10-K 1 form10k12312007.htm FORM 10-K DATED 12-31-07

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, 2007

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 29, 2007 as reported on the New York Stock Exchange Market, was approximately $138,818,400. 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

13,157,823

 

(Title of Class)

(No. of Shares Outstanding at March 14, 2008)

 

Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 20, 2008 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

4

 

8

 

9

Item 3

 

Legal Proceedings

9

Item 4

 

Submission of Matters to a Vote of Security Holders

9

 

 

 

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

11

Item 7

 

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

13

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

27

Item 8

Financial Statements and Supplementary Data

27

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

27

Item 9A

 

Controls and Procedures

27

Item 9B

Other Information

28

 

 

 

PART III

 

 

Item 10

 

Directors and Executive Officers of the Registrant

28

Item 11

 

Executive Compensation

29

Item 12

 

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

29

Item 13

 

Certain Relationships and Related Transactions

29

Item 14

 

Principal Accountant Fees and Services

29

 

 

 

PART IV

 

 

Item 15

 

Exhibits and Financial Statement Schedules

29

 


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 the Company’s 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 41%, 44% and 47% of consolidated net revenues for the years ended December 31, 2007, 2006 and 2005, 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 Fox Broadcasting Corporation (“Fox”), leases Fox’s Saturday morning programming block (“4Kids TV”) from 8am to 12pm eastern/pacific time (7am to 11am central time). The Company provides substantially all programming content to be broadcast on 4Kids TV. 4Kids Ad Sales, Inc. (“4Kids Ad Sales”), a wholly-owned subsidiary of the Company, retains all of the revenues from its sale of network advertising time for the four-hour time period leased from Fox.

 

On October 1, 2007, the Company and The CW Network, LLC ("The CW") entered into an agreement (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 that is broadcast in most markets between 7am and 12pm ("The CW Kids Block") for an initial term of five years beginning with The CW's 2008-2009 broadcast season.

 

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 being classified as a discontinued operation.

 

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The Advertising Media and Broadcast segment accounted for 29%, 23% and 23% of consolidated net revenues for the years ended December 31, 2007, 2006 and 2005, 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 29%, 33% and 30% of consolidated net revenues for the years ended December 31, 2007, 2006 and 2005, 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 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 LLC, a Delaware limited liability company (“TC Websites”) 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 with CUSA. 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. 4Kids Websites had previously 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. The Company believes that its ownership interests in TC Digital and TC Websites represent a potentially significant addition to its business strategy.

Certain of the Company’s executive officers hold management positions and have ownership 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 15 of the Notes to the Company’s consolidated financial statements.

 

The Trading Card and Game Distribution segment accounted for 1%, 0% and 0% of consolidated net revenues for the years ended December 31, 2007, 2006 and 2005, 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.

 

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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, “Yu-Gi-Oh!”, “Teenage Mutant Ninja Turtles” and “Viva Piñata” represented 45% of consolidated net revenues for fiscal 2007. Two licensees, Microsoft Corporation and Konami Corporation, represented 26% of consolidated net revenues for fiscal 2007. For more information on the Company’s Revenues/Major Customers, please see Note 8 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 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) 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 4Kids TV, and beginning with the 2008-2009 broadcast season, The CW Kids Block, 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.

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 and distribute theatrical motion pictures and home videos for the children’s audience. 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 will also be operating 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

 

3

 


Gathering" trading card game; (ii) Upper Deck, a company that distributes “Yu-Gi-Oh!” trading cards and sports cards; (iii) Topps, a company that distributes sports cards; and (iv) 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 will also be competing 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 14, 2008, the Company had a total of 233 full-time employees in its domestic and international operations. Of the total, 96 employees were primarily rendering services for the Licensing segment, 30 were primarily rendering services for the Advertising Media and Broadcasting segment, 70 were primarily rendering services for the Television and Film Production/Distribution segment and 37 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 14, 2008

Alfred R. Kahn

61

 

1987

 

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

 

Bruce R. Foster

 

 

48

 

 

2002

 

 

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

 

Norman Grossfeld

 

 

44

 

 

1994

 

 

President of 4Kids Productions, Inc.

 

Samuel R. Newborn

 

 

53

 

 

2000

 

 

Executive Vice President and General Counsel

 

Brian Lacey

 

 

57

 

 

2003

 

 

Executive Vice President, International

 

Daniel Barnathan

 

53

 

 

2002

 

 

President of 4Kids Ad Sales, Inc.

 

Bryan Gannon

 

50

 

 

2006

 

 

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

 

John Milito

 

34

 

 

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 affect 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.

 

 

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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, 2007, we derived approximately 55% 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.

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 optimal and adequate shelf space 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 millions of dollars of capitalized film costs associated with the unsuccessful series, which will have a material adverse impact on our financial condition and results of operations.

 

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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 4Kids TV and the future results of The CW Kids Block will be affected by how successful they are 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 4Kids TV or The CW Kids Block 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 4Kids TV, and beginning for the 2008-2009 broadcast season, The CW Kids Block, 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) Upper Deck, a company that distributes “Yu-Gi-Oh!” trading cards and sports cards; (iii) Topps, a company that distributes sports cards; and (iv) Nintendo of America and Pokémon USA, Inc., the companies that distribute the “Pokémon” trading card game. The “Chaotic” website which is part of the our Trading Card and Game Distribution segment is also competing with popular online multiplayer game websites such as “World of Warcraft”, the website run by Blizzard Entertainment, a subsidiary of Vivendi.

