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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

|X|     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE           SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003

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 number 0-7843

4Kids Entertainment, Inc.
(Exact name of Registrant as specified in its charter)

New York
(State or other jurisdiction of
incorporation or organization) 		13-2691380
(I.R.S. Employer
Identification No.)

1414 Avenue of the Americas
New York, New York 10019
(212) 758-7666
(Address, including zip code, and telephone number, including area code,
of Registrant’s principal executive offices)


      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 such filing requirements for the past 90 days. Yes |X|    No |_|        

      Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X|    No |_|

      At August 12, 2003, the number of shares outstanding of the Registrant’s common stock, par value $.01 per share, was 13,198,633.




4Kids Entertainment, Inc. and Subsidiaries

Table of Contents


Page #

Part I--FINANCIAL INFORMATION



        Item 1.

Financial Statements

 
     

 

Consolidated Balance Sheets as of June 30, 2003
   (Unaudited) and December 31, 2002

2
     

 

Consolidated Statements of Income for the three and six
   months ended June 30, 2003 and 2002 (Unaudited)

3
     

 

Consolidated Statements of Cash Flows for the six
   months ended June 30, 2003 and 2002 (Unaudited)

4
     

 

Notes to Consolidated Financial Statements (Unaudited)

5
     

        Item 2.

Management’s Discussion and Analysis of Financial
   Condition and Results of Operations

14
     

        Item 3.

Quantitative and Qualitative Disclosures about Market Risk

20
     

        Item 4.

Controls and Procedures

20
     

Part II—OTHER INFORMATION

 

 
     

        Item 4.

Submission of Matters to a Vote of Security Holders

21
     

        Item 6.

Exhibits and Reports on Form 8-K

22
     

Signatures

23

 
   

 

 

Part I-FINANCIAL INFORMATION
Item 1. Financial Statements
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share data)
June 30,
2003
 December 31,
2002
ASSETS (Unaudited)
CURRENT ASSETS:            
  Cash and cash equivalents   $ 62,734   $ 78,712  
  Investments    27,230    10,787  
  Accounts receivable - net    31,887    38,847  
  Prepaid Fox broadcast fee - net    18,173    9,857  
  Prepaid/refundable income taxes    708    1,635  
  Advances to licensors    3,112    1,617  
  Prepaid expenses and other current assets    4,252    2,254  
     Total current assets    148,096    143,709  
 
PROPERTY AND EQUIPMENT - net    3,642    3,853  
ACCOUNTS RECEIVABLE - net    3,070    5,733  
INVESTMENT IN EQUITY SECURITIES    726    726  
FILM AND TELEVISION COSTS - net    7,415    5,653  
DEFERRED INCOME TAXES     1,059    917  
OTHER ASSETS - net    2,487    2,248  
TOTAL ASSETS   $ 166,495   $ 162,839  
LIABILITIES AND STOCKHOLDERS’ EQUITY  
 
CURRENT LIABILITIES:  
  Due to licensors   $ 8,387   $ 9,063  
  Media payable    1,400    5,613  
  Accounts payable and accrued expenses    10,042    9,776  
  Deferred revenue    6,051    3,976  
  Deferred income taxes    88    983  
     Total current liabilities    25,968    29,411  
 
DEFERRED RENT    876    757  
     Total liabilities    26,844    30,168  
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, 13,159,633 and 13,135,008 shares in 2003 and  
     2002, respectively    132    131  
  Additional paid-in capital    40,737    40,411  
  Accumulated other comprehensive income    110    72  
  Retained earnings    98,672    92,057  
           Total stockholders’ equity    139,651    132,671  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 166,495   $ 162,839  

See notes to consolidated financial statements.

-2-

   

 

 
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands of dollars, except share data)
Three Months Ended Six Months Ended
June 30,
2003
 June 30,
2002
 June 30,
2003
 June 30,
2002
NET REVENUES     $ 23,369   $ 8,178   $ 44,347   $ 15,139  
COSTS AND EXPENSES:  
  Selling, general and administrative    8,174    5,018    15,417    9,486  
  Production service costs    1,989    354    3,982    477  
  Amortization of television and film costs and  
     Fox broadcast fee    7,388    1,162    14,504    1,382  
        Total costs and expenses    17,551    6,534    33,903    11,345  
INCOME FROM OPERATIONS    5,818    1,644    10,444    3,794  
 
INTEREST INCOME    259    315    583    792  
INCOME BEFORE INCOME TAX  
  PROVISION    6,077    1,959    11,027    4,586  
 
INCOME TAX PROVISION    2,432    732    4,412    1,805  
NET INCOME   $ 3,645   $ 1,227   $ 6,615   $ 2,781  
PER SHARE AMOUNTS:  
  Basic earnings per common share   $ 0.28   $ 0.10   $ 0.50   $ 0.22  
  Diluted earnings per common share   $ 0.26   $ 0.09   $ 0.47   $ 0.20  
  Weighted average common shares  
      outstanding - basic    13,139,891    12,590,791    13,137,450    12,583,566  
  Weighted average common shares  
      outstanding - diluted    13,987,627    13,653,166    13,943,629    13,646,168  


See notes to consolidated financial statements.

