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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-7843
4Kids Entertainment, Inc.
(Exact name of registrant as specified in its charter)
New York 13-2691380
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1414 Avenue of the Americas, New York, New York 10019
(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
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the Registrant: $85,941,713(based upon the average of the high
and low prices of Registrant's Common Stock, $.01 par value, as of March 17,
1999).
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 3,351,435
(Title of Class) (No. of Shares Outstanding
at March 26, 1999)
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
Item 1. Business
(a) General Development of Business. 4Kids Entertainment, Inc.,(the
"Company" ) is a vertically integrated entertainment based company. The Company
provides a comprehensive range of services including toy design and development,
domestic and international merchandise licensing, media buying and planning,
international and domestic television and movie distribution and television
production.
The Company operates through four wholly owned subsidiaries, Leisure Concepts,
Inc., Leisure Concepts International, Inc., The Summit Media Group, Inc. and
4Kids Productions, Inc.
Leisure Concepts, Inc. is engaged primarily in the business of domestic and
international licensing of the commercial rights to properties, personalities,
and product concepts. Leisure Concepts 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, food, toiletries, apparel and footwear industries. These
rights are also licensed in connection with the production of television shows,
motion pictures and publications such as magazines, books and comic strips.
Leisure Concepts International, Inc. based in the Company's London office,
provides hands-on management of properties in the important United Kingdom and
European marketplace.
The Summit Media Group, Inc. provides media planning, buying and marketing
services primarily for toy and video game companies. Summit Media also provides
television distribution services.
4Kids Productions, Inc. is a television and home video production company
specializing in youth-oriented entertainment programming.
(b) Financial Information About Industry Segments.
Financial information regarding industry segments can be found in note 11 to the
financial statements on page F-15.
(C) Narrative Description of the Business.
(1) Licensing (Other Than Product Concepts). The Company's licensing
activities are conducted through its
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subsidiary, Leisure Concepts, Inc. ("LCI"). The licenses in this category of
activity are typically based upon well-known personalities, fictional and
fanciful characters, and established properties often from the entertainment
field. These rights in some cases may be licensed from the owners of such
properties and sublicensed to others, or LCI may acquire the right to represent
such owners, usually exclusively, in the granting of such rights to third
parties, negotiating licensing arrangements directly with manufacturers or users
and supervising the implementation of the agreements.
A license agreement offered to manufacturers in the industry or industries
LCI considers appropriate, may provide the right to manufacture and sell a broad
range of toy products of various categories (a "master toy license") or it may
be limited to the right to manufacture and sell a specific product or product
lines. The typical licensing arrangement provides for the payment of royalties
based upon a percentage of the manufacturer's aggregate net sales, at wholesale,
of the products in question. LCI usually retains between 20% and 40% of the
owner's licensing royalties, which generally range from 4% to 12% of net
wholesale sales.
As part of the standard licensing arrangements, the manufacturer usually
pays LCI a nonrefundable advance which is applied in most cases against a
guaranteed minimum royalty. The percentage of sales or royalty rate, and any
nonrefundable advance on guaranteed minimum payment, are negotiated for each
transaction and vary from industry to industry and from property to property.
Generally the term of the license runs for one to three years, and may be
renewed if certain minimum annual payments are received under the license
agreement. In addition, the agreements usually provide that the rights under
license will revert to the owner unless the manufacturer commences its marketing
activities by a specified date and continues to market the products thereafter
on a regular basis. The average start-up or lead time necessary for product
manufacture and marketing is between approximately six and eighteen months. LCI
does not assist in financing any of these endeavors.
In the case of licenses for motion picture and television productions, the
licensees pay fees for each production, sometimes preceded by option payments,
and, usually in connection with television series, rerun payments for multiple
exhibitions in the United States. In some cases LCI participates in the "net
profits" (that is, income less deduction of fees and chargeable expenses and
production costs) that may be realized from the exploitation of the property in
question.
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Licensing revenues accounted for approximately 60%, 38% and 32% of
consolidated net revenues for the years ended December 31, 1998, 1997 and 1996,
respectively.
(2) Certain Licensed Properties Represented Exclusively by Leisure
Concepts, Inc. Among the licensed properties represented exclusively by LCI are
the following:
o World Championship Wrestling ("WCW"), a division of Turner
Sports and Time Warner, televised weekly through popular cable
TV programs including "Monday Nitro", and "Thunder". LCI has
entered into a long-term agreement with Toy Biz, Inc. for a
WCW toyline, Electronic Arts, for WCW based video games and in
excess of 150 other domestic licensees for the production of a
broad range of WCW based products including themed
restaurants, Master Cards and apparel.
o Pokemon, Nintendo's popular Video game. The Company has all
merchandising and television distribution rights outside Asia.
Pokemon started in Japan as a Nintendo Game Boy cartridge that
involves finding, capturing, collecting and training 150
different Pokemon. LCI has signed Hasbro, Inc. as the master
toy licensee for Pokemon.
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 cartridge
games developed and owned by Nintendo including the very
successful Nintendo N64. LCI represents Nintendo on a
worldwide basis, other than Japan. These video games ranked
among the top toy sellers in the United States in 1996, 1997
and 1998.
o The cable network Comedy Central, including its programs "Dr.
Katz", "The Daily Show with Jon Stewart" and "Strangers with
Candy".
o James Bond 007; UK representation for this classic character
of eighteen action films.
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(3) Company-Owned Properties. World Martial Arts Council ("WMAC") is an
entertainment-based property utilizing skilled martial arts professionals that
was developed and is owned by the Company. The WMAC Masters television series
was launched in September of 1995. The Company has entered into a master toy
license agreement under which Bandai has the right to market and distribute toys
and video games for the WMAC.
"Charlie Chan" the fictional Asian detective who has been the subject of
numerous films based on the character created by Earl DeBiggers. Charlie Chan
movie rights have been optioned to Miramax films.
(4) Product Concepts. The product concepts developed by LCI usually
consist of a novel theme for a line of merchandise. LCI may conceive of an idea
and then develop it at its expense by preparing drawings or models of the
products or examples of various uses of the concepts, including descriptions or
illustrations of plans for the marketing and merchandising of the product lines
in question. LCI will then seek to license the product concept to manufacturers
for which LCI will typically receive a royalty based upon the manufacturer's
wholesale sales. Other times, although LCI has not created the original concept,
it will assist in developing a concept, initially conceived by others, into a
commercially viable product line, in which case LCI may act as the licensor, as
the agent for the rights holder of the concept in question or may simply receive
a royalty for services rendered. LCI does not typically finance the activities
of the manufacturers to which it licenses product concepts. However, LCI
sometimes enters into arrangements under which it defers its royalties until
after the manufacturer has recouped its cost of production. Furthermore, because
the overhead associated with the development of product concepts is relatively
low, this activity has generally been profitable for LCI. There can be no
assurance, however, that the development of product concepts will be successful
in the future.
Examples of product concepts are "Quiz Wiz", "2-XL," "Toby Terrier" and
"Grave Danger," which the Company represents on a worldwide basis. "Quiz Wiz" is
an electronic hand-held computer answer game. "2-XL" is an interactive toy robot
that questions and teaches children about a variety of educational subjects.
"Toby Terrier" is a toy dog which interacts with specially programmed
videotapes. LCI licenses these properties to Tiger Electronics Ltd. ("Tiger"),
which is a wholly owned subsidiary of Hasbro, Inc. Grave Danger is a board game
licensed to Pressman Toys.
