0000058592-12-000007.txt : 20120323 0000058592-12-000007.hdr.sgml : 20120323 20120323125245 ACCESSION NUMBER: 0000058592-12-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20111231 FILED AS OF DATE: 20120323 DATE AS OF CHANGE: 20120323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 4 KIDS ENTERTAINMENT INC CENTRAL INDEX KEY: 0000058592 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 132691380 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-16117 FILM NUMBER: 12711137 BUSINESS ADDRESS: STREET 1: 53 WEST 23RD STREET CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2127587666 MAIL ADDRESS: STREET 1: 53 WEST 23RD STREET CITY: NEW YORK STATE: NY ZIP: 10010 FORMER COMPANY: FORMER CONFORMED NAME: LEISURE CONCEPTS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN LEISURE INDUSTRIES INC DATE OF NAME CHANGE: 19740822 10-K 1 form10k123111.htm FORM 10-K DATED DEC 31, 2011 form10k123111.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2011
OR
[  ] TRANSITION 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.)

53 West 23rd Street, New York, New York                                                                                 10010
        (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: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes __ No X
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 __ No   X

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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. [  ]

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___                                           Non-accelerated filer ___             Smaller reporting company   X
(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 $0.16 closing price of the Common Stock on June 30, 2011 as reported on the OTC Bulletin Board, was approximately $1,159,149. The calculation of the aggregate market value of voting stock excludes shares of Common Stock held by current executive officers, directors, and stockholders that the registrant has concluded are affiliates of the registrant. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control with the registrant.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes __  No __

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                                                                                                           13,653,824
                                         (Title of Class)                                                                                                           (No. of Shares Outstanding at March 22, 2012)
Portions of the registrant’s Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 2012 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
 
Risk Factors
5
Item 1B
 
Unresolved Staff Comments
9
Item 2
 
Properties
9
Item 3
 
Legal Proceedings
9
Item 4
 
Mine Safety Disclosures
12
     
PART II
   
Item 5
 
Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
12
Item 6
 
Selected Financial Data
13
Item 7
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
Item 7A
 
Quantitative and Qualitative Disclosures About Market Risk
29
Item 8
 
Financial Statements and Supplementary Data
29
Item 9
 
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
29
Item 9A
 
Controls and Procedures
29
Item 9B
 
Other Information
30
     
PART III
   
Item 10
 
Directors and Executive Officers of the Registrant
30
Item 11
 
Executive Compensation
30
Item 12
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
30
Item 13
 
Certain Relationships and Related Transactions
30
Item 14
 
Principal Accountant Fees and Services
31
     
PART IV
   
Item 15
 
Exhibits and Financial Statement Schedules
31

 
 

 

PART I

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

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

Item 1. Business.

General Development and Narrative Description of Business - 4Kids Entertainment, Inc., together with the subsidiaries through which its businesses are conducted (the “Company” or “4Kids”), 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; and (iii) Television and Film Production/Distribution. The Company was organized as a New York corporation in 1970.

4Kids’ consolidated financial statements have been prepared assuming that we will be able to continue to operate as a going concern.  4Kids historical recurring losses and negative cash flows from operations together with its Bankruptcy filing has caused 4Kids’ independent registered public accounting firm to include an explanatory paragraph in their report, expressing substantial doubt about 4Kids’ ability to continue as a going concern.

Chapter 11 Bankruptcy Proceedings – On April 6, 2011 (the “Petition Date”), the Company and all of its domestic wholly-owned subsidiaries (the “Debtors”) filed voluntary petitions for relief (the “Bankruptcy Cases”) under Title 11 of Chapter 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”), which Bankruptcy Cases are jointly administered under Case No. 11-11607.  The Company will continue to operate itself and its subsidiaries as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  In general, as debtors-in-possession, we are authorized under Chapter 11 of the Bankruptcy Code to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.  4Kids Entertainment International, Ltd., the Company’s subsidiary based in London, England, and TC Digital Games LLC and TC Websites LLC, two domestic subsidiaries in each of which the Company holds a majority ownership, were not included in the filing and will continue to operate outside the Bankruptcy Cases.

Shortly after the Petition Date, the Debtors began notifying all known current or potential creditors of the Debtors regarding the commencement of the Bankruptcy Cases. Subject to certain exceptions under the Bankruptcy Code, the commencement of the Bankruptcy Cases automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the property of the Debtors, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

After the filing of the Bankruptcy Cases, the United States Trustee for the Southern District of New York appointed an official committee of unsecured creditors (the “Creditors’ Committee”).  The Creditors’ Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court with respect to the Debtors.  There can be no assurance that the Creditors’ Committee will support the Debtors’ positions on matters to be presented to the Bankruptcy Court in the future or on any bankruptcy plan, once proposed.  Disagreements between the Debtors and the Creditors’ Committee could protract the Bankruptcy Cases, negatively impact the Debtors’ ability to operate and delay the Debtors’ emergence from Chapter 11. Under Section 365 and other relevant sections of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions.  Any description of an executory contract or unexpired lease in this report, including, where applicable, our express termination rights or a
 
 
 
1

 
quantification of our obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights we have under Section 365 of the Bankruptcy Code.

On February 29, 2012, 4Kids and the Licensors (hereinafter defined) entered into a Settlement Agreement, dated as of February 27, 2012 (the “Settlement Agreement”), settling all claims brought by Licensors against 4Kids and all counterclaims brought by 4Kids against the Licensors in the Yu-Gi-Oh! Litigation. The Settlement Agreement provides, among other things, for the Licensors to make a payment to 4Kids in the amount of $8,000 upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order.  On March 9, 2012, the Bankruptcy Court issued an order approving the Settlement Agreement.  Under the Settlement Agreement, the Licensors acknowledged that the Yu-Gi-Oh! Agreement remained valid, binding and legally enforceable with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast and home video rights to the Yu-Gi-Oh! Property throughout the world outside of Asia.  The Settlement Agreement further provided for each of 4Kids and the Licensors to release each other from all claims they may have against each other, other than certain indemnification claims and claims that may arise under the Settlement Agreement.  The Settlement Agreement also provided that the agreement does not constitute an admission by any party of any violation of any agreement or law.

While the consummation of the Settlement Agreement represents a significant step in the process of resolving the Bankruptcy Cases, the timing of any resolution of the Bankruptcy Cases will depend on the timing and outcome of numerous other ongoing matters therein, and it is not possible at this time to accurately predict when such other matters will be resolved.  We have incurred and will continue to incur significant costs associated with the Bankruptcy Cases.  The amount of these costs, which began in April 2011 and are being expensed as incurred, are expected to significantly affect our results of operations, financial position and liquidity.  The Bankruptcy Cases have also presented challenges to our ability to generate additional revenues in all of our business segments especially as it relates to the sales of commercial advertising.

The Company will consider all alternatives available to generate additional cash to fund its operations, including, but not limited to sales of assets, issuance of equity or debt securities, and third party arrangements subject to any limitations and procedures arising from the Bankruptcy Cases.

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 73%, 83% and 70% of consolidated net revenues for the years ended December 31, 2011, 2010 and 2009, respectively.

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

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

The Advertising Media and Broadcast segment accounted for 13%, 6% and 8% of consolidated net revenues for the years ended December 31, 2011, 2010 and 2009, 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
 
 
2

 
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 14%, 11% and 22% of consolidated net revenues for the years ended December 31, 2011, 2010 and 2009, respectively.

Discontinued Operation - 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”) which produced, marketed and distributed the “Chaotic” trading card game. 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”) which owns and operated www.chaoticgame.com, the companion website for the “Chaotic” trading card game.  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.  Effective September 30, 2010, the Company terminated the operations of TC Digital and TC Websites due to their continued lack of profitability.  The termination of the business of TC Digital and TC Websites will enable the Company to further reduce costs and focus on its core businesses.  As a consequence of the termination of their operations, TC Digital and TC Websites ceased supporting the Chaotic trading card game and website, effective October 1, 2010.  The results of operations of TC Digital and TC Websites are reported in the Company’s consolidated financial statements as discontinued operations (see Note 13), subject to a noncontrolling interest.  All prior financial statements have been reclassified to conform to the presentation of this discontinued operation.

Certain of the Company’s former executive officers have interests in Chaotic USA Digital Games LLC (“CUSA LLC”), Chaotic USA Entertainment Group, Inc. (“CUSA”) 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 19.

Liquidity - In recent years, the Company has incurred substantial net losses and has used substantial amounts of cash in its operating activities.  Sales by the Company of certain securities held in its investment portfolio as well as certain other assets have significantly contributed to the funding of these operating losses.  While the timing of these sales was not primarily motivated by then current cash needs, without these sales the Company would not have had sufficient cash to fund its operations.  During the first quarter of 2011, the Company determined that it was necessary to generate additional cash to fund its operations and sold its remaining investment securities with a par value of $18,450 and an adjusted cost basis of $7,126 for $6,216.  Accordingly, the Company recorded a loss on the sale of investment securities of $910 for the year ended December 31, 2011.

On March 24, 2011, the Company received a letter from Nihon Ad Systems, Inc. on behalf of itself and TV Tokyo Corporation (collectively, the “Licensors”), purporting to terminate the agreement dated July 1, 2008 between the Licensors and the Company with respect to the Yu-Gi-Oh! Property (“the Yu-Gi-Oh! Agreement”), which accounted for approximately 36% of the Company’s net revenue for the year ended December 31, 2010, for alleged breaches of the Yu-Gi-Oh! Agreement by the Company.  On March 24, 2011, the Licensors filed a lawsuit against the Company in the United States District Court for the Southern District of New York also claiming that the Company has breached the Yu-Gi-Oh! Agreement and seeking more than $4,700 in damages.

On December 29, 2011, the Bankruptcy Court issued its decision ruling in favor of 4Kids in the first phase of the Yu-Gi-Oh! Litigation. In its 154 page decision, the Bankruptcy Court ruled that the Yu-Gi-Oh! Agreement was not effectively terminated by the Licensors prior to the 4Kids’ bankruptcy filing on April 6, 2011. Rather, the Bankruptcy Court ruled that the Yu-Gi-Oh! Agreement remained in full force and effect and is property of the 4Kids’ bankrupt estate. In addition, the Court’s opinion carefully considered each of the Licensors’ nine audit findings totaling over $4,700 and concluded that audit findings totaling approximately 99% of the amount claimed by the Licensors were "meritless". The remaining two audit claims totaling $48, which 4Kids does not dispute, were offset by the roughly $800 credit balance in favor of 4Kids as of March 24, 2011, the date that the Licensors sent 4Kids the purported notice of termination, and the $1,000 good-faith payment made by 4Kids on March 17, 2011 which was subsequently returned to 4Kids on January 24, 2012.

On February 29, 2012, 4Kids and the Licensors entered into a Settlement Agreement, dated as of February 27, 2012 (the “Settlement Agreement”), settling all claims brought by Licensors against 4Kids and all counterclaims brought by 4Kids against the Licensors in the Yu-Gi-Oh! Litigation. The Settlement Agreement provides, among other things, for the Licensors to make a payment to 4Kids in the amount of $8,000 upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order.  On March 9, 2012, the Bankruptcy Court issued an order approving the Settlement Agreement.  Under the Settlement Agreement, the Licensors acknowledged that the Yu-Gi-Oh! Agreement remained valid, binding and legally enforceable with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast and home video rights to the Yu-Gi-Oh! Property throughout the world outside of Asia.  The Settlement Agreement further provided for each of 4Kids and the Licensors to release each other from all claims they may have against each other, other than certain indemnification claims and claims that may arise under the Settlement Agreement.  
 
 
 
3

 
The Settlement Agreement also provided that the agreement does not constitute an admission by any party of any violation of any agreement or law.

In 2011, the Company incurred significant costs in connection with the Bankruptcy Cases.  The Company expects these costs to continue throughout the Bankruptcy proceedings.  The Company’s overall cash position as of December 31, 2011, together with the realized and anticipated effects of the significant cost cutting initiatives implemented by the Company during 2009, 2010 and throughout 2011 provides only limited liquidity to fund the Company’s day-to-day operations. The financial challenges facing the Company as a result of its recent history of losses and the limited liquidity available to it to fund day-to-day operations raise substantial doubt about the Company’s ability to continue as a going concern.  Our ability to achieve and maintain profitability and positive cash flow is dependent upon the success of our reorganizational efforts and a number of other factors, including our ability to generate additional revenues. The Company’s financial statements have been prepared assuming that the Company will continue as a going concern and do not contain any adjustments that may result from the outcome of this uncertainty.

