May 14, 2003
Q1’03
Conference Call Notes and Observations
4 Kids Entertainment, Inc.
KDE (NYSE)
3 Months ended March 31, 2003
please see Disclaimer at bottom of report
This report was last amended on May 21, 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 year ended March 31, 2003
Notes From Conference Call
Al Kahn – Chairman and Chief Executive Officer:
1. Yu-Gi-Oh continues to grow and shows exceptional strength.
2. Teenage Mutant Ninja Turtles (TMNT) is growing nicely. This is helping licensing revenues. This is the number two selling action figure behind Transformers, in the United States .
3. Fox Box has become platform for brand building.
4. Home Video division is going well.
5. Challenge for Fox Box is an upgrade of the schedule. Cubix , which is number six on WB in ratings , will be moving to Fox Box in the fall. 4 Kids will be announcing that they just signed a forbearer of Yu-Gi-OH, called Shaman King. This will join Fox Box in either the Summer or September. Significant licensee interest is being seen with Shaman King.
6. Starting to recognize Advertising Revenue from Fox Box website.
7. General licensing business is growing. Examples of this are The Dog ,which has been a happy surprise. The Dog is expected to be a significant revenue stream forward in 2003. Monster Jam generating significant sales in Wal-Mart. Yu-Gi-Oh and a resurgence in Pokemon has been helping revenues. 4 Kids does not expect a resurgence to previous historic levels for Pokemon.
8. Game Boy Advanced TV (GBA TV) announced on May 13, 2003. Full color and full sound can be offered via 4 Kids Technology. This is called a ” compression technology. ” Retailers seem to be excited. All shows will be placed on this platform. This will increase both revenues and exposure. Being called ” Video To Go.” Should be released in fourth quarter for a price of $20 or less. No adapters are necessary. GBA TV will be shown on the Nintendo floor at E3 this morning.
9. Girls Block is being developed and negotiated. A show out of Italy called “Winks” ( a show about little girls going to witches school), and a successful show out of Japan for girls will be announced and negotiated with a couple of major licenses. Kahn mentioned that this show out of Japan is as big to girls as Pokemon and Yu-Gi-Oh has been to boys in Japan.
10. Mr. Kahn discussed increased revenue streams. Margins are suffering due to startups and they are hoping that margins increase via maturity of Fox Box. Margin efforts are starting to bear fruit, as evidenced in the first quarter.
11. New property will be Shaman King.
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. Licensing and Fee Revenue increased significantly.
2. Higher staffing levels which began in third quarter of 2002.
3. Production service costs increased to $1,920,000. This increase was attributable to Kirby and Teenage Mutant Ninja Turtles television programs. These began production in 2002.
4. $ 7,332,000 of capitalized film production costs. This relates to various stages of production. The library now consists of 572 episodes.
5. Amortization of Capitalized Film costs are $ 2,106,000.
6. Amortization of Fox Box broadcast fee was $5,010,000. At March 2003 they had paid Fox a total $ 22,465,000 against first years fee, which ends in September. Of this total paid, 14,454,000 has been cumulatively amortized. The remaining $ 8 million of what was paid till date will be amortized over the next two quarters. The total annual fee runs about $25,600,000.
7. Cash position improved to $ 85,579,000 and Short Term Investments were $14,329,000 for a total of $ 99,908,000.
8. Current liabilities of $ 9,129,000 to net cash of $ 90,779,000.
9. There is a seasonality of cash position. Expects cash to decrease at June 30, 2003 because of payments to Fox for pre-paids of next broadcast season of $12,600,000 due in June 2003.
Question and Answers
1. Up to $ 10 million per year can be paid in stock to Fox Box in lieu of cash. There would be a three month floor put on those shares. 4 Kids Entertainment, did not at all hint that fee would be paid in stock. Kahn indicated that share buy backs have been discussed. Kahn indicated that we will here more discussions of that in the future. His tone seemed to indicate hints of buybacks, but to anyone who follows 4 Kids Entertainment, realizes that hints should not be taken as guidance.
2. Ratings are still below expectations. Announcements will be made on replacements. Hopes to announce an undisclosed fourth show within a few days. Mentioned that they are finishing up contracts. Three other shows have already been announced.
3. Guarantees of 2.0 to 2.1 for kids 6 to 11 in the ratings for 2003 and 2004. This year they hope to hold onto $18 to $19 million of Ads sales at end of year. Kahn indicated that we should watch for increased upgrading coverage and programming, which will generate significant rating increases. Kahn indicated that additional clearances and coverage would be via programming deals in Atlanta and Detroit, which will give additional coverage.
4. Kahn won’t give guidance for sales, but indicated that history would be an excellent meter for projecting outwards. This was an interesting comment, since they wont give guidance, but most certainly guided to looking at past history for a road map.
5. Kahn explained that Yu-Gi-Oh is just being launched in parts of Europe. He mentioned to look at Pokemon for a guide to how Yu-Gi-Oh will be rolled out internationally.
6. Kahn indicated that software agreement was not exclusive, hence the “compression technology” could be licensed to other platforms, etc.