(5) Media Buying Planning and Television Distribution. The Company's
subsidiary The Summit Media Group, Inc. ("Summit Media"), provides clients with
media planning, buying and
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marketing services, and television distribution services. These services
accounted for 29%, 49% and 42% of consolidated net revenues for the years ended
December 31, 1998, 1997 and 1996, respectively. Summit Media's current
television distributions include "Pokemon", "Voltron The Third Dimension", "War
Planets" and "RoboCop".
(6) Television and Home Video Production. The Company's subsidiary 4Kids
Productions, Inc. ("4Kids Productions") is a television and home video
production company specializing in youth-oriented entertainment programming.
4Kids Productions is currently producing the American adaption of the Japanese
hit series "Pokemon" which debuted in the United States in September, 1998.
(7) Dependence on a Few Sources of Licensing Revenues. The Company
typically derives a substantial portion of its licensing revenues from a small
number of properties, which properties usually generate revenues only for a
limited period of time. Because the Company's licensing revenues are highly
subject to changing fashion in the toy and entertainment business, its licensing
revenues from year to year from particular sources are subject to dramatic
increases and decreases. It is not possible to precisely anticipate the length
of time a project will be commercially successful, if at all. Popularity of
properties can vary from months to years. In addition, the Company has little
control over the timing of guarantee and minimum payments, some of which are
made upon the execution and delivery of license agreements. Because of this, the
Company must continually seek new properties from which it can derive revenues.
Three properties contributed licensing revenues individually in excess of
10% of consolidated net revenues for fiscal 1998. The only client/licensee which
contributed revenues individually in excess of 10% of consolidated net revenues
for fiscal 1998 was Tiger Electronics, Ltd., a subsidiary of Hasbro, Inc. In
1998, Tiger Electronics Ltd. contributed 14% of consolidated net revenues.
(8) Trademarks and Copyrights. The Company generally does not own any
trademarks or copyrights in properties which it licenses. These rights are
typically owned by the creator or by the entity, such as a television producer,
which may expend substantial amounts in developing or promoting the concept. The
Company does own the copyrights and trademarks to "Charlie Chan" and "WMAC
Masters".
(9) Seasonal Aspects. A substantial portion of the Company's revenues and
net income are subject to the seasonal variations of the toy and game industry.
Typically, a majority of
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toy orders are shipped in the third and fourth calendar quarters. As a result,
in the Company's usual experience, its net income during the second half of the
year will generally be greater than during the first half of the year. In
addition, Summit Media's business is also seasonal as the majority of toy and
video game advertising occurs in the second half of the year.
(10) Competition. The principal competitors of the Company's licensing
activities (including product concepts) are the product development,
merchandising, marketing and advertising departments of toy and other juvenile
merchandise manufacturers and motion picture studios as well as independent
advertising agencies, licensing companies and numerous individuals acting as
licensing representatives. There are also many independent product development
firms with which the Company competes. Many of these companies have
substantially greater resources than the Company and represent properties which
have been commercially successful for longer periods than properties represented
by the Company. The Company believes it would be relatively easy for a potential
competitor to enter its market in light of the relatively small investment
required to commence operations. However, the ultimate success of a new entrant
in the field would depend on its access to toy and other manufacturers, sources
of properties to be licensed, its know-how in the negotiation and subsequent
administration of licenses, and the retail market acceptance of the property in
question.
The Company's media buying, planning and television syndication activities
as well as its television and home video production activities operate in highly
competitive industries and face as competitors many companies with substantially
greater resources and distribution networks than the Company.
(11) Employees. As of March 19, 1999, the Company had a total of 52
full-time employees.
Item 2. Properties
The following table sets forth, with respect to properties leased (none
are owned) by the Company at March 19, 1999, 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
- ------- -------- --- ----
1414 Avenue of the Americas May 31, 2004 Executive and Sales 13,900
New York, New York Office, Media
Buying and
Television
Production
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116 Putney Bridge Road September 29, 2002 International Sales 1,200
Alice Court Office
London, England
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
As of March 26, 1999, there were no legal proceedings pending against the
Company other than routine litigation incidental to its business. Although the
consequences are not presently known, in the opinion of management, they will
not materially affect the Company's liquidity, financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the Company's fiscal quarterly period ended December 31, 1998,
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 traded on the Nasdaq National Market
System. The following table indicates high and low sales quotations for the
periods indicated based upon information supplied by Nasdaq, Inc. Such
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
1998 Low High
- ---- --- ----
First Quarter 2.75 4.875
Second Quarter 3.00 10.00
Third Quarter 5.00 8.688
Fourth Quarter 2.875 13.375
1997 Low High
- ---- --- ----
First Quarter 1 2.25
Second Quarter 1.25 3.375
Third Quarter 2.875 4
Fourth Quarter 2.5 3.875
-8-
(b) Number of Holders of Common Stock. The number of holders of record of
the Company's Common Stock on March 26, 1999 was 129, which does not include
individual participants in security position listings.
(C) Dividends. There were no dividends or other distributions made by the
Company during 1998 or 1997. Future dividend policy will be determined by the
Board of Directors based on the Company's earnings, financial condition, capital
requirements and other existing conditions. It is anticipated that cash
dividends will not be paid to the holders of the Company's Common Stock in the
foreseeable future.
(d) Stock Purchases. The Board of Directors has authorized the Company to
acquire up to 165,000 shares of its Common Stock on Nasdaq or elsewhere. Such
purchases are to be made out of the Company's surplus. No such purchases were
made by the Company during 1998.
Item 6. Selected Financial Data
Year Ended December 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Total Net Revenues $14,767,429 $10,116,800 $ 6,977,327 $ 6,617,279 $ 9,191,582
Net Income (Loss) 2,743,069 739,135 (239,304) (947,850) 135,250
Net Income (Loss) Per .92 .25 (.08) (.32) .05
Common Share-Basic
Net Income .80 .23 (.08) (.32) .04
(Loss) Per Common Share-
Diluted
Pro forma Net Income .61 .17 (.05) (.21) .03
(Loss) Per Common
Share-Basic
Pro forma Net Income .54 .16 (.05) (.21) .03
(Loss) Per Common Share-
Diluted
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Weighted Average Common 2,994,246 2,944,831 2,944,831 2,944,831 2,936,239
Shares Outstanding-Basic
Weighted Average Common 3,409,027 3,169,879 2,944,831 2,944,831 3,070,815
Shares Outstanding-Diluted
Pro forma Weighted Average 4,491,369 4,417,247 4,417,247 4,417,247 4,404,359
Common Shares Outstanding-
Basic
Pro forma Weighted Average 5,113,541 4,754,819 4,417,247 4,417,247 4,606,223
Common Shares Outstanding-
diluted
The Proforma amounts shown above give effect to the three for two stock split as
described in Note 10 to the financial statements included herein. The Company
did not declare or pay any cash dividends during the five-year period ended
December 31, 1998.