Financial Information About Industry Segments - Financial information regarding the Company’s industry segments and non-U.S. sales and assets can be found in Note 21 of the notes to the Company’s consolidated financial statements.

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

One Property, “Yu-Gi-Oh!” represented 57%, 36% and 26% of consolidated net revenues for fiscal 2011, 2010 and 2009, respectively.  One licensee, Konami Corporation, represented 45%, 39% and 18% of consolidated net revenues for fiscal 2011, 2010 and 2009, respectively.  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 “Chaotic” animated television series produced by 4Kids Productions.   Additionally, the Company is a joint copyright holder of the “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. 

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 The CW4Kids is generally higher in the fourth quarter due to higher advertising rates typically charged to children’s advertisers for advertising during the holiday season.

Competition - The Company’s principal competitors in the Licensing segment 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 the market in light of the relatively small investment required to commence operations as a merchandising agent.

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

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

Employees - As of March 22, 2012, the Company had a total of 71 full-time employees in its domestic and international operations.  Of the total, 37 employees were primarily rendering services for the Licensing segment, 13 were primarily rendering services for the Advertising Media and Broadcasting segment and 21 were primarily rendering services for the Television and Film Production/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 100 F Street N.E., 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 22, 2012
             
Bruce R. Foster
 
52
 
2002
 
Executive Vice President and Chief Financial Officer
Samuel R. Newborn
 
57
 
2000
 
Executive Vice President and General Counsel
Brian Lacey
 
61
 
2003
 
Executive Vice President, International
Daniel Barnathan
 
57
 
2002
 
President of 4Kids Ad Sales, Inc.

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.

Operating under Chapter 11 of the Bankruptcy Code (“Chapter 11”) may restrict our ability to pursue our strategic and operational initiatives.

Under Chapter 11, transactions outside the ordinary course of business are subject to the prior approval of the Bankruptcy Court, which may limit our ability to respond in a timely manner to certain events or take advantage of certain opportunities.

The pursuit of the Bankruptcy Cases has consumed and will continue to consume a substantial portion of the time and attention of our corporate management and will impact how our business is conducted, which may have an adverse effect on our business and results of operations.

The requirements of the Bankruptcy Cases have consumed and will continue to consume a substantial portion of our corporate management’s time and attention and leave them with less time to devote to the operation of our business.  This diversion of attention may materially adversely affect the conduct of our business, and, as a result, on our financial condition and results of operations.

There can be no assurance that the Creditors’ Committee will support the Debtors’ positions on matters to be presented to the Bankruptcy Court in the future or on any bankruptcy plan, once proposed. 

Disagreements between the Debtors and the Creditors’ Committee could protract the Bankruptcy Cases, negatively impact the Debtors’ ability to operate and delay the Debtors’ emergence from Chapter 11.
 
 
 
5

 
The Company has incurred and will continue to incur significant costs in connection with the Bankruptcy Cases.
 
The Company’s results have been negatively impacted by the significant costs incurred by it in connection with the Bankruptcy Cases.  The Company expects these costs to continue throughout the Bankruptcy proceedings and may materially adversely affect our business, and, as a result, our financial condition and results of operations.

We may experience increased levels of employee attrition.

During the pendency of the Bankruptcy Cases, we may experience increased levels of employee attrition, and our employees are facing considerable distraction and uncertainty.  A loss of key personnel or material erosion of employee morale could have a material adverse affect on our business and results of operations.

Because we have less than 300 record holders of our common stock, we may elect at any time to terminate our reporting obligations under the Securities Exchange Act.  If we choose to do so, our stock price would likely decline.

Because we have less than 300 record holders of our common stock, we can suspend our reporting obligations under the Securities Exchange Act at any time by filing a Form 15 with the SEC.  If we were to terminate our reporting obligations, we would no longer be required to file periodic reports, including financial information, proxy solicitation materials, or other information with the SEC.  This action would cause our common stock to be de-listed from the OTC Bulletin Board, which would likely negative affect the liquidity, trading volume and trading prices of our common stock.  In addition, our ability to raise financing could be negatively impacted due to a lack of publicly available information about the Company.

Trading in our securities during the pendency of the Bankruptcy Cases is highly speculative and poses substantial risks.  Our common stock may be cancelled and holders of such common stock may not receive any distribution with respect to, or be able to recover any portion of, their investments.
 
 
It is not known at this stage of the Bankruptcy Cases if any plan of reorganization would allow for distributions with respect to our common stock.  In the event of cancellation of these equity interests, amounts invested by such holders in common stock will not be recoverable.  Trading prices for our common stock may bear little or no relationship to the actual recovery, if any, by the holders thereof in the Bankruptcy Cases.  Accordingly, we urge extreme caution with respect to existing and future investments in our common stock.

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

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

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

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

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

(i)  
our current Properties, product concepts or programming will continue to be popular for any significant period of time;
(ii)  
new Properties, product concepts or programming we represent or produce will achieve and or sustain popularity in the marketplace;
(iii)  
a Property’s life cycle will be sufficient to permit us to recover revenues in excess of the costs of advance payments, guarantees, development, marketing, royalties and other costs relating to such Property; or
(iv)  
we will successfully anticipate, identify and react to consumer preferences.
 
 
 
6

 
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, 2011, we derived approximately 70%, or $6,245 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 distribution or placement for this merchandise at retail, the performance of certain Properties could suffer which could have a material adverse impact on our financial condition and results of operations.

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

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

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

We operate in a highly competitive marketplace.

Licensing.  Our principal competitors in the Licensing segment 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 this market in light of the relatively small investment required to commence operations as a merchandising agent.

Advertising Media and Broadcast.  Our Advertising Media and Broadcast segment also operates in a highly competitive marketplace against large media companies (e.g., Disney, Time Warner, CBS, NBC and Nickelodeon, which is owned by Viacom) with substantially greater resources and distribution networks than we have. Our ability to derive advertising revenues from the sale of commercial time on The CW4Kids, substantially depends on the popularity of the television shows that we broadcast. We also face significant competition from other television broadcasters and cable networks, which also broadcast children’s television shows on Saturday mornings. Saturday morning broadcast television for children has been losing popularity over the last few years to the children’s cable television channels such as Nickelodeon, Cartoon Network and the Disney Channel. In addition, the popularity of the internet, video on demand, digital video recording of programming
 
 
 
7

 
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 The CW4Kids. 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.

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

The success of our Advertising Media and Broadcast segment is largely dependent on the amount of advertising revenues generated from sales of network advertising on The CW4Kids.  Recently, there has been increased scrutiny of food advertising directed at children as a result of childhood obesity concerns.  In response to these concerns, many 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 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.  The loss of the services of any of our senior management personnel or other key employees could have a material adverse effect on our business, results of operations or financial condition.  On January 11, 2011, we announced that Alfred R. Kahn had retired and resigned from his position as Chief Executive Officer of the Company, as Chairman of the Company’s Board of Directors, and as a member of our Board of Directors, effective January 10, 2011.  Our Company’s Board of Directors has appointed Director Michael Goldstein as interim Chairman and our existing executive senior management personnel are currently responsible for running our operations.  We are not currently seeking a replacement chief executive officer pending the outcome of the process currently being undertaken by a special committee of our Board of Directors formed for the purpose of exploring potential strategic alternatives.  Due to financial uncertainty affecting the Company and our limited resources, we may have difficulty in attracting new executive talent.

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

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

We may be subject to audit claims from our partners.

We may be subject to audits by certain of our Property partners.  There can be no assurance that the parties will conclude their discussions regarding the audit issues satisfactorily. Any such failure to successfully resolve any audit issues may result in litigation which may have a material adverse effect on our financial position or the results of our 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.


 
8

 
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.

Item 2. Properties.

The following table sets forth, with respect to properties leased (none are owned) by the Company on December 31, 2011, 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
       
53 West 23rd Street,  11th Floor
New York, New York
June 30, 2017
Executive, Administrative and Production Facilities
25,000
       
1st Floor Mutual House
70 Conduit Street
London, England
July 30, 2014
International Sales
Office
 2,400
       

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

Item 3. Legal Proceedings.

TCD International, Ltd. - On February 12, 2010, Home Focus Development, Ltd., a British Virgin Islands Corporation, (“Home Focus”) filed suit against 4Kids in the United States District Court for the Southern District of New York. Home Focus alleged that 4Kids owed Home Focus $1,075 under an Interest Purchase Agreement among 4Kids, Home Focus and TC Digital entered into on March 2, 2009 (the “Interest Purchase Agreement”), pursuant to which the Company acquired a 25% ownership interest in TCD International, Ltd. (“TDI”).
 
 
On April 26, 2010, 4Kids filed an answer and asserted various counterclaims against Home Focus and its owners, in their individual capacities. In its counterclaims, 4Kids has alleged that Home Focus failed to make its contractually required initial capital contribution of $250 to TDI necessary to acquire the 25% ownership interest in TDI it purported to sell to the Company and also failed to contribute its 50% share of the expenses. 4Kids has further asserted counterclaims of fraud and misrepresentation.
 
 
During the last few months, the parties have not proceeded with the litigation in light of the filing of the Bankruptcy Cases on April 6, 2011, which had the effect of automatically staying such litigation. The parties have had substantive discussions and have exchanged draft agreements regarding the possible resolution of the claims and counterclaims. There can be no assurance that the parties will conclude their settlement discussions satisfactorily.
  
Pokémon Royalty Audit - During the first quarter of 2010, The Pokémon Company International (“TPC”) commenced an audit of 4Kids covering the period from mid-2001 through 2008. On May 28, 2010, 4Kids received a letter from counsel for TPC (“TPC Letter”) claiming that the audit “identified deficiencies totaling almost $4,700” and demanding payment of the deficiency together with interest thereon.  The TPC Letter failed to provide any schedules or other specific information regarding the alleged deficiencies. By letter dated June 11, 2010 (“4Kids Letter”), 4Kids disputed the allegations made in the TPC Letter and advised TPC that 4Kids would not be paying the alleged deficiency or any interest thereon. The 4Kids Letter also proposed that, as had been discussed by the parties, 4Kids would audit TPC which was the recipient and payee of Pokémon merchandise licensing, television broadcast and home video proceeds during the 2001 - 2008 period, and that after the completion of the parties’ respective audits, the parties would review the audit reports and discuss any outstanding issues.
 
 
 
9

 
On July 14, 2010, 4Kids and TPC executed a tolling agreement tolling the statute of limitations until October 21, 2010 with respect to TPC’s claims. 4Kids and TPC also agreed in the tolling agreement that neither party would commence any litigation against the other party until after the expiration of the tolling period in order to allow for the parties to complete their respective audits and to discuss the results thereof.  During mid-June 2010, 4Kids commenced its audit of TPC which was completed in December 2010.  On October 12, 2010, 4Kids and TPC executed an amendment to the tolling agreement extending the tolling of the statute of limitations until January 15, 2011.  On January 26, 2011, 4Kids and TPC executed a second amendment to the tolling agreement extending the tolling of the statute of limitations until March 15, 2011. On March 25, 2011, 4Kids and TPC executed a third amendment to the tolling agreement extending the tolling of the statute of limitations until April 15, 2011.  The parties have not sought to further extend the tolling agreement in light of the filing of the Bankruptcy Cases on April 6, 2011, which had the effect of automatically staying such claims.

Yu-Gi-Oh! Royalty Audit - During the first quarter of 2010, ADK, one of the Licensors, commenced an audit of 4Kids with respect to the amounts paid by 4Kids to ADK during the course of the 4Kids representation of Yu-Gi-Oh!, which started in 2001.

On June 25, 2010, 4Kids received a letter from counsel for ADK (“ADK Letter”) alleging that 4Kids had improperly deducted certain expenses from amounts paid to ADK and had failed to pay ADK a share of certain Yu-Gi-Oh! home video revenues. In addition, the ADK Letter requested that 4Kids provide additional documentation with respect to withholding taxes deducted from ADK’s share of Yu-Gi-Oh! revenues. The ADK Letter claimed that the total of the improper deductions and underpayments was approximately $3,000.  By letter dated June 29, 2010 (“4Kids Yu-Gi-Oh! Letter”), 4Kids disputed substantially all of the allegations contained in the ADK Letter.