 

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

The success of our Advertising Media and Broadcastsegment is largely dependent on the amount of advertising revenues generated from sales of network advertising on 4Kids TV and beginning with the 2008-2009 broadcast season, The CW Kids Block. 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.

Our trading card business is a relatively new business with a limited operating history. We expect to invest an aggregate amount between approximately $15 and $20 million in TC Digital and TC Websites. These companies have only a limited operating history and both operate in a highly competitive trading card marketplace. TC Digital is initially distributing one product, the “Chaotic” trading card game. If the “Chaotic” trading card game is not successful, we will incur substantial losses.

We commenced distribution of the “Chaotic” trading card game to the comic book and hobby store distribution channels in October 2007. Additionally, we began to distribute the “Chaotic” trading card game to mass market distribution channels in January 2008. If the trading card game is not successful when initially distributed to the comic and hobby store and mass market distribution channels, it is possible that we will not receive substantial re-orders from these distribution channels. Additionally, if distribution in the U.S. is not successful, 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 affect 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 small percentage 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 affect on our business, financial condition and results of operations.

 

7

 


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 affect 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 affect 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 affect on our competitive position.

We may 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 and in the future may be, 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 may adversely affect our business, financial condition and results of operations.

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.

None.

 

8

 


Item 2. Properties.

 

The following table sets forth, with respect to properties leased (none are owned) by the Company at December 31, 2007, 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

 

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. On February 18, 2008, the Company signed a lease expiring February 18, 2011 for an additional 4,200 square feet of office space in the San Diego, California location. This additional space will be utilized by the Trading Card and Game Distribution segment. The Company considers that, in general, its physical properties are well maintained, in good operating condition and adequate for its purposes.

 

Item 3. Legal Proceedings.

 

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 affect on the Company’s financial position or the results of its operations.

 

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

 

During the Company’s fiscal quarterly period ended December 31, 2007, there were no matters submitted to a vote of security holders.

 

 

 

 

 

 

9

 


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.

 

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

 

 

 

 

 

 

 

 

 

 

2006

 

Low

 

High

 

First Quarter

 

$

15.60

 

$

17.90

 

Second Quarter

 

 

15.07

 

 

17.55

 

Third Quarter

 

 

14.09

 

 

17.29

 

Fourth Quarter

 

 

16.19

 

 

19.65

 

 

 

 

 

 

 

 

 

(b) Holders – The number of holders of record of the Company’s Common Stock on March 14, 2008 was 7,371.  

 

(c) Dividends - There were no dividends or other distributions made by the Company during 2007 or 2006. 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, 2002 and ending December 31, 2007. The graph assumes that $100 was invested on December 31, 2002, and that any dividends were reinvested.

 


 

10

 


 

 

December 31,

 

2002

2003

2004

2005

2006

2007

4Kids

$100.00

$117.84

$95.20

$71.06

$82.52

$59.56

S&P 600

$100.00

$137.53

$167.23

$178.35

$203.44

$200.96

Russell 2000

$100.00

$147.25

$174.24

$182.18

$215.64

$212.26

Peer Group

$100.00

$156.73

$151.47

$134.61

$185.88

$166.64

 

 

(f)

Purchases of Equity Securities by the Issuer -

 

ISSUER PURCHASE OF EQUITY SECURITIES

 

 

 

 

Period During 2007

 

Total Number of Shares Purchased

 

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans orPrograms

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

Jan. 1 – Jan. 31

Feb. 1 – Feb. 28

Mar. 1 – Mar. 31

Apr. 1 – Apr. 30

May 1 – May 31

8,205

$17.13

Jun. 1 – Jun. 30

Jul. 1 – Jul. 31

Aug. 1 – Aug. 31

Sep. 1 – Sep. 30

Oct. 1 – Oct. 31

Nov. 1 – Nov. 30

Dec. 1 – Dec. 31

9,400

$12.09

9,400

990,600

Total

17,605

$14.44

9,400

990,600

 

(1) In May 2007, 8,205 shares were repurchased to discharge withholding tax obligations upon the vesting of certain employees’ restricted stock awards. Additionally, 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 9,400 shares at an average price of $12.09 per share in December 2007 under this authorization. As of March 14, 2008, 174,384 shares of the Company’s common stock were subsequently purchased by the Company under this authorization at an average price of $11.93 per share.

