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4Licensing Corp 10-K 2009

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the fiscal year ended December 31, 2008

OR

oTRANSITION 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:

 

Title of each class

Name of each exchange on which registered

Common Stock, $0.01 par value

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ NoX  

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes___ No X

 

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. o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ___

Accelerated filer X

Non-accelerated filer ___

Smaller reporting company ___

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes___ No X

 

The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on June 30, 2008 as reported on the New York Stock Exchange Market, was approximately $72,257,844. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

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

13,227,019

 

(Title of Class)

(No. of Shares Outstanding at March 13, 2009)

 

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2009 are incorporated by reference into Part III of this Annual Report on Form 10-K.

 


FORM 10-K REPORT INDEX

 

 

10-K Part

and Item No.

 

Page No.

 

 

 

PART I

 

 

Item 1

 

Business

1

 

Item 1A

 

Item 1B

 

Item 2

 

Risk Factors

 

Unresolved Staff Comments

 

Properties

5

 

8

 

9

Item 3

 

Legal Proceedings

9

Item 4

 

Submission of Matters to a Vote of Security Holders

10

 

 

 

PART II

 

 

Item 5

 

Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

10

Item 6

 

Selected Consolidated Financial Data

12

Item 7

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

14

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

29

Item 8

Financial Statements and Supplementary Data

29

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

29

Item 9A

 

Controls and Procedures

29

Item 9B

Other Information

30

 

 

 

PART III

 

 

Item 10

 

Directors and Executive Officers of the Registrant

30

Item 11

 

Executive Compensation

31

Item 12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

31

Item 13

 

Certain Relationships and Related Transactions

31

Item 14

 

Principal Accountant Fees and Services

31

 

 

 

PART IV

 

 

Item 15

 

Exhibits and Financial Statement Schedules

31

 


PART I

 

Throughout this Annual Report on Form 10-K, we “incorporate by reference” certain information in parts of other documents filed with the Securities and Exchange Commission (the “SEC”). The SEC allows us to disclose important information by referring to it in that manner. Please refer to such information.

 

This Annual Report on Form 10-K, including the sections titled "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements that relate to future events or our future financial performance. We may also make written and oral forward-looking statements in our Securities and Exchange Commission ("SEC") filings and otherwise. We have tried, where possible, to identify such statements by using words such as "believe," "expect," "intend," "estimate," "anticipate," "will," "project," "plan" and similar expressions in connection with any discussion of future operating or financial performance. Any forward-looking statements are and will be based upon our then-current expectations, estimates and assumptions regarding future events and are applicable only as of the dates of such statements. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statements. Such risks and uncertainties include those described in "Item 1A. Risk Factors" below as well as other factors. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

Item 1. Business.

 

General Development and Narrative Description of Business - 4Kids Entertainment, Inc., together with the subsidiaries through which its businesses are conducted (the “Company”), is a diversified entertainment and media company specializing in the youth oriented market with operations in the following business segments: (i) Licensing; (ii) Advertising Media and Broadcast; (iii) Television and Film Production/Distribution; and (iv) Trading Card and Game Distribution. The Company was organized as a New York corporation in 1970.

 

Licensing - The Licensing business segment consists of the results of operations of the following wholly-owned subsidiaries of the Company: 4Kids Entertainment Licensing, Inc. (“4Kids Licensing”); 4Sight Licensing Solutions, Inc. (“4Sight Licensing”); 4Kids Entertainment International, Ltd. (“4Kids International”); and 4Kids Technology, Inc. (“4Kids Technology”). 4Kids Licensing is engaged in the business of licensing the merchandising rights to popular children’s television series, properties and product concepts (individually, the “Property” or collectively the “Properties”). 4Kids Licensing typically acts as exclusive merchandising agent in connection with the grant to third parties of licenses to manufacture and sell all types of merchandise, including toys, videogames, trading cards, apparel, housewares, footwear, books and other published materials, based on such Properties. 4Sight Licensing is engaged in the business of licensing properties and product concepts to adults, teens and “tweens”. 4Sight Licensing focuses on brand building through licensing. 4Kids International, based in London, manages Properties represented by the Company in the United Kingdom and European marketplaces. 4Kids Technology develops ideas and concepts for licensing which integrate new and existing technologies with traditional game and toy play patterns.

 

The Licensing segment accounted for approximately 27%, 41% and 44% of consolidated net revenues for the years ended December 31, 2008, 2007 and 2006, respectively. The “Yu-Gi-Oh!” and “Teenage Mutant Ninja Turtles” Properties continue to be the two largest contributors in this business segment.

 

Advertising Media and Broadcast - The Company, through a multi-year agreement with The CW Network, LLC (“The CW”), leases The CW’s Saturday morning programming block (“The CW4Kids”) which broadcasts in most markets from 7am to 12pm for an initial term of five years beginning with The CW's 2008-2009 broadcast season. The Company provides substantially all programming content to be broadcast on The CW4Kids. 4Kids Ad Sales, Inc. (“4Kids Ad Sales”), a wholly-owned subsidiary of the Company, retains a portion of the revenue from its sale of network advertising time for the five-hour time period.

 

The Company, through a multi-year agreement (the “Fox Agreement”) with Fox Broadcasting Corporation (“Fox”), leased Fox’s Saturday morning programming block (“4Kids TV”) from 8am to 12pm eastern/pacific time (7am to 11am central time) which was terminated on December 31, 2008. The Company provided substantially all programming content to be broadcast on 4Kids TV and 4Kids Ad Sales retained all of the revenue from its sale of network advertising time for the four-hour programming block.

 

The Advertising Media and Broadcast segment also generates revenues from the sale of advertising on the Company’s multiple websites. These websites also showcase and promote The CW4Kids as well as the Company’s many Properties.

 


Effective June 30, 2006, the Company’s wholly-owned subsidiary, The Summit Media Group, Inc. (“Summit Media”), which previously provided print and broadcast media planning and buying services for clients principally in the children’s toy and game business, terminated its operations. As a consequence of the termination of its operations, Summit Media no longer serves as a media buying agency for third parties and is classified as a discontinued operation.

 

The Advertising Media and Broadcast segment accounted for 26%, 29% and 23% of consolidated net revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

 

Television and Film Production/Distribution - The Television and Film Production/Distribution business segment consists of the results of operations of the following wholly-owned subsidiaries of the Company: 4Kids Productions, Inc. (“4Kids Productions”); 4Kids Entertainment Music, Inc. (“4Kids Music”); and 4Kids Entertainment Home Video, Inc. (“4Kids Home Video”). 4Kids Productions produces and adapts animated and live-action television programs and theatrical motion pictures for distribution to the domestic and international television, home video and theatrical markets. 4Kids Music composes original music for incorporation into television programming produced by 4Kids Productions and markets and manages such music. 4Kids Home Video distributes home videos associated with television programming produced by 4Kids Productions.

 

The Television and Film Production/Distribution segment accounted for 23%, 29% and 33% of consolidated net revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

 

Trading Card and Game Distribution - Through its wholly-owned subsidiary, 4Kids Digital Games, Inc. (“4Kids Digital”), the Company owns 55% of TC Digital Games LLC, a Delaware limited liability company (“TC Digital”) that produces, markets and distributes the “Chaotic” trading card game. In December 2006, 4Kids Digital acquired a 53% ownership interest in TC Digital and entered into TC Digital’s operating agreement (the “TCD Agreement”) with Chaotic USA Digital Games LLC (“CUSA LLC”), a wholly-owned subsidiary of Chaotic USA Entertainment Group, Inc. (“CUSA”). The TCD Agreement contains terms and conditions governing the operations of TC Digital, and entitles 4Kids Digital and CUSA to elect two managers to the entity’s Management Committee with 4Kids Digital having the right to break any dead-locks. On December 18, 2007, 4Kids Digital purchased an additional 2% membership interest in TC Digital from CUSA increasing 4Kids Digital’s ownership percentage to 55%. The consideration for the purchase of the additional membership interest was paid through the settlement of certain capital contributions required to be made by CUSA to TC Websites LLC, a Delaware limited liability company and subsidiary of the Company (“TC Websites”) under TC Websites’ operating agreement (the “TCW Agreement”).

 

Through its wholly-owned subsidiary, 4Kids Websites, Inc. (“4Kids Websites”), the Company owns 55% of TC Websites, a company that owns and operates www.chaoticgame.com, the companion website for the “Chaotic” trading card game which was launched as a public beta version on October 24, 2007. In December 2006, 4Kids Websites purchased a 50% membership interest in TC Websites from CUSA and entered into the TCW Agreement. The TCW Agreement contains terms and conditions governing TC Websites’ operations and entitles 4Kids Websites and CUSA to elect two managers to its Management Committee. On December 18, 2007, 4Kids Websites entered into an agreement pursuant to which it acquired an additional 5% ownership interest in TC Websites from CUSA, and the TCW Agreement was concurrently amended to provide 4Kids Websites with the right to break any deadlocks on TC Websites’ Management Committee, including with respect to operational matters. The consideration for the purchase of the additional membership interest was paid through the settlement of certain capital contributions required to be made by CUSA to TC Websites under the TCW Agreement. Prior to the acquisition by 4Kids Websites of the additional 5% ownership interest and amendment of the TCW Agreement, the Company used the equity method to account for its investment in TC Websites, where it did not have control but had significant influence. As a result of 4Kids Websites’ increased ownership and operational control, TC Websites is consolidated in the Company’s financial statements, subject to a minority interest.

 

TC Digital and TC Websites are the exclusive licensees of certain patents covering the uploading of coded trading cards to a website where online game play and community activities occur. The www.chaoticgame.com website provides full access to all of its content and is free of charge for all users. No purchase of trading cards is necessary to play the online version where virtual playing decks are available to users who register on the website. These two businesses enable the Company to offer traditional trading card game play with an online digital play experience. In addition, it is anticipated that TC Digital and TC Websites will diversify their product lines and will ultimately distribute and sell, and create websites for other trading card games.

 

Certain of the Company’s executive officers have interests in CUSA, CUSA LLC and certain other entities with which TC Digital and TC Websites have engaged in transactions since their formation. Information regarding these relationships can be found in Note 16 of the notes to the Company’s consolidated financial statements.

 

 


The Trading Card and Game Distribution segment accounted for 24%, 1% and 0% of consolidated net revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

 

Financial Information About Industry Segments - Financial information regarding the Company’s industry segments can be found in Note 17 of the notes to the Company’s consolidated financial statements.

 

Dependence on a Few Sources of Revenues - The Company typically derives a substantial portion of its revenues from a small number of Properties, which usually generate revenues for only a limited period of time. The Company’s revenues are highly subject to changing trends in the toy, game and entertainment businesses, causing dramatic increases and decreases from year to year due to the popularity of particular Properties. It is not possible to accurately predict the length of time that a Property will be commercially successful and/or if a Property will be commercially successful at all. Due to these factors, the Company must continually seek new properties from which it can derive revenues. In addition, the Company also does not control the timing of the release of products by licensees which can affect both the amount of licensing revenues earned and the periods during which such revenues are recognized.

 

Three Properties, “Chaotic”, “Yu-Gi-Oh!” and “Teenage Mutant Ninja Turtles” represented 54% of consolidated net revenues for fiscal 2008. One licensee, Konami Corporation, represented 10% of consolidated net revenues for fiscal 2008. For more information on the Company’s Revenues/Major Customers, please see Note 9 of the notes to the Company’s consolidated financial statements.

 

Trademarks and Copyrights - Except as provided below, the Company generally does not own any trademarks or copyrights in Properties which the Company represents as a merchandising agent. The trademarks and copyrights are typically owned by the creators of the Properties or by other entities, which may have expended substantial amounts of resources in developing or promoting the Properties.

 

The Company owns the copyrights and trademarks to “Charlie Chan” and the “WMAC Masters” live action television series. The Company is also a joint copyright holder of the “Cubix” CGI television series and the “Teenage Mutant Ninja Turtles” and “Chaotic” animated television series produced by 4Kids Productions.  Additionally, the Company is also a joint copyright holder of the new “Chaotic” trading card artwork for the “Chaotic” trading card game. The Company also jointly owns the copyright to the “Chaotic” trading card game as it relates to revisions to the original “Chaotic” trading card game previously sold in Denmark.  The Company, through its 55% ownership interest in TC Websites, jointly owns the intellectual property rights to the website, including certain proprietary software contained in the website which enables “Chaotic” website visitors to play the “Chaotic” trading card game online at www.chaoticgame.com.

 

Seasonal Aspects - A substantial portion of the Company’s revenues and net income are subject to the seasonal and trend variations of the toy and game industry. Typically, a majority of toy orders are shipped in the third and fourth calendar quarters. Historically, the Company’s net revenues from toy and game royalties during the second half of the year have generally been greater than during the first half of the year. Additionally, advertising revenues derived from the sale of commercial time on 4Kids TV and The CW4Kids is generally higher in the fourth quarter due to higher advertising rates typically charged to children’s advertisers for advertising during the holiday season.

 

Competition - The Company’s principal competitors in the area of merchandise licensing are the large media companies (e.g., Disney, Time Warner and Nickelodeon, which is owned by Viacom) with consumer products/merchandise licensing divisions, toy companies, other licensing companies, and numerous individuals who act as merchandising agents. 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 the 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 as a merchandising agent.

 

The Company’s Advertising Media and Broadcast segment also operates in a highly competitive marketplace against large media companies (e.g., Disney, Time Warner, CBS, NBC and Nickelodeon, which is owned by Viacom) with substantially greater resources and distribution networks than the Company. The Company’s ability to derive advertising revenue from the sale of commercial time on The CW4Kids as well as internet advertising on its websites, substantially depends on the popularity of the television shows that the Company broadcasts. The Company also faces significant competition from other television broadcasters and cable networks, which also broadcast children’s television shows on Saturday mornings and sell advertising on their related websites.

 

 


The Company’s Television and Film Production/Distribution segment competes with all forms of entertainment directed at children. There are a significant number of companies that produce and/or broadcast television programming, distribute theatrical motion pictures and home videos for the children’s audience and program websites directed to children. The Company also competes with these companies to obtain creative talent to write, adapt, score, provide voice-overs and produce the television programs and theatrical motion pictures marketed by the Company and its subsidiaries.

