Item 1
Business
Item 1A
Item 1A
Item 1B
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Item 2. Properties.
The following table sets forth, with respect to properties leased (none are owned) by the Company at December 31, 2009, the location of the property, the date on which the lease expires and the use which the Company makes of such facilities:
Address
Expiration of Lease
Use
Approximate Square Feet
1414 Avenue of the Americas, 3rd, 5th and 6th Floors
New York, New York
September 30, 2010
Executive, Marketing,
Sales and Administrative
29,000
53 West 23rd Street, 11th Floor
New York, New York
June 30, 2017
Production Facilities
25,000
53 West 23rd Street, 6th Floor
New York, New York
February 29, 2012
Website Development
5,600
1st Floor Mutual House
70 Conduit Street
London, England
July 30, 2011
International Sales
Office
2,400
12481 High Bluff Drive,
Suite 110
San Diego, California
February 17, 2011
Trading Card and Game Distribution
4,200
The executive, marketing, sales and administrative offices are utilized by the Licensing, Advertising Media and Broadcast and Trading Card and Game Distribution segments. The international sales office is utilized primarily by the Licensing Segment. The production and the website development facilities are primarily utilized by the Television and Film Production/Distribution segment.
Item 3.
Item 3. Legal Proceedings.
On November 9, 2008, the Company entered into an agreement with Fox to settle the lawsuit brought by the Company against Fox for alleged breaches of the Fox Agreement (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the Fox Agreement terminated on December 31, 2008 rather than at the end of the 2008-2009 broadcast season in September 2009. The Company’s remaining financial obligations to Fox for the first three quarters of 2009 also terminated. During the year ended December 31, 2009, the Company paid Fox $6,250 in respect of its remaining obligation under the Settlement Agreement.
On July 29, 2009, The Upper Deck Company, LLC (“Upper Deck”) filed suit in Superior Court of the State of California, County of San Diego, North County Division, against Bryan C. Gannon (“Gannon”) and TC Digital Games LLC (“TC Digital”) alleging that Gannon misappropriated and used confidential information and trade secrets of Upper Deck in connection with the “Chaotic” trading card game. The complaint alleges that Gannon became privy to the Upper Deck confidential information and trade secrets during the course of Gannon’s service to Upper Deck during the July 1, 2002 through January 1, 2003 period as an independent contractor and during the January 2, 2003 through May 23, 2003 period during which Gannon was an employee of Upper Deck. The complaint seeks unspecified monetary damages to be determined at trial. On October 5, 2009, Upper Deck voluntarily dismissed the complaint without prejudice.
On February 12, 2010, Home Focus Development, LTD, a British Virgin Islands Corporation, (“Home Focus”) filed suit against the Company in the United States District Court for the Southern District of New York. In the lawsuit, Home Focus alleges that the Company owes it $1,075 under an Interest Purchase Agreement among the Company, Home Focus and TC Digital entered into on March 2, 2009, pursuant to which the Company acquired a 25% ownership interest in TC Digital International Ltd. As further described in Note 17 of the notes to the Company’s consolidated financial statements, the Company withheld payments in an aggregate amount of $575 from Home Focus otherwise due under the Interest Purchase Agreement as a result of Home Focus’s failure to make required capital contributions to TC Digital International, Ltd, (“TDI”) the joint venture formed by the Company and Home Focus. The Company intends to vigorously defend this litigation.
The Company, from time to time, is involved in litigation arising in the ordinary course of its business. The Company does not believe that such litigation to which the Company or any subsidiary of the Company is a party or of which any of their Properties is the subject will, individually or in the aggregate, have a material adverse effect on the Company’s financial position, results of its operations or cash flows.
PART II
Item 4.
Item 4. Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
(a) Market Information - The Company’s Common Stock is listed for trading on the New York Stock Exchange under the symbol “KDE”. The following table indicates high and low sales quotations for the periods indicated based upon information supplied by the New York Stock Exchange.
(b) Holders - The approximate number of holders of record of the Company’s Common Stock on March 15, 2010 was 5,349.
(c) Dividends - There were no dividends or other distributions made by the Company during 2009 or 2008. 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 11 in Part III of this Form 10-K.
(e) Performance Graph - The following graph compares the cumulative total shareholders return of our common stock with the cumulative return of the Standard & Poor’s Small Cap 600 Index (“S&P 600”), the Russell 2000 Index (“Russell 2000”) and a group of companies, consisting of The Walt Disney Company, Time Warner, Inc., World Wrestling Entertainment, Inc., Marvel Entertainment, Inc. and Mattel, Inc. (“Peer Group”) for the period beginning December 31, 2004 and ending December 31, 2009. The graph assumes that $100 was invested on December 31, 2004, and that any dividends were reinvested.
Item 5.
Item 5. Selected Consolidated Financial Data.
(In thousands of dollars, except share and per share data)
Our selected consolidated financial data presented below has been derived from our audited consolidated financial statements and should be read in conjunction with the notes to the Company’s consolidated financial statements and “Item 6.
Item 6. 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, 2009. 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 under “Item 7.
Item 7.
Financial Statements and Supplementary Data.
The Reports of Registered Public Independent Accounting Firms, the Company’s consolidated financial statements and notes to the Company’s consolidated financial statements appear in a separate section of this Form 10-K (beginning on Page following Part IV). The index to the Company’s consolidated financial statements is included in Item 14.
Item 8.
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 8A.
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 Chief 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 Chief 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 Chief Executive Officer and Chief Financial Officer have concluded that as of the fourth quarter, 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.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The scope of management's assessment of the effectiveness of internal control over financial reporting includes all of our Company's consolidated subsidiaries.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. 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, 2009, our internal control over financial reporting was effective based on those criteria.
Eisner LLP, the independent registered public accounting firm that audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an auditors' report on our internal control over financial reporting.
Item 8B. Other Information.
None.
PART III
Item 9.
Item 9. Directors and Executive Officers of the Registrant.
Information concerning directors and officers of the Company is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year.
On May 29, 2009, the Company filed with the New York Stock Exchange the Annual CEO Certification regarding the Company’s compliance with the NYSE’s Corporate Governance listing standards as required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual.
Item 10.
Item 10. 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 11.
Item 11. 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 12.
Item 12. Certain Relationships and Related Transactions.
Information concerning certain relationships and related transactions is incorporated by reference to the Company’s Definitive Proxy Statement on Schedule 14A to be filed with the Securities and Exchange Commission within 120 days after the end of the Company’s fiscal year.
Item 13.
Item 13. 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 14.
Item 14. 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
Reports of Independent Registered Public Accounting Firms on Consolidated Financial Statements
to
Consolidated Balance Sheets - December 31, 2009 and 2008
Consolidated Statements of Operations - Years Ended
December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders’ Equity and Comprehensive Loss -
Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows - Years Ended
December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
to
(a)(2) Financial Statement Schedules
All schedules have been omitted because they are inapplicable, not required, or the information is included in the Company’s consolidated financial statements or the notes to the Company’s consolidated financial statements.
(a)(3) and (b) Exhibits.
See Index of Exhibits annexed hereto.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
4KIDS ENTERTAINMENT, INC.
Date: March 15, 2010
___________________________
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 15, 2010
___________________________
Chief Executive Officer and
Date: March 15, 2010
___________________________
Executive Vice President,
Date: March 15, 2010
___________________________
Executive Vice President,
Date: March 15, 2010
___________________________
Date: March 15, 2010
___________________________
Date: March 15, 2010
___________________________
Date: March 15, 2010
___________________________
Exhibit
Number
Description
3.1
Certificate of Incorporation of the Registrant filed on April 28, 1970, as amended on October 12, 1971, as further amended on April 21, 1972, as further amended on July 17, 1979, as further amended on May 22, 1985, as further amended on July 30, 1986, as further amended on July 19, 1989, as further amended on November 16, 1995 (changing the name of the Corporation to 4Kids Entertainment, Inc.). (1)
3.2
Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated April 29, 1999. (2)
3.3
Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated May 18, 2000. (3)
3.4
Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated August 15, 2007. (4)
3.5
Amended and Restated By-Laws of the Registrant adopted by the Board of Directors on August 15, 2007. (4)
4.1
Form of Common Stock Certificate. (5)
4.2
Rights Agreement dated as of August 15, 2007 between 4Kids Entertainment and Continental Stock Transfer & Trust Co., as Rights Agent. (4)
4.3
First Amendment dated as of June 23, 2008 of the Rights Agreement between 4Kids Entertainment and Continental Stock Transfer & Trust Co., as Rights Agent. (28)
10.1
1999 Stock Option Plan. (*) (2)
10.2
2000 Stock Option Plan. (*) (3)
10.3
2001 Stock Option Plan. (*) (6)
10.4
2002 Stock Option Plan. (*) (7)
10.5
2003 Stock Option Plan. (*) (8)
10.6
2004 Stock Option Plan. (*) (9)
10.7
2005 Long-Term Incentive Compensation Plan. (*) (10)
10.8
2006 Long-Term Incentive Compensation Plan. (*) (11)
10.9
2007 Long-Term Incentive Compensation Plan. (*) (12)
10.10
2008 Long-Term Incentive Compensation Plan (*) (13)
10.11
Agreement of Lease, dated March 28, 1988, between the Registrant and 1414 Avenue of the Americas Company (“1414 Lease”). (14)
10.12
Amendment, dated July 8, 1994, to the 1414 Lease. (14)
10.13
Amended and Restated Employment Agreement dated January 1, 2002, between 4Kids Entertainment Licensing, Inc. and Alfred R. Kahn. (*)(15)
10.14
Second Amended and Restated Employment Agreement, dated December 15, 2006, between 4Kids Entertainment Licensing, Inc. and Alfred R. Kahn. (*)(16)
10.15
Amendment to Second Amended and Restated Employment Agreement, dated December 31, 2009, between 4Kids Entertainment Licensing, Inc. and Alfred R. Kahn. (*)(33)
10.16
Employment Agreement, dated January 1, 2002, between 4Kids Productions, Inc. and Norman Grossfeld. (*)(15)
10.17
Amendment dated as of June 16, 2003, to the Employment Agreement between 4Kids Productions, Inc. and Norman Grossfeld. (*)(15)
10.18
Amendment to Employment Agreement, dated March 2, 2006, between 4Kids Productions, Inc. and Norman Grossfeld. (*)(17)
10.19
Employment Agreement, dated January 1, 2002, between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(15)
10.20
Amendment dated as of June 16, 2003, to the Employment Agreement between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(15)
10.21
Amendment to Employment Agreement, dated as of March 2, 2006, between 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(17)
10.22
Amendment to Employment Agreement, dated as of October 14, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment Inc. and Samuel R. Newborn. (*)(31)
10.23
Severance Agreement, dated as of October 14, 2009, among 4Kids Entertainment, Inc., 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(31)
10.24
Amendment to Severance Agreement, dated as of December 31, 2009, among 4Kids Entertainment, Inc., and 4Kids Entertainment Licensing, Inc. and Samuel R. Newborn. (*)(33)
10.25
Employment Agreement dated as of June 30, 2005, between 4Kids Entertainment, Inc., and Steven M. Grossman. (*)(18)
10.26
General Release Agreement of Steven M. Grossman dated as of April 6, 2006. (*)(19)
10.27
Employment Agreement dated as of December 1, 2005, between 4Kids Entertainment Licensing, Inc., and Bruce R. Foster. (*)(20)
10.28
Amendment to Employment Agreement dated as of January 30, 2007, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster. (*)(21)
10.29
Amendment to Employment Agreement dated as of April 16, 2007, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster. (*)(34)
10.30
Amendment to Employment Agreement, dated as of October 14, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster. (*)(31)
10.31
Severance Agreement, dated as of October 14, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster. (*)(31)
10.32
Amendment to Severance Agreement, dated as of December 31, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Bruce R. Foster. (*)(33)
10.33
Employment Agreement dated as of July 1, 2003, between 4Kids Entertainment Licensing, Inc. and Brian Lacey. (*)(22)
10.34
Amendment to Employment Agreement, dated as of October 16, 2006, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Brian Lacey. (*)(23)
10.35
Severance Agreement, dated as of November 24, 2009, among 4Kids Entertainment Licensing, Inc., 4Kids Entertainment, Inc. and Brian Lacey. (*)(32)
10.36
Amendment Agreement, dated March 14, 2006, between 4Kids Entertainment, Inc. and Fox Broadcasting Company. (*)(22)
10.37
Employment Agreement, dated as of December 11, 2006, between TC Digital Games LLC and Bryan Gannon. (*)(24)
10.38
Employment Agreement, dated as of December 11, 2006, between TC Digital Games LLC and John Milito. (*)(24)
10.39
Settlement Agreement and Mutual General Release dated as of June 19, 2006 among The Summit Media Group, Inc., The Beacon Media Group LLC, Sheldon Hirsch, Tom Horner and Paul Caldera. (25)
10.40
Operating Agreement of TC Digital Games LLC, dated as of December 11, 2006, between 4Kids Digital Games, Inc. and Chaotic USA Entertainment Digital Games LLC. (24)
10.41
Operating Agreement of TC Websites LLC, dated as of December 11, 2006, between 4Kids Websites, Inc. and Chaotic USA Entertainment Group, Inc. (24)
10.42
Operating Acquisition and Administration agreement dated June 28, 2002 between Cherry Lane Publishing Company, Inc. and 4Kids Entertainment Music, Inc. (26)
10.43
Saturday Morning Programming Block dated October 1, 2007 between The CW Network, LLC. and 4Kids Entertainment, Inc. (26)
10.44
Membership Interest Purchase Agreement dated December 18, 2007 between TC Digital Games, LLC, Chaotic USA Entertainment Group, Inc. and 4Kids Digital, Inc. (26)
10.45
Membership Interest Purchase Agreement dated December 18, 2007 between TC Websites LLC, Chaotic USA Entertainment Group, Inc. and 4Kids Websites, Inc. (26)
10.46
First Amendment dated as of September 15, 2008 to the Operating Agreement of TC Websites LLC, between 4Kids Websites, Inc. and Chaotic USA Entertainment Group, Inc. (29)
10.47
Employment Agreement, dated as of June 1, 2008, between 4Kids Ad Sales, Inc. and Daniel Barnathan. (*)(27)
10.48
Confidential Settlement Agreement and General Release of all Claims between 4Kids Entertainment, Inc. and the Fox Broadcasting Company. (30)
10.49
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. (included herein)
21.1
List of Subsidiaries of the Registrant.
