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November 13, 2003
3Q03
Conference Call Notes and Observations
4 Kids Entertainment, Inc.
KDE (NYSE)
9 Months ended September 30, 2003
please see Disclaimer at bottom of report
This report was last amended on November 14, 2003.
4Kids Entertainment, Inc., is a vertically integrated entertainment-based company. The Company provides a comprehensive range of services including toy design and development, domestic and international merchandise licensing, media buying and planning, international and domestic television and movie distribution and television, music and film production.
The Company primarily operates through four wholly-owned subsidiaries, Leisure Concepts, Inc. (“LCI”), Leisure Concepts International, Inc. (“LCII”), The Summit Media Group, Inc. (“Summit Media”) and 4Kids Productions, Inc. (“4Kids Productions”).
4 Kids Entertainment news release for 9 months ended September 30, 2003
Notes From Conference Call
Al Kahn – Chairman and Chief Executive Officer:
1. Yu-Gi-Oh performing as well as expected. Mattel has burned through their guarantee, hence 4th quarter will show Mattel royalty numbers that will work incrementally against the guarantee. Mattel has shown increased sales via the Duel Disc Shooter.
2. TMNT is doing nicely.
3. Pokemon is 3rd most popular license in the arsenal. KDE would like to maximize Pokemon licensing in 2004. KDE no longer collects revenues from trading cards. Pokemon was number 1 rated show as of November 13, 2003, Yu-Gi-Oh was number 2.
4. Desire for new licensing programs. One such promising license is Mattel’s Incredible Crash Test Dummies. This will be launched starting in February 2004. A funny toy line. Kahn called it “incredible”.
5. Some announcements of Cabbage Patch Kids “being moved from Toys R Us into mass market.”
6. Kahn identified stronger licensing streams and discussed how the Fox Box platform will help advertise these licenses.
7. Fox Box is averaging a 1.7 ( versus a 1.5 at same time last year) for kids aged 6 to 11. There is a viewer ship shortfall across the US of over 7 % in ages 6 to 11, yet Fox Box is up 13.3% in ratings (kids 6 to 11) YOY. Kahn emphasized that the goal of 1.8 mentioned previously is within striking distance. Product development should help Fox Box gain momentum. Revenues of Fox Box are guaranteed at 1.8.
8. Kahn discussed a recent Japanese concept, whereas they are co-producing new programs with some major Japanese programmers and writers. This will be announced shortly. Cash investment should be marginal. Looking at 2 new shows for Fall 2004, which will follow this concept. He labeled this as a “strategy shift”. These are “merchandising and marketing concepts.”
9. KDE is entering pre-school market.
10. Fox Box should ” be very, very profitable” in 2004.
11. KDE states they are a “content provider”
12. GBA-TV has been delayed till Easter. Hasbro has had discussions with KDE for Video Now concepts. Sony looking at content as well for their handheld system.
13. Looking for more places to air programming.
14. Looking for different demographic content.
Joseph P. Garrity – Chief Operating and Financial Officer
This is difficult to absorb, since breakdowns and Balance Sheets did not accompany the earnings release. Our discussion or analysis of the financials will be consummated with our review of the future 10-Q.
1. Frankly, Mr. Garrity was rattling off numbers and without any financials to bounce these off, the discussion was rather worthless to us. We have difficulty interpreting the financials when a balance sheet is not attached. We will further discuss upon release and interpretation of financials.
2. Cash and Equivalents increased because of royalty collections and ad sales receivables. Gross cash is $99M. Due to Licensor is $11.7M, hence net cash and equivalents computes to $87.3M.
Question and Answers
1. Kahn reiterated that KDE will have ownership of shows in library for perpetuity. Yu-Gi-Oh movie is in preproduction with Warner Brothers.
2. Fox Box has only been paid in cash and not in stock.
3. KDE believes in a stock split if a price objective was reached. Kahn mentioned to look at the “$30’s.” Please understand that we are generally not fond of stock splits.
4. Kahn sees opportunity of content for adult male. He sited anime being watched by 18 to 35 year olds.
5. Kahn emphasized multiple properties and diversity of licensing stream. Shaman King will not be pushed until they see a weakening of Yu-Gi-Oh.
6. Question as to statement on 2Q03 conference call and Yu-Gi-Oh showing less sales in 3Q03 compared to 2Q03. He claimed that is exactly what happened and wouldn’t comment on 4Q03 other than it will be the strongest quarter of F2003.
