4Kids Entertainment Q3 2009 Earnings Call Transcript

4Kids Entertainment (KDE)

Q3 2009 Earnings Call

November 9, 2009 9:00 am ET

Executives

Todd Furmer - Investor Relations, KCSA Strategic Communications

Bruce R. Foster - Chief Financial Officer

Alfred R. Kahn - Chairman and Chief Executive Officer

Presentation

Operator

Good morning. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the call over to Todd [Furmer], managing partner of KCSA. Sir, you may begin.

Todd Furmer

Thank you and good morning, everyone. Welcome to the 4Kids Entertainment third quarter 2009 conference call. Before we begin I must state that the information contained in this conference call other than historical information consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may involve risks and uncertainties that could cause actual results to differ materially from those described in such statements.

Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.

Important factors beyond the company’s control including general economic conditions, consumer spending levels, competition from toy companies, motion picture studios and other licensing companies, the uncertainty of public response to the company’s properties and other factors could cause actual results to differ materially from the company’s expectations.

At this time I would like to now turn the call over to Bruce Foster, Chief Financial Officer of 4Kids Entertainment. Bruce, the floor is yours.

Bruce R. Foster

Thanks, Todd. Thank you and good morning. I’d like to spend a few minutes reviewing with you the company’s third quarter of 09 financial results. Revenues by reportable segment for the company as a whole were as follows.

In the licensing segment revenue for the three months ended September 30 ’09 was approximately $3.3 million as compared to $4.2 million in ’08, a decrease of approximately $0.9 million. Revenue for the nine months ended September 30 ’09 was approximately $11.2 million, as compared to $12.7 million in ’08, a decrease of approximately $1.5 million. These decreased revenues for the three months ended September 30 ’09 were primarily attributable to reduced licensing revenues at the Teenage Mutant Ninja Turtles and Monster Jam properties domestically of approximately $0.4 million and $0.1 million respectively, as well as reduced licensing revenue on the Yu-Gi-Oh!, Wings Club, and Dinosaur King properties internationally of approximately $0.3 million in the aggregate, partially offset by increased revenues attributable to Yu-Gi-Oh! property domestically of approximately $0.2 million. The decreased revenues for the nine months ended September 30 09 were primarily attributable to reduced licensing revenues on the Teenage Mutant Ninja Turtles, Yu-Gi-Oh! and Shaman King properties worldwide of approximately $1 million, $0.6 million, and $0.4 million respectively. Reduced licensing revenues on the Wings property internationally of approximately $0.3 million as well as reduced licensing revenues on the Cabbage Patch Kids property domestically of $0.2 million, partially offset by increased revenues attributable to the Monster Jam property domestically of approximately $1.1 million.

In the advertising, media and broadcast segment, revenues for the three months ended September 30 09 was approximately $0.4 million as compared to $2.7 million in ’08, a decrease of approximately $2.3 million. Revenues for the nine months ended September 30 09 was approximately $1.4 million, as compared to approximately $10.4 million in ’08, a decrease of approximately $9 million. These decreased revenues for the three and nine months ended September 30 09 were primarily attributed to the CW’s $2.6 million and $8.3 million minimum guaranteed shares of revenue for the three and nine months ended September 30 09 respectively, was offset against the company’s revenues from the sale of network advertising time on the CW for kids of approximately $2.6 million and $8 million respectively as compared to the same period in the prior year in which the Fox Broadcast revenue was approximately $2.5 million and $8.7 million respectively, and the Fox broadcast fee was amortized and classified as an expense rather than offsetting revenues, which were all partially offset by increased revenue from the sale of Internet advertising on the company’s websites for the three and nine months of approximately $0.2 million and $0.6 million respectively compared to the same periods in ’08.

In the television and film production distribution segment, revenue for the three months ended September 30 09 was approximately $2 million as compared to approximately $3.6 million in ’08, a decrease of approximately $1.6 million. Revenue for the nine months ended September 30 09 was approximately $7.4 million, as compared to $11.5 million in ’08, a decrease of approximately $4.1 million.