 

The Company’s Trading Card and Game Distribution segment also operates in a highly competitive market against strong competition such as: (i)Wizards of the Coast, which is owned by Hasbro and distributes the popular “Magic the Gathering" trading card game; (ii) Konami, a company that distributes “Yu-Gi-Oh!” trading cards in the U.S.; (iii) Upper Deck, a company that distributes “Yu-Gi-Oh!” trading cards in Europe and sports cards; (iv) Topps, a company that distributes sports cards; and (v) Nintendo of America and Pokémon USA, Inc., the companies that distribute the “Pokémon” trading card game. The “Chaotic” website which is part of the Company’s Trading Card and Game Distribution segment also competes with popular online multiplayer game websites such as “World of Warcraft”, the website run by Blizzard Entertainment, a subsidiary of Vivendi.

 

Employees - As of March 13, 2009, the Company had a total of 214 full-time employees in its domestic and international operations. Of the total, 80 employees were primarily rendering services for the Licensing segment, 25 were primarily rendering services for the Advertising Media and Broadcasting segment, 65 were primarily rendering services for the Television and Film Production/Distribution segment and 44 were primarily rendering services for the Trading Card and Game Distribution segment. The Company also hires additional employees on a program-by-program basis whose compensation is typically allocated to the capitalized cost of the related programming.

 

Available Information - The Company's Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for its Annual Meeting of Stockholders are made available, free of charge, through its website, www.4kidsentertainment.com, as soon as reasonably practicable after such reports have been filed with or furnished to the Securities and Exchange Commission (the "SEC"). In addition, you may read and copy any materials the Company files with the SEC at the SEC's Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

Executive Officers of the Company

 

Name

Age

 

Employed By Registrant Since

 

Recent Position(s) Held As Of March 13, 2009

Alfred R. Kahn

62

 

1987

 

Chairman of the Board of Directors and Chief Executive Officer (since 1991)

 

Bruce R. Foster

 

49

 

2002

 

Executive Vice President and Chief Financial Officer (since 2005); Senior Vice President of Finance (2002 to 2005)

 

Norman Grossfeld

45

 

1994

President of 4Kids Productions, Inc.

 

Samuel R. Newborn

54

 

2000

Executive Vice President and General Counsel

 

Brian Lacey

58

 

2003

 

Executive Vice President, International

 

Daniel Barnathan

54

 

2002

 

President of 4Kids Ad Sales, Inc.

Bryan Gannon

51

 

2006

 

Chief Executive Officer of TC Digital Games LLC and TC Websites LLC

John Milito

35

 

2006

 

Executive Vice President of TC Digital Games LLC and TC Websites LLC

 

 

 

 

 

 


Item 1A.

Risk Factors.

 

The following significant factors, as well as others of which we are unaware or deem to be immaterial at this time, could materially adversely effect our business, financial condition or operating results in the future. Therefore, the following information should be considered carefully together with other information contained in this report. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

 

If we cannot meet the New York Stock Exchange (“NYSE”) continued listing requirements, the NYSE may delist our common stock which would have an adverse impact on the liquidity and market price of our common stock.  

 

Our common stock is currently listed on the NYSE. In the future, we may not be able to meet the continued listing requirements of the NYSE. If we are unable to satisfy the NYSE criteria for continued listing, our common stock would be subject to delisting. A delisting of our common stock could negatively impact us by reducing the liquidity and market price of our common stock, reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing.

 

We have been and may continue to be negatively affected by adverse general economic and other conditions.

 

Conditions in the domestic and global economies are extremely unpredictable and our business has been impacted by changes in such conditions. Softening global economies, stock market uncertainty and wavering consumer confidence caused by economic weakness, the decline in the housing market, the threat or occurrence of terrorist attacks, war or other factors generally affecting economic conditions have adversely affected our business, financial condition and results of operations and may continue to do so in the future.

 

Recent turmoil in U.S. and foreign credit markets, equity markets, and in the global financial services industry, including the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the U.S. and foreign governments, have continued to place pressure on the global economy and affect overall consumer spending, spending by advertisers and the availability of credit to us, our clients, and our customers. If conditions in the global economy, U.S. economy or other key vertical or geographic markets remain uncertain or weaken further, they may have a further material adverse effect on our business, financial condition and results of operations.

 

The changing entertainment preferences of consumers could adversely affect our business.

 

Our business and operating results depend upon the appeal of our Properties, product concepts and programming to consumers. Consumer entertainment preferences, as well as industry trends and demands are continuously changing and are difficult to predict as they vary over time. In addition, as entertainment properties often have short life cycles, there can be no assurances that:

 

(i) 

our current Properties, product concepts or programming will continue to be popular for any significant period of time;

(ii) 

new Properties, product concepts or programming we represent or produce will achieve and or sustain popularity in the marketplace;

(iii)

a Property’s life cycle will be sufficient to permit us to recover revenues in excess of the costs of advance payments, guarantees, development, marketing, royalties and other costs relating to such Property; or

(iv)

we will successfully anticipate, identify and react to consumer preferences.

 

Our failure to accomplish any of these events could result in reduced overall revenues, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the volatility of consumer preferences could cause our revenues and net income to vary significantly between comparable periods.

 

Revenues from our Licensing segment are largely derived from a small number of Properties and are subject to changing industry trends.

 

We have historically derived a substantial portion of our licensing revenues from a small number of Properties which usually generate revenues only for a limited period of time. For the year ended December 31, 2008, we derived approximately 56% of our licensing revenues from two Properties. Our licensing revenues are also subject to the changing trends in the toy, game and entertainment industries. Consequently, our licensing revenues may be subject to dramatic increases and decreases from particular sources over time. In addition, we do not control the timing of the release of products by licensees which can affect both the amount of licensing revenues earned and the periods during which such revenues are recognized. A significant decrease in our licensing revenues could have a material adverse impact on our financial condition and results of operations.

 

5

 

 


Revenues from our Licensing segment are directly impacted by the amount of retail shelf space dedicated to our Properties.

 

As an exclusive merchandising agent, we grant licenses to third parties to manufacture and sell all types of merchandise based on the Properties that we represent. The ability of these third parties to design, manufacture, and ultimately market and sell this merchandise through various distribution channels has a direct impact on our revenues. If these third parties are not successful in obtaining distribution or placement for this merchandise at retail, the performance of certain Properties could suffer which could have a material adverse impact on our financial condition and results of operations.

 

Our operating margins could be adversely impacted by the mix of Properties we represent.

 

Historically, the majority of the television episodes produced by our production studio were English language dubbed versions of previously produced foreign language programming. We were able to license television broadcast rights, home video rights and merchandising rights to such foreign language programming for rights fees that were substantially below the cost of producing original programming. Over the past several years, we have begun shifting our strategic focus toward the production of more original animated programming in an effort to obtain a higher percentage of revenues and build the value of our programming library. The investment required to produce original animated programming is substantially greater than our historical cost of dubbing and adapting existing foreign language animated programming. Our production of original programming funded in whole or in part by us has resulted in a substantial increase in capitalized film costs that will be amortized based on overall market acceptance and projected revenues. To the extent that a Property performs at a level lower than our expectations, the ratio of amortization expense will increase and may adversely impact our operating margins and results of operations. If our original programming is not successful, we may be required to write-down capitalized film costs associated with the unsuccessful series, which will have a material adverse impact on our financial condition and results of operations.

 

We must continually seek new Properties from which we can derive revenues.

 

It is difficult to predict whether a Property will be successful, and if so, for how long. Because of this, we are constantly seeking new Properties that are already successful or that we believe are likely to become successful in the future. If we are unable to identify and acquire the rights to successful new Properties, our revenues, financial condition and results of operations could be adversely affected.

 

Our business is seasonal and highly dependent on our performance during the holiday season.

 

A high percentage of our annual operating results have historically depended on our performance during the holiday season. Sales of our licensed toy and game concepts are seasonal and most retail sales of these products occur during the third and fourth fiscal quarters. Also, as a result of the increased demand for commercial time by children’s advertisers during the holiday season, a significant portion of the revenues of 4Kids Ad Sales is generated during the fourth fiscal quarter. The financial results of The CW4Kids will be affected by how successful it is in attracting viewers during the holiday season. As a result of the seasonal nature of our business, we would be significantly and adversely affected by unfavorable economic conditions and other unforeseen events during the holiday season, such as a terrorist attack or a military engagement, that negatively affect the retail environment or consumer buying patterns. In addition, a failure by us to supply programming to The CW4Kids during the holiday season could have a material adverse impact on our financial condition and results of operations.

 

We operate in a highly competitive marketplace.

 

Licensing. Our principal competitors in the area of merchandise licensing are the large media companies (e.g., Disney, Time Warner and Nickelodeon, which is owned by Viacom) with consumer products/merchandise licensing divisions, toy companies, other licensing companies, and numerous individuals who act as merchandising agents. There are also many independent product development firms with which we compete. Many of these companies have substantially greater resources than we do and represent properties which have been commercially successful for longer periods than our Properties. We believe that it would be relatively easy for a potential competitor to enter into this market in light of the relatively small investment required to commence operations as a merchandising agent.

 

Advertising Media and Broadcast. Our Advertising Media and Broadcast segment also operates in a highly competitive marketplace against large media companies (e.g., Disney, Time Warner, CBS, NBC and Nickelodeon, which is owned by Viacom) with substantially greater resources and distribution networks than we have. Our ability to derive advertising revenues from the sale of commercial time on The CW4Kids, substantially depends on the popularity of the television shows that we broadcast. We also face significant competition from other television broadcasters and cable networks, which also broadcast children’s television shows on Saturday mornings. Saturday morning broadcast television for children has been losing popularity over the last few years to the children’s cable television channels such as Nickelodeon, Cartoon Network and the Disney Channel. In addition, the popularity of the internet, video on demand, digital video recording of

 

 


programming and other trends have caused a fragmentation of the audience. Both of these trends have resulted in lower advertising revenues from the sale of advertising time on 4Kids TV. The continued reduction of advertising revenues, as a result of these and other trends, has adversely affected our business and the results of operations.

 

Television and Film Production/Distribution. Our Television and Film Production/Distribution segment competes with all forms of entertainment directed at children. There are a significant number of companies that produce and/or broadcast television programming and distribute theatrical motion pictures and home videos for the children’s audience. We also compete with these companies to obtain creative talent to write, adapt, score, provide voice-overs and produce the television programs and theatrical motion pictures marketed by us.

 

Trading Card and Game Distribution. Our Trading Card and Game Distribution segment operates in a highly competitive market against strong competition such as: (i)Wizards of the Coast, which is owned by Hasbro and distributes the popular “Magic the Gathering" trading card game; (ii) Konami, a company that distributes “Yu-Gi-Oh!” trading cards in the U.S.; (iii) Upper Deck, a company that distributes “Yu-Gi-Oh!” trading cards in Europe and sports cards; (iv) Topps, a company that distributes sports cards; and (v) Nintendo of America and Pokémon USA, Inc., the companies that distribute the “Pokémon” trading card game. The “Chaotic” website which is part of the Company’s Trading Card and Game Distribution segment also competes with popular online multiplayer game websites such as “World of Warcraft”, the website run by Blizzard Entertainment, a subsidiary of Vivendi.

 

Our broadcasting costs may increase or our advertising revenues may decrease due to events beyond our control.

 

The success of our Advertising Media and Broadcast segment is largely dependent on the amount of advertising revenues generated from sales of network advertising on The CW4Kids. Recently, there has been increased scrutiny of food advertising directed at children as a result of childhood obesity concerns. In response to these concerns, several significant food advertisers have reduced or eliminated advertising of food products directed toward children resulting in a reduction in the advertising dollars spent in the children’s television and internet advertising marketplace. In addition, international, political and military developments may result in increases in broadcasting costs or loss of advertising revenue due to, among other things, the preemption of our programming.

 

Our Trading Card and Game Distribution segment presents certain risks.

 

We commenced distribution of the “Chaotic” trading card game to the comic book and hobby store distribution channels in October 2007. Distribution of the “Chaotic” trading card game to mass market distribution channels began in January 2008 and continued throughout the year. If the popularity of the trading card game does not continue, it is possible that we will not receive substantial re-orders from these distribution channels. Additionally, if distribution in the U.S. does not continue with increasing success, it is possible that international distribution could be adversely affected. If such events were to occur, it would have a material adverse impact on our business and results of operations.

 

Card production delays or shortfalls and card inventory risk. Raw materials required for production of the Company’s products are generally available. However, the unavailability of certain raw materials or a significant increase in their cost could have a material adverse effect on our future plans and operating results. Our production of cards to meet anticipated retailer demand could cause an inventory surplus and result in markdowns and increased inventory carrying costs for us on even our most successful products. Additionally, if we underestimate demand for our products, we may be unable to provide adequate supplies of popular products to retailers in a timely fashion, and may consequently lose sales opportunities. A portion of our card sales are subject to returns. Although the Company maintains return provisions, returns considerably in excess of the Company’s provisions or a change in the percentage of card sales on a returnable basis could materially and adversely affect our future plans and results.

 

There may be issues with the functionality of the “Chaotic” website. Each “Chaotic” trading card has a unique code which enables the “Chaotic” card collector to enter or upload the “Chaotic” trading card codes to the companion website, www.chaoticgame.com. The “Chaotic” website enables each “Chaotic” card collector to battle online using the “Chaotic” cards that have been uploaded to the card collector’s online account. The “Chaotic” website is currently operated as a public beta version and is being developed and tested continually in such environment. There can be no assurance that the “Chaotic” website will not have operational issues which can be resolved in a timely manner. If the “Chaotic” website were not to operate properly, the success of the trading card game would be adversely affected. Such circumstances could require us to make additional substantial investments in order to support, enhance or upgrade the “Chaotic” trading game companion website beyond our current expectations.

 


Advertising revenues from the “Chaotic” website may be less than anticipated. Visitors to the “Chaotic” website are not charged a fee for playing the “Chaotic” trading card game online and the website will be supported by card royalty revenues and anticipated advertising revenues. There can be no assurance that card royalty revenues and anticipated advertising revenues will be sufficient to support the costs expected to be incurred in the operation and maintenance of the website. If card royalty revenues and anticipated advertising revenues are not sufficient to cover the costs of operating the website, the losses may adversely impact our business and the results of operations.

 

Failure by the Company to protect its proprietary intellectual property and information could have a material adverse effect on our business, financial condition and results of operations. The value of the “Chaotic” website depends, in part, on our ability to protect patents licensed by TC Digital and TC Websites covering the uploading of coded trading cards to a website where online game play and community activities occur. The failure by the Company to be able to protect successfully its proprietary intellectual property and information could have a material adverse effect on our business, financial condition and results of operations.

