-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CU+Ep9jbqxVXwjvQ9ytzCeB4FF25BonhqjvtBTIs9v8vRmC+Mp2NnHm42PYvi08S +RSdEVBLqnewFFh+W06wsQ== 0000950168-97-000827.txt : 19970402 0000950168-97-000827.hdr.sgml : 19970402 ACCESSION NUMBER: 0000950168-97-000827 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 4 KIDS ENTERTAINMENT INC CENTRAL INDEX KEY: 0000058592 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 132691380 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-07843 FILM NUMBER: 97571936 BUSINESS ADDRESS: STREET 1: 1414 AVE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2127587666 MAIL ADDRESS: STREET 1: 1414 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10019 FORMER COMPANY: FORMER CONFORMED NAME: LEISURE CONCEPTS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN LEISURE INDUSTRIES INC DATE OF NAME CHANGE: 19740822 10-K405 1 4 KIDS ENTERTAINMENT 10-K 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, 1996 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: $3,331,247 (based upon the average of the high and low prices of Registrant's Common Stock, $.01 par value, as of March 17, 1997). 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 2,944,831 (Title of Class) (No. of Shares Outstanding at March 17, 1997) DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement on Schedule 14A for Annual Meeting of Shareholders to be Held April 30, 1997 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 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, games and other juvenile merchandise, although grants have also been made in other fields, including the 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, juvenile 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. For the past three fiscal years, the Company has been engaged in only one industry segment. Substantially all its revenue, operating profit or loss and identifiable assets during such fiscal years were attributable to that segment. - 2 - (c) Narrative Description of the Business. (1) Licensing (Other Than Product Concepts). The Company's licensing activities are conducted through its 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 15% and 50% 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. - 3 - Licensing revenues accounted for approximately 32%, 41% and 60% of consolidated net revenues for the years ended December 31, 1996, 1995 and 1994, respectively. (2) Certain Licensed Properties Represented Exclusively by Leisure Concepts, Inc. Among the licensed properties represented exclusively by LCI are the following: o The animated weekly television series "Mr. Men" scheduled for September, 1997 syndication in the United States and the development of a line of toys based on the characters. o Nintendo of America Inc. ("Nintendo"), for the various characters, trademarks, and copyrights arising out of the software for the video cartridge games developed and owned by Nintendo. LCI represents Nintendo on a worldwide basis, other than Japan. These video games ranked among the top toy sellers in the United States in 1994, 1995 and 1996. o The syndicated weekly TV show, "WMAC Masters", which features the nation's first live action martial arts competition series. o James Bond 007, US and UK representation for this classic character of seventeen action films. o Borden, including Borden's well known brands Crackers Jacks, Elmer's Glue and Elsie the Cow. o The "Polly Pocket" miniature playsets for girls distributed by Mattel. (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 - 4 - 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. Grave Danger is a board game licensed to Pressman Toys. "Toby Terrier" is a toy dog which interacts with specially programmed videotapes. LCI licenses these properties to Tiger Electronics Inc. ("Tiger"), which is a major shareholder of the Company. The Company's agreements with Tiger are on substantially similar terms and conditions as other agreements for similar properties represented by the Company. For a description of certain agreements among Tiger, Mr. Randy Rissman, the President and controlling shareholder of Tiger and Alfred R. Kahn, the Company's Chairman, see "Business Experience", "Executive Compensation", "Security Ownership of Certain Beneficial Owners and Management" and "Certain Relationships and Related Transactions" below. (5) Media Buying, Planning and Television Syndication. The Company's subsidiary The Summit Media Group, Inc. ("Summit Media"), provides clients, including among others, Tiger, with media planning, buying and marketing services, and television syndication services. Media buying accounted for 42%, 33% and 26% of consolidated net revenues for the years ended December 31, 1996, 1995 and 1994, respectively. Summit Media's current syndications include "Oscar's Orchestra," the animated television series designed to introduce children to classical music, "WMAC Masters", the weekly live action martial arts competition and "Mega Man," an animated series based on the popular video game character. Summit Media also syndicates certain animated holiday specials for Sony Music Entertainment. - 5 - (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. In 1996, 4Kids Productions completed a series of nine one-half hour programs for the Atlanta Committee for the 1996 Olympic Games which ran on the NBC television network. In addition, 4Kids Productions produced the second season of "WMAC Masters". (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. The only property which contributed licensing revenues