The decrease in revenues for the three months ended September 30 09 as compared to the same period in ’08 was primarily attributed to decreased production service revenue from the Teenage Mutant Ninja Turtles, Chaotic, Dinosaur King, and Viva Pinata television series of approximately $0.6 million, $0.4 million, $0.2 million and $0.2 million respectively, as well as decreased international broadcast sales from the Viva Piñata television series of approximately $0.3 million, partially offset by increased international broadcast sales from the Yu-Gi-Oh! and Teenage Mutant Ninja Turtles television series of approximately $0.3 million and $0.2 million respectively.

The decrease in the revenues for the nine months ended September 30 09 as compared to the same period in ’08 was primarily attributed to decreased production service revenue for the Teenage Mutant Ninja Turtles, Viva Piñata, and Chaotic television series of approximately $1.4 million, $1.2 million and $0.7 million respectively, as well as decreased international broadcast sales from the Yu-Gi-Oh!, Teenage Mutant Ninja Turtles, and Viva Piñata television series of approximately $0.7 million, $0.6 million, and $0.5 million respectively, partially offset by increased international broadcast sales from the Dinosaur King television series of approximately $0.8 million.

In the trading card and game distribution segment, revenues for the three months ended September 30 09 was approximately $1.5 million as compared to [$7.3 million] in ’08, a decrease of approximately $5.8 million. Revenue for the nine months ended September 30 09 was approximately $1.8 million as compared to $14.7 million in ’08, a decrease of approximately $12.9 million.

The trading card and game distribution segment began to record significant revenues in the first quarter of ’08 as a result of the Chaotic trading game to retail and mass market distribution. During the three and nine months ended September 30 09, retail sales were negatively impacted by the continued global economic downturn. As a result of the downturn, many retailers maintained reduced inventory levels and the company’s trading card and game distribution segment was negatively impacted by the resulting cut-back by the company’s distributors under orders placed with T.C. Digital. Additionally, due to the economic downturn and reduced orders, the company had to give their distributors allowances and promotional markdowns which have amounted to approximately $1.6 million and $2.7 million for the three months ended September 30 09 respectively.

On a consolidated basis, net revenue for the third quarter of 09 was approximately $7.3 million as compared to approximately $17.8 million in ’08, a decrease of approximately $10.5 million. On a consolidated basis, net revenue for the nine months ended September 09 was approximately $21.9 million as compared to $49.4 million in ’08, a decrease of approximately $27.5 million.

Now turning to the expense side, cost of sales of trading cards represents finished goods inventory costs relating to the Chaotic trading card game. Cost of sales decreased approximately $1.9 million to $1.5 million and $3.5 million to $2.8 million for the three and nine months ended September 09 respectively when compared to the same period in ’08. These decreases were primarily attributable to the overall decrease in trading card revenue. In an effort to increase future trading card sales, additional promotional allowances were given to retailers and distributors which have caused a decrease in net trading card revenues while cost of sales in the quarter ended September 09 remained consistent with gross sales.

Selling, general, and administrative expenses decreased approximately $2.9 million to $11 million for the three months ended September 30 09 when compared to the same period in ’08. The decrease was attributed to broad cost-cutting initiatives implemented throughout the company and included decreased personnel related costs of approximately $1.3 million; decreased advertising and marketing costs of $0.4 million; decreased website costs of $0.3 million, and decreased travel and entertainment costs of $0.3 million. Decreased international [inaudible] of approximately $0.3 million.

Selling, general and administrative expenses decreased approximately $6.1 million to $33.8 million for the nine months ended September 09 when compared to the same period in ’08. The decrease was attributed to broad cost-cutting initiatives implemented throughout the company and included decreased personnel related costs of approximately $2 million, decreased advertising and marketing costs of approximately $1.2 million, decreased international selling expenses of approximately $1 million, decreased travel and entertainment costs of $0.7 million, decreased website cost of approximately $0.6 million, and decreased professional fees of approximately $0.3 million.

Production service costs for the three months ended September 30 09 were approximately $0.5 million as compared to $1.7 million in ’08, a decrease of approximately $1.2 million. Production service costs for the nine months ended September 30 09 were approximately $2.5 million as compared to $5.2 million in ’08, a decrease of approximately $2.7 million.