23.1
Consent of Eisner LLP, Independent Registered Public Accounting Firm.
31.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Joint Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
______________
*
Denotes a management contract or compensatory plan, contract or arrangement.
(1)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 000-07843).
(2)
Incorporated by reference to 1999 Proxy Statement for Annual Meeting of Shareholders held April 29, 1999 (File No. 000-07843).
(3)
Incorporated by reference to 2000 Proxy Statement for Annual Meeting of Shareholders held May 17, 2000 (File No. 000-07843).
(4)
Incorporated by reference to Current Report on Form 8-K dated August 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).
(6)
Incorporated by reference to 2002 Proxy Statement for Annual Meeting of Shareholders held May 23, 2001 (File No. 001-16117).
(7)
Incorporated by reference to 2002 Proxy Statement for Annual Meeting of Shareholders held May 23, 2002 (File No. 001-16117).
(8)
Incorporated by reference to 2003 Proxy Statement for Annual Meeting of Shareholders held May 23, 2003 (File No. 001-16117).
(9)
Incorporated by reference to 2004 Proxy Statement for Annual Meeting of Shareholders held May 27, 2004 (File No. 001-16117).
(10)
Incorporated by reference to 2005 Proxy Statement for Annual Meeting of Shareholders held May 26, 2005 (File No. 001-16117).
(11)
Incorporated by reference to 2006 Proxy Statement for Annual Meeting of Shareholders held May 26, 2006 (File No. 001-16117).
(12)
Incorporated by reference to 2007 Proxy Statement for Annual Meeting of Shareholders held May 25, 2007 (File No. 001-16117).
(13)
Incorporated by reference to 2008 Proxy Statement for Annual Meeting of Shareholders held May 20, 2008 (File No. 001-16117).
(14)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1990 (File No. 000-07843).
(15)
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No. 001-16117).
(16)
Incorporated by reference to Current Report on Form 8-K dated December 21, 2006 (File No. 001-16117).
(17)
Incorporated by reference to Current Report on Form 8-K dated March 8, 2006 (File No. 001-16117).
(18)
Incorporated by reference to Current Report on Form 8-K dated July 7, 2005 (File No. 001-16117).
(19)
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (File No. 001-16117).
(20)
Incorporated by reference to Current Report on Form 8-K dated January 13, 2006 (File No. 001-16117).
(21)
Incorporated by reference to Current Report on Form 8-K dated February 5, 2007 (File No. 001-16117).
(22)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 000-07843).
(23)
Incorporated by reference to Current Report on Form 8-K dated November 2, 2006 (File No. 001-16117).
(24)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2006 (File No. 000-07843).
(25)
Incorporated by reference to Current Report on Form 8-K dated June 23, 2006 (File No. 001-16117).
(26)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 000-07843).
(27)
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 (File No. 001-16117).
(28)
Incorporated by reference to Current Report on Form 8-K dated June 25, 2008 (File No. 001-16117).
(29)
Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (File No. 001-16117).
(30)
Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 000-07843).
(31)
Incorporated by reference to Current Report on Form 8-K dated October 21, 2009 (File No. 001-16117).
(32)
Incorporated by reference to Current Report on Form 8-K December 1, 2009 (File No. 001-16117).
(33)
Incorporated by reference to Current Report on Form 8-K dated January 7, 2010 (File No. 001-16117).
(34)
Incorporated by reference to Current Report on Form 8-K dated April 23, 2007 (File No. 001-16117).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
4Kids Entertainment, Inc.
We have audited the accompanying consolidated balance sheets of 4Kids Entertainment, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2009 and 2008 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, 2009, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on criteria established in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2010 expressed an unqualified opinion thereon.
/s/ Eisner LLP
New York, New York
March 15, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
4Kids Entertainment, Inc.
We have audited 4Kids Entertainment, Inc. internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). 4Kids Entertainment, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, 4Kids Entertainment, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 4Kids Entertainment, Inc. and subsidiaries as of December 31, 2009, and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive loss, and cash flows for each of the years in the three year period ended December 31, 2009, and our report dated March 15, 2010 expressed an unqualified opinion on those financial statements.
/s/ Eisner LLP
New York, New York
March 15, 2010
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
(In thousands of dollars, except share data)
See notes to consolidated financial statements.
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(In thousands of dollars, except share data)
See notes to consolidated financial statements.
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(In thousands of dollars and shares)
(1) Cumulative effect adjustment to opening retained earnings as of January 1, 2009, related to the adoption of new accounting standards on investments in debt and equity securities (see Note 2).
See notes to consolidated financial statements.
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(In thousands of dollars)
Cash flows from operating activities:
Net loss
$
(52,456
)
$
(36,819
)
$
(23,326
)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization
1,600
1,535
1,002
Amortization of television and film costs
21,511
7,707
8,179
Amortization of 4Kids TV broadcast fee
-
16,022
21,472
Provision for doubtful accounts
Deferred income taxes
(127
)
2,440
Impairment on investment in international trading card subsidiary
2,430
-
-
Impairment on investment securities
6,175
7,834
-
Loss on sale of investment securities
7,647
-
-
Changes in operating assets and liabilities:
Inventories - net
2,968
(3,630
)
(611
)
Accounts receivable
8,487
(1,978
)
6,107
Film and television costs
(11,682
)
(10,016
)
(7,704
)
Prepaid income taxes
(3,907
)
1,022
4,765
Prepaid 4Kids TV broadcast fee
-
(14,014
)
(20,788
)
Prepaid expenses and other current assets
(722
)
1,438
Other assets - net
5,747
(3,281
)
(3,281
)
Due to licensors
(2,116
)
Accounts payable and accrued expenses
(2,048
)
Deferred revenue
(991
)
(2,030
)
Deferred rent
(85
)
(158
)
(153
)
Net cash used in operating activities
(13,673
)
(32,310
)
(13,821
)
Cash flows from investing activities:
Proceeds from maturities
3,733
24,975
138,688
Purchase of investments
-
-
(117,683
)
Consolidation of previously unconsolidated affiliate
-
-
2,702
Purchase of property and equipment
(211
)
(1,567
)
(3,136
)
Loss from disposal of property and equipment
-
-
Net cash provided by investing activities
3,522
23,408
20,576
Cash flows from financing activities:
Proceeds from exercise of stock options
-
Purchase of treasury shares
(58
)
(2,873
)
(254
)
Capital contribution from noncontrolling interests
-
-
Net cash provided by (used in) financing activities
(2,641
)
Effects of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
(9,882
)
(11,369
)
6,806
Cash and cash equivalents, beginning of period
13,503
24,872
18,066
Cash and cash equivalents, end of period
$
3,621
$
13,503
$
24,872
Supplemental disclosure of cash flow information:
Cash paid during period for Income Taxes
$
$
$
Supplemental schedule of non-cash investing and financing activities
Unrealized gain (loss) on marketable securities
$
10,118
$
(13,486
)
$
(3,993
)
Vesting of restricted shares
$
1,886
$
1,197
$
See notes to consolidated financial statements.
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(In thousands of dollars, except share and per share data)
1. DESCRIPTION OF BUSINESS
General Development and Narrative Description of Business - 4Kids Entertainment, Inc., together with the subsidiaries through which its businesses are conducted (the “Company”), is a diversified entertainment and media company specializing in the youth oriented market with operations in the following business segments: (i) Licensing; (ii) Advertising Media and Broadcast; (iii) Television and Film Production/Distribution; and (iv) Trading Card and Game Distribution. The Company was organized as a New York corporation in 1970.
Licensing - The Licensing business segment consists of the results of operations of the following wholly-owned subsidiaries of the Company: 4Kids Entertainment Licensing, Inc. (“4Kids Licensing”); 4Sight Licensing Solutions, Inc. (“4Sight Licensing”); 4Kids Entertainment International, Ltd. (“4Kids International”); and 4Kids Technology, Inc. (“4Kids Technology”). 4Kids Licensing is engaged in the business of licensing the merchandising rights to popular children’s television series, properties and product concepts (individually, the “Property” or collectively the “Properties”). 4Kids Licensing typically acts as exclusive merchandising agent in connection with the grant to third parties of licenses to manufacture and sell all types of merchandise, including toys, videogames, trading cards, apparel, housewares, footwear, books and other published materials, based on such Properties. 4Sight Licensing is engaged in the business of licensing properties and product concepts to adults, teens and “tweens”. 4Sight Licensing focuses on brand building through licensing. 4Kids International, based in London, manages Properties represented by the Company in the United Kingdom and European marketplaces. 4Kids Technology develops ideas and concepts for licensing which integrate new and existing technologies with traditional game and toy play patterns.
