UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 26, 2005
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 0-15817
THE TOPPS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2849283
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Whitehall Street, New York, NY 10004
(Address of principal executive offices) (Zip Code)
(212) 376-0300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.01
(Title of class)
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 X No _.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act). Yes X No _.
The aggregate market value of Common Stock held by non-affiliates as of the
last business day of the most recently completed fiscal second quarter was
approximately $378,535,000.
The number of outstanding shares of Common Stock as of May 9, 2004 was
40,457,117.
Documents incorporated by reference Part
----------------------------------- ----
Annual Report to Stockholders for the Year Ended February 26, 2005 I, II, IV
Proxy Statement for the 2005 Annual Meeting of Stockholders III
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EXPLANATORY NOTE
The Topps Company, Inc. (the "Company") is filing this Amendment No. 1 on Form
10-K/A (the "Amendment") to the Company's Annual on Form 10-K for the fiscal
year ended February 26, 2005 (which was filed with the Securities Exchange
Commission on May 12, 2005) in order to add footnote 22- Subsequent Event to
part IV Item 15, as follows:
Footnote 22 - Subsequent Event
On May 23, 2005 the Company entered into a Settlement Agreement with Media
Technologies, Inc. ("Plaintiff") which it would pay Plaintiff an immediate sum
of $2,000,000. Plaintiff agreed to dismiss all claims against the Company and
issue a license to the Company to distribute relic cards. The Company further
agreed that under certain conditions which may arise in the future, it would
make additional payments to plaintiff as part of the ongoing license. The
Company is currently evaluating the accounting of the settlement and the
license agreement.
Additionally, the Company is filing this Amendment pursuant to an exemptive
order issued by the Securities Exchange Commission (SEC Release No. 34-50754).
In accordance with the exemptive order, the Company may include management's
annual report on internal control over financial reporting and the related
report of the Company's independent registered public accounting firm in an
amendment to its annual report on Form 10-K not later than forty five days after
the prescribed period for filing such annual report on Form 10-K. In compliance
with the exemptive order, the Company is filing this Amendment to:
o Include management's annual report on internal control over financial
reporting; and
o Include a Report of Independent Registered Public Accounting Firm
relating to the Company's assessment of internal control over
financial reporting and the effectiveness of internal control over
financial reporting.
As a result of this Amendment, (1) the certifications pursuant to Section 302
and Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished,
respectively, as exhibits to the original filing, have been re-executed and
re-filed as of the date of this Amendment; and (2) a Consent of Independent
Registered Public Accounting Firm dated May 23, 2005 to cover its report related
to our internal control over financial reporting and the effectiveness of
internal control over the financial reporting is being filed.
Except for the amendments described above, this Amendment does not modify or
update the Company's previously reported financial statements and other
financial disclosures in, or exhibits to, the original filing.
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT
The Topps Company, Inc. was incorporated in Delaware on February 24, 1987.
The Company is the successor to Topps Chewing Gum, Inc., which was established
as a partnership in 1938 and was incorporated under the laws of New York in
1947. All references in this Annual Report on Form 10-K to "Topps" or the
"Company" are to The Topps Company, Inc. and its subsidiaries.
There are two principle segments of the business, Confectionery and
Entertainment. In the Confectionery segment, Topps markets premium confectionery
brands including lollipops such as Push Pop, Baby Bottle Pop and Juicy Drop Pop,
Bazooka brand bubble gum and certain licensed candy items. The Company also
manufactures and markets Ring Pop lollipops. In the Entertainment segment, the
Company markets branded products including trading cards and sticker album
collections featuring professional athletes and popular television, movie and
other licensed characters. The Company also markets branded collectible strategy
games.
In 1995, the Company acquired Merlin Publishing International Limited
("Merlin"), a U.K.-based marketer of licensed collectibles, primarily sticker
album collections. While continuing to market products under the Merlin brand,
Topps changed its corporate name to Topps Europe Ltd. ("Topps Europe") in March
1997. In July 2003, Topps acquired Wizkids, LLC ("WizKids"), a designer and
marketer of collectible strategy games.
Headquartered in New York, N.Y., Topps also has offices in Pennsylvania,
Delaware, the State of Washington, Canada, the U.K., Ireland, Italy and
Argentina, and distributes its products in many countries around the world.
PRODUCTS
Confectionery
-------------
The Company markets premium-quality lollipop brands and other non-chocolate
confectionery products in the United States, Canada, Europe and parts of Asia,
Latin America, New Zealand and Australia. Branded lollipops include Ring Pop
(candy molded into the form of an exaggerated precious gem stone and anchored to
a plastic ring), Push Pop (a cylinder-shaped lollipop packaged in a plastic
container with a removable cap, designed to enable consumers to eat a portion of
the pop and save the rest for later), Baby Bottle Pop (a miniature baby bottle
filled with powder, candy juice, or crunchy candies and topped with a candy
nipple) and Juicy Drop Pop (a lollipop in a plastic case which also contains
candy juice to be squirted onto the pop for boosting its flavor).
================================================================================
Trademarks of The Topps Company, Inc. and subsidiaries appearing in this report:
Baby Bottle Pop, Bazooka, Bazooka Joe, Bowman, etopps, Garbage Pail Kids,
Heroclix, Juicy Drop Pop, Mage Knight, Mars Attacks, MechWarrior, Merlin, Push
Pop, Ring Pop, thePit.com, Topps, Topps Chrome, Topps Finest, Topps Heritage,
Topps Pristine, Wacky Packages and WizKids.
Unless otherwise indicated, all date references refer to fiscal years.
The Company also markets Bazooka brand bubble gum originally introduced in
1947. Traditional chunk Bazooka bubble gum is produced in individually-wrapped
rectangular pieces in a variety of flavors and sold generally at a suggested
retail price of five cents a piece. Individual pieces of Bazooka brand bubble
gum include a comic featuring Bazooka Joe, a copyrighted cartoon character,
which celebrated its fiftieth anniversary in 2003. In addition to individual
pieces, the Company sells multiple-piece packs of Bazooka (regular and
sugarless) which are designed for distribution across all major trade channels.
Licensed confectionery products include containers replicating the Pokemon
ball with candy and a decorated Pokemon figure inside. Sales of Pokemon
confectionery products began in fiscal 2000 and continue today, though at lesser
volumes. In 2003, the Company introduced Yu-Gi-Oh! lollipops and containers.
In the U.S., the Company's confectionery focus is on providing children
with compelling high-quality products, expanding product availability
(distribution points and in-store location) and advertising on children's
television. Over the last few years, the Company has experienced solid progress
in terms of its U.S. retail distribution and brand and advertising awareness.
Going forward, the Company believes that distribution, advertising, and new
products represent viable sources of growth and is directing its focus
accordingly. Overseas, the primary emphasis is on delivering innovative products
to the marketplace and securing new listings in key retailers. Over the last
couple of years, confectionery distribution in Europe has been expanded to
include Norgen Gruppen and Narvisson in Norway; ICA and Co-op in Sweden;
Internarche in France; Coop, Kiosk, and Volg in Switzerland; and Inex in
Finland.
Entertainment
-------------
The Entertainment segment consists of publishing products in the form of
trading cards and sticker album collections featuring sports and non-sports
licenses and strategy games created by WizKids, acquired by Topps in July 2003.
In the U.S. and Canada, publishing products are generally sold in the form
of cards, while in the rest of the world, publishing products are typically sold
in the form of sticker album collections. The Company markets cards in various
size packages for distribution through a variety of trade channels. Sticker
album products are designed so that stickers, which are sold in packages, can be
placed in an associated album that contains detailed information on the subject.
Sports card and sticker album products contain photographs of athletes as
well as other features, including player and team statistics, biographical
material and, in certain cases, pieces of memorabilia and/or players'
autographs. Sports card products have historically featured professional sports
figures from Major League Baseball, NFL Football, NBA Basketball and NHL Hockey,
while sports sticker album products have featured athletes from English Premier
League Football (soccer). The Company did not produce any NHL Hockey products
for the most recent season which was cancelled due to labor/management issues.
Additionally, in fiscal 2005 the Company sold sticker album products associated
with the European Football Championship which occurs every four years. The
Company also markets bubble gum with mini stickers and albums featuring Italy's
professional soccer league (Calcio).
The Company distributes sports card products in North America under brand
names including, but not limited to, Topps, Topps Heritage, Topps Finest, Topps
Chrome, Topps Pristine and Bowman. The Company attempts to ensure that each
brand of sports cards has its own unique positioning in the marketplace. For
example, Topps Heritage, a retro brand with bubble gum in every pack, addresses
a perceived consumer demand for nostalgia-based products and capitalizes on
Topps' heritage and history in the sports collectible industry. Internationally,
the Company distributes sticker album collections under the Merlin and Topps
brands.
The Company has also marketed non-sports trading cards and sticker album
products since the 1950's, featuring some of the dominant entertainment
properties of all time, including The Beatles, Elvis Presley, Star Wars, Michael
Jackson, E.T.: The Extra-Terrestrial, Indiana Jones, Batman, Teenage Mutant
Ninja Turtles, Jurassic Park, Pokemon and Yu-Gi-Oh!. From time to time, the
Company has also sold cards and stickers featuring self-created entertainment
properties such as Wacky Packages, Garbage Pail Kids and Mars Attacks. During
the fiscal 2000 to 2003 period, the Company distributed Pokemon products in over
44 countries and 25 languages.
In fiscal 2005, the Company marketed non-sports trading card and sticker
album products featuring licenses including Star Wars, Lord of the Rings,
Hamtaro, Barbie, Yu-Gi-Oh! (sticker albums only), SpongeBob SquarePants and
Pokemon. The Company also reintroduced new editions of Garbage Pail Kids and
Wacky Packages stickers during the year. Entertainment cards and sticker album
collections have experienced peaks and valleys of consumer interest, a fact
which has prompted the Company to be highly selective in determining which
entertainment licenses to pursue.
Card and sticker album collections are prepared with care and often use
special technologies and reproduction techniques. Cards may include features
such as foil stamping, film lamination, autographs and/or small pieces of
memorabilia. The Company continuously strives to update the features of its
cards and sticker album collections and seeks new ideas and printing
technologies. Suggested retail prices for cards generally range from $0.99 to
$7.00 per pack, while overseas sticker pack prices are generally the equivalent
of approximately fifty cents. The Company also sells certain sports products in
pack configurations at prices exceeding $30 per pack and in box configurations
that are offered to consumers at variety of suggested retail price points.
In October 2001, the Company launched etopps, a trading card brand sold
exclusively on the Internet at www.etopps.com. Each week on the etopps website,
a limited number of cards featuring distinguished athletes, current events, and
other features are offered for sale. In April 2004, additional features were
added to the etopps website enabling card holders to play a variety of
fantasy-style games and to trade their etopps cards more easily. The Company
also markets memorabilia over the Internet through ToppsVault.com and makes a
market in certain sports cards via thePit.com.
In July 2003, the Company acquired WizKids for a cash purchase price of
approximately $28.4 million. Headquartered in Bellevue, Washington, WizKids is a
designer and marketer of collectible and constructible strategy games. Some
games are played with miniature figurines on bases containing game-specific
information. Core products are sold under the MechWarrior, Mage Knight and
HeroClix brand names and are marketed primarily through the hobby channel. In
2005, WizKids broadened its product line to include constructible strategy
games, introducing products under the Pirates and Football Flix names.
For a schedule of net sales by key business segment for the past three
fiscal years, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 7 of the Company's Annual Report to
Stockholders for the year ended February 26, 2005 (the "Annual Report"), which
is hereby incorporated by reference.
DISTRIBUTION AND MARKETING
Sales and Distribution
----------------------
In the U.S. and Canada, internal and field sales employees handle sales of
Confectionery products to national accounts. Confectionery sales to other
channels are handled by broker organizations managed by Topps employees. In
fiscal 2005, Topps consolidated much of its broker network, joining forces with
a strong national organization which will provide greater retail coverage and
increased focus, particularly on the convenience channel. Topps Confectionery
products reach tens of thousands of retail outlets including supermarkets,
drugstores, convenience stores, mass merchandisers, warehouse clubs, dollar
stores, video outlets and other specialty accounts. The Company's employees also
handle U.S. sales of entertainment card products to hobby stores, hobby
distributors, national accounts and category managers who service major retail
outlets.
In most of Europe, as well as in Latin America, Japan and Australia, sales
are generated primarily through distributors serviced by Topps employees. In the
U.K., sales of both Confectionery and Entertainment products are handled by a
dedicated field sales force augmented by wholesalers selling to independent
retailers. Together, the sales force and wholesalers reach approximately 30,000
retail news and confectionery outlets.
WizKids' products have traditionally been sold primarily to gaming stores
via distributors. Topps' sales force is also assisting WizKids in reaching mass
retailers in the U.S. and Europe. WizKids uses a network of 3,500 volunteers to
run approximately 10,000 in-store tournaments a month for its customers.
Advertising and Promotion
-------------------------
The Company utilizes a variety of marketing techniques, including
television, radio and print advertising campaigns, sweepstakes, on-line ads and
promotions designed to create consumer awareness and stimulate retail sales of
its products. Advertising and marketing expenses (which encompass media
spending, consumer promotions and research) included in selling, general and
administrative expenses amounted to $23,336,000 in fiscal 2005, $23,820,000 in
fiscal 2004 and $20,145,000 in fiscal 2003.
Approximately 74% of the Company's fiscal 2005 sales, 75% of fiscal 2004
sales, and 80% of fiscal 2003 sales were made on a returnable basis. Reductions
in the percentage starting in fiscal 2004 are due to the acquisition of WizKids,
whose sales historically have been largely not returnable. As WizKids begins to
sell more products to the mass market channel, its return rates will likely
increase. Industry practice requires that the Company provide the right to
return on sales of trading card products (excluding those to certain channels of
distribution), on confectionery products and on sales of most sticker album
products. Consolidated net return provisions as a percentage of gross sales for
the fiscal years ended 2005, 2004 and 2003 were 6.5%, 5.1%, and 6.7%,
respectively. Returns significantly in excess of the Company's returns reserve
could have a material adverse effect on the Company.
PRODUCTION
Confectionery
-------------
Ring Pop lollipops for sale in North America are manufactured at the
Company's Scranton, Pennsylvania factory. Raw materials required for the
manufacture of these products are generally available to the Company. Ring Pop
lollipops for sale in international markets as well as all Push Pops, Baby
Bottle Pops, Juicy Drop Pops and many of the Company's other lollipop products
are manufactured by a single independent supplier in factories located in
Taiwan, Thailand and China. The loss of production at one or more of these
facilities due to civil unrest or for any other reason could have a material
adverse effect on the Company until the Company could make other arrangements.
Bazooka bubble gum is produced for Topps by the Hershey Foods Corporation
("Hershey") under a contract that is renewable annually for a five-year term.
This contract contains a number of conditions and requires the Company to source
certain of its U.S. Bazooka production needs from Hershey, provided Hershey can
fulfill the orders on a timely basis and can meet Topps' quality specifications.
Failure by Hershey to supply the Company with quality product on a timely basis
could have a material adverse effect on sales of Bazooka until the Company could
make other arrangements.
