs and Fox
broadcast fee 27.0% 4.0% 2.3%
---- ---- ----
Total Costs and Expenses 81.1% 61.5% 34.2%
---- ---- ----
Income from Operations 18.9% 38.5% 65.8%
Interest income 3.1% 10.9% 7.5%
---- ---- ----
Income before income tax 22.0% 49.4% 73.3%
Income tax provision 8.8% 19.9% 29.2%
---- ---- ----
Net Income 13.2% 29.5% 44.1%
==== ==== ====
Year Ended December 31, 2002 compared to Year Ended December 31, 2001 ("000").
Consolidated net revenues for the year ended December 31, 2002 increased 28% or
$11,602 to $53,140 in 2002 from $41,538 in 2001. The increase was primarily
attributable to the Advertising Media and Broadcast segment where net revenue
increased $8,171 to $11,200 primarily due to sales of advertising time on the
Fox Box which began broadcast operations in September 2002. Net revenue in the
Licensing segment increased approximately $791 to $28,937 for the year ended
December 31, 2002 when compared to the prior year. Significantly increased
licensing and fee revenue from the "Yu-Gi-Oh!" property offset decreased
licensing revenue from "Pokemon" and "Cabbage Patch Kids". "Pokemon" and
"Yu-Gi-Oh!" ranked among the most popular children's television programs during
2002. Net revenue for the Television and Film Production/Distribution segment
increased $2,640 to $13,003. In this segment, increased revenues from home
video, music and television broadcast license fees earned on "Yu-Gi-Oh!" and
additional production service revenue for work performed on the "Kirby" and
"Teenage Mutant Ninja Turtles" television programs were partially offset by
decreased revenues earned from the "Pokemon" movies and "Cubix" television
program license fees.
- 15 -
Selling, general and administrative expenses increased 13% or approximately
$2,892 compared to 2001, primarily due to increased payroll and benefits
resulting from higher staffing levels in advertising sales, the Fox Box network
and the Company's website operations; all of which began operations in 2002.
Along with these increased payroll and benefits costs, the Company incurred
additional infrastructure costs to support these new operations. The Company
also recognized increased bad debt expense primarily due to the bankruptcy
filing of an advertising customer of the Fox Box. These increases were partially
offset by reduced advertising and marketing costs. The Company's initial
promotional campaign for the Fox Box which began in the second half of 2002
involved lower spending compared to the promotional and advertising campaign
which launched the "Yu-Gi-Oh!", "Cubix" and "Tama and Friends" properties in the
second half of 2001. Additionally, for the fiscal year ended December 31, 2002,
the Chairman and CEO of the Company along with three officers voluntarily
reduced the entire amount of their bonus compensation, a reduction of
approximately $1,169 from the amount they would otherwise have been entitled to
receive for 2002 under their employment agreements. 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.
Production service costs increased 137% or $1,952 to $3,375 compared to 2001.
This increase was attributable to certain television production costs related to
the "Kirby" and "Teenage Mutant Ninja Turtles" television programs which began
production in 2002 for which the Company is reimbursed. When the Company is
reimbursed for production costs, it categorizes them as Production service costs
and reflects a corresponding amount in revenue for the amount of the
reimbursement.
At December 31, 2002, there were approximately $5,653 of capitalized film
production costs relating primarily to various stages of production on 26
episodes of "Cubix", 37 episodes of "Tama and Friends", 104 episodes of
"Yu-Gi-Oh!" 52 episodes of "Ultra-Man", 52 episodes of "Ultimate Muscle", and 26
episodes of "Fighting Foodons" and 26 episodes of "Teenage Mutant Ninja
Turtles." Amortization of capitalized film costs increased by $3,244 including a
write-down of certain film and television costs of $462, for the year ended
December 31, 2002 due to increased amortization on "Yu-Gi-Oh!", "Ultra Man",
"Ultimate Muscle" and the "Cubix" television programs as compared to the prior
year. Based on management's ultimate revenue estimates as of December 31, 2002,
approximately 43% of the total completed and unamortized film and television
costs are expected to be amortized during 2003, and over 80% of the total
completed and unamortized film and television costs are expected to be amortized
during the next three years.
Amortization of the Fox broadcast fee was $9,444 as the Fox Box commenced
operations in September 2002. The fees payable to Fox and affiliates have been
and will be capitalized and amortized over the broadcast season based on
estimated advertising revenue. As of December 31, 2002, the Company had paid Fox
and certain affiliates a total amount of $19,301, representing a portion of the
first year fees of which $9,444 was amortized as of December 31, 2002. The
remaining $9,857 representing the unamortized portion of the first broadcast
season's fee paid is included in "Prepaid Fox broadcast fee" on the accompanying
consolidated balance sheets as of December 31, 2002.
Interest income decreased $2,892 in 2002, compared to 2001, as a result of lower
levels of invested cash during 2002 and the declining interest rate environment.
- 16 -
Income tax expense decreased $3,568, or 43%, to $4,702 in 2002, compared to
$8,270 in 2001, due to lower pre-tax income. The Company's effective tax rate
remained relatively consistent at approximately 40% for both 2002 and 2001.
As a result of the above, the Company had net income for 2002 of $6,990 as
compared to net income in 2001 of $12,244.
Year Ended December 31, 2001 compared to Year Ended December 31, 2000 ("000").
Net revenues for the year ended December 31, 2001 decreased 53% or $46,460 to
$41,538 in 2001 from $87,998 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.
Revenues from the Company's Advertising Media and Broadcast services increased
from 2000 levels primarily due to media buying activities. Advertising Media and
Broadcast services activities totaled $3,029 or 7% of total net revenue for 2001
as compared to $2,488 or 3% in 2000. Commissions earned on media placed
increased as a result acquiring new clients in the media business.
Revenues from the Company's Television and Film Broadcast/Distribution
activities decreased $10,036 to $10,363 in 2001, a decrease of 49%. Revenues in
this segment of the Company's business accounted for approximately 25% and 23%
of total net revenue in 2001 and 2000, respectively. 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
$4,297 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, the
Company's selling, general and administrative expenses decreased 16% from the
prior year,
- 17 -
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 $344 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.
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.
Liquidity and Capital Resources ("000")
During 2002, the Company's cash and cash equivalents and short-term investment
balances decreased by $24,101 to $89,499, primarily as a result of payments made
to acquire the Fox Box broadcast rights and other film rights, increases in
accounts receivable and decreases in due to licensors.
Cash flows from operating activities for the years ended December 31, 2002, 2001
and 2000 were ($23,622), ($33,769) and $75,402, respectively. Working capital,
consisting of current assets less current liabilities, was $114,298 as of
December 31, 2002 and $106,570 as of December 31, 2001.
Cash flows from investing activities for the year ended December 31, 2002, 2001,
and 2000 were ($4,251), $19,577, and ($32,454), respectively. As of December 31,
2002, the Company had approximately $10,787 invested primarily in short-term
commercial paper and government obligations. During 2002, the Company purchased
property and equipment of $2,619, which related to the expansion of the
Company's production facility, which was comprised primarily of computer and
television equipment and leasehold improvements, as compared to purchases of
property and equipment of $1,554 in 2001.
Cash flows from financing activities for the years ended December 31, 2002, 2001
and 2000 were $2,068, $888 and $374, respectively. Cash flows from financing
activities were generated by proceeds from the exercise of stock options by the
Company's employees.