individually in excess of 10% of consolidated net revenues for fiscal 1996 was Nintendo. The only client/licensee which contributed revenues individually in excess of 10% of consolidated net revenues for fiscal 1996 was Tiger. (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 master toy licensee or 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 the Company's project "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 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 - 6 - 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 21, 1997, the Company had a total of 47 full-time employees. Item 2. Properties The following table sets forth, with respect to properties leased (none are owned) by the Company at March 21, 1997, the location of the property, the date on which the lease expires and the use which the Company makes of such facilities:
Approximate Square Address Expiration of Lease Use Feet 1414 Avenue of the Americas May 31, 2004 Executive and 13,900 New York, New York Sales Office, Media Buying and Television Production 11400 West Olympic Boulevard March 18, 1999 Subleased 2,460 Los Angeles, California 403-404 The Plaza November 22, International 1,200 535 Kings Road 1997 Sales 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 In November, 1996, the Company commenced an action in New York Supreme Court against Toymax, H.K. Ltd., and its wholly owned subsidiary, Toymax, Inc. in connection with the Company's licensing of the "Creepy Crawlers" property to the Farley Candy Company. In response, the defendants brought counterclaims - 7 - alleging misrepresentation against the Company. The Company believes that it has meritorious defenses to the counterclaims and that they have been brought in retaliation for the primary suit. Except for this lawsuit, as of March 17, 1997, 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. Item 4. Submission of Matters to a Vote of Security Holders During the Company's fiscal quarterly period ended December 31, 1996, 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. 1996 Low High First Quarter 2 1/8 3 5/8 Second Quarter 2 3 Third Quarter 1 2 3/8 Fourth Quarter 1 2 1/8 1995 Low High First Quarter 2 1/2 4 Second Quarter 2 1/2 4 1/4 Third Quarter 3 4 Fourth Quarter 2 1/8 4 1/4 (b) Number of Holders of Common Stock. The number of holders of record of the Company's Common Stock on March 17, 1997 - 8 - was 150, which does not include individual participants in security position listings. (c) Dividends. There were no dividends or other distributions made by the Company during 1996 or 1995. 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 1996. Item 6. Selected Financial Data
Year Ended December 31, 1996 1995 1994 1993 1992 --------- ------- --------- ---------- ------- Total Net $6,977,327 $6,617,279 $9,191,582 $10,909,024 $8,620,860 Revenues Income (Loss) (239,304) (947,850) 135,250 2,524,688 2,254,410 from Continuing Operations Net Income (.08) (.32) .04 .77 .73 (Loss) Per Common Share from Continuing Operations Net Income (.08) (.32) .04 .76 .72 (Loss) Per Common Share from Continuing Operations Assuming Full Dilution Weighted 2,964,178 2,990,514 3,070,815 3,273,176 3,099,463 Average Number of Common Shares Outstanding The Company did not declare or pay any cash dividends during the five-year period ended December 31, 1996. - 9 -
At Year End 1996 1995 1994 1993 1992 - ----------- -------- ----------- ---------- ---------- ------- Total Assets $30,432,130 $25,968,575 $29,376,396 $20,933,958 $13,556,781 Working Capital 5,342,436 6,894,818 8,159,128 8,713,842 8,780,095 Stockholders Equity 11,389,604 11,628,908 12,576,758 12,367,458 9,334,335
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 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, 1996 compared to Twelve Months Ended December 31, 1995. Consolidated net revenue for the year ended December 31, 1996 increased 5% or $360,048 as compared to the year ended December 31, 1995. Increase in revenue was recognized from the - 10 - Nintendo property based on the strength of the launch of Nintendo's new N64 game system in September 1996. Increased revenue was also recognized from the "Mr. Men" property. This classic English property is the subject of a new animated television program which has been distributed in the U.S. by the Company's Summit Media Group and will begin airing in the fall of 1997. The Company negotiated a license with Playmates Toys for the master toy license for Mr. Men. Offsetting these gains were decreased licensing revenue from some of the Company's more mature properties including Polly Pocket and Creepy Crawlers and international licensing revenue received from the Company's network of independent subagents, which has not yet benefitted from the Company's newer licensing properties. Revenue from the Company's media and television syndication services increased over 1995 performance. These activities comprised 42% of total net revenue for 1996 as compared to 33% in 1995. Commissions earned on the media placed increased from the addition of new clients including Direct Connect, Erector, Thinkway Toys and Trendmaster. Increased syndication revenue was recognized from the Monday through Friday television program Mega Men distributed by the Company. The Company's television and home video activities comprised approximately 15% of total net revenue for 1996 and 1995. This revenue related primarily to the 1996 Olympic specials produced for the Atlanta Committee for the Olympic Games which ran on the NBC television network and the "WMAC Masters" sayndicated