Entertainment
-------------
In the U.S., photographs of athletes are generally taken by free-lance
photographers on special assignment with the Company. In addition, certain
photography is provided by the organizations representing the leagues and their
member teams. Pictures of non-sports entertainment subjects are generally
furnished by the respective licensor or created by artists retained by the
Company. Computerized graphic artwork and design development for all of the
Company's products is done by staff artists and through independent design
agencies under the Company's direction. The Company's Graphic Services
Department also utilizes computerized technology to enhance and color-correct
photography and computer imaging to create interesting and unusual backgrounds
and visual effects.
High-quality substrates (paperboard, foilboard) are sent directly to
outside printers by the Company's suppliers. Pictures are printed utilizing a
variety of techniques and sometimes include foil stamping and UV (ultra violet)
coating. Cards that require specialized printing and the combination of various
substrates like plastic, polystyrene and holographic foils are purchased in full
sheet form from specialty printers. Full sheets are then cut into individual
cards, collated, wrapped in a variety of package configurations, and shipped to
customers by these same outside printers or by contract packers.
Sticker production in Europe is subcontracted and coordinated by a single
supplier in Italy, and album production is subcontracted to three suppliers in
Italy. Adhesive material and packaging are sourced and printed by various
subcontractors in Italy. The Company believes that there are other suitable
sources available to meet its requirements if the current suppliers were unable
to meet the Company's needs.
Collectible strategy games are manufactured by suppliers in China and
Taiwan. Collectible figures are designed by the Company, and the tooling
manufacture is subcontracted to a variety of tool and die manufacturers in China
and Taiwan.
Paperboard, packaging materials, foil stamping and UV coating for cards,
and other raw materials required to manufacture the Company's total line of
entertainment products are generally available to the Company. The Company
relies on single producers for several of these materials or processes, although
alternative suppliers are generally available. If any of these single sources
were no longer available to the Company, some adjustment in product
specification would probably be required.
TRADEMARKS AND LICENSE AGREEMENTS
The Company considers its trademarks and license agreements to be of
material importance to its business. Most of the Company's principal trademarks
have been registered in the United States and many foreign countries where its
products are sold. Sports picture products marketed in the U.S. are generally
produced under license agreements with individual athletes and/or their players'
associations, as well as under the licensing bodies of the professional sports
leagues. These agreements cover the following sports: Major League Baseball, NBA
Basketball and NFL Football. Because of the labor dispute in hockey during the
2004 season, the Company did not renew its NHL agreement when it expired in June
2004. The absence of hockey products did not have a material adverse effect on
the Company's sales or earnings in fiscal 2005. The Company also has a contract
with Premier League Soccer in England and with players and teams with regard to
soccer in Italy, Denmark, and Spain. The Company's inability to renew, or
continue to operate under licenses relating to Major League Baseball or England
Premier League soccer, and its inability to market products in these sports,
could have a material adverse effect on the Company.
The Company has an individual license agreement with virtually every major
league baseball player. Each baseball player's license agreement is initially
for four major league baseball seasons and may be extended for additional
seasons as rights are used, if the player and the Company agree. Typically,
these agreements are extended annually. Among the rights the Company receives
are rights to use a player's name, picture, facsimile signature and biographical
description in the form of two or three dimensional pictures, trading cards,
postcards, stickers, stamps, transfers, decals, medallions or coins, each within
certain size limitations. The licenses granted to the Company by athletes permit
the athlete to grant others rights to the use of his name, picture and facsimile
signature on other products, including collectible picture cards sold alone or
with products other than gum and (with certain exceptions) candy. The Company
conducts a related active licensing program with minor league baseball players
and continuously seeks to supplement its relationship with the baseball
community by personal visits and corporate identification. The Company considers
such relationships to be good and to be of great importance to it. However,
should an appreciable number of Major League Baseball players refuse to sign the
Company's license agreement, it could have a material adverse effect on the
Company.
The Company has a related agreement with the Major League Baseball Players
Association, which governs certain terms of the individual player contracts. The
Company also has an agreement with Major League Baseball Properties, Inc.,
which, among other things, covers the use of the names and insignias of the
baseball teams and leagues in connection with its baseball picture products.
The Company also enters into license agreements with non-sports
entertainment companies to produce certain products. The terms of these
contracts depend on a variety of factors.
Total royalty expense under the Company's sports and non-sports
entertainment licensing contracts for the fiscal years ended 2005, 2004 and 2003
was $24,916,000, $23,912,000 and $25,344,000, respectively. See Note 21 of Notes
to Consolidated Financial Statements in the Annual Report, which is incorporated
herein by reference, for a description of minimum guarantee payments required
under the Company's existing sports and non-sports entertainment contracts.
In fiscal 2004, the Company initiated a program of licensing its own
Bazooka, Bazooka Joe, Ring Pop, Push Pop, and Baby Bottle Pop trademarks to
third parties. In fiscal 2005, the Company expanded the program to include
seventeen licensees, including manufacturers of apparel, children's cosmetics,
footwear and collectibles. Additionally, WizKids licenses out its trademarks,
primarily Mech-Warrior, for fantasy books.
COMPETITION
The Company competes for sales as well as counter and shelf space with
large corporations in the food, candy, publishing, toy and other industries.
Many of these corporations have substantially greater resources than the
Company. More narrowly, the Company competes with other companies, large and
small, which market gum, candy, trading cards, sticker albums and strategy games
for the spending money of children and adult collectors. The Company believes
that the industries in which it operates are highly competitive.
SEASONALITY
The Company's sales of Confectionery products are generally seasonally
stronger in the first two fiscal quarters of each year. However, sales can be
significantly impacted by the introduction of new products and line extensions
as well as by advertising and consumer and trade support programs.
In the Entertainment segment, sales of U.S. sports card products are sold
throughout the year, spanning the three major sports seasons in which the
Company currently participates, i.e. baseball, football, and basketball.
Generally, Topps Europe's sales of sports sticker album products are driven by
shipments of Premier League Soccer products, with much of the sales activity
occurring in the fourth fiscal quarter. Sales of non-sports cards, sticker
albums and games tend to be driven by the timing of product introductions and
the property on which they are based, often peaking with the release of a movie
or the rise in popularity of a particular licensed property. Hence, quarterly
results may vary. (See footnote 20 "Quarterly Results of Operations" in the
Company's Annual Report.)
DEPENDENCE ON CERTAIN CUSTOMERS
McLane Distribution Services, Inc. accounted for approximately 12% of
consolidated net sales in fiscal 2005. McLane purchases primarily confectionery
products from the Company and distributes them to Wal-Mart, Sam's Club,
Southland Corp., and convenience stores in the U.S. The loss of this customer
could have a material adverse effect on the Company's plans and results.
ENVIRONMENT
The Company believes that it is in compliance in all material respects
with existing federal, state and local regulations relating to the protection of
the environment. Such environmental regulations have not had a material impact
on the Company's capital expenditures, earnings or competitive position.
EMPLOYEES
The Company employed approximately 485 people in fiscal 2005.
All of the production employees at the Company's factory in Scranton,
Pennsylvania are represented by a union. The current union agreement expires in
February 2008.
The Company considers relations with its employees to be good.
AVAILABILITY OF THIS REPORT
The Company's financial information, including the information contained in
this report filed on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and any amendments to the above mentioned reports may be viewed on
the Internet at www.topps.com. Copies are also available, without charge, from
the Company. Alternatively, reports filed with the Securities and Exchange
Commission (the "SEC") may be viewed or obtained at the SEC Public Reference
Room in Washington, D.C., or at the SEC's Internet site at www.sec.gov.
CAUTIONARY STATEMENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby filing
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in any forward-looking
statements of the Company made by or on behalf of the Company, whether oral or
written. The Company wishes to ensure that any forward-looking statements are
accompanied by meaningful cautionary statements in order to maximize to the
fullest extent possible the protections of the safe harbor established in the
Reform Act. Accordingly, any such statements are qualified in their entirety by
reference to, and are accompanied by, the following important factors, among
others, that could cause the Company's actual results to differ materially from
those projected in forward-looking statements of the Company:
1. Dependence on Licenses. The Company's trading card and sticker album
businesses are highly dependent upon licensing arrangements with third parties.
These licenses, which have varying expiration dates, are obtained from the
various professional sports leagues, players associations and, in certain
instances, the players themselves as well as from non-sports entertainment
companies. The Company's inability to renew or retain certain of these licenses,
or the lack of vitality of these licenses, could materially adversely affect its
future plans and results.
2. Contraction in Sports Card Industry. The sports card industry as a whole
has contracted significantly over at least the last ten years. Further prolonged
and material contraction in the sports card industry, whether caused by labor
strife or otherwise, could materially adversely affect the Company's future
plans and results.
3. New Products. The Company may be unable to produce timely, or at all,
certain new planned products. The inability of the Company to produce planned
products could materially adversely affect its future plans and results.
4. Returns. Approximately 74% of the Company's fiscal 2005 sales were made
on a returnable basis. Although the Company maintains returns provisions,
returns considerably in excess of the Company's provisions could materially
adversely affect its future plans and results.
5. Suppliers. The Company has a single source of supply for most of its
lollipop products. The loss of this supplier due to civil unrest or for any
other reason could materially adversely affect the Company's future plans and
results.
6. Customers. The Company has several large customers, some of which are
serviced by single distributors. The loss of any of these customers or
distributors could materially adversely affect the Company's future plans and
results.
7. International Political and Economic Risk. There is an increase in risk
generally associated with operating outside of the U.S. Events such as civil
unrest, currency devaluation, political upheaval and health-related issues could
materially adversely affect the Company's future plans and results.
8. Legal Proceedings. See Item 3: Legal Proceedings for a discussion of
legal matters that could materially adversely affect the Company's future plans
and results.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
The Company operates in two business segments. They are: (i) the marketing
and distribution of confectionery products; (ii) the marketing and distribution
of entertainment products. Segment and geographic area information contained in
Note 16 of the Notes to Consolidated Financial Statements included in the Annual
Report is hereby incorporated by reference.
EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item with respect to the directors of the
Company and those executive officers who are also directors appearing in the
Proxy Statement for the annual meeting of stockholders scheduled to be held on
June 30, 2005 ("2005 Proxy Statement") is hereby incorporated by reference
thereto. Set forth below is information required by this item covering the other
executive officers of the Company.
Position with the Company and business
Name experience during the past five years
---- --------------------------------------
Ronald L. Boyum Vice President-Marketing and Sales and General Manager -
Confectionery of the Company since February 2000; Vice
President-Marketing and Sales of the Company since March
1995. Mr. Boyum is 53 years of age.
Edward P. Camp Vice President of the Company since April 1997 and
President-Hobby Division since October 1995. Previously,
Mr. Camp held a number of sales-related positions within
the Company. Mr. Camp is 58 years of age.
Michael P. Clancy Vice President-International of the Company since
December 1998 and Vice President since February 1995.
Mr.Clancy has been Managing Director - Topps
International Ltd. (formerly Topps Ireland) since July
1990 and was Joint Managing Director - Topps Europe Ltd.
from January 1997 to December 1998. Mr. Clancy is 50
years of age.
Michael J. Drewniak Vice President-Manufacturing of the Company since March
1991. Mr. Drewniak previously held the position of
General Manager - Manufacturing Operations. Mr. Drewniak
is 68 years of age.
Ira Friedman Vice President-Publishing and New Product Development
of the Company since September 1991. Mr. Friedman
joined the Company in October 1988. Mr. Friedman is 51
years of age.
Warren Friss Vice President-General Counsel and General Manager
Sports. Mr. Friss was General Manager - Sports of the
the Company since February 2005, Vice President and
Internet Business General Manager since June 2001, and
General Counsel of the Company since February 2000. Mr.
Friss joined the Company as Deputy General Counsel in
May 1995. Mr. Friss is 41 years of age.
Position with the Company and business
Name experience during the past five years
---- --------------------------------------
Catherine K. Jessup Vice President-Chief Financial Officer and Treasurer.
Ms. Jessup was Treasurer of the Company since July 2004
and Chief Financial Officer of the Company since July
1995. Prior to joining the Company, Ms. Jessup held
a number of positions with PepsiCo (a food products
company) from 1981 to July 1995. Ms. Jessup is 49 years
of age.
Michael K. Murray Vice President - Confectionery Sales of the Company
since October 2004. Prior to joining the Company, Mr.
Murray was Vice President - Regional Director of Sales
North America for Reckitt Benckiser PLC. Mr Murray is
47 years of age.
William G. O'Connor Vice President-Administration of the Company since
September 1991. Mr. O'Connor was an Assistant Secretary
of the Company from June 1982 until June 1994. Mr.
O'Connor is 56 years of age.
John Perillo Vice President-Operations of the Company since April
1995 and Vice President-Controller and Chief Financial
Officer of the Company from April 1990 to July 1995.
Mr. Perillo is 48 years of age.
Christopher Rodman Vice President - Topps Europe of the Company since
October 2004. Previously, Mr. Rodman was Managing
Director, Topps Europe since November 1997. Mr. Rodman
joined the Company in July 1995 with the acquisition of
Merlin Publishing. Mr. Rodman is 48 years of age.
Scott Silverstein President of the Company and Chief Operating Officer
since August 2004. Previously, Mr. Silverstien was
Executive Vice President of the Company since February
2000. Prior thereto, Mr. Silverstein ran the Pokemon
business for Topps since 1999 and was Vice President
- Business Affairs and General Counsel of the Company
since February 1995. Mr. Silverstein held the position
of General Counsel from July 1993 until February 2000.
Mr. Silverstein is the son-in-law of Mr. Shorin, the
Company's Chairman of the Board and Chief Executive
Officer. Mr. Silverstein is 43 years of age.
ITEM 2. PROPERTIES
The location and general description of the principal properties owned or
leased by the Company are as follows:
Owned or Leased,
Area/Facility If Leased,
Location Type of Facility Square Footage Expiration Year
-------- ---------------- -------------- ----------------
Duryea, Pennsylvania*** Office and warehouse 71,000 Leased; 2006
Scranton, Pennsylvania* Manufacturing plant 41,000 Owned
Seattle, Washington** Office 19,000 Leased; 2006
Cork, Ireland* Office 8,000 Leased; 2006
New York, New York*** Executive offices 60,000 Leased; 2009
Cincinnati, Ohio** Warehouse 14,000 Leased; 2006
Milton Keynes, United Kingdom*** Office and warehouse 12,000 Leased; 2014
Milan, Italy*** Office 7,000 Leased; 2008
The Company also leases offices in Delaware, Canada and Argentina.
The Company believes that its active facilities are in good repair and are
suitable for its needs for the foreseeable future.
* Serves confectionery segment.
** Serves entertainment segment.
*** Serves both business segments.
ITEM 3. LEGAL PROCEEDINGS
In November 2000, the Commission of the European Communities (the
"Commission") began an investigation into whether Topps Europe's past
distribution arrangements for the sale of Pokemon products complied with
European law (the "EU investigation"). On June 17, 2003, the Commission filed a
Statement of Objections against The Topps Company, Inc. and its European
subsidiaries, therein coming to a preliminary conclusion that these entities
infringed Article 81 of the EC treaty during 2000 by preventing parallel trade
between member states of the European Union. A hearing in front of the European
Commission Tribunal took place on October 23, 2003, and on May 27, 2004, the
Commission found The Topps Company, Inc. and its European subsidiaries jointly
and severally liable for infringement of Article 81(1) of the EC treaty. The
Commission imposed a total fine of 1.6 million euros ($1.9 million) which was
paid during fiscal 2005.