The Company's new license agreement with Fox to program the network's four hour
Saturday morning children's block beginning in September 2002, requires the
Company to pay an annual fee of $25,312. Under the terms of the agreement,
during 2002, the Company paid Fox and certain affiliates a total of $19,301,
representing a portion of the first years fee, with two additional payments of
$3,162 each due in February and April 2003. 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
- 18 -
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. As of December 31, 2002, the Company had
received a commitment for the letter of credit, but the letter of credit had not
been issued pending completion of the long form agreement with Fox. Upon the
issuance of the letter of credit, the Company will grant a security interest in
its cash balances to the issuing bank to secure the amount of such letter of
credit and will appropriately disclose these amounts as restricted cash in its
financial statements. The agreement further provides that, at the Company's
option, up to $10,300 of each year's fee may be paid by delivering shares of the
Company's common stock. Further, the Company will incur additional costs to
program the four hour block and to sell the related network 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.
Our aggregate minimum payment obligations under various operating leases related
to certain office, administrative and production facilities, and the Fox License
fee are as follows:
Year ending Fox
December 31, Leases License Total
------- -------- --------
2003 1,206 25,312 26,518
2004 1,402 25,312 26,714
2005 1,522 25,312 26,834
2006 1,557 6,326 7,883
2007 1,557 -- 1,557
2008 and thereafter 1,911 -- 1,911
------ ------- -------
Total $9,155 $82,262 $91,417
====== ======= =======
The Company believes that existing cash and short-term investments and
anticipated cash to be generated from future operations will be sufficient to
meet our cash needs over the next twelve months for working capital, capital
expenditures and strategic investments. However, during such period or
thereafter, depending on the size and number of the projects and investments
related to the growth strategy, within the children's entertainment market, the
Company may seek additional financing alternatives.
Forward-looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements made by or on behalf of the Company. We may from time
to time make written or oral statements that are "forward-looking," including
statements contained in this report and other filings with the Securities and
Exchange Commission and in reports to our stockholders. Such statements may, for
example, express expectations or projections about future actions that we may
take, including restructuring or strategic initiatives or about developments
beyond our control including changes in domestic or global economic conditions.
These statements are made on the basis of management's views and assumptions as
of the time the statements are made. There can be no assurance, however, that
our expectations will come to pass.
- 19 -
Factors that may affect forward-looking statements. For the Company, a wide
range of factors could materially affect future developments and performance,
including the following:
Changes in Company-wide or business-unit strategies, which may result in changes
in the types or mix of businesses in which the Company is involved or chooses to
invest;
Changes in U.S., global or regional economic conditions, which may affect
purchases of Company-licensed consumer products, the advertising market for
broadcast and television programming and the performance of the Company's
theatrical, music and home entertainment releases;
Increased competitive pressures, both domestically and internationally, which
may, among other things, lead to increased expenses in such areas as television
programming acquisition and motion picture production and marketing;
Technological developments that may affect the distribution of the Company's
creative products or create new risks to the Company's ability to protect its
intellectual property;
Labor disputes, which may lead to increased costs or disruption of operations in
any of the Company's business units;
Changing public and consumer taste, which may among other things, affect the
Company's entertainment, broadcasting and consumer products businesses generally
or result in increases in broadcasting losses or loss of advertising revenue;
and
International, political and military developments that may, among other things,
result in increases in broadcasting costs or loss of advertising revenue.
This list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative, but by no means exhaustive.
Accordingly, all forward-looking statements should be evaluated with the
understanding of their inherent uncertainty.
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
- 20 -
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.
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 and of the
Company's equity compensation plans 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.
Item 14. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
As required by new Rule 13a-14 under the Securities Exchange Act of 1934, within
the 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in ensuring that information
required to be disclosed by the Company in the reports it files or submits under
the Exchange Act is included in such reports.
(b) Changes in internal controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their most recent evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
- 21 -
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, 2002 and 2001 F-2
Consolidated Statements of Income - Years Ended
December 31, 2002, 2001 and 2000 F-3
Consolidated Statements of Stockholders' Equity and Comprehensive
Income - Years Ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows - Years Ended
December 31, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6 to F-24
(a) 2. and (d) Financial Statement Schedules:
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, 2002.
- 22 -
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 31, 2003 4KIDS ENTERTAINMENT, INC.
By /s/ Alfred R. Kahn
----------------------------
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 31, 2003
/s/ Alfred R. Kahn
- -------------------------------
Alfred R. Kahn,
Chairman of the Board,
Chief Executive Officer and
Director
Date: March 31, 2003
/s/ Jay Emmett
- -------------------------------
Jay Emmett,
Director
Date: March 31, 2003
/s/ Steven M. Grossman
- -------------------------------
Steven M. Grossman,
Director
Date: March 31, 2003
/s/ Richard Block
- -------------------------------
Richard Block,
Director
Date: March 31, 2003
/s/ Michael Goldstein
- -------------------------------
Michael Goldstein,
Director
Date: March 31, 2003
/s/ Joseph P. Garrity
- -------------------------------
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)
(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)
1996 Stock Option Plan (*) (15)
1997 Stock Option Plan (*) (17)
1998 Stock Option Plan (*) (18)
1999 Stock Option Plan (*) (19)
2000 Stock Option Plan (*) (20)
2001 Stock Option Plan (*) (21)
2002 Stock Option Plan (*) (22)
Stock Option Agreement, dated June 10, 1992, between the
Registrant and Randy O. Rissman (*) (7)
Stock Option Agreement, dated June 10, 1992, between the
Registrant and Gerald Rissman (*) (7)
Agreement between Nintendo of America, Inc. and the Registrant
dated December 17, 1987 (4)
Agreement of Lease, dated March 28, 1988, between the Registrant
and 1414 Americas Company (2) Amendment, dated July 8, 1994, to
Agreement of Lease between the Registrant and 1414 Americas
Company.
(12) 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 (23) Consent of Deloitte &
Touche LLP, Certified Public Accountants
(99.1) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- ---------
(*) 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.
(22) Incorporated by reference to 2002 Proxy Statement for Annual Meeting of
Shareholders held May 23, 2002.
