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EX-10.3 - LETTER AGREEMENT - 4Licensing Corpletteragrmt.htm
EX-31.2 - CFO CERTIFICATION MARCH 31, 2012 - 4Licensing Corpcfocert03312012.htm
EX-10.2 - ASSET PURCHASE AGREEMENT - 4Licensing Corpassetpurchagrmt.htm
EX-31.1 - PEO CERTIFICATION MARCH 31, 2012 - 4Licensing Corppeocert03312012.htm
EX-10.1 - SETTLEMENT AGREEMENT DATED FEBRUARY 27, 2012 - 4Licensing Corpsevagrmt02272012.htm
EX-32 - JOINT CERTIFICATION MARCH 31, 2012 - 4Licensing Corpjointcert03312012.htm
EXCEL - IDEA: XBRL DOCUMENT - 4Licensing CorpFinancial_Report.xls



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

 
ý
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012
 
OR
 
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from  _________________   to   ____________________                          
 

Commission file number 0-7843

4Kids Entertainment, Inc.
(Exact name of registrant as specified in its charter)

New York
(State or other jurisdiction of
incorporation or organization)
 
13-2691380
(I.R.S. Employer
Identification No.)
     

53 West 23rd Street 
New York, New York  10010
(212) 758-7666
(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes o    No ý
  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý  No o  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  ¨             Accelerated filer  ¨             Non-accelerated filer  ¨            Smaller reporting company  ý
      (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    Noý

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

As of May 14, 2012, the number of shares outstanding of the common stock of 4Kids Entertainment, Inc., par value $.01 per share was 13,653,824.
 
 


 
 

 
 
4Kids Entertainment, Inc. and Subsidiaries
Table of Contents
 
       
Page #
 
Part I—FINANCIAL INFORMATION
   
 
 
Item 1.
 
 
Financial Statements
   
   
 
Consolidated Balance Sheets as of  March 31, 2012  (Unaudited) and December 31, 2011
 
 
2
   
 
Consolidated Statements of Operations (Unaudited) for the three months ended March 31, 2012 and 2011
 
3
   
 
Consolidated Statement of Comprehensive Income (Unaudited) for the three months ended March 31, 2012 and 2011
 
4
   
 
Consolidated Statement of Shareholders’ Deficit for the three months ended March 31, 2012 (Unaudited)
 
5
   
 
Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, 2012 and 2011
 
6
   
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
7
 
 
Item 2.
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
 
22
 
 
Item 3.
 
 
Quantitative and Qualitative Disclosures about Market Risk
 
 
31
 
 
Item 4.
 
 
Controls and Procedures
 
31
 
Part II—OTHER INFORMATION
   
 
 
Item 1.
 
 
Legal Proceedings
 
 
32
 
 
Item 1A
 
 
Risk Factors
 
 
35
 
 
Item 6.
 
 
Exhibits
 
 
36
 
   Signatures
 
37
           

 
 
 

 
 
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements.
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2012 and DECEMBER 31, 2011
(In thousands of dollars, except share data)
   
March 31,
 2012
   
December 31, 2011
 
ASSETS:    
(Unaudited)
         
Current assets:
               
   Cash and cash equivalents
  $ 8,611     $ 1,627  
   Accounts receivable - net
    4,247       6,221  
   Prepaid expenses and other current assets
    1,001       1,247  
   Current assets of discontinued operations
          18  
Total current assets
    13,859       9,113  
                 
Property and equipment - net
    613       707  
Accounts receivable - noncurrent, net
    278       378  
Film and television costs - net
    2,464       2,465  
Other assets - net
    3,663       3,281  
Total assets
  $ 20,877     $ 15,944  
                 
                 
LIABILITIES AND DEFICIT:
               
Liabilities not subject to compromise:
               
Current Liabilities:
               
   Due to licensors
  $ 1,321     $ 1,176  
   Accounts payable and accrued expenses
    11,944       11,071  
   Current liabilities of discontinued operations
    1,570       1,583  
   Deferred revenue
    101       166  
Total current liabilities
    14,936       13,996  
                 
Deferred rent
    487       498  
Total liabilities not subject to compromise
    15,423       14,494  
Liabilities subject to compromise
    7,525       7,507  
Total liabilities
    22,948       22,001  
                 
                 
Commitments and contingencies (Note 10)
               
4Kids Entertainment, Inc. shareholders’ deficit
               
      Preferred stock, $.01 par value – authorized 3,000,000 shares; none issued
           
      Common stock, $.01 par value - authorized 40,000,000 shares;  issued
      15,777,711 shares; outstanding  13,653,824 shares at March 31, 2012 and December 31, 2011
    158       158  
      Additional paid-in capital
    69,436       69,436  
      Accumulated other comprehensive income
    465       501  
      Accumulated deficit
    (19,040 )     (23,063 )
      51,019       47,032  
Less cost of 2,123,887 treasury shares at March 31, 2012 and December 31, 2011
    (36,488 )     (36,488 )
Total equity of 4Kids Entertainment, Inc. shareholders
    14,531       10,544  
Noncontrolling interests related to discontinued operations
    (16,602 )     (16,601 )
Total shareholders’ deficit
    (2,071 )     (6,057 )
Total liabilities and shareholders’ deficit
  $ 20,877     $ 15,944  
                 

See notes to consolidated financial statements.

 
2

 

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(In thousands of dollars, except share data)
   
Three Months Ended
 
   
March 31,
 
      2012       2011  
Net revenues:
               
   Service revenue
  $ 2,083     $ 3,377  
   Other revenue
          482  
          Total net revenues
    2,083       3,859  
                 
Costs and expenses:
               
   Selling, general and administrative
    5,156       5,843  
   Amortization of television and film costs
    354       721  
          Total costs and expenses
    5,510       6,564  
                 
Loss from operations
    (3,427 )     (2,705 )
                 
Other income (expense):
               
Interest income
          57  
Loss on sale of investment securities
          (910 )
         Total other expense
          (853 )
                 
Loss from continuing operations before reorganization and litigation items
    (3,427 )     (3,558 )
Reorganization items
    (548 )      
Gain on litigation
    8,000        
                 
Income (loss) from continuing operations
    4,025       (3,558 )
Loss from discontinued operations
    (3 )     (43 )
Net income (loss)
    4,022       (3,601 )
Loss attributable to noncontrolling interests, discontinued operations
    1       481  
Net income (loss) attributable to 4Kids Entertainment, Inc.
  $ 4,023     $ (3,120 )
                 
Per share amounts:
               
Basic and diluted earnings (loss) per share attributable to 4Kids Entertainment, Inc. common shareholders
               
         Continuing operations
  $ 0.29     $ (0.26 )
         Discontinued operations
          0.03  
Basic and diluted earnings (loss) per share attributable to 4Kids Entertainment, Inc. common shareholders
  $ 0.29     $ (0.23 )
                 
Weighted average common shares outstanding:
               
      Basic
    13,653,824       13,528,958  
      Diluted
    13,654,352       13,528,958  
                 
Net income (loss) attributable to 4Kids Entertainment, Inc.:
               
   Income (loss)  from continuing operations
  $ 4,025     $ (3,558 )
   Loss from discontinued operations
    (3 )     (43 )
  Loss attributable to noncontrolling interests, discontinued operations
    1       481  
   Net (loss) income from discontinued operations
    (2 )     438  
Net income (loss) attributable to 4Kids Entertainment, Inc.
  $ 4,023     $ (3,120 )
                 

See notes to consolidated financial statements.


 
3

 
 
4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (UNAUDITED)
(In thousands of dollars and shares)

   
Three Months Ended
 
   
March 31,
 
      2012       2011  
                 
Net income (loss)
  $ 4,023     $ (3,120 )
Translation  adjustment
    (36 )     7  
Total comprehensive income (loss)
  $ 3,987     $ (3,113 )
                 


See notes to consolidated financial statements.



 
4

 


4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT
THREE MONTHS ENDED MARCH 31, 2012 (UNAUDITED)
(In thousands of dollars and shares)

     
4Kids Entertainment, Inc. Shareholders’
     
   
Common Stock
Additional    Paid-In
Capital
 
Accumulated Deficit
Accumulated
Other
Comprehensive 
Income
Less Treasury Stock
Total Equity of 4Kids Entertainment, Inc. Shareholders’
Non-controlling Interests
Total Shareholders’ Deficit
 
 
Shares
Amount
                                           
BALANCE, DECEMBER 31, 2011
    15,778   $ 158   $ 69,436   $ (23,063 ) $ 501   $ (36,488 ) $ 10,544   $ (16,601 ) $ (6,057 )  
Net income (loss)
                4,023             4,023     (1 )   4,022    
Translation adjustment
                    (36 )       (36 )       (36 )  
BALANCE, MARCH 31, 2012
    15,778   $ 158   $ 69,436   $ (19,040 ) $ 465   $ (36,488 ) $ 14,531   $ (16,602 ) $ (2,071 )  
                                                           

See notes to consolidated financial statements.