television program which began airing in September 1995. Selling, general and administrative expenses decreased 16% or $1,181,232 compared to 1995 primarily as a result of staff reductions. Overall selling, general and administrative expenses decreased as a percentage of net revenue from 114.5 % in 1995 to 91.6% in 1996 due to the decline in SG & A expenses and an increase in net revenues. The Company will continue to seek effective cost reductions without adversely impacting the Company's business. At December 31, 1996 there were approximately $5,697,439 of capitalized film production costs, which relate 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 remained approximately the same for the year ended December 31, 1995 as compared to the prior year. Included in amortization expense for 1995 is an additional expense in the fourth quarter of $280,000 relating to "Monster Wars" weekly television show. 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, - 11 - 1996 the percentage of unamortized film cost expected to be amortized within the next three years exceeds 70%. As a result of the above, the Company reported a net loss for 1996 of $239,304, as compared to the reported net loss in 1995 of $947,850. Year Ended December 31, 1995 Compared to Year Ended December 31, 1994. Consolidated net revenue for the year ended December 31, 1995 decreased 28% ($2,574,303) as compared to the year ended December 31, 1994. Decrease in revenue was recognized from the James Bond 007 and "WMAC Masters" properties. In 1994, the Company recognized approximately $1.6 million from the master toy and video game license agreement for the WMAC to be marketed and distributed by Bandai. Bandai was expected to begin shipping WMAC toys and related products in the 2nd quarter of 1996. Additionally, in 1994 the Company recognized $600,000 from a licensing agreement with Nintendo which acquired the video game rights in connection with James Bond 007. In addition, there were substantial decreases in the Swan Princess and Shadow properties. Both the Swan Princess and the Shadow were tied to the success of theatrical motion pictures in 1994 which were not sufficiently successful to provide sustained interest in associated merchandise. This decline in licensing revenue was partially offset by licensing revenue from new licensing agreements related to the properties Polly Pocket, Santo Bugito and Carlo Collodi's Pinocchio. Revenue from the Company's media and television syndication services decreased over 1994 performance. These activities comprised 33% of total net revenue for 1995 as compared to 26% in 1994. Commissions earned on the media placed for the theatrical releases, the Swan Princess and Street Fighter in 1994 were non recurring in 1995. These reduced commissions were partially offset by increased commissions earned from Happiness Express and Tiger Electronics. The Company's television and home video production activities comprised 15% of total net revenue for 1995 as compared to 7% in 1994. This revenue related primarily to the 1996 Olympic specials produced for the Atlanta Committee for the Olympic games to run on the NBC television network and the "WMAC Masters" syndicated television program which began airing in September 1995. Selling, general and administrative expenses remained relatively stable during the two fiscal years, although a higher percentage of such expenses were attributable to the Company's media and syndication operations which accounted for a increasing percentage of revenue. Overall selling, general and administrative expenses increased as a percentage of net revenue from 82.7% in 1994 to 114.5% in 1995 due to the decline in net revenues. - 12 - At December 31, 1995 there were approximately $3,742,641 of capitalized film production costs, which relate to "WMAC Masters," a weekly syndicated television program which began airing in September, 1995, and is produced by the Company's 4Kids Productions subsidiary in cooperation with Renaissance Atlantic Films and "Monster Wars" a syndicated television show which began airing in October 1993. Amortization of capitalized film costs decreased by approximately 34% ($559,000) for the year ended December 31, 1995 as compared to the prior year. The decrease is primarily due to amortization charges in 1994 related to "Monster Wars". Included in amortization expense for 1995 is an additional expense in the fourth quarter of $280,000 relating to "Monster Wars" weekly television show. 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, 1995 the percentage of unamortized film cost expected to be amortized within the next three years exceeds 70%. As a result of the above, the Company reported a net loss for 1995 of $947,850, as opposed to the reported net income in 1994 of $135,250. Liquidity and Capital Resources At December 31, 1996, the Company had working capital of $5,342,436, as compared to working capital of $6,894,818 at December 31, 1995. The decrease in working capital of $1,552,382 is primarily due to the cost of funding 13 episodes for Season 2 of WMAC Masters. Cash and cash equivalents decreased by $676,507 from December 31, 1995. The decrease in cash and cash equivalents is due to cash expenditures associated with funding the production of "WMAC Masters" which had completed production of the second thirteen episodes by December 31, 1996. This reduction in cash produced an increase in film inventory-net. Additionally, cash expenditures were required to fund the operating losses for the year ended December 31, 