Advertising Media and Broadcast - The Company, through a multi-year agreement with The CW Network, LLC (“The CW”), leases The CW’s Saturday morning programming block (“The CW4Kids”) which broadcasts in most markets from 7am to 12pm for an initial term of five years beginning with The CW's 2008-2009 broadcast season. The Company provides substantially all programming content to be broadcast on The CW4Kids. 4Kids Ad Sales, Inc. (“4Kids Ad Sales”), a wholly-owned subsidiary of the Company, retains a portion of the revenue from its sale of network advertising time for the five-hour time period.
The Company, through a multi-year agreement (the “Fox Agreement”) with Fox Broadcasting Corporation (“Fox”), leased Fox’s Saturday morning programming block (“4Kids TV”) from 8am to 12pm eastern/pacific time (7am to 11am central time) which was terminated on December 31, 2008. The Company provided substantially all programming content to be broadcast on 4Kids TV and 4Kids Ad Sales retained all of the revenue from its sale of network advertising time for the four-hour programming block.
The Advertising Media and Broadcast segment also generates revenues from the sale of advertising on the Company’s multiple websites. These websites also showcase and promote The CW4Kids, as well as its many Properties.
Television and Film Production/Distribution - The Television and Film Production/Distribution business segment consists of the results of operations of the following wholly-owned subsidiaries of the Company: 4Kids Productions, Inc. (“4Kids Productions”); 4Kids Entertainment Music, Inc. (“4Kids Music”); and 4Kids Entertainment Home Video, Inc. (“4Kids Home Video”). 4Kids Productions produces and adapts animated and live-action television programs and theatrical motion pictures for distribution to the domestic and international television, home video and theatrical markets. 4Kids Music composes original music for incorporation into television programming produced by 4Kids Productions and markets and manages such music. 4Kids Home Video distributes home videos associated with television programming produced by 4Kids Productions.
Trading Card and Game Distribution - Through its wholly-owned subsidiary, 4Kids Digital Games, Inc. (“4Kids Digital”), the Company owns 55% of TC Digital Games LLC, a Delaware limited liability company (“TC Digital”) that produces, markets and distributes the “Chaotic” trading card game. In December 2006, 4Kids Digital acquired a 53% ownership interest in TC Digital and entered into TC Digital’s operating agreement (the “TCD Agreement”) with Chaotic USA Digital Games LLC (“CUSA LLC”), a wholly-owned subsidiary of Chaotic USA Entertainment Group, Inc. (“CUSA”). The TCD Agreement contains terms and conditions governing the operations of TC Digital, and entitles 4Kids Digital and CUSA to
elect two managers to the entity’s Management Committee with 4Kids Digital having the right to break any dead-locks. On December 18, 2007, 4Kids Digital purchased an additional 2% membership interest in TC Digital from CUSA increasing 4Kids Digital’s ownership percentage to 55%. The consideration for the purchase of the additional membership interest was paid through the settlement of certain capital contributions required to be made by CUSA to TC Websites LLC, a Delaware limited liability company and subsidiary of the Company (“TC Websites”) under TC Websites’ operating agreement (the “TCW Agreement”). TC Digital is consolidated in the Company’s consolidated financial statements, subject to a noncontrolling interest.
Through its wholly-owned subsidiary, 4Kids Websites, Inc. (“4Kids Websites”), the Company owns 55% of TC Websites, a company that owns and operates www.chaoticgame.com, the companion website for the “Chaotic” trading card game which was launched as a public beta version on October 24, 2007. In December 2006, 4Kids Websites purchased a 50% membership interest in TC Websites from CUSA and entered into the TCW Agreement. The TCW Agreement contains terms and conditions governing TC Websites’ operations and entitles 4Kids Websites and CUSA to elect two managers to its Management Committee. On December 18, 2007, 4Kids Websites entered into an agreement pursuant to which it acquired an additional 5% ownership interest in TC Websites from CUSA, and the TCW Agreement was concurrently amended to provide 4Kids Websites with the right to break any deadlocks on TC Websites’ Management Committee, including with respect to operational matters. The consideration for the purchase of the additional membership interest was paid through the settlement of certain capital contributions required to be made by CUSA to TC Websites under the TCW Agreement. Prior to the acquisition by 4Kids Websites of the additional 5% ownership interest and amendment of the TCW Agreement, the Company used the equity method to account for its investment in TC Websites, where it did not have control but had significant influence. As a result of 4Kids Websites’ increased ownership and operational control, TC Websites is consolidated in the Company’s financial statements, subject to a noncontrolling interest.
Additionally, TC Digital, the Company and Home Focus entered into various agreements pursuant to which TC Digital and Home Focus agreed to form TC Digital International, Ltd. (“TDI”), an Irish Private Corporation, for the purpose of distributing “Chaotic” trading cards principally in Europe and the Middle East (“TDI Territory”) and the Company agreed to purchase a 25% interest in TDI from Home Focus (the "TDI Interest"). As a result, TDI is owned 50% by TC Digital, 25% by the Company and 25% by Home Focus. As permitted by authoritative guidance issued by the FASB and based on the Company’s controlling interest and operational control, TDI’s financial statements are included in the Company’s consolidated financial statements for the year ended December 31, 2009.
TC Digital and TC Websites are the exclusive licensees of certain patents covering the uploading of coded trading cards to a website where online game play and community activities occur. The www.chaoticgame.com website provides full access to all of its content and is free of charge for all users. No purchase of trading cards is necessary to play the online version where virtual playing decks are available to users who register on the website. These two businesses enable the Company to offer traditional trading card game play with an online digital play experience.
Certain of the Company’s executive officers have interests in CUSA, CUSA LLC and certain other entities with which TC Digital and TC Websites have engaged in transactions since their formation. Information regarding these relationships can be found in Note 15 and 17.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of 4Kids Entertainment, Inc. and its wholly-owned subsidiaries and investments of more than 50% in subsidiaries and other entities after elimination of significant intercompany transactions and balances. While the Company maintained a 50% ownership interest in TC Websites and did not control, but had significant influence, over such entity, the Company’s investment in TC Websites was accounted for using the equity method in 2006. As a result of the acquisition by the Company of an additional 5% ownership interest in such entity and increased operational control, TC Websites has been included in the Company’s consolidated financial statements in fiscal years 2009, 2008 and 2007 as further discussed in Note 15. These consolidated financial statements reflect the use of significant accounting policies, as described below and elsewhere in the notes to the consolidated financial statements.
Revenue Recognition - Merchandise licensing revenues: Licensing revenues, net of licensor participations, are recognized when the underlying royalties from the sales of the related products are earned. If the Company has no significant direct continuing involvement with the underlying Property or obligation to the licensee, the Company recognizes guaranteed royalties, net of licensor participations, at the time the arrangement becomes effective as long as the license period has commenced. Where the Company has significant continuing direct involvement with the underlying Property or obligation to the licensee, guaranteed minimum royalties, net of licensor participations, are recognized ratably over the term of the license or based on sales of the related products, if greater. Licensing advances and guaranteed payments collected but not yet earned by the Company are classified as deferred revenue in the accompanying consolidated balance sheets.
Broadcast advertising revenues: Advertising revenues, net of network participations, are recognized when the related commercials are aired and are recorded net of agency commissions and net of an appropriate reserve when advertising is sold together with a guaranteed audience delivery. Internet advertising revenues are recognized on the basis of impression views in the period the advertising is displayed.
Episodic television series revenues: Television series initially produced for networks and first-run syndication are generally licensed to domestic and foreign markets concurrently or licensed to foreign markets with a one year lag from the domestic broadcast of the series. The length of the revenue cycle for episodic television varies depending on the number of seasons a series remains in active exploitation. Revenues arising from executed television license agreements, net of licensor participations, are recognized in the period that the films or episodic television series are available for telecast.
Home video revenues: Revenues from home video and DVD sales, net of a reserve for returns, are recognized, net of licensor participations, on the date that video and DVD units are shipped by the Company’s distributor to wholesalers/retailers. Consistent with the practice in the home video industry, the Company estimates the reserve for returns based upon its review of historical returns rates and expected future performance.
Music revenues: Revenues from music sales, net of licensor participations, and net of a reserve for returns, are recognized on the date units are shipped by the Company’s distributor to wholesalers/retailers as reported to the Company. In the case of musical performance revenues, the revenue is recognized when the musical recordings are broadcast and/or performed.
Trading card revenues: The FASB provides guidance on how and when to recognize revenues for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Revenue arrangements with multiple deliverables are required to be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration must be allocated among the separate units of accounting based on their relative fair values. The Company has determined that because its trading card game is provided with a web component, there is a multiple deliverable arrangement. However, since no purchase of trading cards is necessary to access the website and virtual cards are available free of charge to users who register on the website, the Company has determined that the selling price of the trading cards should be fully attributable to the cards. Certain of the Company’s trading card distributors, have contractually changed to a point-of-sale (“POS”) model in response to the demands from retailers. Under the POS model, sales are recorded once the sales are made to the ultimate consumer. Distributors and retailers not under the POS model remain under the FOB shipping point model in which sales are recorded, net of a reserve for returns and allowance, upon shipment to distributors.
Revenue generated from merchandise licensing, broadcast advertising, episodic television series, home video, and music are classified as service revenue on the consolidated statement of operations while revenue generated from the sale of trading cards is classified as product revenue.
Advertising Expense - Advertising costs are expensed as incurred, except for costs related to the development of a Property and/or animated or live-action television commercial or media campaign which are expensed in the period in which the commercial or campaign is first presented. Advertising expense included in selling, general and administrative expenses on the accompanying consolidated statements of income was $4,108, $5,272 and $1,794 during fiscal years 2009, 2008 and 2007, respectively.
Inventories - Inventories consist of raw materials and finished goods inventory of trading cards and are valued at the lower of cost or net realizable value. The cost of the Company’s inventory is computed using the first-in, first-out method.
Property and Equipment - Property and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation is calculated on the straight-line method based on the estimated useful lives of the assets, which range from 3 to 10 years. Amortization of leasehold improvements is computed using the straight-line method over the estimated useful lives of the related assets or, if shorter, the lease term. Costs associated with the repair and maintenance of property are expensed as incurred.
Website Development Costs - The Company capitalizes its website development costs for the www.chaoticgame.com website consistent with the authoritative guidance issued by the FASB. Costs incurred during the preliminary project stage are expensed as incurred, while application stage projects are capitalized. The costs capitalized during the application stage are generally related to employee and/or consulting services directly associated with the development of the website. Website costs are included in property and equipment in the Company’s consolidated balance sheet. Amortization commenced on October 24, 2007, once the website went live and is amortized using the straight-line method over the estimated useful life of three years.
Impairment Of Long-Lived And Intangible Assets - As required by authoritative guidance issued by the FASB, the Company assesses the recoverability of long-lived assets for which an indication of impairment exists. The recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. Fair value of long-lived assets is determined using the expected cash flows discounted at a rate commensurate with the risk involved. At December 31, 2009, the Company recorded an impairment charge with respect to its investment in TDI of $2,430 to reflect the decreased value of the non-performing international joint venture of the Company’s “Chaotic” trading card business for the purpose of distributing “Chaotic” trading cards principally in Europe and the Middle East. The Company believes that the future cash flows to be received from the remaining long-lived assets will exceed the respective assets’ carrying value, and accordingly has not recorded any additional impairment losses.