The ADK Letter also demanded that 4Kids and ADK sign a tolling agreement with an effective date of June 1, 2010 which would stop the running of the statute of limitations during the four month tolling period starting on June 1, 2010 and concluding on September 30, 2010. On June 29, 2010, 4Kids and ADK entered into the tolling agreement described above. On October 19, 2010, 4Kids and ADK signed an amendment to the tolling agreement extending the tolling period through December 31, 2010.

On December 20, 2010, 4Kids received a letter from ADK which alleged audit findings of $4,819. By letters dated December 29, 2010, 4Kids disputed substantially all of the alleged audit findings. On January 11, 2011, the parties entered into another amendment to the tolling agreement extending the tolling period through March 31, 2011.
 
On March 4, 2011, ADK requested a payment from the Company in order for representatives of the Licensors to agree to meet with representatives of the Company. On March 17, 2011, 4Kids made a $1,000 payment to ADK as a show of good-faith so that a meeting could take place with ADK to attempt to resolve the audit claims. Notwithstanding the $1,000 good-faith payment, the Company also reserved its rights to dispute all of ADK’s audit claims. On March 18, 2011, representatives of 4Kids met with representatives of ADK in a further, but ultimately unsuccessful, attempt to resolve the outstanding issues.

On March 24, 2011, 4Kids received a letter from the Licensors purporting to terminate the agreement dated July 1, 2008 between the Licensors and 4Kids with respect to the Yu-Gi-Oh! Property (the “Yu-Gi-Oh! Agreement”) for alleged breaches of the Yu-Gi-Oh! Agreement by 4Kids.  The purported termination letter did not comply with the 10 business day notice and cure provision in the Yu-Gi-Oh! Agreement. On March 24, 2011, the Licensors filed a lawsuit against the Company in the United States District Court for the Southern District of New York also claiming that the Company has breached the Yu-Gi-Oh! Agreement on grounds substantially the same as those asserted in its audit findings and seeking more than $4,700 in damages (the “Yu-Gi-Oh! Litigation”).

On March 27, 2011, 4Kids, responding to the letter from the Licensors, completely rejected the purported termination of the Yu-Gi-Oh! Agreement by the Licensors as wrongful and devoid of any factual and legal basis.  On March 30, 2011, the Company received a letter from counsel to the Licensors reiterating the Licensors’ position with respect to the termination of the Yu-Gi-Oh! Agreement.

The commencement of the Bankruptcy Cases automatically “stayed” the Yu-Gi-Oh! Litigation until such time as the Bankruptcy Court may order otherwise.

On May 13, 2011, the Debtors made a motion in the Bankruptcy Court for an order enforcing the automatic stay with respect to 4Kids’ rights under the Yu-Gi-Oh! Agreement, requesting that the Bankruptcy Court confirm that the automatic stay applied to the purported termination of such agreement by the Licensors on March 24, 2011.  On May 18, 2011, the United States District Court judge approved the stipulated order referring the litigation to the United States Bankruptcy Court for the Southern District of New York.  On June 2, 2011, the Bankruptcy Court entered a stipulated Order confirming that the automatic stay applied to the purported termination of the Yu-Gi-Oh! Agreement and reaffirmed that 4Kids may exercise its rights under the Yu-Gi-Oh! Agreement pending the outcome of the litigation between 4Kids and the Licensors.
 
 
 
10

 
On June 10, 2011, 4Kids filed its answer and counterclaims against the Licensors.  4Kids disputed substantially all of the audit claims asserted by Licensors in their complaint and asserted counterclaims against the Licensors arising from the termination of the Yu-Gi-Oh! Agreement.  The 4Kids counterclaims seek damages from the Licensors’ wrongful termination of the Yu-Gi-Oh! Agreement.

The trial in the Yu-Gi-Oh! Litigation, initially to determine whether the purported termination of the Yu-Gi-Oh! Agreement was effective and whether any amounts owed by 4Kids to the Licensors exceed the credits claimed by 4Kids for amounts paid or advanced to Licensors, commenced in the Bankruptcy Court on August 29, 2011 and concluded on September 23, 2011.

On December 29, 2011, the Bankruptcy Court issued its decision ruling in favor of 4Kids in the first phase of the Yu-Gi-Oh! Litigation. In its 154 page decision, the Bankruptcy Court ruled that the Yu-Gi-Oh! Agreement was not effectively terminated by the Licensors prior to the 4Kids’ bankruptcy filing on April 6, 2011. Rather, the Bankruptcy Court ruled that the Yu-Gi-Oh! Agreement remained in full force and effect and is property of the 4Kids’ bankrupt estate. In addition, the Court’s opinion carefully considered each of the Licensors’ nine audit findings totaling over $4,700 and concluded that audit findings totaling approximately 99% of the amount claimed by the Licensors were "meritless". The remaining two audit claims totaling $48, which 4Kids does not dispute, were offset by the roughly $800 credit balance in favor of 4Kids as of March 24, 2011, the date that the Licensors sent 4Kids the purported notice of termination, and the $1,000 good-faith payment made by 4Kids on March 17, 2011 which was subsequently returned to 4Kids on January 24, 2012.

On February 29, 2012, 4Kids and the Licensors entered into a Settlement Agreement, dated as of February 27, 2012 (the “Settlement Agreement”), settling all claims brought by Licensors against 4Kids and all counterclaims brought by 4Kids against the Licensors in the Yu-Gi-Oh! Litigation. The Settlement Agreement provides, among other things, for the Licensors to make a payment to 4Kids in the amount of $8,000 upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order.  On March 9, 2012, the Bankruptcy Court issued an order approving the Settlement Agreement.  Under the Settlement Agreement, the Licensors acknowledged that the Yu-Gi-Oh! Agreement remained valid, binding and legally enforceable with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast and home video rights to the Yu-Gi-Oh! Property throughout the world outside of Asia.  The Settlement Agreement further provided for each of 4Kids and the Licensors to release each other from all claims they may have against each other, other than certain indemnification claims and claims that may arise under the Settlement Agreement.  The Settlement Agreement also provided that the agreement does not constitute an admission by any party of any violation of any agreement or law.

Wildcat Intellectual Property Holdings, LLC v. 4Kids Entertainment, Inc. et al.  On July 5, 2011, Wildcat Intellectual Property Holdings, LLC filed suit against 4Kids, Chaotic USA Entertainment Group, Inc., Electronic Arts Inc., Konami Digital Entertainment, Inc., Nintendo of America Inc., Panini America, Inc., Pokémon USA, Inc., Sony Computer Entertainment America LLC, Sony Online Entertainment LLC, The Topps Company, Inc., Wizards of the Coast LLC and Zynga Inc. (collectively the "Wildcat Defendants) in the United States District Court for the Eastern District of Texas seeking damages and other various fees. The suit alleges that the Wildcat Defendants infringed upon United States Patent Number 6,200,216 entitled "Electronic Trading Card". Since the Wildcat suit with respect to 4Kids pertains to alleged actions by 4Kids occurring prior to the commencement of the Bankruptcy Cases, the Wildcat suit is "stayed" by the 4Kids bankruptcy.

Lehman Brothers, Inc. Claim - The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased the auction rate securities on behalf of the Company violated its legal obligations to the Company.  As a result, the Company took various measures to obtain appropriate legal relief, including initiating an arbitration on April 3, 2008 against Lehman Brothers, Inc. and the brokers who had serviced the Company’s Lehman account with the Financial Industry Regulatory Authority.  On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy.  The Company’s arbitration proceeding was stayed by the Lehman bankruptcy.  On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc.  The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008.  On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”).  SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC.  In late September, 2009, the Company filed a proof of claim against Lehman Brothers, Inc. in the United States Bankruptcy Court for the Southern District of New York. The principal amount of the claim was approximately $31,500 plus interest. In addition, the proof of claim requested treble damages. The proof of claim is a general unsecured claim. The Company’s claim against Lehman Brothers, Inc. is still pending and there has been no determination made as to the validity or allowed amount of the claim.  On October 18, 2011, the Company entered into a settlement agreement and general release with the brokers who had serviced the Company’s account with Lehman Brothers, Inc. for approximately $489.
 
 
11

 
The Company, from time to time, is involved in litigation, contract disputes and claims arising in the ordinary course of its business. Except as described above, 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 or any claims made against it will, individually or in the aggregate, have a material adverse effect on the Company’s financial position or the results of its operations or cash flows.
 
 
Item 4. Mine Safety Disclosures
Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information - Our Common Stock has been quoted on the OTC Bulletin Board Market since June 1, 2010 under the trading symbol “KIDEQ.PK”.  Prior to June 1, 2010, our common stock was 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 reported by the New York Stock Exchange and the OTC Bulletin Board. The prices quoted on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, markdown or commissions. The OTC Bulletin Board prices listed below may not represent actual transaction prices.

2011
   
Low
   
High
 
First Quarter
    $ 0.18     $ 0.72  
Second Quarter
      0.06       0.28  
Third Quarter
      0.10       0.25  
Fourth Quarter
      0.06       0.24  
                     
 2010    
Low
   
High
 
First Quarter
    $ 1.01     $ 1.70  
Second Quarter
      0.55       1.25  
Third Quarter
      0.53       0.80  
Fourth Quarter
      0.32       0.64  
                     

(b) Holders - The approximate number of holders of record of the Company’s Common Stock on March 22, 2012 was 286.

(c) Dividends - There were no dividends or other distributions made by the Company during 2011 or 2010. 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., and Mattel, Inc. (“Peer Group”) for the period beginning December 31, 2006 and ending December 31, 2011.  The graph assumes that $100 was invested on December 31, 2006, and that any dividends were reinvested.  Marvel Entertainment, Inc. was removed from the peer group as it was purchased by The Walt Disney Company in 2009. The Company intends to continue to evaluate and identify potential companies which may be appropriate for its Peer Group.

 
 
12

 
 


   
December 31,
 
      2006       2007       2008       2009       2010       2011  
4Kids
  $ 100.00     $ 72.17     $ 10.76     $ 8.73     $ 2.25     $ 0.77  
S&P 600
  $ 100.00     $ 98.78     $ 67.18     $ 83.15     $ 103.93     $ 103.76  
Russell 2000
  $ 100.00     $ 98.43     $ 65.18     $ 46.69     $ 58.50     $ 55.31  
Peer Group
  $ 100.00     $ 86.93     $ 62.97     $ 101.78     $ 115.09     $ 116.54  
 
(f)  
Purchases of Equity Securities by the Issuer -
None

Item 6. Selected Financial Data.
 (In thousands of dollars, except share and per share data)

Our selected financial data presented below has been derived from our audited consolidated financial statements in Item 8. Financial Statements and Supplementary Data and should be read in conjunction with the notes to the Company’s consolidated financial statements and “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
 
 
 
13

 
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
Net revenues:
                                       
   Service revenue
  $ 11,464     $ 14,478     $ 24,394     $ 41,925     $ 48,428  
   Other revenue
    882             9,786              
           Total net revenues
    12,346       14,478       34,180       41,925       48,428  
                                         
Costs and expenses:
                                       
   Selling, general and administrative
    25,989       28,011       33,175       36,966       34,974  
   Amortization of television and film costs
    2,762       6,827       21,511       7,707       8,179  
   Amortization of 4Kids TV broadcast fee
                      16,022       21,472  
   Impairment of investment in international
                                       
       trading card subsidiary
                2,430              
          Total costs and expenses
    28,751       34,838       57,116       60,695       64,625  
                                         
Loss from operations
    (16,405 )     (20,360 )     (22,936 )     (18,770 )     (16,197 )
Other income (expense):
                                       
Interest income
    64       403       1,076       2,722       5,281  
Impairment of investment securities
          (3,578 )     (6,175 )     (7,834 )      
Loss on sale of investment securities
    (910 )     (1,616 )     (7,647 )            
         Total other (expense) income
    (846 )     (4,791 )     (12,746 )     (5,112 )     5,281  
                                         
Loss from continuing operations before reorganization and litigation items
    (17,251 )     (25,151 )     (35,682 )     (23,882 )     (10,916 )
Reorganization items
    (1,628 )                        
Gain on litigation
    1,846                          
Loss from continuing operations before income taxes
    (17,033 )     (25,151 )     (35,682 )     (23,882 )     (10,916 )
                                         
