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UNITED STATES [X] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE Commission File No. 0-7843 4Kids Entertainment,
Inc. |
| 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 (Address of principle executive offices) |
10019
(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 the Section 12(g) of the Act: |
| Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days. Yes X No ___ |
| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. | | |
| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes X No ___ |
| The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of the Common Stock on June 30, 2003 as reported on the New York Stock Exchange Market, was approximately $223,603,303. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. |
| Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date. |
| Common Stock, $.01 Par Value
(Title of Class) |
13,965,343
(No. of Shares Outstanding at March 12, 2004) |
| Portions of the Registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 27, 2004 are incorporated by reference into Part III of this Form 10-K Report. |
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FORM 10-K REPORT INDEX
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| 10-K Part |
Page No. | |||
| PART I |
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| Item 1 |
Business | 1 | ||
| Item 2 |
Properties | 4 | ||
| Item 3 |
Legal Proceedings | 4 | ||
| Item 4 |
Submission of Matters to a Vote of Security Holders | 4 | ||
| PART II |
||||
| Item 5 |
Market for the Registrant’s Common Equity and Related Stockholder Matters | 5 | ||
| Item 6 |
Selected Consolidated Financial Data | 5 | ||
| Item 7 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 6 | ||
| Item 7A |
Quantitative and Qualitative Disclosures About Market Risk | 15 | ||
| Item 8 |
Financial Statements and Supplementary Data | |||
| Item 9 |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 15 | ||
| Item 9A |
Controls and Procedures | 15 | ||
| PART III |
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| Item 10 |
Directors and Executive Officers of the Registrant | 15 | ||
| Item 11 |
Executive and Director Compensation | 15 | ||
| Item 12 |
Security Ownership of Certain Beneficial Owners and Management | 15 | ||
| Item 13 |
Certain Relationships and Related Transactions | 15 | ||
| Item 14 |
Principal Accountant Fees and Services | 16 | ||
| PART IV |
||||
| Item 15 |
Exhibits, Financial Statement Schedules, and Reports on Form 8-K | 17 | ||
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| PART I |
| Item 1. Business |
| (a) General Development and Narrative Description of Business — 4Kids Entertainment, Inc. (the “Company”), together with the subsidiaries through which the Company’s businesses are conducted, is a diversified entertainment and media company specializing in the youth oriented market with operations in the following business segments: Licensing, Advertising Media and Broadcast, Television and Film Production/Distribution. The Company was organized as a New York Corporation in 1970. |
| Licensing — The Company’s wholly-owned subsidiaries, 4Kids Entertainment Licensing, Inc. (“4Kids Licensing”) and 4Kids Entertainment International, Ltd. (“4Kids International”), are engaged in the business of licensing the commercial rights to popular children’s television and film properties, personalities and product concepts. 4Kids Licensing typically acts as exclusive agent in connection with the grant to third parties of licenses to manufacture and sell all types of merchandise based on such properties, personalities and concepts. The licensing of these rights has been primarily in the areas of toys, electronic games, trading cards, food, toiletries, apparel, housewares, footwear and publishing rights. 4Kids Licensing also licenses merchandising rights in connection with certain television shows and motion pictures produced by the Company. 4Kids International, which is based in London, manages the properties represented by the Company in the United Kingdom and European marketplace. Licensing revenues accounted for approximately 54%, 54% and 68% of consolidated net revenues for the years ended December 31, 2003, 2002 and 2001, respectively. |
| The following properties are among those represented exclusively by 4Kids Licensing: |
| o | “Artlist Collection: The Dog™": a collection of images of more than 70 breeds of puppies photographed with a unique lens to create strange ratio images where the heads of the puppies are enlarged. The Company holds worldwide rights outside of Asia for “The Dog™” through December 2007. |
| o | “Cabbage Patch Kids”: the Company represents all merchandise licensing rights for “Cabbage Patch Kids” through December 31, 2004 under a rolling one year agreement. The one-of-a-kind “Cabbage Patch Kids” created by Original Appalachian Artworks, Inc., are not purchased, but rather are “adopted”. Each “Cabbage Patch Kid” comes with its own name and birth certificate. |