 
5

 


4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2012 AND 2011
(In thousands of dollars)

   
2012
   
2011
 
Cash flows from operating activities:
               
Net income (loss)
  $ 4,022     $ (3,601 )
Loss from discontinued operations
    3       43  
Income (loss) from continuing operations
    4,025       (3,558 )
Adjustments to reconcile net loss to net cash
               
provided by (used in) operating activities:
               
  Depreciation and amortization
    116       139  
  Amortization of television and film costs
    354       721  
  Recovery for doubtful accounts
    (84 )     (82 )
  Loss on sale of investment securities
          910  
  Changes in operating assets and liabilities:
               
    Accounts receivable
    2,168       2,611  
    Film and television costs
    (353 )     (758 )
    Income taxes receivable
          2  
    Prepaid expenses and other current assets
    255       (331 )
    Other assets – net
    (405 )     (130 )
    Due to licensors
    145       156  
    Accounts payable and accrued expenses
    863       (1,824 )
    Liabilities subject to compromise
    18        
    Deferred revenue
    (65 )     (565 )
    Deferred rent
    (11 )     (48 )
Net cash provided by (used in) continuing operating activities
    7,026       (2,757 )
Net cash provided by (used in) discontinued operating activities
    4       (192 )
Net cash provided by (used in) operating activities
    7,030       (2,949 )
                 
Cash flows from investing activities:
               
Proceeds from sale of investments
          6,216  
Purchase of property and equipment
          (2 )
Net cash provided by investing activities
          6,214  
                 
Effects of exchange rate changes on cash and cash equivalents
    (46 )     (4 )
                 
Net increase in cash and cash equivalents
    6,984       3,261  
Cash and cash equivalents, beginning of period
    1,627       4,195  
Cash and cash equivalents, end of period
  $ 8,611     $ 7,456  
                 
 
 
  See notes to consolidated financial statements.


 
6

 

4KIDS ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 (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” or “4Kids”), is a diversified entertainment and media company specializing in the youth oriented market with operations in the following business segments: (i) Licensing; (ii) Advertising Media and Broadcast; and (iii) Television and Film Production/Distribution. The Company was organized as a New York corporation in 1970.

4Kids’ consolidated financial statements have been prepared assuming that we will be able to continue to operate as a going concern.  4Kids historical recurring losses and negative cash flows from operations together with its bankruptcy filing has caused 4Kids’ independent registered public accounting firm, in the Company’s annual report for the year ended December 31, 2011, to include an explanatory paragraph in their report dated March 22, 2012, expressing substantial doubt about 4Kids’ ability to continue as a going concern.

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

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

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

On February 29, 2012, 4Kids and the Licensors (hereinafter defined) entered into a Settlement Agreement, dated as of February 27, 2012 (the “Settlement Agreement”), settling all claims brought by Licensors against 4Kids and all counterclaims brought by 4Kids against the Licensors in the Yu-Gi-Oh! Litigation. The Settlement Agreement provides, among other things, for the Licensors to make a payment to 4Kids in the amount of $8,000 upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order.  On March 9, 2012, the Bankruptcy Court issued an order approving the Settlement Agreement and, accordingly, the Company recognized a gain on litigation settlement of $8,000.  Under the Settlement Agreement, the Licensors acknowledged that the Yu-Gi-Oh! Agreement (hereinafter defined) remained
 
 
7

 
 
valid, binding and legally enforceable with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast and home video rights to the Yu-Gi-Oh! Property throughout the world outside of Asia.  The Settlement Agreement further provided for each of 4Kids and the Licensors to release each other from all claims they may have against each other, other than certain indemnification claims and claims that may arise under the Settlement Agreement.  The Settlement Agreement also provided that the agreement does not constitute an admission by any party of any violation of any agreement or law.  On March 27, 2012, 4Kids received the payment in the amount of $8,000 pursuant to the Settlement Agreement.

On April 26, 2012, 4Kids, and its subsidiaries which are debtors in the cases pending in the Bankruptcy Court, (4Kids and such subsidiaries, collectively, “Seller”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), which contemplates the sale of substantially all of its assets to Kidsco Media Ventures LLC, a Delaware limited liability company, and an affiliate of Saban Capital Group (“Kidsco” or “Purchaser”) for a purchase price of $10,000, subject to certain adjustments (the “Purchase Price”).  The transaction is proposed under section 363 of the Bankruptcy Code.  The transaction is subject to, among other things, (i) competitive bidding pursuant to such sale procedures which was approved by the Bankruptcy Court at a hearing on April 27, 2012, and (ii) approval of the transaction by the Bankruptcy Court.
 
While the consummation of the Settlement Agreement and the execution of the Asset Purchase Agreement represent significant steps in the process of resolving the Bankruptcy Cases, the timing of any resolution of the Bankruptcy Cases will depend on the timing and outcome of numerous other ongoing matters therein, and it is not possible at this time to accurately predict when such other matters will be resolved.  We have incurred and will continue to incur significant costs associated with the Bankruptcy Cases.  The amount of these costs, which began in April 2011 and are being expensed as incurred, are expected to significantly affect our results of operations, financial position and liquidity.  The Bankruptcy Cases have also presented challenges to our ability to generate additional revenues in all of our business segments especially as it relates to the sales of commercial advertising.

The Company will consider all alternatives available to generate additional cash to fund its operations, including, but not limited to sales of assets, issuance of equity or debt securities, and third party arrangements subject to any limitations and procedures arising from the Bankruptcy Cases.
 
Liquidity - In recent years, the Company has incurred substantial net losses and has used substantial amounts of cash in its operating activities.  Sales by the Company of certain securities held in its investment portfolio as well as certain other assets have significantly contributed to the funding of these operating losses.  While the timing of these sales was not primarily motivated by then current cash needs, without these sales the Company would not have had sufficient cash to fund its operations.

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

The Company continues to incur costs in connection with the Bankruptcy Cases.  The Company expects these costs to continue throughout the Bankruptcy proceedings.  Despite the $8,000 cash received from the Yu-Gi-Oh! Settlement, the Company’s overall cash position as of March 31, 2012, together with the realized and anticipated effects of the significant cost cutting initiatives implemented by the Company beginning in 2009 and continuing in 2012 provides only limited liquidity to fund the Company’s day-to-day operations. The financial challenges facing the Company as a result of its recent history of losses and the limited liquidity available to it to fund day-to-day operations raises substantial doubt about the Company’s ability to continue as a going concern.  Our ability to achieve and maintain profitability and positive cash flow is dependent upon the success of our reorganizational efforts and a number of other factors, including our ability to generate additional revenues. The Company’s financial statements have been prepared assuming that the Company will continue as a going concern and do not contain any adjustments that may result from the outcome of this uncertainty.


 
8

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

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

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.

Discontinued Operation - Trading Card and Game Distribution - Through its wholly-owned subsidiary, 4Kids Digital Games, Inc. (“4Kids Digital”), the Company owns 55% of TC Digital Games LLC, a Delaware limited liability company (“TC Digital”) which produced, marketed and distributed the “Chaotic” trading card game. Through its wholly-owned subsidiary, 4Kids Websites, Inc. (“4Kids Websites”), the Company owns 55% of TC Websites LLC, a Delaware limited liability company (“TC Websites”) which owns and operated www.chaoticgame.com, the companion website for the “Chaotic” trading card game.  TC Digital and TC Websites are the exclusive licensees of certain patents covering the uploading of coded trading cards to a website where online game play and community activities occur.  Effective September 30, 2010, the Company terminated the operations of TC Digital and TC Websites due to their continued lack of profitability.  The termination of the business of TC Digital and TC Websites enabled the Company to further reduce costs and focus on its core businesses.  As a consequence of the termination of their operations, TC Digital and TC Websites ceased supporting the Chaotic trading card game and website, effective October 1, 2010.  The results of operations of TC Digital and TC Websites are reported in the Company’s consolidated financial statements as discontinued operations (see Note 8), subject to a noncontrolling interest.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The consolidated financial statements, except for the December 31, 2011 consolidated balance sheet, are unaudited and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2011 presented in our Annual Report on Form 10-K. The consolidated balance sheet as of December 31, 2011 was derived from the audited consolidated balance sheet contained in our Annual Report on Form 10-K.  All significant intercompany accounts and transactions have been eliminated.  In the opinion of management, the accompanying consolidated financial statements contain all adjustments, which are of a normal and recurring nature, necessary to present fairly the financial position of the Company as of March 31, 2012 and December 31, 2011, and the results of operations and comprehensive income (loss) for the three months ended March 31, 2012 and 2011, and changes in equity for the three months ended March 31, 2012 and cash flows for the three months ended March 31, 2012 and 2011. Because of the inherent seasonality and changing trends of the toy, game, entertainment and advertising industries, operating results for the Company on a quarterly basis may not be indicative of operating results for the full year.
 
 
 
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Revenue RecognitionMerchandise 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.

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 March 31, 2012 and December 31, 2011.

The carrying values of cash and cash equivalents, accounts receivable, due to licensors, accounts payable, accrued expenses and deferred revenue approximate fair value.  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.

Film and Television Costs – The Company's cost of production for television programming, including overhead, participations and talent residuals is capitalized and amortized in accordance with authoritative guidance issued by the FASB using the individual-film-forecast method under which such costs are amortized for each television program in the ratio that revenue earned in the current period for such program bears to management’s estimate of the ultimate revenues to be realized from all media and markets for such program. Management regularly reviews, and revises when necessary, its ultimate revenue estimates on a title-by-title basis, which may result in a change in the rate of amortization applicable to such title and/or a write-down of the value of such title to estimated fair value. These revisions can result in significant quarter-to-quarter and year-to-year fluctuations in film write-downs and rates of amortization. If a total net loss is projected for a
 
 
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particular title, the associated film and television costs are written down to estimated fair value. All exploitation costs, including advertising and marketing costs are expensed as incurred. Television adaptation and production costs that are adapted and/or produced are stated at the lower of cost, less accumulated amortization, or fair value.

Reorganization Items - The Company’s costs related to professional, consulting and trustee fees, as the case may be, in conjunction with the Bankruptcy Cases are expensed as incurred and reported as reorganization items in the accompanying consolidated statements of operations.

Reclassifications - Certain reclassifications have been made to prior year amounts to conform to 2012 presentation.

Other Comprehensive Income (Loss) - The Company classifies items as other comprehensive loss 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 in “other comprehensive loss”, net of related tax.