 

Item 6. Selected 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 related notes thereto and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

 

11

 


 

 

 

2007

 

 

2006

 

 

2005

 

2004

 

2003

Net revenues

$

55,609

 

$

71,781

 

$

80,607

$

99,189

$

98,194

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

44,180

 

 

39,155

 

 

33,835

 

33,437

 

30,933

Production service costs

 

7,195

 

 

11,259

 

 

8,851

 

10,029

 

7,819

Cost of sales of trading cards

 

352

 

 

 

 

 

 

Amortization of television and film costs

 

8,179

 

 

8,041

 

 

9,790

 

9,639

 

10,549

Amortization of 4Kids TV broadcast fee

 

21,472

 

 

22,462

 

 

26,408

 

27,859

 

27,003

Total costs and expenses

 

81,378

 

 

80,917

 

 

78,884

 

80,964

 

76,304

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations

 

(25,769

)

 

(9,136

)

 

1,723

 

18,225

 

21,890

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

5,281

 

 

4,143

 

 

2,834

 

1,469

 

1,112

Gain on sale of investment in equity securities

 

 

 

 

 

234

 

 

Total other income

 

5,281

 

 

4,143

 

 

3,068

 

1,469

 

1,112

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

(20,488

)

 

(4,993

)

 

4,791

 

19,694

 

23,002

 

 

 

 

 

 

 

 

 

 

 

 

 

(Provision for) benefit from income taxes

 

(2,436

)

 

3,506

 

 

(1,762

)

(7,907

)

(9,172)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from unconsolidated operations –

 

 

 

 

 

 

 

 

 

 

 

 

net of a tax benefit

 

 

 

(280

)

 

 

 

Loss on previously unconsolidated affiliate

 

(498

)

 

 

 

 

 

Minority interest (Note 13)

 

96

 

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

(23,326

)

 

(1,728

)

 

3,029

 

11,787

 

13,830

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

722

 

 

2,040

 

943

 

969

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

$

(23,326

)

$

(1,006

)

$

5,069

$

12,730

$

14,799

 

 

 

 

 

 

 

 

 

 

 

 

 

Per share amounts:

 

 

 

 

 

 

 

 

 

 

 

 

Basic (loss) earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(1.77

)

$

(0.13

)

$

0.23

$

0.86

$

1.04

Discontinued operations

 

 

 

0.05

 

 

0.16

 

0.07

 

0.07

Basic (loss) earnings per common share

$

(1.77

)

$

(0.08

)

$

0.39

$

0.93

$

1.11

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per common share

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

(1.77

)

$

(0.13

)

$

0.22

$

0.82

$

0.98

Discontinued operations

 

 

 

0.05

 

 

0.15

 

0.07

 

0.07

Diluted (loss) earnings per common share

$

(1.77

)

$

(0.08

)

$

0.37

$

0.89

$

1.05

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic

 

13,209,495

 

 

13,104,051

 

 

13,115,687

 

13,683,756

 

13,292,852

Weighted average common shares outstanding - diluted

 

13,209,495

 

 

13,104,051

 

 

13,536,830

 

14,335,343

 

14,156,291

 

12

 


 

 

 

 

Year Ended December 31,

 

 

 

2007

 

 

2006

 

 

2005

 

 

2004

 

 

2003

 

Other Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow (used in) provided by:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$(13,821

)

 

$(1,057

)

 

$   3,242

 

 

$  21,639

 

 

$  23,800

 

Investing activities

 

20,576

 

 

(18,047

)

 

(62,207

)

 

7,198

 

 

(14,405

)

Financing activities

 

2

 

 

1,445

 

 

(16,956

)

 

(12,645

)

 

6,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2007

 

 

2006

 

 

2005

 

 

2004

 

 

2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$151,079

 

 

$181,395

 

 

$183,938

 

 

$205,015

 

 

$193,280

 

Working capital

 

65,135

 

 

123,906

 

 

129,576

 

 

139,377

 

 

137,929

 

Stockholders’ equity

 

128,088

 

 

154,737

 

 

153,397

 

 

163,978

 

 

160,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company did not declare or pay any cash dividends during the five-year period ended December 31, 2007.

 

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, 2007. This commentary should be read in conjunction with our consolidated financial statements and the notes thereto which begin on page F-1 under “Item 8. Financial Statements and Supplementary Data”.

 

Overview

 

The Company’s operating results for year ended December 31, 2007 reflect an overall decrease in licensing revenues, production service revenues, and worldwide broadcast sales from its Properties as compared to 2006. The decrease in licensing revenues resulted primarily from reduced revenue on the “Yu-Gi-Oh!” Property and an overall reduction in the Company’s licensing revenue worldwide. The decrease in production service revenues is primarily attributable to the decline in the production of the “Teenage Mutant Ninja Turtles”, “Pokémon” and “One Piece” television series, partially offset by increased production service revenue on the “Viva Piñata” television series. The results for the year ended December 31, 2007 were also negatively impacted by increased selling, general and administrative expenses associated with the operations of the Company’s newly formed Trading Card and Game Distribution companies, partially offset by decreased production service costs.

 

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 4Kids TV 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 at higher rates

 

13

 


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 14 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 home video markets as well as provisions for uncollectible receivables. In determining the estimate of 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 home video inventory. The Company estimates the amount of uncollectible receivables for licensing and advertising 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.

 

 

14

 


4Kids TV Broadcast Agreement - The Company broadcasts certain of its Properties on 4Kids TV, the Saturday morning programming block that the Company leases from Fox. The cost of 4Kids TV has been and will continue to be capitalized and amortized over each broadcast year based on estimated advertising revenue. In developing estimated future revenues, the Company has made certain assumptions with regard to the anticipated popularity of the television series that the Company broadcasts on 4Kids TV and the general market demand and pricing of advertising time for Saturday morning children’s broadcast television. The popularity of such series impacts audience levels and the level of the network advertising rates that the Company can charge. These estimates are based on historical trends, as well as the Company’s subjective judgment of future customer demand and acceptance of its television programming. Differences may result in the amount and timing of revenue for any period if actual performance varies from the Company’s estimates. See Note 12 of the Notes to the Company’s consolidated financial statements for additional information.