At Year End 1998 1997 1996 1995 1994
- ----------- ---- ---- ---- ---- ----
Total Assets $34,961,155 $39,319,077 $30,432,130 $25,968,575 $29,376,396
Working Capital 10,823,845 6,823,466 5,342,436 6,894,818 8,159,128
Stockholders
Equity 15,405,255 12,128,739 11,389,604 11,628,908 12,576,758
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company receives revenues from a number of sources, principally
licensing and media buying. The Company typically derives a substantial portion
of its licensing revenues from a small number of properties, which properties
usually generate revenues only for a limited period of time. Because the
Company's licensing revenues are highly subject to changing fashion in the toy
and entertainment business, its licensing revenues from year to year from
particular sources are subject to dramatic increases and decreases. It is not
possible to precisely anticipate the length of time a project will be
commercially successful, if at all. Popularity of properties can vary from
months to years. As a result, the Company's revenues and net income may
fluctuate significantly between comparable periods. The Company's revenues have
historically been primarily derived from the
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license of toy and game concepts. Thus, a substantial portion of the Company's
revenues and net income are subject to the seasonal variations of the toy and
game industry. Typically, a majority of toy orders are shipped in the third and
fourth calendar quarters. In addition, the Company's media buying subsidiary
concentrates its activities on the youth oriented market. As a result, most of
its revenue is earned in the third and fourth quarters when the majority of toy
and video game advertising occurs. In the Company's usual experience, its net
income during the second half of the year will generally be greater than during
the first half of the year. However, the Company has little control over the
timing of guarantee and minimum payments, some of which are made upon the
execution and delivery of license agreements.
Results of Operation
Twelve Months Ended December 31, 1998 compared to Twelve Months Ended December
31, 1997.
Consolidated net revenue for the year ended December 31, 1998 increased
46% or $4,650,629 as compared to the year ended December 31, 1997. Increased
licensing revenue was recognized primarily from the "World Championship
Wrestling" "WCW/NWO" as well as revenue from the "Pokemon" property as a result
of the master toy agreement signed with Hasbro, Inc. for the Pokemon property.
Revenue from the "WCW/NWO" property increased due to licenses granted to
Electronic Arts for the video game rights as well as many new licensees involved
in a wide array of licensing activities. The Company also recognized increased
revenue from continued strong sales of the Nintendo James Bond 007 "Golden Eye"
video game licensed to Nintendo. Offsetting these gains were decreased licensing
revenue from some of the Company's more mature properties licensed through the
Company's international office in London.
Revenue from the Company's media and television syndication services
decreased over 1997 performance. These activities comprised 29% of total net
revenue for 1998 as compared to 49% in 1997. Commissions earned on media placed
increased as a result of adding new clients including Nintendo. Additionally,
fewer programs distributed by the Company as well as lower than anticipated
Nielsen ratings on television properties distributed by the Company in 1997
lowered distribution revenues compared to the prior year. The Company's
television distribution revenues are generally calculated as a percentage of
advertising revenues generated by the television programs. Such advertising
revenues are directly impacted by the Nielsen ratings.
The Company's television and home video production activities comprised
approximately 11% and 12% of total net revenue for 1998 and 1997 respectively.
This revenue related primarily to the "Pokemon" and "WMAC Masters" syndicated
television programs.
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Selling, general and administrative expenses increased 6.6% or
approximately $476,000 compared to 1997 as a result of increased costs
associated with expanded activity in the Company's licensing activities.
Additionally, bonus amounts, which are based on pre-tax income levels, increased
in 1998 due to the increased level of pre-tax income. Overall selling, general
and administrative expenses decreased as a percentage of net revenue from 71% in
1997 to 52% in 1998.
At December 31, 1998 there were approximately $2,954,000 of capitalized
film production costs, which primarily relates to 26 episodes of "WMAC Masters".
Amortization of capitalized film costs increased $1,067,482 for the year
ended December 31, 1998 as compared to the prior year. Included in amortization
expense for 1998 is an additional expense of approximately $1,528,000($702,000
in the fourth quarter)relating to the "WMAC Masters" television program as well
as certain other charges related to television projects which the Company
determined it will not be pursuing. The charges occurred as a result of the
Company's periodic evaluation of net realizable value of its capitalized costs.
Amortization rates may change as a result of changes in estimated future
revenue. At December 31, 1998 the percentage of unamortized film cost expected
to be amortized within the next three years is approximately 70%.
As a result of the above, the Company reported a net income for 1998 of
$2,743,069, as compared to the reported net income in 1997 of $739,135.
Twelve Months Ended December 31, 1997 compared to Twelve Months Ended December
31, 1996.
Consolidated net revenue for the year ended December 31, 1997 increased
45% or $3,140,000 as compared to the year ended December 31, 1996. Increased
licensing revenue was recognized from the Nintendo property based on the sales
of Nintendo's new N64 game system in 1997. Increased licensing revenue was also
recognized from the "World Championship Wrestling" property. During the fourth
quarter of 1997, the Company licensed Toy Biz for the master toy rights relating
to the WCW property. Additionally, the Company realized increased licensing
revenue from the James Bond 007 property relating to sales of the Nintendo James
Bond 007 "Golden Eye" video game which was released in September of 1997 and was
licensed through the Company. While net revenues were positively impacted for
the full year and fourth quarter of 1997 by the James Bond property, the Company
expects a decline in revenue from the James Bond Property for 1998 because
certain of the Company's rights to license new merchandise have terminated
effective December 31, 1997. Revenues were positively impacted by the Company's
settlement of its outstanding litigation with Toymax. Offsetting these gains
were decreased licensing revenue from some of the Company's more mature
properties including Quiz Wiz and lower than anticipated royalties from "Mr.
Men".
-12-
Revenue from the Company's media and television syndication services
increased over 1996 performance. These activities comprised 49% of total net
revenue for 1997 as compared to 42% in 1996. Commissions earned on the media
placed increased from the addition of new clients including Play by Play and Big
Time Toys. Additionally, increased spending levels from some of the Company's
existing clients generated gains in commission revenue during 1997. Increased
syndication revenue was recognized from the additional programs syndicated by
the Company for the 1997-1998 broadcast season. The Company syndicated six hours
of programming per week for the 1997/1998 season compared to three and one half
hours per week in the prior year. The Company's television and home video
activities comprised approximately 12% and 15% of total net revenue for 1997 and
1996. This revenue related primarily to the "WMAC Masters" syndicated television
program which began airing in September 1995.
Selling, general and administrative expenses increased 13% or $817,406
compared to 1996 as a result of increased costs associated with expanded
activity in the Company's media buying and TV distribution activities as well as
certain television production expenses which were not specifically attributable
to television program production. Additionally, bonus amounts which are based on
pre-tax income levels increased in 1997 due to the increased level of pre-tax
income. Overall selling, general and administrative expenses decreased as a
percentage of net revenue from 92% in 1996 to 72% in 1997. The Company will
continue to seek effective cost reductions without adversely impacting the
Company's business.
At December 31, 1997 there were approximately $4,516,000 of capitalized
film production costs, which primarily relates to 26 episodes of "WMAC Masters"
and 22 episodes of "Monster Wars". "WMAC Masters" is a weekly syndicated
television program which began airing in September, 1995 produced by the
Company's 4Kids Productions subsidiary. The first thirteen episodes of WMAC
Masters were produced in cooperation with Renaissance Atlantic Films. Monster
Wars began syndication in October 1993.
Amortization of capitalized film costs increased $564,285 for the year
ended December 31, 1997 as compared to the prior year. Included in amortization
expense for 1997 is an additional expense in the fourth quarter of approximately
$702,000 relating to the "Monster Wars" television program. The charge occurred
as a result of the Company's periodic evaluation of net realizable value of its
capitalized costs. Amortization rates may change as a result of changes in
estimated future revenue. At December 31, 1997 the percentage of unamortized
film cost expected to be amortized within the next three years is approximately
70%.