Recently Issued Accounting Standards – There have been no recent accounting pronouncements expected to have a material impact on the Company’s financial condition or results of operations and cash flow.

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

3. STOCK-BASED EMPLOYEE COMPENSATION

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’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.

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”). The restricted stock awards were granted to certain employees, including officers and members of the Board of Directors, at a grant price of $1.46 (the average of the high and low stock price from the previous day of trading).  The restricted stock awards vest annually over a period of three years from the date of grant, 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.


 
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A summary of restricted stock award activity under the Company’s LTICPs as of March 31, 2012 and changes during the three months then ended is presented as follows:

   
Number of Shares
(in thousands)
   
Weighted- Average Grant Date Fair Value
 
                 
Outstanding at January 1, 2012
    61     $ 1.46  
  Granted
           
  Vested
           
  Forfeited
           
Outstanding at March 31, 2012
    61     $ 1.46  
                 

The Company recognized approximately $22 and $16 of compensation costs related to the LTICPs during the three months ended March 31, 2012 and 2011, respectively.  Additionally, as of the three months ended March 31, 2012, there was approximately $13 of unrecognized compensation cost related to restricted stock awards granted under the Company’s 2008 LTICPs.  The cost is expected to be recognized over a remaining weighted-average period of 0.1 years under the 2008 LTICPs.

Availability for Future Issuance – As of March 31, 2012, (i) options to purchase approximately 1,973,000 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 808,000 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 210,000 shares of the 808,000 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 598,000 of the 808,000 total shares were available for issuance as options.

4. INCOME TAXES

The (expense) benefit from income taxes consisted of the following:
 
     Three Months Ended  
     March 31,
 
2012
   
2011
 
Current
  $     $  
Deferred
    (1,775  )     941  
    $ (1,775  )   $ 941  
Less: Changes in valuation allowance
    1,775       (941 )
Total
  $     $  
                 

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 regularly reviews its deferred tax assets for recoverability taking into consideration such factors as historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. 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.  In view of the level of deferred tax assets as of March 31, 2012 and the Company’s historical losses from operations, the Company has determined that it should record a full valuation allowance against its net deferred tax assets.  The Company did not record tax expense for the three months ended March 31, 2012, as it has net operating loss available to offset any taxable income forecast for the year ending December 31, 2012.  The Company did not record a benefit from income taxes for the three months ended March 31, 2011 as it was not be able to carryback any of its 2011 net operating losses and it is more likely than not that the Company will not be able to realize its deferred tax assets.  The Company has not recorded any liability for unrecognized tax benefits.

 
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In the event that the Company earns pre-tax income in the future such that it will be able to use some or all of its deferred tax assets, the Company may reduce or eliminate the valuation allowance.  If the Company were to reverse the valuation allowance, in whole or in part, the Company’s income statement for such reporting period would record a reduction in income tax expense and an increase in net income, to the extent of the reversal of the valuation allowance.

The Company is no longer subject to examinations by income tax authorities in most jurisdictions for years prior to 2007.

5. EARNINGS (LOSS) 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. For the three months ended March 31, 2012 and 2011, 0 and 200,782 shares, respectively, attributable to the exercise of outstanding options, were excluded from the calculation of diluted EPS because the effect was antidilutive.

6. LIABILITIES SUBJECT TO COMPROMISE

Liabilities subject to compromise refers to unsecured obligations that will be accounted for under any bankruptcy plan. Generally, actions to enforce or otherwise effect payment of liabilities arising prior to the commencement of the Bankruptcy Cases (“Pre-Petition Liabilities”) are stayed.  The authoritative guidance issued by the FASB requires Pre-Petition liabilities that are subject to compromise to be reported at the amounts expected to be allowed, even if they may be settled for lesser amounts.  These liabilities represent the estimated amount expected to be allowed on known or potential claims to be resolved through the Bankruptcy Cases, and remain subject to future adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts and unexpired leases, the determination as to the value of collateral securing the claims, proofs of claim, or other events.  Liabilities subject to compromise also include certain items that may be assumed under a plan of reorganization, and as such, may be subsequently reclassified to liabilities not subject to compromise.  Unless otherwise provided for in the Bankruptcy Code or any “claims bar date order” entered in the Bankruptcy Cases, holders of pre-petition claims are required to file proofs of claims by the “bar date” established with approval of the Bankruptcy Court.  A bar date is the date by which certain claims against the Debtors must be filed if the claimants wish to receive any distribution in Bankruptcy Cases.  Creditors have been notified that April 18, 2012 is the bar date in the Bankruptcy Cases and were required to file a proof of claim with the Bankruptcy Court by that date.  Differences between liability amounts estimated by the Debtors and claims filed by creditors will be investigated and, if necessary, the Bankruptcy Court will make a final determination of the amount of any allowable claim.  The determination of how liabilities will ultimately be treated cannot be made until the Bankruptcy Court approves a bankruptcy plan.  Accordingly, the ultimate amount or treatment of such liabilities is not determinable at this time.

Liabilities subject to compromise consisted of the following:

   
March 31, 2012
   
December 31, 2011
 
Due to Licensors
  $ 2,627     $ 2,627  
Accounts Payable and Accrued Expenses
    4,898       4,880  
    Total
  $ 7,525     $ 7,507  
                 

Liabilities subject to compromise includes trade accounts payable related to pre-petition purchases, not all of which were paid. As a result, the Company’s cash flows from operations were favorably affected by the stay of payment related to these accounts payable.

7. SEVERANCE AND EXIT COSTS

In connection with the termination of the operations of TC Digital and TC Websites (see Note 8), the Company recorded no charges for severance and termination benefits and other exit costs during the three months ended March 31, 2012.
  
A summary of the actions taken for severance and other exit-costs have been recorded in loss from discontinued operations in the prior year and the estimated remaining liability associated with such costs are as follows:
 
   
Remaining Liability as of March 31, 2012
 
Severance and related costs
  $ 87  
Termination of contracts and leases
    485  
    Total
  $ 572  
         
 
 
 
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The remaining liability for severance and exit costs, which are included in current liabilities of discontinued operations, will be paid in accordance with the provisions of the contractual agreements and payments are expected to be completed at various times through 2012.

8. DISCONTINUED OPERATIONS

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

The following are the summarized results of discontinued operations for the trading card and game distribution segment for the three months ended March 31, 2012 and 2011:
 
      Three Months Ended  
      March 31,  
      2012        2011  
Net revenues
  $     $ 11  
Total costs and expenses
    3       54  
Loss from discontinued operations
  $ (3 )   $ (43 )
                 

The major classes of assets and liabilities of the discontinued operations on the balance sheet are as follows:

   
March 31, 2012
   
December 31, 2011
 
ASSETS
               
  Prepaid and other current assets
  $     $ 18  
Current assets of discontinued operations
  $     $ 18  
                 
LIABILITIES
               
  Accounts payable and accrued expenses
  $ 1,570     $ 1,583  
Current liabilities of discontinued operations
  $ 1,570     $ 1,583  
                 

9. LEGAL PROCEEDINGS

TCD International, Ltd. - On February 12, 2010, Home Focus Development, Ltd., a British Virgin Islands Corporation, (“Home Focus”) filed suit against 4Kids in the United States District Court for the Southern District of New York. Home Focus alleged that 4Kids owed Home Focus $1,075 under an Interest Purchase Agreement among 4Kids, Home Focus and TC Digital entered into on March 2, 2009, pursuant to which the Company acquired a 25% ownership interest in TCD International, Ltd. (“TDI”).

On April 26, 2010, 4Kids filed an answer and asserted various counterclaims against Home Focus and its owners, in their individual capacities. In its counterclaims, 4Kids has alleged that Home Focus failed to make its contractually required initial capital contribution of $250 to TDI necessary to acquire the 25% ownership interest in TDI it purported to sell to the Company and also failed to contribute its 50% share of the expenses. 4Kids has further asserted counterclaims of fraud and misrepresentation.
 
During the last few months, the parties have not proceeded with the litigation in light of the filing of the Bankruptcy Cases on April 6, 2011, which had the effect of automatically staying such litigation. The parties have had substantive discussions and have exchanged draft agreements regarding the possible resolution of the claims and counterclaims. There can be no assurance that the parties will conclude their settlement discussions satisfactorily.
 
 
 
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 Pokémon Royalty Audit - During the first quarter of 2010, The Pokémon Company International (“TPC”) commenced an audit of 4Kids covering the period from mid-2001 through 2008. On May 28, 2010, 4Kids received a letter from counsel for TPC (“TPC Letter”) claiming that the audit “identified deficiencies totaling almost $4,700” and demanding payment of the deficiency together with interest thereon.  The TPC Letter failed to provide any schedules or other specific information regarding the alleged deficiencies. By letter dated June 11, 2010 (“4Kids Letter”), 4Kids disputed the allegations made in the TPC Letter and advised TPC that 4Kids would not be paying the alleged deficiency or any interest thereon. The 4Kids Letter also proposed that, as had been discussed by the parties, 4Kids would audit TPC which was the recipient and payee of Pokémon merchandise licensing, television broadcast and home video proceeds during the 2001 - 2008 period, and that after the completion of the parties’ respective audits, the parties would review the audit reports and discuss any outstanding issues.
 
On July 14, 2010, 4Kids and TPC executed a tolling agreement tolling the statute of limitations until October 21, 2010 with respect to TPC’s claims. 4Kids and TPC also agreed in the tolling agreement that neither party would commence any litigation against the other party until after the expiration of the tolling period in order to allow for the parties to complete their respective audits and to discuss the results thereof.  During mid-June 2010, 4Kids commenced its audit of TPC which was completed in December 2010.  On October 12, 2010, 4Kids and TPC executed an amendment to the tolling agreement extending the tolling of the statute of limitations until January 15, 2011.  On January 26, 2011, 4Kids and TPC executed a second amendment to the tolling agreement extending the tolling of the statute of limitations until March 15, 2011. On March 25, 2011, 4Kids and TPC executed a third amendment to the tolling agreement extending the tolling of the statute of limitations until April 15, 2011.  The parties have not sought to further extend the tolling agreement in light of the filing of the Bankruptcy Cases on April 6, 2011, which had the effect of automatically staying such claims.