On February 17, 2000, Telepresence, Inc. sued Topps and nine other
manufacturers of trading cards (the "Defendants") in the Federal District Court
for the Central District of California for infringement of U.S. Patent No.
5,803,501 which was issued on September 8, 1998 (the "501 Patent"). In its suit,
Telepresence contended that the patent covers all types of "relic" cards that
contain an authentic piece of equipment, i.e., a piece of sporting equipment or
jersey. The court awarded summary judgment to the Defendants on the grounds that
the named Plaintiff (Telepresence, Inc.) did not have standing to sue for
infringement of the 501 patent. The motion was granted, and the litigation was
dismissed with prejudice on March 28, 2001.
After the dismissal, the 501 Patent was assigned to Media Technologies,
Inc. which is under the control of the same person (the inventor, Adrian Gluck)
who brought the Telepresence action. On November 19, 2001, Media Technologies
sued essentially the same group of defendants in the same court for infringement
of the 501 Patent. The court once again granted summary judgment and dismissed
the case with prejudice. The Court of Appeals for the Federal Circuit reversed
the judgment on July 11, 2003, and the case was returned to Judge Stotler in the
Central District of California for trial. On October 16, 2003, Media
Technologies amended its complaint by alleging that Defendants' sale of relic
cards additionally infringed U.S. Patent No. 6,142,532 (the "532 Patent") which
was issued on November 7, 2000 and is similar to the 501 Patent.
On March 17, 2004, Topps filed a motion for summary judgment based on
non-infringement while other defendants filed a motion for summary judgment
based on patent invalidity because of prior art. Both motions were denied on
July 26, 2004. On September 15, 2004, defendant Upper Deck Company, LLC ("Upper
Deck") moved for a separate trial on the issues of infringement, damages,
willfulness and counterclaims, a motion the other defendants subsequently
joined. On October 26, 2004, the court ruled that the patent validity issues
would be tried first, before those of infringement. The court otherwise refused
to bifurcate the trial.
On October 4, 2004, Defendants petitioned the United States Patent &
Trademark Office (the "PTO") to reexamine the patentability of both the 501
Patent and the 532 Patent. On October 25, 2004, Defendants also filed a motion
with the district court requesting a stay of the proceedings pending the
petition with the PTO. On December 2, 2004, the court denied the motion for the
stay. In mid-December, the PTO granted the petition for reexamination of the 501
and 532 Patents. Plaintiffs have petitioned the PTO to vacate the reexaminations
and have also filed papers requesting the PTO, in the event it decides to
proceed with the reexamination, to hold its claims patentable.
On December 29, 2004, Defendants once again filed a motion with the
district court requesting a stay of the proceedings while the PTO reexamines the
patentability of the 501 Patent and the 532 Patent. That motion was denied on
February 28, 2005, along with another motion to dismiss the case based on lack
of standing. The pretrial conference was held on March 21, 2005. Both parties
requested that the judge construe Plaintiff's issued patent claims, and
Defendants once again asked that the damages and infringement issues be tried
separately as to each party.
On May 23, 2005 the Company entered into a settlement agreement with Media
Technologies, Inc. ("Plaintiff") in which it would pay Plaintiff an immediate
sum of $2,000,000. Plaintiff agreed to dismiss all claims against the Company
and issue a license to the Company to distribute relic cards. The Company
further agreed that under certain conditions which may arise in the future, it
would make additional payments to the Plaintiff as part of the ongoing license.
The Company is currently evaluating the accounting of the settlement and the
license agreement See Footnote 15 - Legal Proceedings
The Company is a defendant in several other civil actions which are routine
and incidental to its business. In management's opinion, after consultation with
legal counsel, these other actions will not have a material adverse effect on
the Company's consolidated financial statements or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year ended February 26, 2005.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Reference is made to the data appearing on page 46 of the Annual Report
under the heading "Market and Dividend Information" which is hereby incorporated
by reference and reference is also made to the Equity Compensation Plan
Information on page 9 of the 2005 Proxy.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Reference is made to the data appearing on page 46 of the Annual Report
under the heading "Selected Consolidated Financial Data" which is hereby
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to the data appearing on pages 7 through 14 of the Annual
Report under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which is hereby incorporated by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the data appearing on page 14 of the Annual Report
under the heading "Disclosures about Market Risk" which is hereby incorporated
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the data appearing on pages 15 through 43 and to the
Report of Independent Registered Public Accounting Firm appearing on page 44 of
the Annual Report which are hereby incorporated by reference.
ITEM 9. CHANGES IN ACCOUNTANTS AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our reports filed pursuant to the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
for timely decisions regarding required disclosure. In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
As of the end of the period covered by this report (the "Evaluation Date"),
we carried out an evaluation, under the supervision and with the participation
of our management, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based on the foregoing, we have concluded
that, as of the Evaluation Date, our disclosure controls and procedures were
effective.
(b) Design and Evaluation of Internal Control Over Financial Reporting
Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to
include in this Annual Report on Form 10-K/A (i) a report from our management
regarding the Company's internal controls over financial reporting, which report
is required to include, among other things, an assessment and statement as to
the effectiveness of our internal controls over financial reporting as of
February 26, 2005 and (ii) an attestation report from our independent registered
public accounting firm on management's assessment of such internal controls.
(c) Changes in Internal Control Over Financial Reporting
There have not been any changes in our internal controls over financial
reporting during the fiscal quarter ended February 26, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reports.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information required by this item appears in Part I of this Report on Form
10-K under the heading "Executive Officers of the Company" and in the 2005 Proxy
Statement and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item appears in the 2005 Proxy Statement and
is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item appears in the 2005 Proxy Statement and
is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item appears in the 2005 Proxy Statement and
is hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item appears in the 2005 Proxy Statement and
is hereby incorporated by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1&2) Financial Statements and Financial Statement Schedules
Index to Financial Statements:
The following Consolidated Financial Statements included in the Annual
Report are hereby incorporated by reference to Item 8:
Consolidated Statements of Operations - For Fiscal Years Ended March
1, 2003, February 28, 2004 and February 26, 2005.
Consolidated Balance Sheets February 28, 2004 and February 26, 2005.
Consolidated Statements of Cash Flows For Fiscal Years Ended March 1,
2003, February 28, 2004 and February 26, 2005.
Consolidated Statements of Stockholders' Equity and Comprehensive
Income For Fiscal Years Ended March 1, 2003, February 28, 2004 and
February 26, 2005.
Notes to Consolidated Financial Statements.
Index to Independent Registered Public Accounting
Firm's Report and Financial Statement Schedules
Page No.
Schedule I -- Valuation and Qualifying Accounts -
For Fiscal Years Ended March 1, 2003, February 28, 2004
and February 26, 2005 ............................................S-1
Schedules other than those listed above are omitted because
they are either not required or not applicable or the required
information is shown in the Consolidated Financial Statements
or Notes thereto.
(3) Listing of Exhibits
3.1 - Restated Certificate of Incorporation of the Company (Incorporated
by reference to Exhibit 3.1 to the Company's Report on Form 8-K dated
December 2, 1991 SEC File Number 000-15817).
3.2 - Restated By-laws of the Company (Incorporated by reference to
Exhibit 3.2 to the Company's Report on Form 8-K dated December 2, 1991
SEC File Number 000-15817).
10.1 - The Topps Company, Inc. Executive Officers' Annual Bonus Plan
(Incorporated by reference to Exhibit 3.2 to the Company's Report on
Form 8-K dated April 12, 2005).
10.2 - The Topps Company, Inc. Bonus Plan for Scott Silverstien, effective
August 4, 2004 (Incorporated by reference to Exhibit 10-23 to the
Company Quarterly Report for the quarter ended August 28, 2004 SEC
File Number 000-15817)
10.3 - Retirement Plan and Trust as amended and restated effective February
28, 1993 (Incorporated by reference to the Company's Annual Report on
Form 10-K for the fiscal year ended February 26, 1994 SEC File Number
000-15817).
10.4 - Supplemental Pension Agreement with Arthur T. Shorin (Incorporated
by reference to Exhibit 10.16 to the Company's Registration Statement
on Form S-1(No. 33-130821)).
10.5 - Amendment to Supplemental Pension Agreement with Arthur T. Shorin
dated May 18, 1994 (Incorporated by reference to the Company's Annual
Report on Form 10-K for the fiscal year ended February 25, 1995 SEC
File Number 000-15817).
10.6 - License Agreement and Letter Amendment thereto with Major League
Baseball Promotion Corporation (Incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the fiscal year
ended March 2, 1991 SEC File Number 000-15817).
10.7 - Letter Amendment effective January 1, 2001 to the License Agreement
dated January 1, 1969 and Letter Amendments thereto between the
Company and Major League Baseball Properties, Inc. Portions have been
redacted subject to an application to the Securities Exchange
Commission for confidential treatment. (Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report for the quarter ended
November 29, 2003.)
Index to Exhibits (continued)
10.8 - Stock Option Agreement with Arthur T. Shorin dated March 29, 1995
(Incorporated by reference to Exhibit 10.12 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 25, 1995 SEC
File Number 000-15817).
10.9 - Agreement of Lease with One Whitehall Company dated February 24,
1994 (Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended February 26, 1994 SEC File Number
000-15817).
10.10- Amendment and Restatement of the 1994 Non-Employee Director Stock
Option Plan. (Incorporated by reference to the Company's 1998 Proxy
Statement filed on May 28, 1998 SEC File Number 000-15817).
10.11- Corporate Guaranty in favor of the Bank of Scotland (Incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 25, 1995 SEC File Number 000-15817).
10.12- 1996 Stock Option Plan and form of agreement pursuant to 1996 Stock
Option Plan. (Incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended March 2, 1996 SEC File Number
000-15817).
10.13- Amended and Restated Manufacturing Agreement with Hershey Foods
Corporation, dated March 13, 1998. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended August
29, 1998).
10.14- Credit Agreement, dated September 7, 2004, between The Topps
Company, Inc. and The JPMorganChase Bank. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the period year
ended August 28, 2004).
10.15- 2001 Stock Incentive Plan (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended March
2, 2002).
10.16- Memorandum of Agreement between the Company and Major League
Baseball Players' Association dated January 6, 2003 (Incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March 1, 2003).
Index to Exhibits (continued)
10.17- Amended and Restated Employment Agreement (the "Agreement"),
effective as of the 1st day of June, 2001, by and between The Topps
Company, Inc., a Delaware corporation (the "Company"), and Arthur T.
Shorin, a resident of New York (the "Executive") (Incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended March 1, 2003).
10.18- Employment Agreement, dated as of July 9, 2003 between WizKids. LLC
and Jordan K. Weisman. (Incorporated by reference to Exhibit 10.1 to
the Company's Form 10-Q filed November 29, 2003).
10.19- First Amendment, effective August 1, 2003, to the Employment
Agreement, dated as of July 9, 2003 between WizKids. LLC and Jordan K.
Weisman. (Incorporated by reference to Exhibit 10.1 to the Company's
Form 10-Q filed November 29, 2003).
10.20- Second Amendment, effective October 1, 2003, to the Employment
Agreement, dated as of July 9, 2003 between WizKids. LLC and Jordan K.
Weisman. (Incorporated by reference to Exhibit 10.1 to the Company's
Form 8-K filed July 24, 2003).
10.21- Preferability Letter from Deloitte & Touche regarding the change in
the measurement date for impairment of goodwill. (Incorporated by
reference to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 2004 SEC File Number 000-15817).
10.22- First Amendment, effective October 11, 2004 to the Amended and
Restated Employment Agreement , by and between The Topps Company, Inc.
and Arthur T. Shorin in which he consented to remove the title of
President of the Corporation. (Incorporated by reference to the
Company's Form 10-Q filed November 27, 2004).
10.23- License Agreement between Topps Europe Ltd., a wholly-owned
subsidiary of The Topps Company, Inc., and The Football Association
Premier League Ltd. Dated September 30, 2003 (Incorporated by
reference to Exhibit 10.25 of the Company's Quarterly Report on Form
10-Q for the period year ended August 28, 2004).
10.24- The Topps Company, Inc. Executive Severance Plan, effective July 1,
2004*
13 Annual Report (except for those portions specifically incorporated by
reference, the 2005 Annual Report to Stockholders is furnished for the
information of the Commission and is not to be deemed "filed as part
of this filing").*
21 Significant subsidiaries of the Company (Incorporated by reference in
the Annual Report to Stockholders).
23 Deloitte Consent
31.1 Certification of Principal Executive Officer pursuant to Rules
13(a)-14(a) and 15(d)-14(a) under the Securities Exchange Act of
1934.*
31.2 Certification of Principal Financial Officer pursuant to Rules
13(a)-14(a) and 15(d)-14(a) under the Securities Exchange Act of
1934.*
32.1 Certification of Arthur T. Shorin, Chairman and Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Catherine K. Jessup, Vice-President 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.*
*filed herewith
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.
Dated: May 12, 2005 THE TOPPS COMPANY, INC.