The decrease in production service costs during the three months ended September 09 as compared to the same period in ’08 was primarily due to decreased production cost for the Teenage Mutant Ninja Turtles and Chaotic television series. Production service costs decreased for the nine months ended September 30th as compared to the same period in ’08 primarily due to decreased costs of the Teenage Mutant Ninja Turtles, Viva Piñata, and Chaotic television series.

Amortization of film and television costs for the three months ended September 30 09 were approximately $1.4 million as compared to approximately $1.9 million in ’08, a decrease of approximately $0.5 million. Amortization of film and television costs for the nine months ended September 30 09 were approximately $3.7 million as compared to approximately $5.3 million in ’08, a decrease of $1.6 million. The decrease in amortization of television and film costs for the three months ended September 30 09 as compared to the same period in ’08 is due to a decrease relating to the Teenage Mutant Ninja Turtles and Chaotic television series, partially offset by increased amortization relating to the [Go-Go-Riki] television series.

Amortization of television and film costs decreased for the nine months ended September 30 09 as compared to the same period in ’08 primarily due to a decreased amortization relating to the Teenage Mutant Ninja Turtles, Viva Piñata television series, partially offset by increased amortization relating to the [Go-Go-Riki] television series.

There was no amortization of the 4Kids TV broadcast fee for the three and nine months ended September 30 09 as compared to $3 million and $12.2 million for the same periods in ’08 respectively.

Due to the termination of the Fox agreement on December 31 08, there is no longer an amortization of the 4Kids TV broadcast fee as the fee has been fully amortized. The minimum guaranteed payment obligation under the CW agreement are offset against the company’s revenues from the sale of network advertising time on the CW for kids rather than being amortized as a broadcast fee.

Interest income decreased $0.5 million to $0.2 million and $1.2 million to $0.9 million for the three and nine months ended September 30 09 respectively, as compared to the same periods in ’08, primarily as a result of lower cash balances and the company’s investments yielding lower interest rates than the prior period.

The company did not report a benefit for income taxes for the three and nine months ended September 30 09 and ’08. As a result of the above, the company had a net loss for the three and nine months ended September 09 of approximately $5 million and $20.8 million respectively, compared to a net loss of approximately $5.3 million and $17.2 million for the same periods in ’08.

Loss per share on a fully diluted basis was $0.37 per share and $1.56 for the three and nine months ended September 30 09 respectively, as compared to a loss of $0.40 per share and $1.31 per share for the same periods in ’08.

Diluted shares were approximately 13.4 million and 13.3 million for the three and nine months ended September 30 09 and approximately 13.2 million for the three and nine months ended September 30 ’08.

Subsequent event -- on October 21, 2009 the Mirage Group sold the Teenage Mutant Ninja Turtles property to Nickelodeon, a division of Viacom Inc. In connection with this transaction, the company agreed to terminate its right to serve as the merchandising licensing agent for this property prior to the scheduled expiration of the rep agreement in 2012 in exchange for a one-time payment of approximately $9.8 million, plus the potential to receive up to an additional $1 million upon the expiration of the escrow relating to this transaction if certain performance criteria are met.

Now turning to the balance sheet, as of September 30 09 the company’s cash and cash equivalents, as well as short and long-term balances was approximately $17.8 million. Of that total amount, the company had approximately $36.9 million in auction rate securities, which had been written down on the balance sheet to approximately $14.2 million.

Based on the company’s current cash and cash equivalents, the addition of $9.8 million from the sale of the Teenage Mutant Ninja Turtles property in October 09 and the current more stable economic environment, the company expects its overall cash position to provide adequate liquidity to funds its day-to-day operations for the next 12 months.

Working capital, consisting of current assets less current liabilities was approximately $0.9 million as of September 30 09 and approximately $17.6 million as of December 31, 2008.

And now I would like to turn the call over to our CEO and Chairman, Mr. Al Kahn.

Alfred R. Kahn

Thank you, Bruce. Good morning, everyone. Let me first go and comment on the Ninja Turtles property, which closed on October 21st. The owner of the Ninja Turtles property, our clients, Mirage, decided earlier this year to sell the property to Nickelodeon. We had three years left on our Teenage Mutant Ninja Turtles property representation agreement. We also had a number of years left on our right to broadcast the Teenage Mutant Ninja Turtles series that we had co-produced with Mirage.