| o | “Cubix”: a computer animated television series featuring robots that was co-produced and co-owned by the Company with certain Asian partners. The Company represents all worldwide merchandising, television and home video rights to the series outside of Asia. |
| o | “Monster Jam”: Clear Channel Entertainment’s SFX Motor Sports Division owns this property and produces three hundred live monster truck events each year and a weekly cable television series. The Company represents worldwide merchandise licensing rights to the “Monster Jam”property through December 31, 2006. |
| o | Nintendo of America Inc. (“Nintendo”): the Company represents Nintendo for merchandise licensing and television rights to such classic Nintendo characters as the Super Mario Bros., Kirby, Donkey Kong and Zelda on a worldwide basis, other than Japan through December 31, 2005. |
| o | “Pokémon”: the Company represents the worldwide merchandising rights (exclusive of strategy cards and videogames), and the worldwide television and home video rights to “Pokémon” outside of Asia through December 31, 2005. |
| o | “Sonic X”: the Company is the exclusive licensee of television and home video rights to the “Sonic X” animated series based on the popular Sonic the Hedgehog character in the USA and Canada through 2011. |
| o | “Teenage Mutant Ninja Turtles” (“TMNT”): the Company is the exclusive worldwide licensing agent as well as co-owner and co-producer of an animated series featuring all new TMNT episodes which began broadcasting in 2003 on the Saturday morning programming block (“Fox Box”) that the Company leases from Fox Broadcasting Company (“Fox”). TMNT was originally launched in 1984 as a 40-page comic book created by Peter Laird and Kevin Eastman. |
| o | “The American Kennel Club” (“AKC”): the Company represents the worldwide merchandise rights to AKC through 2005. Founded in 1884, the AKC is one of the oldest sports organizations. It maintains the largest registry of purebred dogs in the world. |
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| o | “The Shaman King”: the Company represents the broadcast rights in North America, Australia and New Zealand, and the merchandising rights in North America, Europe (excluding Spain and Portugal), Africa, Middle East, Australia and New Zealand for “The Shaman King,” animated television series through 2010. |
| o | “Ultimate Muscle”: the Company represents all worldwide television and merchandise licensing rights for “Ultimate Muscle”, an animated television series that was produced by Toei Animation in Japan outside of Asia through August 31, 2008. |
| o | “Winx Club™": the Company represents all worldwide television and merchandising rights for “Winx Club™", an animated series produced by Rainbow in Italy in the United States, Canada, Australia, and New Zealand through 2010. |
| o | “Yu-Gi-Oh!": the Company is the exclusive representative for all television and merchandise licensing (exclusive of trading cards and video games) outside of Asia through August 31, 2010. Additionally, the Company receives certain marketing fees with respect to “Yu-Gi-Oh!” trading cards and video games. |
| Company-Owned Properties — The Company developed and owns WMAC Masters, a live action television series in which skilled martial arts professionals compete for supremacy. The Company also owns “Charlie Chan”, the fictional Asian detective who has been the subject of numerous films based on the character created by Earl Derr Biggers. In March 2001, the Company optioned the film rights to “Charlie Chan” to Twentieth Century Fox Film Corporation and in 2004 that option was extended by Twentieth Century Fox Film Corporation for an additional two years. As previously noted, the Company is a co-owner of the “Cubix” and the new “Teenage Mutant Ninja Turtles” television series. |
| Product Concepts — 4Kids Technology, Inc., a wholly-owned subsidiary, 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 Fox, leases the Fox Box. The Company provides all programming content to be broadcast on the Fox Box, which airs on Saturday mornings from 8am to 12pm eastern/pacific time (7am to 11am central time); and retains all of the revenue from network advertising sales for the four-hour time period. 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. |
| Advertising Media and Broadcast services accounted for 22%, 21% and 7% of consolidated net revenues for the years ended December 31, 2003, 2002 and 2001, respectively. |
| Television and Film Production/Distribution — The Company’s wholly-owned subsidiary, 4Kids Productions, Inc. (“4Kids Productions”), produces and adapts animated and live-action television programs and theatrical motion pictures for distribution to the television, home video and theatrical markets. 4Kids Productions adapts foreign programming for the 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. |