-----------------------
Registrant
/s/Arthur T. Shorin
------------------------
Arthur T. Shorin
Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed on the 12th day of May 2005 by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/Arthur T. Shorin /s/Catherine K. Jessup
------------------- ----------------------
Arthur T. Shorin Catherine K. Jessup
Chairman and Chief Executive Vice President-Chief Financial Officer
Officer and Treasurer (Principal Financial
(Principal Executive Officer) Accounting Officer)
/s/Allan A. Feder /s/David Mauer
----------------- --------------
Allan A. Feder David Mauer
Director Director
/s/Stephen D. Greenberg /s/Jack H. Nusbaum
----------------------- ------------------
Stephen D. Greenberg Jack H. Nusbaum
Director Director
/s/Ann Kirschner /s/Richard Tarlow
---------------- -----------------
Ann Kirschner Richard Tarlow
Director Director
/s/Edward Miller /s/Stanley Tulchin
---------------- ------------------
Edward Miller Stanley Tulchin
Director Director
VALUATION AND QUALIFYING ACCOUNTS -- Years Ended Mar 1, 2003, February 28, 2004,
and February 26, 2005
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
SCHEDULE I - VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
Column A Column B Column C Column D Column E
--------------------------------- ------------ --------------------- ------------ -------------
Balance Charged to Charged Balance
at Beginning Costs and Against Additions At End
Description of Period Expenses Sales (Deductions) of Period
----------- ------------ ---------- --------- ------------- ------------
Year Ended March 1, 2003:
------------------------
Accumulated Amortization of Sports,
Entertainment and Proprietary
Products $ 36,363 $ -- $ -- $(36,363)(g) $ --
Accumulated Amortization of Other
Intangible Assets 12,419 1,160 -- 18,090 (g) $ 31,669
-------- ------- -------- --------- --------
$ 48,782 $ 1,160 $ -- $(18,273) $ 31,669
======== ======= ======== ========= ========
Reserve for Estimated Returns $ 15,875 $ -- $ 22,413 $(21,845)(b) $ 16,443
======== ======= ======== ========= ========
Reserve for Doubtful Accounts $ 1,234 $ 456 $ -- $ ( 88)(c) $ 1,602
======== ======= ======== ========= ========
Reserve for Cash Discounts $ 415 $ -- $ 4,660 $ (4,110)(d) $ 965
======== ======= ======== ========= ========
Reserve for Customer Deductions $ -- $ 528 $ -- $ -- (e) $ 528
======== ======= ======== ========= ========
Reserve for Obsolete Inventory $ 4,525 $ 3,298 $ -- $ (4,296)(f) $ 3,527
======== ======= ======== ========= ========
======================================================================================================
Year Ended February 28, 2004:
-----------------------------
Accumulated Amortization of Other
Intangible Assets $ 31,669 $ 2,333 $ -- $ (762)(a) $ 33,240
======== ======= ======== ========= ========
Reserve for Estimated Returns $ 16,443 $ -- $ 17,404 $(14,331)(b) $ 19,516
======== ======= ======== ========= ========
Reserve for Doubtful Accounts $ 1,602 $ (143) $ -- $ (810)(c) $ 649
======== ======= ======== ========= ========
Reserve for Cash Discounts $ 965 -- $ 3,882 $ (3,410)(d) $ 1,437
======== ======= ======== ========= ========
Reserve for Customer Deductions $ 528 $ 1,132 $ -- $ (528)(e) $ 1,132
======== ======= ======== ========= ========
Reserve for Obsolete Inventory $ 3,527 $ 7,462 $ -- $ (3,874)(f) $ 7,115
======== ======= ======== ========= ========
======================================================================================================
Year Ended February 26, 2005:
-----------------------------
Accumulated Amortization of Other
Intangible Assets $ 33,240 $ 1,797 $ -- $ -- $ 35,037
======== ======= ======== ========= ========
Reserve for Estimated Returns $ 19,516 $ -- $ 22,020 $(20,712)(b) $ 20,824
======== ======= ======== ========= ========
Reserve for Doubtful Accounts $ 649 $ (110) $ -- $ (276)(c) $ 263
======== ======= ======== ========= ========
Reserve for Cash Discounts $ 1,437 $ -- $ 4,692 $ (4,685)(d) $ 1,444
======== ======= ======== ========= ========
Reserve for Customer Deductions $ 1,132 $ -- $ 883 $ (1,132)(e) $ 883
======== ======= ======== ========= ========
Reserve for Obsolete Inventory $ 7,115 $ 4,917 $ -- $ (7,741)(f) $ 4,291
======== ======= ======== ========= ========
======================================================================================================
a) Write-off of thePit.com marketing agreement.
b) Returns charged against provision, net of recoveries.
c) Bad debt write-offs
d) Early payment discounts taken by customers.
e) Pricing allowance and slotting credits issued to customers.
f) Disposals, net of recoveries.
g) Reclassifed (to)/from goodwill accumulated amotization
in accordance with FAS 142.
S-1
The Topps Company, Inc.
Executive Severance Plan
Summary Plan Description/Plan Document
1. General Information
(a) The Topps Company, Inc. Executive Severance Plan (the "Plan") provides
a select group of management or highly compensated designated executives of The
Topps Company, Inc. (the "Company") with severance pay if they are separated
from service with the Company for the reasons described herein.
(b) Notwithstanding any other provision of the Plan, as of the date any
employee becomes an "Eligible Employee" (as defined below), the Plan supersedes
any and all prior plans, policies, or practices, written or oral, which may have
previously applied governing the payment of severance to such Eligible Employee,
including, but not limited to The Topps Company, Inc. Severance Plan, effective
February 1, 2003.
(c) The Plan is adopted and effective as of July 1, 2004 (the "Effective
Date").
(d) This Summary Plan Description/Plan Document is intended to comply with
the requirements of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
2. Definitions. For purposes of the Plan, the following definitions shall
apply:
(a) "Base Salary" shall mean the Participant's base annual salary,
excluding shift premiums, overtime, bonuses, commissions, other special payments
or any other allowance.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Cause" shall mean that an Eligible Employee has (i) refused or
repeatedly failed to perform the duties assigned to him/her; (ii) engaged in a
willful or intentional act that has the effect of injuring the reputation or
business of the Company in any material respect; (iii) continually or repeatedly
been absent from the Company, unless due to serious illness or disability; (iv)
used illegal drugs or been impaired due to other substances; (v) been convicted
of any felony; (vi) committed an act of gross misconduct, fraud, embezzlement or
theft against the Company; (vii) engaged in any act of such extreme nature that
the Company determines to be grounds for immediate dismissal, including, but not
limited to harassment of any nature; or (viii) violated a material company
policy; provided, however, that following a Change in Control, a termination for
Cause pursuant to clause (i) shall only be permitted if the Eligible Employee's
refusal or repeated failure to perform the duties assigned to him/her were
willful and deliberate on the Eligible Employee's part or committed in bad faith
or without reasonable belief that such refusal or failure was in the best
interests of the Company. The determination of whether any conduct, action or
failure to act on the part of any Eligible Employee constitutes Cause shall be
made by the CEO in the CEO's sole discretion; provided, however, that following
a Change in Control, any such determination by the CEO shall be approved by the
Successor Compensation Committee.
(d) "Change in Control" shall have the meaning assigned to it in the
Company's 2001 Stock Incentive Plan, except that, in determining whether a
Change in Control has occurred, the fact that the Board may have previously
approved the acquisition of voting securities, or tender or exchange offer for
the purchase of the Company's common stock, shall be disregarded.
(e) "CEO" shall mean the Chief Executive Officer of the Company.
(f) "Disability" shall mean the Eligible Employee's absence from his/her
duties with the Company on a full-time basis for at least 180 consecutive days
as a result of the Eligible Employee's incapacity due to physical or mental
illness.
(g) "Eligible Employee" shall mean an executive of the Company, other than
the CEO, who has been selected by the CEO as a covered employee under this Plan
and who has executed the Acknowledgment and Acceptance of the Terms and
Conditions of the Plan and agreed to be bound by the terms and conditions of the
Plan.
(h) "Good Reason" shall mean the occurrence of any of the following events
following a Change in Control, without the Eligible Employee's express written
consent:
(i) the assignment to the Eligible Employee of any duties which
constitute, in any material respect, a change in the Eligible Employee's
position(s), duties or responsibilities with the Company immediately prior
to such Change in Control;
(ii) a reduction in the Eligible Employee's Base Salary or bonus
opportunity as in effect immediately prior to such Change in Control or as
the same may be increased from time to time thereafter;
(iii) any requirement that the Eligible Employee be based more than
thirty (30) miles from the Eligible Employee's principal place of
employment immediately prior to the Change in Control;
(iv) the failure of the Successor to (A) continue in effect any
employee benefit plan or compensation plan in which the Eligible Employee
and the Eligible Employee's eligible dependants are participating
immediately prior to such Change in Control, unless the Eligible Employee
is permitted to participate in other plans providing the Eligible Employee
with substantially equivalent benefits in the aggregate or (B) provide the
Eligible Employee with paid vacation in accordance with the plans,
practices, programs and policies of the Company and its affiliated
companies in effect for the Eligible Employee immediately prior to such
Change in Control or as in effect generally at any time thereafter with
respect to other peer executives of the Company.
For purposes of this Plan, any good faith determination of Good Reason made
by the Eligible Employee shall be conclusive; provided, however, that an
isolated, insubstantial and inadvertent action taken in good faith and
which is remedied by the Successor promptly after receipt of notice thereof
given by the Eligible Employee shall not constitute Good Reason.
(i) "Participant" shall mean an Eligible Employee whose employment has been
terminated for any of the reasons set forth in Section 3(b) below.
(j) "Plan Administrator" shall have the meaning assigned to it in Section
6(e) below.
(k) "Release" shall mean an agreement releasing any and all claims the
Participant may have against, among others, the Company, its parents,
subsidiaries, affiliates and each of its current and former shareholders,
officers, and directors, each of the foregoing in their capacity as such.
(l) "Successor" shall mean the Company's successor in interest or other
entity acquiring control of the Company or its assets as a result of a Change in
Control.
(m) "Successor Compensation Committee" shall mean the Compensation
Committee of the Board of Directors of the Successor; provided, however, that if
the Successor does not have a Compensation Committee, "Successor Compensation
Committee" shall refer to such entity's full Board of Directors or similar
governing body.
(n) "Termination Date" shall mean the last official work day for which the
Participant receives pay for service with the Company.
(o) "Years of Service" shall mean a Participant's completed year of service
measured from his/her date of hire by the Company; provided, however, that
following the completion of the Participant's first Year of Service, a
Participant will be considered to have completed a full Year of Service after
completing six (6) months of service in that year.
3. Eligibility for Severance Benefits
(a) The Plan Administrator shall provide each Eligible Employee with
written notice of his/her eligibility in the Plan. Such notification shall be
delivered to the Eligible Employee as soon as practicable following the
Effective Date.
(b) An Eligible Employee shall become a "Participant" for purposes of this
Plan, if his/her employment is terminated for any of the following reasons:
(i) Termination of employment by the Company without Cause and such
termination is unrelated to a Change in Control of the Company (a
"Non-Change in Control Termination"), or
(ii) Termination of employment by (A) the Company without Cause in
connection with a Change in Control of the Company or within two years
following a Change in Control of the Company or (B) the Eligible Employee
for Good Reason within two years following a Change in Control of the
Company (either of which shall be referred to as a "Change in Control
Termination").
4. Severance Benefits
(a) Severance Benefit Amounts.
(i) Non-Change in Control Termination. Subject to Section 4(b) below,
in the event a Participant becomes entitled to benefits pursuant to Section
3(b)(i) above, the Company shall pay to the Participant a lump sum payment
equal to the sum of (A) six (6) weeks of Base Salary (determined as of the
Termination Date) and (B) one (1) week of Base Salary (determined as of the
Termination Date) for each Year of Service, provided, however, that each
such Participant shall receive a minimum of eight (8) weeks of Base Salary
(determined as of the Termination Date).
(ii) Change in Control Termination. Subject to Section 4(b) below, in
the event a Participant becomes entitled to benefits pursuant to Section
3(b)(ii) above, the Company shall pay to the Participant a lump sum payment
equal to two (2) times the sum of (A) the Participant's Base Salary
(determined as of the Termination Date) and (B) the Participant's highest
annual bonus paid or payable with respect to any of the last three fiscal
years of the Company that ended immediately prior to the Termination Date.
(b) Notwithstanding anything contained herein to the contrary, the payments
to be provided to the Participant as set forth in Section 4(a):
(i) shall be lieu of any and all benefits otherwise provided under any
severance pay policy, plan or program maintained from time to time by the
Company for its employees, including, but not limited to any and all
provisions relating to severance or separation benefits that are contained
in any written employment agreement entered into between the Company and
the Participant or any offer letter received from the Company; and,
(ii) shall not be paid upon termination of the Eligible Employee's
employment (A) by the Company for Cause, (B) by the Eligible Employee for
any reason prior to a Change in Control, (C) by the Eligible Employee for
any reason other than Good Reason following a Change in Control, (D) as a
result of the Eligible Employee's death, or (E) by the Company due to a
Disability; and
(iii) shall not be due or paid or made available hereunder unless and
until the Participant or his representative has executed a Release, and any
applicable revocation period described in such Release has expired.
(c) Taxes on Severance Pay. Severance payments are considered taxable
income. All appropriate federal, state and local taxes will be withheld from all
severance pay.
(d) Severance Benefit Offsets. Payment of severance benefits pursuant to
this Plan shall not be subject to offset, counterclaim, recoupment, defense or
other claim, right or action which the Company may have, provided, however, that
the amount of the severance benefit which any Participant is entitled to receive
under the Plan shall be reduced, on a dollar for dollar basis, by all amounts,
if any, which the Participant is entitled to receive as a result of the
circumstances of his or her termination under the Federal Worker Adjustment and
Retraining Notification Act (Pub. L. 100-379) or other similar federal, state or
local statute. Payment of severance benefits pursuant to this Plan shall not be
subject to a requirement that the Participant mitigate or attempt to mitigate
damages resulting from the Participant's termination of employment.
(e) Continuation of Benefits in the Event of Death. In the event a
Participant dies prior to receipt of his or her entire severance benefit, the
remaining portion of such severance benefit shall continue to be paid, in the
same form as it was paid prior to death, to the Participant's spouse, or if the
Participant is not married on the date of death, to the Participant's estate.
5. Restrictive Covenants. In consideration for the benefits provided under
this Plan, each Participant hereby agrees and acknowledges to be bound to the
following restrictive covenants:
(a) Confidentiality. Except as may be required by law or legal process, the
Participant shall not at any time during the course of his/her employment or
after the Termination Date disclose to any person or entity or use any
information not in the public domain or generally known in the industry that the
Company treats as confidential or proprietary, in any form, acquired by the
Participant while employed by the Company or any predecessor to the Company's
business or, if acquired following the Termination Date, such information which,
to the Participant's knowledge, has been acquired, directly or indirectly, from
any person or entity owing a duty of confidentiality to the Company or any of
its subsidiaries or affiliates, including but not limited to information
regarding clients, customers, investors, vendors, suppliers, trade secrets,
training programs, manuals or materials, technical information, contracts,
systems, procedures, mailing lists, know-how, trade names, improvements, price
lists, financial or other data (including the revenues, costs or profits
associated with any of the Company's products or services), business plans, code
books, invoices and other financial statements, computer programs, software
systems, databases, discs and printouts, plans (business, technical or
otherwise), customer and industry lists, correspondence, internal reports,
personnel files, sales and advertising material or any other compilation of
information, written or unwritten, which is or was used in the business of the
Company or any subsidiaries or affiliates thereof. The Participant agrees and
acknowledges that all of such information, in any form, and copies and extracts
thereof, are and shall remain the sole and exclusive property of the Company,
and upon the Termination Date, the Participant shall return to the Company the
originals and all copies of any such information provided to or acquired by the
Participant in connection with the performance of his duties for the Company,
and shall return to the Company all files, correspondence and/or other
communications received, maintained and/or originated by the Participant during
the course of his/her employment.
(b) Non-Compete. The Participant acknowledges and recognizes the highly
competitive nature of the businesses of the Company and its affiliates and
accordingly agrees that in the event of a Change in Control Termination pursuant
to Section 3(b)(ii) above, during the six (6) month period following the
Termination Date, the Participant shall not, directly or indirectly, whether as
an employee, consultant, owner, shareholder, partner, member or otherwise, (i)
engage in any business for his/her own account of the type performed by the
Company in the geographic areas where the Company is actively doing business or
soliciting business at the time of the Participant's termination ("Competitive
Business"); (ii) enter the employ of, or render any services to, any person
engaged in a Competitive Business; or (iii) acquire a financial interest in, or
otherwise become actively involved with, any person engaged in a Competitive
Business. Notwithstanding anything contained herein to the contrary, the
Participant may, directly or indirectly own, solely as an investment, securities
of any person engaged a Competitive Business which are publicly traded on a
national or regional stock exchange or on the over-the-counter market if he/she
(A) is not a controlling person of, or a member of a group which controls, such
person and (B) does not, directly or indirectly, own 5% or more of any class of
securities of such person.
