4Kids On Fox Ends December 27 2008

Well, all good things have to come to a end right?

From ANN:

In its financial statement for the third quarter of 2008 which ran from July 1 to September 30, 4Kids Entertainmenthas revealed on Monday that it will end its programming on the Fox Network at the end of this year. The current seventh season of 4Kids TV’s Saturday morning block on Fox includes episodes of Kirby: Right Back At Ya! and Sonic X. Fox had originally scheduled the block to run through September of next year. To back out of the contract, 4Kids had to settle with Fox for an undisclosed amount.       The relationship between 4Kids and Fox started in 2002, when the block launched under the name FoxBox. The block has aired numerous anime, including One Piece, Shaman King, and Tokyo Mew Mew. Last year, 4Kids signed a similar agreement with The CW Networkto run original and licensed cartoons over a five-hour Saturday morning block and sell ads to be aired during that time. According to 4Kids CEO Alfred E. Kahn, the dissolution of the Fox contract will allow 4Kids “to focus resources” on its CW programming going into 2009.  4Kids’ quarterly results included an increase in net revenues to US$17.8 million, compared to US$12.2 million over the same term last year. About US$7.3 million of the new revenue came from sales of the Chaotic trading card game. However, 4Kids still experienced a net loss of US$5.3 million (compared to US$4.2 million last year).  For the year to date, net revenues were US$49.4 million, up from US$39.1 million, but net losses have also increased. In the first nine months of 2007, 4Kids lost US$6.6 million; this year, that figure was up to US$17.2 million. Kahn attributed this to “the increase in selling, general, and administrative expenses and cost of goods sold in the Trading Card and Game Distribution Segment of our business, coupled with decreased licensing and broadcast revenues.” However, he said he was confident that in the last quarter of the year, the company will return to profitability, and that the outlook for 2009 will be positive as sales and licensing revenue related to Chaotic, Dinosaur King, and other 4Kids series continue to increase. 4Kids also renegotiated the terms of “representation agreement” for the Yu-Gi-Oh! franchise, and now holds the licensing, broadcast, and merchandise rights to it through 2015.

So it seems that after 7 years, some highs and some lows, 4Kids has moved on from Fox. 

In my opinion this was a great relationship, but in someways i wish it was better. Yes, Obviously I’m disappointed that the relationship couldn’t continue past 2009, but pretty much this may be the end of Fox’s near 20 year kids programing relationships with first Saban and then with Kahn’s 4Kids ent. With the future of TheCW in doubt – the worries continue. Cookie Jar hasn’t made an announcement, and Fox has DOWNSIZED its news operations so dont expect any today like show on that block. If recent history is any situation, the local stations might do other programing on the block. If I am seeing things – Im guessing that if the economic situation gets worse – they may be no other choice.

So now we are down to TWO major blocks, and ONLY one major block airing NEW shows. This is horrendous. Compared with the stations that aired series and blocks only 3 years ago, and you just got to put your head down and wonder… how long before we go into the HD era and the only way you will see a animated series or a show might be during christmas time? And even that isnt as sacred as it once was.

A interesting interlude if you might say – when there was more animation, adults acted like adults. When there is less and less (and be honest there is less and less), adults started to act like kids…(see Jerry and Maury shows)

Here is Al Kahn’s statement on the situation:

The other major piece of news that I’d like to describe to you has been the settlement of our Fox litigation. Last April as you’ll remember, we commenced litigation against Fox. Our contract with Fox provides that for each broadcast season 4Kids television programming needs to be broadcast by Fox on Saturday mornings between the hours of 8 a.m. and 12 p.m. on the East and West Coast times and between the hours of 7 a.m. and 11 a.m. in the Central and Mountain time zones in at least 90% of the country.

Our Fox agreement further provides that if 90% broadcast clearance is not maintained in any broadcast season, 4Kids is entitled to a refund of a portion of the time buy being paid to Fox for that broadcast season. Our Fox contract also provides that 4Kids is entitled to set off the refund against installment for the time buy fee to Fox. We computed the average clearances that Fox has provided to us for the preceding broadcast seasons of our deal and based on our calculations we believe that Fox owed 4Kids a substantial revenue refund of approximately $13 million.

Fox disputed our calculation and denied that 4Kids was entitled to any refund. 4Kids exercised the set-off right and did not pay Fox the $5 million fee due on April 1, 2008 and then later that month we sued Fox. 4Kids did not pay the $5 million fee due July 1, 2008 and the $3 million of the $5 million which was due on October 1, 2008. The $13 million not paid to Fox has been expensed on our P&L in accordance with the way we amortized the Fox fee.

In the settlement agreement that we concluded yesterday, Fox and 4Kids has agreed that the 4Kids Fox agreement will terminate on December 31, 2008 rather than at the end of the 2008/2009 broadcast season in September ’09. As a result of the early termination, 4Kids will now have to pay the $15 million broadcast fee which is payable in three installments of $5 million due January 1, ’09, April 1, ’09 and July 1, ’09. Under the terms of the settlement however we will be paying Fox $12.25 million out of the $13 million we previously set off, an amount that we already amortized and will be eligible to retain $750,000 in cash.

Historically our fourth quarter ad sales, representing almost 50% of the overall ad sales for each broadcast year. The early termination should save us about $5 million on the amortization of broadcast fees in the fourth quarter of ’08 as Bruce has discussed. By not having to pay the $15 million of broadcast fees to Fox until ’09 we estimate that the net savings of the amortized fees less estimated ad revenues in the fourth quarter will be about another $5 million or $6 million and possibly more should the advertising market weaken further next year.

We’ve therefore received compensation for substantially all of the amount that we have claimed but I think there’s a more important angle. If ad revenues as we believe will be very soft in the first and second quarters, that would have put a very, very big drain on our profits because we’d be paying Fox that $15 million and really not necessarily getting any fourth quarter ad revenues. So we conceivably could have had a loss that would be very substantial. Maybe that loss could have been maybe $10 million.

With this deal we will have no loss on Fox and obviously we will have less inventory to sell on our CW block. We then also can take our best programming from Fox and our best programming from CW and the new programming that has been scheduled to be added in January, such as Rollbots, such as Cayman Riders, such as Huntechs, and really create one very, very powerful block which can be promoted solely by 4Kids and that can be sold by our ad subsidiaries both online and also for regular advertising.

So this deal really can save us in the $15 million range in terms of expense and more importantly it also saves us the $15 million in cash that we will not have to pay out next year to Fox. I want to thank Bruce Foster and Sam Newborn and all of our people who have worked tirelessly to get this deal done and get it done in a timely fashion so that not only could we report it for this conference call but also that it has a positive impact on our fourth quarter and going forward in 2009.

As I mentioned we believe the advertising market will be very, very tough in the first two quarters and that this reduction of 64 advertising units per week on Fox will make us much more viable in terms of selling the ad time on CW and also take another competitor out of the kids broadcast network because Fox has alluded to us that the time will no longer be used for kids programming but for other programming that has yet to be determined.

To see other parts of this:

http://seekingalpha.com/article/105157-4kids-entertainment-inc-q3-2008-earnings-call-transcript?page=4

Its just another day in this business. I will have more data on this, but I do expect Fox to do something soon, so three of the four major networks do not have a major Saturday Morning block and heading into next year with the HD compliance, most if not all of the series will suffer badly if they do not have a widescreen option. 

So what happens now? 

Nobody knows. Not even I.

Keep it here, because once the year ends… there will be some major announcements and such humungous news not only at the industry end but on the Cartoon Retro end as well.