Cash and Cash Equivalents - All highly liquid investments with original maturities of three months or less are classified as cash and cash equivalents. The fair value of cash and cash equivalents approximates the amounts shown on the financial statements. Cash and cash equivalents consist of unrestricted cash in various banks in which the Company maintains balances in excess of the Federal Deposit Insurance Corporation (FDIC) insured limit of $250 per interest bearing account as of December 31, 2009 and, 2008. At December 31, 2009 and 2008, the cash and cash equivalents in excess of the insured limit aggregated $2,139 and $8,880, respectively. The standard amount of $250 per depositor is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100 per depositor for all account categories except IRA’s and other certain retirement accounts, which will remain at $250 per depositor.
Fair Value Measurements - The fair values of the Company’s financial instruments reflect the estimates of amounts that would be received from selling an asset in an orderly transaction between market participants at the measurement date. The fair value estimates presented in this report are based on information available to the Company as of December 31, 2009 and December 31, 2008.
The carrying values of cash and cash equivalents approximate fair value. The Company has estimated the fair value of its investment in auction rate securities (“ARS”) and other long-term investments using unobservable inputs at December 31, 2009. The authoritative guidance issued by the FASB includes a fair value hierarchy based on three levels of inputs, the first two of which are considered observable and the last of which is considered unobservable, that may be used to measure fair value. The three levels are the following:
•
Level 1 - Quoted prices in active markets for identical assets or liabilities.
•
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Investments - The Company’s long-term investments principally consist of ARS, corporate bonds and preferred shares. ARS are generally rated “BBB” or better by one or more national rating agencies and have contractual maturities of up to 80 years. Of the aggregate principal amount of $35,550 in investment securities held by the Company as of December 31, 2009, 23% mature within the next 30 years, 43% mature through 2087 and the remaining 57% have no maturity date. The Company classifies these investments as “available for sale”, in accordance with the authoritative guidance issued by the FASB for certain investments in debt and equity securities. The ARS that the Company invests in generally had interest reset dates that occurred every 7 or 35 days and despite the long-term nature of their stated contractual maturity, the historical operation of the ARS market had given the Company the ability to quickly liquidate these securities at ongoing auctions every 35 days or less.
During 2007, liquidity issues began to affect the global credit and capital markets. In addition, certain individual ARS experienced liquidity issues specific to such securities. As a result, ARS, which historically have had a liquid market and had their interest rates reset periodically (e.g. monthly) through Dutch auctions, began to fail at auction. These auction failures have caused ARS to become illiquid, which in turn has caused the fair market values of these securities to decline.
The ARS currently held by the Company are private placement debt securities with long-term nominal maturities and interest rates that typically reset monthly. The Company’s investments in ARS represent interests in debt obligations issued by banks and insurance companies that originally had at least an “A” credit rating at the time of purchase, including JP Morgan Chase, bond insurers and re-insurers such as MBIA, AMBAC, FGIC, FSA, RAM and Radian. The collateral underlying these securities consists primarily of commercial paper, but also includes asset-backed and mortgage-backed securities, corporate debt, government holdings, money market funds and other ARS.
As of December 31, 2009, the Company held investment securities having an aggregate principal amount of $35,550. The estimated fair market value of the investment securities held by the Company had declined by $21,370 (a decline of $22,125 prior to 2009, with an increase in value of $755 during 2009) to $14,180, including $2,130 related to credit losses recorded in accordance with new authoritative guidance issued by the FASB and adopted in 2009 based upon an analysis of the current market conditions of the Company’s securities made by the Company. The Company concluded in 2009, that $6,175 of the decline in the fair value of the investment securities held by the Company were now other than temporarily impaired. The Company’s determination that certain of its long-term investments were other than temporarily impaired was based upon the fact that: (i) two of the Company’s securities with an aggregate par value of $8,700 were sold subsequent to December 31, 2009 for $2,575 resulting in a realized loss of $6,125, of which $5,383 had been recorded in other comprehensive loss in 2008; and (ii) certain of the Company’s other ARS ceased to pay interest according to their stated terms and that the underlying bond insurers of such securities elected to exercise their put right against the trusts, thereby exchanging the investment grade collateral in the trust with preferred stock. The Company did not incur any impairment charges in 2009 as a result of credit losses under the new authoritative guidance issued by the FASB in 2009.
Since the Company has the ability, and presently expects, to hold its remaining investment securities until recovery of their face value, which may not be prior to the maturity of the applicable security (to the extent such security has a specified maturity date) and based on consideration of all of the factors described above, the Company considered certain of these investments to be temporarily impaired as such term is defined in the accounting literature. Accordingly, the entire balance of unrealized loss in accumulated other comprehensive income at December 31, 2009 relates to securities which the Company considers temporarily impaired. Additionally, these remaining investment securities held by the Company have continued to pay interest according to their stated terms, which the Company believes may create an incentive for the issuers to redeem these securities once the current liquidity problems in the credit market substantially improve.
The Company continues to monitor the market for ARS and consider its impact (if any) on the fair value of its investments. If the current market conditions deteriorate further, the Company may be required to record additional impairment charges to non-operating expense in future periods.
During 2009, the Company sold investment securities with a par value of $11,380 for $3,733 causing the Company to record a loss on the sale of investments of $7,647. The Company had previously recorded an unrealized loss on these securities of $3,081 which was reclassified due to the sale of the investment.
The credit and capital markets, including the market for ARS, have remained illiquid, and as a result of this and other factors specific to certain investment securities, the Company’s unrealized loss on its investment securities may subsequently increase. The Company estimates the fair values of the investment securities quarterly based upon consideration of such factors as: issuer and insurer credit rating; comparable market data, if available; current market conditions; the credit quality of the investment securities; the rate of interest received since the date the auctions began; yields of securities similar to the underlying investment securities; and, until September 2008, input from broker-dealers’ statements provided by the investment bank through which the Company held such securities. These considerations are used to determine a range of values for each security from moderate to highly conservative. The Company has based its evaluation on the mid-point of that range. Specifically, the Company considers the composition of the collateral supporting the investment securities and the default probabilities of the collateral underlying these securities in our overall valuation of each security. The Company has also researched the secondary market, and while such a market may be available, there is no guarantee that such a market will exist at any particular point in time. Additionally, the Company looks at the probabilities of default, probabilities of successful auctions and probabilities of earning the maximum (failed auction) rate for each period.
Due to the sensitivity of the methodologies and considerations used, the Company continually re-evaluates the investment securities and although the valuation methodologies have remained consistent for each quarter in which these securities were valued, certain inputs may have changed. The changes in these inputs primarily relate to the changes in the economic environment and the market for such securities.
Given the failed auctions, the Company’s investment securities are currently illiquid. Accordingly, the Company has classified $14,180 of its investment in ARS and the securities into which certain of the ARS have been exchanged, as non-current assets as of December 31, 2009 on its balance sheet due to the fact that the Company believes that the liquidity of these securities is unlikely to be restored in a period less than twelve months from such date.
The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased the ARS on behalf of the Company that have been classified as other than temporarily impaired based on discretion afforded to it, has violated its legal obligations to the Company. As a result, the Company has taken various measures to obtain appropriate legal relief, including initiating an arbitration with the Financial Industry Regulatory Authority. On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy. On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc. The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008. On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”). SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC. In view of the bankruptcy of Lehman Brothers Holdings, Inc. and the liquidation of Lehman Brothers, Inc., the Company is currently assessing what additional steps, if any, to take to pursue legal redress.
If uncertainties in the credit and capital markets continue or the Company’s investments experience any rating downgrades on any investments in its portfolio or the value of such investments declines further, the Company may incur additional impairment charges to its investment portfolio, which could negatively affect the Company’s financial condition, results of operations and cash flow. As a result of the current market issues, the Company’s surplus cash is invested solely in government securities with a maturity of 90 days or less.
During the first quarter of 2010, the Company realized cash proceeds from the sale of two of its investment securities in an amount equal to approximately $2,575 and received tax refunds relating to extended net operating loss carrybacks of approximately $3,567. Based on the Company’s receipt of such cash proceeds, its cash position as of December 31, 2009, the anticipated effects of the significant cost cutting initiatives implemented by the Company during 2009 and continuing into 2010, and the Company’s belief that economic conditions have become more stable, the Company expects its overall cash position to provide adequate liquidity to fund its day-to-day operations for the next twelve months. However, the illiquidity affecting a significant portion of the Company’s portfolio of investment securities is impacting the Company’s ability to make capital investments or expand its operations.
If the Company determines that it is necessary to generate additional cash to fund its operations, the Company will consider all alternatives available to it, including, but not limited to sales of assets, issuance of equity or debt securities and third party arrangements. There can be no assurance, however, that the Company would be able to generate such additional cash in a timely manner or that such additional cash could be obtained on terms acceptable to the Company.
Operating Leases - The Company accounts for all operating leases on a straight-line basis over the term of the lease. In accordance with authoritative guidance issued by the FASB, any incentives or rent escalations are recorded as deferred rent and are included as a component of rent expense over the respective lease term.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are used in, but not limited to, certain areas of revenue recognition, the amortization of televisions and film costs, the amortization of 4Kids TV broadcast fees, valuation of our investment securities and inventory reserves. Actual results could differ materially from those estimates.
Reclassifications - Certain reclassifications have been made to prior year amounts to conform to the 2009 presentation.
Translation of Foreign Currency - In accordance with authoritative guidance issued by the FASB, the Company classifies items as other comprehensive income by their nature in the financial statements and displays the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the consolidated balance sheet. The assets and liabilities of the Company’s foreign subsidiary, 4Kids International have been recorded in their local currency and translated to U.S. dollars using period-end exchange rates. Income and expense items have been translated at the average rate of exchange prevailing during the period. Any adjustment resulting from translating the financial statements of the foreign subsidiary is reflected as “other comprehensive income”, net of related tax.
Comprehensive loss for the years ended December 31, 2009, 2008 and 2007 was $(40,024), $(51,653) and $(27,217), respectively, which included translation adjustments of $504, $(1,348) and $102 for the respective periods.
Concentration Of Credit Risk - Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of long-term investment securities, temporary cash investments and accounts receivable. The investment securities held by the Company are generally rated “BBB” or above. The Company evaluates the fair values of these investment securities quarterly to determine its exposure for credit loss. The majority of the cash and cash equivalents are maintained with major financial institutions in the United States of America. The counterparties to the agreements relating to investment instruments consist of various United States governmental units and financial institutions of high credit standing. Credit risk on accounts receivable is minimized by the Company by performing ongoing credit evaluations of its customers’ financial condition and monitoring its exposure for credit losses and maintaining allowances for anticipated losses.
Income Taxes - The Company is subject to income taxes in both the United States and the United Kingdom. Income tax expense (benefit) is provided for using the asset and liability method. Deferred income taxes are recognized at currently enacted tax rates for the expected future tax consequences attributable to temporary differences between amounts reported for income tax purposes and financial reporting purposes. Deferred taxes are provided for the undistributed earnings as if they were to be distributed. The tax rate for the year ended December 31, 2009 is affected by the estimated valuation allowance against the Company’s deferred tax assets. The Company regularly reviews its deferred tax assets for recoverability taking into consideration such factors as recurring operating losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. The authoritative guidance issued by the FASB requires the Company to record a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Based on the level of deferred tax assets as of December 31, 2009 and the level of historical losses realized, the Company has determined that the uncertainty regarding the realization of these assets is sufficient to warrant the establishment of a full valuation allowance against the Company’s net deferred tax assets.
Our assessment of the valuation allowance on the deferred tax assets could change in the future based on our levels of pre-tax income and other tax-related adjustments. A change in estimate of the valuation allowance, in whole or in part, would result in a non-cash reduction in income tax expense during the period of the change. To the extent there is a reversal of some or all of the valuation allowance, future financial statements would reflect a decrease in non-cash income tax expense until such time as our deferred tax assets are all used to reduce current taxes payable.