(c) Non-Solicitation. In the event of a Change In Control Termination
pursuant to Section 3(b)(ii) above, for a period of six (6) months following the
Termination Date, the Participant shall not, whether for his/her own account or
for the account of any other individual, partnership, firm, corporation or other
business organization, directly or indirectly: (i) solicit, endeavor to entice
away from the Company or any of its subsidiaries or affiliates, or otherwise
directly interfere with the relationship of the Company or any of its
subsidiaries or affiliates with any person who, to the knowledge of the
Participant, is or was within the then most recent twelve-month period, a
customer or client of the Company, its predecessors or any of its subsidiaries
or (ii) attempt to influence, persuade or induce, or assist any other person in
so persuading or inducing, any employee of the Company to give up, or to not
commence, employment or a business relationship with the Company.
(d) Non-Disparagement. The Participant agrees that he/she will make no
disparaging or defamatory comments regarding the Company or its directors,
officers, shareholders or employees in any respect or make any comments
concerning any aspect of the Participant's relationship with the Company or the
conduct or events which precipitated the Participant's termination of employment
from the Company. The obligations of the Participant under this Section 5(d)
shall not apply to disclosures required by applicable law, regulation or order
of a court or governmental agency.
(e) Acknowledgment: In consideration for the benefits provided under this
Plan, each Participant acknowledges and confirms that (i) the restrictive
covenants contained in this Section 5 are reasonably necessary to protect the
legitimate business interests of the Company, and (ii) the restrictions
contained in this Section 5 (including without limitation the length of the term
of the provisions of this Section 5) are not overbroad, overlong, or unfair and
are not the result of overreaching, duress or coercion of any kind. The
Participant further acknowledges and confirms that his/her full, uninhibited and
faithful observance of each of the covenants contained in this Section 5 will
not cause him/her any undue hardship, financial or otherwise, and that
enforcement of each of the covenants contained herein will not impair his/her
ability to obtain employment commensurate with his/her abilities and on terms
fully acceptable to him/her or otherwise to obtain income required for the
comfortable support of him/her and his/her family and the satisfaction of the
needs of his/her creditors. The Participant acknowledges and confirms that
his/her special knowledge of the business of the Company is such as would cause
the Company serious injury or loss if he/she were to use such ability and
knowledge to the benefit of a competitor or were to compete with the Company in
violation of the terms of this Section 5. The Participant further acknowledges
that the restrictions contained in this Section 5 are intended to be, and shall
be, for the benefit of and shall be enforceable by, the Company's successors and
assigns.
(f) Reformation by the Court: In the event that a court of competent
jurisdiction shall determine that any provision of this Section 5 is invalid or
more restrictive than permitted under the governing law of such jurisdiction,
then only as to enforcement of this Section 5 within the jurisdiction of such
court, such provision shall be interpreted and enforced as if it provided for
the maximum restriction permitted under such governing law.
(g) Injunction: It is recognized and hereby acknowledged by the parties
hereto that a breach by the Participant of any of the covenants contained in
this Section 5 will cause irreparable harm and damage to the Company, the
monetary amount of which may be virtually impossible to ascertain. As a result,
the Participant recognizes and hereby acknowledges that the Company shall be
entitled to an injunction from any court of competent jurisdiction enjoining and
restraining any violation of any or all of the covenants contained in this
Section 5 by the Participant or any of his/her affiliates, associates, partners
or agents, either directly or indirectly, and that such right to injunction
shall be cumulative and in addition to whatever other remedies the Company may
possess.
6. Administrative Information
(a) Plan Name. The full name of the Plan is The Topps Company, Inc.
Executive Severance Plan.
(b) Plan's Sponsor. The Plan is sponsored by The Topps Company, Inc., One
Whitehall Street, New York, NY 10004-2109, (212) 376-0300.
(c) Plan Number and Employer Identification Number. The employer
identification number (EIN) assigned by the Internal Revenue Service to the Plan
Sponsor is 11-2849283. The Plan number assigned by the Company pursuant to
instructions of the United States Department of Labor is 511.
(d) Type of Plan and Funding. The Plan is an employee welfare benefit plan
which is maintained primarily for the purpose of providing benefits to a select
group of management or highly compensated employees. The benefits provided under
the Plan are paid from the Company's general assets. No fund has been
established for the payment of Plan benefits. No contributions are required
under the Plan.
(e) Plan Administrator.
(i) The Plan shall be administered by the Vice President -
Administration of The Topps Company, Inc. (the "VP"), provided that, with
respect to benefits provided under the Plan to the VP, the Executive Vice
President of The Topps Company, Inc. (the "EVP") shall administer the Plan;
further, provided, that, following a Change in Control, the Plan shall be
administered by the Successor Compensation Committee. The term "Plan
Administrator" shall refer to the VP, except as described in the preceding
sentence, in which case the "Plan Administrator" shall refer to the EVP or
the Successor Compensation Committee.
(ii) The Plan Administrator has full responsibility for the operation
of the Plan. Supervisors or other officers of the Company are not
authorized to interpret provisions of the Plan or make representations
which are contrary to the provisions of the Plan document as interpreted by
the Plan Administrator. All correspondence and requests for information
should be directed as follows: The Topps Company, Inc., Plan Administrator,
The Topps Company, Inc. Severance Plan, One Whitehall Street, New York, NY
10004-2109, (212) 376-0300.
(iii) Subject to the express provisions of this Plan, the Plan
Administrator shall have sole authority to interpret the Plan (including
any vague or ambiguous provisions) and to make all other determinations
deemed necessary or advisable for the administration of the Plan. All
determinations and interpretations of the Plan Administrator shall be
final, binding and conclusive as to all persons.
(f) Agent for Service of Process. Should it ever be necessary, legal
process may be served on the Plan Administrator at: The Topps Company, Inc., One
Whitehall Street, New York, NY 10004-2109, Attn: General Counsel.
(g) Type of Administration. The Plan is administered by The Topps Company,
Inc.
(h) Plan Year. January 1 - December 31.
7. Plan Amendment or Termination.
The Company reserves the right, in its sole and absolute discretion to amend or
terminate, in whole or in part, any or all of the provisions of the Plan by
action of the Board (or a duly authorized committee thereof) at any time;
provided, however, that (i) any amendment that would reduce the aggregate level
of benefits or terminate the Plan shall not become effective prior to the second
anniversary of the Company giving notice to the Eligible Employees of such
amendment or termination; and (ii) that any such amendment or termination of the
Plan shall not affect the severance benefits payable under the Plan to any
Participant whose Termination Date has occurred prior to the effective date of
the amendment or termination of the Plan.
8. Other Important Plan Information
(a) Employment Rights Not Implied. Participation in the Plan neither gives
you the right to be retained in the employ of the Company, nor does it guarantee
your right to claim any benefit except as outlined in the Plan.
(b) Governing Law. The construction and administration of the Plan will be
governed by ERISA.
(c) No Liability. No director, officer, agent or employee of the Company
shall be personally liable in the event the Company is unable to make any
payments under the Plan due to a lack of, or inability to access, funding or
financing, legal prohibition (including statutory or judicial limitations) or
failure to obtain any required consent. In addition, neither the Plan
Administrator nor any employee, officer or director of the Company shall be
personally liable by reason of any action taken with respect to the Plan for any
mistake of judgment made in good faith, and the Company shall indemnify and hold
harmless each employee, officer or director of the Company, including the Plan
Administrator, to whom any duty or power relating to the administration or
interpretation of the Plan may be allocated or delegated, against any reasonable
cost or expense (including counsel fees) or liability (including any sum paid in
settlement of a claim with the approval of the Board) arising out of any act or
omission to act in connection with the Plan unless arising out of such person's
own fraud, bad faith or gross negligence.
9. Claims Appeal Procedure
The following information is intended to comply with the requirements of
ERISA and provides the procedures an employee may follow if he or she disagrees
with any decision about eligibility for Plan payments.
(a) An Eligible Employee will be informed as to whether or not he/she is a
Participant under the Plan, and thereby entitled to benefits under the Plan, on
or before the last day worked. Eligible Employees who believe they are entitled
to benefits under the Plan and do not receive notice of their status as a
Participant, or who have questions about the amounts they receive, must write to
the Plan Administrator within thirty (30) days of the date of their respective
termination.
(b) If the Plan Administrator denies an Eligible Employee's claim for
benefits under the Plan, the Eligible Employee will be sent a letter within
ninety (90) days (in special cases, more than 90 days may be needed and you will
be notified if this is the case) explaining:
(i) the specific reason or reasons for the denial;
(ii) the specific provisions on which the denial is based;
(iii) any additional material or information necessary for the
Participant to perfect the claim and an explanation of why such material or
information is necessary; and
(iv) an explanation of the Plan's claim review procedure.
(c) If payment is denied or the Eligible Employee disagrees with the amount
of the payment, he or she may file a written request for review within sixty
(60) days after receipt of such denial. This request should be filed with the
Plan Administrator. The letter which constitutes the filing of an appeal should
ask for a review and include the reasons why the Eligible Employee believes the
claim was improperly denied, as well as any other appropriate data, questions,
or comments. In addition, an Eligible Employee is entitled to:
(i) review documents pertinent to his or her claim at such reasonable
time and location as shall be mutually agreeable to the Eligible Employee
and the Plan Administrator; and
(ii) submit issues and comments in writing to the Plan Administrator
relating to its review of the claim.
(d) A final decision will normally be reached within sixty (60) days,
unless special circumstances require an extension of time for processing, in
which case a decision will be rendered as soon as possible. The Eligible
Employee will receive a written notice of the decision on the appeal, indicating
the specific reasons for the decision as well as specific references to the Plan
provisions on which the decision is based.
10. Statement of ERISA Rights
The following statement of ERISA rights is required by federal law and
rulings:
(a) As a person covered under the Plan, you are entitled to certain rights
and protections under ERISA. This law provides that all people covered by the
Plan are entitled to:
(i) Receive information about your plan and benefits.
(ii) Examine, without charge, all plan documents, including copies of
all documents filed by the Plan with the U.S. Department of Labor at the
Plan Administrator's offices.
(iii) Obtain copies of all plan documents and other plan information
by writing to the Plan Administrator and asking for them. The Plan
Administrator may make a reasonable charge for the copies.
(b) In addition to creating rights for persons covered by the Plan, ERISA
imposes duties upon the people who are responsible for the operation of the
Plan. The people who operate the Plan, called "fiduciaries" of the Plan, have a
duty to do so prudently and in your interest and in the interest of the other
people covered by the Plan. The law provides that no one may terminate you or
otherwise discriminate against you in any way to prevent you from getting a
benefit or exercising your rights under ERISA. The law provides that if your
claim for a benefit is denied in whole or in part, you will receive a written
notice explaining why your claim was denied. You have the right to have your
claim reviewed and reconsidered.
(c) Under ERISA, there are steps you can take to enforce your rights. For
instance, if you request copies of documents from the Plan Administrator and do
not receive them within thirty (30) days, you may file suit in federal court. In
such a case, the court may require the Plan Administrator to provide the
documents and pay up to $110 a day until you receive them, unless they were not
sent because of reasons beyond the control of the Plan Administrator.
(d) If you have a claim for benefits which is denied or ignored, in whole
or in part, you may file suit in a state or federal court that has jurisdiction.
If it should happen that the people who operate the Plan misuse the Plan's money
or if you are discriminated against for asserting your rights, you may ask the
U.S. Department of Labor for help, or you may file suit in a federal court. The
court will decide who should pay court costs and legal fees. If your suit is
successful, the court may order the person you have sued to pay costs and fees.
If you lose, the court may order you to pay these costs and fees, for example,
if it finds your claim is frivolous. If you have any questions about your rights
under ERISA, you should contact the nearest office of the Pension and Welfare
Benefits Administration, U.S. Department of Labor, listed in your telephone
directory or the Division of Technical Assistance and Inquiries, Pension and
Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution
Avenue N.W., Washington, D.C. 20210. You may also obtain certain publications
about your rights and responsibilities under ERISA by calling the publications
hotline of the Pension and Welfare Benefits Administration.
IN WITNESS WHEREOF, the Company has caused the Plan to be executed as of
the 1st day of July, 2004.
THE TOPPS COMPANY, INC.
By: /s/ William O'Connor
--------------------
William O'Connor
THE TOPPS COMPANY, INC.
EXECUTIVE SEVERANCE PLAN
ACKNOWLEDGMENT AND ACCEPTANCE OF
THE TERMS AND CONDITIONS OF THE PLAN
I acknowledge receipt of a copy of The Topps Company, Inc. Executive Severance
Plan (the "Plan"). I have familiarized myself with the information in the Plan
and do hereby agree to be bound by the terms and conditions of the Plan.
I understand and agree that my employment with The Topps Company, Inc. (the
"Company") will continue to be "at-will," that either the Company or I may
terminate my employment relationship with the Company at any time, and that
nothing in this Plan is intended to imply or create any guarantee of employment
between the Company and me.
Employee Signature Date
Please sign and return to Bill O'Connor
F'05 STOCKHOLDERS LETTER
Dear Stockholders,
At the conclusion of our letter in last year's Annual Report, we said our plan
for the upcoming fiscal year called for financial and strategic progress. Fair
to say, we kept only half of that bargain. Were it not for a European Commission
fine (previously disclosed) of $1.9 million, stemming from an investigation
initiated back in 2000, financial results would have approximated prior year,
but not ahead as envisioned.
Specifically, for the fiscal year 2005, consolidated Net Sales were $295.9
million versus $297.3 million in fiscal '04, with stronger European currencies
versus the prior year providing a $6.6 million benefit. Income from operations
was $12.0 million, versus $14.6 in the prior year. Excluding the fine, income
from operations in fiscal 2005 would have been $13.9 million.
Similarly, since the fine was not tax deductible, its full amount affected net
income which was $11.0 million or $0.27 per diluted share, compared with $12.7
million or $0.31 per diluted share last year. Were it not for the fine, net
income would have been $12.9 million or $0.31 per diluted share, essentially
flat with the prior year.
Strategic progress is a better story, marked by planned achievement. During the
year, we commissioned an outside consulting firm to conduct a thorough review of
our U.S. Confectionery and Entertainment business segments and to help us
develop potential growth opportunities for the future. We also gained a better
understanding of our strengths and weaknesses, the markets in which we operate
and our competition.
The balance of this letter is dedicated to providing you with background and
insights emanating from the strategic study and, to the extent practical, some
of the steps contemplated, or already being taken, toward implementation. We
hope you find the discussion of interest.
U.S. CONFECTIONERY
------------------
Over the last five years, Topps has gained market share, becoming a more
important player in the non-chocolate confectionery business.
During that time period, we built distribution with the help of a fact-based
selling approach, demonstrating that our products...
-- enjoy widespread consumer appeal,
-- generate high dollars per point of distribution, and
-- make more money for our trade partners than do many stock keeping
units (SKU's) of major competitors.
In fact, according to recent Nielsen reports on Food, Drug and Mass outlets,
three Topps brands, Baby Bottle Pop, Push Pop and Ring Pop are numbers four,
seven and nine, respectively, among the top ten best-selling SKU's in the
non-chocolate category.*
--------------------------------------------------------------------------------
*Source: AC Nielsen Total U.S. FDM (excluding Wal-Mart) 52 weeks ended March 19,
2005, dollar sales for non-chocolate candy category items less than 3.70 ounces
excluding mints, roll candy, breath fresheners, and gum.