We advised Mirage that we would work with them to make the deal with Nickelodeon. We told Mirage that in addition to receiving compensation of the royalty income which we would be giving up [inaudible] termination of our representation agreement, we also wanted some compensation for the eight years during which we helped Mirage relaunch the Turtles brand worldwide.

I am pleased to say the payment received by 4Kids for the turtles deal not only compensated us for the royalty income that we have received during the final three years of our turtles representation but also recognized the contribution made by 4Kids to the relaunch of the Turtles brand.

While we are sorry that our business relationship with our partner, Mirage, has come to an end, we did what we felt was best for our client and for our shareholders and our company. The roughly $10 million that 4Kids receives equals to approximately one-third of the market cap at the time. 4Kids, while the market response to the turtles transaction was essentially neutral, it was an important and ultimately beneficial transaction for your company.

In my last conference call in the second week of August, I stated that I expected to be able to report to you a number of positive developments. Separate and apart from any developments related to 4Kids retaining Montgomery and Company to explore their corporation’s strategic alternatives, the developments that I was alluding to were the Turtles deal and the signing of the National Football League and the National Football League Players Association for our trading card company.

Let me talk about the third quarter revenues and an overview of the company in general as we move forward. The company reported a second quarter loss of $5 million or $0.37 per share in the third quarter. Chaotic trading card sales, although rebounding from the 185,000 reported in the second quarter of ’09 to 1.5 in the third quarter of ’09, this $1.5 million net sales number reflects a $1 million reserve for returns on the aggregate sales number of 2.5. Chaotic trading card sales increased on the June through August period in response to the launch of the broadcast of Chaotic on Cartoon Network. We are hopeful that the new card releases’ seasonal increases in sales for the Christmas season and planned advertising and promotion of Chaotic will result in better fourth quarter sales numbers for Chaotic trading cards. We also believe that the Chaotic videogame released by Activision on November 17th will focus more attention on the Chaotic brand as well.

Sales of Chaotic trading cards in Europe have been below plan. We expected to get a free TV deal for Chaotic in the U.K. in the third quarter but the broadcaster declined to take the program due to a need to broadcast additional European content, our best market in Europe for trading card sales is Germany. We are monitoring Christmas sales in some of our key European markets.

Obviously 4Kids revenue of $7.27 million in the third quarter of 09 represents a decline of $10.5 million when compared to the third quarter of ’08. As I discussed in the conference call at the release of the second quarter earnings, the principal reasons for the decline in our third quarter ’09 revenue compared to the third quarter ’08 are two-fold. First, the revenue decline is partially attributable to a decline in Chaotic trading card revenues. Second, the revenue decline is also partly attributable to the different accounting treatment applicable to our agreement with the CW Network as compared to our Fox agreement.

In the third quarter of ’09, we booked $1.5 million in Chaotic trading card revenue as compared to $7.25 million of Chaotic trading card revenue in the third quarter of ’08. While some of the Chaotic revenue declines is attributable to the shift by some of our distributors to a pay on scan -- in other words, we record revenue when the company -- when the consumer actually purchases the Chaotic trading cards as opposed to recording revenue when we ship the trading cards to the distributor. There are also a number of other factors at work.

First, our distributors are more cautious about ordering Chaotic trading cards, given the uncertainties of the Christmas season. These distributors also were caught with too much trading card inventory after the disappointing fourth quarter of ’08. Second, T.C. Digital provided our distributors with approximately 80% of the amount of orders so as to ensure to the extent possible that T.C. Digital does not wind up with a substantial excess inventory problem at the end of the 09 Christmas selling season. And then finally, of course, the demand for the Chaotic trading cards in the marketplace is certainly less than the high watermark which was reached in the third quarter of ’08 when we booked $7.25 million in trading card sales.

The $10.5 million decline in revenue when comparing to the third quarter of 09 to the third quarter of ’08 is also partially attributable to the different accounting treatment with regard to advertising revenue under our agreement with the CW Network as compared with the accounting treatment for advertising revenue we have seen from the agreement we had with Fox.