 

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 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.

Fair Value Measurements – In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (“SFAS 157”). SFAS 157 defines “fair value”, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements and is effective in part for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact the adoption of SFAS 157 will have on its consolidated financial position and results of operations.

 

In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—An Amendment of FASB No.  87, 88, 106 and 132(R) (“SFAS 158”). SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized on companies’ balance sheets and that changes in the funded status be reflected in comprehensive income, effective for fiscal years ending after December 15, 2006. SFAS 158 also requires companies to measure the funded status of each such plan as of the date of its fiscal year-end, effective for fiscal years ending after December 15, 2008. Since the Company does not currently have a defined benefit postretirement plan, the adoption of SFAS 158 will not have any impact on its consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact the adoption of SFAS 159 will have on its consolidated financial position and results of operations.

 

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

 

15


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 June 2007, the FASB ratified EITF Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (“EITF 06-11”). EITF 06-11 requires that tax benefits generated by dividends paid during the vesting period on certain equity-classified share-based compensation awards be classified as additional paid-in capital and included in a pool of excess tax benefits available to absorb tax deficiencies from share-based payment awards. EITF 06-11 is effective as of January 1, 2008. The Company is currently evaluating the impact the adoption of EITF 06-11 will have on its 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 and amounts 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 that this pronouncement may have on its consolidated financial position and results of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 


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, 2007, 2006 and 2005.

                

 

 

 

 

 

 

 

2007

 

2006

 

2005

 

Net revenues

 

 

100

%

 

100

%

 

100

%

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

 

79

 

 

55

 

 

42

 

Production service costs

 

 

13

 

 

16

 

 

11

 

Cost of sales of trading cards

 

 

1

 

 

 

 

 

Amortization of television and film costs

 

 

15

 

 

11

 

 

12

 

Amortization of 4Kids TV broadcast fee

 

 

39

 

 

31

 

 

33

 

Total costs and expenses

 

 

147

 

 

113

 

 

98

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations

 

 

(47)

 

 

(13)

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

10

 

 

6

 

 

4

 

Gain on sale of investment in equity securities

 

 

 

 

 

 

 

Total other income

 

 

10

 

 

6

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

 

(37)

 

 

(7)

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

(Provision for) benefit from income taxes

 

 

(4)

 

 

5  

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

Loss from unconsolidated operations –

 

 

 

 

 

 

 

 

 

 

net of a tax benefit

 

 

 

 

 

 

 

Loss from previously unconsolidated affiliate

 

 

(1)

 

 

 

 

 

Minority interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from continuing operations

 

 

(42)

 

 

(2)

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

 

 

1

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

 

(42)

%

 

(1)

%

 

6

%

 

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, the “G.I. Joe” Property, domestically and “Teenage Mutant Ninja Turtles” Property, internationally; partially offset by

 

17

 


(ii)

increased revenue attributable to the “Teenage Mutant Ninja Turtles” Properties, domestically.

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, as well as

(ii)

decreased broadcast sales from the “Yu-Gi-Oh!”, “Mew Mew Power” and “One Piece” television series, internationally; partially offset by

(iii)

increased international broadcast sales from the “Viva Piñata” television series.

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 thewww.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.

 

 

18

 


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 12 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 Kids Block, an anticipated increase in network support due to a revenue sharing arrangement, along with the availability of the CW Kids Block, 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.

 

19

 


 

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,  Accounting for Income Taxes, 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,Accounting for Income Taxes requires the Company to record a full valuation allowance against its net deferred tax assets.

 

If the Company had not taken any valuation allowance, but rather recorded its 2007 loss after giving effect to the tax benefit from such loss, the Company’s loss in 2007 would have decreased by $11,912 or $0.90 per share to a net loss of $11,414 or $0.87 per share.

 

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,Accounting for Income Taxes 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

 

 

 

20

 


 

Year Ended December 31, 2006 as compared to Year Ended December 31, 2005

 

Revenues

 

Revenues for the years ended December 31, 2006 and 2005, by reportable segment and for the Company as a whole, were as follows:

 

 

 

 

 

2006

 

2005

 

$ Change

 

% Change

 

Licensing

 

$

31,677

 

$

37,616

 

$

(5,939

)

(16

)

%

Advertising, Media and Broadcast

 

 

16,153

 

 

18,660

 

 

(2,507

)

(13

)

 

Television and Film Production/Distribution

 

 

23,951

 

 

24,331

 

 

(380

)

(2

)

 

Trading Card and Game Distribution

 

 

 

 

 

 

 

 

 

Total

 

$

71,781

 

$

80,607

 

$

(8,826

)

(11

)

%

The decrease in consolidated net revenues for 2006, as compared to 2005, was due to a number of factors. In the Licensing segment, decreased revenues were primarily attributable to:

(i)

reduced licensing revenues on the “Teenage Mutant Ninja Turtles”, “Yu-Gi-Oh!”, “American Kennel Club” and “Winx Club” Properties domestically; partially offset by

(ii)

increased revenues attributable to the “Viva Piñata” Property domestically, and the “Winx Club” Property internationally.