Benefit from (provision for) income taxes
                3,805       (300 )     (2,436 )
Loss from continuing operations
    (17,033 )     (25,151 )     (31,877 )     (24,182 )     (13,352 )
Loss from discontinued operations
    (51 )     (6,489 )     (20,579 )     (12,637 )     (9,974 )
Net loss
    (17,084 )     (31,640 )     (52,456 )     (36,819 )     (23,326 )
                                         
Loss attributable to noncontrolling interests, discontinued operations
    1,884       4,479       10,380              
                                         
Net loss attributable to 4Kids Entertainment, Inc.
  $ (15,200 )   $ (27,161 )   $ (42,076 )   $ (36,819 )   $ (23,326 )
                                         
                                         
Per share amounts:
                                       
Basic and diluted loss per share attributable to
                                       
4Kids Entertainment, Inc. common shareholders
                                       
    Continuing operations
  $ (1.25 )   $ (1.87 )   $ (2.40 )   $ (1.81 )   $ (1.01 )
    Discontinued operations
    0.13       (0.15 )     (0.76 )     (0.98 )     (0.76 )
Basic and diluted loss per share attributable to
                                       
4Kids Entertainment, Inc. common shareholders
  $ (1.12 )   $ (2.02 )   $ (3.16 )   $ (2.79 )   $ (1.77 )
                                         
Weighted average common shares
                                       
    outstanding – basic and diluted
    13,605,148       13,460,214       13,303,192       13,181,549       13,209,495  
Net loss attributable to 4Kids Entertainment, Inc.:
                                       
Loss from continuing operations
  $ (17,033 )   $ (25,151 )   $ (31,877 )   $ (24,182 )   $ (13,352 )
                                         
Loss from discontinued operations
    (51 )     (6,489 )     (20,579 )     (12,637 )     (9,974 )
Loss attributable to noncontrolling interests
    1,884       4,479       10,380              
Net loss from discontinued operations
    1,833       (2,010 )     (10,199 )     (12,637 )     (9,974 )
Net loss attributable to 4Kids Entertainment, Inc.
  $ (15,200 )   $ (27,161 )   $ (42,076 )   $ (36,819 )   $ (23,326 )
                                         

 
 
14

 

 
   
Years Ended December 31,
 
      2011       2010       2009       2008       2007  
Other Operating Data:
                                       
Cash flow (used in) provided by:
                                       
Operating activities
  $ (8,843 )   $ (6,139 )   $ (13,580 )   $ (33,334 )   $ (15,850 )
Investing activities
    6,248       6,812       3,429       24,432       22,605  
Financing activities
          (44 )     74       (2,641 )     2  
                                         


   
As of December 31,
 
      2011       2010       2009       2008       2007  
                                         
Total assets
  $ 15,944     $ 29,070     $ 56,653     $ 100,574     $ 151,079  
Working capital
    (4,883 )     2,052       4,859       17,579       65,135  
Shareholders’ (deficit) equity
    (6,057 )     10,258       35,117       74,991       128,088  
                                         

The Company did not declare or pay any cash dividends during the five-year period ended December 31, 2011.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
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, 2011.  This commentary should be read in conjunction with our consolidated financial statements and the notes to the Company’s consolidated financial statements, which begin on page F-1 under “Item 8. Financial Statements and Supplementary Data”.

Overview

The Company’s operating results for the year ended December 31, 2011 were negatively impacted by decreasing licensing revenues on the “Pokémon”, “Cabbage Patch Kids”, “Viva Piñata”, “Chaotic” and “Winx” Properties, domestically.  These declines are generally the result of the declining popularity of the Company’s existing Properties combined with the failure of new Properties to achieve satisfactory popularity levels. In addition, the Company’s results have been negatively impacted by the significant costs associated with the Bankruptcy Cases and Yu-Gi-Oh! Litigation.  The Company expects to continue to incur bankruptcy costs throughout the Bankruptcy proceedings.  Additionally, during the year ended December 31, 2011, the Company recorded a loss on the sale of its remaining investment securities of $910.  During 2009, 2010 and throughout 2011, the Company implemented significant cost-cutting initiatives, primarily pertaining to personnel related costs and advertising and marketing expenses, in an effort to offset its poor operating results; however, these initiatives failed to fully offset lower revenues and these other charges.

Chapter 11 Bankruptcy Proceedings – On April 6, 2011 (the “Petition Date”), the Company and all of its domestic wholly-owned subsidiaries (the “Debtors”) filed voluntary petitions for relief (the “Bankruptcy Cases”) under Title 11 of Chapter 11 of the United States Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”), which Bankruptcy Cases are jointly administered under Case No. 11-11607.  The Company will continue to operate itself and its subsidiaries as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.  In general, as debtors-in-possession, we are authorized under Chapter 11 of the Bankruptcy Code to continue to operate as an ongoing business, but may not engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court.  4Kids Entertainment International, Ltd., the Company’s subsidiary based in London, England, and TC Digital Games LLC and TC Websites LLC, two domestic subsidiaries in each of which the Company holds a majority ownership, were not included in the filing and will continue to operate outside the Bankruptcy Cases.

Shortly after the Petition Date, the Debtors began notifying all known current or potential creditors of the Debtors regarding the commencement of the Bankruptcy Cases. Subject to certain exceptions under the Bankruptcy Code, the commencement of the Bankruptcy Cases automatically enjoined, or stayed, the continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Thus, for example, most creditor actions to obtain possession of property from the Debtors, or to create, perfect or enforce any lien against the property of the Debtors, or to collect on monies owed or otherwise exercise rights or remedies with respect to a pre-petition claim are enjoined unless and until the Bankruptcy Court lifts the automatic stay.

 
 
15

 
After the filing of the Bankruptcy Cases, the United States Trustee for the Southern District of New York appointed an official committee of unsecured creditors (the “Creditors’ Committee”).  The Creditors’ Committee and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court with respect to the Debtors.  There can be no assurance that the Creditors’ Committee will support the Debtors’ positions on matters to be presented to the Bankruptcy Court in the future or on any bankruptcy plan, once proposed.  Disagreements between the Debtors and the Creditors’ Committee could protract the Bankruptcy Cases, negatively impact the Debtors’ ability to operate and delay the Debtors’ emergence from Chapter 11. Under Section 365 and other relevant sections of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions.  Any description of an executory contract or unexpired lease in this report, including, where applicable, our express termination rights or a quantification of our obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights we have under Section 365 of the Bankruptcy Code.
 
On February 29, 2012, 4Kids and the Licensors entered into a Settlement Agreement, dated as of February 27, 2012, settling all claims brought by Licensors against 4Kids and all counterclaims brought by 4Kids against the Licensors in the Yu-Gi-Oh! Litigation. The Settlement Agreement provides, among other things, for the Licensors to make a payment to 4Kids in the amount of $8,000 upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order.  On March 9, 2012, the Bankruptcy Court issued an order approving the Settlement Agreement.  Under the Settlement Agreement, the Licensors acknowledged that the Yu-Gi-Oh! Agreement remained valid, binding and legally enforceable with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast and home video rights to the Yu-Gi-Oh! Property throughout the world outside of Asia.  The Settlement Agreement further provided for each of 4Kids and the Licensors to release each other from all claims they may have against each other, other than certain indemnification claims and claims that may arise under the Settlement Agreement.  The Settlement Agreement also provided that the agreement does not constitute an admission by any party of any violation of any agreement or law.

While the consummation of the Settlement Agreement represents a significant step in the process of resolving the Bankruptcy Cases, the timing of any resolution of the Bankruptcy Cases will depend on the timing and outcome of numerous other ongoing matters therein, and it is not possible at this time to accurately predict when such other matters will be resolved.  We have incurred and will continue to incur significant costs associated with the Bankruptcy Cases.  The amount of these costs, which began in April 2011 and are being expensed as incurred, are expected to significantly affect our results of operations and financial position.  The Bankruptcy Cases have also presented challenges to our ability to generate additional revenues in all of our business segments especially as it relates to the sales of commercial advertising.

The Company will consider all alternatives available to generate additional cash to fund its operations, including, but not limited to sales of assets, issuance of equity or debt securities, and third party arrangements subject to any limitations and procedures arising from the Bankruptcy Cases.

Our ability to achieve and maintain profitability and positive cash flow is dependent upon the success of our reorganizational efforts and a number of other factors, including our ability to generate additional revenues. The Company’s financial statements have been prepared assuming that the Company will continue as a going concern and do not contain any adjustments that may result from the outcome of this uncertainty.

General

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

The Company’s licensing revenues have historically been derived primarily from the licensing of toy and game concepts. As a result, a substantial portion of the Company’s revenues and net income are subject to the seasonal variations of the toy and game industry. Typically, a majority of toy orders are shipped in the third and fourth calendar quarters resulting in increased royalties earned by the Company during such calendar quarters. The Company recognizes revenues from the sale of advertising time on the leased Saturday morning programming block from The CW (“The CW4Kids”), as more fully described in Note 2 of the notes to the Company’s consolidated financial statements. The Company’s advertising sales subsidiary, 4Kids Ad Sales, sells advertising time on The CW4Kids at higher rates in the fourth quarter due to the increased demand for commercial time by children’s advertisers during the holiday season. As a result, much of the revenues of 4Kids Ad Sales are earned in the fourth quarter when the majority of toy and video game advertising occurs. As a result of the
 
 
 
16

 
foregoing, the Company has historically experienced greater revenues during the second half of the year than during the first half of the year.

Effective September 30, 2010, the Company terminated the operations of TC Digital Games LLC (“TC Digital”), the joint venture which produced, marketed and distributed the “Chaotic” trading card game, and TC Websites LLC (“TC Websites”), the joint venture that owns and operates www.chaoticgame.com, the companion website for the “Chaotic” trading card game.  The Company owns 55% of each of TC Digital and TC Websites.  The closing of these companies enabled the Company to further reduce costs and focus on its core businesses.  As a consequence of the termination of their operations, TC Digital and TC Websites ceased supporting the Chaotic trading card game and website, effective October 1, 2010.  TC Digital and TC Websites are included in discontinued operations in the Company’s consolidated financial statements, subject to a noncontrolling interest.

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 - 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.
 
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.

Reorganization Items - The Company’s costs relate to professional, consulting and trustee fees in conjunction with the filing of the Bankruptcy Cases.  These types of expenditures are expensed as incurred and reported as reorganization items.

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 trading card and home video inventory. The Company estimates the amount of uncollectible receivables from its business segments by monitoring delinquent accounts and estimating a reserve based on contractual terms and other customer specific issues.

Revenue Recognition - The Company’s revenue recognition policies for its three 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.
 
 
 
17

 
4Kids TV Broadcast Agreement - The Company broadcasted certain of its Properties on 4Kids TV, the Saturday morning programming block that the Company leased from Fox, under the Fox Agreement, until December 31, 2008.  The cost of 4Kids TV has been capitalized and amortized over each broadcast year based on estimated advertising revenue up until the termination of the Fox Agreement on December 31, 2008, at which time the cost to lease 4Kids TV was fully amortized.

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

Recently Adopted Accounting Standards – There are no recently adopted accounting standards that currently apply to the Company.

Recently Issued Accounting Standards – In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which amended its guidance on the testing of goodwill impairment to allow an entity the option to first assess qualitative factors to determine whether performing the current two-step process is necessary. Under the new option, the calculation of the reporting unit’s fair value is not required unless as a result of the qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than the unit’s carrying amount. This guidance is effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted. The Company is currently evaluating the effect this guidance will have on the Company’s consolidated financial position and results of operations.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. The objective of ASU 2011-05 is to improve the comparability, consistency, and transparency of financial reporting, to increase the prominence of items reported in other comprehensive income, and to facilitate convergence of U.S. GAAP and International Financial Reporting Standards. To achieve this, the FASB decided to eliminate the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU 2011-05 require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. Finally, current GAAP does not require an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income, which is required by the guidance in ASU 2011-05. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted, because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. In October 2011, the FASB announced that it will consider deferring certain aspects of ASU 2011-5 in its future meeting.  The Company is currently evaluating the effect this guidance will have on the Company’s consolidated financial position and results of operations.


 
18

 
Results of Operations

The following table sets forth our results of operations expressed as a percentage of total net revenues for each of the three years ended December 31, 2011, 2010 and 2009.