 

Dependence on limited number of suppliers. The Company currently has a single source of supply for its trading cards. The loss of this supplier for any reason could have a materially adverse effect on the Company's future plans and results. Additionally, failure of the manufacturer to supply the Company with quality products on a timely basis could have a material adverse effect on the sales of the “Chaotic” trading cards.

 

Our future success is dependent on certain key employees.

 

The success of our business depends to a significant extent upon the skills, experience and efforts of a number of senior management personnel and other key employees. In certain instances, we have employment agreements in place as a method of retaining the services of these key employees. The loss of the services of any of our senior management personnel or other key employees could have a material adverse effect on our business, results of operations or financial condition.

 

We may not be able to successfully protect our intellectual property rights.

 

We rely on a combination of copyright, trademark, patent and other proprietary rights laws to protect the intellectual property rights that we own or license. It is possible that third parties may challenge our rights to such intellectual property. In addition, there is a risk of third parties infringing upon our licensors’ or our intellectual property rights and producing counterfeit products. These events may result in lost revenue as well as litigation, which may be expensive and time-consuming even if a favorable outcome is obtained. There can be no assurance that adequate remedies would be available for any infringement of the intellectual property rights owned or licensed by the Company. Any such failure to successfully protect our intellectual property rights may have a material adverse effect on our competitive position.

 

We must be able to respond to rapidly changing technology occurring within our industry.

 

Our success will depend, in part, on our ability to anticipate and adapt to numerous changes in our industry resulting from technological developments such as the internet, broadband distribution of entertainment content and the adoption of digital television standards. These new distribution technologies may diminish the size of the audience watching broadcast television and require us to fundamentally change the way we market and distribute our Properties. For example, digital technology is likely to accelerate the convergence of broadcast, telecommunications, internet and other media and could result in material changes in the regulations, intellectual property usage and technical platforms on which our business relies. These changes could significantly decrease our revenues or require us to incur significant capital expenditures.

 

Potential labor disputes may lead to increased costs or disrupt the operation of our business.

 

The success of our business is dependent on our employees who are involved with our domestic and international operations. Any labor dispute may adversely affect one or more of our business segments through increased costs of operating such segment or disruption of the operations of such segment which could adversely affect our results of operations.

 

Item 1B. Unresolved Staff Comments.

 

There are no unresolved written comments that were received from the SEC staff 180 days or more before the end of our fiscal year relating to our periodic or current reports under the Exchange Act.

 

 


Item 2. Properties.

 

The following table sets forth, with respect to properties leased (none are owned) by the Company at December 31, 2008, the location of the property, the date on which the lease expires and the use which the Company makes of such facilities:

 

Address

Expiration of Lease

Use

Approximate Square Feet

1414 Avenue of the Americas, 3rd, 5th and 6th Floors
New York, New York

September 30, 2010

Executive, Marketing,
Sales and Administrative

29,000

 

 

 

 

53 West 23rd Street, 11th Floor
New York, New York

June 30, 2017

Production Facilities

25,000

 

 

 

 

53 West 23rd Street, 6th Floor
New York, New York

February 29, 2012

Website Development

5,600

 

 

 

 

1st Floor Mutual House
70 Conduit Street
London, England

June 23, 2009

International Sales
Office

2,400

 

 

 

 

12481 High Bluff Drive,

Suite 201

San Diego, California

July 31, 2009

Trading Card and Game Distribution

6,900

 

 

 

 

12481 High Bluff Drive,

Suite 110

San Diego, California

February 17, 2011

Trading Card and Game Distribution

4,200

 

The executive, marketing, sales and administrative offices are utilized by the Licensing, Advertising Media and Broadcast and Trading Card and Game Distribution segments. The international sales office is utilized primarily by the Licensing Segment. The production facility is utilized by the Television and Film Production/Distribution segment.

 

Item 3. Legal Proceedings.

 

On April 24, 2008, the Company commenced an action in the Supreme Court of the State of New York, County of New York against Fox seeking declaratory relief and damages from Fox pursuant to the Fox Agreement. Under the terms of the Fox Agreement, during each broadcast season, Fox was required to broadcast the 4Kids programming block on stations broadcasting to, on average, at least 90% of United States television households ("Minimum Average Clearance") and if, in any broadcast season, the 4Kids programming block did not achieve the Minimum Average Clearance, the Company was entitled to a reduction in the time buy fee payable under the Fox Agreement determined in accordance with a formula set forth in the Fox Agreement. If there were additional payments due from the Company to Fox under the Fox Agreement, the Company was entitled to set off the amount of the reduction in the time buy fee against future payments otherwise due to Fox from the Company; if such future payments due from the Company to Fox were insufficient to provide the Company with the full amount of the reduction in the time buy fee resulting from Fox's failure to maintain the required Minimum Average Clearance, the Company was entitled to a refund from Fox.

 

As a result of Fox's alleged failure to maintain the required Minimum Average Clearance during past broadcast seasons, the Company exercised its set-off right in the Fox Agreement and did not pay Fox the $5,000 installment of the time buy fee that was due on April 1, 2008. Since Fox disputed whether the Company was entitled to a reduced time buy fee, the Company brought an action in state court seeking a declaratory judgment confirming its set-off right. The Company also asserted a separate claim for damages against Fox alleging that, as a result of Fox's failure to achieve the Minimum Average Clearance for past broadcast seasons and its failure to broadcast 4Kids' programming within the Saturday morning block, the Company sustained damages resulting from, among other things, lost advertising and merchandising revenue.

 

On May 27, 2008, Fox removed the case from state court to the United States District Court for the Southern District of New York. On June 3, 2008, Fox filed its answer to the complaint and asserted counterclaims against the Company alleging that the Company's failure to pay the $5,000 installment of the time buy fee otherwise scheduled to be paid on April 1, 2008 was a breach of contract and that the Company's alleged statement to Fox that the Company would not pay the $5,000 installment of the time buy fee that was scheduled to be paid on July 1, 2008 constituted a breach of the Fox Agreement by anticipatory repudiation. The Company exercised its set-off right in the Fox Agreement and did not pay Fox the $5,000 installment of the time buy fee that was due on July 1, 2008. On July 16, 2008, the Company filed its reply to

 

 


Fox's counterclaims. The Company also exercised its set-off right and paid Fox $2,000 in lieu of the $5,000 installment of the time buy fee that was due on October 1, 2008, bringing the total amount set off by the Company to $13,000.

 

On November 9, 2008, the Company entered into an agreement with Fox to settle the action (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the Fox Agreement terminated on December 31, 2008 rather than at the end of the 2008-2009 broadcast season in September 2009 as was provided under the original terms of the Fox Agreement. Under the terms of the Settlement Agreement, the Company paid Fox $12,250 of the $13,000 of the 2008 time buy fees owed to Fox withheld by the Company as a set off to payments to Fox in the second, third and fourth quarters of 2008; $6,000 of such amount was paid on November 14, 2008, $3,125 of such amount was paid on February 13, 2009 and the remaining $3,125 is scheduled to be paid on March 15, 2009. As of December 31, 2008, all amounts to be paid to Fox were accrued on the Company’s consolidated balance sheet. In order to secure payment by the Company to Fox of the installments of the settlement amounts, the Company granted Fox a security interest in the sale of the national advertising time sold on 4KidsTV by the Company during the fourth quarter of 2008. The Company believes that the settlement enables 4Kids, beginning in 2009, to focus its resources on the five-hour block of children’s Saturday morning television on The CW Network.

 

The Company, from time to time, is involved in litigation arising in the ordinary course of its business. The Company does not believe that such litigation to which the Company or any subsidiary of the Company is a party or of which any of their Properties is the subject will, individually or in the aggregate, have a material adverse effect on the Company’s financial position, results of its operations or cash flows.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

During the Company’s fiscal quarterly period ended December 31, 2008, 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 and Issuer Purchases of Equity Securities

 

(a) Market Information - The Company’s Common Stock is listed for trading on the New York Stock Exchange under the symbol “KDE”. The following table indicates high and low sales quotations for the periods indicated based upon information supplied by the New York Stock Exchange.

 

2008

 

Low

 

High

 

First Quarter

 

$

9.56

 

$

14.31

 

Second Quarter

 

 

7.14

 

 

10.10

 

Third Quarter

 

 

6.45

 

 

9.59

 

Fourth Quarter

 

 

1.80

 

 

7.56

 

 

 

 

 

 

 

 

 

2007

 

 

Low

 

 

High

 

First Quarter

 

$

17.89

 

$

20.31

 

Second Quarter

 

 

14.75

 

 

18.93

 

Third Quarter

 

 

14.26

 

 

18.00

 

Fourth Quarter

 

 

10.72

 

 

19.90

 

 

 

 

 

 

 

 

 

 

(b) Holders - The number of holders of record of the Company’s Common Stock on March 13, 2009 was 5,964.

 

(c) Dividends - There were no dividends or other distributions made by the Company during 2008 or 2007. Future dividend policies 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) Equity Compensation Plan Information - Information regarding the Company’s equity compensation plans is incorporated by reference to Item 12 in Part III of this Form 10-K.

 

 

 


(e) Performance Graph - The following graph compares the cumulative total shareholders return of our common stock with the cumulative return of the Standard & Poor’s Small Cap 600 Index (“S&P 600”), the Russell 2000 Index (“Russell 2000”) and a group of companies, consisting of The Walt Disney Company, Time Warner, Inc., World Wrestling Entertainment, Inc., Marvel Entertainment, Inc. and Mattel, Inc. (“Peer Group”) for the period beginning December 31, 2003 and ending December 31, 2008. The graph assumes that $100 was invested on December 31, 2003, and that any dividends were reinvested.

 


 

 

December 31,

 

2003

2004

2005

2006

2007

2008

4Kids

$100.00

$80.78

$60.30

$70.02

$50.54

$7.53

S&P 600

$100.00

$121.59

$129.68

$147.92

$146.12

$99.38

Russell 2000

$100.00

$118.33

$123.72

$146.44

$144.15

$95.44

Peer Group

$100.00

$96.64

$85.89

$118.60

$106.32

$88.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 


 

(f)

Purchases of Equity Securities by the Issuer -

 

ISSUER PURCHASE OF EQUITY SECURITIES

 

 

 

Period During 2008

 

Total Number of Shares Purchased

 

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)

Jan. 1 – Jan. 31

93,979

$11.85

93,979

896,621

Feb. 1 – Feb. 29

15,300

12.24

109,279

881,321

Mar. 1 – Mar. 31

126,205

11.42

235,484

755,116

Apr. 1 – Apr. 30

755,116

May 1 – May 31

755,116

Jun. 1 – Jun. 30

755,116

Jul. 1 – Jul. 31

755,116

Aug. 1 – Aug. 31

755,116

Sep. 1 – Sep. 30

755,116

Oct. 1 – Oct. 31

755,116

Nov. 1 – Nov. 30

755,116

Dec. 1 – Dec. 31

755,116

Total

235,484

$11.65

235,484

755,116

 

(1) On December 4, 2007, the Company announced that the Board of Directors authorized the Company to purchase up to 1,000,000 shares of the Company’s common stock from time to time through December 31, 2008 in the open market or through negotiated prices. The Company purchased 235,484 shares at an average price of $11.65 per share for the year ended December 31, 2008 under this authorization.

 

Item 6. Selected Consolidated Financial Data.

(In thousands of dollars, except per share data)

 

Our selected consolidated financial data presented below has been derived from our audited consolidated financial statements and should be read in conjunction with the notes to the Company’s consolidated financial statements and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

 

12

 

 


 

 

 

2008

 

 

2007

 

 

2006

 

 

2005

 

2004

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service revenue

$

48,393

 

$

54,833

 

$

71,781

 

$

80,607

$

99,189

Product revenue

 

15,276

 

 

776

 

 

 

 

 

Total net revenues

 

63,669

 

 

55,609

 

 

71,781

 

 

80,607

 

99,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

54,280

 

 

44,180

 

 

39,155

 

 

33,835

 

33,437

Production service costs

 

6,752

 

 

7,195

 

 

11,259

 

 

8,851

 

10,029

Cost of sales of trading cards

 

10,625

 

 

352

 

 

 

 

 

Amortization of television and film costs

 

7,707

 

 

8,179

 

 

8,041

 

 

9,790

 

9,639

Amortization of 4Kids TV broadcast fee

 

16,022

 

 

21,472

 

 

22,462

 

 

26,408

 

27,859

Total costs and expenses

 

95,386

 

 

81,378

 

 

80,917

 

 

78,884

 

80,964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations

 

(31,717

)

 

(25,769

)

 

(9,136

)

 

1,723

 

18,225

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

2,722

 

 

5,281

 

 

4,143

 

 

2,834

 

1,469

Impairment on investment securities

 

(7,834

)

 

 

 

 

 

 

Gain on sale of investment in equity securities

 

 

 

 

 

 

 

234

 

Total other income

 

(5,112

)

 

5,281

 

 

4,143

 

 

3,068

 

1,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

(36,829

)

 

(20,488

)

 

(4,993

)

 

4,791

 

19,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Provision for) benefit from income taxes

 

(300

)

 

(2,436

)

 

3,506

 

 

(1,762

)

(7,907)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from unconsolidated operations – net of a tax benefit

 

 

 

 

 

(280

)

 

 

Loss on previously unconsolidated affiliate

 

 

 

(498

)

 

 

 

 

Minority interest (Note 14)

 

310

 

 

96

 

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

(36,819

)

 

(23,326

)

 

(1,728

)

 

3,029

 

11,787

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

 

 

722

 

 

2,040

 

943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(36,819

)

$

(23,326

)

$

(1,006

)

$

5,069

$

12,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(2.79

)

$

(1.77

)

$

(0.13

)

$

0.23

$

0.86

Discontinued operations

 

 

 

 

 

0.05

 

 

0.16

 

0.07

Basic (loss) earnings per common share

$

(2.79

)

$

(1.77

)

$

(0.08

)

$

0.39

$

0.93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(2.79

)

$

(1.77

)

$

(0.13

)

$

0.22

$

0.82

Discontinued operations

 

 

 

 

 

0.05

 

 

0.15

 

0.07

Diluted (loss) earnings per common share

$

(2.79

)

$

(1.77

)

$

(0.08

)

$

0.37

$

0.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

outstanding - basic

 

13,181,549

 

 

13,209,495

 

 

13,104,051

 

 

13,115,687

 

13,683,756

Weighted average common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

outstanding - diluted

 

13,181,549

 

 

13,209,495

 

 

13,104,051

 

 

13,536,830

 

14,335,343

 

 


 

 

 

Year Ended December 31,

 

 

 

2008

 

 

2007

 

 

2006

 

 

2005

 

 

2004

 

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow (used in) provided by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

$

(32,310

)

$

(13,821

)

$

(1,057

)

$

3,242

 

$

21,639

 

Investing activities

 

23,408

 

 

20,576

 

 

(18,047

)

 

(62,207

)

 

7,198

 

Financing activities

 

(2,641

)

 

2

 

 

1,445

 

 

(16,956

)

 

(12,645

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2008

 

 

2007

 

 

2006

 

 

2005

 

 

2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

100,574

 

$

151,079

 

$

181,395

 

$

183,938

 

$

205,015

 

Working capital

 

17,579

 

 

65,135

 

 

123,906

 

 

129,576

 

 

139,377

 

Stockholders’ equity

 

74,991

 

 

128,088

 

 

154,737

 

 

153,397

 

 

163,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company did not declare or pay any cash dividends during the five-year period ended December 31, 2008.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(In thousands of dollars unless otherwise specified)

 

The following is a discussion and analysis of our financial position and results of operations for each of the three years in the period ended December 31, 2008. This commentary should be read in conjunction with our consolidated financial statements and the notes to the Company’s consolidated financial statements, which begin on page F-1 under “Item 8. Financial Statements and Supplementary Data”.