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
I, Alfred R. Kahn, Chairman of the Board and Chief Executive Officer of 4Kids
Entertainment, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of 4Kids Entertainment,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By: /s/ Alfred R. Kahn
-------------------------
Alfred R. Kahn
Chairman of the Board and
Chief Executive Officer
1
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
I, Joseph P. Garrity, Executive Vice President and Chief Financial Officer of
4Kids Entertainment, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of 4Kids Entertainment,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report
2
financial data and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 31, 2003
By: /s/ Joseph P. Garrity
------------------------
Joseph P. Garrity
Executive Vice President
Chief Financial Officer
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, 2002 and
2001, and the related consolidated statements of income, stockholders' equity
and comprehensive income and cash flows for each of the three years in the
period ended December 31, 2002. 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, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche, LLP
New York, New York
March 26, 2003
F-1
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(In thousands of dollars, except share data)
- --------------------------------------------------------------------------------
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 78,712 $104,445
Investments 10,787 9,155
Accounts receivable - net 38,847 9,653
Prepaid Fox broadcast fee, net of accumulated amortization
of $9,444 in 2002 9,857 --
Prepaid/refundable income taxes 1,635 3,584
Prepaid expenses and other current assets 3,871 4,043
-------- --------
Total current assets 143,709 130,880
PROPERTY AND EQUIPMENT - NET 3,853 2,099
ACCOUNTS RECEIVABLE - Noncurrent, net 5,733 4,662
INVESTMENT IN EQUITY SECURITIES 726 726
FILM AND TELEVISION COSTS 5,653 4,182
DEFERRED INCOME TAXES - Noncurrent 917 --
OTHER ASSETS - net 2,248 1,190
-------- --------
TOTAL ASSETS $162,839 $143,739
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to licensors $ 9,063 $ 16,912
Media payable 5,613 1,588
Accounts payable and accrued expenses 9,776 4,215
Deferred revenue 3,976 97
Deferred income taxes 983 1,498
-------- --------
Total current liabilities 29,411 24,310
DEFERRED INCOME TAXES - Noncurrent -- 731
DEFERRED RENT 757 240
-------- --------
Total liabilities 30,168 25,281
-------- --------
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, 13,135,008 and 12,546,708 shares in 2002 and 2001 131 125
Additional paid-in capital 40,411 33,266
Accumulated other comprehensive income 72 --
Retained earnings 92,057 85,067
-------- --------
Total stockholders' equity 132,671 118,458
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $162,839 $143,739
======== ========
See notes to consolidated financial statements.
F-2
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands of dollars, except share data)
- --------------------------------------------------------------------------------
2002 2001 2000
NET REVENUES $ 53,140 $ 41,538 $ 87,998
----------- ----------- -----------
COSTS AND EXPENSES:
Selling, general and administrative 25,374 22,482 26,779
Production service costs 3,375 1,423 1,315
Amortization of television and film costs and
Fox broadcast fee 14,355 1,667 2,011
----------- ----------- -----------
Total costs and expenses 43,104 25,572 30,105
----------- ----------- -----------
INCOME FROM OPERATIONS 10,036 15,966 57,893
INTEREST INCOME 1,656 4,548 6,615
----------- ----------- -----------
INCOME BEFORE INCOME TAX
PROVISION 11,692 20,514 64,508
INCOME TAX PROVISION 4,702 8,270 25,735
----------- ----------- -----------
NET INCOME $ 6,990 $ 12,244 $ 38,773
=========== =========== ===========
PER SHARE AMOUNTS:
Basic earnings per common share $ 0.55 $ 1.01 $ 3.25
=========== =========== ===========
Diluted earnings per common share $ 0.51 $ 0.92 $ 2.96
=========== =========== ===========
Weighted average common shares
outstanding - basic 12,653,102 12,163,927 11,947,217
=========== =========== ===========
Weighted average common shares
outstanding - diluted 13,726,642 13,381,073 13,092,653
=========== =========== ===========
See notes to consolidated financial statements.
F-3
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands of dollars and shares)
- --------------------------------------------------------------------------------
Accumulated
Additional Other
Common Stock Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income Total
BALANCE, DECEMBER 31, 1999 11,858 $ 118 $ 26,774 $ 34,050 $ -- $ 60,942
Proceeds from exercise of stock options 223 2 372 -- -- 374
Tax benefit from exercise of stock options -- -- 1,818 -- -- 1,818
Comprehensive income:
Net income -- -- -- 38,773 -- 38,773
--------
Total comprehensive income -- -- -- -- -- 38,773
------ -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2000 12,081 $ 120 $ 28,964 $ 72,823 $ -- $101,907
Proceeds from exercise of stock options 466 5 883 -- -- 888
Tax benefit from exercise of stock options -- -- 3,419 -- -- 3,419
Comprehensive income:
Net income -- -- -- 12,244 -- 12,244
--------
Total comprehensive income -- -- -- -- -- 12,244
------ -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2001 12,547 $ 125 $ 33,266 $ 85,067 $ -- $118,458
Proceeds from exercise of stock options 588 6 2,062 -- -- 2,068
Tax benefit from exercise of stock options -- -- 5,083 -- -- 5,083
Comprehensive income:
Net income -- -- -- 6,990 -- 6,990
Translation adjustment, net of tax of $48 -- -- -- -- 72 72
--------
Total comprehensive income -- -- -- -- -- 7,062
------ -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 2002 13,135 $ 131 $ 40,411 $ 92,057 $ 72 $132,671
====== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-4
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands of dollars)
- --------------------------------------------------------------------------------
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,990 $ 12,244 $ 38,773
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 865 766 357
Amortization of television and film costs and Fox broadcast fee 14,355 1,667 2,011
Provision for doubtful accounts 901 -- 200
Deferred income taxes (2,163) 1,527 64
Tax benefit on exercise of stock options 5,083 3,419 1,818
Changes in operating assets and liabilities:
Accounts receivable (31,166) 1,878 30,937
Film and television costs (6,382) (3,421) (3,523)
Prepaid/refundable income taxes 1,949 940 (2,709)
Prepaid Fox broadcast fee (19,301) -- --
Prepaid expenses and other current assets 172 (1,876) (965)
Other assets - net (1,058) (430) (108)
Due to licensors (7,849) (39,884) (239)
Media payable 4,025 (1,411) 646
Accounts payable and accrued expenses 5,561 (5,003) 3,654
Income taxes payable -- (1,977) 1,942
Deferred revenue 3,879 (2,448) 2,544
Deferred rent 517 240 --
--------- --------- ---------
Net cash (used in) provided by operating activities (23,622) (33,769) 75,402
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of investments 41,366 62,098 --
Purchase of investments (42,998) (40,241) (31,012)
Investment in equity securities -- (726) --
Purchase of property and equipment (2,619) (1,554) (1,442)
--------- --------- ---------
Net cash (used in) provided by investing activities (4,251) 19,577 (32,454)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 2,068 888 374
--------- --------- ---------
Net cash provided by financing activities 2,068 888 374
--------- --------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 72 -- --
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (25,733) (13,304) 43,322
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 104,445 117,749 74,427
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 78,712 $ 104,445 $ 117,749
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID DURING THE YEAR FOR:
Income Taxes $ 1,874 $ 1,105 $ 24,584
========= ========= =========
See notes to consolidated financial statements.
F-5
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(In thousands of dollars, except share and per share data)
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
4Kids Entertainment, Inc., together with the subsidiaries through which the
Company's businesses are conducted (the "Company"), is a diversified
entertainment and media company specializing in the youth oriented market with
operations in the following business segments: Licensing, Advertising Media and
Broadcast, Television and Film Production/Distribution.
Licensing - The Company's wholly-owned subsidiaries, 4Kids Entertainment
Licensing, Inc. ("4Kids Licensing") and 4Kids International, Ltd. ("4Kids
International"), are engaged in the business of licensing the commercial rights
to popular children's 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, housewares, footwear and publishing rights. 4Kids Licensing
also licenses merchandising rights in connection with certain television shows
and motion pictures produced by the Company. 4Kids International, which is based
in London, manages the Company's properties in the United Kingdom and European
marketplace.
4Kids Technology, Inc., a wholly-owned subsidiary, was established in 2002 to
develop ideas and concepts for licensing which integrate new and existing
technologies with traditional game and toy play patterns. Websites 4Kids, Inc.,
a wholly-owned subsidiary, also established in 2002, specializes in website
development by creating websites designed to enhance and support the marketing
of children's properties represented by the Company.