     
2011
   
2010
   
2009
 
                     
Net revenues
   
100
%
 
100
%
 
100
%
                 
 
 
Costs and expenses:
                   
   Selling, general and administrative
   
211
   
194
   
97
 
   Amortization of television and film costs
   
22
   
47
   
63
 
   Impairment of investment in international
                   
      trading card subsidiary
   
   
   
7
 
          Total costs and expenses
   
233
   
241
   
167
 
                     
Loss from operations
   
(133
)
 
(141
)
 
(67
)
                     
Other income (expense):
                   
Interest income
   
   
3
   
3
 
Impairment of investment securities
   
   
(25
)
 
(18
)
Loss on sale of investment securities
   
(7
)
 
(11
)
 
(22
)
         Total other expense
   
(7
)
 
(33
)
 
(37
)
                     
Loss from continuing operations before reorganization and litigation items
   
(140
)
 
(174
)
 
(104
)
                     
Reorganization items
   
(13
)
 
   
 
Gain (loss) on litigation
   
15
   
   
 
Loss from continuing operations before income taxes
   
(138
)
 
(174
)
 
(104
)
Benefit from income taxes
   
   
   
11
 
                     
Loss from continuing operations
   
(138
)
 
(174
)
 
(93
)
Loss from discontinued operations
   
   
(45
)
 
(60
)
Net loss
   
(138
)
 
(219
)
 
(153
)
                     
Net loss attributable to noncontrolling interests, discontinued operations
   
15
   
31
   
30
 
                     
Net loss attributable to 4Kids Entertainment, Inc.
   
(123
)%
 
(188
)%
 
(123
)%
 
                   

Year Ended December 31, 2011 as compared to Year Ended December 31, 2010

Revenues

Revenues for the years ended December 31, 2011 and 2010, by reportable segment and for the Company as a whole, were as follows:

   
2011
   
2010
   
$ Change
   
% Change
 
                                 
Licensing
  $ 8,962     $ 12,046     $ (3,084 )     (26 )%
Advertising Media and Broadcast
    1,635       921       714       78  
Television and Film Production/Distribution
    1,749       1,511       238       16  
Total
  $ 12,346     $ 14,478     $ (2,132 )     (15 )%
                                 
 
 
 
19

 
The decrease in consolidated net revenues for 2011, as compared to 2010, was due to a number of factors.  In the Licensing segment, decreased revenues were primarily attributable to:

(i)  
reduced licensing revenues on the “Pokémon”, “Cabbage Patch Kids”, “Viva Piñata”, “Chaotic” and “Winx” Properties, domestically, of approximately $2,500, $650, $380, $340 and $250, respectively; partially offset by
(ii)  
increased licensing revenues on the “American Kennel Club” Property, domestically, of approximately $685; and
(iii)  
increased licensing revenues of approximately $660 from the realization of an additional $882 in proceeds arising from the Company’s agreement to terminate its right to serve as the merchandise licensing agent for the “Teenage Mutant Ninja Turtles” Property prior to the scheduled expiration of the representation agreement with the Mirage Group in 2012.

The “Yu-Gi-Oh!” and “American Kennel Club” Properties were the largest contributors of net revenues with approximately 58% and 11%, respectively, of the Company’s revenues in this business segment for 2011.

In the Advertising Media and Broadcast segment, the increase in revenues for the year ended December 31, 2011, as compared to the same period in 2010, was primarily attributable to increased sales of internet advertising on the Company’s websites as well as third party websites of approximately $710.

In the Television and Film Production/Distribution segment, the increase in revenues for 2011, as compared to 2010, was primarily attributable to:

(i)  
decreased reserves relating to “Yu-Gi-Oh!” home video revenues of approximately $1,500; partially offset by
(ii)  
decreased contract revenue from the “Yu-Gi-Oh!” television series of approximately $320; as well as
(iii)  
decreased international broadcast sales from the “Dinosaur King” and “Chaotic” television series of approximately $220 and $130, respectively; as well as
(iv)  
decreased broadcast sales on the “Pokémon” Property of approximately $240; as well as
(v)  
decreased musical performance revenues from the “Winx” television series of approximately $145; and
(vi)  
decreased theatrical revenue from the  “Yu-Gi-Oh!” movie of approximately $120.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 7%, or $2,022 to $25,989 for the year ended December 31, 2011, when compared to the same period in 2010.  The decrease was primarily attributable to broad cost-cutting initiatives implemented throughout the Company and included:

(i)  
decreased personnel related costs of approximately $4,085; as well as
(ii)  
decreased marketing and promotional costs of approximately $1,415; as well as
(iii)  
decreased bad debt expenses of approximately $970; and
(iv)  
decreased office expenses of approximately $995; partially offset by
(v)  
increased network selling expenses of approximately $3,205; and
(vi)  
increased legal fees primarily relating to the “Yu-Gi-Oh!” Litigation of approximately $2,070.

Capitalized Film Costs

   
2011
   
2010
   
$ Change
 
         % Change
Amortization of Television and Film Costs
  $ 2,762     $ 6,827     $ (4,065 )   (60 )%  

The decrease in amortization of television and film costs for 2011 when compared to 2010 was primarily due to the decreased amortization of the “Chaotic” television series, as well as the prior year write-off of certain older television series.

As of December 31, 2011, there was $2,465 of capitalized film production costs recorded in the Company’s consolidated balance sheet relating primarily to various stages of production on 159 episodes of animated programming. Based on management’s ultimate revenue estimates as of December 31, 2011, approximately 63% 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.

Interest Income

Interest income decreased 84%, or $339, to $64 for the year ended December 31, 2011, as compared to the same period in 2010, primarily as a result of lower cash balances and the Company’s investments yielding lower interest rates than the prior period.
 
 
 
20

 
Loss on Sale of Investment Securities

During the first quarter of 2011, the Company determined that it was necessary to generate additional cash to fund its operations and sold its remaining investment securities with a par value of $18,450 and an adjusted cost basis of $7,126 for $6,216.  Accordingly, the Company recorded a loss on the sale of investment securities of $910 for the year ended December 31, 2011.

Reorganization Items

The Company incurred reorganization costs of $1,628 during the year ended December 31, 2011.  These costs included professional and consulting fees charged for services retained in connection with the Bankruptcy Proceedings, as well as fees paid to the Bankruptcy trustee.

Gain on Litigation Settlement

On December 29, 2011, the Bankruptcy Court issued its decision ruling in favor of 4Kids in the first phase of the Yu-Gi-Oh! Litigation. In its 154 page decision, the Bankruptcy Court ruled that the Yu-Gi-Oh! Agreement was not effectively terminated by the Licensors prior to the 4Kids’ bankruptcy filing on April 6, 2011. Rather, the Bankruptcy Court ruled that the Yu-Gi-Oh! Agreement remained in full force and effect and is property of the 4Kids’ bankrupt estate. In addition, the Court’s opinion carefully considered each of the Licensors’ nine audit findings totaling over $4,700 and concluded that audit findings totaling approximately 99% of the amount claimed by the Licensors were "meritless". The remaining two audit claims totaling $48, which 4Kids does not dispute, were offset by the roughly $800 credit balance in favor of 4Kids as of March 24, 2011, the date that the Licensors sent 4Kids the purported notice of termination, and the $1,000 good-faith payment made by 4Kids on March 17, 2011 which was subsequently returned to 4Kids on January 24, 2012.  Based on the ruling and the conclusions on certain findings previously recorded, 4Kids recorded a gain of approximately $1,357.

On February 29, 2012, 4Kids and the Licensors entered into a Settlement Agreement, dated as of February 27, 2012 (the “Settlement Agreement”), settling all claims brought by Licensors against 4Kids and all counterclaims brought by 4Kids against the Licensors in the Yu-Gi-Oh! Litigation. The Settlement Agreement provides, among other things, for the Licensors to make a payment to 4Kids in the amount of $8,000 upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order.  On March 9, 2012, the Bankruptcy Court issued an order approving the Settlement Agreement.  Under the Settlement Agreement, the Licensors acknowledged that the Yu-Gi-Oh! Agreement remained valid, binding and legally enforceable with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast and home video rights to the Yu-Gi-Oh! Property throughout the world outside of Asia.  The Settlement Agreement further provided for each of 4Kids and the Licensors to release each other from all claims they may have against each other, other than certain indemnification claims and claims that may arise under the Settlement Agreement.  The Settlement Agreement also provided that the agreement does not constitute an admission by any party of any violation of any agreement or law.

The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased the auction rate securities on behalf of the Company violated its legal obligations to the Company.  As a result, the Company took various measures to obtain appropriate legal relief, including initiating an arbitration on April 3, 2008 against Lehman Brothers, Inc. and the brokers who had serviced the Company’s Lehman account with the Financial Industry Regulatory Authority.  On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy.  The Company’s arbitration proceeding was stayed by the Lehman bankruptcy.  On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc.  The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008.  On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”).  SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC.  In late September, 2009, the Company filed a proof of claim against Lehman Brothers, Inc. in the United States Bankruptcy Court for the Southern District of New York. The principal amount of the claim was approximately $31,500 plus interest. In addition, the proof of claim requested treble damages. The proof of claim is a general unsecured claim. The Company’s claim against Lehman Brothers, Inc. is still pending and there has been no determination made as to the validity or allowed amount of the claim.  On October 18, 2011, the Company entered into a settlement agreement and general release with the brokers who had serviced the Company’s account with Lehman Brothers, Inc. for approximately $489.
 
 
21

 
 
Loss From Continuing Operations Before Income Taxes

   
2011
   
2010
 
$ Change
   
% Change
                             
Licensing
  $ (3,152 )   $ (7,822 )   $ 4,670       60 %  
Advertising, Media and Broadcast
    (9,998 )     (8,161 )     (1,837 )     (23 )  
Television and Film Production/Distribution
    (3,883 )     (9,168 )     5,285       58    
Total
  $ (17,033 )   $ (25,151 )   $ 8,118       32 %  
                                   
 
In the Licensing segment, the decrease in segment loss for the year ended December 31, 2011, as compared to the same period in 2010, was primarily attributable to decreased expenses due to significant cost-cutting initiatives,  partially offset by lower licensing revenues.

In the Advertising Media and Broadcast segment, the increase in segment loss for the year ended December 31, 2011, as compared to the same period in 2010, resulted from increased network selling expenses, partially offset by increased sale of internet advertising on the Company’s websites.

In the Television and Film Production/Distribution segment, the decrease in segment loss for the year ended December 31, 2011, as compared to the same period in 2010, was primarily due to decreased amortization of television and film costs , as well as a decrease in overall expenses partially offset by decreased licensor participations relating to “Yu-Gi-Oh!” home video revenues .

Income Tax Expense

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. Authoritative guidance issued by the FASB requires the Company to record a valuation allowance when it is more likely than not that all or some portion of the deferred tax assets will not be realized. In view of the level of deferred tax assets as of December 31, 2011, and the Company’s historical losses from operations, the Company has determined that a full valuation allowance against its net deferred tax assets is required.

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, the Company will 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.

The Company did not record a benefit from income taxes for the years ended December 31, 2011 and 2010 as it will not be able to carryback any of its 2011 net operating loss and it is more likely than not that the Company will not be able to realize its deferred tax assets.   

The Company files in multiple tax jurisdictions and from time to time is subject to audit in certain tax jurisdictions.  The Company is no longer subject to examinations by income tax authorities in most jurisdictions for years prior to 2007.  As of December 31, 2011, the Company is under audit by New York for the year ended December 31, 2009.  At this time, the Company does not expect the results from this income tax audit to have a material impact on our financial statements.

Loss from Continuing Operations

As a result of the above, the Company had a loss from continuing operations for the year ended December 31, 2011 of $17,033, as compared to a loss from continuing operations in 2010 of $25,151.

Discontinued Operations

Effective September 30, 2010, the Company terminated the operations of TC Digital and TC Websites due to their continued lack of profitability.  As a consequence of the termination of their operations, TC Digital and TC Websites ceased supporting the Chaotic trading card game and website, effective October 1, 2010.  The results of operations for the trading card and game distribution segment are reported as a discontinued operation for the years ended December 31, 2011 and 2010, and accordingly the accompanying consolidated financial statements have been reclassified for all prior periods to report the assets, liabilities and operating results of this business.
 