 

Overview

 

The Company’s operating results for the year ended December 31, 2008 were negatively impacted by the global economic downturn which gained increasing downward momentum throughout the fourth quarter of 2008, as well as a continuing decline in the popularity of our significant Properties. Accordingly, the Company experienced an overall decrease in licensing revenues worldwide. As a result of the downturn, many retailers decided to reduce inventory on hand for the holiday selling season and the Company’s Trading Card and Game Distribution segment was negatively impacted by the resulting cut back by the Company’s distributors on their own holiday orders placed with TC Digital. Consequently, overall sales of “Chaotic” trading cards during the fourth quarter of 2008 were below expectations. In addition, these reduced sales caused an overall surplus of trading card inventory forcing the Company to record a reserve of $3,000 on this slower moving inventory. The Company was also impacted by increased selling, general and administrative expenses associated with the operations of TC Digital, and an other than temporary impairment of certain of the Company’s investment securities.

 

General

 

The Company receives revenues from the following four business segments: (i) Licensing; (ii) Advertising, Media and Broadcasting; (iii) Television and Film Production/Distribution; and (iv) Trading Card and Game Distribution. The Company typically derives a substantial portion of its licensing revenues from a small number of Properties, which usually generate revenues for only a limited period of time. The Company’s revenues are highly subject to changing trends in the toy, game and entertainment businesses, potentially causing dramatic increases and decreases from year to year due to the popularity of particular Properties. It is not possible to accurately predict the length of time a Property will be commercially successful and/or if a Property will be commercially successful at all. Popularity of Properties can vary from months to years. As a result, the Company’s revenues from particular Properties may fluctuate significantly between comparable periods.

 

The Company’s licensing revenues have historically been derived primarily from the licensing of toy and game concepts. As a result, 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 resulting in increased royalties earned by the Company during such calendar quarters. The Company recognizes revenues from the sale of advertising time on the leased Saturday morning programming blocks from Fox (“4Kids TV”), which terminated on December 31, 2008, and The CW (“The CW4Kids”), as more fully described in Note 2 of the notes to the Company’s consolidated financial statements. The Company’s advertising sales subsidiary, 4Kids Ad Sales, sells advertising time on 4Kids TV and The CW4Kids at higher rates in the fourth quarter due to the increased demand for commercial time by

 

 


children’s advertisers during the holiday season. As a result, much of the revenues of 4Kids Ad Sales are earned in the fourth quarter when the majority of toy and video game advertising occurs. As a result of the foregoing, the Company has historically experienced greater revenues during the second half of the year than during the first half of the year.

 

The Company’s media buying subsidiary, Summit Media, which previously provided print and broadcast media planning and buying services for clients principally in the children’s toy and game business, terminated its operations effective June 30, 2006. In connection with the closing of Summit Media, the media buying operations have been classified as a discontinued operation. As further discussed in Note 15 of the notes to the Company’s consolidated financial statements, the consolidated financial statements have been reclassified to accommodate the reporting of this business as a discontinued operation.

 

Critical Accounting Policies

 

The Company’s accounting policies are fully described in Note 2 of the notes to the Company’s consolidated financial statements. Below is a summary of the critical accounting policies, among others, that management believes involve significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Accounting for Film and Television Costs -  In accordance with accounting principles generally accepted in the United States and industry practice, the Company amortizes the costs of production for film and television programming using the individual-film-forecast method under which such costs are amortized for each film or television program in the ratio that revenue earned in the current period for such title bears to management’s estimate of the total revenues to be realized from all media and markets for such title. All exploitation costs, including advertising and marketing costs, are expensed as incurred.

 

Management regularly reviews, and revises when necessary, its total revenue estimates on a title-by-title basis, which may result in a change in the rate of amortization and/or a write-down of the film or television asset to estimated fair value. The Company determines the estimated fair value for individual film and television Properties based on the estimated future ultimate revenues and costs in accordance with Statement of Position No. 00-2, Accounting by Producers and Distributors of Film (“SOP No. 00-2”).

 

Any revisions to ultimate revenues can result in significant quarter-to-quarter and year-to-year fluctuations in film and television write-downs and amortization. A typical film or television series recognizes a substantial portion of its ultimate revenues within the first three years of release. By then, the film or television series has been exploited in the domestic and international television (network and cable) and home video markets. In addition, a significant portion of licensing revenues associated with the film or television series will have been realized. A similar portion of the film’s or television series’ capitalized costs should be expected to be amortized accordingly, assuming the film or television series is profitable.

 

The commercial potential of individual films and television programming varies dramatically, and is not directly correlated with production or acquisition costs. Therefore, it is difficult to predict or project the impact that individual films or television programming will have on the Company’s results of operations. However, the likelihood that the Company will report losses, particularly in the year of a television series initial release, is increased as the applicable accounting literature requires the immediate recognition of all of the production or acquisition costs (through increased amortization) in instances where it is estimated that the ultimate revenues of a film or television series will not recover those costs. Conversely, the profit from a film or television series must be deferred and recognized over the entire revenue stream generated by that film or television series. As a result, significant fluctuations in reported income or loss can occur, particularly on a quarterly basis, depending on release schedules and broadcast dates, the timing of advertising campaigns and the relative performance of individual film or television series.

 

Other Estimates -   The Company estimates reserves for future returns of product in the trading card and home video markets as well as provisions for uncollectible receivables. In determining the estimate of trading card and home video product sales that will be returned, the Company performs an analysis that considers historical returns, changes in customer demand and current economic trends. Based on this information, a percentage of each sale is reserved provided that the customer has the right to return unsold trading card and home video inventory. The Company estimates the amount of uncollectible receivables from its business segments by monitoring delinquent accounts and estimating a reserve based on contractual terms and other customer specific issues.

 

Revenue Recognition - The Company’s revenue recognition policies for its four business segments are appropriate to the circumstances of each segment’s business. See Note 2 of the notes to the Company’s consolidated financial statements for a discussion of these revenue recognition policies.

 

 


 

4Kids TV Broadcast Agreement - The Company broadcasted certain of its Properties on 4Kids TV, the Saturday morning programming block that the Company leased from Fox, under the Fox Agreement, until December 31, 2008. The cost of 4Kids TV has been capitalized and amortized over each broadcast year based on estimated advertising revenue up until the termination of the Fox Agreement. See Note 13 of the notes to the Company’s consolidated financial statements for additional information regarding the termination of the Fox Agreement. As of December 31, 2008, the cost to lease 4Kids TV was fully amortized.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company continually evaluates the policies and estimates that it uses to prepare its consolidated financial statements. In general, management’s estimates and assumptions are based on historical experience, known trends or events, information from third-party professionals and other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions.

 

Recently Issued Accounting Pronouncements – In November 2007, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141R, Business Combinations (“SFAS No. 141R”), which continues to require that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole, at their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No. 141R rescinds Emerging Issues Task Force (“EITF”) Issue No. 93-7 (“EITF 93-7”). Under EITF 93-7, the effect of any subsequent adjustments to uncertain tax positions were generally applied to goodwill, except for post-acquisition interest on uncertain tax positions, which was recognized as an adjustment to income tax expense. Under SFAS No. 141R, all subsequent adjustments to these uncertain tax positions that otherwise would have impacted goodwill will be recognized in the income statement. SFAS No. 141R will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008.

 

In November 2007, the FASB issued SFAS No. 160, Accounting and Reporting of Noncontrolling Interest (“SFAS No. 160”). SFAS No. 160 requires that a noncontrolling interest (previously referred to as a minority interest) be separately reported in the equity section of the consolidated entity’s balance sheet. SFAS No. 160 also established accounting and reporting standards for: (i) ownership interests in subsidiaries held by parties other than the parent, (ii) the amount of consolidated net income attributable to the parent and to the noncontrolling interest, (iii) changes in a parent’s ownership interest and (iv) the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 is effective for the Company beginning January 1, 2009. The Company is currently evaluating the impact the adoption of SFAS No. 160 will have on its consolidated financial position and results of operations.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”) — an amendment of FASB Statement No.133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”). SFAS No. 161 requires companies to provide enhanced disclosures regarding derivative instruments and hedging activities in order to better convey the purpose of derivative use in terms of risk management. Disclosures are required on (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedged items affect a company's financial position, financial performance, and cash flows. This Statement retains the same scope as SFAS No. 133 and is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 161 will have on its consolidated financial position and results of operations.

 

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (“SFAS No. 162”). SFAS No. 162 sets forth the sources of accounting principles and the framework, or hierarchy, for selecting principles to be used in financial statement preparation. Prior to the issuance of SFAS No. 162, the GAAP hierarchy was defined in the American Institute of Certified Public Accountants Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. SFAS No. 162 is currently effective and its adoption did not have an impact on the Company’s consolidated financial position and results of operations.

 

 


 

In December 2007, the FASB ratified EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property (“EITF 07-1”). The EITF concluded that a collaborative arrangement is one in which the participants are actively involved and are exposed to significant risks and rewards that depend on the ultimate commercial success of the endeavor. Revenues and costs incurred with third parties in connection with collaborative arrangements would be presented gross or net based on the criteria in EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, and other accounting literature. Payments to or from collaborators would be evaluated and presented based on the nature of the arrangement and its terms, the nature of the entity’s business, and whether those payments are within the scope of other accounting literature. The nature and purpose of collaborative arrangements are to be disclosed along with the accounting policies and the classification of significant financial statement amounts related to the arrangements. Activities in the arrangement conducted in a separate legal entity should be accounted for under other accounting literature; however required disclosure under EITF 07-1 applies to the entire collaborative agreement. This Issue is effective for fiscal years beginning after December 15, 2008, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating the impact, if any, the adoption of this standard will have on its consolidated financial position and results of operations.

 

Results of Operations

 

The following table sets forth our results of operations expressed as a percentage of total net revenues for the three years ended December 31, 2008, 2007 and 2006.

                

 

 

 

 

 

 

 

2008

 

2007

 

2006

 

Net revenues

 

 

100

%

 

100

%

 

100

%

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

85

 

 

79

 

 

55

 

Production service costs

 

 

11

 

 

13

 

 

16

 

Cost of sales of trading cards

 

 

17

 

 

1

 

 

 

Amortization of television and film costs

 

 

12

 

 

15

 

 

11

 

Amortization of 4Kids TV broadcast fee

 

 

25

 

 

39

 

 

31

 

Total costs and expenses

 

 

150

 

 

147

 

 

113

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(50)

 

 

(47)

 

 

(13)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

4

 

 

10

 

 

6

 

Impairment of investment securities

 

 

(12)

 

 

 

 

 

Total other (expense) income

 

 

(8)

 

 

10

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(58)

 

 

(37)

 

 

(7)

 

 

 

 

 

 

 

 

 

 

 

 

(Provision for) benefit from income taxes

 

 

 

 

(4)

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

Loss from unconsolidated operations - net of a tax benefit

 

 

 

 

 

 

 

Loss from previously unconsolidated affiliate

 

 

 

 

(1)

 

 

 

Minority interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

 

(58)

 

 

(42)

 

 

(2)

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(58)

%

 

(42)

%

 

(1)

%

 

 

 

17

 

 


Year Ended December 31, 2008 as compared to Year Ended December 31, 2007

 

Revenues

 

Revenues for the years ended December 31, 2008 and 2007, by reportable segment and for the Company as a whole, were as follows:

 

 

 

2008

 

2007

 

$ Change

 

% Change

Licensing

 

$

17,124

 

$

22,561

 

$

(5,437

)

(24

)%

Advertising Media and Broadcast

 

 

16,368

 

 

16,296

 

 

72

 

 

Television and Film Production/Distribution

 

 

14,901

 

 

15,976

 

 

(1,075

)

(7

)

Trading Card and Game Distribution

 

 

15,276

 

 

776

 

 

14,500

 

1,869

 

Total

 

$

63,669

 

$

55,609

 

$

8,060

 

14

%

 

The increase in consolidated net revenues for 2008, as compared to 2007, was due to a number of factors.

In the Licensing segment, decreased revenues were primarily attributable to:

 

(i)

decreased licensing revenues on the “Teenage Mutant Ninja Turtles” and “Yu-Gi-Oh!” Properties, domestically of approximately $2,150 and $910, respectively; as well as

(ii)

decreased licensing revenues on the “Viva Piñata” and “Nintendo” Properties, worldwide of approximately $2,060 and $1,200, respectively; partially offset by

(iii)

increased revenues attributable to the “Dinosaur King” Property, worldwide of approximately $910.

 

The “Yu-Gi-Oh!” and “Teenage Mutant Ninja Turtles” Properties, despite lower licensing revenues as compared to 2007, continued to be the largest contributors to the Company’s revenues in this business segment in 2008.

 

In the Advertising Media and Broadcast segment, revenues for 2008 remained relatively consistent when compared to 2007, primarily resulting from:

 

(i)

decreased revenue from the sale of advertising on Fox of approximately $1,090 resulting from decreased consumer demand related to a decline in current economic conditions; offset by

(ii)

revenue from a one time buy out fee of $1,000 paid from Microsoft to terminate a portion of their existing media commitment; as well as

(iii)

revenue from the sale of advertising on The CW4Kids of approximately $340, which did not exist in 2007.