1996. Accounts receivable, net (current and non-current) increased from $16,986,468 at December 31, 1995 to $19,889,353 at December 31, 1996. This decrease is primarily due to the higher revenue in the media businesss. Media payable primarily represents obligations to television stations for advertising time purchased on behalf of clients. Media payable increased from $11,428,185 at December 31, 1995 to $16,038,574 at December 31, 1996. This increase is due to the timing of receipts and subsequent payments to television stations as well as higher levels of media buying activities. Amounts due to licensors, which represent the owners share of royalties collected, decreased by $196,647 to $1,416,959 from December 31, 1995. The decrease is primarily due to lower royalties collected during the - 13 - fourth quarter as compared to the prior year which are paid to licensors after the close of the quarter. 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, formerly Chemical Bank, discussed in Note 8 to the financial statements. As of March 17, 1997 there have been no borrowings under this credit facility. As the Company explores new and expanded opportunities in the youth oriented entertainment market, including television production, it will seek additional financing alternatives. Item 8. Financial Statements and Supplementary Data Financial Statements and Supplementary Data are attached hereto. 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 30, 1997. 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 30, 1997. 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 30, 1997. 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 30, 1997. - 14 - 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 - F-2 December 31, 1996 and 1995 Consolidated Statements of F-3 Income - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of F-4 Stockholders' Equity - Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of F-5 Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated F-6 to F-14 Financial Statements (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, 1996. - 15 - 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, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. March 18, 1997 F-1 4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 - -------------------------------------------------------------------------------
ASSETS 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 2,830,270 $ 3,505,777 Accounts receivable - net (Notes 2 and 6) 17,625,331 14,668,829 Film inventory - net (Note 3) 1,852,439 1,210,918 Prepaid refundable income taxes (Note 5) 522,763 448,442 Prepaid expenses and other current assets 1,008,300 704,215 Current deferred tax asset (Note 5) - 34,445 Total current assets 23,839,103 20,572,626 FURNITURE, FIXTURES AND COMPUTER EQUIPMENT - Net of accumulated depreciation of $1,174,260 and $1,060,065 237,226 347,772 ACCOUNTS RECEIVABLE - Noncurrent, net (Notes 2 and 6) 2,264,022 2,317,639 FILM INVENTORY - Noncurrent (Note 3) 3,845,000 2,531,703 SECURITY DEPOSITS AND OTHER ASSETS 246,779 198,835 TOTAL ASSETS $ 30,432,130 $ 25,968,575 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Due to licensors (Note 2) $ 1,416,959 $ 1,613,606 Media payable (Note 2) 16,038,574 11,428,185 Accounts payable and accrued expenses 787,579 636,017 Current deferred tax liability (Note 5) 253,555 - Total current liabilities 18,496,667 13,677,808 NONCURRENT DEFERRED TAX LIABILITY (Note 5) 545,859 661,859 Total liabilities 19,042,526 14,339,667 COMMITMENTS AND CONTINGENCIES (Note 8) STOCKHOLDERS' EQUITY (Notes 7, 8 and 9): Preferred stock, $.01 par value - authorized, 3,000,000 shares; none issued - - Common stock, $.01 par value - authorized, 10,000,000 shares; issued 2,944,831 shares 29,448 29,448 Additional paid-in capital 4,429,906 4,429,906 Retained earnings 6,930,250 7,169,554 Total stockholders' equity 11,389,604 11,628,908 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,432,130 $ 25,968,575 See notes to consolidated financial statements. F - 2 4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------
1996 1995 1994 REVENUES: Net revenues (Notes 4 and 6) $ 6,977,327 $ 6,617,279 $ 9,191,582 COSTS AND EXPENSES: Selling, general and administrative (Note 8) 6,392,411 7,573,643 7,602,063 Amortization of capitalized film cost (Note 3) 1,070,477 1,080,889 1,640,234 Total costs and expenses 7,462,888 8,654,532 9,242,297 (485,561) (2,037,253) (50,715) INTEREST INCOME 122,257 334,403 334,965 INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) (363,304) (1,702,850) 284,250 INCOME TAX PROVISION (BENEFIT) (Note 5) (124,000) (755,000) 149,000 NET INCOME (LOSS) $ (239,304) $ (947,850) $ 135,250 PER SHARE AMOUNTS: Earnings (loss) per common and dilutive common equivalent share $ (0.08) $ (0.32) $ 0.04 WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 2,964,178 2,990,514 3,070,815
See notes to consolidated financial statements. F - 3 4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------
ADDITIONAL COMMON STOCK PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL BALANCE, DECEMBER 31, 1993 2,924,831 $ 29,248 $ 4,356,056 $ 7,982,154 $ 12,367,458 Proceeds from exercise of stock options 20,000 200 62,300 - 62,500 Tax benefit from exercise of stock options - - 11,550 - 11,550 Net income - - - 135,250 135,250 ---------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 2,944,831 29,448 4,429,906 8,117,404 12,576,758 Net loss - - - (947,850) (947,850) ---------------------------------------------------------------------------- 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 =============================================================================