Advertising Media and Broadcast - The Company, through a multi-year agreement
with the Fox Broadcasting Company ("Fox"), leases Fox's Saturday morning
programming block (the "Fox Box"). The Company provides all programming content
to be broadcast on the Fox Box, which airs on Saturday mornings from 8am to 12pm
eastern/pacific time (7am to 11am central time); and retains all of the revenue
from network advertising sales for the four-hour time period. During 2002, the
Company created a new wholly-owned subsidiary, 4Kids Ad Sales, Inc., to manage
and account for the revenue and costs associated with the Fox Box.
The Company's wholly-owned subsidiary, The Summit Media Group, Inc. ("Summit
Media"), provides media planning and buying services for clients in both print
and broadcast media. Summit Media is compensated by receiving a percentage of
the cost of the media it places. 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.
Television and Film Production/Distribution - The Company's wholly-owned
subsidiary, 4Kids Productions, Inc. ("4Kids Productions"), produces and acquires
animated and live-action television programs for distribution to the television,
home video and theatrical markets. 4Kids Productions adapts foreign programming
for the US market and also produces original animated television programming
F-6
for domestic and international broadcast. Additionally, 4Kids Productions will
typically produce original music compositions for use with its television and
film production activities.
The Company created two additional wholly-owned subsidiaries in 2002, 4Kids
Entertainment Music, Inc. ("4Kids Music"), and 4Kids Entertainment Home Video,
Inc. ("4Kids Home Video"). 4Kids Music was formed to market and administer the
musical operations for the Company on certain existing and newly created music
associated with its television programming. 4Kids Home Video was formed to
market and administer the Company's home video operations associated with
its television programming.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of 4Kids Entertainment, Inc. and its wholly-owned
subsidiaries after elimination of significant intercompany transactions and
balances. These consolidated financial statements reflect the use of significant
accounting policies, as described below and elsewhere in the notes to the
consolidated financial statements. These financial statements are prepared in
accordance with accounting principles generally accepted in the United States of
America.
Revenue Recognition - Merchandise licensing revenues are recognized when the
underlying royalties from the sales of the related products are earned. The
Company recognizes guaranteed royalties at the time the arrangement becomes
effective if the Company has no significant direct continuing involvement with
the underlying property or obligation to the licensee. Where the Company has
significant continuing direct involvement with the underlying property or
obligation to the licensee, guaranteed minimum royalties are recognized ratably
over the term of the license or based on sales of the related products, if
greater. Licensing advances and guaranteed payments collected, but not yet
earned by the Company, are classified as deferred revenue in the accompanying
consolidated balance sheets.
Broadcast advertising revenues are recognized when the related commercials are
aired and are recorded net of agency commissions and an appropriate reserve when
advertising is sold together with a guaranteed audience delivery. Internet
advertising revenues are recognized on the basis of impression views in the
period the advertising is displayed. Fee-based commissions for media planning
and buying services, for clients in both print and broadcast media, are
recognized at the time the related media runs.
Episodic television series initially produced for networks and first-run
syndication are generally licensed to domestic and foreign markets concurrently.
The length of the revenue cycle for episodic television varies depending on the
number of seasons a series remains in active production. Revenues arising from
television license agreements are recognized in the period that the films or
episodic television series are available for telecast.
Production and adaptation costs reimbursed or charged to the licensor are
included in net revenue and the corresponding costs are included in production
service costs in the accompanying consolidated statements of income. Production
service costs included in net revenue amounted to $3,375, $1,423 and $1,315 in
2002, 2001 and 2000, respectively.
F-7
Revenues from home video and DVD sales, net of a reserve for returns, are
recognized on the date that video and DVD units are shipped by the Company's
distributor to wholesalers/retailers. Consistent with the practice in the home
video industry, the Company estimates the reserve for returns based upon its
review of historical returns rates and expected future performance.
Revenues from music sales, net of a reserve for returns, are recognized on the
date units are shipped by the Company's distributor to wholesalers/retailers. In
the case of musical performance revenues, the revenue is recognized when the
musical recordings are broadcast and/or performed.
Advertising Expense - Advertising costs are expensed as incurred, except for
costs related to the development of a property and/or animated or live-action
television program commercial or media campaign which are expensed in the period
in which the commercial or campaign is first presented. Advertising expenses are
included in selling, general and administrative expenses on the accompanying
consolidated statements of income.
Property and Equipment - Property and equipment are carried at cost, net of
accumulated depreciation and amortization. Depreciation is calculated on the
straight-line method based on the estimated useful lives of the assets, which
range from 3 to 10 years. Amortization of leasehold improvements is computed
using the straight-line method over the estimated useful lives of the related
assets or, if shorter, the lease term. Costs associated with the repair and
maintenance of property are expensed as incurred.
Impairment Of Long-Lived And Intangible Assets - As required by Statement of
Financial Accounting Standards ("SFAS") No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, (which the Company adopted on January 2,
2002), the Company assesses the recoverability of long-lived assets for which an
indicator of impairment exists. The recoverability of assets to be held and used
is measured by comparing the carrying amount of an asset to the future
undiscounted net cash flows expected to be generated by the asset. If an asset
is considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the asset exceeds its fair value. Fair
value of long-lived assets is determined using the expected cash flows
discounted at a rate commensurate with the risk involved. The Company believes
that the future cash flows to be received from our long-lived assets will exceed
the respective assets' carrying value, and accordingly has not recorded any
impairment losses through December 31, 2002.
Cash and Cash Equivalents - All highly liquid investments with original
maturities of three months or less are classified as cash and cash equivalents.
The fair value of cash and cash equivalents approximates the amounts shown on
the financial statements. Cash and cash equivalents consist of unrestricted cash
and short-term investments. Included in cash and cash equivalents are accounts
in various banks which maintain balances in excess of the Federal Deposit
Insurance Corporation (FDIC) insured limit of $100 per bank. At December 31,
2002 and 2001, the excess cash amounted to a total of $61,105 and $88,800,
respectively.
Prepaid Fox Broadcast Fee - The Company has capitalized the broadcast fee paid
to Fox and amortized the amount over the broadcast season based on estimated
advertising revenue. During 2002, the Company paid Fox and certain affiliates a
total of $19,301, representing a portion of the first year fees of which $9,444
was amortized as of December 31, 2002. The remaining $9,857, representing the
unamortized portion of the first broadcast season's fees paid, is included in
"Prepaid Fox broadcast fee" on the accompanying consolidated balance sheets as
of December 31, 2002 (see Note 12.h.).
F-8
Investments - Management determines the appropriate classification of its debt
securities at the time of purchase and re-evaluates such designation as of each
balance sheet date. Debt securities for which the Company has both the intent
and ability to hold to maturity are classified as held-to-maturity and are
recorded at amortized cost. At December 31, 2002 and 2001, the Company had no
investments that qualified as trading or available for sale.
At December 31, 2002 and 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 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 to "Pokemon" throughout the world.
The Company accounts for this investment on the cost basis and has classified it
as a noncurrent asset on the accompanying consolidated balance sheets.