Nonetheless, sales over this past year were lower than last, due in part to the
impact of industry trends such as retail consolidation and consumer nutritional
concerns. Because such factors appear to be abating, and the fact that we have a
variety of sales/marketing measures in the works, our plan calls for a return to
organic top line growth in fiscal '06.
Going forward, we will concentrate on further improvement in the breadth and
quality of our distribution, particularly as regards convenience stores. We will
restore advertising investments to historic levels or higher, redesign our
product development process and bolster sourcing activities. More detail about
each of these key areas may be helpful.
Distribution
------------
Reflecting the success of our distribution efforts over the last few years, we
have achieved an impressive presence at large grocery chains and mass
merchandisers. The strategic study showed that additional promise exists for us
in the convenience channel where previous in-store representation had been
insufficient. To that end, we have adopted a new go-to-market strategy that,
among other positives, will help us take advantage of this opportunity. Our
broker network has been consolidated, thus affording us greater leverage with
retailers by significantly increasing coverage at store level. We will now have
the benefit of a retail team visiting 40,000 targeted convenience stores at
least six times a year. The incremental costs of doing so are not
inconsequential but, in the long run, this investment should serve us well.
Advertising
-----------
TV advertising is one of the key drivers of our confectionery business. Early
this past year, based on the strong brand awareness levels enjoyed by our core
brands--each is over 90% with kids 6-14--we eased up somewhat on our advertising
levels. The study helped us understand that if we restored advertising to
historical levels, we could expect to see a demonstrable pay-off. Accordingly,
we increased ad spending in last year's 4th quarter and plan to exceed previous
levels in fiscal `06.
New Product Development
-----------------------
To date, we have taken an opportunistic approach to new product development.
Guided largely by instinct, we have created successful brands including Ring
Pop, Push Pop, Baby Bottle Pop and, most recently, Juicy Drop Pop, which
continues building up a head of steam, so to speak. All tolled, we've done very
well with new products but believe we can do even better through a more
disciplined, data driven, systematic development process that compliments our
creative capabilities.
Another key priority on the new product front will be to leverage our
investments in the brands we create. This may take the form of line extensions
and flankers, different packaging formats such as value bags to reach new
distribution targets and consumers and seasonal opportunities such as Halloween
and Easter.
Sourcing
--------
We will support the decision to place greater emphasis on new products by
significantly improving our sourcing capabilities. After all, with the exception
of Ring Pop for North America, we outsource all of our manufacturing. Today, we
are under-resourced in this area, but will begin devoting time, attention and
funding to improve performance against this important initiative.
One final note on Confectionery...when we referred to organic growth earlier
--"organic" implied not-by-acquisition. This is because we believe that for the
most part prices commanded by candy businesses today are simply out of our
reach. Still, Topps will continue keeping an eye open for affordable product
lines that can strengthen our portfolio and enhance our position in the market.
U. S. ENTERTAINMENT
-------------------
There are three key aspects to this segment: Sports Trading Cards, Publishing
and Collectible Gaming products.
Turning first to sports cards, it's no secret that the industry has experienced
a steady decline since reaching historic highs in the early 1990's. In fact, the
current level of all sport card sales is approximately $300MM in wholesale
dollars, having trended down over the past five years at an annual rate of
approximately 15%. Although a number of factors influenced these declines, the
study forcefully confirmed that the combination of product proliferation and
higher pack prices emerged as the key causes for losing young consumers and the
casual adult collector. Accordingly, going forward three elements will drive our
strategy:
o First, as referenced above, the sheer number of products in stores is
intimidating to all but the most serious card collector, driving
consumers away and creating a barrier to bringing in new ones.
Believing that current negative trends will persist unless there is a
significant reduction in the number of products introduced into the
marketplace, we will increase efforts to persuade our licensing
partners to aggressively address product proliferation.
o Second, we will expand our efforts toward creating more sports
products that are specifically designed for kids. This is going to
take significant investments of time and money, but given that kids
have all but left sports trading cards, the benefit of recapturing
them can be substantial. Work in this area has already begun. As a
matter of fact, a new product called "Hot Button" baseball was
recently launched in selected test markets. If it goes well, rollout
will occur next year around Opening Day. "Hot Button" represents step
one of our drive to "bring 'em back."
o Finally, we will be even more aggressive in our marketing to the
serious collector, whose purchases presently fund the business, and
who truly appreciates our brands and who represents the most stable
community of sports card buyers today. Our efforts in this regard will
include getting closer to these consumers, strengthening our product
development activities and enhancing Topps' presence within hobby
stores.
As regards Publishing, we will continue to participate in this potentially
lucrative area. Over the years, we have demonstrated a track record of
identifying, and in some instances creating, breakout opportunities that
generate meaningful results. Looking ahead, we will be as highly selective about
choosing licenses as before and will maintain a focus on only those truly
meriting pursuit.
We recently introduced a line of products featuring the final episode of the
Star Wars saga: Revenge of the Sith, another milestone in our relationship with
the Lucas Film organization spanning some 25 years. Furthermore, exploitation of
our own creations -- Garbage Pail Kids and Wacky Packages -- continues apace,
and a TV advertising campaign featuring Wacky Packs is scheduled for this coming
August.
Finally, we believe that Collectible Gaming continues to represent a significant
opportunity, as originally envisioned when we acquired WizKids.
o The Collectible Gaming market is just over $1B and growing.
o Collectible Miniatures represent a 20% segment in which WizKids is the
#2 player.
o The other 80% is comprised primarily of Collectible Card Games which
accounts for much of the industry's growth and represents a new
opportunity for us.
WizKids will remain an important factor in the miniatures market. At the same
time, we will also leverage its impressive game design, grass roots marketing
and culture of innovation against new collectible gaming formats, "Pirates of
the Spanish Main," the first constructible strategy game, is a perfect example
of such an effort. "Pirates" is enjoying good trade and consumer acceptance and
there are a number of other new products in the development pipeline. However,
part of our WizKids strategy is to branch out even more broadly.
Coming out of the study, our view is that Collectible Card Games can generate
significant financial returns on investment, through either licensed or
internally developed properties. Given the nature of this business, the timing
of "hits" is difficult to predict. Even so, within a 3 to 5-year time frame,
empirical evidence suggests overall returns on investment could exceed 20%,
excluding huge home runs such as a "Pokemon." Accordingly, we intend to
systematically invest in self-development and acquisition of licenses for the
Collectible Card Game market. As part of the Topps family, WizKids provides the
platform for such investment and opportunity.
INTERNATIONAL
-------------
Most of the initial strategic study did not encompass overseas activities,
primarily due to cost and time constraints. However, a second phase of work
undertaken recently is focused on improving our operational processes, methods
and procedures across the entire business. This phase will also include
assessing opportunities to drive top-line growth abroad.
CONCLUSION
----------
The tireless devotion of our people in Asia, Europe, North and South America has
become a greater asset than ever, especially taking into account various
challenges our business has weathered over the last two years. However, the need
to accelerate efforts toward operational excellence persists.
Accordingly, we are sharply focused on cultivating a new performance-driven work
ethic company-wide to facilitate increased accountability and productivity and
to drive future growth. This represents a significant cultural change for the
organization, but one that makes eminent sense all around.
On behalf of the organization, we'd like to thank our consumers, fans,
collectors, licensors, stockholders and suppliers for their valued support.
TABLE OF CONTENTS
Page
Stockholders Letter............................................. 37
Financial Highlights............................................ 42
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 43
Consolidated Financial Statements................................ 51
Notes to Consolidated Financial Statements....................... 55
Management's Report on Internal Control over Financial Reporting.. 80
Reports of Independent Registered Public Accounting Firm.......... 79,81
Market and Dividend Information .................................. 83
Selected Consolidated Financial Data............................. 83
Directors, Officers, Subsidiaries
and Corporate Information........................ Inside Back Cover
FINANCIAL HIGHLIGHTS
================================================================================
February February March
26, 2005 28, 2004 1, 2003
--------------------------------------------------------------------------------
(in thousands of dollars, except share data)
Net sales ........................ $ 295,865 $ 297,338 $ 290,115
Income from operations ........... 11,967 14,595 20,782
Net income ....................... 10,999 12,695 16,936
Cash provided by operations ...... 22,930 11,954 6,200
Working capital .................. 138,146 133,299 141,484
Stockholders' equity ............. 219,189 211,277 196,768
Per share items:
Net diluted earnings .......... $ 0.27 $ 0.31 $ 0.40
Cash dividend paid ............ $ 0.16 0.12 $ --
Average diluted shares outstanding 41,327,000 41,515,000 42,065,000
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This section provides an analysis of the Company's operating results, cash flow,
critical accounting policies, and other matters. It includes or incorporates
"forward-looking statements" as that term is defined by the U.S. federal
securities laws. In particular, statements using words such as "may", "should",
"intend", "estimate", "anticipate", "believe", "predict", "potential", or words
of similar import generally involve forward-looking statements. We based these
forward-looking statements on our current expectations and projections about
future events, and, therefore, these statements are subject to numerous risks
and uncertainties. Accordingly, actual results may differ materially from those
expressed or implied by the forward-looking statements. We caution readers not
to place undue reliance on these forward-looking statements, which speak only as
of the date of this report.
The Company has two reportable business segments, Confectionery and
Entertainment. The following table sets forth, for the periods indicated, net
sales by business segment:
Year Ended
================================================================================
February February March
26, 2005 28, 2004 1, 2003
--------------------------------------------------------------------------------
(in thousands of dollars)
Confectionery ........................ $143,762 $147,188 $146,901
Entertainment ........................ 152,103 150,150 143,214
-------- -------- --------
Total ........................... $295,865 $297,338 $290,115
================================================================================
|X|FISCAL 2005 VERSUS 2004*
---------------------------
CONSOLIDATED NET SALES
In fiscal 2005, the Company's consolidated net sales decreased 0.5% to $295.9
million from $297.3 million in fiscal 2004. Stronger foreign currencies versus
the prior year added $6.6 million to fiscal 2005 sales. Excluding the impact of
stronger foreign currencies, net sales decreased 2.7%.
Worldwide net sales of the Confectionery segment, which includes Ring Pop, Push
Pop, Baby Bottle Pop, Juicy Drop Pop and Bazooka brand bubble gum, decreased
2.3% to $143.8 million in 2005 from $147.2 million in 2004. Stronger foreign
currencies provided a $2.7 million benefit to fiscal 2005 sales. Confectionery
products accounted for 49% of the Company's net sales in 2005 and 50% in 2004.
--------------------------------------------------------------------------------
* Unless otherwise indicated, all date references to 2005, 2004 and 2003 refer
to the fiscal years ended February 26, 2005, February 28, 2004, and March 1,
2003, respectively.
Fiscal 2005 U.S. confectionery sales were impacted in part by industry trends
such as consumer nutritional concerns and retail consolidation, particularly in
the first nine months of the year. Incremental sales of chewy products and
strong gains on Juicy Drop Pop contributed favorably to results. For the full
year, declines in U.S. confectionery sales of 2.8% were in line with trends in
the non-chocolate industry. Going forward, the Company intends to improve retail
distribution particularly in the convenience channel, step up television
advertising levels, re-design its product development process and strengthen
sourcing activities.
Net sales of international confectionery products were also down comparatively
in fiscal 2005 due to strong 2004 performance of both Push Pop Flip N'Dip in
Japan and Yu-Gi-Oh! candy products in Europe. International sales represented
32% of total confectionery sales in fiscal 2005 versus 31% in 2004.
Net sales of the Entertainment segment, which includes cards, sticker album
collections, Internet activities and strategy games, increased 1.3% in fiscal
2005 to $152.1 million. Stronger foreign currencies provided a $3.9 million
benefit to fiscal 2005 sales. Entertainment products represented 51% of the
Company's net sales in 2005 and 50% in fiscal 2004.
Within the segment, sales from WizKids, a developer and marketer of strategy
games acquired in July 2003, increased $6 million to $22 million, reflecting a
full year of ownership in fiscal 2005 versus a partial year in fiscal 2004. In
late 2005, WizKids created a new product category, constructible strategy games,
and launched two new products, Pirates and Football Flix. In addition, sales of
European sports products increased in fiscal 2005, reflecting the inclusion of
products featuring the European Football Championship held once every four
years.
Net sales of U.S. sports products were below the prior year, a function of the
absence of an NHL hockey season and continued industry softness, in general. The
Company believes that this downward trend is due largely to the proliferation of
card and memorabilia products and to significantly higher price points and that
these are principal factors in driving children and the casual adult collector
from the market.
Going forward, the Company intends to make a case to the leagues and player
associations to address product proliferation in order to promote a more
rational retail environment and a more satisfying consumer experience. The
Company will also focus on creating sports products specifically designed for
kids and market even more aggressively to the core collector.
As anticipated, sales of Internet products were below year ago levels in 2005 as
the Company reduced advertising support and explored new directions for this
venture. Internet operations were virtually breakeven this year versus a loss of
almost $3 million last year.
Finally, fiscal 2005 sales of non-sports publishing products were impacted by
the absence of strong licenses, particularly in the fourth quarter. However,
during the year, WWE, Barbie, Pokemon and Yu-Gi-Oh! were solid contributors in
Europe and Garbage Pail Kids, now in its fourth series, performed well in the
U.S.
RESULTS OF OPERATIONS
Fiscal 2005 consolidated gross profit as a percentage of net sales was 35.6%, up
from 35.0% in 2004. Margins this year were favorably impacted by lower
obsolescence costs following abnormally high write-offs at WizKids and the
domestic confectionery and European publishing businesses in fiscal 2004.
Improved gross profit margins also reflected lower tooling and mold costs on
WizKids and European confectionery products. Partially offsetting these
improvements were higher autograph and relic costs on U.S. sports cards and an
increase in effective royalties associated with England Premier League products.
Other income was $1,675,000 in 2005 versus $631,000 last year. This increase was
primarily due to more favorable foreign exchange translation gains on non-local
currency cash balances in Europe, the absence of a write-off associated with
closing our Brazilian office last year, and increases in royalty income from the
licensing of our WizKids and confectionery trademarks.
Selling, general & administrative expenses ("SG&A") increased as a percentage of
net sales to 32.1% in 2005 from 30.3% a year ago. SG&A dollar spending increased
to $94.9 million in 2005 from $90.0 million. A $1.9 million fine paid to the
European Commission and the full year of WizKids ownership versus a partial year
in 2004, were the primary reasons for the dollar increase. Additionally, higher
professional fees, in particular legal, Sarbanes-Oxley and consulting-related
expenses, impacted fiscal 2005 SG&A. The Company estimates fees paid to third
parties related to Sarbanes-Oxley Section 404 were approximately $1.1 million in
2005.
Within SG&A, full year advertising and marketing expenses of $23.3 million were
$0.5 million below 2004 due to reduced spending on U.S. confectionery and
Internet products, partially offset by increased marketing activity overseas.
U.S. confectionery advertising exceeded historical levels in the fourth quarter.
Net interest income increased slightly to $2.7 million in fiscal 2005 from $2.4
million in fiscal 2004, reflecting rising interest rates and higher average
investment balances.