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

On June 25, 2010, 4Kids received a letter from counsel for ADK (“ADK Letter”) alleging that 4Kids had improperly deducted certain expenses from amounts paid to ADK and had failed to pay ADK a share of certain Yu-Gi-Oh! home video revenues. In addition, the ADK Letter requested that 4Kids provide additional documentation with respect to withholding taxes deducted from ADK’s share of Yu-Gi-Oh! revenues. The ADK Letter claimed that the total of the improper deductions and underpayments was approximately $3,000.  By letter dated June 29, 2010 (“4Kids Yu-Gi-Oh! Letter”), 4Kids disputed substantially all of the allegations contained in the ADK Letter.
 
The ADK Letter also demanded that 4Kids and ADK sign a tolling agreement with an effective date of June 1, 2010 which would stop the running of the statute of limitations during the four month tolling period starting on June 1, 2010 and concluding on September 30, 2010. On June 29, 2010, 4Kids and ADK entered into the tolling agreement described above. On October 19, 2010, 4Kids and ADK signed an amendment to the tolling agreement extending the tolling period through December 31, 2010.
 
On December 20, 2010, 4Kids received a letter from ADK which alleged audit findings of $4,819. By letters dated December 29, 2010, 4Kids disputed substantially all of the alleged audit findings. On January 11, 2011, the parties entered into another amendment to the tolling agreement extending the tolling period through March 31, 2011.
 
On March 4, 2011, ADK requested a payment from the Company in order for representatives of the Licensors to agree to meet with representatives of the Company. On March 17, 2011, 4Kids made a $1,000 payment to ADK as a show of good-faith so that a meeting could take place with ADK to attempt to resolve the audit claims. Notwithstanding the $1,000 good-faith payment, the Company also reserved its rights to dispute all of ADK’s audit claims. On March 18, 2011, representatives of 4Kids met with representatives of ADK in a further, but ultimately unsuccessful, attempt to resolve the outstanding issues.

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


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

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

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

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

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

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

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

Wildcat Intellectual Property Holdings, LLC v. 4Kids Entertainment, Inc. et al.  On July 5, 2011, Wildcat Intellectual Property Holdings, LLC filed suit against 4Kids, Chaotic USA Entertainment Group, Inc., Electronic Arts Inc., Konami Digital Entertainment, Inc., Nintendo of America Inc., Panini America, Inc., Pokémon USA, Inc., Sony Computer Entertainment America LLC, Sony Online Entertainment LLC, The Topps Company, Inc., Wizards of the Coast LLC and Zynga Inc. (collectively the “Wildcat Defendants”) in the United States District Court for the Eastern District of Texas seeking damages and other various fees. The suit alleges that the Wildcat Defendants infringed upon United States Patent Number 6,200,216 entitled “Electronic Trading Card”. Since the Wildcat suit with respect to 4Kids pertains to alleged actions by 4Kids occurring prior to the commencement of the Bankruptcy Cases, the Wildcat suit is “stayed” by the 4Kids bankruptcy.
 
 
 
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 Lehman Brothers, Inc. Claim - The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased the auction rate securities on behalf of the Company violated its legal obligations to the Company.  As a result, the Company took various measures to obtain appropriate legal relief, including initiating an arbitration on April 3, 2008 against Lehman Brothers, Inc. and the brokers who had serviced the Company’s Lehman account with the Financial Industry Regulatory Authority.  On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy.  The Company’s arbitration proceeding was stayed by the Lehman bankruptcy.  On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc.  The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008.  On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”).  SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC.  In late September, 2009, the Company filed a proof of claim against Lehman Brothers, Inc. in the United States Bankruptcy Court for the Southern District of New York. The principal amount of the claim was approximately $31,500 plus interest. In addition, the proof of claim requested treble damages. The proof of claim is a general unsecured claim. The Company’s claim against Lehman Brothers, Inc. is still pending and there has been no determination made as to the validity or allowed amount of the claim.  On October 18, 2011, the Company entered into a settlement agreement and general release with the brokers who had serviced the Company’s account with Lehman Brothers, Inc. for approximately $489.

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

10. COMMITMENTS AND CONTINGENCIES

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

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

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

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

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

 
 
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As of March 31, 2012, 4Kids has not made a settle-up payment in the approximate amount of $3,688 as required under the CW Agreement.  Under the letter agreement entered into by 4Kids and the CW in connection with the Asset Purchase Agreement, 4Kids and the CW agreed that except for $3,051 in respect of cure costs, 4Kids shall have no further obligations to the CW with respect to claims for settle up payments for calendar quarters occurring prior to 4Kids bankruptcy filing or for post-petition settle up payments for calendar quarters from the second quarter of 2011 through the calendar quarter in which the closing of the Kidsco Sale (as defined below) under the Asset Purchase Agreement occurs.  The CW further agreed to not assert any settle up claims against 4Kids or any of its affiliates and, upon the closing of the Kidsco Sale under the Asset Purchase Agreement, to deliver a release of 4Kids for settle-up claims. The following table summarizes the Company’s material firm commitments to The CW as of March 31, 2012:

                                                             Year Ending December 31,
                           CW Agreement
 
  2012   $18,187  
  2013            6,500         
                                                                 Total
         $24,687       
         

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

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

b. Other Commitments -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 agreements, as each of these agreements also have specific provisions relating to rights granted, territory and contractual term.

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

11. NONCONTROLLING INTEREST RELATED TO DISCONTINUED OPERATIONS

As of January 1, 2009, all earnings and losses of a subsidiary are attributed to both the parent and the noncontrolling interest, even if the losses attributable to the noncontrolling interest result in a deficit noncontrolling interest balance.  Previously, any losses exceeding the noncontrolling interest’s investment in the subsidiaries were attributed to the parent.
 

 
 
18

 
 
Effective September 30, 2010, the Company has terminated the operations of TC Digital and TC Websites due to their continued lack of profitability.  As a consequence of the termination of their operations, TC Digital and TC Websites ceased supporting the Chaotic trading card game and website, effective October 1, 2010 (see Note 8, Discontinued Operations).

a) TC Digital Games LLC - TC Digital was formed in December 2006.  4Kids Digital has owned 55% of TC Digital’s membership interests, and Chaotic USA Entertainment Group, Inc. (“CUSA”) has owned the remaining 45% of TC Digital’s membership interests, since December 2007.   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 March 31, 2012, the noncontrolling member continued to hold 45% of the equity in the entity.  The following table summarizes the noncontrolling interest’s loss attributable to the noncontrolling equity interest in TC Digital:
 
    Three Months Ended  
     March 31,  
   
2012
   
2011
 
TC Digital net loss before common units noncontrolling interest
  $ (3 )   $ (1,065 )
Noncontrolling interest percentage
    45 %     45 %
Noncontrolling interest loss allocation
    (1 )     (479 )
Less: Capital contribution from noncontrolling interest
           
Loss attributable to noncontrolling interest
  $ (1 )   $ (479 )
                 
 
Included in the TC Digital net loss for the three months ended March 31, 2012 and 2011 is interest expense of $0 and $1,028, respectively, which has been eliminated in consolidation.  As of March 31, 2012, the loss in excess of noncontrolling interest for TC Digital absorbed by 4Kids Digital, in the aggregate, since the formation of such entity is $22,037.

b) TC Websites LLC - Under the terms of the TC Websites Operating Agreement (“TCW Agreement”), 4Kids Websites and CUSA are each entitled to elect two managers to TC Websites’ Management Committee, with 4Kids Websites having the right to break any deadlocks on TC Websites' Management Committee with respect to operational matters.  TC Websites is treated as a consolidated subsidiary of the Company as a result of its majority ownership and its right to break any deadlocks within the TC Websites Management Committee.

As of March 31, 2012, the noncontrolling member held 45% of the equity in the entity.  The following table summarizes the noncontrolling interest’s loss attributable to the noncontrolling equity interest in TC Websites:
 
 
     Three Months Ended  
     March 31,  
   
2012
   
2011
 
TC Websites net loss before common units noncontrolling interest
  $     $ (3 )
Noncontrolling interest percentage
    45 %     45 %
Noncontrolling interest loss allocation
          (2 )
Less: Capital contribution from noncontrolling interest
           
Loss attributable to noncontrolling interest
  $     $ (2 )
                 

As of March 31, 2012, the loss in excess of noncontrolling interest for TC Websites absorbed by 4Kids Websites in the aggregate since the formation of such entity is $6,038.

12.  SUBSEQUENT EVENTS

Subsequent events were evaluated by the Company through the date the financial statements were issued.   On April 26, 2012, 4Kids and its subsidiaries which are debtors in the cases pending in the Bankruptcy Court, (4Kids and such subsidiaries, collectively, “Seller”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), which contemplates the sale of substantially all of its assets to Kidsco Media Ventures LLC, a Delaware limited liability company, and an affiliate of Saban Capital Group (“Kidsco” or “Purchaser”) for a purchase price of $10,000, subject to certain adjustments (the “Purchase Price”).  The transaction is proposed under section 363 of the United States Code, 11 U.S.C. § 101-1532 (the “Bankruptcy Code”).  The transaction is subject to, among other things, (i) competitive bidding pursuant to such sale procedures which was approved by the Bankruptcy Court at a hearing on April 27, 2012, and (ii) approval of the transaction by the Bankruptcy Court.
 