As I explained in the second quarter 09 conference call, under our CW agreement, 4Kids reported as revenue the difference between the guaranteed payment to the CW Network for the third quarter of 09, the ad revenue received with respect to the third quarter of 09. This net number, which we reported in the third quarter of 2009, is $406,000.

The accounting treatment for the Fox agreement, however, allowed us to record the full amount of the advertising revenue received by 4Kids with respect to third quarter ’08 sales on Fox while at the same time recording the portion of the time buy fee attributable to the third quarter of ’08 as an expense, thus in the third quarter of 2008, we recognized $2.7 million of ad revenue attributable to Fox and $3 million of expenses attributable to the Fox time buy, so in reality the bottom line is that the $8 million of the $10.5 million difference between the third quarter 09 and the third quarter ’08 revenue of $17.7 million is primarily due to the difficult Chaotic comparison I just discussed, as well as the elimination of the Fox ad revenue figure.

The interesting thing about the Fox ad and the CW figure is if you look at it on a net basis, we theoretically lost $300,000 on Fox in the -- not theoretically, we lost $300,000 and then we made actually $400,000 on the end CW, so it actually, a positive swing under the network side of about $700,000, which I want to talk about further as we talk about how this gets straightened out and how the company moves forward.

On the expense side, I am pleased to report that the third quarter 09 costs and expenses were $14.5 million, down from $24 million in the second quarter of ’08 while $3 million of savings is attributable to the termination of Fox agreement, the cost cutting that we have been doing has save over $6 million in the quarter over quarter, year-over-year. Company expenses are still too high relative to the expected revenues. The company will therefore be implementing additional personnel cuts and expense cuts over the next few months to further reduce our SG&A expenses. In other words, we have done a very, very careful analysis of what we believe is a worst-case scenario for revenues in the ‘010, ‘011 period and we will adjust our overheads in the non-Chaotic area to reflect those projections, which should then cut our losses to hopefully nothing and create profits against the revenue streams that are currently [projected] for us. And also after the fourth quarter, the company will assess how successful the relaunch of Chaotic in the U.S. has been. We’ve had the benefit of seven months of increased broadcast exposure of the Chaotic television series on Cartoon Network and a videogame release that is expected to bolster Chaotic’s presence at retail. We have also the benefit of an experienced Chaotic website which is more user friendly and requires fewer computer resources.

However, it is clear that the expense in running the website and the expense of printing cards with codes is such that the card company has to have more sources of revenue. And that -- or obviously greater decrease in expenses, so we are taking on two additional understandings. One, as I said we are looking at Chaotic to see how viable it will be going forward after the fourth quarter but in addition we are also now working on the new NFL trading card game which we believe would be a substantive increase of opportunity for the trading card company in general. As you know, the NFL is the number one sport in the United States in terms of television ratings in terms of people watching, and that the actual excitement surrounding the NFL has never been higher. We expect that the new trading card game which is currently in development would take advantage of not only the demand for trading cards as it relates to football but also the demand of things such as Fantasy Football and online football and games like EA Sports Football have demonstrated over the years and we can take advantage of that in a fabulous environment using the website that has already been established for Chaotic with a change of the game engine, so therefore we could obviously amortize some costs over that new game.

But like I said before, we will be analyzing Chaotic to make sure that going into ‘010, our projections on the expense side will be lower than our estimated royalty, so that these losses would be stemmed and that the company can return to profitability because obviously this is something that we cannot continue to live with.

Another positive for the company was the CW Network. In September, we relaunched our new season of the programs on the CW. Our new TV lineup includes a new show called Robots, as well as new episodes of Chaotic. We also began a new off-channel advertising tune in campaign for the CW. I am pleased to report that our ratings for the 09/010 broadcast season are up 11%. Our ratings typically increase in late fall and the winter months as kids spend more time indoors watching television. Fortunately we have not experienced the problems that many broadcasters are having selling our their ad inventory. The amount of ad revenue we also [retain] will be based upon our ratings, which we are working to bolster our ratings so that we can increase our CW ad revenue for the 2009 broadcast season by a 10% to 20% margin. That will hopefully continue as we again focus in on two very important parts of our business as we look at ‘010 and beyond, and that’s the licensing business and obviously the broadcast business. Both of those we believe with the addition of additional properties and additional promotion, especially on the broadcast side, will result in higher ratings and higher revenues for your company as well as continuing to diminish costs. We have a number of new shows that are being contemplated for ‘010/011 that are very exciting and we believe can be some national revenue drivers relative to their ratings.