 

In the Television and Film Production/Distribution segment, the revenue decline for 2008, as compared to 2007, primarily resulting from:

 

(i)

decreased production service revenue from the “Viva Piñata” television series, domestically of approximately $1,730; as well as

(ii)

decreased broadcast sales from the “Yu-Gi-Oh!” television series , domestically of approximately $1,440; partially offset by

(iii)

increased production service revenue from the “Teenage Mutant Ninja Turtles” television series of approximately $1,210; as well as

(iv)

increased international broadcast sales from the “Dinosaur King” television series of approximately $860.

 

The Trading Card and Game Distribution segment began to record revenues in the fourth quarter of 2007 as a result of the October launch of the “Chaotic” trading card game to comic and hobby stores. For the year ended December 31, 2008, revenues were $15,276, as a result of sales to mass market distribution channels as well as to comic and hobby stores. During the fourth quarter of 2008, retail sales were negatively impacted by the global economic downturn. As a result of the downturn, many retailers decided to reduce inventory on hand for the holiday selling season, and the Company’s Trading Card and Game Distribution segment was negatively impacted by the resulting cut back by the Company’s distributors on their own holiday orders placed with TC Digital. Consequently, overall sales of “Chaotic” trading cards during the fourth quarter of 2008 were below expectations. In addition, these reduced sales caused an overall surplus of trading card inventory forcing the Company to record a reserve of $3,000 on its slower moving inventory.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased 23%, or $10,100 to $54,280 for the year ended December 31, 2008, when compared to 2007. The increase was primarily due to the following:

 

(i)

increased costs of approximately $7,980 related to the operations of TC Digital;

 


(ii)

increased international selling expenses of approximately $1,220;

(iii)

increased foreign exchange loss associated with currency fluctuations of approximately $750; as well as

(iv)

increased costs relating to the grant of restricted shares of approximately $650; partially offset by

(v)

decreased advertising and promotional expenses of approximately $620.

 

Cost of Sales of Trading Cards

 

Cost of sales of trading cards represents finished good inventory costs relating to the “Chaotic” trading card game which was released to comic and hobby stores in October 2007. The Company’s production of cards to meet anticipated retailer demand followed by a decrease in overall consumer spending caused an inventory surplus and resulted in the Company recording a reserve of $3,000 associated with its slower moving inventory, as of December 31, 2008.

 

Production Service and Capitalized Film Costs

 

 

 

2008

 

2007

 

$ Change

 

% Change

Production Service Costs

 

$

6,752

 

$

7,195

 

$

(443

)

(6)

%

Amortization of Television and Film Costs

 

 

7,707

 

 

8,179

 

 

(472

)

(6)

 

 

The decrease in production service costs during the year ended December 31, 2008, as compared to the same period in 2007, was primarily due to decreased production costs for the “Viva Piñata” and “Kirby” television series, partially offset by increased production costs for the work performed on the “Teenage Mutant Ninja Turtles”, “Chaotic” and “Dinosaur King” television series. When the Company is entitled to be paid for such production costs, the Company categorizes them as production service costs and reflects a corresponding amount in revenues for the amounts billed back to the property owners.

 

The decrease in amortization of television and film costs for the year ended December 31, 2008 when compared to the same period in 2007, was primarily due to the decreased amortization of “Viva Piñata” and “Teenage Mutant Ninja Turtles” television series as well as decreased amortization of various older properties which were fully amortized in 2007. These decreases were offset by increased amortization of the “Chaotic” and “Yu-Gi-Oh!” television series.

 

As of December 31, 2008, there were $16,661 of capitalized film production costs in the Company’s consolidated balance sheet relating primarily to various stages of production on 461 episodes of animated programming. Based on management’s ultimate revenue estimates as of December 31, 2008, approximately 42% of the total completed and unamortized film and television costs are expected to be amortized during the next year, and over 90% of the total completed and unamortized film and television costs are expected to be amortized during the next three years.

 

4Kids TV Broadcast Fee

 

 

2008

 

2007

 

$ Change

 

% Change

Amortization of 4Kids TV Broadcast Fee

 

$

16,022

 

$

21,472

 

$

(5,450

)

(25)

%

 

As a result of the broadcast year (ending each year in September) being different than the Company’s fiscal year (ending each year in December), the amount of the amortization of the broadcast fee recognized from period to period will vary based upon: (i) the amount of advertising revenue recognized during the period; and (ii) the amount of advertising revenue already recognized for the broadcast year as a percentage of the total amount expected to be recognized for the full broadcast year.

 

The decrease in amortization of the 4Kids TV broadcast fee for the year ended December 31, 2008 when compared to the same period in 2007, resulted from the agreement to terminate the Fox Agreement on December 31, 2008. The Fox Agreement was originally scheduled to terminate in September 2009.

 

Interest Income

 

Interest income decreased 48%, or $2,559 to $2,722 for the year ended December 31, 2008, as compared to 2007, primarily as a result of lower cash balances and the Company investing its surplus cash in U.S. Treasury securities typically bearing lower interest rates than other investments.

 

 


Impairment in Investment Securities

 

As of December 31, 2008, the Company held investment securities having an aggregate principal amount of $46,930. As of December 31, 2008, the estimated fair market value of the investment securities held by the Company had declined by $25,313 ($3,993 during 2007 and $21,320 during 2008) to $21,617, based upon an analysis of the current market conditions of the Company’s investment securities made by the Company in accordance with SFAS No. 157. The Company concluded that a portion of the 2008 decline in fair value of $6,262, as well as $1,572 of the long-term investment decline during 2007 previously deemed to be temporarily impaired and recorded to other comprehensive income in 2007, were now other than temporarily impaired. The Company’s determination that certain of its long-term investments were other than temporarily impaired was based upon the fact that certain of the Company’s auction rate securities (“ARS”) ceased to pay interest according to their stated terms and that the underlying bond insurers of such securities elected to exercise their put right against the trusts, thereby exchanging the investment grade collateral in the trust with preferred stock. Accordingly, the Company recorded $7,834 of impairment charges to non-operating expense, in the Licensing segment, related to the other than temporary impairment of its ARS. The Company continues to monitor the market for ARS and consider its impact (if any) on the fair value of its investments. If the current market conditions deteriorate further, the Company may be required to record additional impairment charges to non-operating expense in future periods.

 

(Loss) Income Before Income Taxes

 

 

 

2008

 

2007

 

$ Change

 

% Change

Licensing

 

$

(8,557

)

$

9,321

 

$

(17,878

)

(192

)%

Advertising Media and Broadcast

 

 

(8,854

)

 

(15,168

)

 

6,314

 

42

 

Television and Film Production/Distribution

 

 

(6,470

)

 

(5,069

)

 

(1,401

)

(28

)

Trading Card and Game Distribution

 

 

(12,948

)

 

(9,572

)

 

(3,376

)

(35

)

Total

 

$

(36,829

)

$

(20,488

)

$

(16,341

)

(80

)%

 

The loss in the Licensing segment for the year ended December 31, 2008, as compared to income for the same period in 2007, was primarily attributable to an other than temporary impairment of certain of the Company’s investment securities, lower revenues from licensed Properties as well as a decrease in interest income allocated to this segment.

 

In the Advertising Media and Broadcast segment, the decrease in segment loss for the year ended December 31, 2008, as compared to the same period in 2007, was due to a decrease in amortization of the 4Kids TV broadcast fee in conjunction with the termination of the Fox Agreement, as well as a decrease in advertising and promotional expenses.

 

In the Television and Film Production/Distribution segment, the increase in segment loss for the year ended December 31, 2008 as compared to the same period in 2007, was primarily due to an increase in international selling expenses as well as a decrease in domestic broadcast sales, partially offset by decreased amortization of television and film costs.

 

In the Trading Card and Game Distribution segment, the increase in segment loss for the year ended December 31, 2008 when compared to the same period in 2007, was primarily attributable to increased cost of goods sold and selling, general and administrative expenses partially offset by increased revenues.

 

Income Tax Expense

 

The net tax provision for the year ended December 31, 2008 reflected a deferred tax expense of $300 related to taxable income from the Company’s foreign subsidiary. The deferred tax expense of $2,436 for the year ended December 31, 2007, related to an increase in the Company’s valuation reserve.

 

The Company regularly reviews its deferred tax assets for recoverability taking into consideration such factors as historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), requires the Company to record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In view of the level of deferred tax assets as of December 31, 2008, and the Company’s historical losses from operations, the Company has determined that the application of SFAS No. 109 requires the Company to record a full valuation allowance against its net deferred tax assets.

 

In the event that the Company earns pre-tax income in the future such that it will be able to use some or all of its deferred tax assets, SFAS No. 109 permits the Company to reduce or eliminate the valuation allowance. If the Company were to reverse the valuation allowance, in whole or in part, the Company’s income statement for such reporting period would record a reduction in income tax expense and an increase in net income, to the extent of the reversal of the valuation allowance.

 


Our effective tax rate for 2008 would have been a benefit of 38.1%. This rate differs from the Federal statutory rate of 35% primarily due to the mix of income and losses, which have tax rates that differ from the statutory rate, and due to permanent differences and tax rate differences on subsidiaries.

 

The Company files in multiple tax jurisdictions and from time to time is subject to audit in certain tax jurisdictions. As of December 31, 2008, the Company is in the process of undergoing an audit of its 2006 federal return. Management does not anticipate any adjustments.

 

Net Loss

 

As a result of the above, the Company had a net loss for the year ended December 31, 2008 of $36,819, as compared to a net loss of $23,326 for the same period in 2007.

 

Year Ended December 31, 2007 as compared to Year Ended December 31, 2006

 

Revenues

 

Revenues for the years ended December 31, 2007 and 2006, by reportable segment and for the Company as a whole, were as follows:

 

 

 

 

2007

 

2006

 

$ Change

 

% Change

Licensing

 

$

22,561

 

$

31,677

 

$

(9,116

)

(29

)%

Advertising Media and Broadcast

 

 

16,296

 

 

16,153

 

 

143

 

1

 

Television and Film Production/Distribution

 

 

15,976

 

 

23,951

 

 

(7,975

)

(33

)

Trading Card and Game Distribution

 

 

776

 

 

 

 

776

 

 

Total

 

$

55,609

 

$

71,781

 

$

(16,172

)

(23

)%

 

The decrease in consolidated net revenues for 2007, as compared to 2006, was due to a number of factors.

 

In the Licensing segment, decreased revenues were primarily attributable to:

 

(i)

decreased licensing revenues on the “Yu-Gi-Oh!”, “Winx Club” and Pokémon” Properties, worldwide of approximately $5,020, $1,600 and $1,560, respectively;

(ii)

decreased licensing revenues on the “G.I. Joe” Property, domestically of approximately $1,270; as well as

(iii)

decreased licensing revenues on the “Teenage Mutant Ninja Turtles” Property, internationally of approximately $670; partially offset by

(iv)

increased revenue attributable to the “Teenage Mutant Ninja Turtles” Property, domestically of approximately $1,940.

 

The “Yu-Gi-Oh!” Property, despite lower licensing revenues as compared to 2006, continued to be the largest contributor to the Company’s revenues in this business segment in 2007. In addition, revenue from the “Teenage Mutant Ninja Turtles” Property was also one of the largest contributors in this segment in 2007.

 

In the Advertising Media and Broadcast segment, revenues for 2007 remained relatively consistent when compared to 2006.

 

In the Television and Film Production/Distribution segment, the revenue decline for 2007, as compared to 2006, primarily resulted from:

 

(i)

decreased production service revenue from the “Teenage Mutant Ninja Turtles”, “Pokémon” and “One Piece” television series, domestically of approximately $2,650, $1,230 and $870, respectively; as well as

(ii)

decreased broadcast sales from the “Yu-Gi-Oh!”, “Mew Mew Power” and “One Piece” television series, internationally of approximately $1,010, $590 and $500, respectively; partially offset by

(iii)

increased international broadcast sales from the “Viva Piñata” television series of approximately $580.

 

In 2007, the Trading Card and Game Distribution segment recorded its initial revenues as a result of the October 2007 launch of the “Chaotic” trading card game to comic and hobby stores, as well as smaller retail chains.

 

 


 

 

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased 13%, or $5,025 to $44,180 for the year ended December 31, 2007, when compared to 2006. The increase was primarily due to the following:

 

(i)

increased costs of approximately $4,120 and $4,010 related to the operations of the Company’s newly formed ventures, TC Websites and TC Digital, respectively, as well as

(ii)

increased website costs of approximately $1,500 primarily related to the redesign and upgrade of the www.4Kids.tv website; partially offset by

(iii)

decreased personnel costs of approximately $2,740,

(iv)

decreased advertising and promotion expense of approximately $1,090, as well as

(v)

decreased computer supplies of approximately $660.

 

Cost of Sales of Trading Cards

 

Cost of sales of trading cards represents finished good inventory costs relating to the October 2007 launch of the “Chaotic” trading card game.

 

Production Service and Capitalized Film Costs

 

 

 

2007

 

2006

 

$ Change

 

% Change

Production Service Costs

 

$

7,195

 

$

11,259

 

$

(4,064

)

(36)

%

Amortization of Television and Film Costs

 

 

8,179

 

 

8,041

 

 

138

 

2

 

 

The decrease in production service costs during the year ended December 31, 2007, as compared to the same period in 2006, was primarily due to decreased production costs for the “Teenage Mutant Ninja Turtles”, “Pokémon”, and “One Piece” television series, partially offset by increased production costs for the work performed on the “Dinosaur King” and “Viva Piñata” television series. When the Company is entitled to be paid for such production costs, the Company categorizes them as production service costs and reflects a corresponding amount in revenues for the amounts billed back to the property owners.

 

Amortization of television and film costs remained relatively consistent for the year ended December 31, 2007 when compared to the same period in 2006.

 

As of December 31, 2007, there were $14,352 of capitalized film production costs in the Company’s consolidated balance sheet relating primarily to various stages of production on 291 episodes of animated programming. Based on management’s ultimate revenue estimates as of December 31, 2007, approximately 56% of the total completed and unamortized film and television costs are expected to be amortized during the next year, and over 90% of the total completed and unamortized film and television costs are expected to be amortized during the next three years.