See notes to consolidated financial statements. F - 4 4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------
1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (239,304) $ (947,850) $ 135,250 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 143,135 216,514 207,803 Amortization of capitalized film cost 1,070,477 1,080,889 1,640,234 Provision for losses on accounts receivable 100,000 183,420 (106,398) Deferred income taxes 137,555 (632,252) 596,949 Changes in operating assets and liabilities (using) providing cash: Accounts receivable (3,002,885) 793,392 (8,128,754) Film inventory (3,025,295) (2,610,944) (1,487,859) Prepaid refundable income taxes (39,876) 117,051 1,223,899 Prepaid expenses and other current assets (304,085) (288,073) (281,628) Security deposits and other assets (47,944) 194,750 (221,102) Due to licensors (196,647) (186,429) (1,515,298) Media payable 4,610,389 (1,679,000) 8,930,715 Accounts payable and accrued expenses 151,562 3,266 220,773 Net cash (used in) provided by operating activities (642,918) (3,755,266) 1,214,584 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture, fixtures and computer equipment (32,589) (110,268) (192,469) Net cash used in investing activities (32,589) (110,268) (192,469) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options and related tax benefit - - 74,050 Net cash provided by financing activities - - 74,050 NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (675,507) (3,865,534) 1,096,165 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,505,777 7,371,311 6,275,146 CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,830,270 $ 3,505,777 $ 7,371,311
See notes to consolidated financial statements. F - 5 4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - ------------------------------------------------------------------------------- 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 F-6 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 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%. PER SHARE AMOUNTS - Earnings per common and dilutive common equivalent share are based on the weighted average number of shares and common equivalent shares outstanding during the period. Common shares issuable upon the exercise of options are included as common equivalent shares when their inclusion is dilutive using the treasury stock method. CASH AND CASH EQUIVALENTS - At December 31, 1996 and 1995, the Company had cash equivalents consisting primarily of funds invested in Treasury bills of approximately $2,472,446 and $2,386,998, respectively, with original maturities of 90 days or less. LONG-TERM ASSETS - In fiscal 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement requires the recognition of an impairment loss for an asset held for use when the estimate of undiscounted future cash flows expected to be generated by the asset is less than its carrying amount. Measurement of the impairment loss is based on fair value of the asset. Generally, fair value will be determined using valuation techniques such as the present value of expected future cash flows. This statement does not apply to the Company's long term film inventory whose accounting is prescribed by SFAS No. 53. 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. 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 F-7 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, 1996 1995 Gross accounts receivable $ 20,426,510 $ 17,423,625 Allowance for doubtful accounts (537,157) (437,157) ------------------ ------------- 19,889,353 16,986,468 Less long-term portion 2,264,022 2,317,639 ------------------ ------------- $ 17,625,331 $ 14,668,829 ================== =============
3. FILM INVENTORY At December 31, 1996, there were $5,697,439 of capitalized film costs, which relate to two completed works in release and one in progress. Amortization of capitalized film cost was $1,070,477, $1,080,889 and $1,640,234 in 1996, 1995 and 1994, respectively. During 1995 and 1994, the Company recorded charges of approximately $280,000 and $910,000, respectively, to reduce the carrying value of film inventory primarily related to producing the "Monster Wars" television program. This reduction of the carrying value was 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, 1996 1995 Opening balance $ 3,742,621 $ 2,212,566 Additions 3,025,295 2,610,944 --------------- -------------- 6,767,916 4,823,510 Amortization (1,070,477) (1,080,889) ----------------- -------------- 5,697,439 3,742,621 Less noncurrent portion (3,845,000) (2,531,703) ----------------- -------------- $ 1,852,439 $ 1,210,918 ================= ==============
4. REVENUES/MAJOR CUSTOMERS Licensing revenue included on the Statements of Operations are net of licensor participations of approximately $3,610,934 in 1996, $6,068,880 in 1995 and $11,114,000 in 1994. F-8 The percentages of revenue from major properties and customers/licensees are as follows:
YEAR ENDED DECEMBER 31, 1996 1995 1994 Percentage of revenue derived from major properties (revenue in excess of 10 percent of total revenue) 25% - 18% Number of major properties 2 - 1 Percentage of revenue derived from major customers/licensees (revenue in excess of 10 percent of total revenue) 31% 32% 35% Number of major customers/licensees 1 1 2
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 $554,000, $972,000 and $982,000 in net revenue from international sources, primarily in Europe, for 1996, 1995 and 1994, respectively. 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:
YEAR ENDED DECEMBER 31, 1996 1995 1994 Current: Federal $ (326,000) $ (295,000) $ (324,000) State and local 30,000 31,000 (124,000) ---------------------------------------------- (296,000) (264,000) (448,000) ---------------------------------------------- Deferred: Federal 248,000 (195,000) 546,000 State and local (76,000) (296,000) 51,000 ---------------------------------------------- 172,000 (491,000) 597,000 ---------------------------------------------- $ (124,000) $ (755,000) $ 149,000 =============================================
F-9 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:
YEAR ENDED DECEMBER 31, 1996 1995 1994 Income (loss) before income tax provision $ (363,304) $ (1,702,850) $ 284,250 ============== ================ ========== Provision (benefit) at the statutory Federal rate $ (124,000) $ (579,000) $ 97,000 Provision for state and local income taxes net of Federal income tax benefit (30,000) (175,000) 29,000 Other 30,000 (1,000) 23,000 --------------------------------------- ------ $ (124,000) $ (755,000) $ 149,000 ============== ================= ==========
The Company's deferred tax liabilities are net of deferred tax assets of approximately $1,272,000 and $1,109,000 at December 31, 1996 and 1995, respectively. The components of the deferred tax balances at December 31, 1996 and 1995 are as follows:
YEAR ENDED DECEMBER 31, 1996 1995 Commissions on guarantees not currently recognized for tax reporting purposes $ (1,779,000) $ (1,475,000) Tax benefit of state and local tax loss carryforwards 428,000 445,000 Provision for doubtful accounts not currently deductible for tax reporting purposes 231,000 188,000 Film inventory valuation adjustment not currently deductible for tax reporting purposes 471,000 476,000 Depreciation, amortization and other charges deducted for tax reporting purposes (150,000) (261,000) -------------------- --------- $ (799,000) $ (627,000) ================= ===============
6. RELATED PARTY TRANSACTIONS The Company provided certain services to Tiger Electronics, Inc., ("Tiger") a corporation controlled by an individual who is a director and major beneficial shareholder of the Company. These transactions totaled approximately $2,141,000, $2,112,000 and $1,659,000 of net revenue in 1996, 1995 and 1994, respectively. The Company had receivables from Tiger of approximately $13,156,682 and $11,712,304 at December 31, 1996 and 1995, respectively. F-10 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 loss and loss per share would have been increased by approximately $438,000 and $246,000, or $.15 and $.08 per share for 1996 and 1995 respectively. The fair value of the options granted during 1996 and 1995 are estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield 0%, volatility of 49%, risk-free interest rate of 7% and an expected life based on the life of the options. The Company has various stock option plans (the "Plans"). Options may be exercised for a period of not more than ten years after the date of grant. Unless otherwise determined by the Company's 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:
EXERCISE PRICE WEIGHTED AVERAGE OPTIONS PER SHARE EXERCISE PRICE Outstanding at December 31, 1993 694,000 $ 2.620 $ 9.75 $ 5.47 Options exercised (20,000) 3.1250 3.125 Options granted 207,500 9.750 10.25 10.23 Options expired (65,000) 6.120 9.75 8.50 -------------- -------------- ---- ---------- Outstanding at December 31, 1994 816,500 2.620 10.25 6.32 ============== ============ ===== ========= Options granted 349,500 2.6250 3.81 3.39 Options expired (10,000) 3.120 9.75 8.09 -------------- -------------- ---- -------- Outstanding at December 31, 1995 1,156,000 2.620 10.25 5.43 ================ ============ ===== ======== Options granted 265,000 2.3125 2.375 2.33 Options expired 172,000 2.3750 9.75 3.24 -------------- -------------- ---- ------- Outstanding at December 31, 1996 1,249,000 2.315 10.25 5.13 ================ ============ ===== ======= Exercisable at December 31, 1996 1,216,500 $ 2.3125 $ 10.25 5.24 ============ ============ ========= =======
F-11 Under the Company's various stock option plans, 232,000 shares of the Company's common stock were available at December 31, 1996 for future issuance. In addition, in June 1992, the Board of Directors granted to its outside directors, who receive no cash compensation, options to purchase a total of 100,000 shares of the Company's common stock at $5.75, the market price of the Company's common stock on the date of grant. Such options, which were immediately exercisable, expire five years from the date of grant. At December 31, 1996, there were 1,581,000 shares of the Company's common stock reserved for stock options. The following table summarizes information about fixed-price stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ---------------------------------------- ------------------------ Weighted Weighted Weighted Number Average Average Number Average Range of outstanding Remaining Exercise exercisable Exercise Exercise Prices at 12/31/96 Contractual Life Price at 12/31/96 Price $2.3125-3.8125 612,500 7 years $ 2.91 580,000 $ 2.94 $ 5.00- 6.125 516,500 2.5 years $ 5.59 516,500 $ 5.59 $ 9.75-10.25 220,000 6.5 years $10.20 220,000 $10.20 ---------- ---------- 1,349,000 1,316,500 ========== ==========