Film and Television Costs - Effective January 1, 2001, the Company adopted AICPA
Statement of Position ("SOP") No. 00-2, Accounting by Producers or Distributors
of Films. SOP 00-2 established new accounting standards for producers and
distributors of films, which resulted in changes in revenue recognition and
accounting for exploitation costs, including advertising and marketing expenses
and development and overhead costs. The adoption of SOP 00-2 did not have a
material impact on the Company's financial position or results of operations.
The Company capitalizes and amortizes the cost of production, including
overhead, participations and talent residuals, for television programming using
the individual-film-forecast method under which such costs are amortized for
each television program in the ratio that revenue earned in the current period
for such program bears to management's estimate of the total revenues to be
realized from all media and markets for such program. Management regularly
reviews, and revises when necessary, its total revenue estimates on a
title-by-title basis, which may result in a change in the rate of amortization
applicable to such title and/or a write-down of the value of such title to
estimated fair value. These revisions can result in significant
quarter-to-quarter and year-to-year fluctuations in film write-downs and rates
of amortization. If a total net loss is projected for a particular title, the
associated film and television costs are written down to estimated fair value.
Effective January 1, 2001, all exploitation costs, including advertising and
marketing costs, are expensed as incurred. Television adaptation and production
costs that are adapted and/or produced are stated at the lower of cost, less
accumulated amortization, or fair value.
Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, accounts receivable, investments, prepaid expenses and other
current assets, due to licensors, media payable, accounts payable and accrued
expenses, and other liabilities approximate their fair values principally
because of the short-term maturities of these 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 financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
materially from those estimates.
F-9
Comprehensive Income - The Company follows SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires companies to classify items of other comprehensive
income by their nature in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the consolidated balance
sheet.
Foreign Currency - For the Company's international subsidiary, where the local
currency is the functional currency translation gains and losses are reported as
part of the accumulated other comprehensive income (loss) component of
stockholders' equity as a cumulative translation adjustment, while all other
transactional gains and losses are recognized in the consolidated statements of
income.
Reclassifications - Certain amounts reported for prior years have been
reclassified to conform to the current year's presentation.
Concentration Of Credit Risk - Financial instruments, which potentially subject
the Company to concentration of credit risk, consist primarily of temporary cash
investments and accounts receivable. The majority of the cash and cash
equivalents are maintained with major financial institutions in the United
States of America. The counterparties to the agreements relating to investment
instruments consist of various United States governmental units and financial
institutions of high credit standing. Credit risk on accounts receivable is
minimized by the Company by performing ongoing credit evaluations of its
customers' financial condition and monitoring its exposure for credit losses and
maintaining allowances for anticipated losses.
Income Taxes - Deferred income taxes are recorded for the temporary differences
between the financial statement and tax bases of assets and liabilities using
current tax rates. Valuation allowances are established against deferred tax
assets whenever circumstances indicate that it is more likely than not that such
assets will not be realized in future periods.
Stock-Based Compensation - On December 31, 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure. This standard amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method (expense
treatment) of accounting for stock-based employee compensation. This standard
also requires prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company adopted the
disclosure requirements of this statement as of December 31, 2002. Should the
Company elect to utilize the fair value based method for its stock-based
compensation in the future, it must adopt the remaining provisions of SFAS No.
148.
The Company accounts for stock-based compensation under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB No. 25").
Under FASB Interpretation 44, Accounting for Certain Transactions involving
Stock Compensation, an Interpretation of APB No. 25, outside directors are
considered employees for purposes of applying APB No. 25 if they are elected by
shareholders. Consequently, no compensation expense for employees and directors
is recognized.
F-10
The following table illustrates the pro forma effect on net income and net
income per basic and diluted shares had the Company applied the fair value
recognition provisions of Statement No. 123 for the years ended December 31,
2002, 2001 and 2000. See Note 9 for the assumptions used to compute the pro
forma amounts.
2002 2001 2000
Net income as reported $ 6,990 $ 12,244 $ 38,773
Deduct stock-based employee
compensation expense determined
under fair value based method
for all awards, net of tax 2,795 1,276 984
--------- ---------- ----------
Pro forma net income $ 4,195 $ 10,968 $ 37,789
========= ========== ==========
Net income per share:
Reported
Basic $ 0.55 $ 1.01 $ 3.25
Diluted $ 0.51 $ 0.92 $ 2.96
Pro forma
Basic $ 0.33 $ 0.90 $ 3.16
Diluted $ 0.31 $ 0.82 $ 2.89
Recently Issued Accounting Pronouncements - Costs Associated with Exit or
Disposal Activities. In June 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. Such standard requires costs
associated with exit or disposal activities (including restructurings) to be
recognized when the costs are incurred, rather than at a date of commitment to
an exit or disposal plan. SFAS No. 146 nullifies Emerging Issue Task Force
("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). Under SFAS No. 146, a liability related to an exit or
disposal activity is not recognized until such liability has actually been
incurred whereas under EITF Issue No. 94-3 a liability was recognized at the
time of a commitment to an exit or disposal plan. The provisions of this
standard are effective for exit or disposal activities initiated after December
31, 2002. The Company does not believe that the adoption of this standard will
have a material impact on the Company's financial statements.
Guarantees - In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. Such Interpretation elaborates on
the disclosures to be made by a guarantor about its obligations under certain
guarantees issued. It also clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this Interpretation apply to guarantees issued or
modified after December 31, 2002. The disclosure provisions of this
Interpretation are effective for financial statements with annual periods ending
after December 15, 2002. The Company does not believe that the adoption of this
standard will have a material impact on its financial position or results of
operations.
Consolidation of Variable Interest Entities - On January 17, 2003, the FASB
issued Interpretation ("FIN") No. 46, Consolidation of Variable Interest
Entities. Such Interpretation addresses consolidation of entities that are not
controllable through voting interests or in which the equity investors do not
bear the residual economic risks and rewards. These entities have been commonly
F-11
referred to as special purpose entities. The Interpretation provides guidance
related to identifying variable interest entities and determining whether such
entities should be consolidated. It also provides guidance related to the
initial and subsequent measurement of assets, liabilities and noncontrolling
interests in newly consolidated variable interest entities and requires
disclosures for both the primary beneficiary of a variable interest entity and
other beneficiaries of the entity. FIN No. 46 is effective for newly created
Variable Interest Entities beginning February 1, 2003 and for existing Variable
Interest Entities as of the third quarter of 2003. The Company does not expect
this interpretation to have any impact on its financial position or results of
operations.
3. INVESTMENTS
Short-term investments consisted of the following as of:
December 31,
2002 2001
Amortized Cost Fair Value Amortized Cost Fair Value
Held-to-maturity:
Commercial paper $ 795 $ 795 $ 6,874 $ 6,874
Treasury bills 9,992 9,994 -- --
Corporate bonds -- -- 2,281 2,254
------- ------- ------- -------
$10,787 $10,789 $ 9,155 $ 9,128
======= ======= ======= =======
4. ACCOUNTS RECEIVABLE AND MEDIA PAYABLE/DUE TO LICENSORS
Generally, licensing contracts provide for the Company to collect, on behalf of
the licensor, royalties from the licensees. The Company records as accounts
receivable only its proportionate share of such earned royalties.
Due to licensors represents amounts collected by the Company on behalf of
licensors, which are generally payable to such licensors after the close of each
calendar quarter.