-3-
   

 

 
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
(In thousands of dollars)
Six Months Ended
June 30,
2003
 June 30,
2002
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income     $ 6,615   $ 2,781  
  Adjustments to reconcile net income to net cash  
     provided by (used in) operating activities:  
    Depreciation and amortization    616    465  
    Amortization of television and film costs and Fox broadcast fee    14,504    1,382  
    Provision for doubtful accounts    253    --  
    Deferred income taxes    (1,037 )  --  
    Tax benefit on exercise of stock options    71    222  
    Changes in operating assets and liabilities:  
      Accounts receivable    9,370    (5,010 )
      Film and television costs    (5,597 )  (2,133 )
      Prepaid/refundable income taxes    927    1,179  
      Prepaid Fox broadcast fee    (18,985 )  (12,656 )
      Advances to licensors    (1,495 )  --  
      Prepaid expenses and other current assets    (1,998 )  648  
      Other assets - net    (239 )  (89 )
      Due to licensors    (676 )  (9,351 )
      Media payable    (4,213 )  (508 )
      Accounts payable and accrued expenses    266    106  
      Deferred revenue    2,075    1,355  
      Deferred rent    119    240  
           Net cash provided by (used in) operating activities    576    (21,369 )
CASH FLOWS FROM INVESTING ACTIVITIES:  
  Proceeds from maturities of investments    13,619    9,155  
  Purchase of investments    (30,062 )  (19,806 )
  Purchase of property and equipment    (405 )  (1,109 )
           Net cash used in investing activities    (16,848 )  (11,760 )
CASH FLOWS FROM FINANCING ACTIVITIES:  
  Proceeds from exercise of stock options    256    397  
EFFECTS OF EXCHANGE RATE CHANGES ON CASH  
   AND CASH EQUIVALENTS    38    --  
NET DECREASE IN CASH AND CASH EQUIVALENTS    (15,978 )  (32,732 )
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD    78,712    104,445  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 62,734   $ 71,713  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:  
 
CASH PAID DURING THE PERIOD FOR:  
  Income Taxes   $ 4,300   $ --  


See notes to consolidated financial statements.


-4-

   

 

 
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(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, and Television and Film Production/Distribution.

  Licensing —The Company’s wholly-owned subsidiaries, 4Kids Entertainment Licensing, Inc. (“4Kids Licensing”) and 4Kids Entertainment 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, develops 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 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 generally 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. 4Kids Ad Sales, Inc., a wholly-owned subsidiary, manages and accounts 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.

  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 for domestic and international broadcast. Additionally, 4Kids Productions produce original music compositions for use with its television and film production activities.

-5-
   

 

 
  4Kids Entertainment Music, Inc., a wholly-owned subsidiary, markets and administers the musical operations for the Company on certain existing and newly created music associated with its television programming. 4Kids Entertainment Home Video, Inc., a wholly-owned subsidiary, markets and administers the Company’s home video operations associated with its television programming.

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Basis of Presentation — The consolidated financial statements, except for the December 31, 2002 consolidated balance sheet, are unaudited. In the opinion of management, the accompanying consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company as of June 30, 2003 and December 31, 2002 and the results of operations for the three and six months ended June 30, 2003 and 2002 and cash flows for the six months ended June 30, 2003 and 2002. Because of the seasonality and changing trends of the toy and game, entertainment and advertising industries, operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto, for the year ended December 31, 2002, which are included in the Company’s Annual Report on Form 10-K with respect to such period filed with the Securities and Exchange Commission on March 31, 2003. All significant intercompany accounts and transactions have been eliminated. The December 31, 2002 consolidated balance sheet amounts are derived from the Company’s audited consolidated financial statements.

  Revenue Recognition — Merchandise licensing revenues:  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:  Advertising revenues are recognized when the related commercials are aired and are recorded net of agency commissions with 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 that 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 revenues:  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 exploitation. Revenues arising from television license agreements are recognized in the period that the films or episodic television series are available for telecast.
-6-
   

 

 
  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.

  Home video revenues: 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.

  Music revenues: Revenues from music sales, net of a reserve for returns, are recognized based on the date units are shipped by the Company’s distributor to wholesalers/retailers as reported to the Company. In the case of musical performance revenues, the revenue is recognized when the musical recordings are broadcast and/or performed.

  Film and Television Costs — The Company accounts for its film and television costs pursuant to AICPA Statement of Position (“SOP”) No. 00-2, Accounting by Producers or Distributors of Films. The cost of production for television programming, including overhead, participations and talent residuals is capitalized and amortized 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. 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.

  Reclassifications — Certain amounts reported for the prior period have been reclassified to conform to the current period’s presentation.

  Stock-Based Compensation — On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS No. 148”). 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.

-7-
   

 

 
  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 SFAS No. 123 for the three and six months ended June 30, 2003 and 2002.

Three Months Ended Six Months Ended
June 30,
2003
 June 30,
2002
 June 30,
2003
 June 30,
2002
          Net income as reported     $ 3,645     $ 1,227     $ 6,615     $ 2,781  
          Deduct stock-based employee compensation  
           expense determined under fair value based  
           method for all awards, net of tax   1,204