 

4Kids TV Broadcast Fee

 

 

 

2007

 

2006

 

$ Change

 

% Change

Amortization of 4Kids TV Broadcast Fee

 

$

21,472

 

$

22,462

 

$

(990

)

(4)

%

 

As a result of the broadcast year (ending each year in September) being different than the Company’s fiscal year (ending each year in December), the amount of the amortization of the broadcast fee recognized from period to period will vary based upon: (i) the amount of advertising revenue recognized during the period; and (ii) the amount of advertising revenue already recognized for the broadcast year as a percentage of the total amount expected to be recognized for the full broadcast year. The Company’s amortization of the 4Kids TV broadcast fee decreased by $990 from $22,462 in 2006 to $21,472 in 2007 in conjunction with the decreased fee for each of the 2006-2007 and 2007-2008 broadcast seasons of approximately $5,312.

 

In addition to advertising revenues, the operating costs of 4Kids Ad Sales and the amortization of the 4Kids TV broadcast fee, the overall impact of 4Kids TV on the Company’s results of operations includes:

 

(i)

revenues generated from merchandise licensing, home videos and music publishing of 4Kids TV Properties; and

(ii)

production and acquisition costs associated with the television programs broadcast on 4Kids TV.

 

 


The ability of the Company to further develop its merchandising and, to a lesser extent, home video and music publishing revenue streams were significant components of its evaluation process which resulted in the decision to lease an additional Saturday morning children’s programming block from The CW, as described in Note 13 of the notes to the Company’s consolidated financial statements under “Broadcast Agreements”. Other factors, such as lower guaranteed payments associated with the five-hour broadcast period, additional units allocated to the Company for sale during The CW4Kids, an anticipated increase in network support due to a revenue sharing arrangement, along with the availability of The CW4Kids, also contributed to the decision to lease another Saturday morning children’s block which will overlap our current 4Kids TV block during the same Saturday morning time period for the 2008-2009 broadcast season.

 

Interest Income

 

Interest income increased 27%, or $1,138 to $5,281 for the year ended December 31, 2007, as compared to 2006, as a result of the increasing interest rate environment during the first half of 2007 when compared with 2006.

 

Income (Loss) Before Income Taxes

 

 

 

2007

 

2006

 

$ Change

 

% Change

Licensing

 

$

9,321

 

$

11,475

 

$

(2,154

)

(19

)%

Advertising Media and Broadcast

 

 

(15,168

)

 

(14,805

)

 

(363

)

(2

)

Television and Film Production/Distribution

 

 

(5,069

)

 

(1,092

)

 

(3,977

)

(364

)

Trading Card and Game Distribution

 

 

(9,572

)

 

(571

)

 

(9,001

)

(1,576

)

Total

 

$

(20,488

)

$

(4,993

)

$

(15,495

)

(310

)%

 

The decrease in the Licensing segment profit for 2007, as compared to 2006, is primarily attributable to lower licensing revenues from licensed Properties, partially offset by decreased selling, general and administrative expenses attributable to the Licensing segment and an increase in interest income allocated to this segment.

 

In the Advertising Media and Broadcast segment, the segment loss for 2007 remained relatively consistent as compared to the same period in 2006.

 

In the Television and Film Production/Distribution segment, the increase in segment loss for 2007 as compared to 2006 was primarily due to decreased production service revenue.

 

In the Trading Card and Game Distribution segment, the increase in segment loss was attributable to the fact that since TC Digital and TC Websites commenced operations in mid-December 2006, the majority of the start-up costs for this segment were incurred in 2007.

 

Income Tax Expense

 

The net tax provision for the year ended December 31, 2007 reflected a deferred tax expense of $2,436 related to the increase in the Company’s valuation reserve. The net tax benefit of $3,506 for the year ended December 31, 2006 reflected a current tax benefit of $2,963 and a deferred tax benefit of $543 related to the utilization of acquired net operating loss carrybacks and carryforwards and other acquired timing differences.

 

The Company regularly reviews its deferred tax assets for recoverability taking into consideration such factors as historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. SFAS No. 109 requires the Company to record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In view of the level of deferred tax assets as of December 31, 2007 and the Company’s historical losses from operations, the Company has determined that the application of SFAS No. 109 requires the Company to record a full valuation allowance against its net deferred tax assets.

 

In the event that the Company earns pre-tax income in the future such that it will be able to use some or all of its deferred tax assets, SFAS No. 109 permits the Company to reduce or eliminate the valuation allowance. If the Company were to reverse the valuation allowance, in whole or in part, the Company’s income statement for such reporting period would record a reduction in income tax expense and an increase in net income, to the extent of the reversal of the valuation allowance.

 

Our effective tax rate for 2007 would have been a benefit of 45.4%. This rate differs from the Federal statutory rate of 35% primarily due to the mix of income and losses, which have tax rates that differ from the statutory rate, and due to permanent differences and tax rate differences on subsidiaries.

 

The Company files in multiple tax jurisdictions and from time to time is subject to audit in certain tax jurisdictions. As of December 31, 2007, there were no outstanding tax audits.

 


Net Loss

 

As a result of the above, the Company had a net loss for the year ended December 31, 2007 of $23,326, as compared to a net loss in 2006 of $1,006.

 

Discontinued Operations

 

Effective June 30, 2006, the Company’s wholly-owned subsidiary, Summit Media, which previously provided print and broadcast media planning and buying services for clients principally in the children’s toy and game business, terminated its operations. As a consequence of the termination of its operations, Summit Media no longer serves as a media buying agency for third parties.

 

The results of operations for Summit Media are reported as a discontinued operation for the years ended December 31, 2007 and 2006, and accordingly, the accompanying consolidated financial statements have been reclassified separately to report the assets, liabilities and operating results of this business.

 

The following are the summarized results of discontinued operations for the media buying business for the years ended December 31, 2007 and 2006:

 

 

 

2007

 

2006

 

Net revenues

 

$

 

$

2,852

 

Income before income taxes

 

 

 

 

1,181

 

Income taxes

 

 

 

 

459

 

Net income from discontinued operations

 

$

 

$

722

 

 

Liquidity and Capital Resources

 

Financial Position

 

Cash and cash equivalents and short-term investments for the years ended December 31, 2008 and December 31, 2007 were as follows:

 

 

 

 

2008

 

2007

 

$ Change

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,503

 

$

24,872

 

$

(11,369

)

Investments

 

 

 

 

36,106

 

 

(36,106

)

 

 

$

13,503

 

$

60,978

 

$

(47,475

)

 

Long-term investments for the years ended December 31, 2008 and December 31, 2007 were as follows:

 

 

 

2008

 

2007

 

$ Change

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

21,617

 

$

31,806

 

$

(10,189

)

 

The Company’s long-term investments principally consist of ARS, corporate bonds and preferred shares. ARS are generally rated “BBB” or better by one or more national rating agencies and have contractual maturities of up to 80 years. Of the aggregate principal amount of $46,930 in investment securities held by the Company as of December 31, 2008, 3% mature within the next 20 years, 21% mature within the next 30 years, 35% mature through 2087 and the remaining 65% have no maturity date. The Company classifies these investments as “available for sale”, in accordance with the provisions of SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. The ARS that the Company invests in generally had interest reset dates that occured every 7 or 35 days and despite the long-term nature of their stated contractual maturity, the historical operation of the ARS market had given the Company the ability to quickly liquidate these securities at ongoing auctions every 35 days or less.

 

During 2007, liquidity issues began to affect the global credit and capital markets. In addition, certain individual ARS experienced liquidity issues specific to such securities. As a result, ARS, which historically have had a liquid market and had their interest rates reset periodically (e.g. monthly) through Dutch auctions, began to fail at auction. These auction failures have caused ARS to become illiquid, which in turn has caused the fair market values of these securities to decline.

 


The ARS currently held by the Company are private placement debt securities with long-term nominal maturities and interest rates that typically reset monthly. The Company’s investments in ARS represent interests in debt obligations issued by banks and insurance companies that originally had at least an “A” credit rating at the time of purchase, including JP Morgan Chase, bond insurers and re-insurers such as MBIA, AMBAC, FGIC, FSA, RAM and Radian, and International Lease Finance Corporation, the aircraft leasing subsidiary of AIG. The collateral underlying these securities consists primarily of commercial paper, but also includes asset-backed and mortgage-backed securities, corporate debt, government holdings, money market funds and other ARS.

 

As of December 31, 2008, the Company held investment securities having an aggregate principal amount of $46,930. As of December 31, 2008, the estimated fair market value of the investment securities held by the Company had declined by $25,313 ($3,993 during 2007 and $21,320 during 2008) to $21,617, based upon an analysis of the current market conditions of the Company’s securities made by the Company in accordance with SFAS No. 157. The Company concluded that a portion of the 2008 decline in fair value of $6,262, as well as $1,572 of the long-term investment decline during 2007 previously deemed to be temporarily impaired and recorded to other comprehensive loss in 2007, were now other than temporarily impaired. The Company’s determination that certain of its long-term investments were other than temporarily impaired was based upon the fact that certain of the Company’s ARS ceased to pay interest according to their stated terms and that the underlying bond insurers of such securities elected to exercise their put right against the trusts, thereby exchanging the investment grade collateral in the trust with preferred stock. Accordingly, the Company recorded $7,834 in impairment charges in non-operating expense related to the other than temporary impairment of its ARS. The Company continues to monitor the market for ARS and consider its impact (if any) on the fair value of its investments. If the current market conditions deteriorate further, the Company may be required to record additional impairment charges to non-operating expense in future periods. Additionally, the Company recorded an unrealized loss of $13,486 during 2008, resulting in a reduction in stockholders’ equity. Since the Company has the ability, and presently expects, to hold these investments until recovery of their face value, which may not be prior to the maturity of the applicable security (to the extent such security has a specified maturity date) and based on consideration of all such factors, the Company did not consider these investments to be other than temporarily impaired as such term is defined in the accounting literature as of the filing date. Additionally, the remaining investment securities held by the Company have continued to pay interest according to their stated terms, which the Company believes may create an incentive for the issuers to redeem these securities once the current liquidity problems in the credit market end, and substantially all of the ARS invested in by the Company are rated “BBB” or above.

 

In November 2008, one of the Company’s ARS experiencing liquidity problems converted to a corporate bond due to a provision in the trust stating that if liquidity ceased for an extended period of time the trust would dissolve and distribute the underlying assets of the trust, which were solely comprised of corporate bonds. This corporate bond is currently paying interest and the Company does not consider this investment to be other than temporarily impaired. Additionally, during 2008, the Company received an early redemption of certain ARS at par value of $14,975. Since these securities were never deemed to have an unrealized loss, their redemption had no affect on stockholders’ equity. As of March 13, 2009, no additional securities had been redeemed.

 

The credit and capital markets, including the market for ARS, have remained illiquid, and as a result of this and other factors specific to certain investment securities, the Company’s unrealized loss on its investment securities may subsequently increase. The Company estimates the fair values of the investment securities quarterly based upon consideration of such factors as: issuer and insurer credit rating; comparable market data, if available; current market conditions; the credit quality of the investment securities; the rate of interest received since the date the auctions began; yields of securities similar to the underlying investment securities; and, until September 2008, input from broker-dealers’ statements provided by the investment bank through which the Company held such securities. These considerations are used to determine a range of values for each security from moderate to highly conservative. The Company has based its evaluation on the mid-point of that range. Specifically, the Company considers the composition of the collateral supporting the investment securities and the default probabilities of the collateral underlying these securities in our overall valuation of each security. The Company has also researched the secondary market, and while such a market may be available, there is no guarantee that such a market will exist at any particular point in time. Additionally, the Company looks at the probabilities of default, probabilities of successful auctions and probabilities of earning the maximum (failed auction) rate for each period.

 

Due to the sensitivity of the methodologies and considerations used, the Company continually re-evaluates the investment securities and although the valuation methodologies have remained consistent for each quarter in which these securities were valued, certain inputs may have changed. The changes in these inputs primarily relate to the changes in the economic environment and the market for such securities.

 

Given the failed auctions, the Company’s investment securities are currently illiquid.  Accordingly, the Company has classified $21,617 in investment as non-current assets at December 31, 2008 on its balance sheet due to the fact that the Company believes that the liquidity of these securities is unlikely to be restored in a period less than twelve months from such date.

 


The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased the ARS on behalf of the Company that have been classified as other than temporarily impaired based on discretion afforded to it, has violated its legal obligations to the Company. As a result, the Company has taken various measures to obtain appropriate legal relief, including initiating an arbitration with the Financial Industry Regulatory Authority. On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy. On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc. The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008. On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”). SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC. In view of the bankruptcy of Lehman Brothers Holdings, Inc. and the liquidation of Lehman Brothers, Inc., the Company is currently assessing what additional steps to take to pursue legal redress.

 

If uncertainties in the credit and capital markets continue or the Company’s investments experience any rating downgrades on any investments in its portfolio or the value of such investments declines further, the Company may incur impairment charges to its investment portfolio, which could negatively affect the Company’s financial condition, results of operations and cash flow. As a result of the current market issues, the Company’s surplus cash is invested solely in U.S. Treasury securities with a maturity of 90 days or less.

 

In light of the current lack of liquidity affecting a significant portion of its portfolio of investment securities, based on the Company’s projected cash flows, current cash and cash equivalents, and its overall cash position, the Company expects to have adequate liquidity to fund its day-to-day operations through 2009. However, the illiquidity affecting a significant portion of the Company’s portfolio of investment securities is impacting the Company’s ability to make capital investments or expand its operations.

 

Sources and Uses of Cash

 

Cash flows for the three years ended December 31, 2008, 2007 and 2006 were as follows:

 

Sources (Uses)

 

2008

 

2007

 

2006

 

 

Operating Activities

 

$

(32,310

)

$

(13,821

)

$

(1,057

)

Investing Activities

 

 

23,408

 

 

20,576

 

 

(18,047

)

Financing Activities

 

 

(2,641

)

 

2

 

 

1,445

 

 

Working capital, consisting of current assets less current liabilities, was $17,579 as of December 31, 2008 and $65,135 as of December 31, 2007.

 

Operating Activities

2008

Net cash used in operating activities of $32,310 in 2008 primarily reflects a decrease in the Company’s business performance as well as additional costs related to the purchase of film and television inventory, payment of the Fox broadcast fee and purchase of trading card inventory. This decrease was partially offset by amortization of television and film costs and the 4Kids TV broadcast fee as well as the impairment of a portion of the Company’s investment securities.

