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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 September 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 November 13, 2003, the number of shares outstanding of the Registrant’s common stock, par value $.01 per share, was 13,419,068.




4Kids Entertainment, Inc. and Subsidiaries

Table of Contents


Page #

Part I--FINANCIAL INFORMATION



        Item 1.

Financial Statements

 
     

 

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

2
     

 

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

3
     

 

Consolidated Statements of Cash Flows for the nine
   months ended September 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

21
     

        Item 4.

Controls and Procedures

21
     

Part II—OTHER INFORMATION

 

 
     

        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)
September 30, December 31,
2003
 2002
ASSETS (Unaudited)
 
CURRENT ASSETS:            
  Cash and cash equivalents   $ 63,491   $ 78,712  
  Investments    35,988    10,787  
  Accounts receivable - net    30,031    38,847  
  Prepaid Fox broadcast fee - net    14,170    9,857  
  Prepaid/refundable income taxes    1,665    1,635  
  Advances to licensors    1,279    1,617  
  Prepaid expenses and other current assets    2,585    2,254  
           Total current assets    149,209    143,709  
 
PROPERTY AND EQUIPMENT - net    3,450    3,853  
ACCOUNTS RECEIVABLE - net    3,560    5,733  
INVESTMENT IN EQUITY SECURITIES    726    726  
FILM AND TELEVISION COSTS - net    8,400    5,653  
DEFERRED INCOME TAXES    1,369    917  
OTHER ASSETS - net    4,780    2,248  
TOTAL ASSETS   $ 171,494   $ 162,839  
LIABILITIES AND STOCKHOLDERS' EQUITY  
 
CURRENT LIABILITIES:  
  Due to licensors   $ 8,942   $ 9,063  
  Media payable    2,043    5,613  
  Accounts payable and accrued expenses    8,153    9,776  
  Deferred revenue    5,136    3,976  
  Deferred income taxes    651    983  
           Total current liabilities    24,925    29,411  
 
DEFERRED RENT    928    757  
           Total liabilities    25,853    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, 13,403,568 and 13,135,008 shares in 2003 and  
    2002, respectively    134    131  
  Additional paid-in capital    43,809    40,411  
  Accumulated other comprehensive income     159    72  
  Retained earnings    101,539    92,057  
           Total stockholders' equity    145,641    132,671  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 171,494   $ 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 Nine Months Ended
September 30, September 30,
2003
 2002
 2003
 2002
NET REVENUES     $ 25,334   $ 12,099   $ 69,681   $ 27,238  
COSTS AND EXPENSES:  
  Selling, general and administrative    8,579    6,842    23,996    16,328  
  Production service costs    2,574    327    6,556    804  
  Amortization of television and film costs and  
     Fox broadcast fee    9,700    1,919    24,204    3,301  
           Total costs and expenses    20,853    9,088    54,756    20,433  
INCOME FROM OPERATIONS    4,481    3,011    14,925    6,805  
 
INTEREST INCOME    252    388    835    1,180  
INCOME BEFORE INCOME TAX  
  PROVISION    4,733    3,399    15,760    7,985  
 
INCOME TAX PROVISION    1,866    1,436    6,278    3,241  
NET INCOME   $ 2,867   $ 1,963   $ 9,482   $ 4,744  
PER SHARE AMOUNTS:  
  Basic earnings per common share   $ 0.22   $ 0.16   $ 0.72   $ 0.38  
  Diluted earnings per common share   $ 0.20   $ 0.14   $ 0.68   $ 0.35  
  Weighted average common shares  
      outstanding - basic    13,247,459    12,597,355    13,174,119    12,588,162  
  Weighted average common shares  
      outstanding - diluted    14,169,729    13,678,026    14,018,995    13,656,787  

See notes to consolidated financial statements.



-3-

   

 