 
22

 
 
The following are the summarized results of discontinued operations for the trading card and game distribution segment for the years ended December 31, 2011 and 2010:

             
   
2011
   
2010
 
Net revenues
  $ 11     $ 247  
Total costs and expenses
    62       6,736  
Loss from discontinued operations
  $ (51 )   $ (6,489 )
                 

In connection with the termination of the operations of TC Digital and TC Websites, the Company recorded charges for severance and termination benefits as well as other exit costs in the amount of approximately $51 during the year ended December 31, 2011.  The charges were attributable to certain exit costs incurred during the period. The remaining liability for severance and exit costs will be paid in accordance with the provisions of the contractual agreements and payments are expected to be completed at various times through 2012.

Year Ended December 31, 2010 as compared to Year Ended December 31, 2009

Revenues

Revenues for the years ended December 31, 2010 and 2009, by reportable segment and for the Company as a whole, were as follows:

   
2010
 
2009
 
$ Change
 
% Change
 
Licensing
  $ 12,046   $ 24,068   $ (12,022 )   (50 )%
Advertising Media and Broadcast
    921     2,772     (1,851 )   (67 )
Television and Film Production/Distribution
    1,511     7,340     (5,829 )   (79 )
Total
  $ 14,478   $ 34,180   $ (19,702 )   (58 )%
                           
The decrease in consolidated net revenues for 2010, as compared to 2009, was due to a number of factors.  In the Licensing segment, decreased revenues were primarily attributable to:

(i)  
reduced licensing revenues as a result of a one-time payment of $9,786 received in 2009 in consideration of the Company’s agreement to terminate its right to serve as the merchandise licensing agent for the “Teenage Mutant Ninja Turtles” Property prior to the scheduled expiration of the representation agreement with the Mirage Group in 2012; as well as
(ii)  
reduced licensing revenues on the “Monster Jam”, “Teenage Mutant Ninja Turtles”, and “Yu-Gi-Oh! Properties, worldwide of approximately $1,530, $1,360 and $1,120, respectively; partially offset by
(iii)  
increased licensing revenues on the “Pokémon” Property of approximately $2,500.

The “Yu-Gi-Oh!” and “Pokémon” Properties were the largest contributors of net revenues with approximately 44% and 21%, respectively, of the Company’s revenues in this business segment for 2010.

In the Advertising Media and Broadcast segment, the significant decrease in revenues for 2010 when compared to 2009 was primarily attributable to decreased revenue from the sale of network advertising on the CW4Kids and the sale of internet advertising on the Company’s websites of approximately $1,020 and $815, respectively notwithstanding that ratings and website traffic remained relatively consistent.  Recently, there has been increased scrutiny of food advertising directed at children as a result of childhood obesity concerns.  In response to these concerns, many 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 the Television and Film Production/Distribution segment, the decrease in revenues for 2010, as compared to 2009, was primarily attributable to:

(i)  
decreased international broadcast sales from the “Dinosaur King”, “Yu-Gi-Oh!” and “Teenage Mutant Ninja Turtles” television series of approximately $1,400, $840 and $440, respectively; as well as
(ii)  
increased licensor participations relating to “Yu-Gi-Oh!” home video revenues of approximately $1,500; as well as
(iii)  
decreased domestic and international broadcast sales from the “Chaotic” television series of approximately $600.

 
 
23

 
 
Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 16%, or $5,164 to $28,011 for the year ended December 31, 2010, when compared to the same period in 2009.  The decrease was attributable to broad cost-cutting initiatives implemented throughout the Company and included:

(i)  
decreased personnel related costs of approximately $8,160; as well as
(ii)  
decreased international selling expenses of approximately $1,950; partially offset by
(iii)  
increased costs due to decreased capitalized production salaries of approximately $3,480; as well as
(iv)  
increased network selling expenses of approximately $1,510.

Capitalized Film Costs

   
2010
   
2009
   
$ Change
 
% Change
Amortization of Television and Film Costs
  $ 6,827     $ 21,511     $ (14,684 )   (68 )%

The decrease in amortization of television and film costs for 2010 when compared to 2009 was primarily due to the decreased amortization of the “Teenage Mutant Ninja Turtles” and “Chaotic” television series.  The amortization of television and film costs for the year ended December 31, 2009 was unusually high due to increased amortization relating to the “Chaotic” television series based on significant reductions of estimated future revenues.  In addition, increased amortization was recorded in 2009 for the “Teenage Mutant Ninja Turtles” Property due to an increase in revenue from a one-time payment to the Company relating to the termination of the Company’s right to serve as the merchandise licensing agent for the Property, prior to the scheduled expiration of the representation agreement in 2012.

As of December 31, 2010, there was $3,668 of capitalized film production costs recorded in the Company’s consolidated balance sheet relating primarily to various stages of production on 184 episodes of animated programming. Based on management’s ultimate revenue estimates as of December 31, 2010, approximately 62% 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.

Interest Income

Interest income decreased 63%, or $673, to $403 for the year ended December 31, 2010, as compared to the same period in 2009, primarily as a result of lower cash balances and the Company‘s investments yielding lower interest rates than the prior period.

Impairment of Investment Securities

As of December 31, 2010, the Company held investment securities with an aggregate principal amount of $18,450 and an estimated fair market value of $7,126, as determined by the Company, representing a decline in value of $11,324 (consisting of a decrease in value of $10,843 prior to 2010, and a decrease in value of $481 during 2010).  As of December 31, 2010, the Company concluded that the entire decline in the fair value of the investment securities held by the Company was now other than temporary. Accordingly, the Company impaired $3,578 of its unrealized losses on its investment securities which were previously classified as temporarily impaired.

Loss on Sale of Investment Securities

During 2010, the Company sold securities having an aggregate principal amount of $17,100 and an adjusted cost basis of $6,573 for $7,091.  Accordingly, the Company reclassified $2,134 of an unrealized loss and recorded a loss on the sale of investment securities of $1,616 during 2010.

Loss From Continuing Operations Before Income Taxes

   
2010
   
2009
   
$ Change
 
% Change
Licensing
    $ (7,822 )   $ (8,913 )   $ 1,091   12 %  
Advertising, Media and Broadcast
      (8,161 )     (4,278 )     (3,883 ) (91 )  
Television and Film Production/Distribution
      (9,168 )     (22,491 )     13,323   59    
Total
    $ (25,151 )   $ (35,682 )   $ 10,531   30 %  
                                 

 
 
24

 
 
In the Licensing segment, the decrease in segment loss for the year ended December 31, 2010, as compared to the same period in 2009, was primarily attributable to a decrease in amount of loss on the sale of investment securities and decreased licensing expenses, offset by lower licensing revenues.
 
In the Advertising Media and Broadcast segment, the increase in segment loss for the year ended December 31, 2010, as compared to the same period in 2009, resulted from decreased revenue from the sale of network advertising on the CW4Kids and the sale of internet advertising on the Company’s websites as well as increased network selling expenses.
 
In the Television and Film Production/Distribution segment, the decrease in segment loss for the year ended December 31, 2010, as compared to the same period in 2009, was primarily due to decreased amortization of television and film costs on the  “Chaotic” and “Teenage Mutant Ninja Turtle” Properties, partially offset by decreased broadcast revenues.
 
Income Tax Expense

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. Authoritative guidance issued by the FASB requires the Company to record a valuation allowance when it is more likely than not that all or some portion of the deferred tax assets will not be realized. In view of the level of deferred tax assets as of December 31, 2010, and the Company’s historical losses from operations, the Company has determined that a full valuation allowance against its net deferred tax assets is required.

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, the Company will 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.

The Company did not record a benefit from income taxes for the year ended December 31, 2010 as it will not be able to carryback any of its 2010 net operating loss and it is more likely than not that the Company will not be able to realize its deferred tax assets.  The net tax benefit of $3,805 for the year ended December 31, 2009 reflected a current tax benefit related to the utilization of the Company’s net operating loss carrybacks.   

The Company files in multiple tax jurisdictions and from time to time is subject to audit in certain tax jurisdictions.  As of December 31, 2010 there were no outstanding tax audits.

Loss from Continuing Operations

As a result of the above, the Company had a loss from continuing operations for the year ended December 31, 2010 of $25,151, as compared to a loss from continuing operations in 2009 of $31,877.

Discontinued Operations

Effective September 30, 2010, the Company terminated the operations of TC Digital and TC Websites due to their continued lack of profitability.  As a consequence of the termination of their operations, TC Digital and TC Websites ceased supporting the Chaotic trading card game and website, effective October 1, 2010.  The results of operations for the trading card and game distribution segment are reported as a discontinued operation for the years ended December 31, 2010 and 2009, and accordingly the accompanying consolidated financial statements have been reclassified for all prior periods to report the assets, liabilities and operating results of this business.

The following are the summarized results of discontinued operations for the trading card and game distribution segment for the years ended December 31, 2010 and 2009:

             
   
2010
   
2009
 
Net revenues
  $ 247     $ 2,603  
Total costs and expenses
    6,736       23,182  
Loss from discontinued operations
  $ (6,489 )   $ (20,579 )
                 


 
25

 
In connection with the termination of the operations of TC Digital and TC Websites, the Company recorded charges for severance and termination benefits as well as other exit costs in the amount of approximately $2,673 during the year ended December 31, 2010.  The charges were attributable to certain exit costs incurred during the period, including the elimination of seven sales and related support positions as well as certain other management positions. Mr. Bryan Gannon’s position as Chief Executive Officer of TC Digital was eliminated as part of the staff reduction.  Mr. Gannon provided certain transitional services through his termination date.  The remaining liability for severance and exit costs of approximately $740 will be paid in accordance with the provisions of the contractual agreements and payments are expected to be completed at various times through 2011.

Liquidity and Capital Resources

Financial Condition

Cash and cash equivalents for the years ended December 31, 2011 and 2010 were as follows:


   
2011
 
2010
 
$ Change
 
Cash and cash equivalents
  $ 1,627     $ 4,195     $ (2,568 )
                         

Investments for the years ended December 31, 2011 and 2010 were as follows:

 
2011
 
2010
 
$ Change
 
Investments
  $     $ 7,126     $ (7,126 )
                         

In recent years, the Company has incurred substantial net losses and has used substantial amounts of cash in its operating activities.  Sales by the Company of certain securities held in its investment portfolio as well as certain other assets have significantly contributed to the funding of these operating losses.  While the timing of these sales was not primarily motivated by then current cash needs, without these sales the Company would not have had sufficient cash to fund its operations.  During the first quarter of 2011, the Company determined that it was necessary to generate additional cash to fund its operations and sold its remaining investment securities with a par value of $18,450 and an adjusted cost basis of $7,126 for $6,216.  Accordingly, the Company recorded a loss on the sale of investment securities of $910 for the year ended December 31, 2011.

On February 29, 2012, 4Kids and the Licensors entered into a Settlement Agreement, settling all claims brought by Licensors against 4Kids and all counterclaims brought by 4Kids against the Licensors in the Yu-Gi-Oh! Litigation. The Settlement Agreement provides, among other things, for the Licensors to make a payment to 4Kids in the amount of $8,000 upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order.  On March 9, 2012, the Bankruptcy Court issued an order approving the Settlement Agreement.  Under the Settlement Agreement, the Licensors acknowledged that the Yu-Gi-Oh! Agreement remained valid, binding and legally enforceable with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast and home video rights to the Yu-Gi-Oh! Property throughout the world outside of Asia.  The Settlement Agreement further provided for each of 4Kids and the Licensors to release each other from all claims they may have against each other, other than certain indemnification claims and claims that may arise under the Settlement Agreement.  The Settlement Agreement also provided that the agreement does not constitute an admission by any party of any violation of any agreement or law.

In 2011, the Company incurred significant costs in connection with the Bankruptcy Cases.  The Company expects these costs to continue throughout the Bankruptcy proceedings.  The Company’s overall cash position as of December 31, 2011, together with the realized and anticipated effects of the significant cost cutting initiatives implemented by the Company during 2009, 2010 and throughout 2011 provides only limited liquidity to fund the Company’s day-to-day operations. The financial challenges facing the Company as a result of its recent history of losses and the limited liquidity available to it to fund day-to-day operations raise substantial doubt about the Company’s ability to continue as a going concern.  Our ability to achieve and maintain profitability and positive cash flow is dependent upon the success of our reorganizational efforts and a number of other factors, including our ability to generate additional revenues. The Company’s financial statements have been prepared assuming that the Company will continue as a going concern and do not contain any adjustments that may result from the outcome of this uncertainty.