TC Digital and TC Websites are limited liability companies and have elected to be treated as partnerships for income tax purposes. As such, U.S. federal and state income taxes (in the states which tax limited liability companies as partnerships) are the direct responsibility of its members. We own 55% of the membership interests in both entities. Thus, our respective portion of their activity is reported in our consolidated tax returns.
Recently Adopted Accounting Standards - In June 2009, the FASB established the FASB ASC as the single source of authoritative U.S. generally accepted accounting principles (“U.S. GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the United States Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The adoption of the ASC by the Company did not have a material impact on its consolidated financial statements or results of operations. In accordance with the FASB’s guidance, the Company’s notes to consolidated financial statements will explain accounting concepts rather than cite the topics of specific U.S. GAAP.
In May 2009, the FASB issued authoritative guidance which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance sets forth (1) the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which events or transactions occurring after the balance sheet date should be recognized in its financial statements and (3) the disclosures that should be made about events or transactions that occurred after the balance sheet date. In February 2010, the FASB amended this new standard to eliminate the requirement yo disclose the date through which subsequent events have been evaluated. As the new standard was not intended to significantly change the current practice of reporting subsequent events, it did not have an impact on the Company’s consolidated financial position and results of operations.
In April 2009, the FASB issued authoritative guidance related to investments in debt and equity securities. The objective of the new guidance is to make impairment guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments (“OTTI”) of debt and equity securities in financial statements. The guidance revises the OTTI evaluation methodology. Further, the security is analyzed for credit loss, (the difference between the present value of cash flows expected to be collected and the amortized cost basis). The credit loss, if any, will then be recognized in the statement of earnings, while the balance of impairment related to other factors will be recognized in other comprehensive income. This guidance was effective for all interim and annual periods ending after June 15, 2009. The Company adopted this authoritative guidance issued by the FASB as of January 1, 2009 and recorded a cumulative-effect adjustment of $2,130 to its opening balance of retained earnings with a corresponding adjustment to accumulated other comprehensive loss.
In April 2009, the FASB issued authoritative guidance that principally requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. This guidance is currently effective and its adoption did not have an impact on the Company’s consolidated financial position and results of operations.
Recently Issued Accounting Standards - In June 2009, the FASB issued authoritative guidance that is intended to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial position and results of operations.
In August 2009, the FASB issued authoritative guidance regarding the measurement of liabilities at fair value when a quoted price in an active market is not available. In these circumstances, a valuation technique should be applied that uses either the quote of the liability when traded as an asset, the quoted prices for similar liabilities or similar liabilities when traded as assets, or another valuation technique consistent with existing fair value measurement guidance, such as an income approach or a market approach. The guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This guidance is effective for interim periods beginning on or after June 15, 2010. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial position and results of operations.
In October 2009, the FASB issued authoritative guidance which will allow companies to allocate arrangement consideration to multiple deliverables. The guidance provides principles and application guidance on whether multiple deliverables exist, how an arrangement should be separated, and the consideration allocated. The guidance requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of the selling price. The guidance eliminates the use of the residual method, requires entities to allocate revenue using the relative-selling-price method and significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. The guidance requires new and expanded disclosures and is applied prospectively to revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 or retrospectively for all periods presented. The Company is evaluating the impact the adoption of this guidance will have on its consolidated financial position and results of operations.
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of the Company’s financial instruments for the periods presented are as follows:
Level 1- The Company’s Level 1 assets consist of cash, U.S. Treasury securities with original maturities of three months or less.
Level 2 - At December 31, 2009 and December 31, 2008, the Company had no investments which were considered to be Level 2 assets.
Level 3 - The Company’s Level 3 assets consist of the Company’s investment in ARS, corporate obligations, and preferred shares. The recent uncertainties in the credit markets have hindered the Company and other investors from liquidating their holdings of these securities for the years ended December 31, 2009 and 2008, because the amount of securities submitted for sale has exceeded the amount of purchase orders.
The carrying value of the Company’s investments in its Level 3 assets, as of the years ended December 31, 2009 and 2008, represent the Company’s best estimate of the fair value of these investments based on currently available information. The Company estimates the fair values of the investment securities quarterly based upon consideration of such factors as: issuer and insurer credit rating; comparable market data, if available; current market conditions; the credit quality of the investment securities; the rate of interest received since the date the auctions began; yields of securities similar to the underlying investment securities; and, until September 2008, broker-dealers’ statements provided by the investment bank through which the Company held such securities. These considerations are used to determine a range of values for each security from moderate to highly conservative. The Company has based its evaluation on the mid-point of that range. Specifically, the Company considered the composition of the collateral supporting the investment securities and the default probabilities of the collateral underlying the ARS in its overall valuation of each security. The Company has also researched the secondary market, and while such a market may be available, there is no guarantee that such a market will exist at any particular point in time. Additionally, the Company looked at the probabilities of default, probabilities of successful auctions and probabilities of earning the maximum (failed auction) rate for each period. If the issuers are unable
to successfully close future auctions and their credit ratings deteriorate, the Company may be required to further adjust the carrying value of its investment securities through additional devaluations.
The table below provides a summary of changes in fair value for the Company’s available for sale investments:
The following table presents additional information about assets measured at fair value using Level 3 inputs for the year ended December 31, 2009:
4. ACCOUNTS RECEIVABLE/DUE TO LICENSORS
Generally, licensing contracts provide for the Company to collect, on behalf of the licensor, royalties from the licensees. The Company records as accounts receivable only its proportionate share of such earned royalties.
Due to licensors represents amounts collected by the Company on behalf of licensors, which are generally payable to such licensors after the close of each calendar quarter. Additionally, accounts receivable include amounts due from customers for advertising revenue earned from airing commercial spots on The CW4Kids and 4Kids TV and from trading cards sold by TC Digital.
Accounts receivable consisted of the following as of:
5. INVENTORIES
Inventories consisted of the following as of:
As of December 31, 2009, 2008 and 2007, the reserve for slow-moving inventory was $6,038, $3,000 and $0, respectively. During 2009, this reserve was reduced by $370 based on the reduction of inventory for trading card sales made by the Company. Based on the overall surplus of trading card inventory in 2009, the Company recorded an additional inventory reserve of $3,408.
6. FILM AND TELEVISION COSTS
Film and television costs consisted of the following as of:
Amortization of capitalized film and television costs were $21,511, $7,707 and $8,179 during fiscal years 2009, 2008 and 2007, respectively. Based on management’s ultimate revenue estimates as of December 31, 2009, approximately 56% of the total completed and unamortized film and television costs are expected to be amortized during 2009, and over 90% of the total completed and unamortized film and television costs are expected to be amortized during the next three years.
7. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of:
8. STOCKHOLDERS’ EQUITY
The Company has stock-based compensation plans for employees and non-employee members of the Board of Directors. The plans provide for discretionary grants of stock options, shares of restricted stock, and other stock-based awards. The plans are administered by the Compensation Committee of the Board of Directors, consisting of non-employee directors.
The Company records stock compensation utilizing the modified prospective method provided in the definitive guidance by the SEC whereby prior periods are not restated for comparability. The Company’s recognition of stock-based compensation expense in the statement of operations over the vesting period is based on the fair value of the award at the grant date. All of the Company’s outstanding options were fully vested at the time the Company adopted this guidance and the Company has not subsequently granted any such options.
The following table summarizes activity under the Company’s stock option plans for the years ended December 31, 2009, 2008 and 2007:
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing price of the Company’s common stock on the date of determination for those awards that have an exercise price currently below the closing price. As of December 31, 2009, there were no options outstanding to purchase shares with an exercise price below the quoted price of its common stock. During the years ended December 31, 2009, 2008 and 2007, the aggregate intrinsic value of options exercised under its stock option plans was $0, $281 and $1,328, respectively, determined as of the date of exercise.
Restricted Stock Awards
The Company granted restricted stock awards of approximately 378,000 shares on May 22, 2009 under its 2008 long-term incentive compensation plan (“LTICP”), 311,000 shares on May 23, 2008 under its 2007 LTICP, 162,000 shares on May 25, 2007 under its 2006 LTICP and 145,000 and 4,000 shares on May 23, 2006 and June 15, 2006, respectively, under its 2005 LTICP. The restricted stock awards were granted to certain employees, including officers and members of the Board of Directors, at grant prices of $1.46, $7.85, $16.79, $16.52 and $15.78 (in each case, the average of the high and low stock price from the previous day of trading) for the May 22, 2009, May 23, 2008, May 25, 2007, the May 23, 2006 and the June 15, 2006 grants, respectively. The restricted stock awards vest annually over a period of three years from the date of grant for the awards made under the 2008 and 2007 LTICPs and over a period of four years for the awards made under the 2006 and 2005 LTICPs, with accelerated vesting upon a change of control of the Company (as defined in the applicable plan). During the restriction period, award holders do not have the rights of stockholders and cannot transfer ownership. Additionally, nonvested shares of award holders are subject to forfeiture. These awards are forfeited and revert to the Company in the event of employment termination, except in the case of death, disability, retirement or other specified events.
The following table summarizes restricted stock activity under the Company’s long-term incentive compensation plans for the years ended December 31, 2009, 2008 and 2007:
The Company recognized $1,826, $1,621 and $942 of compensation costs related to the LTICPs during the years ended December 31, 2009, 2008 and 2007, respectively. Additionally, as of the year ended December 31, 2009, there was approximately $386, $910, $750 and $173 of unrecognized compensation cost related to restricted stock awards granted under the Company’s 2008, 2007, 2006 and 2005 LTICPs, respectively. The cost is expected to be recognized over a remaining weighted-average period of 2.4, 1.4, 1.4 and 0.4 years under the 2008, 2007, 2006 and 2005 LTICPs, respectively. There were approximately 97,000, 37,000 and 31,000 shares of restricted stock that vested during the year ended December 31, 2009 that had been granted under the 2007, 2006 and 2005 LTICPs, respectively.
Availability for Future Issuance - As of December 31, 2009, (i) options to purchase approximately 1,482,000 shares of the Company’s common stock were available for future issuance under the Company’s stock option plans and (ii) options to purchase a maximum of approximately 443,000 shares of the Company’s common stock were available for future issuance under the Company’s LTICPs, reduced by four shares for each share of restricted stock awarded under the 2006 and 2005 LTICPs, under which an aggregate of approximately 143,000 shares of the 443,000 total shares were available for issuance as options, and reduced by two shares for each share of restricted stock awarded under the 2008 and 2007 LTICPs, under which an aggregate of approximately 300,000 of the 443,000 total shares were available for issuance as options.
9. REVENUES/MAJOR CUSTOMERS
Net revenues included in the accompanying consolidated statements of operations are net of licensor participations of $30,945, $29,378 and $29,150 during fiscal years 2009, 2008 and 2007, respectively. The percentages of revenue from major Properties and customers/licensees are as follows:
Two Properties, “Teenage Mutant Ninja Turtles” and “Yu-Gi-Oh!” represented 33% and 24%, respectively, for a total of 57%, of consolidated net revenues for fiscal 2009, or $21,031, of which $9,786, or 27% of consolidated net revenues, represented a one-time payment received by the Company in October 2009 in consideration of its 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 its representation agreement with Mirage Group in 2012. Two Properties, “Chaotic” and “Yu-Gi-Oh!” represented 43% of consolidated net revenues for fiscal 2008 and two Properties, “Yu-Gi-Oh!” and “Teenage Mutant Ninja Turtles” represented 37% of consolidated net revenues for fiscal 2007. One licensee, Konami, represented 17%, 11% and 14% of consolidated net revenues for fiscal 2009, 2008 and 2007, respectively. As of December 31, 2009 and 2008, accounts receivable due from these major customers/licensees discussed above represented 6% of the Company’s gross accounts receivable for each such year.