As a result of the above, the Company reported a net income for 1997 of
$739,135, as compared to the reported net loss in 1996 of $239,304.
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Liquidity and Capital Resources
At December 31, 1998, the Company had working capital of $10,823,844, as
compared to working capital of $6,823,466 at December 31, 1997. Cash and cash
equivalents increased by $6,944,383 to $9,749,956 from December, 1997. The
increase in cash equivalents is primarily due to the increased activity in the
Company's licensing businesses as well as the timing of advance payments due on
new licensing agreements.
Accounts receivable, net (current and non-current) decreased from
$30,443,106 at December 31, 1997 to $20,321,942 at December 31, 1998. This
decrease is primarily due to lower amounts due from the Company's media clients
for media payable. Media payable primarily represents obligations to television
stations for advertising time purchased on behalf of clients. As a result of the
lower media receivable, media payable decreased from $21,591,172 at December 31,
1997 to $11,460,913 at December 31, 1998. Amounts due to licensors, which
represent the owners share of royalties collected, increased by $209,814 to
$3,690,582 from December 31, 1997. The increase is primarily due to higher
royalties collected during the fourth quarter as compared to the prior year
which are paid to licensors after the close of the quarter.
In April, 1998, Tiger Electronics, Inc. a major customer of the Company
and a related party, sold substantially all of its business assets to a
subsidiary of Hasbro, Inc. The Company was notified that beginning in 1999, the
Company will no longer be providing media planning or buying services to the
subsidiary of Hasbro, Inc. However, the Company has succeeded in acquiring new
media clients during 1998 such that a substantial amount of the media business
represented by Tiger Electronics, Inc. should be replaced.
In the opinion of management, the Company will be able to finance its
business as currently conducted from its current working capital and the
$2,000,000 credit facility with The Chase Manhattan Bank, discussed in Note 9 to
the financial statements. As of March 20, 1999 there were no amounts outstanding
under this facility. As the Company explores new and expanded opportunities in
the youth oriented entertainment market, including television production, it may
seek additional financing alternatives.
Year 2000 Compliance
Overview
The Year 2000 issue is primarily the result of computer programs only
accepting a two digit date code, as opposed to four digits, to indicate the
year. Beginning in the Year 2000, and in certain instances prior to the Year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, the
Company's date critical functions may be adversely affected unless these
computer systems and software products are, or become, able to accept four digit
entries.
-14-
Internal systems and equipment
The Company has commenced a comprehensive program consisting of identifying,
assessing and if necessary, upgrading and/or replacing its systems and equipment
that may be vulnerable to Year 2000 problems. The first stage of this program,
identifying the systems and equipment, has been substantially completed. The
Company has prioritized the identified items as either critical or non-critical
to the operations of the Company. The Company has made substantial progress
through the second and third stages of this program, assessing and upgrading
and/or replacing the equipment it has deemed to be non-compliant. The Company is
also in the beginning stage of developing a plan to test its entire system for
Year 2000 compliance. The Company believes that it will have completed all of
its necessary upgrades and/or replacements and the testing of its systems by
June, 1999.
Third party relationships
The Company has begun to formally communicate with its significant suppliers and
customers to determine if those parties have appropriate plans to remedy Year
2000 issues when their systems may impact the operations of the Company. There
can be no assurance, however, that the systems of other companies on which the
Company's processes rely will be timely converted, or that a failure to
successfully convert by another company, or a conversion that is incompatible
with the Company's systems, would not have an impact on the Company's
operations. The Company believes that by June 1999 it will substantially
complete its assessment of the status of its significant customers' and
suppliers' compliance with the Year 2000 issues.
Contingency plans
Based on the assessment effort to date, the Company has focused on three
separate contingency plans (1) if the Company's systems are non-compliant (2) if
the Company's customers are non-compliant and (3) if the Company's suppliers are
non-compliant. The Company is in the early stages of developing these plans and
believes that it will be able to fully determine its worst case scenarios by
June 1999. There can be no assurance that the Company will be able to have a
contingency plan in place for a significant supplier and/or customer that does
not become Year 2000 compliant.
Costs/Risks
Management currently estimates that the cost, in connection with bringing its
own systems and equipment into compliance, will be less than $50,000 for fiscal
1998 and does not expect the additional cost to exceed $25,000. Although the
Company is not aware of any material operational issues or costs associated with
preparing its internal systems for the Year 2000, there can be no assurance that
there will not be a delay in, or increased costs associated with, the
implementation of the necessary systems and changes to address the Year 2000.
Potential sources of risk include but are not limited to (1) the inability of
principal clients and licensees to be Year 2000
-15-
compliant, which could result in delays in product deliveries from such clients
and licensees, (2) the inability of the Company's clients and licensees to
become compliant, which could impact their ability to sell product or report
royalties in a timely manner resulting in a disruption of the Company's cash
flow, and (3) disruption of television broadcast signals, including satellite
distribution and commercial integration vendors as a result of the general
failure of systems and necessary infrastructure such as electrical supply.
Forward-looking Statements
This annual report contains forward-looking statements. Due to the fact that the
Company faces competition from toy companies, motion picture studios and other
licensing companies, and the uncertainty of public's response to the Company's
properties, actual results or outcomes may differ materially from any such
forward-looking statements.
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
Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A with respect to Annual Meeting of Shareholders to be held April 29,
1999.
Item 11. Executive Compensation
Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A with respect to Annual Meeting of Shareholders to be held April 29,
1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A with respect to Annual Meeting of Shareholders to be held April 29,
1999.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A with respect to Annual Meeting of Shareholders to be held April 29,
1999.
-16-
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements:
The following Consolidated Financial Statements of 4Kids Entertainment,
Inc. and Subsidiaries are included in Item 8:
Page
Number
------
Independent Auditors' Report F-1
Consolidated Balance Sheets -December 31, 1998 and 1997 F-2
Consolidated Statements of Income - Years Ended F-3
December 31, 1998, 1997 and 1996
Consolidated Statements of F-4
Stockholders' Equity - Years
Ended December 31, 1998, 1997
and 1996
Consolidated Statements of F-5
Cash Flows - Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements F-6 to F-15
(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
The Company did not file any Current Reports on Form 8-K during the
quarterly period ended December 31, 1998.