The Company will consider all alternatives available to generate additional cash to fund its operations, including, but not limited to sales of assets, issuance of equity or debt securities, and third party arrangements, subject to any limitations and procedures arising from the Bankruptcy Cases.

 
 
26

 
Sources and Uses of Cash

Cash flows for the three years ended December 31, 2011, 2010 and 2009 were as follows:

Sources (Uses)
 
2011
   
2010
   
2009
 
Operating Activities
  $ (8,843 )   $ (6,139 )   $ (13,580 )
Investing Activities
    6,248       6,812       3,429  
Financing Activities
          (44 )     74  

Working capital, consisting of current assets less current liabilities, was $(4,883) as of December 31, 2011 and $2,052 as of December 31, 2010.

 Operating Activities
2011
Net cash used in operating activities of $8,843 in 2011 primarily reflects the Company’s operating losses partially offset by cash collections of the Company’s trade receivables and the decrease of payments of liabilities arising prior to the commencement of the Bankruptcy Cases.

2010
Net cash used in operating activities of $6,139 in 2010 primarily reflects net operating losses of the Company, offset by an increase in cash collections of the Company’s trade and income tax receivables, including a tax refund in an amount of $4,014 relating to extended net operating loss carrybacks.

2009
Net cash used in operating activities of $13,580 in 2009 primarily reflects net operating losses of the Company, as well as additional costs related to the purchase of film and television inventory, partially offset by increased collections of the Company’s accounts receivable.

Investing Activities
2011
Net cash provided by investing activities of $6,248 in 2011, primarily reflects proceeds from the sale of the Company’s investment securities for $6,216.

2010
Net cash provided by investing activities of $6,812 in 2010, reflects proceeds from the sale of the Company’s investment securities for $7,091, partially offset by purchases of property and equipment.

2009
Net cash provided by investing activities of $3,429 in 2009, reflects proceeds from the sale of certain of the Company’s investment securities for $3,733, partially offset by purchases of property and equipment.

Financing Activities
2011
There was no net cash provided by, or used in, financing activities for the year ended December 31, 2011.

2010
Net cash used in financing activities of $44 in 2010, reflects the Company’s purchase of shares of its common stock classified as treasury stock on the consolidated financial statements, offset by capital contributions from the Company’s noncontrolling interests.

2009
Net cash provided by financing activities of $74 in 2009, reflects the capital contributions from the Company’s noncontrolling interests, partially offset by the Company’s purchase of shares of its common stock classified as treasury stock on the consolidated financial statements.

During 2011, the decrease in the Company's cash flow from operations resulted from the diminished popularity of its Properties, increased costs incurred in connection with the Yu-Gi-Oh! Litigation and the Bankruptcy Cases, as well as continued weakness in the current economic climate.  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.
 
 
27

 
 
Broadcast Agreements

On October 1, 2007, the Company and The CW entered into the CW Agreement, under which The CW granted to the Company the exclusive right to program The CW's Saturday morning children's programming block (“The CW4Kids”) that is broadcast in most markets between 7am and 12pm for an initial term of five years beginning with The CW's 2008-2009 broadcast season. Each broadcast season runs from September to September.
 
Under the terms of the CW Agreement, the Company is obligated to make quarterly minimum guaranteed payments which are subject to reduction under certain circumstances. The Company and The CW share advertising revenues earned from the sale of national commercial time during The CW4Kids with The CW's share to be applied against such quarterly guarantee payments.  In addition, The CW is entitled under the CW Agreement to participate in the Company's merchandising revenue from certain content broadcast on The CW4Kids, if such merchandising revenues exceed a certain annual minimum.  4Kids Ad Sales, Inc. manages and accounts for the advertisement revenue and costs associated with The CW4Kids.

The minimum guarantee payable by the Company to The CW under the CW Agreement is as follows:

                                                                   Broadcast Season
   
Minimum Fee
 
  2008/2009     $ 15,000  
  2009/2010     $ 12,000  
  2010/2011     $ 11,500  
  2011/2012     $ 11,500  
  2012/2013     $ 11,500  

For the 2008/2009 broadcast season, the revenue sharing percentage split in favor of the CW was 80%/20% until $20,000 in revenue has been realized and a revenue split of 50%/50% applied thereafter.  For each other broadcast season, the CW Agreement provides for (1) an 80%/20% revenue split in favor of The CW until it has received its minimum guarantee applicable to such broadcast season, (2) the Company to retain 100% of the revenue until its share of the revenue for such broadcast season equals 35%, (3) a 65%/35% revenue split in favor of The CW until $20,000 in revenue has been realized and (4) a revenue split between the parties of 50%/50% thereafter.  The Agreement also requires the Company to make certain security arrangements in favor of The CW to secure payment of the minimum guarantee and The CW's share of national advertising proceeds.

The Company’s ability to recover the cost of its quarterly minimum guarantee due to The CW will depend on the popularity of the television programs the Company broadcasts on The CW4Kids and the general market demand and pricing of advertising time for Saturday morning children’s broadcast television.  The popularity of such programs, broadcast by the Company on The CW4Kids, impacts audience levels and the level of the network advertising rates that the Company can charge.  Additionally, the success of the merchandise licensing programs and home video sales based on such television programs broadcast on The CW4Kids is dependent on consumer acceptance of such television programs.  If the Company estimates that it will be unable to generate sufficient future revenue from advertising sales, home video sales and merchandising licensing at levels to cover the cost of its quarterly contractual obligation to The CW, the Company would record a charge to earnings to reflect an expected loss on The CW agreements in the quarter in which the factors negatively affecting the recoverability of the fee payable become known.  The Company will be required to make certain assumptions and estimates about future events such as advertising rates and audience viewing levels in evaluating its ability to recover the cost of the minimum guaranteed payments.  Such estimates and assumptions are subject to market forces and factors beyond the control of the Company and are inherently subject to change.  There can be no assurance that the Company will be able to recover the full cost of the minimum guaranteed payments and in the event it cannot, it would record the resulting charge to earnings to reflect an expected loss on the minimum guaranteed payments, which could be significant.

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

Contractual Commitments

Under Section 365 and other relevant sections of the Bankruptcy Code, we may assume, assume and assign, or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property and equipment, subject to the approval of the Bankruptcy Court and certain other conditions.  Any description of an executory contract or unexpired lease in this report, including, where applicable, our express termination rights or a quantification of our obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights we have under Section 365 of the Bankruptcy Code.
 

 
28

 
 
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, 2011 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 with operating cash flows generated in the normal course of business.

Year Ending December 31,
   
CW Agreement
   
Operating Leases
   
Total
 
  2012     $ 20,599     $ 1,176     $ 21,775  
  2013       6,500       1,232       7,732  
  2014             1,162       1,162  
  2015             1,056       1,056  
  2016             1,088       1,088  
          2017 and after
            560       560  
        Total
    $ 27,099     $ 6,274     $ 33,373  
                             

The Company’s contractual obligations and commitments are detailed in the Company’s consolidated financial statements. For additional information see Note 16 of the notes to the Company’s consolidated financial statements.

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

Foreign Currency Exchange Rate Fluctuations.

From time to time, the Company may be exposed to the risk of future currency exchange rate fluctuations, which is accounted for as an adjustment to stockholders’ equity and changes in the exchange rates between various foreign currencies and the U.S. dollar may, as a result, have an impact on the accumulated other comprehensive 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 Report of Independent Registered Public Accounting Firm, the Company’s consolidated financial statements and notes to the Company’s consolidated financial statements appear in a separate section of this Form 10-K (beginning on Page F-1 following Part IV). The index to the Company’s consolidated financial statements is included in Item 15.
 
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
 
None.

Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

(a) We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in our filings and submissions under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We completed an evaluation under the supervision and with participation of our management, including our principal executive officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation, our principal executive officer and Chief Financial Officer have concluded that as of December 31, 2011, such disclosure controls and procedures were effective to provide the reasonable assurance described above.

(b) There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934) during the period covered by this report that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
 
 
 
29

 
 
Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for its assessment of the effectiveness of 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, 2011. 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, 2011, our internal control over financial reporting was effective based on those criteria.

Item 9B.  Other Information.
 
None.

PART III

Item10. 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.

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.
 
 
30

 
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.

(a)(1) Financial Statements:
The following consolidated financial statements of 4Kids Entertainment, Inc. and Subsidiaries are included in Item 8:
 
Page Number
Report of Independent Registered Public Accounting Firm
F-1
   
Consolidated Balance Sheets - December 31, 2011 and 2010
F-2
   
Consolidated Statements of Operations - Years Ended
 
   December 31, 2011, 2010 and 2009
F-3
   
Consolidated Statements of Shareholders’ Equity (Deficit) and Comprehensive Loss -
 
   Years Ended December 31, 2011, 2010 and 2009
F-4
   
Consolidated Statements of Cash Flows - Years Ended
 
   December 31, 2011, 2010 and 2009
F-5
   
Notes to Consolidated Financial Statements
F-6 to F-31

(a)(2)  Financial Statement Schedules
All schedules have been omitted because they are inapplicable, not required, or the information is included in the Company’s consolidated financial statements or the notes to the Company’s consolidated financial statements.

(a)(3) and (b) Exhibits.
 See Index of Exhibits annexed hereto.

 
31

 

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 22, 2012
By/s/ Samuel R. Newborn          
           Samuel R. Newborn
           Executive Vice President
           and General Counsel
           (principal executive officer)

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 22, 2012
By/s/ Bruce R. Foster                            
Bruce R. Foster,
Executive Vice President
and Chief Financial Officer
(principal Financial
and chief accounting officer )

Date: March 22, 2012
By/s/ Samuel R. Newborn                                   
Samuel R. Newborn,
Executive Vice President
and General Counsel
(principal executive officer and Director)
 
Date: March 22, 2012
By /s/ Jay Emmett                                        
Jay Emmett,
(Director)

Date: March 22, 2012
By  /s/ Michael Goldstein                           
Michael Goldstein,
(Director)

Date: March 22, 2012
By  /s/ Wade Massad                                   
Wade Massad,
(Director)

Date: March 22, 2012
By  /s/ Duminda DeSilva                               
Duminda DeSilva
(Director)



 
32

 
 
Exhibit
Number
Description
   
3.1
Certificate of Incorporation of the Registrant filed on April 28, 1970, as amended on October 12, 1971, as further amended on April 21, 1972, as further amended on July 17, 1979, as further amended on May 22, 1985, as further amended on July 30, 1986, as further amended on July 19, 1989, as further amended on November 16, 1995 (changing the name of the Corporation to 4Kids Entertainment, Inc.).   (1)
   
3.2
Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated April 29, 1999.  (2)
   
3.3
Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated May 18, 2000.   (3)
   
3.4
Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 15, 2007.   (4)
   
3.5
Amended and Restated By-Laws of the Registrant adopted by the Board of Directors on April 30, 2010 (31).
   
4.1
Form of Common Stock Certificate. (5)
   
4.2
Rights Agreement dated as of August 15, 2007 between 4Kids Entertainment and Continental Stock Transfer & Trust Co., as Rights Agent. (4)
   
4.3
First Amendment dated as of June 23, 2008 of the Rights Agreement between 4Kids Entertainment and Continental Stock Transfer & Trust Co., as Rights Agent. (24)
   
10.1
2000 Stock Option Plan. (*) (3)
   
10.2
2001 Stock Option Plan. (*) (6)
   
10.3
2002 Stock Option Plan. (*) (7)
   
10.4
2003 Stock Option Plan. (*) (8)
   
10.5
2004 Stock Option Plan. (*) (9)
   
10.6
2005 Long-Term Incentive Compensation Plan. (*) (10)
   
10.7
2006 Long-Term Incentive Compensation Plan. (*) (11)
   
10.8
2007 Long-Term Incentive Compensation Plan. (*) (12)
   
10.9
2008 Long-Term Incentive Compensation Plan (*) (13)
   
10.10
Employment Agreement, dated January 1, 2002, between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn.  (*)(15)
   
10.11
Amendment dated as of June 16, 2003, to the Employment Agreement between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn.  (*)(15)
   
10.12
Amendment to Employment Agreement, dated as of March 2, 2006, between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn.  (*)(16)
   
10.13
Amendment to Employment Agreement, dated as of October 14, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment Inc. and Samuel R. Newborn.  (*)(26)
   