| Television and Film Production/Distribution accounted for 24%, 25%, and 25% of consolidated net revenues for the years ended December 31, 2003, 2002 and 2001, respectively. |
| 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. |
| (b) Financial Information About Industry Segments — Financial information regarding industry segments can be found in Note 13 of the Notes to the Company’s consolidated financial statements. |
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| (c) Dependence on a Few Sources of Revenues. — The Company typically derives a substantial portion of its revenues from a small number of properties, which properties usually generate revenues only for a limited period of time. Because the Company’s revenues are highly subject to changing trends in the toy, game and entertainment business, its revenues from year to year from particular sources are subject to dramatic increases and decreases. It is not possible to accurately predict the length of time that a property will be commercially successful or if a property will be commercially successful at all. Popularity of properties can vary from months to years. In addition, the Company has little control over the timing of payments made by licensees of various rights to the properties, some of which are made upon the execution and delivery of license agreements and some of which are made in quarterly royalty payments reported by the licensees. Due to these factors, the Company must continually seek new properties from which it can derive revenues. |
| Three properties “Yu-Gi-Oh!", “Pokémon” and “Teenage Mutant Ninja Turtles”, represented approximately 69% of consolidated net revenues for fiscal 2003. From a licensee perspective, the Konami Corporation contributed 29% of consolidated net revenues for fiscal 2003. For more information on Revenues/Major Customers, please see Note 7 of the Notes to the Company’s consolidated financial statements. |
| (d) Trademarks and Copyrights — The Company generally does not own any trademarks or copyrights in properties which the Company represents as merchandising agent. The trademarks and copyrights are typically owned by the creator or by the entity, such as a television producer, which may expend substantial amounts of resources in developing or promoting the property. However, the Company does own the copyrights and trademarks to “Charlie Chan” and “WMAC Masters” and is a joint copyright holder of “Cubix” and the new “Teenage Mutant Ninja Turtles” television episodes. |
| (e) Seasonal Aspects — A substantial portion of the Company’s revenues and net income are subject to the seasonal and trend variations of the toy and game industry. Typically, a majority of toy orders are shipped in the third and fourth calendar quarters. As a result, in the Company’s usual experience, its net income from toy and game royalties during the second half of the year has generally been greater than during the first half of the year. Additionally, advertising revenues derived from the sale of commercial time on the Fox Box will be higher in the fourth quarter commensurate with the demand for commercial time by children’s advertisers for the holiday season. |
| (f) Competition — The Company’s principal competitors in the area of licensing are the large media companies with theatrical distribution and television broadcast distribution (e.g., Disney, Time-Warner, Viacom), toy companies, other 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 the 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 as a merchandising agent. However, the ultimate success of a new entrant in the field would depend on its access to toy and other manufacturers, access to distribution of television based properties, access to properties to be licensed, retail market acceptance of the properties and its know-how in negotiating and subsequently administering of licenses. |
| The Company’s Advertising Media and Broadcast activities operate in highly competitive industries and compete with many companies with substantially greater resources and distribution networks than the Company. |
| The Company’s Television and Film Production/Distribution activities compete with all forms of entertainment. A significant number of companies produce and/or broadcast television programming and distribute theatrical releases and television films and exploit products in the home entertainment market. The Company also competes to obtain creative talents, properties, advertiser support, broadcast rights and market share, which are essential to the success of this business segment. |
| The Company’s ability to derive advertising revenue from the sale of commercial time on the Fox Box will depend on the popularity of the television shows the Company broadcasts. The Company also faces significant competition from other television shows, including competition from shows it produces (“Pokémon” and “Yu-Gi-Oh!”), which are broadcast on a competing network. |