-17-
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, 1998 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, 1999 /s/ Alfred R. Kahn,
------------------------------------------
Alfred R. Kahn,
Chairman of the Board,
Chief Executive Officer and
Director
Date: March 31, 1999 /s/ Robert Dunn Glick
------------------------------------------
Robert Dunn Glick,
Director
Date: March 31, 1999 /s/ Gerald Rissman
------------------------------------------
Gerald Rissman,
Director
Date: March 31, 1999 /s/ Joseph P. Garrity
------------------------------------------
Joseph P. Garrity,
Executive Vice President,
Treasurer, Principal Financial
Officer and Principal Accounting
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 as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
Deloitte & Touche, LLP
New York, New York
March 29, 1999
F-1
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 9,749,956 $ 2,805,573
Accounts receivable - net (Notes 2 and 6) 17,694,262 28,173,085
Film inventory - net (Note 3) 1,079,677 1,456,009
Prepaid refundable income taxes (Note 5) 324,864 3,279
Prepaid expenses and other current assets 1,151,974 1,061,999
----------- -----------
Total current assets 30,000,733 33,499,945
FURNITURE, FIXTURES AND COMPUTER EQUIPMENT -
Net of accumulated depreciation of
$1,384,837 and $1,269,478 174,783 197,649
ACCOUNTS RECEIVABLE - Noncurrent, net (Notes 2 and 6) 2,627,680 2,270,021
FILM INVENTORY - Noncurrent (Note 3) 1,875,000 3,060,000
SECURITY DEPOSITS AND OTHER ASSETS 282,959 291,462
----------- -----------
TOTAL ASSETS $34,961,155 $39,319,077
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Due to licensors (Note 2) $ 3,690,582 $ 3,480,768
Media payable (Note 2) 11,460,913 21,591,172
Accounts payable and accrued expenses 1,285,624 927,954
Taxes payable 1,750,799 307,030
Current deferred tax liability (Note 5) 989,000 369,555
-----------
Total current liabilities 19,176,918 26,676,479
NONCURRENT DEFERRED TAX LIABILITY (Note 5) 379,012 513,859
----------- -----------
Total liabilities 19,555,930 27,190,338
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Notes 7 and 10):
Preferred stock, $.01 par value - authorized,
3,000,000 shares; none issued -- --
Common stock, $.01 par value - authorized,
10,000,000 shares; issued, 3,062,735
and 2,944,831 shares 30,627 29,448
Additional paid-in capital 4,962,144 4,429,906
Retained earnings 10,412,454 7,669,385
----------- -----------
Total stockholders' equity 15,405,225 12,128,739
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,961,155 $39,319,077
=========== ===========
See notes to consolidated financial statements.
F-2
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
REVENUES:
Net revenues (Notes 4 and 6) $ 14,767,429 $ 10,116,800 $ 6,977,327
------------ ------------ ------------
COSTS AND EXPENSES:
Selling, general and administrative (Note 9) 7,685,887 7,209,817 6,392,411
Amortization of capitalized film costs (Note 3) 2,702,244 1,634,762 1,070,477
------------ ------------ ------------
Total costs and expenses 10,388,131 8,844,579 7,462,888
------------ ------------ ------------
4,379,298 1,272,221 (485,561)
INTEREST INCOME 335,771 70,914 122,257
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) 4,715,069 1,343,135 (363,304)
INCOME TAX PROVISION (BENEFIT) (Note 5) 1,972,000 604,000 (124,000)
------------ ------------ ------------
NET INCOME (LOSS) $ 2,743,069 $ 739,135 $ (239,304)
============ ============ ============
PER SHARE AMOUNTS (Note 8):
Basic earnings (loss) per common share $ 0.92 $ 0.25 $ (0.08)
============ ============ ============
Diluted earnings (loss) per common share $ 0.80 $ 0.23 $ (0.08)
============ ============ ============
Pro forma earnings (loss) per common share - basic
(Note 10) $ 0.61 $ 0.17 $ (0.05)
============ ============ ============
Pro forma earnings (loss) per common share - diluted
(Note 10) $ 0.54 $ 0.16 $ (0.05)
============ ============ ============
Pro forma weighted average common share
outstanding - basic (Note 10) 4,491,369 4,417,247 4,417,247
============ ============ ============
Pro forma weighted average common share
outstanding - diluted (Note 10) 5,113,541 4,754,819 4,417,247
============ ============ ============
See notes to consolidated financial statements.
F-3
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Additional
Common Stock Paid-in Retained
Shares Amount Capital Earnings Total
------ ------ ------- -------- -----
BALANCE, DECEMBER 31, 1995 2,944,831 $ 29,448 $ 4,429,906 $ 7,169,554 $ 11,628,908
Net loss -- -- -- (239,304) (239,304)
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 2,944,831 29,448 4,429,906 6,930,250 11,389,604
Net income -- -- -- 739,135 739,135
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 2,944,831 29,448 4,429,906 7,669,385 12,128,739
Proceeds from exercise of
stock options 117,904 1,179 230,568 -- 231,747
Tax benefit from exercise of
stock options 301,670 301,670
Net income -- -- -- 2,743,069 2,743,069
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 3,062,735 $ 30,627 $ 4,962,144 $ 10,412,454 $ 15,405,225
============ ============ ============ ============ ============
See notes to consolidated financial statements.
F-4
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,743,069 $ 739,135 $ (239,304)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 124,514 107,742 143,135
Amortization of capitalized film costs 2,702,244 1,634,762 1,070,477
Provision for losses on accounts receivable -- -- 100,000
Deferred income taxes 484,598 84,000 137,555
Changes in operating assets and liabilities
providing (using) cash:
Accounts receivable 10,121,164 (10,553,753) (3,002,885)
Film inventory (1,140,912) (453,332) (3,025,295)
Prepaid refundable income taxes (321,585) 519,484 (39,876)
Prepaid expenses and other current assets (89,975) (53,699) (304,085)
Security deposits and other assets 8,503 (44,683) (47,944)
Due to licensors 209,814 2,063,809 (196,647)
Media payable (10,130,259) 5,552,598 4,610,389
Taxes payable 1,443,769 307,030 --
Accounts payable and accrued expenses 357,670 140,375 151,562
------------ ------------ ------------
Net cash provided by (used in)
operating activities 6,512,614 43,468 (642,918)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures
and computer equipment (101,648) (68,165) (32,589)
------------ ------------ ------------
Net cash used in investing activities (101,648) (68,165) (32,589)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term bank note -- 400,000 --
Repayment of short-term bank note -- (400,000) --
Proceeds from exercise of stock options
and related tax benefit 533,417 -- --
------------ ------------ ------------
Net cash provided by
financing activities 533,417 -- --
------------ ------------ ------------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS 6,944,383 (24,697) (675,507)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 2,805,573 2,830,270 3,505,777
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 9,749,956 $ 2,805,573 $ 2,830,270
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest $ -- $ 5,806 $ --
============ ============ ============
Income Taxes $ 17,000 $ 7,091 $ 24,223
============ ============ ============
See notes to consolidated financial statements.
F-5
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of all wholly owned subsidiaries. All related
significant intercompany balances and transactions have been eliminated in
consolidation.
Description and Accounting Basis for Revenues - 4Kids Entertainment, Inc.
and subsidiaries (the "Company") is an integrated entertainment and media
company specializing in the youth oriented market.
Licensing Business - The Company's licensing subsidiary is engaged
primarily in the business of licensing the commercial rights to
properties, personalities, and product concepts. The Company 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
properties, personalities and concepts. The licensing of these rights has
been primarily in the area of toys, games and other juvenile merchandise.
Grants have also been made in other fields, including the food,
toiletries, apparel and footwear industries. Additionally, these rights
are licensed in connection with the production of television shows, motion
pictures and publications such as magazines, juvenile books and comic
strips.
These license agreements often include nonrefundable minimum guaranteed
royalties which are payable by the licensee. The Company records as
revenue its proportionate share of the minimum guarantee when all material
terms of the contracts have been agreed to by the parties and a cash
payment or reasonable assurance of collectability is received. It is at
this point that the Company has substantially performed all of its
obligations under the contract.
For contracts not providing minimum guaranteed royalties and for royalty
amounts in excess of the minimum guarantee, the Company records revenue
based upon its share of earned royalties from the sales of the related
property.