 

2007

Net cash used in operating activities of $13,821 in 2007, primarily reflected a decrease in the Company’s business performance. This decrease was partially offset by a reduction of the Company’s tax assets attributable to a valuation allowance being established against net operating loss carryforwards.

 

2006

Net cash used in operating activities of $1,057 in 2006, primarily reflected lower net income and decreased amortization of television and film costs, partially offset by lower 4Kids TV broadcast fees paid to Fox.

 

Investing Activities

2008

Net cash provided by investing activities of $23,408 in 2008, reflects a shift in the Company’s investments for the period from auction rate securities to U.S. Treasury securities, which are short in duration and are classified as cash and cash equivalents.

26

 

 


2007

Net cash provided by investing activities of $20,576 in 2007, reflected a shift in the Company’s investment strategy, implemented during 2007, to purchase taxable investments with longer maturities to minimize the risk of short-term interest rate fluctuations, partially offset by increased capitalized website costs related to the development of the “Chaotic” website.

 

2006

Net cash used in investing activities of $18,047 in 2006, reflected the Company’s proceeds from the maturity of auction rate securities that were purchased as an investment, partially offset by the Company’s purchase of a 50% membership interest in TC Websites.

 

Financing Activities

2008

Net cash used in financing activities of $2,641 in 2008, reflects the Company’s purchase of shares of its common stock classified as treasury stock on the consolidated financial statements.

 

2007

Net cash provided by financing activities of $2 in 2007, reflected proceeds from the exercise of stock options, substantially offset by the purchase of treasury shares.

 

2006

Net cash provided by financing activities of $1,445 in 2006, reflected the Company’s proceeds from the exercise of stock options by the Company’s employees.

 

During 2008, the Company's cash flow from operations was impacted by an overall decrease in consumer spending due to current economic conditions.  While the Company strives to further diversify its revenue streams, management remains cognizant of changing trends in the toy, game and entertainment business and the difficulty in predicting the length of time a property will be commercially successful.  As a result, the Company's revenues, operating results and cash flow from operations may fluctuate significantly from year to year and present operating results are not necessarily indicative of future performance.

 

Historically, the majority of the television-based Properties that the Company represented were existing episodes of foreign programming that were adapted for the United States and other markets. The Company’s strategic focus has shifted toward Properties like “Chaotic” and “Teenage Mutant Ninja Turtles”, where the Company is a joint copyright owner of the episodes. Therefore, it is the Company’s intention to allocate a larger portion of its capital resources to the production costs associated with developing original animated programming resulting in increased capitalized film and television costs. Following the commercial release of a Property, its overall market acceptance and resulting revenues will directly impact the Company’s amortization of these capitalized film and television costs. To the extent a Property performs at a level lower than the Company’s expectations, the ratio of amortization expense to revenues realized will increase. While the Company expects that the revenues associated with such Properties will be sufficient to maintain its historical operating margins, there can be no assurance that the marketing plans designed to achieve those revenues can be executed in a manner to achieve its objectives.

 

Broadcast Agreements

 

The CW Broadcast Agreement - On October 1, 2007, the Company and The CW entered into the CW Agreement, under which The CW granted to the Company the exclusive right to program The CW's Saturday morning children's programming block (“The CW4Kids”) that is broadcast in most markets between 7am and 12pm for an initial term of five years beginning with The CW's 2008-2009 broadcast season.

 

Under the CW Agreement, the Company is obligated to make quarterly minimum guaranteed payments which are subject to reduction under certain circumstances. The Company and The CW share advertising revenues earned from the sale of national commercial time during The CW4Kids with The CW's share to be applied against such quarterly guarantee payments. In addition, The CW is entitled under the CW Agreement to participate in the Company's merchandising revenues from certain content broadcast on The CW4Kids, if such merchandising revenues exceed a certain annual minimum. 4Kids Ad Sales, Inc. manages and accounts for the ad revenue and costs associated with The CW4Kids.

 

4Kids TV Broadcast Agreement - In January 2002, the Company entered into a multi-year agreement with Fox (the “Fox Agreement”) to lease Fox’s Saturday morning programming block (“4Kids TV”) which aired principally on Saturday mornings from 8am to 12pm eastern/pacific time (7am to 11am central time) which was terminated on December 31, 2008. The Company provided substantially all programming content to be broadcast on 4Kids TV and retained all of the revenues from network advertising sales for the four-hour programming block.

 

27


In March 2006, the Fox Agreement was extended for two broadcast years through the 2007-2008 broadcast season. The broadcast fee for the 2007-2008 broadcast season was $20,000 payable in quarterly installments of $5,000 commencing in October 2007. Fox exercised its option to extend this agreement through its 2008-2009 broadcast season under the same terms and conditions that were in effect for the 2007-2008 broadcast season.

 

On April 24, 2008, the Company commenced an action in the Supreme Court of the State of New York, County of New York against Fox seeking declaratory relief and damages from Fox pursuant to the Fox Agreement. Under the terms of the Fox Agreement, during each broadcast season, Fox was required to broadcast the 4Kids programming block on stations broadcasting to, on average, at least 90% of United States television households ("Minimum Average Clearance") and if, in any broadcast season, the 4Kids programming block did not achieve the Minimum Average Clearance, the Company was entitled to a reduction in the time buy fee payable under the Fox Agreement determined in accordance with a formula set forth in the Fox Agreement. If there were additional payments due from the Company to Fox under the Fox Agreement, the Company was entitled to set off the amount of the reduction in the time buy fee against future payments otherwise due to Fox from the Company; if such future payments due from the Company to Fox were insufficient to provide the Company with the full amount of the reduction in the time buy fee resulting from Fox's failure to maintain the required Minimum Average Clearance, the Company was entitled to a refund from Fox.

 

As a result of Fox's alleged failure to maintain the required Minimum Average Clearance during past broadcast seasons, the Company exercised its set-off right in the Fox Agreement and did not pay Fox the $5,000 installment of the time buy fee that was due on April 1, 2008. Since Fox disputed whether the Company was entitled to a reduced time buy fee, the Company brought an action in state court seeking a declaratory judgment confirming its set-off right. The Company also asserted a separate claim for damages against Fox alleging that, as a result of Fox's failure to achieve the Minimum Average Clearance for past broadcast seasons and its failure to broadcast 4Kids' programming within the Saturday morning block, the Company sustained damages resulting from, among other things, lost advertising and merchandising revenue.

 

On May 27, 2008, Fox removed the case from state court to the United States District Court for the Southern District of New York. On June 3, 2008, Fox filed its answer to the complaint and asserted counterclaims against the Company alleging that the Company's failure to pay the $5,000 installment of the time buy fee otherwise scheduled to be paid on April 1, 2008 was a breach of contract and that the Company's alleged statement to Fox that the Company would not pay the $5,000 installment of the time buy fee that was scheduled to be paid on July 1, 2008 constituted a breach of the Fox Agreement by anticipatory repudiation. The Company exercised its set-off right in the Fox Agreement and did not pay Fox the $5,000 installment of the time buy fee that was due on July 1, 2008. On July 16, 2008, the Company filed its reply to Fox's counterclaims. The Company also exercised its set-off right and paid Fox $2,000 in lieu of the $5,000 installment of the time buy fee that was due on October 1, 2008, bringing the total amount set off by the Company to $13,000.

 

On November 9, 2008, the Company entered into an agreement with Fox to settle the action (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the Fox Agreement terminated on December 31, 2008 rather than at the end of the 2008-2009 broadcast season in September 2009 as was provided under the original terms of the Fox Agreement. Under the terms of the Settlement Agreement, the Company paid Fox $12,250 of the $13,000 of the 2008 time buy fees owed to Fox withheld by the Company as a set off to payments to Fox in the second, third and fourth quarters of 2008; $6,000 of such amount was paid on November 14, 2008, $3,125 of such amount was paid on February 13, 2009 and the remaining $3,125 is scheduled to be paid on March 15, 2009. As of December 31, 2008, all amounts to be paid to Fox were accrued on the Company’s consolidated balance sheet. In order to secure payment by the Company to Fox of the installments of the settlement amounts, the Company granted Fox a security interest in the proceeds received by the Company from the sale of the national advertising time sold on 4KidsTV by the Company during the fourth quarter of 2008. The Company believes that the settlement enables 4Kids, beginning in 2009, to focus its resources on the five-hour block of children’s Saturday morning television on The CW Network.

 

In addition to the broadcast fee paid to Fox and the minimum guarantee to be paid to The CW, the Company incurs additional costs to program each broadcast block and sell the related network advertising time. These costs include direct programming costs to acquire, adapt and deliver programming for the broadcast during the weekly broadcast blocks as well as additional indirect expenses of advertising sales, promotion and administration.

 

The ability of the Company to further develop its merchandising and, to a lesser extent, home video and music publishing revenue streams were significant components of its evaluation process which resulted in the decision to lease an additional Saturday morning children’s programming block from The CW, as described in Note 13 of the notes to the Company’s consolidated financial statements under “Broadcast Agreements”. Other factors, such as lower guaranteed payments associated with the five-hour broadcast period, additional units allocated to the Company for sale during The CW’s programming block, and an anticipated increase in network support due to a revenue sharing arrangement, also contributed to the decision to lease another Saturday morning children’s block.

 


Contractual Commitments

 

The Company has commitments under certain firm contractual arrangements (“firm commitments”) to make future payments for goods and services. These firm commitments secure the future rights to various assets and services to be used in the normal course of operations. The following table summarizes the Company’s material firm commitments as of December 31, 2008 and the impact that such obligations are expected to have on the Company’s liquidity and cash flows in future periods. The Company expects to fund these commitments primarily with operating cash flows generated in the normal course of business.

 

Year Ending December 31,

 

CW Agreement

 

4Kids TV Broadcast Agreement

 

 

Operating Leases

 

Total

2009

$

15,000

$

6,250

$

2,645

$

23,895

2010

 

15,000

 

 

2,091

 

17,091

2011

 

15,000

 

 

1,108

 

16,108

2012

 

15,000

 

 

971

 

15,971

2013

 

8,250

 

 

996

 

9,246

2014 and after

 

 

 

3,730

 

3,730

Total

$

68,250

$

6,250

$

11,541

$

86,041

 

The Company’s contractual obligations and commitments are detailed in the Company’s consolidated financial statements. For additional information see Note 13 of the notes to the Company’s consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

 

Foreign Currency Exchange Rate Fluctuations.

 

From time to time, the Company may be exposed to the risk of future currency exchange rate fluctuations, which is accounted for as an adjustment to stockholders’ equity and changes in the exchange rates between various foreign currencies and the U.S. dollar may, as a result, have an impact on the accumulated other comprehensive income (loss) component of stockholders’ equity reported by the Company, and such effect may be material in any individual reporting period. The Company is currently not a party to any market risk sensitive instruments, or any derivative contracts or other arrangements that may reduce such market risk.

 

Item 8.  

Financial Statements and Supplementary Data.

 

The Reports of Registered Public Independent Accounting Firms, the Company’s consolidated financial statements and notes to the Company’s consolidated financial statements appear in a separate section of this Form 10-K (beginning on Page F-1 following Part IV). The index to the Company’s consolidated financial statements is included in Item 15.

 

Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A.  

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e),which is designed to provide reasonable assurance that information, which is required to be disclosed in our reports filed pursuant to the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), is accumulated and communicated to management in a timely manner. At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the date of such evaluation, our disclosure controls and procedures were effective in timely al

 

 


Changes in Internal Control over Financial Reporting

 

During the fourth quarter of 2008, there were no significant changes in our internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Management's Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

 

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The scope of management's assessment of the effectiveness of internal control over financial reporting includes all of our Company's consolidated subsidiaries.

 

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control-Integrated Framework." Based on this assessment, management believes that, as of December 31, 2008, our internal control over financial reporting was effective based on those criteria.

 

Eisner LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an auditors' report on our internal control over financial reporting.

 

Item 9B.  Other Information.

 

None.

 

PART III

 

Item 10. Directors and Executive Officers of the Registrant.

 

Information concerning directors and officers of the Company is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year.

 

On May 15, 2008, the Company filed with the New York Stock Exchange the Annual CEO Certification regarding the Company’s compliance with the NYSE’s Corporate Governance listing standards as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.  

 

 


 

Item 11. Executive Compensation.

 

Information concerning executive and director compensation is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Information concerning security ownership of each person known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, of each director of the Company and all officers and directors as a group and of the Company’s equity compensation plans is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year.

 

Item 13. Certain Relationships and Related Transactions.

 

Information concerning certain relationships and related transactions is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year.

 

Item 14. Principal Accountant Fees and Services.

 

Information concerning principal accountant fees and services is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year.

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

 

(1) Financial Statements:

 

The following consolidated financial statements of 4Kids Entertainment, Inc. and Subsidiaries are included in Item 8:

 

 

Page

 

Number

Reports of Independent Registered Public Accounting Firms on Consolidated Financial Statements

F-1 to F-2

 

 

 

 

Consolidated Balance Sheets - December 31, 2008 and 2007

F-3

 

 

Consolidated Statements of Operations - Years Ended

 

December 31, 2008, 2007 and 2006

F-4

 

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Loss -

 

Years Ended December 31, 2008, 2007 and 2006

F-5

 

 

Consolidated Statements of Cash Flows - Years Ended

 

December 31, 2008, 2007 and 2006

F-6

 

 

Notes to Consolidated Financial Statements

F-7 to F-33

 

(a)(2) Financial Statement Schedules

 

All schedules have been omitted because they are inapplicable, not required, or the information is included in the Company’s consolidated financial statements or the notes to the Company’s consolidated financial statements.

 

(a)(3) and (b) Exhibits.

See Index of Exhibits annexed hereto.

 

 


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.

 

4KIDS ENTERTAINMENT, INC.

