4Kids Entertainment Inc.

FOUNDED: 1974 as American Leisure Industries Inc.

Contact Information:

HEADQUARTERS: 1414 Avenue of the Americas
New York, NY 10019
PHONE: (212)758-7666
FAX: (212)980-0933
EMAIL: cwest@4kidsent.com
URL: http://www.4kidsent.com

OVERVIEW

4Kids Entertainment is a vertically integrated children's entertainment company. A vertically integrated company owns and operates all the resources necessary to create a product from design to manufacture. In the case of 4Kids Entertainment, the company produces and distributes movies and television programs, develops and designs toys based on the characters in its properties, and sells merchandising rights for the characters to appear on products ranging from pajamas to notebooks to bedding. 4Kids Entertainment also engages in media buying and planning for other companies and develops Internet sites to enhance the marketing of its characters.

The company's structure consists of five wholly owned subsidiaries: 4Kids Entertainment Licensing Inc., 4Kids Entertainment International LTD., The Summit Media Group Inc., 4Kids Productions Inc., and 4Kids Websites Inc. All of the units are headquartered in the United States with the exception of 4Kids Entertainment International LTD., which is located in London.

COMPANY FINANCES

4Kids Entertainment Inc.'s financial history records modest gains for each year since its creation. In 1998 the company posted $2.7 million in net income on revenues of $14.8 million with a profit margin of 18 percent. Since then profits have steadily increased. In 1999 the company recorded a $23.6 million net income on $60.5 million in revenues, with a 39 percent profit margin. In 2000 and 2001, 4Kids Entertainment posted $38.8 million and $12.2 million in net income, on revenues of $88 million and $41.5 million, respectively. In 2000 the company saw its highest profit margin ever, an astounding 44 percent.

ANALYSTS' OPINIONS

4Kids Entertainment Inc., is a publicly traded company but is largely ignored by Wall Street firms. It wasn't until the last quarter of 2000 that the first analyst, Dina Sternberg of Sidoti & Company provided the official coverage of the fledgling company. Her report on the future of 4Kids Entertainment Inc. was neutral.

Frustrated by the lack of respect his firm received from the investment community, chairman and CEO, Alfred Kahn, moved the stock from the NASDAQ exchange to the New York Stock Exchange in 2000. This was an attempt to raise the company's profile and garner positive attention. Industry insiders, however, are reluctant to invest time and resources following a company considered highly speculative.

More than 90 percent of the company's income to date has been derived from Pokemon sales, creating the impression that the company is a one-hit wonder. Kahn plans to silence his critics by using the Pokemon profits to diversify operations and build a more consistent stream of revenue. The fortunes of 4Kids Entertainment are still uncertain and stock analysts are reluctant to go on record with predictions.

HISTORY

American Leisure Industries Inc. was founded in 1974 as a licensing company specializing in children's products. Some of the earlier characters the company handled included: Gumby, ALF, Thundercats, and World Wrestling Federation celebrities. Alfred Kahn joined the company in 1988 as a highly regarded player in the field of children's marketing and licensing. His past experience included a stint as the EVP of marketing at Coleco Industries, where he was the mastermind behind the Cabbage Patch Kids phenomenon.

In 1993 Kahn directed acquisitions of television distribution and production, and media buying to complement the licensing business. Two new subsidiaries were created: The Summit Media Group and 4Kids Productions. Since then Kahn has managed the company's growth and earned a profit in 8 of the last 10 years. The number of employees has also doubled during the last decade.

In the late 1990s the company rose to prominence behind the strength of its Pokemon deal. 4Kids secured the exclusive rights to license the popular Japanese characters. The series' popularity soared, and merchandise flew off the store shelves.

STRATEGY

4Kids Entertainment intends to bolster its bottom line and gain credibility by diversifying revenue sources. Pokemon licensing accounted for 90 percent of all company revenues at the height of its popularity.

Criticized as a fad company, 4Kids does not want to rely on luck, or the fickle taste of 4-year-olds for its success. Prior to the tidal wave of licensed Pokemon goods, media buying accounted for 50 percent of the company's revenues. Kahn announced that he would like to use some of the Pokemon profits to invest in additional media buying companies. Along with the planned expansion of the media buying unit, the television production and distribution business will gain prominence in the organization. In a blockbuster deal signed in early 2002, 4Kids Entertainment secured the rights to provide a four-hour block of Saturday morning programming for the Fox Network. Kahn placed considerable resources into this deal, paying $100 million for the four-year agreement. He believed it is the final piece of a completely vertically integrated business plan. The agreement's cost was less expensive than buying a network and provides the company with access to the most valuable block of children's television available. Of course, management acknowledged that it will continue to use its considerable expertise to identify the next white-hot trend in children's characters and licensing.

INFLUENCES

The popularity of video games and the Internet have guided the evolution of 4Kids Entertainment. As early as 1988 the company had signed an agreement to act as the licensing agent for Nintendo and its cast of characters. Some of its original properties included Donkey Kong, Super Mario Brothers, Zelda, and Gameboy. The success of these games, and the characters that populated them, was not lost on Kahn. Known for his keen eye for a break-out concept, he tracked the Japanese market. The advent of Internet technology increased the exposure of foreign characters to the American marketplace.