| (g) Employees — As of March 15, 2004, the Company had a total of 218 full-time employees consisting of 89 employees in licensing, 31 in Advertising Media and Broadcast and 98 in Television and Film Production/Distribution. |
| (h) Available Information — The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for its Annual Meeting of Stockholders are made available, free of charge, through its Web site http://www.4kidsentertainment.com, as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission (the “SEC”). |
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| Item 2. Properties |
| The following table sets forth, with respect to properties leased (none are owned) by the Company at December 31, 2003, the location of the property, the date on which the lease expires and the use which the Company makes of such facilities: |
| Address |
Expiration of Lease |
Use |
Approximate Square Feet |
|---|---|---|---|
| 1414 Avenue of the Americas | April 30, 2010 | Executive and Sales Office, | 21,000 |
| New York, New York | Media Buying and | ||
| Television Production | |||
| 116 Putney Bridge Road | January 6, 2005 | International Sales Office | 4,000 |
| Alice Court | |||
| London, England | |||
| 53 West 23rd Street | December 31, 2006 | Production Facilities | 25,000 |
| New York, New York |
| 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 |
| (i) Morrison v. Nintendo, et al. On March 29, 2000, Morrison Entertainment Group, Inc., filed suit in the United States District Court for the Central District of California against Nintendo of America Inc., 4Kids Entertainment, Inc., and Leisure Concepts, Inc. The suit alleged that the Pokémon trademark infringes upon the Plaintiff’s “Monster in my Pocket” trademark. The complaint also alleged trademark dilution, unfair competition, and a breach of implied contract. The complaint sought injunctive relief as well as monetary damages. On August 6, 2001, the United States District Court granted summary judgment dismissing the suit. Plaintiff appealed the dismissal of the case by the U.S. District Court. On February 4, 2003, the U.S. Court of Appeals for the Ninth Circuit affirmed the decision by the U.S. District Court to dismiss the suit. |
| (ii) DSI Toys. During 2003, the Company’s subsidiary, Summit Media served as the media buying agency for DSI Toys, Inc. (“DSI”). On October 17, 2003, DSI filed a voluntary petition under Chapter 7 of the Bankruptcy Law in the United States Bankruptcy Court for the Southern District of Texas. In January 2004, the Trustee for the bankruptcy estate of DSI (the “Trustee”) sent a letter to Summit Media alleging that DSI made payments to Summit Media totaling $1,159 (the “Amount”) during the ninety (90) day period prior to the DSI’s bankruptcy filing and asserting that such payments constituted avoidable preference payments. The Trustee formally demanded that Summit Media repay the Amount to the Trustee. The Company believes it has meritorious defenses to this claim. This amount paid to Summit Media was not a payment with respect to an antecedent debt, but rather payment by DSI to Summit Media for certain DSI advertising in advance of the broadcast. The Company intends to vigorously defend its position. |
| The Company from time to time is involved in litigation arising in the ordinary course of its business. The Company does not believe that such litigation to which the Company or any subsidiary of the Company is a party or of which any of their property is the subject will, individually or in the aggregate, have a material adverse effect on the Company’s financial position or the results of its operations. |
| Item 4. Submission of Matters to a Vote of Security Holders |
| During the Company’s fiscal quarterly period ended December 31, 2003, there were no matters submitted to a vote of security holders. |
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| PART II |
| Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters |
| (a) The Company’s Common Stock is listed for trading on the New York Stock Exchange under the symbol “KDE”. The following table indicates high and low sales quotations for the periods indicated based upon information supplied by the New York Stock Exchange. |
| 2003 | Low |
High | ||||||
|---|---|---|---|---|---|---|---|---|
| First Quarter | $ | 10 | .92 | $ | 23 | .57 | ||
| Second Quarter | 11 | .47 | 19 | .14 | ||||
| Third Quarter | 15 | .87 | 23 | .81 | ||||
| Fourth Quarter | 21 | .00 | 29 | .55 | ||||
| 2002 | Low |
High | ||||||
|---|---|---|---|---|---|---|---|---|
| First Quarter | $ | 15 | .06 | $ | 20 | .99 | ||
| Second Quarter | 16 | .50 | 21 | .42 | ||||
| Third Quarter | 17 | .25 | 24 | .15 | ||||
| Fourth Quarter | 21 | .69 | 29 | .86 | ||||
| (b) Number of Holders of Common Stock — The number of holders of record of the Company’s Common Stock on March 9, 2004 was 353, which does not include individual participants in security position listings. |