8. 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 1994, the Board of Directors, under the Bonus Plan, awarded the Chairman and Chief Executive Officer of the Company approximately $40,000. An additional $9,000 under the Bonus Plan was granted to several employees, including one officer in 1994. Due to the losses in 1995 and 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, 1996, future minimum lease payments were as follows: YEAR ENDING AMOUNT 1997 $ 400,100 1998 376,518 1999 367,172 2000 364,056 2001 364,056 Thereafter 897,127 ------------ $ 2,769,029 ============ Rent expense approximated $460,183, $487,544 and $497,000 in 1996, 1995 and 1994, respectively. c. LITIGATION - In November, 1996, the Company commenced an action in New York Supreme Court against Toymax, H.K. Ltd., and its wholly owned subsidiary, Toymax, Inc. in connection with the Company's licensing of the "Creepy Crawlers" property to the Farley Candy Company. In response, the defendants brought counterclaims alleging misrepresentation against the Company. The Company believes that it has meritorious defenses to the counterclaims and that they have been brought in retaliation for the primary suit. Except for this lawsuit, as of March 21, 1997, 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. F-12 d. CREDIT FACILITY -The Company's line of credit (the "Credit Facility") from Chemical Bank which expired on June 30, 1996 has been renegotiated and renewed through June 30, 1997. Under the new 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, 1996 the Company had no borrowings under the Credit Facility. 9. SUBSEQUENT EVENTS In January, 1997, the Chairman and the Company entered into an agreement canceling an aggregate of 200,000 stock options previously granted to the Chairman which were due to expire by the end of July, 1997. On January 22, 1997, the Company granted options to purchase 100,000 shares to the Chairman and 50,000 shares to each of the outside directors at $1.375 per share, the market price of the Company's stock at that time. In addition, the company granted options to purchase 197,500 shares of the Company's common stock at $1.375, the market price of the company's common stock on that date to seven employees, four of which are executive officers. ****** F-13 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, 1997 4KIDS ENTERTAINMENT, INC. By 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, 1997 Alfred R. Kahn Chairman of the Board, Chief Executive Officer and Director Date: March 31, 1997 Randy O. Rissman, Director Date: March 31, 1997 Gerald Rissman, Director Date: March 31, 1997 Joseph P. Garrity, Executive Vice President, Treasurer, Principal Financial Officer and Principal Accounting Officer
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 Registrant (*)(4) (b) 1985 Non-Qualified Stock Option Plan, as amended (*)(4) (c) 1986 Stock Option Plan, as amended (*)(4) (d) 1992 Stock Option Plan (*)(5) (e) 1993 Stock Option Plan (*)(6) (f) 1994 Stock Option Plan (*)(10) (g) 1995 Stock Option Plan (*)(11) (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) Exhibit Page Number Description Number (s) Amendment, dated as of October 17, 1994, to the Employment Agreement between the Registrant and Joseph Garrity (*)(12) (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. (x) Security Agreement, dated May 29, 1996, by and between Leisure Concepts, Inc. and Chemical Bank (y) Security Agreement, dated May 29, 1996, by and between 4Kids Productions, Inc. and Chemical Bank (z) Security Agreement, dated May 29, 1996, by and between The Summit Media Group, Inc. and Chemical Bank (aa) Amendment, dated as of January 1, 1997, to the Employment Agreement between the Registrant and Joseph P. Garrity (bb) Amendment, dated as of January 1, 1997, to the Employment Agreement between The Summit Media Group, Inc. and Sheldon Hirsch (cc) Amendment, dated as of January 1, 1997, to the Employment Agreement between The Summit Media Group, Inc. and Thomas Kenney (dd) Amendment, dated as of February, 1997, to the Employment Agreement between the Registrant and Alfred R. Kahn. (21) List of Subsidiaries of the Registrant (24) Consent of Deloitte & Touche, Certified Public Accountants
- ----------------------------------------------------------------- (*) 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. EX-10 2 EXHIBIT 10(AA) Exhibit 10(aa) As of January 1, 1997 Mr. Joseph P. Garrity 21 Shoshone Drive Katonah, New York 10536 Dear Mr. Garrity: This is to confirm our agreement that, effective as of January 1, 1997, the Employment Agreement between us dated as of June 3, 1991 and modified October 7, 1991, October 17, 1994 and January 1, 1996 (the "Agreement") is further amended as follows: 1. Section 1.01 of the Agreement is hereby deleted in its entirety and the following substituted therefor: 1.01 Term. Company hereby employs Executive, and Executive hereby accepts employment with Company with the duties hereinafter set forth, for a period commencing on June 3, 1991 and ending December 31, 2000 subject, however, to earlier termination in accordance with the provisions of this Agreement. This Agreement shall automatically renew on a year-to-year basis unless terminated by either party hereto giving written notice to the other at least 90 days prior to December 31, 2000 or any December 31 thereafter. 