If we look at other broadcasters in our field, we are the only broadcaster -- broadcast network that has increased ratings for this particular season. Our competitors, ABC, CBS, NBC have shown downward trends in terms of ratings.

The cable side of the equation, of course, continues to become very, very competitive with new cable blocks such as Disney’s DX, challenging Cartoon and challenging other Chaotic broadcasters of course, for cable networks. Of course, the announcement of Hasbro with Discovery is another cable network. I think the beauty about CW is that still we are an over the air free network which still gets about 20% of the homes that don’t have -- gets 20% of the homes in the United States that don’t have cable and that obviously we can continue we think to build on this ratings and eventually turn it into exciting revenue increases for the company. We believe that licensing revenue, which has also been somewhat hit by the economy, especially Yu-Gi-Oh! revenues, if you remember I think I mentioned that Konami terminated the Upper Deck distribution agreements late last year -- sorry, the middle of last year and that resulted in no cards being shipped and a lot of uncertainty in the market as to what was happening with Yu-Gi-Oh!. Obviously Konami has worked very diligently and we are pleased to report that Yu-Gi-Oh! in the U.S. sales we expect to be up in terms of the trading cards.

Internationally, there are still challenges in Europe for Konami as they move over from the Upper Deck platform, so we expect again as we move into ‘010 that Konami will elicit additional sales in Europe and continue the momentum in the U.S. which will result in positive numbers for the company.

We as a company are also trying to help that by broadcasting not 5Ds, which is on Cartoon Network six days a week, but by the original Yu-Gi-Oh! programming which was the original impetus for the kids getting attached to Yu-Gi-Oh!. As we and the owners of Yu-Gi-Oh! believe that every five-year cycle there are new kids coming into the market and that the new kids who are coming into the market wouldn’t necessarily have experienced the original Yu-Gi-Oh! television shows, which we believe are the major drivers along with the card game of sales of Yu-Gi-Oh!. So we are obviously very pleased that we are airing those original episodes and promoting them external to the CW block, and the ratings on those particular shows have shown that we are obviously correct in terms of how we have envisioned those shows to perform.

Teenage Mutant Ninja Turtles, as I mentioned, we received our full share for the third quarter and we will continue to receive a reduced share of Turtles royalties for the fourth quarter of 09 and the first two quarters of ‘010. We have also the right to continue to broadcast the Turtles series on the CW Network through August 31, 2010. The Turtles should therefore continue to contribute to revenues into the fourth quarter of 2010. Also, 4Kids had put up approximately $1 million in escrow relating to the Turtles deal -- 15% of the escrow will be released 18 months after the October 9 closing, with the balance of the escrow being released 18 months after. Since we have no claims against Teenage Mutant Ninja Turtles property in recent years, we expect to receive most if not all of the $1 million that we have put into the Turtles escrow.

Dinosaur King -- this property continues to do very well for us in Europe where the television series is broadcast on some of the major networks. International Dinosaur King revenue has been a real bright spot for our U.K. office and we expect a good fourth quarter ’09 revenue contribution from this property. Sega will be producing another season of episodes which we are already selling to European broadcasters. We will expect Dinosaur King to be an important contributor to revenue in the fourth quarter of ’09 and through ‘010.

We also I think obviously are looking at costs as it relates to our European offices and we will be obviously making whatever adjustments are necessary to make sure that all revenues fall in line with the -- all costs rather fall in line with the projected revenues in every segment of the business. We can no longer afford to do investment spending with the hopes that the revenues will be attainable.

New properties, the life blood of our company is still new properties. We have made presentations of our preschool property, [inaudible], to a number of toy companies. We also have the doll brand called [Quints] which is a toy line we presented 20 years ago [at 4Kids]. That was very successful, selling about $100 million worth of product at retail. We have updated the art for the brand. We’ll be sending it to toy companies shortly. We expect both [inaudible] and [Quints] to start contributing to revenue beginning late this year or 2010 and incidentally, no costs, no revenues have been assigned to these two properties in our projections so that we do not -- we are not being overly optimistic in terms of our costs. So anything that comes in on these new properties would be a -- in a positive contribution to our bottom line and not just to cover expenses at the bottom line.