The fiscal 2005 effective tax rate was 25.0% versus 25.4% in fiscal 2004.
Net income in fiscal 2005 was $11.0 million, or $0.27 per diluted share, versus
$12.7 million, or $0.31 per diluted share in 2004. Excluding the impact of the
non-tax deductible European Commission fine, fiscal 2005 net income was $12.9
million, or $0.31 per diluted share.
|X|FISCAL 2004 VERSUS 2003
--------------------------
CONSOLIDATED NET SALES
In fiscal 2004, the Company's consolidated net sales increased 2.5% to $297.3
million from $290.1 million in fiscal 2003. The July 2003 acquisition of WizKids
added $15.9 million to sales in fiscal 2004, and stronger European currencies
increased sales by $9.7 million. Excluding these two factors, fiscal 2004 net
sales were below 2003 levels, largely the result of declines in sales of U.S.
sports cards and U.S. confectionery products.
Worldwide net sales of the Confectionery segment increased 0.2% to $147.3
million in 2004 from $146.9 million in 2003. Confectionery products accounted
for 50% of the Company's net sales in 2004 and 51% in 2003.
U.S. confectionery sales decreased year-over-year, in part the result of
softness in wholesale clubs, the effects of delayed new product introductions
and a reduction in promotional activity undertaken by certain retailers in
fiscal 2003.
Net sales of international confectionery products increased in 2004, offsetting
the U.S. declines. Increases were largely driven by the roll out of Juicy Drop
Pop, solid sales of licensed confectionery products and stronger European
currencies. International sales represented 31% of total confectionery sales in
fiscal 2004.
Net sales of the Entertainment segment increased 4.8% in fiscal 2004 to $150.1
million. Entertainment products represented 50% of the Company's net sales in
2004 and 49% in fiscal 2003.
Within the segment, sales of international sports sticker albums increased, a
function of the expansion and further success of the mini album format, higher
sales of traditional Premier League sticker album collections and the impact of
stronger European currencies. The acquisition of WizKids added $15.9 million to
segment sales. In addition, sales of non-sports publishing products exceeded
those in fiscal 2003 due to the strength of products featuring the Yu-Gi-Oh!,
Garbage Pail Kids and Hamtaro properties.
Also within the Entertainment segment, sales of traditional U.S. sports cards
declined in fiscal 2004, a function of continued industry softness and reduced
product offerings. The Company reduced the number of sports products it released
in fiscal 2004 by almost 20%, and restructured the sports organization,
eliminating over $1.5 million in costs on an annualized basis.
Finally, sales of product sold via the Internet decreased in fiscal 2004,
primarily as a result of declines experienced at thePit.com. The Company has
refocused the etopps website to feature trading capabilities and fantasy-style
games played with etopps cards.
RESULTS OF OPERATIONS
Fiscal 2004 consolidated gross profit as a percentage of net sales was 35.0%,
virtually flat with 2003's figure of 35.1%. Margins in fiscal 2004 were
negatively impacted by higher obsolescence costs which reflected write-offs
associated with slow-moving WizKids product, excess domestic confectionery
inventories and components related to an Italian publishing product. Lower
royalty costs as a function of the smaller U.S. sports business and reduced
costs at our Scranton, Pennsylvania manufacturing facility largely offset the
higher obsolescence costs.
Other income was $631,000 in fiscal 2004 versus $184,000 in fiscal 2003. This
increase was primarily due to favorable mark-to-market adjustments on forward
currency contracts which were partially offset by translation losses on
non-local currency cash balances in Europe. The licensing-out of intellectual
property associated with WizKids and the confectionery business also contributed
favorably in fiscal 2004.
Selling, general & administrative expenses increased as a percentage of net
sales to 30.3% in 2004 from 28.0% a year ago. SG&A dollar spending increased to
$90.0 million from $81.1 million, largely as a result of the addition of
WizKids. Additionally, advertising and marketing costs were higher in fiscal
2004 due to increased media activity and stronger foreign currencies.
Partially offsetting these increases in SG&A was a reduction in overhead
expenses achieved through the restructuring of the U.S. sports card organization
and headcount eliminations at the Internet operations. Fiscal 2004 SG&A also
benefited from reduced costs associated with employee incentive compensation and
the absence of a payment related to a legal settlement that occurred in fiscal
2003.
Net interest income decreased slightly to $2.4 million in fiscal 2004 from $2.5
million in fiscal 2003, reflecting less favorable interest rates and a lower
average cash balance following the WizKids acquisition.
The fiscal 2004 effective tax rate was 25.4%. The decrease versus the 2003 rate
of 27.3% was primarily a function of foreign tax benefits received in 2004.
Net income in fiscal 2004 was $12.7 million, or $0.31 per diluted share, versus
$16.9 million, or $0.40 per diluted share in 2003.
|X|QUARTERLY COMPARISONS
------------------------
Management believes that quarter-to-quarter comparisons of sales and operating
results are affected by a number of factors. The Company's sales of
Confectionery products are generally seasonally stronger in the first two fiscal
quarters of the year. However, sales can be significantly impacted by the
introduction of new products and line extensions as well as by advertising and
consumer and trade support programs.
In the Entertainment segment, sales of U.S. sports card products are sold
throughout the year, spanning the three major sports seasons in which the
Company currently participates: baseball, football, and basketball. Topps
Europe's sales of sports sticker albums are driven largely by shipments of
Premier League Soccer products, with much of the sales activity occurring in the
fourth fiscal quarter. Sales of non-sports cards, sticker albums and games tend
to be impacted by the timing of product introductions and the property on which
they are based, often peaking with the release of a movie or the rise in
popularity of a particular licensed property.
The net result of the above factors is that quarterly results vary. See Note 20
- Quarterly Results of Operations.
|X|INFLATION
------------
In the opinion of management, inflation has not had a material effect on the
operations or financial results of the Company.
|X|LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
Management believes that the Company has adequate means to meet its liquidity
and capital resource needs over the foreseeable future as a result of the
combination of cash on hand, anticipated cash from operations and credit line
availability.
The Company entered into a credit agreement with Chase Manhattan Bank on
September 14, 2004. The agreement provides for a $30.0 million unsecured
facility to cover revolver and letter of credit needs and expires on September
13, 2007. With the exception of $2.1 million currently reserved for letters of
credit, the $30.0 million credit line was available as of February 26, 2005.
(See Note 9 - Long-Term Debt.)
The Company has reclassified its portfolio of auction rate securities from cash
to short-term investments in the Consolidated Balance Sheets, in line with
recent clarification from regulatory bodies. All periods contained in this
report reflect this reclassification. Year-over-year changes in the amounts of
these securities are now being shown under investing activities on the
Consolidated Statement of Cash Flows. While these securities are no longer
included in cash and cash equivalents, the Company believes them to be similar
to a cash equivalent since they can be redeemed at any time at nominal cost.
As of February 26, 2005, the Company had $36.4 million in cash and cash
equivalents.
During fiscal 2005, the Company's net decrease in cash and cash equivalents was
$20.5 million versus a decrease of $28.7 million in 2004. The fiscal 2005 use of
cash was primarily the result of the purchase of an additional $33.1 million in
auction rate securities. The fiscal 2004 cash use was driven by the acquisition
of WizKids for $28.7 million.
Cash provided by operating activities in 2005 was $22.9 million versus $12.0
million in 2004. The improvement was primarily due to a decrease in receivables
stemming from lower fourth quarter sales in Europe, the timing of inventory and
royalty payments and the collection of income tax refunds. These and other items
more than offset the $1.7 million decline in net income in 2005.
Cash used in investing activities this year of $35.7 million largely reflects
the purchase of $33.1 million of auction rate securities. The Company also spent
$2.6 million in capital expenditures, which included the first phase of a
multi-year ERP project as well as Ring Pop production-related equipment. Fiscal
2006 full year capital spending is projected to be approximately $4 million,
driven by investments in Ring Pop production equipment and computer software and
hardware. Capital spending will be funded out of cash flow from operating
activities.
Cash used in financing activities this year of $8.8 million reflects $2.3
million of treasury stock purchases net of options exercised plus $6.5 million
in dividend payments, versus $1.0 million net treasury stock purchases and $4.9
million in dividend payments last year.
Finally, the $1.0 million favorable effect of exchange rate changes on cash and
cash equivalents, which is due to the impact of stronger currencies on foreign
subsidiaries' cash balances when translated into U.S. dollars, was $4.0 million
lower than in 2004. This change reflects a slowdown in the strengthening of
European currencies against the U.S. dollar.
In October 2001, the Board of Directors authorized the purchase of up to 5
million shares of Company stock. As of February 2005, the Company had purchased
3.4 million shares against this authorization. See Note 13 - Capital Stock. The
Company anticipates purchasing additional shares in the future to complete the
authorization.
|X|CONTRACTUAL OBLIGATIONS
--------------------------
Future minimum payments under existing key contractual obligations are as
follows:
Future Future
Payments Payments
Under Non- Under
Fiscal Cancelable Purchase Royalty
Year Leases Obligations Contracts Total
---- ------ ----------- --------- -----
(in thousands of dollars)
2006 $ 2,733 $12,198 $12,088 $27,019
2007 2,361 175 10,944 13,480
2008 1,956 - 3,726 5,682
2009 1,770 - - 1,770
2010 1,644 - - 1,644
Thereafter 1,139 - - 1,139
The Company anticipates making a payment of approximately $3 - 4 million in
fiscal 2006 for the funding of its qualified pension plans.
|X| CRITICAL ACCOUNTING POLICIES
--------------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires Topps' management to
make estimates and judgments that affect the reported amounts of revenue,
expenses, assets, liabilities and the disclosure of contingent assets and
liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
Note 1 to the Company's consolidated financial statements "Summary of
Significant Accounting Policies" summarizes its significant accounting policies
and discusses the impact of new accounting pronouncements. Following is a
summary of the critical policies and methods used.
Revenue Recognition:
--------------------
Revenue related to sales of the Company's products is generally recognized when
products are shipped, the title and risk of loss has passed to the customer, the
sales price is fixed or determinable and collectibility is reasonably assured.
Sales made on a returnable basis are recorded net of a provision for estimated
returns. These estimates are revised, as necessary, to reflect actual experience
and market conditions.
Returns Provisions:
-------------------
In determining the provision for returns, the Company performs an in-depth
review of wholesale and retail inventory levels, trends in product sell-through
by sales channel, and other factors. The provision for returns was $22.0 million
in 2005 and $17.4 million in 2004, which equates to 7.4% and 5.9% of net sales,
respectively. An increase or decrease in the provision for returns by 1% of
sales would decrease or increase operating income by approximately $3.0 million.
Intangible Assets:
------------------
Intangible assets include trademarks and the value of sports, entertainment and
proprietary product rights. Amortization is by the straight-line method over
estimated lives of up to fifteen years. Management evaluates the recoverability
of finite-lived intangible assets under the provisions of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142")
based on the projected undiscounted cash flows attributable to the individual
assets, among other methods.
Accruals for Obsolete Inventory:
--------------------------------
The Company's accrual for obsolete inventory reflects the cost of items in
inventory not anticipated to be sold. This accrual may be deemed necessary as a
result of discontinued items and packaging or a reduction in forecasted sales.
The provision for obsolete inventory was $4.9 million in fiscal 2005 and $7.5
million in fiscal 2004, which equates to 1.7% and 2.5% of net sales,
respectively. An increase or decrease in the provision for obsolescence by 1% of
sales would decrease or increase operating income by approximately $3.0 million.
Income Taxes:
-------------
Deferred tax assets and liabilities represent the tax effects of temporary
book-tax differences which will become payable or refundable in future periods.
The Company has accrued tax reserves for probable exposures and, as a result,
any assessments resulting from current tax audits should not have a material
adverse effect on the Company's consolidated net income.
|X|DISCLOSURES ABOUT MARKET RISK
--------------------------------
There is no material risk to financial results due to market risk. The Company's
exposure to market risk is largely related to the impact of mark-to-market
changes in foreign currency rates on forward contracts. As of February 26, 2005,
the Company had $26.6 million in forward contracts which were entered into for
the purpose of reducing the impact of changes in foreign currency rates
associated with firm and forecasted receipts and disbursements.
The Company's primary exchange rate exposure is with the Euro against the
British pound, the Japanese yen and the U.S. dollar. At maturity, the proceeds
or outlays from the foreign exchange contracts offset a corresponding additional
or reduced outlay in the underlying currency. The recognition of mark-to-market
gains and losses on these contracts accelerates the gains and losses that would
otherwise be recognized when the contracts mature and generally does not result
in an incremental impact on earnings or cash flows. The Company has no long-term
debt and does not engage in any commodity-related derivative transactions.