Additionally, accounts receivable include amounts due from customers for
advertising revenue earned from airing commercial spots on the Fox Box, as well
as amounts due from clients for earned commissions and the cost of related media
placed on their behalf in circumstances where the Company is making the payment
for the client for such media. In such circumstances, the Company will record a
corresponding liability for media payable.
F-12
Accounts receivable consisted of the following as of:
December 31,
2002 2001
Gross accounts receivable $ 46,002 $ 14,836
Allowance for doubtful accounts (1,422) (521)
-------- --------
44,580 14,315
Less long-term portion 5,733 4,662
-------- --------
$ 38,847 $ 9,653
======== ========
5. FILM AND TELEVISION COSTS
Film and television costs consisted of the following as of:
December 31,
2002 2001
Opening balance $ 4,182 $ 2,428
Additions 6,382 3,421
-------- --------
10,564 5,849
Amortization (4,911) (1,667)
-------- --------
Ending Balance $ 5,653 $ 4,182
======== ========
Development/Preproduction $ 132 $ 1,277
Production 2,221 973
Completed not released 2,267 216
Completed released 1,033 1,716
-------- --------
$ 5,653 $ 4,182
======== ========
Amortization of capitalized film and television costs were $4,911, $1,667 and
$2,011 in 2002, 2001 and 2000, respectively. Amortization expense for 2002
includes a write-down of certain film and television costs of $462. Based on
management's ultimate revenue estimates as of December 31, 2002, approximately
43% of the total completed and unamortized film and television costs are
expected to be amortized during 2003, and over 80% of the total completed and
unamortized film and television costs are expected to be amortized during the
next three years.
F-13
6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
December 31,
2002 2001
Computer equipment and software $2,906 $1,462
Office furniture and fixtures 758 689
Leasehold improvements 2,456 1,435
Office equipment 215 130
------ ------
6,335 3,716
Less accumulated depreciation and
amortization 2,482 1,617
------ ------
$3,853 $2,099
====== ======
7. REVENUES/MAJOR CUSTOMERS
Licensing commission revenues included in the accompanying consolidated
statements of income are net of licensor participations of approximately
$29,337, $67,272 and $183,030 in 2002, 2001 and 2000, respectively.
The percentages of revenue from major properties and customers/licensees are as
follows:
Years Ended December 31,
2002 2001 2000
Percentage of revenue derived from major
properties (revenue in excess of 10 percent
of total revenue) 64% 66% 95%
Number of major properties 2 1 1
Percentage of revenue derived from major
customers/licensees (revenue in excess of
10 percent of total revenue) 40% 26% 53%
Number of major customers/licensees 2 2 2
As of December 31, 2002 and 2001, accounts receivable due from major
customers/licensees listed above represented 44% and 52% of the Company's total
accounts receivable, respectively.
8. INCOME TAXES
The Company has provided for deferred income taxes in accordance with 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.
F-14
The income tax provision (benefit) includes the following as of:
Years Ended December 31,
2002 2001 2000
Current:
Federal $ 5,141 $ 4,886 $18,214
State and local 1,714 1,543 5,480
Foreign 10 314 1,977
------- ------- -------
6,865 6,743 25,671
------- ------- -------
Deferred:
Federal (1,738) 1,304 55
State and local (425) 223 9
------- ------- -------
(2,163) 1,527 64
------- ------- -------
$ 4,702 $ 8,270 $25,735
======= ======= =======
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,
2002 2001 2000
Income before income tax provision $ 11,692 $ 20,514 $ 64,508
======== ======== ========
Provision at the statutory Federal rate $ 4,092 $ 7,180 $ 22,578
Provision for state and local income
taxes net of Federal income tax benefit 773 1,136 3,568
Effect of foreign tax rate 6 (52) (329)
Other (169) 6 (82)
-------- -------- --------
$ 4,702 $ 8,270 $ 25,735
======== ======== ========
Income tax benefits, which related to the exercise of nonqualified stock
options, reduced current taxes payable and increased additional paid-in capital
by approximately $5,083, $3,419 and $1,818 in 2002, 2001 and 2000, respectively.
F-15
The components of the deferred tax balances at December 31, 2002 and 2001 are as
follows:
2002 2001
Deferred income taxes - current:
Commissions not currently recognized for
tax reporting purposes $(1,577) $(1,522)
State and Local taxes deductible for tax reporting -- (357)
Provision for doubtful accounts not currently
deductible for tax reporting purposes 594 214
Other -- 167
------- -------
$ (983) $(1,498)
======= =======
2002 2001
Deferred income taxes - noncurrent:
Commissions not currently recognized for tax
reporting purposes $ -- $(1,211)
Film and televsion costs valuation adjustment
not currently deductible for tax reporting purposes 514 255
Depreciation and amortization not currently deductible
for tax reporting purposes 196 120
Straight-line rent not currently deductible for
tax reporting purposes 207 105
------- -------
$ 917 $ (731)
======= =======
The Company has determined that earnings through 2002 of approximately $3,938 of
its foreign subsidiary will remain invested overseas for the indefinite future
and, accordingly, no deferred tax liability has been recognized. It is
impractical to determine the ultimate tax effects of remittance of these
earnings.
9. STOCK OPTIONS
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 Compensation 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 weighted average fair value of options granted was $7.97, $9.46, and $28.38
during 2002, 2001 and 2000, respectively. The fair value of the options granted
during 2002, 2001 and 2000 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 48%, 56% and 124% for 2002, 2001 and 2000,
respectively, risk-free interest rate of 2.16%, 4.81% and 4.40% for 2002, 2001
and 2000, respectively, and an expected life of four years, three years, and
three years for 2002, 2001, and 2000, respectively, based on the expected life
of the options giving consideration to past experience and current stock price
levels.
F-16
The Company has outstanding stock options as follows:
Weighted
Average
Exercise Price Exercise
Options Per Share Price
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
--------- ------- ------- -------
Exercisable at December 31, 2000 2,327,000 0.458 - 33.281 5.030
--------- ------- ------- -------
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
--------- ------- ------- -------
Options granted 596,500 15.550 - 27.150 19.986
Options exercised (588,300) 0.912 20.030 3.517
Options cancelled (35,000) 19.760 - 33.281 31.350
--------- ------- ------- -------
Outstanding at December 31, 2002 2,596,985 0.771 - 33.281 10.561
========= ======= ======= =======
Exercisable at December 31, 2002 2,376,235 $ 0.771 - $33.281 $ 9.687
========= ======= ======= =======
Under the Company's various stock option plans, options to purchase 610,500
shares of the Company's common stock were available at December 31, 2002 for
future issuance.