 
 
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Contemporaneously with the execution and delivery of the Asset Purchase Agreement, Saban Properties LLC delivered a guarantee pursuant to which it guaranteed the performance of Kidsco’s payment obligations under the Asset Purchase Agreement.

On the date of the consummation of the transactions contemplated by the Asset Purchase Agreement, $1,000 of the Purchase Price will be deposited in an escrow account (the “Escrow Amount”), to be used to satisfy any post-closing adjustments to the Purchase Price or indemnification obligations that Seller may have to Purchaser pursuant to the provisions of the agreement.  $3,051 of the Purchase Price will be paid to The CW Network LLC (“the CW”) as a cure cost under the term sheet originally entered into as of October 1, 2007 and amended as of October 2, 2008 and June 23, 2010 (the “CW Agreement”).  $368 of the Purchase Price will be paid to Toei Animation as a cure cost.  The Asset Purchase Agreement also provides for various adjustments to the Purchase Price at the closing.  After payment of the foregoing amounts and giving effect to the adjustments to the Purchase Price, the balance of the Purchase Price will be paid to the Seller.

In connection with entry into the Asset Purchase Agreement and as contemplated thereby, 4Kids entered into a letter agreement with the CW pursuant to which 4Kids agreed that if the sale to Kidsco pursuant to the Asset Purchase Agreement is consummated (the “Kidsco Sale”), 4Kids will assume the CW Agreement, pay the CW cure costs of $3,051 (the “CW Cure Costs”) in connection with such assumption, and assign the CW Agreement to Kidsco at the closing of the Kidsco Sale.

Under the letter agreement, 4Kids and the CW agreed that except for the CW Cure Costs, 4Kids shall have no further obligations to the CW with respect to claims for settle-up payments for calendar quarters occurring prior to 4Kids bankruptcy filing or for post-petition settle-up payments for calendar quarters from the second quarter of 2011 through the calendar quarter in which the closing of the Kidsco Sale under the Asset Purchase Agreement occurs.  The CW further agreed to not assert any settle-up claims against 4Kids or any of its affiliates and, upon the closing of the Kidsco Sale under the Asset Purchase Agreement, to deliver a release of 4Kids for settle-up claims.  4Kids agreed, upon the closing of the Kidsco Sale under the Asset Purchase Agreement, to deliver a release of claims against the CW.  The release by the CW will not release 4Kids for claims under the letter agreement or its contingent claim for indemnity filed under the Bankruptcy Cases.  4Kids release will not release claims against the CW under the letter agreement.

4Kids and the CW also acknowledged under the letter agreement that Kidsco is an intended third party beneficiary of the letter agreement.

On April 11, 2012, 4Kids received a letter (the “Original Letter”), from the CW pursuant to which the CW gave notice to 4Kids pursuant to Section 5.h of the CW Agreement, to the effect that 4Kids has not made a payment required by the CW Agreement.  The amount set forth in the Original Letter as being owed by 4Kids to the CW in respect of such payment is alleged to be $3,688.  Pursuant to the provisions of the CW Agreement, if a payment required to be made by 4Kids under the CW Agreement is not made within ten days of the receipt of notice from the CW, the CW is entitled to exercise various rights and remedies including terminating the CW Agreement.

Following discussions between representatives of 4Kids and the CW, 4Kids received another letter from the CW on April 19, 2012 which was revised and re-sent to 4Kids on April 24, 2012 (the “Second Letter”).  Pursuant to the Second Letter, the CW indicated that it would not terminate or seek to terminate the CW Agreement based on the failure of 4Kids to pay the amounts alleged to be owed under the CW Agreement, so long as certain conditions identified in the Second Letter are satisfied, including that:

1.  A motion (“Kidsco Sale Motion”) to approve the sale of certain of 4Kids’ assets (including the CW Agreement) to Kidsco (such sale, a “Section 363 Sale”) is filed in connection with the Chapter 11 Bankruptcy Cases, on April 25, 2012, such motion is granted no later than June 30, 2012, and such Section 363 Sale must close no later than July 17, 2012; and

2.  The CW Agreement can only be sold to Kidsco (or any other entity as the CW may approve of, in its sole discretion).

The Second Letter provides that the CW reserves all rights and remedies, including the right to terminate or seek to terminate the CW Agreement, if any of the foregoing conditions is not satisfied.

As provided in the Second Letter, the CW has agreed not to terminate or seek to terminate the CW Agreement unless the conditions set forth above are not satisfied. However, if the conditions set forth in the Second Letter are not timely satisfied,
 
 
 
20

 
 
 it is possible that the CW will seek to terminate the CW Agreement. If the CW were to terminate the CW Agreement and such termination were deemed to be proper, such termination would have a material adverse impact on the business of 4Kids. Such termination would also jeopardize the ability of 4Kids to sell its assets in the proposed sale to Kidsco pursuant to the Asset Purchase Agreement and would have a material adverse effect on the ability of 4Kids to consummate any other potential sale of its assets to another party.

On April 17, 2012, in connection with the proposed sale of certain of its assets to Kidsco, 4Kids filed the Kidsco Sale Motion with the Bankruptcy Court which was approved on April 27, 2012.

Despite the possibility of a Section 363 Sale, the Company continues to explore all alternatives available to generate additional cash to fund its operations, including, but not limited to sales of assets, issuance of equity or debt securities, and third party arrangements subject to any limitations and procedures arising from the Bankruptcy Cases.

There were no other events that occurred subsequent to March 31, 2012 that would require recognition or disclosure in the Company’s consolidated financial statements.

13. SEGMENT AND RELATED INFORMATION

The Company has three reportable segments: (i) Licensing; (ii) Advertising Media and Broadcast; and (iii) Television and Film Production/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.

   
Licensing
Advertising
Media and
Broadcast
 
TV and Film Production/ Distribution
 
Total
 
Three Months Ended March 31,
2012:
                         
Net revenues from external customers
 
$
1,370
 
$
308
 
$
405
 
$
2,083
 
Amortization of television and film costs
   
   
   
354
   
354
 
Reorganization items
   
(548
)
 
   
   
(548
)
Gain on litigation
   
8,000
   
   
   
8,000
 
Segment income (loss)
   
7,147
   
(2,425
)
 
(697
)
 
4,025
 
Segment assets
   
13,016
   
2,240
   
5,621
   
20,877
 
2011:
                         
Net revenues from external customers
 
$
3,191
 
$
241
 
$
427
 
$
3,859
 
Amortization of television and film costs
   
   
   
721
   
721
 
Interest income
   
57
   
   
   
57
 
    Loss on sale of investment securities
   
(910
)
 
   
   
(910
)
   Segment loss
   
(493
)
 
(1,896
)
 
(1,169
)
 
(3,558
)
   Segment assets
   
13,523
   
1,970
   
7,523
   
23,016
 

Net revenues from external customers and segment loss from discontinued operations have been excluded and are disclosed in Note 8.  Additionally, segment assets relating to discontinued operations of $0 and $19 for the three months ended March 31, 2012 and 2011, respectively, have also been excluded in segment reporting.

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 $162 and $410 for the three months ended March 31, 2012, respectively.  As of March 31, 2012 and 2011, net assets of the Company’s London office were $843 and $427, respectively.

******
 
 
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
(In thousands of dollars unless otherwise specified)

Overview

The Company’s operating results for the three months ended March 31, 2012 were primarily impacted by the receipt of a payment to 4Kids in the amount of $8,000 based upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order which resulted in the Company recognizing a gain on litigation settlement of $8,000.  The Company continues to experience declining popularity of its existing Properties combined with the failure of new Properties to achieve satisfactory popularity levels. In addition, the Company continues to incur costs associated with the Bankruptcy Cases, which costs the Company expects to continue to incur throughout the Bankruptcy proceedings.

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

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

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

On February 29, 2012, 4Kids and the Licensors entered into a Settlement Agreement, dated as of February 27, 2012 (the “Settlement Agreement”), settling all claims brought by Licensors against 4Kids and all counterclaims brought by 4Kids against the Licensors in the Yu-Gi-Oh! Litigation. The Settlement Agreement provides, among other things, for the Licensors to make a payment to 4Kids in the amount of $8,000 upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order.  On March 9, 2012, the Bankruptcy Court issued an order approving the Settlement Agreement and, accordingly, the Company recognized a gain on litigation settlement of $8,000.  Under the Settlement Agreement, the Licensors acknowledged that the Yu-Gi-Oh! Agreement remained valid, binding and legally enforceable with 4Kids continuing to serve as the exclusive licensing agent for the merchandise licensing, television broadcast and home video rights to the Yu-Gi-Oh! Property throughout the world outside of Asia.  The Settlement Agreement further provided for each of 4Kids and the Licensors to release each other from all claims they may have against each other, other than certain indemnification claims and claims that may arise under the Settlement Agreement.  The Settlement Agreement also provided that the agreement does not constitute an admission by any party of any violation of any agreement or law.  On March 27, 2012, 4Kids received the payment in the amount of $8,000 pursuant to the Settlement Agreement.
 
 
 
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On April 26, 2012, 4Kids, and its subsidiaries which are debtors in the cases pending in the Bankruptcy Court, (4Kids and such subsidiaries, collectively, “Seller”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), which contemplates the sale of substantially all of its assets to Kidsco Media Ventures LLC, a Delaware limited liability company, and an affiliate of Saban Capital Group (“Kidsco” or “Purchaser”) for a purchase price of $10,000, subject to certain adjustments (the “Purchase Price”).  The transaction is proposed under section 363 of the Bankruptcy Code.  The transaction is subject to, among other things, (i) competitive bidding pursuant to such sale procedures which was approved by the Bankruptcy Court at a hearing on April 27, 2012, and (ii) approval of the transaction by the Bankruptcy Court.
 