7. Kahn said that they will be quantifying a stock buy back program. Kahn emphasized that they are against dilution. The reader of this needs to keep in mind that these are the words of Mr. Kahn and only reported by us. If one checks the link mentioned later in the report, they will see that split adjusted shares have grown by 25% since March 31, 2003.
8. Hasbro is so far in the hole in relation to guarantees with Pokemon. Hence, don’t expect additional Pokemon revenues from Hasbro. Pokemon is not expected to be a big property again. Pokemon was classified as a potential reasonable revenue generator.
9. All bonuses have been properly accrued and reflected each quarter.
10. We Questioned about GBA-TV. Kahn explained that GBA-TV is content driven. There are patent applications, but investors should not get focused on delivery of technology by KDE, but be focused on the content that could be provided to Nintendo. Kahn mentioned that Hasbro is interested in content for technology via Video Now. Kahn emphasized that costs of GBA-TV technology development have been immaterial and have been immediately expensed and not capitalized.
11. Andrew Scott of Maxim Group asked if there was a forecast of cash flows and forecasts through F2004. KDE discussed that such projections and forecasts exist internally, but will not be shared this time with the investing community.
12. Revenue mix is between 80 to 85% from US sources. Kahn said he would love to see international revenues grow to a larger percentage.
Some “ back of the envelope” financial observations
1. As of November 13, 2003, we don’t yet have the Statement of Cash Flows, Income Statement and the Balance Sheet. Hence, we really don’t know much about cost structure, deferrals, prepaid expenses , etc. We find it unusual (yet typical for this company), that we can not get a Balance Sheet and Statement Of Cash Flows with the earnings release. We will wait for our analysis of the 10Q before we comment a great deal on the current earnings. We did ask Joe Garrity during the conference call about enhanced financial disclosure during the earnings releases. He did indicate that they will further look into and that they have enhanced their reporting based on our prior recommendation.
2. Shares outstanding increased by 443,087 from December 31, 2002, which at a price of $ 26.00 is $11.5 million in market capitalization. Total market capitalization is now $ 368,412,954 based on $26.00 share price. Dilution increased by 3.3% during the last 9 months. This annualizes to 4.4 % dilution and certainly is higher than we would like to see. You can view shares outstanding here . Please understand that the estimates in that link may be outdated or they may be hypothetical numbers. Please do not rely on those estimates or any other estimates in our reports. Please read the disclaimer at the bottom of this report.
This link gives historical quarterly shares outstanding, earnings per share and Revenues.
We can’t overemphasize the need to review dilution and its effects, when investing. KDE has increased their split adjusted shares outstanding by a projected 2.9M since March 31, 1999. Using a stock price of $28, that computes to additional market value of $82.4M. That is 22% of current market capitalization.
3. Current Ratio (Current Assets / Current Liabilities) .
The following table lists prior Current Ratios :
September 30, 2003 5.99
December 31, 2002 4.90
December 31, 2001 5.40
December 31, 2000 2.30
December 31, 1999 1.90
December 31, 1998 1.60
December 31, 1997 1.30
December 31, 1996 1.30
4. Accounts Receivable Turnover ratio (Sales/Average Accounts Receivable).
The following table lists prior Accounts Receivable Turnover Ratios :
September 30, 2003 2.90
December 31, 2002 2.20
December 31, 2001 3.40
December 31, 2000 2.90
December 31, 1999 1.90
December 31, 1998 0.60
December 31, 1997 0.40
December 31, 1996 0.40
5. Flow Ratio is 2.00. The Flow Ratio is desired to be less than 1.25. Here are the givens : Current Assets = $149,209, Cash = $99,479, Current Liabilities = $24,925 and Short Term Debt = $0.
The Flow ratio is similar to the Cash ratio, except it includes a reduction of short term debt from current liabilities. It is similar to the Quick Ratio.
Flow Ratio = (CA – Cash and equivalents) / (CL – STD) .