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted Weighted
Number Weighted Average Average Number Average
Range of Outstanding Remaing Exercise Exercisable Exercise
Exercise Prices at 12/31/02 Contractual Life Price at 12/31/02 Price
$ 0.7710 - $ 3.3281 1,197,300 2.4 $ 1.8734 1,197,300 $ 1.8734
$ 6.6564 - $ 9.9844 489,185 3.0 $ 8.9375 489,185 $ 8.9375
$ 9.9845 - $ 13.3125 34,000 6.4 $ 10.3125 34,000 $ 10.3125
$ 13.3126 - $ 16.6407 10,000 9.1 $ 15.5500 5,000 $ 15.5500
$ 16.6408 - $ 19.9688 72,500 4.6 $ 18.5079 57,500 $ 18.4178
$ 19.9689 - $ 23.2969 531,500 4.0 $ 20.0316 334,500 $ 20.0313
$ 23.2970 - $ 26.6250 15,000 8.6 $ 24.7700 15,000 $ 24.7700
$ 26.6251 - $ 29.9532 57,500 2.4 $ 28.2152 53,750 $ 28.2895
$ 29.9533 - $ 33.2813 190,000 4.6 $ 33.2813 190,000 $ 33.2813
--------- ---------
2,596,985 2,376,235 $ 9.6870
========= =========
F-17
10. EARNINGS PER SHARE
The Company applies 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, 2002.
Year Ended 2002
Net Income Shares Per Share
Basic earnings per share -
Income available to common
shareholders $ 6,990 12,653,102 $0.55
Effect of dilutive security:
Stock options 1,073,540 (0.04)
---------- ---------- -----
Diluted earnings per share $ 6,990 13,726,642 $0.51
========== ========== =====
Year Ended 2001
Net Income Shares Per Share
Basic earnings per share -
Income available to common
shareholders $ 12,244 12,163,927 $1.01
Effect of dilutive security:
Stock options -- 1,217,146 (0.09)
---------- ---------- -----
Diluted earnings per share $ 12,244 13,381,073 $0.92
========== ========== =====
Year Ended 2000
Net Income Shares Per Share
Basic earnings per share -
Income available to common
shareholders $ 38,773 11,947,217 $3.25
Effect of dilutive security:
Stock options -- 1,145,436 (0.29)
---------- ---------- -----
Diluted earnings per share $ 38,773 13,092,653 $2.96
========== ========== =====
For the years ended December 31, 2002, 2001 and 2000, approximately 256,000,
287,000 and 270,000 shares, respectively, attributable to the exercise of
outstanding options, were excluded from the calculation of diluted EPS because
the effect was antidilutive. No adjustments with respect to these shares were
made to net income in the computation of EPS.
11. DEFINED CONTRIBUTION PLAN
The Company participates in a 401(k) plan covering substantially all employees.
Benefits vest based on number of years of service. The Company's policy is to
match 25% of an employee's contributions, up to 6.0% of an employee's annual
salary. Contributions to the plan by the Company amounted to approximately $89,
$62 and $42 for the years ended December 31, 2002, 2001 and 2000, respectively.
F-18
12. COMMITMENTS AND CONTINGENCIES
a. Bonus Plan - Bonuses under the Bonus Plan are based upon an amount of up
to 10 percent of pretax profits. Key officers and employees, as designated
by the Board of Directors, can be included in the Bonus Plan. For the year
ended December 31, 2002, the Chairman and CEO of the Company, along with
three officers, voluntarily reduced the entire amount of their bonus
compensation. The reduction amounted to approximately $1,169 from the
amount they would otherwise have been entitled to receive for 2002 under
their employment agreements. For 2001 and 2000, the Board of Directors,
under the Bonus Plan, awarded the Chairman and CEO of the Company
approximately $370 and $7,561, respectively. An additional amount of
approximately $907 and $1,890 under the Bonus Plan was granted to
employees in 2001 and 2000, respectively.
b. Leases - The Company leases certain office, administration and production
facilities. Commitments for minimum rentals, not including common charges,
under non-cancellable leases at the end of 2002 are as follows :
Year Ending
December 31, Amount
2003 $ 1,206
2004 1,402
2005 1,522
2006 1,557
2007 1,557
2008 and thereafter 1,911
-------
$ 9,155
=======
Rent expense for all operating leases charged against earnings amounted to
$1,587, $1,477, and $600 in 2002, 2001 and 2000, 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 Pokemon trading cards, challenged longstanding practices in the
trading card industry, including the practice of randomly inserting
premium cards in packages of Pokemon cards. The lawsuit claimed that these
practices constitute illegal gambling activity in violation of California
and federal law, including the Federal Racketeer Influenced and Corrupt
Organization Act ("RICO") and sought an unspecified amount of monetary
damages.
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 appealed the June 21, 2000 dismissal
to the United States Court of Appeals for the Ninth Circuit. On August 20,
2002, the United States Court of Appeals for the Ninth Circuit
F-19
affirmed the United States District Court's dismissal of the RICO claims
with prejudice, and all other state law claims without prejudice.
(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 alleged
that the Pokemon trademark infringes upon the Plaintiff's "Monster in my
Pocket" trademark. The complaint also alleged trademark dilution, unfair
competition, and a breach of implied contract. The complaint sought
injunctive relief as well as monetary damages. On August 6, 2001, the
United States District Court granted summary judgment dismissing the suit.
Plaintiff appealed the dismissal of the case by the U.S. District Court.
On February 4, 2003, the United States Court of Appeals for the Ninth
Circuit affirmed the decision by the United States District Court to
dismiss the suit.
The Company believes these litigations will not have a material adverse
effect on the Company's financial condition or results of operations.
The Company from time to time is involved in litigation arising in the
ordinary course of its business. The Company does not believe that such
litigation to which the Company or any subsidiary of the Company is a
party or of which any of their property is the subject will, individually
or in the aggregate, have a material adverse effect on the Company's
financial position or the results of its operations.
d. 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, the
Chairman and CEO 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 with
the Company. The Company would, however, continue to be paid on license
agreements in place at the time such options were exercised.
e. 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, 2002, 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 $10,766.
These employment agreements provide for an aggregate minimum annual base
compensation of $2,280 expiring on various dates through 2007.
f. Deferred Revenue - Music Publishing - In July 2002, 4Kids Music granted a
right to receive a 50% interest in the Company's net share of the music
revenues from currently existing music produced by the Company for its
television programs (excluding Pokemon)("Current Music Assets") to an
unaffiliated third party in an arms length transaction for $3,000.
Further, the Company agreed to grant a right to receive a 50% interest in
the Company's net share of music revenues from future music to be produced
by the Company for its television programs (excluding Pokemon) (" Future
Music Assets") to the same third party for $2,000. In consideration of the
grant of Future Music Assets, the Company will receive $750 in each of
June 2003 and 2004 and $500 in June 2005.
The Company will defer all amounts received or to be received under the
contract, and will recognize revenue as the Current Music Assets and
Future Music Assets generate revenue over the contract term.
Notwithstanding the foregoing, as of the date when the Company
F-20
has delivered all of the Future Music Assets required under the contract,
any portion of the $5,000 that remains deferred and not recognized, will
be recognized as revenue. Pursuant to the above, the Company recognized
revenue of $314 of the initial $3,000 for the year ended December 31, 2002
and has included $2,686 as deferred revenue in the accompanying
consolidated balance sheets.
Home Video - In May 2002, 4Kids Home Video, entered into an agreement with
an unaffiliated third party home video distributor (the "Video
Distributor"), pursuant to which 4Kids Home Video provides ongoing
advertising, marketing and promotional services with respect to certain
home video titles, that are owned or controlled by the Company and which
are distributed by the Video Distributor. The Video Distributor has paid
the Company an advance of $1,300 against 4Kids Home Video's share of the
service fee proceeds to be realized by 4Kids Home Video from such titles.