Television and Video Productions - The Company accounts for its activities
associated with the production of entertainment programming in accordance
with Statement of Financial Accounting Standards No. 53 ("SFAS No. 53"),
Financial Reporting by Producers and Distributors of Motion Picture Films.
Under SFAS No. 53, the Company capitalizes costs associated with each
individual production. The capitalized costs are classified into current
and noncurrent assets depending on an estimate of when revenues associated
with those costs are anticipated to be recognized. Such costs are
amortized against the related revenue as such revenue is recognized.
Amortization rates may change as a result of changes in estimated future
revenue. Periodically, the Company evaluates the anticipated future
revenue against the net realizable value of the capitalized costs and,
where appropriate, reduces the carrying value of such costs to their
estimated net realizable amount which would result in a corresponding
charge to earnings.
Media Buying, Planning and Syndication Services - Through the Company's
wholly-owned subsidiary, The Summit Media Group, Inc. ("Summit Media"),
the Company provides media planning and buying services for both print and
broadcast. Summit Media is compensated based on a percentage of the media
it places. Such revenue is recognized at the time the related media runs.
Summit Media also provides television syndication services for which it
receives a fee based on a percentage of the advertising sales
F-6
generated by the related program. Such revenue is recognized at the time
the syndication services are completed and the advertising sales of the
related program are reasonably known. Summit Media will reflect a
liability for media payable and a corresponding receivable from its
clients in circumstances where Summit Media assumes the payment obligation
for media commitments.
Furniture, Fixtures and Computer Equipment - Furniture, fixtures and
computer equipment are recorded at cost. Depreciation is computed using
various methods over the estimated lives of the assets.
Imputed Interest - The Company imputes interest on the noncurrent portion
of accounts receivable at an average rate of 7% for 1998 and 1997.
Cash and Cash Equivalents - At December 31, 1998 and 1997, the Company had
cash equivalents consisting primarily of funds invested in Treasury bills
of approximately $9,251,340 and $2,200,541, respectively, with original
maturities of 90 days or less.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles 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 from
those estimates.
New Accounting Pronouncements - In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement establishes accounting and reporting standards for derivative
instruments and requires recognition of all derivatives as assets or
liabilities in the statement of position and measurement of these
instruments at fair value. The statement is effective for fiscal years
beginning after June 15, 1999. Management believes that adopting this
Statement will not have a material impact on the financial position,
results of operations or cash flows of the Company.
2. ACCOUNTS RECEIVABLE - MEDIA PAYABLE/DUE TO LICENSORS
Generally, licensing contracts provide for the Company to collect, on
behalf of the licensor, royalties including minimum guarantees from the
licensees. The Company records as accounts receivable its proportionate
share of such minimum guarantees and its share of earned royalties in
excess of guarantees.
Due to licensors represents amounts collected by the Company on behalf of
licensors, which are generally payable to such licensors after the close
of the quarter.
Additionally, accounts receivable include amounts due from clients for
earned commissions and the cost of related media placed on their behalf in
circumstances where the Company has assumed the payment obligation for
such media. In such circumstances, the Company will record a corresponding
liability for media payable. Accounts receivable consist of the following:
December 31,
1998 1997
Gross accounts receivable $20,838,613 $30,839,263
Allowance for doubtful accounts (516,671) (396,157)
----------- -----------
20,321,942 30,443,106
Less long-term portion 2,627,680 2,270,021
----------- -----------
$17,694,262 $28,173,085
=========== ===========
F-7
3. FILM INVENTORY
At December 31, 1998, there was $2,954,677 of capitalized film costs,
which relate to two completed works. Amortization of capitalized film cost
was $2,702,244, $1,634,762 and $1,070,477 in 1998, 1997 and 1996,
respectively. During 1998 and 1997, inclusive in the amortization above,
the Company recorded charges of approximately $1,424,000 and $702,000,
respectively, to reduce the carrying value of film inventory primarily
related to producing "WMAC Masters" and "Monster Wars" television
programs. These reductions of carrying values were based on the Company's
periodic evaluation of anticipated future revenue against the net
realizable value of capitalized cost. Film inventory consists of the
following components:
December 31,
1998 1997
Opening balance $ 4,516,009 $ 5,697,439
Additions 1,140,912 453,332
----------- -----------
5,656,921 6,150,771
Amortization (2,702,244) (1,634,762)
----------- -----------
2,954,677 4,516,009
Less noncurrent portion (1,875,000) (3,060,000)
----------- -----------
$ 1,079,677 $ 1,456,009
=========== ===========
4. REVENUES/MAJOR CUSTOMERS
Licensing revenue included on the Statements of Operations are net of
licensor participations of approximately $26,472,965 in 1998, $7,232,498
in 1997 and $3,610,934 in 1996.
The percentages of revenue from major properties and customers/licensees
are as follows:
Percentage of revenue derived from major
properties (revenue in excess of
10 percent of total revenue) 52% 10% 25%
Number of major properties 3 1 2
Percentage of revenue derived from
major customers/licensees (revenue
in excess of 10 percent of total revenue) 14% 25% 31%
Number of major customers/licensees 1 1 1
Additionally, through the Company's London office and network of
international subagents, which allow it to license its properties through
the world, the Company recognized approximately $446,000, $841,000 and
$554,000 in net revenue from international sources, primarily in Europe,
for 1998, 1997 and 1996, respectively.
F-8
5. INCOME TAXES
The Company has provided for deferred income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," whereby deferred income taxes are determined based upon
the enacted income tax rates for the years in which these taxes are
estimated to be payable or recoverable. Deferred income taxes arise from
temporary differences resulting from a difference between the tax basis of
an asset or liability and its reported amount in the financial statements.
The income tax (benefit) provision includes the following:
Years Ended December 31,
1998 1997 1996
Current:
Federal $1,120,000 $ 490,000 $ (326,000)
State and local 367,000 30,000 30,000
---------- ---------- ----------
1,487,000 520,000 (296,000)
---------- ---------- ----------
Deferred:
Federal 383,000 (82,000) 248,000
State and local 102,000 166,000 (76,000)
---------- ---------- ----------
485,000 84,000 172,000
---------- ---------- ----------
$1,972,000 $ 604,000 $ (124,000)
========== ========== ==========
The provision for taxes as reported is different than the tax provision
computed by applying the statutory Federal rate of 34 percent. The
differences are as follows:
Years Ended December 31,
1998 1997 1996
Income (loss) before income
tax provision $ 4,715,069 $ 1,343,135 $ (363,304)
=========== =========== ===========
Provision (benefit) at the
statutory Federal rate $ 1,603,000 $ 457,000 $ (124,000)
Provision for state and local
income taxes net of
Federal income tax benefit 310,000 129,000 (30,000)
Other 59,000 18,000 30,000
----------- ----------- -----------
$ 1,972,000 $ 604,000 $ (124,000)
=========== =========== ===========
Income tax benefits, which related to the exercise of options reduced
current taxes payable and increased additional paid-in capital by $301,670
in 1998.