While the consummation of the Settlement Agreement and the execution of the Asset Purchase Agreement represent significant steps in the process of resolving the Bankruptcy Cases, the timing of any resolution of the Bankruptcy Cases will depend on the timing and outcome of numerous other ongoing matters therein, and it is not possible at this time to accurately predict when such other matters will be resolved.  We have incurred and will continue to incur significant costs associated with the Bankruptcy Cases.  The amount of these costs, which began in April 2011 and are being expensed as incurred, are expected to significantly affect our results of operations, financial position and liquidity.  The Bankruptcy Cases have also presented challenges to our ability to generate additional revenues in all of our business segments especially as it relates to the sales of commercial advertising.

The Company will consider all alternatives available to generate additional cash to fund its operations, including, but not limited to sales of assets, issuance of equity or debt securities, and third party arrangements subject to any limitations and procedures arising from the Bankruptcy Cases.
 
 
Our ability to achieve and maintain profitability and positive cash flow is dependent upon the success of our reorganizational efforts and a number of other factors, including our ability to generate additional revenues. The Company’s financial statements have been prepared assuming that the Company will continue as a going concern and do not contain any adjustments that may result from the outcome of this uncertainty.

4Kids historical recurring losses and negative cash flows from operations has caused 4Kids’ independent registered public accounting firm, in the Company’s annual report for the year ended December 31, 2011, to include an explanatory paragraph in their report dated March 22, 2012, expressing substantial doubt about 4Kids’ ability to continue as a going concern.

General

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

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


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

Critical Accounting Policies

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

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

Management regularly reviews, and revises when necessary, its total revenue estimates on a title-by-title basis, which may result in a change in the rate of amortization and/or a write-down of the film or television asset to estimated fair value. The Company determines the estimated fair value for individual film and television Properties based on the estimated future ultimate revenues and costs.
 
 
Any revisions to ultimate revenues can result in significant quarter-to-quarter and year-to-year fluctuations in film and television write-downs and amortization. A typical film or television series recognizes a substantial portion of its ultimate revenues within the first three years of release. By then, the film or television series has been exploited in the domestic and international television (network and cable) and home video markets.  In addition, a significant portion of licensing revenues associated with the film or television series will have been realized.  A similar portion of the film’s or television series’ capitalized costs should be expected to be amortized accordingly, assuming the film or television series is profitable.

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

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

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

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

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

Recently Issued Accounting Standards – There have been no recent accounting pronouncements expected to have a material impact on the Company’s financial condition or results of operations and cash flow.

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

Results of Operations

The following table sets forth our results of operations expressed as a percentage of total net revenues for the three months ended March 31, 2012 and 2011:

   
Three Months Ended
March 31,
 
   
2012
 
2011
 
Net revenues
   
100
%
 
100
%
               
Costs and expenses:
             
   Selling, general and administrative
   
248
   
151
 
   Amortization of television and film costs
   
17
   
19
 
          Total costs and expenses
   
265
   
170
 
               
Loss from operations
   
(165
)
 
(70
)
               
Interest income
   
   
2
 
Loss on sale of investment securities
   
   
(24
)
          Total other expense
   
   
(22
)
               
Loss from continuing operations before reorganization items
   
(165
)
 
(92
)
Reorganization items
   
(26
)
 
 
Gain on Litigation
   
384
   
 
               
Income (loss) from continuing operations
   
193
   
(92
)
Loss from discontinued operations
   
   
(1
)
Net income (loss)
   
193
   
(93
)
Net loss attributable to noncontrolling interests, discontinued operations
   
   
12
 
Net income (loss) attributable to 4Kids Entertainment, Inc.
   
193
%
 
(81
)%
 
 
 
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Three months ended March 31, 2012 as compared to the three months ended March 31, 2011.

Revenues

Revenues by reportable segment and for the Company as a whole were as follows:

For the three months ended March 31, 2012 and 2011
        2012      2011        
$ Change
       
% Change
   
Licensing
  $ 1,370     $ 3,191       $ (1,821 )     (57 )%  
Advertising, Media and Broadcast
    308       241         67       28    
Television and Film Production/Distribution
    405       427         (22 )     (5 )  
Total
  $ 2,083     $ 3,859       $ (1,776 )     (46 )%  
                                       

The decrease in consolidated net revenues for the three months ended March 31, 2012, as compared to the same periods in 2011, was due to a number of factors.

In the Licensing segment, decreased revenues for the three months ended March 31, 2012 were primarily attributable to:

(i)  
reduced licensing revenues on the “American Kennel Club” and “Monster Jam” Properties, domestically, of approximately  $885 and $195, respectively; as well as
(ii)  
the realization of an additional $482 in proceeds in 2011 arising from the Company’s agreement to terminate its right to serve as the merchandise licensing agent for the “Teenage Mutant Ninja Turtles” Property prior to the scheduled expiration of the representation agreement with the Mirage Group in 2012.

The “Yu-Gi-Oh!” Property was the largest contributor to this business segment for the three months ended March 31, 2012, with approximately 81% of the Company’s revenues.

In the Advertising Media and Broadcast segment, the slight increase in revenues for the three months ended March 31, 2012, as compared to the same periods in 2011, was primarily attributable to increased sales of internet advertising on the Company’s websites as well as third party websites of approximately $70.

In the Television and Film Production/Distribution segment, revenues remained consistent for the three months ended March 31, 2012, as compared to the same period in 2011.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased 12%, or $687, to $5,156 for the three months ended March 31, 2012, when compared to the same period in 2011.  The decrease was primarily attributable to:

(i)  
decreased personnel related costs of approximately $725; as well as
(ii)  
decreased professional fees of approximately $240; and
(iii)  
decreased website expense of approximately $140; partially offset by
(iv)  
increased network selling expenses of approximately $640.

Capitalized Film Costs

For the three months ended March 31, 2012 and 2011

   
2012
   
2011
   
$ Change
   
% Change
Amortization of Television and Film Costs
  $ 354     $ 721     $ (367 )     (51 )%

The decrease in amortization of television and film costs for the three months ended March 31, 2012 when compared to the same period in 2011, was primarily due to the decreased amortization of the “Teenage Mutant Ninja Turtles” and “Yu-Gi-Oh!” television series partially offset by increased amortization of the “Tai Chi Chasers” television series.


 
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As of March 31, 2012, there were $2,464 of capitalized film production costs in the Company’s consolidated balance sheet relating primarily to various stages of production on 159 episodes of animated programming. Based on management’s ultimate revenue estimates as of March 31, 2012, approximately 37% of the total completed and unamortized film and television costs are expected to be amortized during the next year, and over 90% of the total completed and unamortized film and television costs are expected to be amortized during the next three years.

Interest Income

Interest income decreased 100%, or $57, to $0 for the three months ended March 31, 2012, as compared to the same period in 2011, primarily as a result of cash balances in 2012 held in non-interest bearing accounts and the liquidation of the Company’s investment portfolio in the first quarter of 2011.

Reorganization Items

The Company incurred reorganization costs of $548 during the three months ended March 31, 2012.  These costs included professional and consulting fees charged for services retained in connection with the Bankruptcy Cases, as well as fees paid to the Office of the United States Trustee.

Income (loss) from Continuing Operations

For the three months ended March 31, 2012 and 2011
       
         2012      2011      $ Change      % Change  
Licensing
  $ 7,147     $ (493 )   $ 7,640     1,550  %
Advertising, Media and Broadcast
    (2,425 )     (1,896 )     (529 )   (28  )
Television and Film Production/Distribution
    (697 )     (1,169 )     472     40  
Total
  $ 4,025     $ (3,558 )   $ 7,583     213  %
                                 

In the Licensing segment, the change from a segment loss to a segment gain for the three months ended March 31, 2012, as compared to the segment loss in the same periods in 2011, was primarily attributable to the receipt of a payment to 4Kids in the amount of $8,000 based upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order which resulted in the Company recognizing a gain on litigation settlement of $8,000.

In the Advertising, Media and Broadcast segment, the increase in segment loss for the three months ended March 31, 2012, as compared to the same periods in 2011 was primarily attributable to increased network selling expenses.
 
In the Television and Film Production/Distribution segment, the decrease in segment loss for the three months ended March 31, 2012, as compared to the same periods in 2011, was primarily due to a decrease in amortization of television and film costs.
 
Income Taxes
 
The Company regularly reviews its deferred tax assets for recoverability taking into consideration such factors as historical losses, projected future taxable income and the expected timing of the reversals of existing temporary differences. 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.  In view of the level of deferred tax assets as of March 31, 2012 and the Company’s historical losses from operations, the Company has determined that it should record a full valuation allowance against its net deferred tax assets.  The Company did not record tax expense for the three months ended March 31, 2012, as it has net operating loss available to offset any taxable income forecast for the year ending December 31, 2012.  The Company did not record a benefit from income taxes for the three months ended March 31, 2011 as it was not be able to carryback any of its 2011 net operating losses and it is more likely than not that the Company will not be able to realize its deferred tax assets.
 
In the event that the Company earns pre-tax income in the future such that it will be able to use some or all of its deferred tax assets, the Company may reduce or eliminate the valuation allowance.  If the Company were to reverse the valuation allowance, in whole or in part, the Company’s income statement for such reporting period would record a reduction in income tax expense and an increase in net income, to the extent of the reversal of the valuation allowance.


 
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Income (Loss) from Continuing Operations

Principally due to the gain on the litigation settlement of $8,000, the Company had income from continuing operations for the three months ended March 31, 2012 of $4,025 as compared to a loss from continuing operations during the same period in 2011 of $(3,558).