Pursuant to the above, the Company recognized revenue of $713 for the year
ended December 31, 2002 and has included $587 as deferred revenue in the
accompanying consolidated balance sheets.
Other Agreements - In addition, the Company entered into other agreements
for various properties in which the Company has received certain advances
and/or minimum guarantees. Accordingly, as of December 31, 2002 the
unearned portion of these advances and guaranteed payments was $703 and is
included in deferred revenue on the accompanying consolidated balance
sheets.
g. Master Toy Licensee - 4Kids Licensing, 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) entered into an agreement (the "Agreement") effective
January 1, 2001.
Under the terms of the Agreement, 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 over the period of the Agreement. During
each of the years ended December 31, 2002 and 2001 the Company earned
royalties relating to minimum guarantees under this agreement of $2,500.
Additionally, under the Agreement, including the advance paid in April
2000, are non-refundable and non-recoupable against any future royalties.
Accordingly, approximately $2,300 of deferred revenue at December 31, 2000
was recognized as revenue in the quarter ended March 31, 2001.
h. Fox Broadcast Agreement - In January 2002, the Company entered into a
multi-year agreement with Fox to lease the Fox Box. The Company is
providing all programming content for the Fox Box and commenced doing so
with the September 2002 broadcast year. 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 fee of
$25,312 for each broadcast year during the initial term of the agreement.
The agreement provided for 50% of the fee for the first broadcast season
to be paid within ten days of the execution of the short form agreement in
February, 2002, with the balance of the fee for the first broadcast season
to be paid in four equal installments in the following September 2002,
December 2002, February 2003 and April, 2003 of the broadcast year. All
payments required to be made on or prior to March 31, 2003 have been made.
The cost of the Fox Box has been and will be capitalized and amortized
over the broadcast season based on estimated advertising revenue.
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During 2002, the Company paid Fox and certain affiliates a total of
$19,301, representing a portion of the first year fees of which $9,444 was
amortized as of December 31, 2002. The remaining $9,857 representing the
unamortized portion of the first broadcast season's fee paid is included
in "Prepaid Fox broadcast fee" on the accompanying consolidated balance
sheets as of December 31, 2002. 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 the following September, December,
February and April. Additionally, the agreement required 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 fee are paid. As of December 31, 2002, the Company had received a
commitment for the letter of credit, but the letter of credit had not been
issued pending completion of the long form agreement with Fox. Upon the
issuance of the letter of credit, the Company will grant a security
interest in its cash balances to the issuing bank to secure the amount of
such letter of credit and will appropriately disclose these amounts as
restricted cash in its financial statements.
The agreement further provides that, at the Company's option, up to
$10,300 of each year's fee may be paid by delivering shares of the
Company's common stock. Over the initial four year term of the agreement,
the Company will pay Fox an aggregate fee of $101,250. Further, the
Company will incur additional costs to program the four hour block and to
sell the related network 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 ability to recover the cost of its fees payable to Fox will
depend on the popularity of the television programs the Company broadcasts
on the Fox Box and the general market demand and pricing of advertising
time for Saturday morning children's broadcast television. The popularity
of such programs impacts audience levels and the level of the network
advertising rates that the Company can charge. Additionally, the success
of merchandise licensing programs and home video sales based on such
television programs broadcast on the Fox Box is dependent on consumer
acceptance of the properties. If the Company estimates that it will be
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, the Company would record a charge to
earnings to reflect an expected loss on the Fox agreement in the period in
which the deficiency or factors affecting the recoverability of the 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 fee. Such estimates and assumptions are subject to market
forces and factors beyond the control of the Company and are inherently
subject to change.
There can be no assurance that the Company will be able to recover the
full cost of the Fox fee and in the event it cannot, it would record the
resulting charge to earnings to reflect an expected loss on the Fox fee,
which could be significant.
i. Contractual Arrangements - During the normal course of business, the
Company may enter into various agreements with third parties to license,
acquire, distribute, broadcast, develop and/or promote properties. The
terms of these agreements will vary based on the services and/or
properties included within the agreement, as well as, geographic
restrictions, duration, property and exploitation rights, and various
other terms. The effect of these agreements could be material to the
Company's financial condition and results of operations.
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13. SEGMENT AND RELATED INFORMATION
The Company applies SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information. The Company has three reportable segments; (i)
Licensing, (ii) Advertising Media and Broadcast, and (iii) Television and Film
Production/Distribution. The Company's reportable segments are strategic
business units, which, while managed separately, work together as a vertically
integrated entertainment company.
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. The Company's management regularly evaluates the
performance of each segment based upon its net revenues, profit and loss after
all expenses, including amortized film and television costs, the Fox Box
broadcast fee and interest income.
The Company periodically reviews its operating segments, and as such, evaluates
the relevance and appropriateness of each of its reportable segments. During the
quarter ended September 30, 2002, management reviewed the Company's operating
segments, as they relate to current operations and in accordance with the
Company's internal management structure. In response to this evaluation, the
Company revised its operating segments to reflect a more appropriate measure of
evaluating the operating performance of its reportable segments. These revisions
have been reflected in the 2002 disclosure, with all previously reported amounts
reclassified to conform to the current presentation.
Advertising TV and Film
Media and Production/
Licensing Broadcast Distribution Total
2002:
Net revenues $ 28,937 $ 11,200 $ 13,003 $ 53,140
Amortization of televsion
and film costs and Fox
broadcast fee -- 9,444 4,911 14,355
Segment profit (loss) 16,862 (6,613) 1,443 11,692
Segment assets 121,442 26,417 14,980 162,839
Interest income 1,619 37 -- 1,656
2001:
Net revenues $ 28,146 $ 3,029 $ 10,363 $ 41,538
Amortization of television
and film costs -- -- 1,667 1,667
Segment profit 15,929 789 3,796 20,514
Segment assets 126,434 8,984 8,321 143,739
Interest income 4,358 190 -- 4,548
2000:
Net revenues $ 65,111 $ 2,488 $ 20,399 $ 87,998
Amortization of television
and film costs -- -- 2,011 2,011
Segment profit (loss) 51,768 (904) 13,644 64,508
Segment assets 160,788 6,798 8,558 176,144
Interest income 6,461 154 -- 6,615
Additionally, through the Company's London office and network of international
subagents, which allow it to license its properties throughout the world, the
Company recognized approximately
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$3,161, $5,772 and $9,446 in net revenue from international sources, primarily
in Europe for 2002, 2001 and 2000, respectively.
14. SUMMARIZED QUARTERLY DATA (UNAUDITED):
Following is a summary of the quarterly results of operations for the years
ended December 31, 2002 and 2001:
Fiscal Quarter
First Second Third Fourth Total
2002:
Net revenues $ 6,961 $ 8,178 $12,100 $25,901 $53,140
Income from operations 2,150 1,644 3,011 3,231 10,036
Net earnings 1,554 1,227 1,963 2,246 6,990
Basic earnings per share $ 0.12 $ 0.10 $ 0.16 $ 0.17 $ 0.55
Diluted earnings per share $ 0.11 $ 0.09 $ 0.14 $ 0.16 $ 0.51
2001:
Net revenues $12,264 $ 9,148 $ 9,876 $10,250 $41,538
Income from operations 7,401 4,292 1,451 2,822 15,966
Net earnings 5,290 3,259 1,495 2,200 12,244
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
******
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