 
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands of dollars)
Nine Months Ended
September 30, September 30,
2003
 2002
CASH FLOWS FROM OPERATING ACTIVITIES:            
  Net income   $ 9,482   $ 4,744  
  Adjustments to reconcile net income to net cash  
     provided by (used in) operating activities:  
    Depreciation and amortization    928    722  
    Amortization of television and film costs and Fox broadcast fee    24,204    3,301  
    Provision for doubtful accounts    253    --  
    Deferred income taxes    (784 )  --  
    Tax benefit on exercise of stock options    1,569    292  
    Changes in operating assets and liabilities:  
      Accounts receivable    10,736    (11,125 )
      Film and television costs    (9,115 )  (4,163 )
      Prepaid/refundable income taxes    (30 )  3,584  
      Prepaid Fox broadcast fee    (22,149 )  (14,427 )
      Advances to licensors    338    --  
      Prepaid expenses and other current assets    (331 )  (4,060 )
      Other assets - net    (2,532 )  (176 )
      Due to licensors    (121 )  (9,049 )
      Media payable    (3,570 )  292  
      Accounts payable and accrued expenses    (1,623 )  589  
      Income taxes payable    --    680  
      Deferred revenue    1,160    4,155  
      Deferred rent    171    424  
           Net cash provided by (used in) operating activities    8,586    (24,217 )
CASH FLOWS FROM INVESTING ACTIVITIES:  
  Proceeds from maturities of investments    63,242    20,047  
  Purchase of investments    (88,443 )  (19,806 )
  Purchase of property and equipment    (525 )  (2,274 )
           Net cash used in investing activities    (25,726 )  (2,033 )
CASH FLOWS FROM FINANCING ACTIVITIES -  
  Proceeds from exercise of stock options    1,832    525  
EFFECTS OF EXCHANGE RATE CHANGES ON CASH  
  AND CASH EQUIVALENTS    87    --  
NET DECREASE IN CASH AND CASH EQUIVALENTS    (15,221 )  (25,725 )
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD    78,712    104,445  
CASH AND CASH EQUIVALENTS, END OF PERIOD   $ 63,491   $ 78,720  
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:  
CASH PAID DURING THE PERIOD FOR:  
  Income Taxes   $ 5,600   $ --  

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 produces original music compositions for use with its television and film production activities.

-5-
   

 

 
  4Kids Entertainment Music, Inc. ("4Kids Music"), 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. ("4Kids Home Video"), 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 September 30, 2003 and December 31, 2002 and the results of operations for the three and nine month periods ended September 30, 2003 and 2002 and cash flows for the nine months ended September 30, 2003 and 2002. Because of the inherent seasonality and changing trends of the toy and game, entertainment and advertising industries, operating results in 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: Merchandise licensing revenues are recognized when the underlying royalties from the sales of the related products are earned. The Company recognizes guaranteed royalties at the time the arrangement becomes effective if the Company has no significant direct continuing involvement with the underlying property or obligation to the licensee. Where the Company has significant continuing direct involvement with the underlying property or obligation to the licensee, guaranteed minimum royalties are recognized ratably over the term of the license or based on sales of the related products, if greater. Licensing advances and guaranteed payments collected, but not yet earned by the Company, are classified as deferred revenue in the accompanying consolidated balance sheets.

  Broadcast advertising revenues: 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 periods that the films or episodic television series are available for telecast.

  Production and adaptation costs reimbursed or charged to the licensor are included in net revenue and the corresponding costs are included in production service costs in the accompanying consolidated statements of income.

-6-
   

 

 
  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.

  Translation of Foreign Currency —The assets and liabilities of the Company's foreign subsidiary have been recorded in their local currency and translated to U.S. dollars using period-end exchange rates. Income and expense items have been translated at the average rate of exchange prevailing during the period. Any adjustment resulting from translating the financial statements of the foreign subsidiary is reflected as “other comprehensive income”, net of related tax; which is a component of stockholders’ equity. Comprehensive income for the three and nine months ended September 30, 2003 was $2,916 and $9,569, respectively, which included translation adjustments of $49 and $87 for the respective periods. Comprehensive income for the three and nine months ended September 30, 2002 is the same as net income for the periods.

  Earnings Per Share — The Company applies SFAS No. 128, Earnings per share, which requires the computation and presentation of earnings per share (“EPS”) to include basic and diluted EPS. Basic EPS is computed solely on the weighted average number of common share outstanding during the period. Diluted EPS reflects all potential dilution of common stock. Total dilution was due to stock options and increased the weighted average common shares outstanding by 922 shares and 845 shares for the three and nine months ended September 30, 2003, respectively, and 1,081 shares and 1,069 shares for the three and nine months ended September 30, 2002, respectively.

  Stock-Based Compensation —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 nine months ended September 30, 2003 and 2002.

Three Months Ended Nine Months Ended
September 30, September 30,
2003
 2002
 2003
 2002
          Net income as reported     $ 2,867   $ 1,963   $ 9,482   $ 4,744  
          Deduct stock-based employee compensation  
           expense determined under fair value based  
                method for all awards, net of tax    251