The “Yu-Gi-Oh!” Property continues to be the largest contributor to the Company’s revenues in this business segment. The Company recorded revenues of approximately $2,800 for the “Yu-Gi-Oh!” Property during the year ended December 31, 2006, resulting from changes in the manner in which sales are calculated by a licensee for purposes of computing the amount of certain marketing fees due to the Company from such licensee. In addition, revenues for the “Teenage Mutant Ninja Turtles” Property, despite lower licensing revenues as compared to 2005, along with the “Cabbage Patch” Property, are also amongst the largest contributors in this segment.

In the Advertising Media and Broadcast segment, the decrease in revenues for 2006, as compared to 2005, was due to reduced revenues from the sale of network advertising time on 4Kids TV caused by an overall decrease in the 4Kids TV ratings.

In the Television and Film Production/Distribution segment, the revenue decline for 2006, as compared to 2005, primarily resulted from:

(i)

decreased domestic broadcast sales from the “Pokémon”, “Yu-Gi-Oh!”, “Teenage Mutant Ninja Turtles” and “One Piece” television series; partially offset by

(ii)

increased production service revenue from the “Viva Piñata” and “Chaotic” television series; as well as

(iii)

increased international broadcast sales of the “Yu-Gi-Oh!” television series.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased 16%, or $5,320 to $39,155 for the year ended December 31, 2006, when compared to 2005. The increase was primarily due to the following:

 

(i)

severance expenses for certain former employees of approximately $1,800;

(ii)

increased international sales expenses and trade shows expenses totaling approximately $946;

(iii)

increased bad debt expense of approximately $448;

(iv)

the write-off of developmental software totaling approximately $525;

(v)

increased compensation costs resulting from the issuance of restricted stock awards of approximately $346; as well as

(vi)

increased various state taxes of approximately $384; partially offset by

(vii)

decreased professional fees of approximately $890.

 

21

 


 

Production Service and Capitalized Film Costs

 

 

 

2006

 

2005

 

$ Change

 

% Change

 

Production Service Costs

 

$

11,259

 

$

8,851

 

$

2,408

 

27

 

%

Amortization of Television and Film Costs

 

 

8,041

 

 

9,790

 

 

(1,749

)

(18

)

 

 

The significant increase in production service costs during the year ended December 31, 2006, as compared to the same period in 2005, was primarily due to increased production costs for the work performed on the “Viva Piñata” and “Chaotic” television series, partially offset by decreased costs for the “Pokémon” and “Teenage Mutant Ninja Turtles” 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 revenue for the amount billed back to the property owners.

 

The decrease in the amortization of television and film costs is principally due to a reduction in the realized revenue on the “Teenage Mutant Ninja Turtles”, “One Piece” and “Mew Mew Power” television series; partially offset by the increased amortization of “Viva Piñata” and “Funky Cops” television series during 2006.

 

As of December 31, 2006, there were $14,827 of capitalized film production costs in the Company’s consolidated balance sheet relating primarily to various stages of production on 282 episodes of animated programming. Based on management’s ultimate revenue estimates as of December 31, 2006, approximately 49% 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

 

 

2006

 

2005

 

$ Change

 

% Change

 

Amortization of 4Kids TV Broadcast Fee

 

$

22,462

 

$

26,408

 

$

(3,946

)

(15

)%

 

 

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 $3,946 from $26,408 in 2005 to $22,462 in 2006 in conjunction with the decreased fee for the 2006-2007 broadcast season of approximately $5,312, as well as lower advertising revenues recognized by the Company for the year ended December 31, 2006.

 

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 initial decision to lease the 4Kids TV Saturday morning programming block and to extend the lease through the 2007-2008 broadcast season, as described in Note 13 under “4Kids TV Broadcast Agreement” of the Notes to the Company’s consolidated financial statements.

 

Interest Income

 

Interest income increased 46%, or $1,309 to $4,143 for the year ended December 31, 2006, as compared to 2005, as a result of the increasing interest rate environment and higher average cash balances invested.

 

Income(Loss) Before Income Taxes

 

 

 

2006

 

2005

 

$ Change

 

% Change

 

Licensing

 

$

11,475

 

$

20,912

 

$

(9,437

)

(45

)

%

Advertising, Media and Broadcast

 

 

(14,805

)

 

(16,041

)

 

1,236

 

8

 

 

Television and Film Production/Distribution

 

 

(1,092

)

 

(80

)

 

(1,012

)

(1,265

)

 

Trading Card and Game Distribution

 

 

(571

)

 

 

 

(571

)

 

 

Total

 

$

(4,993

)

$

4,791

 

$

(9,784

)

(204

)

%

 

22

 


The decrease in the Licensing segment profit for 2006, as compared to 2005, is primarily attributable to lower licensing revenues from licensed Properties and increased selling, general and administrative expenses attributable to this segment, partially offset by an increase in interest income allocated to this segment.

 

In the Advertising Media and Broadcast segment, the decrease in segment loss for 2006 as compared to 2005 was substantially due to decreased amortization of the 4Kids TV broadcast fee, partially offset by the reduced sale of network advertising time.

