March 28, 2003
Conference Call Notes and Observations
4 Kids Entertainment, Inc.
12 Months ended December 31, 2002
please see Disclaimer at bottom of report
This report was last amended on March 28, 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”).
Notes From Conference Call
Al Kahn – Chairman and Chief Executive Officer:
1. Yu-Gi-Oh a substantial success. Yu-Gi-Oh cards are starting to be seen by Europe. These are a major driver of the television show. Cards should be in most of Europe by April.
2. Teenage Mutant Ninja Turtles (TMNT) has become one of the top selling toys in the USA.
4. Resurgence of Pokemon in 2003. This is refueling Nintendo licensing in general.
5. Home video is showing some success. Wal Mart has been successful with the Yu-Gi-Oh videos. Kahn mentioned that Turtles home video will be launched in the Summer of 2003.
6. Fox Box discussion :
A. Benefits are that 4Kids Entertainment, Inc can launch new properties on their own platform.
B. Considers the start of Fox Box to be ” wonderful “. Ratings in 4th Quarter were below the guarantees that 4 Kids Entertainment had sold the time at. 4Kids Entertainment, Inc had a guarantee rating of about 2 for children from 6 to 11. Fox Box currently has about a 1.6 rating, which is up from the ratings at Q4’02. Annualized , Fox Box ad sales will not cover guaranteed payments. The range of ad sales were $ 18 to 25 million. They are now at the lower side of the range. 4Kids Entertainment, Inc took a $2.4 million adjustment to make up for that fee. Costs are taken as incurred. Revenue recognition are deferred due to timed obligations. Revenue stream includes items such as ad sales, international sales, home videos and worldwide licensing. Revenue recognition will be taken over time. In Q4’02 there was little revenue recognition of Kirby, Ultimate Muscle and Ninja Turtles.
C. Very little revenue was recognized during Q4’02. Claims that expenses were “front-loaded”. A reserve of around $ 800,000 was taken based on an advertiser declaring bankruptcy.
D. Going forward , revenue recognition and Fox Box will be ” very, very profitable”. This will be profitable due to the diversified properties and not a concentration in just Yu-Gi-Oh.
E. Initial response of Teenage Mutant Ninja Turtles is very positive.
F. Reminds investors that Pokemon and Yu-Gi-Oh are competitors of Fox Box, since they are on Kids WB.
G. New Fox Box schedule will be announced shortly. Mr. Kahn feels these new shows will help drive the block.
H. Kahn considers the company in its “infancy” stage with Fox Box. Kahn claimed that Fox Box will not cut into margins which 4Kids Entertainment, Inc is used to. He further stated that Fox Box will be profitable. He claimed that these initiatives in Fox Box is not causing any burn on cash.
I. Outside services were brought in to get Fox Box up and running. These will not continue over time. These outside services did have a negative impact on Gross Margin. Kahn expects to see margin improvement.
7. Supplying children’s television with 11 hours per week.
8. General licensing business is “substantial and profitable”
Joseph P. Garrity – Chief Operating and Financial Officer
1. Kahn and 3 officer’s reduced their bonus under the employment agreement. This was a reduction in excess of $ 1.1 M.
2. Paid Fox about $ 3.2 M in Q4’02.
3. Accounts Receivable was $ 41.976 M. As of today around 28 million of that receivable has been collected. Cash is generally at the highest levels at March 31st, whereas Accounts Receivable is generally at its highest levels on December 31st.
4. Would offer no guidance to future costs , such as SG&A.
5. We are not yet posting about the balance sheet and financial data which Mr. Garrity spoke of. We would prefer to wait for the release of Balance Sheet and Statement Of Cash Flows. According to Mr. Garrity during one of our questions in the Q&A, the 10-K will be released on March 31, 2003.
Question and Answers
1. Garrity stated that 25 – 50 % of consolidated revenue for the quarter and the year was from Yu-Gi-Oh. Claims that Yu-Gi-Oh has had no traction outside the USA so far.
2. It was mentioned that revenue streams from Fox Box is ratings sensitive. The revenues that have been recognized so far ( $ 18 M ) are only from Ad sales.
3. 4Kids Entertainment, Inc would not give guidance for 2003.
4. Kahn thinks Yu-Gi-Oh has not reached its peak. Feels that Yu-Gi-Oh will be ” substantially greater in 2003 from 2002.”
5. Kahn indicated that there have been no material changes in their agreement with Nintendo. The agreement was changed over a ago, and according to Kahn he would make those same changes every day. The changes that were made at that time included some changes in the Pokemon term and the card royalties from Pokemon. Again, 4Kids Entertainment, Inc clearly feels this renegotiation was important to their future with other properties and the ability to compete with Pokemon.
6. Kahn claims that Tech 4 Kids has a lot of initiatives. Mentions that they are working in the area of Cell Phones and PDA’s (side note of ours…., since we know the data networking and telecom industry fairly well, initially we see no possibility of potential revenue or profit streams with either Cell phones or PDA’s at this time. in our opinion, the current technology of the wireless infrastructure will not currently allow for any type of profitable efforts in distributing games or toys over wireless or PDA’s in its current form.)
7. Kahn claimed that video will be a critical component of revenue sources. He mentioned 4Kids Entertainment, Inc hasn’t even touched the surface yet in that area.
Some “ back of the envelope” financial observations
1. Earnings Per Share of $ 0.51, was slightly lighter than expected. We had seen analyst estimates of $ 0.74, which were brought down from $ 0.76 previously. Yet, the revenue streams are lumpy.
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 are on the 2nd to last business day of the quarter, and we can’t get a balance sheet and Statement Of Cash Flows.
3. Shares outstanding increased by 258,181 from September 30, 2002, which at a price of $ 13.50 is $ 3.5 million in market capitalization. Total market capitalization is now $ 188,138,795 based on 13.50 per share. Dilution increased by 2 %. That annualizes to 8 % dilution and certainly is higher than we would like to see.
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 March 28, 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 March 28, 2003; it is possible that by March 29, 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).
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