Discontinued Operations

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

The following are the summarized results of discontinued operations for the trading card and game distribution segment for the three months ended March 31, 2012 and 2011:

   Three Months Ended  
 
March 31,
 
     2012      2011  
Net revenues
  $     $ 11  
Total costs and expenses
    3       54  
Loss from discontinued operations
  $ (3  )   $ (43 )
                 

Liquidity and Capital Resources

Financial Condition

Cash and cash equivalents as of March 31, 2012 and December 31, 2011 were as follows:


   
March 31, 2012
 
December 31, 2011
 
$ Change
 
 
                 
Cash and cash equivalents
  $ 8,611     $ 1,627     $ (6,984 )
                         

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

On April 26, 2012, 4Kids, and its subsidiaries which are debtors in the cases pending in the Bankruptcy Court, (4Kids and such subsidiaries, collectively, “Seller”), entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”), which contemplates the sale of substantially all of its assets to Kidsco Media Ventures LLC, a Delaware limited liability company, and an affiliate of Saban Capital Group (“Kidsco” or “Purchaser”) for a purchase price of $10,000, subject to certain adjustments (the “Purchase Price”).  The transaction is proposed under section 363 of the Bankruptcy Code.  The transaction is subject to, among other things, (i) competitive bidding pursuant to such sale procedures which was approved by the Bankruptcy Court at a hearing on April 27, 2012, and (ii) approval of the transaction by the Bankruptcy Court.
 
 
 
 
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The Company continues to incur significant costs in connection with the Bankruptcy Cases and expects these costs to continue throughout the Bankruptcy proceedings.  The Company’s overall cash position as of March 31, 2012, together with the realized and anticipated effects of the significant cost cutting initiatives implemented by the Company during 2009, 2010 and throughout 2011 provides only limited liquidity to fund the Company’s day-to-day operations. The financial challenges facing the Company as a result of its recent history of losses and the limited liquidity available to it to fund day-to-day operations raise substantial doubt about the Company’s ability to continue as a going concern.  Our ability to achieve and maintain profitability and positive cash flow is dependent upon the success of our reorganizational efforts and a number of other factors, including our ability to generate additional revenues. The Company’s financial statements have been prepared assuming that the Company will continue as a going concern and do not contain any adjustments that may result from the outcome of this uncertainty.

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

Sources and Uses of Cash

Cash flows for the three months ended March 31, 2012 and 2011 were as follows:

Sources (Uses)
 
2012
 
2011
   
Operating Activities
  $ 7,030   $ (2,949  )
Investing Activities
        6,214  
Financing Activities
         

Working capital, consisting of current assets less current liabilities, was $(1,077) as of March 31, 2012 and $(4,883) as of December 31, 2011.

Operating Activities
2012
Net cash provided by operating activities for the three months ended March 31, 2012 of $7,030 primarily reflects the receipt of a payment to 4Kids in the amount of $8,000 based upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order.

2011
Net cash used in operating activities for the three months ended March 31, 2011 of $2,949 primarily reflects the Company’s operating losses as well as payments to vendors which resulted in a decrease to accounts payable, offset by cash collections of the Company’s trade receivables.

Investing Activities
2012
There was no net cash provided by, or used in, investing activities for the three months ended March 31, 2012.
 
2011
Net cash provided by investing activities for the three months ended March 31, 2011 of $6,214 reflects proceeds from the sale of the Company’s investment securities for $6,216, partially offset by purchases of property and equipment.

Financing Activities
2012
There was no net cash provided by, or used in, financing activities for the three months ended March 31, 2012.

2011
There was no net cash provided by, or used in, financing activities for the three months ended March 31, 2011.


 
29

 
 
During the three months ended March 31, 2012, the increase in the Company's cash flow from the receipt of a payment to 4Kids in the amount of $8,000 based upon the order of the Bankruptcy Court approving the Settlement Agreement becoming a final order was partially offset by the diminished popularity of its Properties, increased costs incurred in connection with the Bankruptcy Cases, as well as continued weakness in the current economic climate.  While the Company strives to further diversify its revenue streams, management remains cognizant of changing trends in the toy, game and entertainment business and the difficulty in predicting the length of time a property will be commercially successful.  As a result, the Company's revenues, operating results and cash flow from operations may fluctuate significantly from year to year and present operating results are not necessarily indicative of future performance.

Broadcast Agreements

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

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

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

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

For the 2008/2009 broadcast season, the revenue sharing percentage split in favor of the CW was 80%/20% until $20,000 in revenue has been realized and a revenue split of 50%/50% applied thereafter.  For each other broadcast season, the CW Agreement provides for (1) an 80%/20% revenue split in favor of The CW until it has received its minimum guarantee applicable to such broadcast season, (2) the Company to retain 100% of the revenue until its share of the revenue for such broadcast season equals 35%, (3) a 65%/35% revenue split in favor of The CW until $20,000 in revenue has been realized and (4) a revenue split between the parties of 50%/50% thereafter.  The Agreement also requires the Company to make certain security arrangements in favor of The CW to secure payment of the minimum guarantee and The CW's share of national advertising proceeds.  As of March 31, 2012, 4Kids has not made a settle-up payment in the approximate amount of $3,688 as required under the CW Agreement.  Under the letter agreement entered into by 4Kids and the CW in connection with the Asset Purchase Agreement, 4Kids and the CW agreed that except for $3,051 in respect of cure costs, 4Kids shall have no further obligations to the CW with respect to claims for settle up payments for calendar quarters occurring prior to 4Kids bankruptcy filing or for post-petition settle up payments for calendar quarters from the second quarter of 2011 through the calendar quarter in which the closing of the Kidsco Sale under the Asset Purchase Agreement occurs.  The CW further agreed to not assert any settle up claims against 4Kids or any of its affiliates and, upon the closing of the Kidsco Sale under the Asset Purchase Agreement, to deliver a release of 4Kids for settle-up claims.

The Company’s ability to recover the cost of its quarterly minimum guarantee due to The CW will depend on the popularity of the television programs the Company broadcasts on The CW4Kids and the general market demand and pricing of advertising time for Saturday morning children’s broadcast television.  The popularity of such programs, broadcast by the Company on The CW4Kids, impacts audience levels and the level of the network advertising rates that the Company can charge.  Additionally, the success of the merchandise licensing programs and home video sales based on such television programs broadcast on The CW4Kids is dependent on consumer acceptance of such television programs.  If the Company estimates that it will be unable to generate sufficient future revenue from advertising sales, home video sales and merchandising licensing at levels to cover the cost of its quarterly contractual obligation to The CW, the Company would record a charge to earnings to reflect an expected loss on The CW agreements in the quarter in which the factors negatively affecting the recoverability of the fee payable become known.  The Company will be required to make certain assumptions and estimates about future events such as advertising rates and audience viewing levels in evaluating its ability to recover the cost of the minimum guaranteed payments.  Such estimates and assumptions are subject to market forces and factors beyond the control of the Company and are inherently subject to change.  There can be no assurance that the Company will be able to recover the full cost of the minimum guaranteed payments and in the event it cannot, it would record the resulting charge to earnings to reflect an expected loss on the minimum guaranteed payments, which could be significant.
 
 
30

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

Contractual Commitments

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

The Company’s contractual obligations and commitments are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.  As of March 31, 2012, the Company’s remaining contractual obligations and commitments have not materially changed since December 31, 2011.

Forward Looking Information and Risk Factors That May Affect Future Results

This Quarterly Report on Form 10-Q, including the section titled “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements that relate to future events or our future financial performance. We may also make written and oral forward-looking statements in our Securities and Exchange Commission (“SEC”) filings and otherwise. We have tried, where possible, to identify such statements by using words such as “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “project,” “plan” and similar expressions in connection with any discussion of future operating or financial performance. Any forward-looking statements are and will be based upon our then-current expectations, estimates and assumptions regarding future events and are applicable only as of the dates of such statements. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated in any forward-looking statements. Such risks and uncertainties include those described in this Quarterly Report on Form 10-Q and in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC, as well as other factors. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Rate Fluctuations

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

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

(a) We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) that are designed to provide reasonable assurance that information required to be disclosed in our filings and submissions under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our principal executive officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
 
 
 
31

 
We completed an evaluation under the supervision and with participation of our management, including our principal executive officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report.  Based on this evaluation, our principal executive officer and Chief Financial Officer have concluded that as of March 31, 2012, 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.

Part II - OTHER INFORMATION

Item 1. Legal Proceedings.

TCD International, Ltd. - On February 12, 2010, Home Focus Development, Ltd., a British Virgin Islands Corporation, (“Home Focus”) filed suit against 4Kids in the United States District Court for the Southern District of New York. Home Focus alleged that 4Kids owed Home Focus $1,075 under an Interest Purchase Agreement among 4Kids, Home Focus and TC Digital entered into on March 2, 2009, pursuant to which the Company acquired a 25% ownership interest in TCD International, Ltd. (“TDI”).

On April 26, 2010, 4Kids filed an answer and asserted various counterclaims against Home Focus and its owners, in their individual capacities. In its counterclaims, 4Kids has alleged that Home Focus failed to make its contractually required initial capital contribution of $250 to TDI necessary to acquire the 25% ownership interest in TDI it purported to sell to the Company and also failed to contribute its 50% share of the expenses. 4Kids has further asserted counterclaims of fraud and misrepresentation.
 
During the last few months, the parties have not proceeded with the litigation in light of the filing of the Bankruptcy Cases on April 6, 2011, which had the effect of automatically staying such litigation. The parties have had substantive discussions and have exchanged draft agreements regarding the possible resolution of the claims and counterclaims. There can be no assurance that the parties will conclude their settlement discussions satisfactorily.
 