 

In the Television and Film Production/Distribution segment, the increase in segment loss for 2006 as compared to 2005 was primarily due to decreased production service revenue, partially offset by decreased amortization of television and film costs.

 

In the Trading Card and Game Distribution segment, the increase in segment loss was attributable to the fact that TC Digital and TC Websites commenced operations in mid-December 2006 and consequently, there were no revenues in the segment in 2006 and 2005.

 

(Benefit from) Income Tax Expense

 

Income tax expense decreased 299%, or $5,268 to a benefit from income taxes of $3,506 from a provision for income taxes of $1,762 for the year ended December 31, 2006, as compared to 2005. This decrease is primarily due to decreased income from continuing operations and a shift in the Company’s investment strategy towards tax exempt and tax advantaged securities during 2006. The Company’s effective tax rate was a benefit from income taxes of 70% for 2006 and provision for income taxes of 37% for 2005.

 

Net (Loss) Income

 

As a result of the above, the Company had a net loss for the year ended December 31, 2006 of $1,006, as compared to net income in 2005 of $5,069.

 

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, 2006 and 2005, 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, 2006 and 2005:

 

 

 

2006

 

2005

 

Net revenues

 

$

2,852

 

$

6,055

 

Income before income taxes

 

 

1,181

 

 

3,454

 

Income taxes

 

 

459

 

 

1,414

 

Net income from discontinued operations

 

$

722

 

$

2,040

 

 

Under the terms of the Settlement Agreement entered into by Summit Media with The Beacon Media Group LLC (“Beacon”), Sheldon Hirsch, Tom Horner and Paul Caldera (the “Beacon Defendants”) on June 19, 2006, relating to the lawsuit filed by Summit Media in Supreme Court, New York County against Beacon and the Beacon Defendants, Summit Media will receive $2,000, in regularly scheduled payments through 2010, in exchange for Summit Media’s discontinuation of the lawsuit. As of December 31, 2006, the Company had received $200 of the scheduled payments related to the lawsuit. The Company has included approximately $1,800 in net revenues for the year ended December 31, 2006, relating to this agreement. In connection with the termination of the Company’s media buying operations, the Company recorded charges for severance and termination benefits in the amount of approximately $333 during the year ended December 31, 2006. The charges were attributable to the elimination of ten positions, primarily representing sales and related support functions in addition to certain other management positions.

 

23

 


Liquidity and Capital Resources

 

Financial Position

 

Cash and cash equivalents and short-term investments for the years ended December 31, 2007 and December 31, 2006 were as follows:

 

 

 

2007

 

2006

 

$ Change

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24,872

 

$

18,066

 

$

6,806

 

Investments

 

 

36,106

 

 

92,910

 

 

(56,804

)

 

 

$

60,978

 

$

110,976

 

$

(49,998

)

 

Long-term investments for the years ended December 31, 2007 and December 31, 2006 were as follows:

 

 

 

2007

 

2006

 

$ Change

 

 

 

 

 

 

 

 

 

 

 

 

Investments

 

$

31,806

 

$

 

$

31,806

 

 

During 2007, liquidity issues began to affect the global credit and capital markets. As a result, securities known as auction rate securities (“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 since investors are hesitant to purchase these types of investments, which in turn has caused the fair market values for these securities to decline.

As of December 31, 2007, the Company held ARS having an aggregate principal amount of approximately $60,000. The ARS held by the Company are private placement debt securities with long-term nominal maturities and interest rates that reset monthly. The Company’s investments in ARS represent interests in debt obligations issued by banks and insurance companies that had at least an “A” credit rating at the time of purchase by the Company, including bond insurers and re-insurers such as MBIA, AMBAC, FGIC, FSA, RAM and Radian.

Many of the ARS held by the Company at December 31, 2007, have also experienced failed auctions due to the liquidity issues described above. As of December 31, 2007, the estimated fair market value of the ARS held by the Company declined by $3,993 based upon statements provided by the investment bank through which the Company holds such securities. Although all of the ARS invested in by the Company have continued to pay interest according to their stated terms and substantially all of the ARS invested in by the Company continue to be a rated “A” or above, the Company recorded an unrealized loss of $3,993 during 2007 resulting in a reduction in stockholders’ equity. Based on the factors above, and because the Company has the ability and the intent to hold these investments until recovery of their fair value, which may not be prior to the maturity of the applicable security, the Company does not consider these investments to be other-than-temporarily impaired.

 

Although $10,000 in ARS owned by the Company as of December 31, 2007 have been redeemed subsequent to such date, the credit and capital markets, including the market for ARS, has continued to deteriorate in 2008, and there have been additional failed auctions affecting ARS owned by the Company. Although all of the Company’s investments in ARS have continued to pay interest according to their stated terms and substantially all of the ARS invested in by the Company continue to be a rated “A” or above the Company’s unrealized loss on its ARS had increased by $7,859, to $11,852 as of February 29, 2008, based upon statements provided by the investment bank through which the Company holds such securities.

Given the failed auctions, many of the Company’s ARS are currently illiquid.  Accordingly, the Company has reclassified $20,350 in ARS from current to non-current assets at December 31, 2007 on its balance sheet due to the fact that the Company believes that the liquidity of these ARS is unlikely to be restored in a period less than twelve months from such date.