10. INCOME TAXES
The Company and its wholly-owned subsidiaries file income tax returns in the United States and in the United Kingdom. Income tax expense (benefit) is determined using the asset and liability method provided for in the authoritative guidance issued by the FASB. Deferred income taxes are recognized at currently enacted tax rates for the expected future tax consequences attributable to temporary differences between amounts reported for income tax purposes and financial reporting purposes. Deferred taxes are provided for the undistributed earnings as if they were to be distributed. The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has not recorded any liability for unrecognized tax benefits.
The Company is no longer subject to examinations by income tax authorities in most jurisdictions for years prior to 2006. As of December 31, 2009, there were no outstanding tax audits.
The (benefit from) provision for income taxes consisted of the following:
The domestic and foreign components of pre-tax (loss) income are as follows:
The components of the net deferred tax assets (liabilities) are as follows:
A reconciliation of activity for the Company’s deferred tax asset valuation allowance is provided as follows:
The expiration terms and amounts for which an allowance has been provided with respect to the loss and credit carryforwards reflected in the gross deferred tax assets above are comprised as follows:
Loss Carryforwards
Expiration
Gross Amount
Allowance
Federal
$
61,097
$
61,097
State and local
2016-2029
235,774
235,774
Foreign
Indefinite
Capital Loss Carryforwards
Federal
$
7,647
$
7,647
State and local
7,647
7,647
Credit Carryforwards
Foreign tax
2011-2014
$
$
The Company records U.S. taxes on undistributed earnings of subsidiaries to the extent such earnings are planned to be remitted and not permanently reinvested. During 2009, the Company found it necessary to repatriate earnings from its foreign subsidiary. The Company has no current plans to repatriate more earnings from its foreign subsidiary. The Company, however, has decided to provide U.S. taxes on the undistributed earnings, as if they were to be distributed. The Company has provided $1,210 of U.S. taxes on undistributed earnings of $3,025. The taxes were calculated assuming a deduction for foreign taxes, even though foreign tax credits may be available.
There were no income tax benefits related to the exercise of stock options for the years ended December 31, 2009, 2008 and 2007.
The Company has no unrecognized tax benefits recorded for the years ended December 31, 2009 and 2008.
When and if the Company were to recognize interest or penalties related to unrecognized tax benefits, they would be reported net of federal tax benefit in tax expense.
It is difficult to predict what would occur to change the Company’s unrecognized tax benefits over the next twelve months. The Company believes, however, that there should be no change during the next twelve months.
11. EARNINGS PER SHARE
The Company computes basic EPS based solely on the weighted average number of common shares outstanding during the period in accordance with authoritative guidance issued by the FASB. Diluted EPS reflects all potential dilution of common stock. The following table reconciles Basic EPS with Diluted EPS for the years ended December 31, 2009, 2008 and 2007:
Net Loss
Year Ended 2009 Weighted Average Shares
Per Share
Basic loss per share attributable to 4Kids Entertainment Inc. common shareholders
$(42,076
)
13,303,192
$(3.16
)
Effect dilutive security - Stock options
-
-
-
Diluted loss per share attributable to 4Kids Entertainment Inc. common shareholders
$(42,076
)
13,303,192
$(3.16
)
Net Loss
Year Ended 2008 Weighted Average Shares
Per Share
Basic loss per share - Loss available to common shareholders
$(36,819
)
13,181,549
$(2.79
)
Effect dilutive security - Stock options
-
-
-
Diluted loss per share
$(36,819
)
13,181,549
$(2.79
)
Net Loss
Year Ended 2007 Weighted Average Shares
Per Share
Basic loss per share - Loss available to common shareholders
$(23,326
)
13,209,495
$(1.77
)
Effect dilutive security - Stock options
-
-
-
Diluted loss per share
$(23,326
)
13,209,495
$(1.77
)
For the years ended December 31, 2009, 2008 and 2007, 770,250, 1,301,000 and 1,189,000 shares, respectively, attributable to the exercise of outstanding options, were excluded from the calculation of diluted EPS because the effect was antidilutive.
12. ACCOUNTING CHANGE AND RECLASSIFICATION
Certain of the Company’s representation contracts contain provisions for the production of animated television episodes based on the licensor’s property. These contracts typically contain provisions for the licensor to reimburse the Company for costs incurred in the production of the television programming. The reimbursement may be in the form of reduced royalty fees owed the licensor under other provisions of the contract or in the form of direct cash reimbursement. The Company has historically accounted for this reimbursement as reduction of its film costs capitalized in accordance with ASC 926-20. Additionally, the Company has historically recorded the reimbursement as service revenue with an equal amount as cost of production.
These reimbursements are contained under overall representation contracts with licensors. Under these contracts, the Company will generate royalty revenue from third party licensees. Since the primary licensor (property owner) will also benefit from the increased awareness of the property, they are willing to contribute to the cost of the production of the programming. The Company believes that it is appropriate to account for the partial reimbursement of production costs as a reduction of its capitalized film costs which is amortized into the cost of revenue in accordance with ASC 926-20.
The Company has reassessed the accounting treatment for reimbursements of its production costs under representation contracts and will no longer record these amounts in the Television and Film Production/Distribution segment as revenue with a corresponding charge to production service costs. In accordance with authoritative guidance issued by the FASB, the Company has retroactively adjusted revenue and production service costs for all periods presented. The Company considered the qualitative aspect of these adjustments, as well as the impact on the Company’s operating losses and earnings per share calculations in determining that no further restatement of the Company’s financial statements is necessitated by this accounting change. The following table shows the summary impact in the consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007.
As originally reported:
13. DEFINED CONTRIBUTION PLAN
The Company participates in a 401(k) plan covering substantially all employees. Benefits vest based on number of years of service. The Company’s policy is to match 25% of the first 6% of the covered employee’s annual salary, as defined by the plan. Contributions to the plan by the Company amounted to $159, $198 and $170 for the years ended December 31, 2009, 2008 and 2007, respectively.
14. COMMITMENTS AND CONTINGENCIES
a.
Bonus Plan - Bonuses are eligible to key officers and employees in an amount, if any, to be determined in the sole discretion of the Compensation Committee of the Board of Directors in consultation with the CEO of 4Kids. For 2009, 2008 and 2007, no bonuses were awarded to the Chairman and CEO of the Company by the Compensation Committee. Additionally, no bonuses were awarded to employees as of December 31, 2009, 2008 and 2007.
b.
Leases - The Company leases certain office, administration and production facilities. Commitments for minimum rentals, not including common charges, under non-cancelable leases at the end of 2008 are as follows:
Year Ending
December 31,
Amount
$
2,334
1,254
1,025
2015 and after
2,705
Total
$
9,285
Rent expense for all operating leases charged against earnings amounted to $2,694, $2,771 and $2,365 during fiscal years 2009, 2008 and 2007, respectively.
Litigation - On November 9, 2008, the Company entered into an agreement with Fox to settle the lawsuit brought by the Company against Fox for alleged breaches of the Fox Agreement (the “Settlement Agreement”). Under the terms of the Settlement Agreement, the Fox Agreement terminated on December 31, 2008 rather than at the end of the 2008-2009 broadcast season in September 2009. The Company’s remaining financial obligations to Fox for the first three quarters of 2009 also terminated. During the year ended December 31, 2009, the Company paid Fox $6,250 in respect of its remaining obligation under the Settlement Agreement.
On July 29, 2009, The Upper Deck Company, LLC ("Upper Deck") filed suit in Superior Court of the State of California, County of San Diego, North County Division, against Bryan C. Gannon ("Gannon") and TC Digital Games LLC ("TC Digital") alleging that Gannon misappropriated and used confidential information and trade secrets of Upper Deck in connection with the “Chaotic” trading card game. The complaint alleges that Gannon became privy to the Upper Deck confidential information and trade secrets during the course of Gannon's service to Upper Deck during the July 1, 2002 through January 1, 2003 period as an independent contractor and during the January 2, 2003 through May 23, 2003 period during which Gannon was an employee of Upper Deck. The complaint seeks unspecified monetary damages to be determined at trial. On October 5, 2009, Upper Deck voluntarily dismissed the complaint without prejudice.
On February 12, 2010, Home Focus Development, LTD, a British Virgin Islands Corporation, ("Home Focus") filed suit against the Company in the United States District Court for the Southern District of New York. In the lawsuit, Home Focus alleges that the Company owes it $1,075 under an Interest Purchase Agreement among the Company, Home Focus and TC Digital entered into on March 2, 2009, pursuant to which the Company acquired a 25% ownership interest in TDI. As further described in Note 17, the Company withheld payments in an aggregate amount of $575 from Home Focus otherwise due under the Interest Purchase Agreement as a result of Home Focus’s failure to make required capital contributions to TDI. The Company intends to vigorously defend this litigation.
The Company, from time to time, is involved in litigation arising in the ordinary course of its business. The Company does not believe that such litigation to which the Company or any subsidiary of the Company is a party or of which any of their Properties is the subject will, individually or in the aggregate, have a material adverse effect on the Company’s financial position, results of its operations or cash flows.
d.
Employment Contracts - The Company has employment agreements and arrangements with its executive officers and certain management personnel. The agreements generally continue until terminated by the employee or the Company, and provide for severance payments under certain circumstances. The majority of the agreements and arrangements provide the employees with certain additional rights after a change of control (as defined in such agreements) of the Company occurs. The agreements include a covenant against competition with the Company which extends for a period of time after termination for any reason. As of December 31, 2009, if all of the employees under contract were terminated by the Company without good cause or following a change of control, under these contracts, the Company’s liability would be approximately $9,402 or $7,869, respectively.
e.
Deferred Revenue - Music Publishing - In July 2002, 4Kids Music granted a right to receive a 50% interest in the Company’s net share of the music revenues from currently existing music produced by the Company for its television programs (“Current Music Assets”) to an unaffiliated third party in an arm’s length transaction for $3,000 (the “Music Agreement”). Further, the Company agreed to grant a right to receive a 50% interest in the Company’s net share of music revenues from future music to be produced by the Company for its television programs (“Future Music Assets”) to the same third party for $2,000. In consideration of the grant of Future Music Assets, the Company received $750 in June 2003, $750 in June 2004 and $500 in June 2005.
The Company has deferred all amounts received under the contract, and recognizes revenue as the Current Music Assets and Future Music Assets generate revenue over the contract term. The Company expects and continues to produce additional new music which, based on the success of the administrative service, continues to supply the unaffiliated third party with this content. Since the Company continues to deliver more than the amount of music required to be delivered under the Music Agreement, there is no way to appropriately record the fair value of the future amounts to be delivered. Based on authoritative guidance issued by the FASB, the Company’s inability to fair value the future portion of the music deliverables results in the entire amount recorded as deferred revenue. The most appropriate and systematic method of accounting for this revenue relating to the deferred portion would be to reduce this deferred amount dollar for dollar based on the actual music earnings of the Company. Pursuant to the above, the Company recognized revenues of $517, $634 and $461 for the years ended December 31, 2009, 2008 and 2007, respectively. The Company has included $843 and $1,360 as deferred revenue on the accompanying consolidated balance sheets as of December 31, 2009 and 2008, respectively.