 Pokémon Royalty Audit - During the first quarter of 2010, The Pokémon Company International (“TPC”) commenced an audit of 4Kids covering the period from mid-2001 through 2008. On May 28, 2010, 4Kids received a letter from counsel for TPC (“TPC Letter”) claiming that the audit “identified deficiencies totaling almost $4,700” and demanding payment of the deficiency together with interest thereon.  The TPC Letter failed to provide any schedules or other specific information regarding the alleged deficiencies. By letter dated June 11, 2010 (“4Kids Letter”), 4Kids disputed the allegations made in the TPC Letter and advised TPC that 4Kids would not be paying the alleged deficiency or any interest thereon. The 4Kids Letter also proposed that, as had been discussed by the parties, 4Kids would audit TPC which was the recipient and payee of Pokémon merchandise licensing, television broadcast and home video proceeds during the 2001 - 2008 period, and that after the completion of the parties’ respective audits, the parties would review the audit reports and discuss any outstanding issues.
 
On July 14, 2010, 4Kids and TPC executed a tolling agreement tolling the statute of limitations until October 21, 2010 with respect to TPC’s claims. 4Kids and TPC also agreed in the tolling agreement that neither party would commence any litigation against the other party until after the expiration of the tolling period in order to allow for the parties to complete their respective audits and to discuss the results thereof.  During mid-June 2010, 4Kids commenced its audit of TPC which was completed in December 2010.  On October 12, 2010, 4Kids and TPC executed an amendment to the tolling agreement extending the tolling of the statute of limitations until January 15, 2011.  On January 26, 2011, 4Kids and TPC executed a second amendment to the tolling agreement extending the tolling of the statute of limitations until March 15, 2011. On March 25, 2011, 4Kids and TPC executed a third amendment to the tolling agreement extending the tolling of the statute of limitations until April 15, 2011.  The parties have not sought to further extend the tolling agreement in light of the filing of the Bankruptcy Cases on April 6, 2011, which had the effect of automatically staying such claims.

Yu-Gi-Oh! Royalty Audit - During the first quarter of 2010, ADK, one of the Licensors, commenced an audit of 4Kids with respect to the amounts paid by 4Kids to ADK during the course of the 4Kids representation of Yu-Gi-Oh!, which started in 2001.
 
 
 
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On June 25, 2010, 4Kids received a letter from counsel for ADK (“ADK Letter”) alleging that 4Kids had improperly deducted certain expenses from amounts paid to ADK and had failed to pay ADK a share of certain Yu-Gi-Oh! home video revenues. In addition, the ADK Letter requested that 4Kids provide additional documentation with respect to withholding taxes deducted from ADK’s share of Yu-Gi-Oh! revenues. The ADK Letter claimed that the total of the improper deductions and underpayments was approximately $3,000.  By letter dated June 29, 2010 (“4Kids Yu-Gi-Oh! Letter”), 4Kids disputed substantially all of the allegations contained in the ADK Letter.
 
The ADK Letter also demanded that 4Kids and ADK sign a tolling agreement with an effective date of June 1, 2010 which would stop the running of the statute of limitations during the four month tolling period starting on June 1, 2010 and concluding on September 30, 2010. On June 29, 2010, 4Kids and ADK entered into the tolling agreement described above. On October 19, 2010, 4Kids and ADK signed an amendment to the tolling agreement extending the tolling period through December 31, 2010.
 
On December 20, 2010, 4Kids received a letter from ADK which alleged audit findings of $4,819. By letters dated December 29, 2010, 4Kids disputed substantially all of the alleged audit findings. On January 11, 2011, the parties entered into another amendment to the tolling agreement extending the tolling period through March 31, 2011.
 
On March 4, 2011, ADK requested a payment from the Company in order for representatives of the Licensors to agree to meet with representatives of the Company. On March 17, 2011, 4Kids made a $1,000 payment to ADK as a show of good-faith so that a meeting could take place with ADK to attempt to resolve the audit claims. Notwithstanding the $1,000 good-faith payment, the Company also reserved its rights to dispute all of ADK’s audit claims. On March 18, 2011, representatives of 4Kids met with representatives of ADK in a further, but ultimately unsuccessful, attempt to resolve the outstanding issues.

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

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

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

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

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

The trial in the Yu-Gi-Oh! Litigation, initially to determine whether the purported termination of the Yu-Gi-Oh! Agreement was effective and whether any amounts owed by 4Kids to the Licensors exceed the credits claimed by 4Kids for amounts paid or advanced to Licensors, commenced in the Bankruptcy Court on August 29, 2011 and concluded on September 23, 2011.
 
 
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On December 29, 2011, the Bankruptcy Court issued its decision ruling in favor of 4Kids in the first phase of the Yu-Gi-Oh! Litigation. In its 154 page decision, the Bankruptcy Court ruled that the Yu-Gi-Oh! Agreement was not effectively terminated by the Licensors prior to the 4Kids’ bankruptcy filing on April 6, 2011. Rather, the Bankruptcy Court ruled that the Yu-Gi-Oh! Agreement remained in full force and effect and is property of the 4Kids’ bankrupt estate. In addition, the Court’s opinion carefully considered each of the Licensors’ nine audit findings totaling over $4,700 and concluded that audit findings totaling approximately 99% of the amount claimed by the Licensors were "meritless". The remaining two audit claims totaling $48, which 4Kids does not dispute, were offset by the roughly $800 credit balance in favor of 4Kids as of March 24, 2011, the date that the Licensors sent 4Kids the purported notice of termination, and the $1,000 good-faith payment made by 4Kids on March 17, 2011 which was subsequently returned to 4Kids on January 24, 2012.

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

Wildcat Intellectual Property Holdings, LLC v. 4Kids Entertainment, Inc. et al.  On July 5, 2011, Wildcat Intellectual Property Holdings, LLC filed suit against 4Kids, Chaotic USA Entertainment Group, Inc., Electronic Arts Inc., Konami Digital Entertainment, Inc., Nintendo of America Inc., Panini America, Inc., Pokémon USA, Inc., Sony Computer Entertainment America LLC, Sony Online Entertainment LLC, The Topps Company, Inc., Wizards of the Coast LLC and Zynga Inc. (collectively the “Wildcat Defendants”) in the United States District Court for the Eastern District of Texas seeking damages and other various fees. The suit alleges that the Wildcat Defendants infringed upon United States Patent Number 6,200,216 entitled “Electronic Trading Card”. Since the Wildcat suit with respect to 4Kids pertains to alleged actions by 4Kids occurring prior to the commencement of the Bankruptcy Cases, the Wildcat suit is “stayed” by the 4Kids bankruptcy.
 
Lehman Brothers, Inc. Claim - The Company believes that Lehman Brothers, Inc., the securities broker-dealer that purchased the auction rate securities on behalf of the Company violated its legal obligations to the Company.  As a result, the Company took various measures to obtain appropriate legal relief, including initiating an arbitration on April 3, 2008 against Lehman Brothers, Inc. and the brokers who had serviced the Company’s Lehman account with the Financial Industry Regulatory Authority.  On September 15, 2008, Lehman Brothers Holdings, Inc., the parent company of Lehman Brothers, Inc., filed for bankruptcy.  The Company’s arbitration proceeding was stayed by the Lehman bankruptcy.  On September 16, 2008, Barclays PLC announced that it had reached an agreement to purchase the assets of Lehman Brothers Holdings, Inc.’s North American operations, including substantial assets of Lehman Brothers, Inc.  The Lehman-Barclays transaction was approved by the United States Bankruptcy Court for the Southern District of New York on September 20, 2008.  On September 19, 2008, the Securities Investor Protection Corporation (“SIPC”) filed a proceeding, placing Lehman Brothers, Inc. in liquidation under the Securities Investor Protection Act (“SIPA”).  SIPC, pursuant to its authority under SIPA, has acted to facilitate the transfer of Lehman Brothers, Inc.’s customer accounts (including the Company’s accounts) to Barclays, PLC.  In late September, 2009, the Company filed a proof of claim against Lehman Brothers, Inc. in the United States Bankruptcy Court for the Southern District of New York. The principal amount of the claim was approximately $31,500 plus interest. In addition, the proof of claim requested treble damages. The proof of claim is a general unsecured claim. The Company’s claim against Lehman Brothers, Inc. is still pending and there has been no determination made as to the validity or allowed amount of the claim.  On October 18, 2011, the Company entered into a settlement agreement and general release with the brokers who had serviced the Company’s account with Lehman Brothers, Inc. for approximately $489.

Information regarding the Company’s Chapter 11 bankruptcy proceedings is described in Part I. Item 2.  Management Discussions and Analysis of Financial Condition and Results of Operations and is incorporated by reference.

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

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” of the Annual Report on Form 10-K for the year ended December 31, 2011 (“2011 Annual Report”), which could materially affect our business, financial condition or future results.  The risks described in the 2011 Annual Report are not the only risks facing us.  Additional risks and uncertainties not currently known to us or that we currently do not consider material also may materially adversely affect our business, financial condition and/or operating results.  There have been no material changes from the risk factors disclosed in the 2011 Annual Report.




 
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Item 6.                      Exhibits.

 
(a)
Exhibits

10.1
Settlement Agreement, dated as of February 27, 2012, among 4Kids Entertainment, Inc., Asatsu-DK Inc and TV Tokyo Corporation.
10.2
Asset Purchase Agreement, dated April 26, 2012, among 4Kids Entertainment, Inc. and Kidsco Media Ventures LLC.
10.3
Letter Agreement among 4Kids Entertainment, Inc and The CW Network LLC.
31.1
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Joint Certification of principal executive officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document

 

 
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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: May 14, 2012


By:    /s/ Samuel R. Newborn
___________________________
Samuel R. Newborn,
Executive Vice President
and General Counsel
(principal executive officer
                and Director)


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








 
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