If uncertainties in the credit and capital markets deteriorate further or the Company experiences any rating downgrades on any investments in its ARS portfolio, the Company may incur impairment charges to its investment portfolio, which could negatively affect the Company’s financial condition, cash flow and reported earnings.

 

24

 


The Company believes that based on the Company’s current cash, cash equivalents and marketable securities, the current lack of liquidity affecting its portfolio of ARS will not have a material impact on the Company’s liquidity or its ability to fund its operations.

 

Sources and Uses of Cash

 

Cash flows for the three years ended December 31, 2007, 2006 and 2005 were as follows:

 

Sources (Uses)

 

2007

 

2006

 

2005

 

 

Operating Activities

 

$

(13,821

)

$

(1,057

)

$

3,242

 

Investing Activities

 

 

20,576

 

 

(18,047

)

 

(62,207

)

Financing Activities

 

 

2

 

 

1,445

 

 

(16,956

)

 

Working capital, consisting of current assets less current liabilities, was $65,135 as of December 31, 2007 and $123,906 as of December 31, 2006.

 

Operating Activities

2007

Net cash used in operating activities of $13,821 in 2007, primarily reflects 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.

 

2005

Net cash provided by operating activities of $3,242 in 2005 primarily reflected higher net income and a reduction in the Company’s obligations to licensors and payments made for media obligations and accounts payable and accrued expenses, partially offset by lower accounts receivable and participation advances.

 

Investing Activities

2007

Net cash provided by investing activities of $20,576 in 2007 reflects 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. This increase was partially offset by the Company’s purchase of a 50% membership interest in TC Websites.

 

2005

Net cash used in investing activities of $62,207 in 2005 reflected Company’s purchase of auction-rate securities as an investment strategy for its excess cash balances.

 

Financing Activities

2007

Net cash provided by financing activities of $2 in 2007 reflects 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.

 

2005

Net cash used in financing activities of $16,956 in 2005 reflected the Company’s purchase of shares of its treasury stock, partially offset by proceeds from the exercise of stock options by the Company’s employees.

 

25

 


During 2007, the Company's cash flow from operations was impacted by consumer demand for a limited number of its licensed Properties.  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

 

4Kids TV Broadcast Agreement - In January 2002, the Company entered into a multi-year agreement with Fox to lease Fox’s Saturday morning programming block (“4Kids TV”) which airs principally on Saturday mornings from 8am to 12pm eastern/pacific time (7am to 11am central time). The Company provides substantially all programming content to be broadcast on 4Kids TV and retains all of the revenues from network advertising sales for the four-hour time period. 4Kids Ad Sales manages and accounts for the ad revenue and costs associated with 4Kids TV.

 

In March 2006, the Fox agreement was extended for two broadcast years through the 2007-2008 broadcast season. As of December 31, 2007, no amounts remain to be paid for the 2006-2007 broadcast season under the amended agreement. The broadcast fee for the 2007-2008 broadcast seasons is $20,000 as compared to the $25,312 paid for each broadcast year during the initial term of the multi-year agreement. The fee is payable in quarterly installments of $5,000 each year beginning in October 2006. Fox has exercised its option to extend this agreement through its 2008-2009 broadcast season under the same terms and conditions as in effect for the 2007-2008 broadcast season.

 

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 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 will share advertising revenues earned from the sale of national commercial time during The CW Kids Block with The CW's share to be applied against such quarterly guarantee payments. In addition, The CW will be entitled under the CW Agreement to participate in the Company's merchandising revenue from certain content broadcast on The CW Kids Block, if such merchandising revenues exceed a certain annual minimum.

In addition to the broadcast fee and minimum guarantee paid to Fox and to be paid to The CW, commencing with the 2008-2009 broadcast season, respectively, 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 12 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 Kids 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.

 

26

 


 

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, 2007 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

2008

$6,750

$20,000

$ 2,706

$29,456

2009

15,000

15,000

2,442

32,442

2010

15,000

1,871

16,871

2011

15,000

1,075

16,075

2012

15,000

971

15,971

2013 and after

8,250

5,286

13,536

Total

$75,000

$35,000

$14,351

$124,351

 

 

On February 18, 2008, the Company signed a lease for additional office space in the San Diego, California location with aggregate rental payments of $620 for the term of the lease, which has not been included in the table above. The Company’s contractual obligations and commitments are detailed in the Company’s consolidated financial statements, for additional information see Note 12.

 

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, our Consolidated Financial Statements and Notes thereto appear in a separate section of this Form 10-K (beginning on Page F-1 following Part IV). The index to our 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 alerting them to information relating to us that is required to be included in our reports filed under the Exchange Act.

 

27

 


Changes in Internal Control over Financial Reporting

During the fourth quarter of 2007, 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, 2007. 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, 2007, our internal control over financial reporting was effective based on those criteria.

Eisner LLP, the independent registered public accounting firm that audited the 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 June 19, 2007, 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.  

 

 

28

 


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, 2007 and 2006

F-3

 

 

Consolidated Statements of Operations - Years Ended

 

December 31, 2007, 2006 and 2005

F-4

 

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

 

(Loss) - Years Ended December 31, 2007, 2006 and 2005

F-5

 

 

Consolidated Statements of Cash Flows - Years Ended

 

December 31, 2007, 2006 and 2005

F-6

 

 

Notes to Consolidated Financial Statements

F-7 to F-30

 

(a)(2) Financial Statement Schedules

 

All schedules have been omitted because they are inapplicable, not required, or the information is included in the financial statements or notes thereto.