| (c) Dividends — There were no dividends or other distributions made by the Company during 2003 or 2002. Future dividend policy will be determined by the Board of Directors based on the Company’s earnings, financial condition, capital requirements and other existing conditions. It is anticipated that cash dividends will not be paid to the holders of the Company’s Common Stock in the foreseeable future. |
| (d) Equity Compensation Plans — Information regarding the Company’s equity compensation plans is incorporated by reference to Item 12 in Part III of this Form 10-K. |
| (e) Stock Purchases — On November 25, 2003, the Company announced that its Board of Directors had authorized the Company to purchase up to 750,000 shares of its common stock in the open market or through negotiated prices from time-to-time through December 31, 2004. Such purchases are to be made out of the Company’s surplus. No such purchases were made by the Company during 2003. |
| Item 6. Selected Consolidated Financial Data (in thousands of dollars, except per share data) |
| The following consolidated selected financial data has been derived from and should be read in conjunction with the Company’s related consolidated financial statements. |
| Year Ended December 31, | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 |
2001 |
2000 |
1999 | |||||||||||||
| Total Net Revenues | $ | 102,079 | $ | 53,140 | $ | 41,538 | $ | 87,998 | $ | 60,482 | |||||||
| Net Income | 14,799 | 6,990 | 12,244 | 38,773 | 23,638 | ||||||||||||
| Net Income Per Common | |||||||||||||||||
| Share-Basic | $ | 1.11 | $ | 0.55 | $ | 1.01 | $ | 3.25 | $ | 2.20 | |||||||
| Net Income Per Common | |||||||||||||||||
| Share- Diluted | $ | 1.05 | $ | 0.51 | $ | 0.92 | $ | 2.96 | $ | 1.91 | |||||||
| Weighted Average Common | |||||||||||||||||
| Shares Outstanding-Basic | 13,292,852 | 12,653,102 | 12,163,927 | 11,947,217 | 10,741,082 | ||||||||||||
| Weighted Average Common | |||||||||||||||||
| Shares Outstanding-Diluted | 14,156,291 | 13,726,642 | 13,381,073 | 13,092,653 | 12,366,349 | ||||||||||||
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| December 31, |
2003 |
2002 |
2001 |
2000 |
1999 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Assets | $ | 192,380 | $ | 162,839 | $ | 143,739 | $ | 176,144 | $ | 127,104 | |||||||
| Working Capital | 137,929 | 114,298 | 106,570 | 96,351 | 56,982 | ||||||||||||
| Stockholders' Equity | 160,487 | 132,671 | 118,458 | 101,908 | 60,943 | ||||||||||||
| The amounts shown above give effect to the April 1999 three for two stock split and the September 1999 two for one stock split. The Company did not declare or pay any cash dividends during the five-year period ended December 31, 2003. |
| Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (In thousands of dollars unless otherwise specified) |
| Overview |
| The Company’s results for the year ended December 31, 2003 were driven by strong consumer demand for “Yu-Gi-Oh!” and to a lesser extent “Teenage Mutant Ninja Turtles” licensed merchandise, which grew steadily throughout the year into the holiday season. Additionally, business initiatives launched during 2002, such as the Fox Box, which generated advertising sales, and 4Kids Home Video, were contributors to higher revenues. The Company’s costs for 2003 were also significantly higher primarily due to a full twelve months of operations for the Fox Box. These higher costs included the fee paid to the Fox Broadcasting Company, programming costs, and sales, marketing and promotional costs. |
| General |
| The Company receives revenues from a number of sources, principally Licensing, Advertising Media and Broadcast and Television and Film Production/Distribution. The Company typically derives a substantial portion of its licensing revenues from a small number of properties, which properties usually generate revenues only for a limited period of time. Because the Company’s licensing revenues are highly subject to the changing trends in the toy, game and entertainment business, its licensing revenues from year to year from particular sources are subject to dramatic increases and decreases. It is not possible to precisely anticipate the length of time a property will be commercially successful, if at all. Popularity of properties can vary from months to years. As a result, the Company’s revenues and net income may fluctuate significantly between comparable periods. The Company’s licensing revenues have historically been derived primarily from the 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 provides media services to a significant number of toy and video game companies which place a substantial portion of their overall annual advertising in the fourth quarter. The Company recognizes revenue from the sale of advertising time related to its lease of the Fox Saturday morning television block as more fully described in Note 12 to the Company’s consolidated financial statements. In view of the increased demand for commercial time on the Fox Box by children’s advertisers for the holiday season, the Company’s advertising sales subsidiary sells advertising time at higher rates in the fourth quarter