The creation of youth oriented television networks such as Nickelodeon, The Disney Channel, The Cartoon Network, ABC Family Channel, Fox, and the WB has also influenced the company's product development. Networks geared toward children and youth programming proved to be tough competition for traditional television networks. Unable to compete with these upstarts, the major networks began to abandon the development of children's programming. They looked for independent producers to supply them with products. In addition, the new networks offered cartoons and similar fare, all day and night. This greatly expanded the opportunities to place programming on television. It also diminished the value of Saturday morning programming, which was no longer the sole viewing day for perennial favorites.

CURRENT TRENDS

4Kids Entertainment has joined the growing ranks of entertainment companies leasing space on network television. In January 2002, the company entered into a bidding war with rival, DIC Entertainment, to provide programming for a four-hour block of Saturday morning time on the Fox Kids network. 4Kids paid a reported $100 million for a four-year contract. This dwarfs the arrangement made between the Discovery Channel and NBC for a three-hour Saturday morning programming block. The Discovery Channel only shelled out $58 million to air its wares on prime network time. ABC had already relinquished most of its programmable time to its sister network, The Disney Channel. Disney provides episodes of its popular original series to be aired on Saturday morning. CBS receives its supply of juvenile fare from Nickelodeon. The network's reluctance to continue producing such programming in house greatly enhances the role of the third party content provider.

PRODUCTS

4Kids Entertainment offers products and services through five subsidiaries. 4Kids Licensing supplies domestic and international licensing rights to properties. The property can be a product, a television show, or an individual character. The company acts as a third-party agent to sell the right to use the likeness of a character on a wide variety of items. The company receives a royalty fee and a share of the sales of the branded products. Its recently launched division, Technology 4Kids creates new concepts for toys and games using technology.

4Kids International is based in London and manages the use of properties in Europe and the United Kingdom. Summit Media offers media-buying marketing services to companies in youth oriented businesses such as toys and video game companies. 4Kids Productions creates programming for children in television, film or musical formats. The newest subsidiary is a Web site development company that designs sites to enhance the exposure of licensed characters, or create new opportunities.

In 2001 licensing accounted for 68 percent of total revenues. This figure represents a decline from the prior year when the figure climbed to 83 percent. Media buying and planning accounted for 10 percent of sales in 2001. This was an increase in business from past years when this sector derived only 4 or 5 percent of revenues. Television, film, home video, and music production accounted for 22 percent of revenues in 2001.

CORPORATE CITIZENSHIP

4 Kids Entertainment CEO, Alfred R. Kahn, was one of the recipients of the 2002 E-3 Awards (Emerald Entrepreneurial and Excellence Award) presented by Emerald Asset Management. The award winners were chosen by a staff of investment analysts who used the following criteria: an entrepreneurial approach that maximizes human initiative, a demonstrated record of achievement, creating jobs and stimulating growth, and serving as a role model for ethical business practices. Norman Grossfield has also been recognized for the quality of his work. In 1996 he was presented with The Golden Rings, which is the highest award bestowed by the International Olympic Committee. Grossfield was singled out for his work with 4Kids Entertainment providing coverage of the 1996 Olympic Games in Atlanta.

GLOBAL PRESENCE

The company operates in the United States and in Europe. Its most notable successes have come as a result of importing Japanese characters and games to the United States. Personnel at 4Kids Entertainment have developed expertise in evaluating characters for crossover value. Nothing can be taken for granted when predicting the tastes of children, but the company has posted an impressive track record in this area.

EMPLOYMENT

4Kids Entertainment Inc. employs a workforce of approximately 120 full-time staffers. The licensing division, which accounts for the majority of the company's revenues, employs 75 people. Television and media production, and television and media distribution, each retain about 20 employees. The company offers little information on its personnel policies or recruiting practices. In early 2002 the company was not hiring new employees. The size of the workforce has increased from 42 members in 1992 to 120 in 2002, with the bulk of expansion occurring in the late 1990s.

SOURCES OF INFORMATION

Bibliography

"4Kids Entertainment's Animated Television Series YU-GI-OH! Will Expand to Six Days a Week on Kids' WB." Business Wire, 28 February 2002.

Adalian, Josef, and Paula Bernstein. "4KidsEntertainment Pocketing Fox Kids Ayem Block." Daily Variety, 21 January 2002.

James, Meg. "TV Networks Find Ways to Stretch Educational Rules." Los Angeles Times, 23 February 2002.

Keenan, Charles. "Life After Pokemon; 4Kids Entertainment Looks for the Next Big Thing." Crain's New York Business, 9 October 2000.

"Pokemon Battles to Boost Licensing." Discount Store News, 7 February 2000.

"Pokemon Powers Up." Playthings, February 2000.

"Retailers Pocketing Pokemon Sales." Discount Store News, 7 February 2000.

For an annual report:

on the Internet at: http://www.4kidsentertainment.com/investor/

For additional industry research:

Investigate companies by their Standard Industrial Classification Codes, also known as SICs. 4Kids Entertainment Inc.'s primary SIC is:

7812 Motion Picture and Video Production

Also investigate companies by their North American Industry Classification System codes, also known as NAICS codes. 4Kids Entertainment Inc.'s primary NAICS code is:

512110 Motion Picture and Video Production