F-9
The Company's deferred tax liabilities are net of deferred tax assets of
approximately $783,000 and $990,000 at December 31, 1998 and 1997,
respectively. The components of the deferred tax balances at December 31,
1998 and 1997 are as follows:
Years Ended December 31,
1998 1997
Commissions on guarantees not currently
recognized for tax reporting purposes $(2,151,000) $(1,873,000)
Tax benefit of state and local tax
loss carryforwards -- 119,000
Provision for doubtful accounts not currently
deductible for tax reporting purposes 222,000 71,000
Film inventory valuation adjustment not currently
deductible for tax reporting purposes 561,000 769,000
Depreciation, amortization and other charges
deducted for tax reporting purposes -- 31,000
----------- -----------
$(1,368,000) $ (883,000)
=========== ===========
6. RELATED PARTY TRANSACTIONS
In April 1998, Tiger Electronics, Inc., a major customer of the Company
and a Related Party was acquired by Hasbro, Inc. In addition, in
anticipation of the acquisition on March 4, 1998, a director and major
beneficial shareholder of the Company, who was also a principal
stockholder of Tiger, announced his resignation from the Company's Board
of Directors.
The Company provided certain services to Tiger during each of the past
three fiscal years. These transactions accounted for approximately
$2,080,000, $2,550,000 and $2,141,000 of net revenue in 1998, 1997 and
1996, respectively.
The Company had receivables due from Tiger of approximately $9,687,598 and
$21,791,754 at December 31, 1998 and 1997, respectively.
7. STOCK OPTIONS
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its plans. Accordingly, no compensation expense has been recognized
for its stock-based compensation plans. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at
the grant date for awards under these plans consistent with the
methodology prescribed under Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, the Company's net income
(loss) and net income (loss) per share would have been
decreased/(increased) by approximately $518,000, 239,000 and $(246,000),
or $.15, $.08 and $(.08) basic earnings per share for 1998, 1997 and 1996,
respectively. The fair value of the options granted during 1998, 1997 and
1996 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 85% for 1998, 70% for 1997 and 49% for 1996,
risk-free interest rate of 5.14% for 1998 and 7% for 1997 and 1996 and
F-10
an expected life based on the estimated holding period giving
consideration to past experience and current stock price levels.
The Company has various stock option plans (the "Plans"). Options may be
exercised for a period of not more than ten years after the date of grant.
Unless otherwise determined by the Company's Stock Option Committee, each
option will be immediately exercisable with respect to 50 percent of the
shares subject to the option and will become 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.
Under the 1994 and 1992 Plans, in each of the two years following the
adoption of the plan, the Company's chairman was granted options to
purchase 100,000 shares and each outside director was granted options to
purchase 50,000 shares.
The Company has outstanding employee stock options as follows:
Weighted
Average
Exercise Price Exercise
Options Per Share Price
Outstanding at December 31, 1995 1,156,000 $ 2.625 - $ 10.25 $ 5.43
========= ======= ======== ======
Options granted 265,000 2.3125 - 2.375 2.33
Options expired (172,000) 2.375 - 9.75 3.24
--------- ------- -------- ------
Outstanding at December 31, 1996 1,249,000 2.3125 - 10.25 5.13
========= ======= ======== ======
Options granted 417,500 1.375 - 1.585 1.39
Options expired (200,000) 5.00 - 5.75 5.38
--------- ------- -------- ------
Outstanding at December 31, 1997 1,466,500 1.375 - 10.25 4.10
========= ======= ======== ======
Options granted 331,000 2.75 - 9.3125 5.77
Options expired (31,500) 6.125 - 9.75 7.85
Options exercised (117,904) 1.375 - 2.625 1.96
--------- ------- -------- ------
Outstanding at December 31, 1998 1,648,096 1.375 - 9.3125 4.30
========= ======= ======== ======
Exercisable at December 31, 1998 1,547,596 $ 1.375 - $ 9.3125 $ 3.92
========= ======= ======== ======
Under the Company's various stock option plans, 5,000 of the Company's
common stock were available at December 31, 1998 for future issuance.
At December 31, 1998, there were 1,653,096 shares of the Company's common
stock reserved for stock options.
F-11
The following table summarizes information about fixed-price stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------- ------------------------
Weighted Weighted
Number Weighted Average Average Number Average
Range of Outstanding Remaing Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Contractual Life Price at 12/31/98 Price
--------------- ----------- ---------------- ----- ----------- -----
$1.3750 - $3.8125 1,088,096 5 years $ 2.40 1,065,096 $ 2.33
$ 5.00 - $ 6.125 200,000 4 years $ 5.68 200,000 $ 5.68
$8.0625 - $ 10.25 360,000 3 years $ 9.39 282,500 $ 9.45
--------- ---------
1,648,096 1,547,596
========= =========
8. EARNINGS PER SHARE
The Company applies Statement of Accounting Standards ("SFAS") No. 128
"Earnings per Share" which requires the computation and presentation of
earnings per share ("EPS") to include basic and diluted EPS. Basic EPS is
computed based solely on the weighted average number of common shares
outstanding during the period. Diluted EPS reflects all potential dilution
of common stock. The following table reconciles Basic EPS with Diluted EPS
for the years ended December 31, 1998 and 1997. For 1996 the weighted
average number of common shares outstanding were 2,944,831 and the effect
of stock options was antidilutive.
For the Year Ended 1998
Income Shares Per Share
Net income $2,743,069 -- $--
Basic earnings per share:
Income available to common shareholders 2,743,069 2,994,246 0.92
Effect of dilutive security:
Stock options -- 414,781 --
---------- --------- -----
Diluted earnings per share $2,743,069 3,409,027 $0.80
========== ========== =====
For the Year Ended 1997
Income Shares Per Share
Net income $ 739,135 -- $--
Basic earnings per share:
Income available to common shareholders 739,135 2,944,831 0.25
Effect of dilutive security:
Stock options -- 225,048 --
--------- --------- -----
Diluted earnings per share $ 739,135 3,169,879 $0.23
========= ========= =====
F-12
Options to purchase 360,000, 840,000, and 1,249,000 shares of common stock
at prices ranging from $2.3125 - $10.25 per share were outstanding in
1998, 1997, and 1996, respectively, but were not included in the
computation of diluted earnings per share because their effect would have
been antidilutive.
9. COMMITMENTS AND CONTINGENCIES
a. Bonus Plan - Bonuses are based upon an amount up to 14 percent of
pretax profits. Key officers and employees, as designated by the
Board of Directors, can be included in the Bonus Plan. For 1998 and
1997, the Board of Directors, under the Bonus Plan, awarded the
Chairman and Chief Executive Officer of the Company approximately
$557,000 and $177,000, respectively. An additional amount of
approximately $139,000 and $35,000 under the Bonus Plan was granted
to two employees, one of which was an officer, in 1998 and 1997,
respectively. Due to the losses in 1996, no bonuses were granted
under the Bonus Plan.
b. Leases - The Company is obligated for future leases for office
space. Certain leases provide for escalation clauses and renewal
options.
At December 31, 1998, future minimum lease payments were as follows:
Year Ending
December 31, Amount
------------ ------
1999 $387,643
2000 384,527
2001 384,527
2002 379,409
2003 364,056
Thereafter 151,690
-----------
$ 2,051,852
===========
Rent expense approximated $421,024, $445,136 and $460,183 in 1998,
1997 and 1996, respectively.
c. Litigation - As of December 31, 1998, there were no legal
proceedings pending against the Company other than routine
litigation incidental to its business. Some matters involve claims
for large amounts as well as other relief. Although the consequences
are not presently known, in the opinion of management, they will not
materially affect the Company's liquidity, financial position or
results of operations.
d. Credit Facility -The Company's line of credit (the "Credit
Facility") from Chase Bank that expired on June 30, 1998 has been
renewed through June 30, 1999. Under the terms the Company may
borrow from time to time for general working capital purposes up to
$2 million. Any borrowings under the credit facility would be
secured by the Company's receivables. The Credit Facility provides
for an interest rate of 1% over the bank's prime rate and an annual
commitment fee of 3/4%. As of December 31, 1998 the Company had no
borrowings under the Credit Facility
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
F-13
termination for any reason. As of December 31, 1998, 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
$2,387,000.