Home Video - At various dates since May 2002, 4Kids Home Video, entered into various agreements with an unaffiliated third party home video distributor (the “Video Distributor”), pursuant to which 4Kids Home Video provides ongoing advertising, marketing and promotional services with respect to certain home video titles, that are owned or controlled by the Company and which are distributed by the Video Distributor. The Video Distributor has paid the Company advances of $4,119 against 4Kids Home Video’s share of the distribution and service fee proceeds to be realized by 4Kids Home Video from such titles. Pursuant to the above, the Company recognized revenue of $131, $208 and $122 for the years ended December 31, 2009, 2008 and 2007, respectively. The Company has included $80 and $211 as deferred revenue on the accompanying consolidated balance sheets as of December 31, 2009 and 2008, respectively.
Other Agreements - In addition, the Company entered into other agreements for various Properties and advertising time on The CW4Kids in which the Company has received certain advances and/or minimum guarantees. Accordingly, as of December 31, 2009 and 2008 the unearned portion of these advances and guaranteed payments were $1,356 and $1,699, respectively, and are included in deferred revenue on the accompanying consolidated balance sheets.
f.
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.
Under the CW Agreement, the Company is obligated to make quarterly minimum guaranteed payments which are subject to reduction under certain circumstances. The Company and The CW share advertising revenues earned from the sale of national commercial time during The CW4Kids with The CW's share to be applied against such quarterly guarantee payments. In addition, The CW is entitled under the CW Agreement to participate in the Company's merchandising 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 ad revenue and costs associated with The CW4Kids.
In December 2009, the Company notified The CW that it believed it was entitled to a reduction in the total guarantee for the broadcast year as well as a change in the split of the national advertising proceeds derived from The CW4Kids block from 80% - 20% in favor of The CW to 65% - 35% in favor of The CW as a result of industry action taken by most of the leading food advertisers reducing or otherwise limiting categories of permitted advertising in response to public concern about childhood obesity. Such a reduction and adjustment in the share of advertising proceeds is provided for under The CW Agreement if any federal, state or other governmental law, regulation or rule or any industry action bans, reduces or otherwise limits the categories of permitted advertising that can be broadcast in children's programming. The Company has supplied The CW with evidence supporting its position including a copy of the October 2009 report of the Children's Food and Beverage Advertising Initiative set up under the auspices of the Council of Better Business Bureaus which describes the effect of the industry action undertaken by leading food advertisers as well as children's food advertising spending statistics documenting the reduction in children's food advertising. In December 2009, the Company paid The CW the first installment of $4,275 in respect of the quarterly guarantee for the 2009 - 2010 broadcast season rather than $6,750, the original amount required under The CW Agreement.
The CW has disputed the Company’s position by claiming that there has been no industry action reducing or otherwise limiting the categories of permitted advertising and believes that the Company is in breach of The CW Agreement by having paid the reduced amount in respect of the quarterly guarantee. The Company and The CW are currently in discussions regarding the contractual dispute. If they are unable to resolve the dispute through negotiation, the dispute between the Company and The CW will be resolved through arbitration. If the Company prevails through negotiation or arbitration, the $15,000 guarantee will be reduced and the split of advertising revenues will be adjusted. There can be no assurance, however, that the Company will prevail or of the amount of any reduction or adjustment in the event the Company is successful. If the Company is unsuccessful, it will be required to pay $2,475 to The CW, representing the difference between the original amount required under The CW Agreement and the amount paid by the Company in December 2009.
As of December 31, 2009, the minimum guaranteed payment obligations under the CW Agreement are as follows:
Year Ending
December 31,
Amount
$
15,000
15,000
15,000
8,250
Total
$
53,250
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.
The costs of 4Kids TV was capitalized and amortized over each broadcast year based on estimated advertising revenue for the related broadcast year. The Company recorded amortization expenses of $16,022 and $21,472 for the years ended December 31, 2008 and 2007, respectively. During the year ended December 31, 2008, the Company paid Fox and certain Fox affiliates $5,741 and $2,273, attributable to the 2007-2008 and 2008-2009 broadcast seasons fees, respectively.
The Company’s ability to recover the cost of its 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 contractual obligation to The CW, the Company would record a charge to earnings to reflect an expected loss on The CW agreements in the period 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 broadcast fees. 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 broadcast fees and in the event it cannot, it would record the resulting charge to earnings to reflect an expected loss on the broadcast fee, which could be significant.
In addition to the minimum guarantee paid to The CW, the Company incurs additional costs to program each broadcast block and sell the related network advertising time. These costs include direct programming costs to acquire, adapt and deliver programming for the broadcast during the weekly broadcast blocks as well as additional indirect expenses of advertising sales, promotion and administration.
g.
Contractual Arrangements - During the normal course of business, the Company may enter into various agreements with third parties to license, acquire, distribute, broadcast, develop and/or promote Properties. The terms of these agreements will vary based on the services and/or Properties included within the agreement, as well as, geographic restrictions, duration, property and exploitation condition and results of operation.
15. NONCONTROLLING INTEREST
The Company adopted the authoritative guidance issued by the FASB which provides that all earnings and losses of a subsidiary should be attributed to the parent and the noncontrolling interests, even if the losses attributable to the noncontrolling interest result in a deficit noncontrolling interest balance. Previously, any losses exceeding the noncontrolling interests’ investment in the subsidiaries were attributed to the parent. This guidance was applied prospectively as of January 1, 2009.
The following table reflects the Company’s net loss and loss per share had the Company not attributed the losses of the subsidiary to the noncontrolling interest and remained under the previous accounting guidance.
a) TC Digital Games LLC - On December 11, 2006, 4Kids Digital and CUSA LLC entered into the TCD Agreement with respect to the operation of TC Digital as a joint venture, with 4Kids Digital owning 53% of TC Digital’s membership interests and CUSA LLC owning 47% of TC Digital’s membership interests. On December 18, 2007, 4Kids Digital purchased an additional 2% membership interest in TC Digital from CUSA for approximately $200, increasing 4Kids Digital’s ownership percentage to 55%. The consideration for the purchase of this additional membership interest was paid through the settlement of capital contributions required to be made by CUSA to TC Websites under the TCW Agreement. TC Digital is treated as a consolidated subsidiary of the Company as a result of its majority ownership and its right to break any dead-locks within the TC Digital Management Committee.
Noncontrolling interest of membership units in TC Digital represents the noncontrolling members’ proportionate share of the equity in the entity. Income is allocated to the membership units noncontrolling interest based on the ownership percentage throughout the year. As of December 31, 2009 and 2008, the noncontrolling member held 45% of the equity in the entity. The following table summarizes the noncontrolling interest loss attributable to the noncontrolling equity interest in TC Digital:
Included in the TC Digital net loss is $1,288 related to the operations of TC Digital International Ltd. (“TDI”), a joint venture owned 50% by TC Digital, 25% by the Company and 25% by Home Focus Development Ltd. (“Home Focus”), see Note 17 for further details. As of December 31, 2009, Home Focus has not made a capital contribution to TDI.
As of December 31, 2009, the loss in excess of noncontrolling interest for TC Digital absorbed by 4Kids Digital, in the aggregate, since the formation of such entity is $16,291.
b) TC Websites LLC - Under the terms of the TCW Agreement, 4Kids Websites and CUSA are each entitled to elect two managers to TC Websites’ Management Committee. On December 18, 2007, 4Kids Websites entered into an agreement with CUSA and TC Websites pursuant to which 4Kids acquired an additional 5% ownership interest in TC Websites from CUSA for approximately $650 and the TCW Agreement was amended to provide 4Kids Websites with the right to break any deadlocks on TC Websites’ Management Committee with respect to operational matters. The consideration for the purchase of this additional membership interest was paid through the settlement of certain capital contributions required to be made by CUSA to TC Websites under the TCW Agreement.
While the Company maintained a 50% ownership interest in TC Websites and did not control, but had significant influence, over such entity, the Company’s investment in TC Websites had been accounted for using the equity method in accordance with authoritative guidance issued by the FASB. Due to the increased membership interest and the additional operational control, TC Websites’ financial statements are included in the Company’s consolidated financial statements for the years ended December 31, 2009 and 2008.
As of December 31, 2009, the noncontrolling member of TC Websites held 45% of the equity in the entity. The following table summarizes the noncontrolling interest loss attributable to the noncontrolling equity interest in TC Websites:
As of December 31, 2009, the loss in excess of noncontrolling interest for TC Websites absorbed by 4Kids Websites in the aggregate since the formation of such entity is $5,430.
16. IMPAIRMENT OF CHAOTIC RELATED ASSETS
The Company continually monitors events and changes in circumstances that could indicate carrying amounts of certain assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of these assets by determining whether the carrying value will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the value of the assets.
During the fourth quarter of 2009, the Company recorded $20,195 of charges to reduce the carrying value of certain “Chaotic” assets based on their revised estimated fair values. Such amounts include: (i) a reduction of the Company’s film inventory of $12,637 through amortization based on a change in the overall expected future revenues of the Property, including approximately $6,943 owed to the Company by CUSA and Apex, collectively, for their share of production costs for television episodes of the “Chaotic” Property under their representation agreement with 4Kids Licensing; (ii) a reduction of the Company’s trading card inventory of $3,829, based on the value of expected future trading card sales; (iii) an impairment charge with respect to the Company’s investment in TDI of $2,430 to reflect the decreased value of this non-performing international joint venture of the “Chaotic” trading card business; and (iv) an impairment charge of $1,299 relating to the decreased value of the Company’s international subsidiary’s investment in a percentage of domestic “Chaotic” trading card sales.
17. RELATED PARTY TRANSACTIONS
National Law Enforcement and Firefighters Children’s Foundation - The Company’s Chairman and Chief Executive Officer is the founder and President of The National Law Enforcement and Firefighters Children’s Foundation (the “Foundation”). The Foundation is a not-for-profit organization dedicated to helping the children of law enforcement and firefighting personnel and working with law enforcement and firefighting organizations to provide all children with valuable social and life skill programs. During the years ended December 31, 2009, 2008 and 2007, the Company contributed approximately $66, $110 and $120, respectively, to the Foundation.
Chaotic USA Entertainment Group, Inc. (“CUSA”) - On December 11, 2006, 4Kids Digital and CUSA LLC, entered into the TCD Agreement with respect to the operation of TC Digital as a joint venture, with 4Kids Digital owning 53% of TC Digital’s membership interests and CUSA LLC owning 47% of TC Digital’s membership interests. On December 18, 2007, 4Kids Digital purchased an additional 2% membership interest in TC Digital from CUSA LLC increasing 4Kids Digital’s ownership percentage to 55%. TC Digital is treated as a consolidated subsidiary of the Company as a result of its majority ownership in TC Digital and its right to break any dead-locks within the TC Digital Management Committee. Bryan Gannon (“Gannon”), President and Chief Executive Officer of CUSA and John Milito (“Milito”), Executive Vice President and Chief Operating Officer of CUSA, each own an interest of approximately 32% in CUSA. Additionally, on December 11, 2006, Gannon and Milito became officers of TC Digital.
As of December 31, 2009, the Company has entered into the following transactions with CUSA and CUSA LLC, or parties related to Gannon and Milito that are summarized below:
°
Employment Agreements - On December 11, 2006, TC Digital entered into employment agreements through December 31, 2009, with Gannon, to serve as its President and Chief Executive Officer and Milito, to serve as its Executive Vice President. Under the terms of the employment agreements, each of Gannon and Milito received an annual base salary of $350 and were eligible to receive additional bonuses at the sole discretion of TC Digital’s Management Committee, on which they served with minority voting rights. As of December 31, 2009, no bonus had been paid with respect to the employment agreements. Milito’s employment with TC Digital was terminated at the expiration date of his agreement on December 31, 2009. Gannon continues to serve as President and Chief Executive Officer of TC Digital following the expiration of his contract at an annual salary of $350.