 

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

See Index of Exhibits annexed hereto.

 

29

 


 

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 14, 2008

 

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 14, 2008

 

/s/Alfred R. Kahn

_______________________

 

Alfred R. Kahn,

 

Chairman of the Board,

 

Chief Executive Officer and

 

Director

 

Date: March 14, 2008

 

/s/ Bruce R. Foster

_________________________

 

Bruce R. Foster,

 

Executive Vice President,

 

Principal Financial

 

and Accounting Officer

 

Date: March 14, 2008

 

/s/ Samuel R. Newborn

_________________________

 

Samuel R. Newborn,

 

Executive Vice President,

 

General Counsel and

 

Director

 

Date: March 14, 2008

 

/s/ Richard Block

_______________________

 

Richard Block,

 

Director

 

Date: March 14, 2008

 

/s/ Jay Emmett

______________________

 

Jay Emmett,

 

Director

 

Date: March 14, 2008

 

/s/ Michael Goldstein

_________________________

 

Michael Goldstein,

 

Director

 

Date: March 14, 2008

 

/s/ Randy O. Rissman

___________________________

 

Randy O. Rissman,

 

Director

 

30

 


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)

 

 

10.1

1992 Stock Option Plan. (*) (6)

 

 

10.2

1997 Stock Option Plan. (*) (7)

 

 

10.3

1998 Stock Option Plan. (*) (9)

 

 

10.4

1999 Stock Option Plan. (*) (2)

 

 

10.5

2000 Stock Option Plan. (*) (3)

 

 

10.6

2001 Stock Option Plan. (*) (9)

 

 

10.7

2002 Stock Option Plan. (*) (10)

 

 

10.8

2003 Stock Option Plan. (*) (11)

 

 

10.9

2004 Stock Option Plan. (*) (12)

 

 

10.10

2005 Long-Term Incentive Compensation Plan. (*) (13)

 

 

10.11

2006 Long-Term Incentive Compensation Plan. (*) (14)

 

 

10.12

2007 Long-Term Incentive Compensation Plan. (*) (15)

 

 

10.13

Agreement between Nintendo of America, Inc. and the Registrant dated December 17, 1987. (16)

 

 

10.14

Agreement of Lease, dated March 28, 1988, between the Registrant and 1414 Avenue of the Americas Company (“1414 Lease”). (17)

 

 

10.15

Amendment, dated July 8, 1994, to the 1414 Lease. (17)

 

 

10.16

Amended and Restated Employment Agreement dated January 1, 2002, between 4Kids Entertainment Licensing, Inc. and Alfred R. Kahn. (*)(18)

 

 

10.17

Second Amended and Restated Employment Agreement, dated December 15, 2006, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Alfred R. Kahn. (*)(19)

 

 

10.18

Employment Agreement, dated January 1, 2002, between 4Kids Productions, Inc. and Norman Grossfeld. (*)(18)

 

 

10.19

Amendment dated as of June 16, 2003, to the Employment Agreement between 4Kids Productions, Inc. and Norman Grossfeld. (*)(18)

 

 

10.20

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

 

 

10.21

Employment Agreement, dated January 1, 2002, between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(18)

 

 

10.22

Amendment dated as of June 16, 2003, to the Employment Agreement between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(18)

 

 

10.23

Letter Agreement, dated as of March 2, 2006, between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(20)

 

 

10.24

Employment Agreement dated as of June 30, 2005, between 4Kids Entertainment, Inc., and Steven M. Grossman. (*)(21)

 

 

 

 

31


 

10.25

General Release Agreement of Steven M. Grossman dated as of April 6, 2006. (*)(22)

 

 

10.26

Employment Agreement dated as of December 1, 2005, between 4Kids Entertainment Licensing, Inc., and Bruce R. Foster. (*)(15)

 

 

10.27

Amendment to Employment Agreement dated as of January 30, 2007, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster. (*)(23)

 

 

10.28

Amendment to Employment Agreement dated as of April 16, 2007, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster. (*)(24)

 

 

10.29

Employment Agreement dated as of July 1, 2003, between 4Kids Entertainment Licensing, Inc. and Brian Lacey. (*)(25)

 

 

10.30

Amendment to Employment Agreement, dated as of October 16, 2006, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Brian Lacey. (*)(26)

 

 

10.31

Amendment Agreement, dated March 14, 2006, between 4Kids Entertainment, Inc. and Fox Broadcasting Company. (*)(18)

 

 

10.32

Employment Agreement, dated as of December 11, 2006, between TC Digital Games LLC and Bryan Gannon. (*)(27)

 

 

10.33

Employment Agreement, dated as of December 11, 2006, between TC Digital Games LLC and John Milito. (*)(27)

 

 

10.34

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. (28)

 

 

10.35

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. (27)

 

 

10.36

Operating Agreement of TC Websites LLC, dated as of December 11, 2006, between 4Kids Websites, Inc. and Chaotic USA Entertainment Group, Inc. (27)

 

 

10.37

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

 

 

10.38

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

 

 

10.39

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

 

 

10.40

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