These employment agreements provide for aggregate minimum annual
base compensation of $1,395,000 expiring on various dates through
2003.
10. SUBSEQUENT EVENT AND PRO FORMA INFORMATION
On March 29, 1999, the Company's Board of Directors approved the
declaration of a 3 for 2 stock split effective for shareholders of record
on April 15, 1999. The following table presents a retroactive
reconciliation of the pro forma basic and diluted EPS for the years ended
December 31, 1998, 1997 and 1996 assuming that the stock split had
occurred:
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- ----------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
Net Income $2,743,069 $2,743,069 $ 739,135 $ 739,135 $ (239,304) $ (239,304)
Pro forma weighted average
common shares outstanding 4,491,369 4,491,369 4,417,247 4,417,247 4,417,247 4,417,247
Pro forma additional shares due to:
Assumes conversion of dilutive
stock options 0 622,172 0 337,572 0 0
---------- ---------- ---------- ---------- ---------- ----------
Pro forma adjusted weighted average
common shares outstanding 4,491,369 5,113,541 4,417,247 4,754,819 4,417,247 4,417,247
========== ========== ========== ========== ========== ==========
Pro forma net income per share $ 0.61 $ 0.54 $ 0.17 $ 0.16 $ (0.05) $ (0.05)
========== ========== ========== ========== ========== ==========
F-14
11. SEGMENT AND RELATED INFORMATION
The Company applies Statement of Financial Accounting Standards No. 131
("SFAS No. 131"), "Disclosures About Segments of an Enterprise and Related
Information".
The Company has three reportable segments; Licensing, Media Buying
Planning and Television Distribution and Television Production. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company does not have any
inter-segment sales or transfers.
The Company's reportable segments are strategic business units which,
while managed separately, work together as a vertically integrated
Entertainment Company.
MEDIA & TELEVISION
LICENSING TV DISTRIBUTION PRODUCTION TOTAL
--------- --------------- ---------- -----
1998
Revenues $ 8,837,224 $ 4,328,808 $ 1,601,397 $ 14,767,429
Amortization -- 105,179 2,597,065 2,702,244
Segment Profit 4,825,136 1,158,319 (1,268,386) 4,715,069
Segment Assets 14,213,786 17,290,624 3,456,745 34,961,155
1997
Revenues $ 3,924,609 $ 4,969,519 $ 1,222,672 $ 10,116,800
Amortization -- -- 1,634,762 1,634,762
Segment Profit 736,463 1,604,158 (997,486) 1,343,135
Segment Assets 8,940,470 25,072,439 5,306,168 39,319,077
1996
Revenues $ 2,967,680 $ 2,936,685 $ 1,072,962 $ 6,977,327
Amortization -- -- 1,070,477 1,070,477
Segment Profit (963,081) 733,201 (133,424) (363,304)
Segment Assets 6,891,569 17,199,875 6,340,685 30,432,129
******
INDEX OF EXHIBITS
Exhibit Page
Number Description Number
- ------ ----------- ------
(3) (a) Certificate of Incorporation of the Registrant, as amended (13)
(b) By-Laws of the Registrant adopted by the Board of Directors on March
28, 1991 (2)
(c) Resolution of the Board of Directors of the Registrant adopted March
12, 1991 reducing the size of the Board from six directors to three
directors (2)
(4) (a) Form of Common Stock Certificate (3)
(10) (a) Bonus Plan of the (*)(4)
(b) 1985 Non-Qualified Stock Option Plan, as amended (*)(4)
(c) 1986 Stock Option Plan, as amended (*)(4)
(d) 1992 Stock Option Plan (*)(5)
(e) 1993 Stock Option Plan (*)(6)
(f) 1994 Stock Option Plan (*)(10)
(g) 1995 Stock Option Plan (*)(11)
(h) 1996 Stock Option Plan (*)(15)
(i) Stock Option Agreement, dated June 10, 1992, between the Registrant
and Randy O. Rissman (*)(7)
(j) Stock Option Agreement, dated June 10, 1992, between the Registrant
and Gerald Rissman (*)(7)
(k) Agreement between Nintendo of America, Inc. and the Registrant dated
December 17, 1987 (4)
(l) Agreement of Lease, dated March 28, 1988, between the Registrant and
1414 Americas Company (2)
(m) Amendment, dated July 8, 1994, to Agreement of Lease between the
Registrant and 1414 Americas Company. (12)
(n) Agreement of Lease, dated June 30, 1991, between the Registrant and
Olympic Purdue Associates (the "Olympic Lease") (7)
(o) First Amendment, dated January 3, 1994, to the Olympic Lease (7)
(p) Agreement of Lease, dated March 23, 1993, between Leisure Concepts
International, Inc. and Svenska Handelsbanken (7)
(q) Employment Agreement, dated March 12, 1991 between the Registrant and
Alfred R. Kahn(*)(8)
(r) Employment Agreement, dated June 3, 1991, between the Registrant and
Joseph Garrity (*)(9)
(s) Amendment, dated as of October 17, 1994, to the Employment Agreement
between the Registrant and Joseph Garrity (*)(12)
Exhibit Page
Number Description Number
- ------ ----------- ------
(t) Employment Agreement, dated January 1, 1995 between The Summit Media
Group, Inc. and Sheldon Hirsch.(*)(13)
(u) Employment Agreement, dated January 1, 1995 between The Summit Media
Group, Inc. and Thomas J. Kenney. (*)(13)
(v) Employment Agreement, dated January 9, 1996 between 4 Kids
Productions, Inc. and Norman Grossfeld. (*)(13)
(w) Note, dated May 29, 1997, between the Registrant and Chemical Bank.
(16)
(x) Security Agreement, dated May 29, 1996, by and between Leisure
Concepts, Inc. and Chemical Bank (16)
(y) Security Agreement, dated May 29, 1996, by and between 4Kids
Productions, Inc. and Chemical Bank (16)
(z) Security Agreement, dated May 29, 1996, by and between The Summit
Media Group, Inc. and Chemical Bank (16)
(aa) Amendment, dated as of January 1, 1997, to the Employment Agreement
between the Registrant and Joseph P. Garrity(*)(16)
(bb) Amendment, dated as of January 1, 1997, to the Employment Agreement
between The Summit Media Group, Inc. and Sheldon Hirsch(*)(16)
(cc) Amendment, dated as of January 1, 1997, to the Employment Agreement
between The Summit Media Group, Inc. and Thomas Kenney(*)(16)
(dd) Amendment, dated as of February, 1997, to the Employment Agreement
between the Registrant and Alfred R. Kahn(*)(16).
(ee) 1998 Stock Option Plan(*)(17)
(21) List of Subsidiaries of the Registrant
(24) Consent of Deloitte & Touche LLP, Certified Public Accountants
(27) Financial Data Schedule
- ----------
(*) 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 1997 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 Proxy Statement for Annual Meeting of
Shareholders held April 30, 1998.