2. In all other respects, the Agreement shall continue in full force and effect in accordance with its original terms. If the foregoing sets forth a correct statement of our agreement, please sign the duplicate hereof in the place indicated and return it to us. Sincerely, 4KIDS ENTERTAINMENT, INC. By Alfred R. Kahn, Chairman ACCEPTED AND AGREED: Joseph P. Garrity EX-10 3 EXHIBIT 10(BB) Exhibit 10(bb) THE SUMMIT MEDIA GROUP, INC. 1414 Avenue of the Americas New York, New York 10019 As of January 1, 1997 Mr. Sheldon Hirsch 28 Doral Court New City, New York 10956 Dear Mr. Hirsch: This is to confirm our agreement that, effective as of January 1, 1997, the Employment Agreement between us dated as of January 1, 1995 (the "Agreement") is amended as follows: 1. Section 1.01 of the Agreement is hereby deleted in its entirety and the following substituted therefor: 1.01 Term. Company hereby employs Executive, and Executive hereby accepts employment with Company with the duties hereinafter set forth, for a period commencing on January 1, 1995 and ending December 31, 2000 subject, however, to earlier termination in accordance with the provisions of this Agreement. This Agreement shall automatically renew on a year-to-year basis unless terminated by either party hereto giving written notice to the other at least 90 days prior to December 31, 2000 or any December 31 thereafter. 2. In all other respects, the Agreement shall continue in full force and effect in accordance with its original terms. If the foregoing sets forth a correct statement of our agreement, please sign the duplicate hereof in the place indicated and return it to us. Sincerely, THE SUMMIT MEDIA GROUP, INC. By Alfred R. Kahn, Chairman ACCEPTED AND AGREED: Sheldon Hirsch EX-10 4 EXHIBIT 10(CC) Exhibit 10(cc) THE SUMMIT MEDIA GROUP, INC. 1414 Avenue of the Americas New York, New York 10019 As of January 1, 1997 Mr. Thomas Kenney 26 Woodfield Road Pomona, New York 10970 Dear Mr. Kenney: This is to confirm our agreement that, effective as of January 1, 1997, the Employment Agreement between us dated as of January 1, 1995 (the "Agreement") is amended as follows: 1. Section 1.01 of the Agreement is hereby deleted in its entirety and the following substituted therefor: 1.01 Term. Company hereby employs Executive, and Executive hereby accepts employment with Company with the duties hereinafter set forth, for a period commencing on January 1, 1995 and ending December 31, 2000 subject, however, to earlier termination in accordance with the provisions of this Agreement. This Agreement shall automatically renew on a year-to-year basis unless terminated by either party hereto giving written notice to the other at least 90 days prior to December 31, 2000 or any December 31 thereafter. 2. In all other respects, the Agreement shall continue in full force and effect in accordance with its original terms. If the foregoing sets forth a correct statement of our agreement, please sign the duplicate hereof in the place indicated and return it to us. Sincerely, THE SUMMIT MEDIA GROUP, INC. By Alfred R. Kahn, Chairman ACCEPTED AND AGREED: Thomas Kenney EX-10 5 EXHIBIT 10(DD) Exhibit 10(dd) February , 1997 Mr. Alfred R. Kahn 205 West 57th Street New York, New York 10019 Dear Mr. Kahn: This is to confirm our agreement that, effective as of the date hereof, the Employment Agreement between us dated as of March 12, 1991 (the "Agreement") is amended as follows: 1. The first sentence of Section 1 of the Agreement is hereby deleted in its entirety and the following substituted therefor: Company employs Executive and Executive accepts employment with Company, as Chairman of the Board and Chief Executive Officer from the date hereof to March 31, 1999 (the "Termination Date"). 2. Section 2(b) of the Agreement is hereby deleted in its entirety. 3. Section 3(b) of the Agreement is hereby deleted in its entirety and the following substituted therefor: (b) Bonuses. In addition to his Fixed Salary, Executive shall receive, with respect to each full fiscal year during the term hereof, commencing with the year ending December 31, 1997 an annual bonus (the "Profit Bonus") equal to ten percent (10% of the Company's annual "Income Before Income Tax Provision" as stated in the Company's financial statements in its Annual Report on Form 10-K. The Profit Bonus shall be payable within 120 days after the end of the Company's fiscal year. 4. The first sentence of Section 3(c) is hereby deleted in its entirety and the following substituted therefor: Executive shall be entitled to receive the sum of One Thousand Dollars ($1,000) per month as an automobile allowance provided at the expense of the Company during the term of this Agreement. 5. In all other respects, the Agreement shall continue in full force and effect in accordance with its original terms. If the foregoing sets forth a correct statement of our agreement, please sign the duplicate hereof in the place indicated and return it to us. Sincerely, 4KIDS ENTERTAINMENT, INC. By Joseph P. Garrity Executive Vice President ACCEPTED AND AGREED: Alfred R. Kahn EX-21 6 EXHIBIT 21 EXHIBIT 21 4 KIDS ENTERTAINMENT, INC. List of Subsidiaries The following is a list of all subsidiaries of 4 Kids Entertainment, Inc. of which all are incorporated in the State of New York. All of the listed subsidiaries do business under the names presented below: Leisure Concepts, Inc. The Summit Media Group, Inc. 4 Kids Productions, Inc. Leisure Concepts International, Inc. LCI UK Limited World Martial Arts Productions, Inc. EX-24 7 EXHIBIT 24 INDEPENDENT AUDITOR'S CONSENT We hereby consent to the incorporation by reference in Registration Statement Nos. 33-11718 and 33-60928 of 4Kids Entertainment, Inc. on Form S-8 of our report dated March 18, 1997 appearing in this Annual Report on Form 10-K of 4Kids Entertainment, Inc. for the year ended December 31, 1996. Deloitte & Touche LLP New York, NY March 31, 1997 -----END PRIVACY-ENHANCED MESSAGE-----