As I mentioned, we are very excited about the potential of our new NFL sports card license, which will make use of the Chaotic game platform which we have invested so heavily. We expect to do some focus group tests in the next few months on the NFL trading card game and if all goes well, to release the NFL trading card game late next year to correspond with the start of the ‘010/011 football season.

I think it’s important to note some of the things that have happened to us and where we are as I relate to the company’s hideous past couple of years. As you know, we launched our trading card property, Chaotic, with the idea the company had $60 million in excess cash at Lehman Brothers and we knew that the Chaotic investment would be in the range of what we would actually spend because we had obviously seen what the cost of these trading card company launches were through [our other partners].

We also expected -- we also thought that the Chaotic revenues were going to continue to increase as we saw a good momentum in our trading card sales with $7.1 million in the third quarter of ’08.

We never realized that our investment at Lehman Brothers would be compromised by Lehman taking out a lot of our cash and putting in a very worthless or very illiquid auction rate securities. When we found out, we filed suit, a [inaudible] suit arbitration against Lehman Brothers which would have provided us we believed with the remaining capital that had been tied up in the $50 million to $60 million range, which we had built up over the years and which is now invested, as I mentioned, in a liquid auction rate securities. In mid-September, the government declined to bail out Lehman and Lehman filed for bankruptcy. Our arbitration was stayed by the bankruptcy and we are relegated to the status of a contingent unsecured creditor.

The bottom line of the fallout of the economy, our Chaotic trading card game, which we spent years developing, lost momentum. Since that time, we have had to cope with an incredibly challenging business environment. Again, as I want to make sure we are clear, that Chaotic investment was done with the idea of taking a chance to try and really build the company’s profits and obviously sales, and we never would have taken it had we not been sure that we had $60 million worth of additional cash in our Lehman Brothers accounts, if we had any inkling that this was in any jeopardy certainly we would never have spent the money that we did on Chaotic.

I think also that the ability for us to cut expenses, which we have been undertaking, is now going to be accelerated, as I mentioned, to make sure that the minimal revenues that we project will be more than the cost that we will assume and that includes Chaotic or any other areas of our company.

But in addition to that, in mid-August we announced that the 4Kids board has decided to retain Montgomery and Company to explore its strategic alternatives. We are at this time still in the process of evaluating a number of these strategic alternatives which may help us maximize shareholder value.

Although there are some signs the economy has seen the bottom and there may be even some stabilization of retail sales, we have to prepare as a company for the possibility of a second consecutive disappointing Christmas selling season, which would again result in reduced pay revenues to your company. We therefore more continue to pursue and evaluate all possibilities for creating shareholder value as well as the information that I have given you.

As part of this [cost company], the senior management team and myself, Bruce Foster, Sam Newborn, have taken substantial pay cuts that will go into effect as well, which is again another way of making sure that the expenses will be in line with our revenue forecast, not counting any new properties and also not looking for any miraculous conceptions relative to Chaotic or in the NFL.

What can I say? This has been the most challenging period of my life. We have to reset 4Kids, go back to where we have made our money, which has been in the licensing side, make sure that the television network is profitable, and then continue to get back to growing our revenues but more importantly getting profits back into this company and getting our cash position in line. I am delighted again with the sale of Turtles because that gives us sufficient cash, along with our existing cash and also our value of the auction rates, to have substantial working capital to foresee -- for the foreseeable future as we readjust and reshift the business to the revenues that we can expect on a very, very safe basis.

I want to thank all the shareholders who have stood by the company and I want to assure you that we are comfortable that there are some better times ahead for us as we adjust to all the things that I suggested in this call.

With that, I will now entertain questions.

Question-and-Answer Session

Operator

(Operator Instructions) At this time, we have no questions.

Alfred R. Kahn

Okay, well, I want to thank everyone who participated on the call and if you have anything you would like to discuss further, certainly Bruce and myself will be available to take any questions that you would like to ask on a private basis but of course, not -- with any non-public information. Thank you.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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