generally resulting in higher advertising revenues for the fourth quarter. As a result, much of these subsidiaries’ revenues are earned in the fourth quarter when the majority of toy and video game advertising occurs. In the Company’s usual experience for many of the reasons stated above, the Company’s revenues during the second half of the year have generally been greater than during the first half of the year. However, the Company’s revenues in the most recent fiscal years have been heavily influenced by popularity trends of “Yu-Gi-Oh!", “Pokémon” and “Teenage Mutant Ninja Turtles” and advertising revenue derived from the sale of commercial time on the Fox Box which is typically sold with a guaranteed audience delivery, rather than the historical seasonal trends of toy and game sales. Further, revenue fluctuations result from guarantee and minimum royalty payments occurring throughout the year, some of which are recognized as revenue upon the execution and delivery of license agreements. |
| Critical Accounting Policies |
| This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. The Company continually evaluates the policies and estimates it uses to prepare its consolidated financial statements. In, general, management’s estimates and assumptions are based on historical experience, known trends or events, information from third-party professionals and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. |
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| Our accounting policies are more fully described in Note 2 of the Notes to the Company’s consolidated financial statements. Below is a summary of the critical accounting policies, among others, that management believes involve significant judgments and estimates used in the preparation of its consolidated financial statements. |
| Revenue Recognition |
| The Company has revenue recognition policies for its various operating segments, which are appropriate to the circumstances of each business. See Note 2 of the Notes to the Company’s consolidated financial statements for a discussion of these revenue recognition policies. |
| The Company records reductions to revenues for estimated future returns of merchandise, primarily home video products. These estimates are based on trends and projections of customer demand for and acceptance of various products. Differences may result in the amount and timing of the Company’s revenue for any period if actual performance varies from these estimates. In addition, the Company records a reduction to advertising revenue for any under-delivered audience guarantees with regard to advertising time sold on the Fox Box. |
| Film and Television Costs |
| Film and television costs - In accordance with Statement of Position No. 00-2, “Accounting by Producers or Distributors of Films” (“SOP 00-2”), management’s judgment is required as it relates to total revenues to be received and costs to be incurred throughout the life of each program or its license period, to determine the amortization of capitalized film and television programming costs associated with revenues earned and any fair value adjustments. |
| Film and television programming costs are amortized in the consolidated statements of income in the direct proportion that revenues currently recognized bears to management’s estimate of total future revenues to be received throughout the life of each motion picture or television program. Estimates of revenues are reviewed and reassessed periodically on a title-by-title basis. |
| Fox Broadcast Fee |
| Fox Broadcast Agreement –The Company leases from Fox its television network’s Saturday morning programming block. The cost of the Fox Box has been and will be capitalized and amortized over the broadcast season based on estimated advertising revenue. In developing future estimated revenues, the Company has made certain assumptions with regard to the anticipated popularity of the television programs the Company broadcasts on the Fox Box and the general market demand and pricing of advertising time for Saturday morning children’s broadcast television. The popularity of such programs impacts audience levels and the level of the network advertising rates that the Company can charge. These estimates are based on historical trends, as well as the Company’s subjective judgment of future customer demand and acceptance of its television programming. Differences may result in the amount and timing of revenue for any period if actual performance varies from the Company’s estimates. See Note 12 of the Notes to the Company’s consolidated financial statements for a detailed discussion of the Fox Broadcast Agreement. |
| Recently Issued Accounting Pronouncements |