 

Date: March 13, 2009

By

/s/ Alfred R. Kahn

___________________________

 

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 13, 2009

 

/s/ Alfred R. Kahn

___________________________

 

Alfred R. Kahn,

 

Chairman of the Board,

 

Chief Executive Officer and

 

Director

 

Date: March 13, 2009

 

/s/ Bruce R. Foster

___________________________

 

Bruce R. Foster,

 

Executive Vice President,

 

Principal Financial

 

and Accounting Officer

 

Date: March 13, 2009

 

/s/ Samuel R. Newborn

___________________________

 

Samuel R. Newborn,

 

Executive Vice President,

 

General Counsel and

 

Director

 

Date: March 13, 2009

 

/s/ Richard Block

___________________________

 

Richard Block,

 

Director

 

Date: March 13, 2009

 

/s/ Jay Emmett

___________________________

 

Jay Emmett,

 

Director

 

Date: March 13, 2009

 

/s/ Michael Goldstein

___________________________

 

Michael Goldstein,

 

Director

 

Date: March 13, 2009

 

/s/ Randy O. Rissman

___________________________

 

Randy O. Rissman,

 

Director

32

 

 


     Exhibit
Number

Description

 

 

3.1

Certificate of Incorporation of the Registrant filed on April 28, 1970, as amended on October 12, 1971, as further amended on April 21, 1972, as further amended on July 17, 1979, as further amended on May 22, 1985, as further amended on July 30, 1986, as further amended on July 19, 1989, as further amended on November 16, 1995 (changing the name of the Corporation to 4Kids Entertainment, Inc.). (1)

 

 

3.2

Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated April 29, 1999. (2)

 

 

3.3

Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated May 18, 2000. (3)

 

 

3.4

Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 15, 2007. (4)

 

 

3.5

Amended and Restated By-Laws of the Registrant adopted by the Board of Directors on August 15, 2007. (4)

 

 

4.1

Form of Common Stock Certificate. (5)

 

 

4.2

Rights Agreement dated as of August 15, 2007 between 4Kids Entertainment and Continental Stock Transfer & Trust Co., as Rights Agent. (4)

 

 

4.3

First Amendment dated as of June 23, 2008 of the Rights Agreement between 4Kids Entertainment and Continental Stock Transfer & Trust Co., as Rights Agent. (31)

 

 

10.1

1999 Stock Option Plan. (*) (2)

 

 

10.2

2000 Stock Option Plan. (*) (3)

 

 

10.3

2001 Stock Option Plan. (*) (6)

 

 

10.4

2002 Stock Option Plan. (*) (7)

 

 

10.5

2003 Stock Option Plan. (*) (8)

 

 

10.6

2004 Stock Option Plan. (*) (9)

 

 

10.7

2005 Long-Term Incentive Compensation Plan. (*) (10)

 

 

10.8

2006 Long-Term Incentive Compensation Plan. (*) (11)

 

 

10.9

2007 Long-Term Incentive Compensation Plan. (*) (12)

 

 

10.10

2008 Long-Term Incentive Compensation Plan (*) (13)

 

 

10.11

Agreement of Lease, dated March 28, 1988, between the Registrant and 1414 Avenue of the Americas Company (“1414 Lease”). (14)

 

 

10.12

Amendment, dated July 8, 1994, to the 1414 Lease. (14)

 

 

10.13

Amended and Restated Employment Agreement dated January 1, 2002, between 4Kids Entertainment Licensing, Inc. and Alfred R. Kahn. (*)(15)

 

 

10.14

Second Amended and Restated Employment Agreement, dated December 15, 2006, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Alfred R. Kahn. (*)(16)

 

 

10.15

Employment Agreement, dated January 1, 2002, between 4Kids Productions, Inc. and Norman Grossfeld. (*)(15)

 

 

10.16

Amendment dated as of June 16, 2003, to the Employment Agreement between 4Kids Productions, Inc. and Norman Grossfeld. (*)(15)

 

 

10.17

Letter Agreement, dated March 2, 2006, between 4Kids Productions, Inc. and Norman Grossfeld. (*)(20)

 

 

10.18

Employment Agreement, dated January 1, 2002, between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(15)

 

 

10.19

Amendment dated as of June 16, 2003, to the Employment Agreement between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(15)

 

 

10.20

Letter Agreement, dated as of March 2, 2006, between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(17)

 

 

10.21

Employment Agreement dated as of June 30, 2005, between 4Kids Entertainment, Inc., and Steven M. Grossman. (*)(18)

 

 

10.22

General Release Agreement of Steven M. Grossman dated as of April 6, 2006. (*)(19)

 

 

10.23

Employment Agreement dated as of December 1, 2005, between 4Kids Entertainment Licensing, Inc., and Bruce R. Foster. (*)(12)

 

 

 


10.24

Amendment to Employment Agreement dated as of January 30, 2007, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster. (*)(20)

 

 

10.25

Amendment to Employment Agreement dated as of April 16, 2007, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster. (*)(21)

 

 

10.26

Employment Agreement dated as of July 1, 2003, between 4Kids Entertainment Licensing, Inc. and Brian Lacey. (*)(22)

 

 

10.27

Amendment to Employment Agreement, dated as of October 16, 2006, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Brian Lacey. (*)(23)

 

 

10.28

Amendment Agreement, dated March 14, 2006, between 4Kids Entertainment, Inc. and Fox Broadcasting Company. (*)(15)

 

 

10.29

Employment Agreement, dated as of December 11, 2006, between TC Digital Games LLC and Bryan Gannon. (*)(24)

 

 

10.30

Employment Agreement, dated as of December 11, 2006, between TC Digital Games LLC and John Milito. (*)(24)

 

 

10.31

Settlement Agreement and Mutual General Release dated as of June 19, 2006 among The Summit Media Group, Inc., The Beacon Media Group LLC, Sheldon Hirsch, Tom Horner and Paul Caldera. (25)

 

 

10.32

Operating Agreement of TC Digital Games LLC, dated as of December 11, 2006, between 4Kids Digital Games, Inc. and Chaotic USA Entertainment Digital Games LLC. (24)

 

 

10.33

Operating Agreement of TC Websites LLC, dated as of December 11, 2006, between 4Kids Websites, Inc. and Chaotic USA Entertainment Group, Inc. (24)

 

 

10.34

Operating Acquisition and Administration agreement dated June 28, 2002 between Cherry Lane Publishing Company, Inc. and 4Kids Entertainment Music, Inc. (26)

 

 

10.35

Saturday Morning Programming Block dated October 1, 2007 between The CW Network, LLC. and 4Kids Entertainment, Inc. (26)

 

 

10.36

Membership Interest Purchase Agreement dated December 18, 2007 between TC Digital Games, LLC, Chaotic USA Entertainment Group, Inc. and 4Kids Digital, Inc. (26)

 

 

10.37

Membership Interest Purchase Agreement dated December 18, 2007 between TC Websites LLC, Chaotic USA Entertainment Group, Inc. and 4Kids Websites, Inc. (26)

 

 

10.38

First Amendment dated as of September 15, 2008 to the Operating Agreement of TC Websites LLC, between 4Kids Websites, Inc. and Chaotic USA Entertainment Group, Inc. (29)

 

 

10.39

Employment Agreement, dated as of June 1, 2008, between 4Kids Ad Sales, Inc. and Daniel Barnathan. (*)(27)

 

 

10.40

Confidential Settlement Agreement and General Release of all Claims between 4Kids Entertainment, Inc. and the Fox Broadcasting Company. (*)(included herein)

 

 

21.1

List of Subsidiaries of the Registrant.

 

 

23.1

Consent of Eisner LLP, Independent Registered Public Accounting Firm.

 

 

31.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

Joint Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

______________

 

 

*

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, 1995 (File No. 000-07843).

 

 

(2)

Incorporated by reference to 1999 Proxy Statement for Annual Meeting of Shareholders held April 29, 1999 (File No. 000-07843).

 

 

(3)

Incorporated by reference to 2000 Proxy Statement for Annual Meeting of Shareholders held May 17, 2000 (File No. 000-07843).

 

 

(4)

Incorporated by reference to Current Report on Form 8-K dated August 15, 2007 (File No. 001-16117).

 

 

(5)

Incorporated by reference to Registration Statement on Form S-1 declared effective March 7, 1986 (File No. 33-3056).

 

 

 


(6)

Incorporated by reference to 2002 Proxy Statement for Annual Meeting of Shareholders held May 23, 2001 (File No. 001-16117).

 

 

(7)

Incorporated by reference to 2002 Proxy Statement for Annual Meeting of Shareholders held May 23, 2002 (File No. 001-16117).

 

 

(8)

Incorporated by reference to 2003 Proxy Statement for Annual Meeting of Shareholders held May 23, 2003 (File No. 001-16117).

 

 

(9)

Incorporated by reference to 2004 Proxy Statement for Annual Meeting of Shareholders held May 27, 2004 (File No. 001-16117).

 

 

(10)

Incorporated by reference to 2005 Proxy Statement for Annual Meeting of Shareholders held May 26, 2005 (File No. 001-16117).

 

 

(11)

Incorporated by reference to 2006 Proxy Statement for Annual Meeting of Shareholders held May 26, 2006 (File No. 001-16117).

 

 

(12)

Incorporated by reference to 2007 Proxy Statement for Annual Meeting of Shareholders held May 25, 2007 (File No. 001-16117).

 

 

(13)

Incorporated by reference to 2008 Proxy Statement for Annual Meeting of Shareholders held May 20, 2008 (File No. 001-16117).

 

 

(14)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 000-07843).

 

 

(15)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 001-16117).

 

 

(16)

Incorporated by reference to Current Report on Form 8-K dated December 21, 2006 (File No. 001-16117).

 

 

(17)

Incorporated by reference to Current Report on Form 8-K dated March 8, 2006 (File No. 001-16117).

 

 

(18)

Incorporated by reference to Current Report on Form 8-K dated July 7, 2005 (File No. 001-16117).

 

 

(19)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File No. 001-16117).

 

 

(20)

Incorporated by reference to Current Report on Form 8-K dated January 13, 2006 (File No. 001-16117).

 

 

(21)

Incorporated by reference to Current Report on Form 8-K dated February 5, 2007 (File No. 001-16117).

 

 

(22)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 000-07843).

 

 

(23)

Incorporated by reference to Current Report on Form 8-K dated November 2, 2006 (File No. 001-16117).

 

 

(24)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-07843).

 

 

(25)

Incorporated by reference to Current Report on Form 8-K dated June 23, 2006 (File No. 001-16117).

 

 

(26)

Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-07843).

 

 

(27)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (File No. 001-16117).

 

 

(28)

Incorporated by reference to Current Report on Form 8-K dated June 23, 2008 (File No. 001-16117).

 

 

(29)

Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 001-16117).

 

 

 

 

 

 

 

 

 

 

 


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Stockholders

4Kids Entertainment, Inc.

 

We have audited the accompanying consolidated balance sheets of 4Kids Entertainment, Inc. and Subsidiaries (the “Company”) as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders' equity and comprehensive income (loss), and cash flows for each of the years in the three year period ended December 31, 2008. 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 the standards of the Public Company Accounting Oversight Board (United States). 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2008 and 2007 and the consolidated results of their operations and their consolidated cash flows for each of the years in the three year period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 13, 2009 expressed an unqualified opinion thereon.

 

/s/ Eisner LLP

 

New York, New York

March 13, 2009

 

 

 

 

 

 

 

 

 

 

 

 

F-1

 

 

 

 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders

4Kids Entertainment, Inc.

 

We have audited 4Kids Entertainment, Inc. internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). 4Kids Entertainment, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, 4Kids Entertainment, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 4Kids Entertainment, Inc. and subsidiaries as of December 31, 2008, and 2007, and the related consolidated statements of operations, stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three year period ended December 31, 2008, and our report dated March 13, 2009 expressed an unqualified opinion on those financial statements.

 

/s/ Eisner LLP

 

New York, New York

March 13, 2009

 

 

 

 

 

F-2

 

 

 


4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2008 AND 2007

(In thousands of dollars, except share data)

                                                                                                                                                                                                                              

ASSETS:

 

2008

 

2007

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,503

 

$

24,872

 

Investments

 

 

 

 

36,106

 

Total cash, cash equivalents and investments

 

 

13,503

 

 

60,978

 

 

 

 

 

 

 

 

 

Accounts receivable - net

 

 

22,818

 

 

21,403

 

Inventories - net

 

 

4,241

 

 

611

 

Prepaid income taxes

 

 

137

 

 

1,159

 

Prepaid expenses and other current assets

 

 

1,425

 

 

2,985

 

Current assets from discontinued operations

 

 

451

 

 

372

 

Deferred income taxes

 

 

127

 

 

 

Total current assets

 

 

42,702

 

 

87,508

 

 

 

 

 

 

 

 

 

Property and equipment - net

 

 

4,287

 

 

4,255

 

Long term investments

 

 

21,617

 

 

31,806

 

Accounts receivable - noncurrent, net

 

 

180

 

 

208

 

Film and television costs - net

 

 

16,661

 

 

14,352

 

Non-current assets from discontinued operations

 

 

475

 

 

926

 

Other assets - net (includes related party amounts of $6,638 and $4,265, respectively)

 

 

14,652

 

 

12,024

 

Total assets

 

$

100,574

 

$

151,079

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Due to licensors

 

$

5,651

 

$

4,420

 

Accounts payable and accrued expenses

 

 

16,202

 

 

14,969

 

Deferred revenue

 

 

3,270

 

 

2,984

 

Total current liabilities

 

 

25,123

 

 

22,373

 

 

 

 

 

 

 

 

 

Deferred rent

 

 

460

 

 

618

 

Total liabilities

 

 

25,583

 

 

22,991

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Preferred stock, $.01 par value - authorized, 3,000,000 shares; none issued

 

 

 

 

 

Common stock, $.01 par value - authorized, 40,000,000 shares;

issued, 15,246,579 and 15,099,812 shares; outstanding 13,227,019 and         13,332,207 shares in 2008 and 2007, respectively

 

 

152

 

 

151

 

Additional paid-in capital

 

 

65,107

 

 

63,679

 

Accumulated other comprehensive loss

 

 

(17,396)

 

 

(2,562)

 

Retained earnings

 

 

63,504

 

 

100,323

 

 

 

111,367

 

 

161,591

 

Less cost of 2,019,560 and 1,767,605 treasury shares in 2008 and 2007, respectively

 

 

36,376

 

 

33,503

 

 

 

 

74,991

 

 

128,088

 

Total liabilities and stockholders’ equity

 

$

100,574

 

$

151,079

 

 

 

See notes to consolidated financial statements.

F-3

 


4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(In thousands of dollars, except share data)

 

 

 

2008

 

 

2007

 

 

2006

 

Net revenues:

 

 

 

 

 

 

 

 

 

Service revenue

$

48,393

 

$

54,833

 

$

71,781

 

Product revenue

 

15,276

 

 

776

 

 

 

Total net revenues

 

63,669

 

 

55,609

 

 

71,781

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

54,280