7. Kahn says that Turtles are ” hotter than a pistol “. He mentioned that ratings track of Nielsen are historically trailing the retail . He mentioned that Pokemon and Yu-Gi-Oh showed a similar trend.
8. Kahn indicated that 40 % of revenues are generated in fourth quarter.
9. We asked Mr. Kahn if he could at all indicate a range of future gross margins. We understand that he does not feel comfortable with guidance in that area. He indicated that Fixed Costs dominate the gross margin. Hence, Fox Box ratings are the key. When 4 Kids Entertainment sees a rise in ratings, the profits go directly to the bottom line. We asked if the 14 % gross margin was a bottom, and they wouldn’t guide on that. Very understandable of them as they were clear in not wanting to give forward guidance. We asked what the margin goal would be, and Mr. Kahn could not really determine that, and hence can’t guide on it. Revenue streams and accounting rules are so vast and the learning curve prevents them from knowing the ultimate gross margins. Mr. Kahn indicated that they are striving for higher gross margins.
15. We asked if Joe Garrity would consider attaching balance sheets to future earnings releases. He mentioned that 10-Q will be released later today. We indicated that an attached Balance Sheet would be very helpful for the analysis of the earnings call. Mr. Garrity indicated he will discuss that with the lawyers.
16. Overall revenues of $32 to $33 million would be needed to cover the $25 million Fox Box fee. This was a very general comment. Fox Box has tremendous revenue streams other than Ad Sales. Hence , the accounting is different in presentation. Mr. Kahn says there is no question that Fox Box will be profitable over a long term view. We are seeing a non equalization in revenues, due to Ads Sales.
16. Mr. Kahn mentioned that KDE has all rights to Shaman King’s cards, video games and toys. KDE has purchased all 66 episodes of Shaman King. When it ran in Japan it was second largest card game behind Yu-Gi-OH. The excitement for this is huge. A show called Funky Cops looks really good.
17. Mr. Kahn indicated that he reviewed the history of Kids WB. He saw that at first launch the ratings was a 1.2. After Pokemon and Yu-Gi-OH the ratings went to 5.0. He claims that WB is doing about $60 to 70 million in Advertising Sales.
Some “ back of the envelope” financial observations
1. Earnings Per Share of $ 0.21, was slightly higher than we expected.
2. We don’t yet have the Statement of Cash Flows and the Balance Sheet. Hence, we really don’t know much about cost structure, deferrals, prepaid expenses , etc. Like in 1999, many investors are looking to the future and certainly , good or bad that is what 2003 will bring. 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.
3. Shares outstanding increased by 172,988 from December 31, 2002, which at a price of $ 16.00 is $ 2.77 million in market capitalization. Total market capitalization is now $ 222,394,080 based on $16.00 share price. Dilution increased by 1.24 %. That annualizes to 5 % dilution and certainly is higher than we would like to see. Using the previous quarter ended December 31, 2002, dilution was increasing at an 8 % annualized rate. This dilution slowdown may be a seasonal event.
4. Net Margins are 14.16 %, this is an increase from 8.67 % for the 3 months ended December 31, 2002. Margins were 12.45 % for the year ended December 31, 2002. We do not feel that margin comparisons are meaningful at this point, mainly because of Fox Box costs.
Analysis of the 10-Q
1. Current Ratio (Current Assets / Current Liabilities) is 5.46. The ratio was 4.89 at December 31, 2002. At December 31, 2001 it was 5.38.
2. Flow Ratio is 2.22. The Flow Ratio is desired to be less than 1.25. Here is the formula : Current Assets = $ 144,022 Cash = $ 85,579, Current Liabilities = $ 26,357 and Short Term Debt = $ 0.
Flow Ratio = (CA – Cash) / (CL – STD) = 2.22. The ratio was 2.68 on December 31, 2002, 1.09 on December 31, 2001.
3. Book Value is $ 9.76 per share ( 135,604/13900).
4. Capitalized Film Costs are $ 0.50 per share.
5. Selling , General and Administrative Expenses were 34.87 % of Revenues at March 31, 2003.
6. Cash flow provided by operations was $ 10,629. Capital expenditures were $ 183. So far, this is a rather clean number. There were not any Tax Benefit on Options add-backs to cash. That could change as the year goes on. Capital expenditures for 2002 were $2,619. Cash flow per share (taking into account capital expenditures ) was $ 0.75.
7. Revenues are broken down as follows :
Licensing $ 11,261 53.68 %
Advertising Media and Broadcast $ 4,123 19.65 %
TV and Film Production / Distribution $ 5,594 26.67 %
8. Licensing had segment margins of 66.81 %
9. Advertising Media and Broadcast had negative margins.
10. TV and Film Production / Distribution had segment margins of 13.69 %
11. Working Capital was $ 117,665 as of March 31, 2003 and 114,298 as of December 31, 2002.
12. Provision for Bad Debts is $ 50 . This is less than 1 % of Accounts Receivable.
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 may have undergone revisions starting on May 14, 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 May 14, 2003; it is possible that by May 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.