°
Chaotic Property Representation Agreement - On December 11, 2006, 4Kids Licensing, CUSA and Apex Marketing, Inc. (“Apex”), a corporation in which Gannon holds 60% of the outstanding capital stock and Milito owns 39% of the outstanding capital stock, entered into an amended and restated Chaotic Property Representation Agreement (“CPRA”) replacing the original Chaotic Property Representation Agreement entered into by the parties in April 2005. Under the terms of the CPRA, 4Kids Licensing is granted exclusive television broadcast and production, merchandising licensing, and home video rights to the “Chaotic” Property worldwide in perpetuity, subject to certain limited exceptions. Under the terms of the CPRA, all “Chaotic” related income less approved merchandising and other expenses shall be distributed 50% to the Company and 50% to CUSA and Apex, excluding trading card royalties which are distributed 55% to 4Kids Digital and 45% to CUSA. Additionally, all approved production expenses for television episodes based on the “Chaotic” property are allocated 50% to 4Kids Licensing and 50% to CUSA and Apex. As of December 31, 2009 and 2008, there were no distributions and approximately $8,458 and $6,938, respectively, of production, merchandising and other general expenses were owed to 4Kids Licensing by CUSA and Apex, collectively.
°
Patent License Agreements - On December 11, 2006, TC Digital and TC Websites each entered into an agreement (the “Patent License Agreements”) with Cornerstone Patent Technologies, LLC (“Cornerstone”), a limited liability company, in which Gannon and Milito each hold a 25% membership interest. Pursuant to the Patent License Agreements, TC Digital and TC Websites obtained exclusive licenses (subject to certain exceptions) to use certain patent rights in connection with “Chaotic” and other trading card games which are uploaded to websites owned and operated by each such entity. Additionally, each of TC Digital and TC Websites agreed to pay Cornerstone a royalty of 1.5% of the Manufacturers Suggested Retail Price for the sale of trading cards, which amounted to $374 and $237 for each such entity for the year ended December 31, 2009 and 2008, respectively. On September 10, 2007, the Company purchased a 25% interest in such patents from Cornerstone for $750. For the years ended December 31, 2009 and 2008, the Company earned royalties of $250 and $158, respectively, associated with its portion of the patents, related to the sales of “Chaotic” trading cards which is eliminated in the Company’s consolidated financial statements.
°
TCD Agreement - Under the terms of the TCD Agreement, TC Digital is obligated to pay the following fees and/or royalties to: (i) 4Kids Digital equal to 3% of TC Digital’s gross revenues up to $350 per year for management services performed; (ii) 4Kids Digital and CUSA equal to 3% of net sales of each pack of trading cards sold; and (iii) the Company equal to (x) 10% of the net sales of “Chaotic” trading cards and (y) an additional 1% of net sales of “Chaotic” trading cards above $50 million during a calendar year. The Company acquired its rights to receive royalties of 10% in respect to net sales of “Chaotic” trading cards under the TCD Agreement through purchases from Dracco Company Ltd. (“Dracco”) of a 5% royalty stream on October 17, 2007, a 1% royalty stream, previously allocated to CUSA from Dracco, on December 18, 2007, a 4% royalty stream on March 17, 2008 in exchange for one-time payments of $2,250, $450 and $1,100, respectively. The consideration for the purchase of the 1% royalty stream for $450 was satisfied through the settlement of certain capital contributions required to be made by CUSA to TC Websites under the TCW Agreement. For the years ended December 31, 2009 and 2008, the Company earned royalties and or fees of $879 and $2,791, respectively, and CUSA earned royalties and or fees of $188 and $553, respectively, relating to the sales of “Chaotic” trading cards under the TCD agreement. The Company’s portion of royalties and its management fee were eliminated in its consolidated financial statements.
4Kids Digital is required under the terms of the TCD Agreement and the related loan and line of credit agreements to provide loans to TC Digital from time to time with a maturity date of December 31, 2010. On September 15, 2008, 4Kids Digital and TC Digital agreed to reduce the interest payable on any such loans from 12% to 9% retroactive to December 11, 2006.
°
Chaotic Merchandise License Agreement - On December 11, 2006, 4Kids Licensing, CUSA and TC Digital entered into a merchandise licensing agreement pursuant to which 4Kids Licensing and CUSA granted TC Digital exclusive rights to manufacture, produce and license “Chaotic” trading cards and related accessories through December 31, 2016. Under the terms of the agreement, TC Digital is obligated to pay a royalty on trading cards and all related accessories equal to (i) 4% of net sales to 4Kids Licensing while any amounts are outstanding to 4Kids Digital under the loan agreement or line of credit agreement or (ii) 8% of net sales of such cards and accessories, 55% of which will be paid to 4Kids Licensing and 45% of which will be paid to CUSA. For the years ended December 31, 2009 and 2008, no royalties had been earned under this agreement.
°
Operating Agreement of TC Websites LLC - On December 11, 2006, 4Kids Websites entered into the TCW Agreement with CUSA to purchase a 50% membership interest in TC Websites, which was amended on December 18, 2007 in connection with 4Kids Websites’ acquisition of an additional 5% ownership interest in TC Websites. On September 15, 2008, the terms of the TCW Agreement were further amended to eliminate TC Websites’ obligation to pay fees to each of the following: (i) 4Kids Websites equal to 3% of gross revenues of TC Websites with a minimum fee of $100 and a maximum fee of $200 per year for management services; (ii) Gannon equal to $100 for services as a senior executive; and (iii) Milito equal to $100 for services as a senior executive. Under the terms of the TCW Agreement, each member of TC Websites is obligated to make capital contributions on a pro-rata basis to the extent determined by its Management Committee to be necessary to fund the operation of the Website. Any transaction resulting in the sale of more than 50% of TC Websites’ membership interests or in the sale of all or substantially all of TC Digital’s assets requires the consent of members of TC Websites holding two-thirds of its membership interests (as opposed to a majority of its membership interests).
°
Interest Purchase Agreement - On March 2, 2009, TC Digital, the Company and Home Focus entered into various agreements pursuant to which TC Digital and Home Focus agreed to form TDI and the Company agreed to purchase the TDI Interest from Home Focus. The purchase price for the TDI Interest is an initial price of $1,575 with an obligation to pay up to an additional $1,000 (the "Conditional Payments") conditioned upon the “Chaotic” television series being telecast in the five largest European television markets (the United Kingdom, France, Germany, Spain and Italy) and/or TDI selling in excess of $10,000 of “Chaotic” trading cards. To date, the Company has entered into agreements for the telecast of the “Chaotic” television series in the UK, France and Germany, requiring the Company to make $600 of the Conditional Payments. The Company has paid Home Focus the following consideration for the TDI interest: the Company paid $475 upon execution of the various agreements and has paid the monthly installments of $125 for each of April, May, June, July and August. The Company was required to continue to pay the monthly installments of $125 through September 1, 2009, and beginning on October 1, 2009, $150 per month until such time as the balance due has been paid. However, Home Focus had not made the capital contribution to TDI of $456 required under the Shareholders Agreement, dated March 2, 2009, entered into by the Company and Home Focus with respect to TDI (the “TDI Agreement”) and as a result, the Company withheld the $125 required to be paid to Home Focus on September 1, 2009, the $150 required to be paid on each October 1, 2009, November 1, 2009 and December 1, 2009, and will continue to withhold such future payments until the required capital contribution has been paid.
°
TDI Shareholders Agreement - Under the TDI Agreement, the Board of Directors of TDI will consist of four directors. TC Digital has the right to elect two directors and the Company and Home Focus each have the right to elect one director. There are a number of extraordinary actions that require the consent by shareholders holding at least 80% of the voting stock of TDI in addition to approval of the Board of Directors. The TDI Agreement requires the shareholders to provide TDI with additional capital on a pro rata basis in exchange for additional equity. Under the TDI Agreement, TDI is required to pay or reimburse TC Digital for the costs and expenses associated with the printing, advertising, marketing and promotion of the “Chaotic” trading card game in the TDI Territory. In addition, TDI is responsible for reimbursing TC Digital and TC Websites for the cost of translating the “Chaotic” trading cards and “Chaotic” website into the European languages and for bandwidth and equipment charges associated with making the “Chaotic” website operational in the TDI Territory. TDI is also required to pay TC Digital and TC Websites a design fee equal to 3% and 1.5%, respectively, of net sales of “Chaotic” trading cards in the TDI Territory. For the years ended December 31, 2009, TC Digital and TC Websites earned royalties of $33 and $16, respectively, under this agreement arising from the net sales of “Chaotic” trading cards in the TDI Territory. The royalties earned by TC Digital and TC Websites are eliminated in the Company’s consolidated financial statements.
18. SUBSEQUENT EVENTS
Subsequent events were evaluated by the Company through the date the financial statements were issued. There were no events that occurred subsequent to December 31, 2009 that would require recognition in the Company’s consolidated financial statements.
19. SEGMENT AND RELATED INFORMATION
The Company has four reportable segments: (i) Licensing; (ii) Advertising Media and Broadcast; (iii) Television and Film Production/Distribution; and (iv) Trading Card and Game Distribution. The Company’s reportable segments are strategic business units, which, while managed separately, work together as a vertically integrated entertainment company. The Company’s management regularly evaluates the performance of each segment based on its net revenues, profit and loss after all expenses, including amortized film and television costs and the 4Kids TV broadcast fee and interest income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company’s Television and Film Production/Distribution segment records inter-segment revenues and the Company’s Advertising Media and Broadcast segment records inter-segment charges related to the estimated acquisition costs of episodic television series for broadcast. All inter-segment transactions have been eliminated in consolidation.
As of December 31, 2009, included in segment loss for the Licensing segment is an impairment charge of $6,175 related to the Company’s investment securities, as disclosed in Note 3.
Additionally, through the Company’s London office and network of international subagents, which allow it to license its Properties throughout the world, the Company recognized net revenues from international sources primarily in Europe, of approximately $7,130, $11,684 and $7,374 during fiscal years 2009, 2008 and 2007, respectively. As of December 31, 2009 and 2008, net assets of the Company’s London office were $3,094 and $5,420, respectively.
20. SUMMARIZED QUARTERLY DATA (UNAUDITED)
Following is a summary of the quarterly results of operations for the years ended December 31, 2009 and 2008:
Quarterly amounts for loss per share may not agree to annual amount due to rounding.
During the fourth quarter of 2009, the Company recorded $20,195 of charges to reduce the carrying value of certain “Chaotic” assets based on their revised estimated fair values. Such amounts include: (i) a reduction of the Company’s film inventory of $12,637 through amortization based on a change in the overall expected future revenues of the Property, including approximately $6,943 owed to the Company by CUSA and Apex, collectively, for their share of production costs for television episodes of the “Chaotic” Property under their representation agreement with 4Kids Licensing; (ii) a reduction of the Company’s trading card inventory of $3,829, based on the value of expected future trading card sales; (iii) an impairment charge with respect to the Company’s investment in TDI of $2,430 to reflect the decreased value of this non-performing international joint venture of the “Chaotic” trading card business; and (iv) an impairment charge of $1,299 relating to the decreased value of the Company’s international subsidiary’s investment in a percentage of domestic “Chaotic” trading card sales. The Company also recorded an impairment charge of $6,006 in non-operating expense relating to securities which were now other than temporarily impaired. In addition to these charges, the Company recorded revenue of $9,786 which represented a one-time payment received 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.
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