10.14
Severance Agreement, dated as of October 14, 2009, among 4Kids Entertainment, Inc., 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn.  (*)(26)
   
10.15
Amendment to Severance Agreement, dated as of December 31, 2009, among 4Kids Entertainment, Inc., and 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn.  (*)(28)
   
10.16
Employment Agreement dated as of December 1, 2005, between 4Kids Entertainment Licensing, Inc., and Bruce R. Foster.  (*)(17)
   
10.17
Amendment to Employment Agreement dated as of January 30, 2007, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster.  (*)(18)
   
10.18
Amendment to Employment Agreement dated as of April 16, 2007, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster.  (*)(29)
   
10.19
 Amendment to Employment Agreement, dated as of October 14, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster.  (*)(26)
   
10.20
Severance Agreement, dated as of October 14, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster.  (*)(26)
   
10.21
Amendment to Severance Agreement, dated as of December 31, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster.  (*)(28)
   
10.22
Employment Agreement dated as of July 1, 2003, between 4Kids Entertainment Licensing, Inc. and Brian Lacey.  (*)(19)
 
 
33

 
 
10.23
Amendment to Employment Agreement, dated as of October 16, 2006, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Brian Lacey.  (*)(20)
   
10.24
Severance Agreement, dated as of November 24, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Brian Lacey.  (*)(27)
   
10.25
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. (21)
   
10.26
Operating Agreement of TC Websites LLC, dated as of December 11, 2006, between 4Kids Websites, Inc. and Chaotic USA Entertainment Group, Inc. (21)
   
10.27
Operating Acquisition and Administration agreement dated June 28, 2002 between Cherry Lane Publishing Company, Inc. and 4Kids Entertainment Music, Inc. (22)
   
10.28
Saturday Morning Programming Block dated October 1, 2007 between The CW Network, LLC. and 4Kids Entertainment, Inc. (22)
   
10.29
Amended Saturday Morning Programming Block dated June 23, 2010 between The CW Network, LLC. and 4Kids Entertainment, Inc. (32)
   
10.30
Membership Interest Purchase Agreement dated December 18, 2007 between TC Digital Games, LLC, Chaotic USA Entertainment Group, Inc. and 4Kids Digital, Inc. (22)
   
10.31
Membership Interest Purchase Agreement dated December 18, 2007 between TC Websites LLC, Chaotic USA Entertainment Group, Inc. and 4Kids Websites, Inc. (22)
   
10.32
 First Amendment dated as of September 15, 2008 to the Operating Agreement of TC Websites LLC, between 4Kids Websites, Inc. and Chaotic USA Entertainment Group, Inc. (25)
   
10.33
Employment Agreement, dated as of June 1, 2008, between 4Kids Ad Sales, Inc. and Daniel Barnathan.  (*)(23)
   
10.34
Letter Agreement Supplement to the Termination, Assignment and Release Agreement, dated as of October 20, 2009, between 4Kids Entertainment, Inc. and its Subsidiaries,  Mirage Licensing, Inc and Mirage Studios, Inc.  (30)
   
21.1
List of Subsidiaries of the Registrant.
   
23.1
Consent of EisnerAmper LLP, Independent Registered Public Accounting Firm.
   
31.1
Certification of principal 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 principal 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.
   
101.INS
XBRL Instance Document
   
101.SCH
XBRL Schema Document
   
101.CAL
XBRL Calculation Linkbase Document
   
101.DEF
XBRL Definition Linkbase Document
 
101.LAB
XBRL Label Linkbase Document
   
101.PRE
XBRL Presentation Linkbase Document
 
   
 
______________
   
*
Denotes a management contract or compensatory plan, contract or arrangement.
   
(1)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 000-07843).
   
(2)
Incorporated by reference to 1999 Proxy Statement for Annual Meeting of Shareholders held April 29, 1999 (File No. 000-07843).
   
(3)
Incorporated by reference to 2000 Proxy Statement for Annual Meeting of Shareholders held May 17, 2000 (File No. 000-07843).
   
(4)
Incorporated by reference to Current Report on Form 8-K dated August 16, 2007 (File No. 001-16117).
   
(5)
Incorporated by reference to Registration Statement on Form S-1 declared effective March 7, 1986 (File No. 33-3056).
   
 
 
34

 
 
(6)
Incorporated by reference to 2002 Proxy Statement for Annual Meeting of Shareholders held May 23, 2001 (File No. 001-16117).
   
(7)
Incorporated by reference to 2002 Proxy Statement for Annual Meeting of Shareholders held May 23, 2002 (File No. 001-16117).
   
(8)
Incorporated by reference to 2003 Proxy Statement for Annual Meeting of Shareholders held May 23, 2003 (File No. 001-16117).
   
(9)
Incorporated by reference to 2004 Proxy Statement for Annual Meeting of Shareholders held May 27, 2004 (File No. 001-16117).
   
(10)
Incorporated by reference to 2005 Proxy Statement for Annual Meeting of Shareholders held May 26, 2005 (File No. 001-16117).
   
(11)
Incorporated by reference to 2006 Proxy Statement for Annual Meeting of Shareholders held May 26, 2006 (File No. 001-16117).
   
(12)
Incorporated by reference to 2007 Proxy Statement for Annual Meeting of Shareholders held May 25, 2007 (File No. 001-16117).
   
(13)
Incorporated by reference to 2008 Proxy Statement for Annual Meeting of Shareholders held May 20, 2008 (File No. 001-16117).
   
(14)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 000-07843).
   
(15)
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No.  001-16117).
   
(16)
Incorporated by reference to Current Report on Form 8-K dated March 8, 2006 (File No. 001-16117).
   
(17)
Incorporated by reference to Current Report on Form 8-K dated January 13, 2006 (File No. 001-16117).
   
(18)
Incorporated by reference to Current Report on Form 8-K dated February 5, 2007 (File No. 001-16117).
   
(19)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 000-07843).
   
(20)
Incorporated by reference to Current Report on Form 8-K dated November 2, 2006 (File No. 001-16117).
   
(21)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-07843).
   
(22)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-07843).
   
(23)
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (File No. 001-16117).
   
(24)
Incorporated by reference to Current Report on Form 8-K dated June 25, 2008 (File No. 001-16117).
   
(25)
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 001-16117).
   
(26)
Incorporated by reference to Current Report on Form 8-K dated October 21, 2009 (File No. 001-16117).
   
(27)
Incorporated by reference to Current Report on Form 8-K December 1, 2009 (File No. 001-16117).
   
(28)
Incorporated by reference to Current Report on Form 8-K dated January 7, 2010 (File No. 001-16117).
   
(29)
Incorporated by reference to Current Report on Form 8-K dated April 23, 2007 (File No. 001-16117).
   
(30)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 001-16117).
   
(31)
Incorporated by reference to Current Report on Form 8-K April 30, 2010 (File No. 001-16117).
   
(32)
Incorporated by reference to Current Report on Form 8-K June 30, 2010 (File No. 001-16117).
   
 
 
 
35

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
4Kids Entertainment, Inc.

We have audited the accompanying consolidated balance sheets of 4Kids Entertainment, Inc. and Subsidiaries (the “Company”) as of December 31, 2011 and 2010 and the related consolidated statements of operations, shareholders' (deficit) equity and comprehensive loss, and cash flows for each of the years in the three year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits include consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2011 and 2010 and the consolidated results of their operations and their consolidated cash flows for each of the years in the three year period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As more fully described in Note 1 to the consolidated financial statements, in recent years the Company has incurred substantial operating losses and used substantial amounts of cash in its operating activities and experienced limited liquidity available to fund its operations.  In addition, on April 6, 2011 4Kids Entertainment, Inc.  and all of its domestic wholly-owned subsidiaries, filed voluntary petitions for relief under Title 11 of Chapter 11 of the United States Code in the United States Bankruptcy Court.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans considering these matters are also described in Note 1 to the consolidated financial statements.  The consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.


 
 
/s/ EisnerAmper LLP
New York, New York
March 22, 2012


 

 
F - 1

 

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2011 AND 2010
(In thousands of dollars, except share data)
   
December 31, 2011
   
December 31, 2010
 
ASSETS:
               
Current assets:
               
   Cash and cash equivalents
  $ 1,627     $ 4,195  
   Investments
          7,126  
   Accounts receivable - net
    6,221       7,818  
   Income taxes receivable
          30  
   Prepaid expenses and other current assets
    1,247       1,185  
   Current assets of discontinued operations
    18       39  
Total current assets
    9,113       20,393  
                 
Property and equipment - net
    707       1,197  
Accounts receivable - noncurrent, net
    378       59  
Film and television costs - net
    2,465       3,668  
Other assets - net (includes related party amounts of $0 and $195, respectively)
    3,281       3,753  
Total assets
  $ 15,944     $ 29,070  
                 
LIABILITIES AND EQUITY:
               
Liabilities not subject to compromise:
               
Current liabilities:
               
   Due to licensors
  $ 1,176     $ 2,501  
   Accounts payable and accrued expenses
    11,071       12,517  
   Current liabilities of discontinued operations
    1,583       1,753  
   Deferred revenue
    166       1,570  
Total current liabilities
    13,996       18,341  
Deferred rent
    498       471  
Total liabilities not subject to compromise
    14,494       18,812  
Liabilities subject to compromise
    7,507        
Total liabilities
    22,001       18,812  
                 
Commitments and contingencies (Note 16)
               
4Kids Entertainment, Inc. shareholders’ (deficit) equity
               
      Preferred stock, $.01 par value – authorized 3,000,000 shares; none issued
           
      Common stock, $.01 par value - authorized 40,000,000 shares;
       issued 15,777,711 and 15,652,845 shares; outstanding
       13,653,824 and 13,528,958 shares in 2011 and 2010, respectively
    158       157  
      Additional paid-in capital
    69,436       68,699  
      Accumulated other comprehensive income (loss)
    501       470  
     Accumulated deficit
    (23,063 )     (7,863 )
      47,032       61,463  
Less cost of 2,123,887 treasury shares in both 2011 and 2010
    (36,488 )     (36,488 )
Total equity of 4Kids Entertainment, Inc. shareholders
    10,544       24,975  
Noncontrolling interests related to discontinued operations
    (16,601 )     (14,717 )
Total shareholders’ (deficit) equity
    (6,057 )     10,258  
Total liabilities and shareholders (deficit) equity
  $ 15,944     $ 29,070  
                 

See notes to consolidated financial statements.
 
 
 
F - 2

 

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2011, 2010 AND 2009
(In thousands of dollars, except share data)
   
2011
   
2010
   
2009
 
Net revenues:
                       
   Service revenue
  $ 11,464     $ 14,478     $ 24,394  
   Other revenue
    882             9,786  
          Total net revenues
    12,346       14,478       34,180  
                         
Costs and expenses:
                       
   Selling, general and administrative
    25,989       28,011       33,175  
   Amortization of television and film costs
    2,762       6,827       21,511  
   Impairment of investment in international
                       
      trading card subsidiary
                2,430  
          Total costs and expenses
    28,751       34,838       57,116  
                         
Loss from operations
    (16,405 )     (20,360 )     (22,936 )
Other income (expense):
                       
Interest income
    64       403       1,076  
Impairment of investment securities
          (3,578 )     (6,175 )
Loss on sale of investment securities
    (910 )     (1,616 )     (7,647 )
         Total other expense
    (846 )     (4,791 )     (12,746 )
                         
Loss from continuing operations before reorganization and litigation items
    (17,251 )     (25,151 )     (35,682 )
Reorganization items
    (1,628 )            
Gain on litigation
    1,846              
Loss from continuing operations before income taxes
    (17,033 )     (25,151 )     (35,682 )
Benefit from income taxes
                3,805  
                         
Loss from continuing operations
    (17,033 )     (25,151 )     (31,877 )
Loss from discontinued operations
    (51 )     (6,489 )     (20,579 )
Net loss
    (17,084 )     (31,640 )     (52,456 )
Loss attributable to noncontrolling interests, discontinued operations
    1,884       4,479       10,380  
Net loss attributable to 4Kids Entertainment, Inc.
  $ (15,200 )   $ (27,161 )   $ (42,076 )
                         
Per share amounts:
                       
Basic and diluted loss per share attributable to
                       
4Kids Entertainment, Inc. common shareholders
                       
    Continuing operations
  $ (1.25 )   $ (1.87 )   $ (2.40 )