| Recently Issued Accounting Pronouncements —Costs Associated with Exit or Disposal Activities — In June 2002, Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS No. 146”). Such standard requires costs associated with exit or disposal activities (including restructurings) to be recognized when the costs are incurred, rather than at a date of commitment to an exit or disposal plan. SFAS No. 146 nullifies Emerging Issue Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Under SFAS No. 146, a liability related to an exit or disposal activity is not recognized until such liability has actually been incurred whereas under EITF Issue No. 94-3 a liability was recognized at the time of a commitment to an exit or disposal plan. The provisions of this standard are effective for exit or disposal activities initiated after December 31, 2002. The adoption of this standard by the Company did not have a material effect on its consolidated financial position or results of operations. |
| Guarantees — In November 2002, the FASB issued Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. Such Interpretation elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation apply to guarantees issued or modified after December 31, 2002. The disclosure provisions of this Interpretation are effective for financial statements with annual periods ending after December 31, 2002. The adoption of this standard by the Company did not have a material effect on its consolidated financial position or results of operations. |
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| Revenue Arrangements — In November 2002, EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF Issue No. 00-21”). EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of this consensus by the Company did not have a material impact on its consolidated financial position or results of operations. |
| Consolidation of Variable Interest Entities — On January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. In December 2003, the FASB issued FIN No. 46 (Revised) (“FIN 46-R”) to address certain FIN implementation issues. This interpretation clarifies the application of Accounting Research Bulletin (“ARB”) No. 51, Consolidated Financial Statements for companies that have interests in entities that are Variable Interest Entities (“VIE”) as defined under FIN 46. According to this interpretation, if a company has an interest in a VIE and is at risk for a majority of the VIE’s losses or receives a majority of the VIE’s expected gains it shall consolidate the VIE. FIN 46-R also requires additional disclosures by primary beneficiaries and other significant variable interest holders. For entities acquired or created before February 1, 2003, this interpretation is effective no later than the end of the first interim or reporting period ending March 31, 2004, except for those VIE’s that are considered to be special purpose entities, for which the effective date is no later than the end of the first interim period or reporting period ending after December 15, 2003. The adoption of the provisions of this interpretation by the Company did not have a material effect on its consolidated financial position or results of operations. |
| Derivative Instruments and Hedging Activities — In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”). SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated in the statement for hedging relationships designated after June 30, 2003. The adoption of this standard by the Company did not have a material effect on its consolidated financial position or results of operations. |
| Financial Instruments — In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS No. 150”). SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and to all other instruments that exist as of the beginning of the first interim financial reporting period after June 15, 2003. The Company adopted the provisions of SFAS No. 150 on July 1, 2003. The adoption of this standard by the Company did not have a material effect on its consolidated financial position or results of operations. |
| Results of Operations |
| The following table sets forth our results of operations expressed as a percentage of total net revenues for the three years ended December 31, 2003. |
| 2003 |
2002 |
2001 | |||||
|---|---|---|---|---|---|---|---|
| Net Revenues | 100 | % | 100 | % | 100 | % | |
| Selling, general & administrative | 33 | % | 48 | % | 54 | % | |
| Production service costs | 8 | % | 6 | % | 3 | % | |
| Amortization of television | |||||||
| and film costs and Fox broadcast fee | 36 | % | 27 | % | 4 | % | |
| Total Costs and Expenses | 77 | % | 81 | % | 61 | % | |
| Income from Operations | 23 | % | 19 | % | 39 | % | |
| Interest income | 1 | % | 3 | % | 11 | % | |
| Income before income taxes | 24 | % | 22 | % | 50 | % | |
| Income taxes | 10 | % | 9 | % | 20 | % | |
| Net Income | 14 | % | 13 | % | 30 | % | |
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| Year Ended December 31, 2003 as compared to Year Ended December 31, 2002 |
| Revenues |
| Revenues for the years ended December 31, 2003 and 2002, by reportable segment and for the Company as a whole, were as follows: |
| 2003 |
2002 |
$ Change |
% Change | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Licensing | |||||||||