The following table lists prior Flow Ratios :
September 30, 2003 2.00
June 30, 2003 2.24
March 31, 2003 1.67
December 31, 2002 1.85
September 30, 2002 1.94
June 30, 2003 1.98
December 31, 2001 0.71
September 30, 2001 0.79
December 31, 2000 0.29
December 31, 1999 0.74
December 31, 1998 1.05
December 31, 1997 1.15
December 31, 1996 1.14
6. Total Asset Turnover Ratio is ( Sales/ Total Net Assets). Generally, the higher the multiple, the more efficient the company. The industry standard, which I have quickly , unofficially and haphazardly appears to be between 1.10 to 1.30. Like other ratios here, this is merely a ratio to watch.
The following table lists prior Total Asset Turnover Ratios :
September 30, 2003 0.55
December 31, 2002 0.30
December 31, 2001 0.30
December 31, 2000 0.60
December 31, 1999 0.70
December 31, 1998 0.40
December 31, 1997 0.30
December 31, 1996 0.20
7. Operating Margin Percentage ( Operating Income (loss)/Sales).
The following table lists prior Operating Margin Percentage :
September 30, 2003 17.6
December 31, 2002 18.8
December 31, 2001 38.3
December 31, 2000 65.8
December 31, 1999 66.3
December 31, 1998 29.7
December 31, 1997 12.9
December 31, 1996 (7.10)
8. Net Profit Margin Percentage (Net Income (Loss)/Sales).
The following table lists prior Net Profit Margin Percentage :
September 30, 2003 11.3
June 30, 2003 15.6
March 31, 2003 14.2
December 31, 2002 13.2
December 31, 2001 29.4
December 31, 2000 44.1
December 31, 1999 39.0
December 31, 1998 18.2
December 31, 1997 6.90
December 31, 1996 (2.90)
9. Return on Equity (ROE) Net Income/Equity . There are more thorough ROE formulas, such as “The Dupont Formula”, but for this, we will use the simple calculation.
The following table lists prior ROE :
September 30, 2003 8.10
December 31, 2002 5.60
December 31, 2001 11.10
December 31, 2000 47.70
December 31, 1999 61.90
December 31, 1998 19.60
December 31, 1997 6.00
December 31, 1996 (1.70)
10. Total Liabilities to Total Assets Ratio .
The following table lists prior Total Liabilities to Total Assets Ratio :
September 30, 2003 16.4
December 31, 2002 18.6
December 31, 2001 17.6
December 31, 2000 42.1
December 31, 1999 52.1
December 31, 1998 56.0
December 31, 1997 69.2
December 31, 1996 62.5
11. Total Shares outstanding are 14,169,729. Current market price is $28.00. Hence, market capitalization is $396,752,412. The current Price to Sales multiple is 3.62X , using potential F2003 Revenues of $109,681,000.
12. Price To Sales Ratio (averages used) .
September 30, 2003 3.62e
December 31, 2002 5.30
December 31, 2001 5.50
December 31, 2000 3.10
December 31, 1999 8.40
December 31, 1998 1.60
December 31, 1997 0.70
December 31, 1996 0.90
12. Altman Z shows an amount greater than 2000. There does not appear to be any solvency issues. Of course with financials that they currently have, one would not expect solvency issues. We placed in the LTD section $50M for the Fox Box guarantee, and the result was still a healthy 6.75.
Disclaimer
If you are a client of ours, and if you have questions regarding 4 Kids Entertainment, Inc, please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading this report, we urge you to do your own research. We will not be responsible for any person making an investment decision based on this report. This report is a “by-product” of our research. We are not responsible for the accuracy of this report. We are not responsible for errors that may occur in this report. Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate 4 Kids Entertainment, Inc, from our portfolios. This report has undergone revisions starting on November 13, 2003. We will not notify readers of future revisions. We are not responsible to keep readers of this report updated for changes or material errors or for any reason whatsoever. This report is dated November 13, 2003; it is possible that by November 14, 2003 we could have eliminated our entire 4 Kids Entertainment, Inc position without giving notice to any reader of this report. We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have 4 Kids Entertainment, Inc in their portfolios. There could be various reasons for this. Again, if you would like to discuss 4 Kids Entertainment, Inc, please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).
Information herein is believed to be reliable, but its accuracy and completeness cannot be guaranteed. Opinions, estimates, and projections constitute our judgment and are subject to change without notice. This publication is provided to you for information purposes only and is not intended as an offer or solicitation. Redfield, Blonsky & Co. LLC and Ronald R Redfield, CPA, PFS, may hold a position or act as an advisor on any investments mentioned in a report or discussion.