CONSOLIDATED STATEMENTS OF OPERATIONS
The Topps Company, Inc. and Subsidiaries
(in thousands of dollars, except share data)
Year Ended
============================================================================
February February March
26, 2005 28, 2004 1, 2003
----------------------------------------------------------------------------
Net sales $ 295,865 $ 297,338 $ 290,115
Cost of sales 190,667 193,417 188,375
--------- --------- ----------
Gross profit on sales 105,198 103,921 101,740
Other income, net 1,675 631 184
Selling, general and administrative
expenses 94,906 89,957 81,142
--------- --------- ----------
Income from operations 11,967 14,595 20,782
Interest income, net 2,706 2,426 2,516
--------- --------- ----------
Income before provision for
income taxes 14,673 17,021 23,298
Provision for income taxes 3,674 4,326 6,362
--------- --------- ----------
Net income $ 10,999 $ 12,695 $ 16,936
============================================================================
Net income per share - basic $ 0.27 $ 0.31 $ 0.41
- diluted $ 0.27 $ 0.31 $ 0.40
----------------------------------------------------------------------------
Cash dividends per share $ 0.16 $ 0.12 $ -
Weighted average shares
outstanding - basic 40,471,000 40,604,000 41,353,000
- diluted 41,327,000 41,515,000 42,065,000
============================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
The Topps Company, Inc. and Subsidiaries
(in thousands of dollars)
================================================================================
February February
26, 2005 28, 2004
--------------------------------------------------------------------------------
ASSETS
--------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents ....................... $ 36,442 $ 56,959
Short-term investments .......................... 69,955 36,878
Accounts receivable, net ........................ 27,851 30,109
Inventories ..................................... 32,936 33,009
Income tax receivable ........................... 338 2,697
Deferred tax assets ............................. 3,616 1,505
Prepaid expenses and other current assets ....... 14,541 11,691
-------- --------
Total current assets ........................ 185,679 172,848
Property, plant and equipment, net ................... 12,553 13,786
Goodwill ............................................. 67,566 67,586
Intangible assets, net ............................... 8,544 10,474
Other assets ......................................... 16,069 10,769
-------- --------
TOTAL ASSETS ......................................... $290,411 $275,463
======== ========
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Current liabilities:
Accounts payable ................................ $ 12,658 $ 10,946
Accrued expenses and other liabilities .......... 27,485 26,249
Income taxes payable ............................ 7,390 2,354
-------- --------
Total current liabilities ................... 47,533 39,549
Deferred income taxes ................................ - 1,956
Other liabilities .................................... 23,689 22,681
-------- --------
Total liabilities ....................... 71,222 64,186
-------- --------
Stockholders' equity:
Preferred stock, par value $.01 per share,
authorized 10,000,000 shares, none issued .... -- --
Common stock, par value $.01 per share,
authorized 100,000,000 shares,
issued 49,244,000 in 2005 and 2004 ........... 492 492
Additional paid-in capital ...................... 28,293 27,829
Treasury stock, 8,790,000 shares in 2005
and 8,632,000 shares in 2004 ................ (85,060) (82,287)
Retained earnings ............................... 275,226 270,704
Accumulated other comprehensive loss, net of tax 238 ( 5,461)
--------- ---------
Total stockholders' equity ............. 219,189 211,277
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $290,411 $275,463
======== =========
================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Topss Company, Inc. and Subsidiaries
(in thousands of dollars)
Year Ended
========================================================================================
February February March
26, 2005 28, 2004 1, 2003
----------------------------------------------------------------------------------------
Operating Activities
Net income ................................... $ 10,999 $ 12,695 $ 16,936
Non-cash items included in net income:
Depreciation and amortization ............. 6,261 6,593 5,038
Deferred taxes on income .................. 1,895 1,905 ( 984)
Net effect of changes in:
Receivables ............................... 2,258 (2,538) (4,638)
Inventories ............................... 73 562 (7,241)
Income taxes receivable/payable ........... 580 (2,256) 3,261
Prepaid expenses and other current assets . (2,850) (1,048) 1,505
Payables and other current liabilities .... 2,948 (7,696) (3,796)
All other ................................. 766 3,737 (3,881)
--------- --------- ---------
Cash provided by operating activities . 22,930 11,954 6,200
Investing Activities
Net purchases of short-term investments ...... (33,077) (8,303) (5,525)
Purchase of subsidiary ....................... -- (28,650) --
Additions to property, plant and equipment ... (2,634) (2,842) (3,807)
--------- --------- ---------
Cash used in investing activities ..... (35,711) (39,795) (9,332)
Financing Activities
Exercise of employee stock options ........... 1,814 1,770 1,449
Dividends paid to stockholders ............... (6,477) (4,868) --
Purchase of treasury stock ................... (4,123) (2,781) (14,305)
--------- --------- ---------
Cash used in financing activities ...... (8,786) (5,879) (12,856)
Effect of exchange rate changes on cash
and cash equivalents ......................... 1,050 4,995 3,665
--------- --------- ---------
Net Decrease in Cash and Cash Equivalents ....... $ (20,517) $ (28,725) $ (12,323)
----------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year .. $ 56,959 $ 85,684 $ 98,007
Cash and cash equivalents at end of year ........ $ 36,442 $ 56,959 $ 85,684
----------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid .............................. $ 258 $ 322 $ 91
Income taxes paid .......................... $ 3,883 $ 6,398 $ 12,578
========================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
The Topps Company, Inc. and Subsidiaries
(In thousands of dollars)
============================================================================================================================
Additional Other
Common Paid-in Treasury Retained Comprehensive
Total Stock Capital Stock Earnings Income (Loss)
-------------------------------------------------------------'--------------------------------------------------------------
Stockholders' equity as of 3/3/2002 ........... $ 194,054 ' $ 492 $ 26,824 $ (67,415) $ 245,941 $ (11,788)
-------------------------------------------------------------'--------------------------------------------------------------
Net income .................................... 16,936 ' -- -- -- 16,936 --
Translation adjustment, net of tax ............ 3,399 ' -- -- -- -- 3,399
Minimum pension liability ..................... (4,765) ' -- -- -- -- (4,765)
Total comprehensive income ................ 15,570 ' -- -- -- 16,936 (1,366)
Purchase of treasury stock .................... (14,305) ' -- -- (14,305) -- --
Exercise of employee stock options ............ 1,449 ' -- 520 929 -- --
Stockholders' equity as of 3/1/2003 ........... $ 196,768 ' $ 492 $ 27,344 $ (80,791) $ 262,877 $ (13,154)
-------------------------------------------------------------'--------------------------------------------------------------
Net income .................................... 12,695 ' -- -- -- 12,695 --
Translation adjustment, net of tax ............ 6,823 ' -- -- -- -- 6,823
Minimum pension liability ..................... 870 ' -- -- -- -- 870
Total comprehensive income ................ 20,388 ' -- -- -- 12,695 7,693
Cash Dividends ................................ (4,868) ' -- -- -- (4,868) --
Purchase of treasury stock .................... (2,781) ' -- -- (2,781) -- --
Exercise of employee stock options ............ 1,770 ' -- 485 1,285 -- --
Stockholders' equity as of 2/28/2004........... $ 211,277 ' $ 492 $ 27,829 $ (82,287) $ 270,704 $ (5,461)
-------------------------------------------------------------'--------------------------------------------------------------
Net income .................................... 10,999 ' -- -- -- 10,999 --
Translation adjustment, net of tax ............ 1,864 ' -- -- -- -- 1,864
Minimum pension liability, net of tax ......... 3,835 ' -- -- -- -- 3,835
Total comprehensive income ................ 16,698 ' -- -- -- 10,999 5,699
Cash dividends ................................ (6,477) ' -- -- -- (6,477) --
Purchase of treasury stock .................... (4,123) ' -- -- (4,123) -- --
Exercise of employee stock options ............ 1,814 ' -- 464 1,350 -- --
Stockholders' equity as of 2/26/2005 .......... $ 219,189 ' $ 492 $ 28,293 $ (85,060) $ 275,226 $ 238
============================================================='==============================================================
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
----------------------------
The consolidated financial statements include the accounts of The Topps Company,
Inc. and its subsidiaries (the "Company"). All intercompany items and
transactions have been eliminated in consolidation.
The Company and its subsidiaries operate and report financial results on a
fiscal year of 52 or 53 weeks which ends on the Saturday closest to the end of
February. Fiscal 2003, fiscal 2004 and fiscal 2005 were all comprised of 52
weeks.
Foreign Currency Translation:
-----------------------------
The financial statements of subsidiaries outside the United States, except those
subsidiaries located in highly inflationary economies or where costs are
primarily U.S. dollar-based, are generally measured using the local currency as
the functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange as of the balance sheet date, with the
resultant translation adjustments included in accumulated other comprehensive
income. Income and expense items are translated at the average exchange rate for
the month. Gains and losses from foreign currency transactions of these
subsidiaries are included in net income. The Company has no foreign subsidiaries
operating in highly inflationary economies or where inventory costs are U.S.
dollar-based for which the financial statements are measured using the U.S.
dollar as the functional currency.
Derivative Financial Instruments:
---------------------------------
From time to time, the Company enters into contracts that are intended and
effective as hedges of foreign currency risks associated with the anticipated
purchase of confectionery inventories from foreign suppliers. It also enters
into contracts in order to hedge risks associated with the collection of
receivables from certain foreign countries. The Company does not hold or issue
derivative financial instruments for trading purposes.
Gains or losses arising from derivative financial instruments are recorded in
earnings. On March 4, 2001, the Company adopted the provisions of SFAS 133
"Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS
133 provides a comprehensive standard for the recognition and measurement of
derivatives and hedging activities.
Cash Equivalents:
-----------------
The Company considers investments in highly liquid debt instruments with a
maturity of three months or less to be cash equivalents.
Short-term Investments:
-----------------------
Investments in auction rate instruments as well as bank certificates of deposit
with maturities in excess of three months and subject to an early withdrawal
penalty are reported as short-term investments.
Inventories:
------------
Inventories are stated at lower of cost or market. Cost is determined on the
first-in, first-out basis.
Property, Plant and Equipment ("PP&E"):
---------------------------------------
PP&E is stated at cost. Depreciation is computed using the straight-line method
based on estimated useful lives of twenty-five years for buildings, three to
twelve years for machinery, equipment and software, and the remaining lease
period for leasehold improvements. Expenditures for new property, plant or
equipment that substantially extend the useful life of an asset are capitalized.
Ordinary repair and maintenance costs are expensed as incurred. In accordance
with SFAS 144, "Accounting for the Impairment or Disposal of Long-lived Assets,"
the Company periodically evaluates the carrying value of its PP&E for
circumstances which may indicate impairment.
Goodwill and Intangible Assets:
-------------------------------
Goodwill and Intangible Assets represent amounts paid for the purchase of
businesses in excess of the fair value of the acquired assets. Intangible assets
include trademarks and the value of sports, entertainment and proprietary
product rights. Amortization is by the straight-line method over estimated lives
of up to fifteen years. Under the provisions of SFAS 144, the Company reviews
intangibles on at least an annual basis to determine if there are indicators of
impairment. Goodwill is not amortized. Management evaluates the recoverability
of goodwill and finite-lived intangible assets under the provisions of Statement
of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets"
("SFAS 142") based on the projected undiscounted cash flows attributable to the
individual assets, among other methods. See Note 6 - Goodwill and Intangible
Assets.
Revenue Recognition:
--------------------
The Company recognizes revenue when the following criteria are met: the products
are shipped, the title and risk of loss has passed to the customer, the sales
price is fixed or determinable and collectibility is reasonably assured. Sales
made on a returnable basis are recorded net of a provision for estimated
returns. These estimates are revised, as necessary, to reflect actual experience
and market conditions. In fiscal 2005, approximately 74% of the Company's sales
were made on a returnable basis, and the returns provision as of February 26,
2005 was $22.0 million.
Estimates:
----------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates which affect the
reporting of assets and liabilities as of the dates of the financial statements
and revenues and expenses during the reporting period. These estimates primarily
relate to the provision for sales returns, allowance for doubtful accounts and
inventory obsolescence. In each case, prior to booking an accounting entry, the
Company does an in-depth review of available information including wholesale and
retail inventory levels and product sell-through in the case of returns,
receivables aging and account credit-worthiness for the allowance for doubtful
accounts and component and finished goods inventory levels and product
sell-through for obsolescence. Actual results could differ from these estimates.
Reclassifications:
------------------
Certain items in the prior years' financial statements have been reclassified to
conform with the current year's presentation.
The Company has classified its portfolio of auction rate securities ("ARS") from
cash to short-term investments, in line with recent clarification from
regulatory bodies. The Company classified approximately $69,955,000 as of
February 26, 2005 and reclassified $36,878,000, $28,575,000 and $23,050,000 of
investments in ARS as of February 28, 2004, March 1, 2003 and March 2, 2002,
respectively. Year-over-year changes in the accounts of these securities are now
being reflected under investing activities on the Consolidated Statements of
Cash Flows. The impact of the reclassification on investing activities, related
to the ARS, was approximately ($8,303,000) and ($5,525,000) for the two year
period ended February 28, 2004.
Income Taxes:
-------------
The Company provides for deferred income taxes resulting from temporary
differences between the valuation of assets and liabilities in the financial
statements and the carrying amounts for tax purposes. Such differences are
measured using the tax rates and laws in effect for the years in which the
differences are expected to reverse.
Employee Stock Options:
-----------------------
The Company accounts for stock-based employee compensation based on the
intrinsic value of stock options granted in accordance with the provisions of
APB 25, "Accounting for Stock Issued to Employees." The pro forma effect, had
the Company accounted for stock-based employee compensation based on the fair
value of stock options granted in accordance with SFAS 123, "Accounting for
Stock-Based Compensation," is shown below:
(In thousands of dollars,
except share data)
Stock-based
As Employee
Reported Compensation Pro forma
=============================================================
2005
-------------------------------------
Net income $10,999 $ (1,054) $ 9,945
-------------------------------------------------------------
Earnings per share
Basic $ 0.27 $ 0.25
-------------------------------------
Diluted $ 0.27 $ 0.24
-------------------------------------
2004
-------------------------------------
Net income $12,695 $ (1,247) $ 11,448
-------------------------------------------------------------
Earnings per share
Basic $ 0.31 $ 0.28
-------------------------------------
Diluted $ 0.31 $ 0.28
-------------------------------------
2003
-------------------------------------
Net income $16,936 $ (1,350) $ 15,586
-------------------------------------------------------------
Earnings per share
Basic $ 0.41 $ 0.38
-------------------------------------
Diluted $ 0.40 $ 0.37
-------------------------------------
=============================================================
Options typically vest within a three-year period. In determining the preceding
pro forma amounts under SFAS 123, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option pricing model.
Following are the key assumptions: $0.16 per share dividend on fiscal 2005 and
2004 options, but no dividend on fiscal 2003 options; risk free interest rate,
estimated volatility and expected life as follows: fiscal 2005 options - 4.4%,
32% and 5.8 years, respectively; fiscal 2004 options - 4.4%, 38% and 6.5 years,
respectively; fiscal 2003 options - 4.5%, 35% and 6.5 years, respectively.
Advertising and Marketing Expenses:
-----------------------------------
Advertising and marketing expenses (which encompass media spending, customer
promotions and research) included in selling, general and administrative
expenses amounted to $23,336,000 in fiscal 2005, $23,820,000 in fiscal 2004 and
$20,145,000 in fiscal 2003. Advertising and marketing expenses are recognized as
incurred. Costs relating to future periods are classified as prepaid.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2004, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. 106-1 ("FSP 106-1"), which allowed companies to elect a
one-time deferral of the recognition of effects of the Medicare Prescription
Drug Act and disclosures related to the postretirement healthcare plan. The FASB
allowed the one-time deferral due to a lack of clarification regarding its
accounting and uncertainties regarding the effects of the Medicare Prescription
Drug Act on plan participants. For companies electing the one-time deferral, the
deferral was to remain in effect until guidance on the accounting for the
federal subsidy was issued, or until certain other events, such as a plan
amendment, settlement or curtailment, had occurred. The Company has evaluated
the effects of the Medicare Prescription Drug Act on the postretirement benefit
plan and its participants, and has elected the one-time deferral. In May 2004,
the FASB issued FASB Staff Position No. 106-2 ("FSP 106-2"), which superceded
FSP 106-1. FSP 106-2 provides authoritative guidance on the accounting for the
Act and specifies the disclosure requirements for employers who have adopted FSP
106-2. FSP 106-2 is effective for the interim or annual period beginning after
June 15, 2004. The Company's accumulated postretirement benefit obligation and
net postretirement benefit cost for fiscal 2004 and fiscal 2005 reflect the
effects of the Medicare Prescription Drug Act. The Medicare Prescription Drug
Act reduced the Company's fiscal 2005 postretirement medical expenses by $0.2
million.
On November 24, 2004, the FASB issued FASB Statement No. 151 to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This statement is effective for annual
periods beginning after June 15, 2005 and requires that those items be
recognized as current period charges regardless of whether they meet the
criterion of "so abnormal" as defined by Accounting Research Bulletin No. 43.
This Statement had no effect on the Company's consolidated results of operations
or financial position.
On December 16, 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004) "Share-Based Payments"("SFAS 123(r)"), which
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements starting with interim statements issued
after June 15, 2005. The SEC has since extended the date to be effective for
fiscal years beginning after June 15, 2005. This statement establishes fair
value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees, except
for equity instruments held by employee share ownership plans. SFAS 123(r) also
establishes fair value as the measurement objective for transactions in which an
entity acquires goods or services from non-employees in share-based payment
transactions. With limited exceptions, the amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will be remeasured each
reporting period. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. SFAS 123(r) replaces SFAS
No. 123, "Accounting for Stock-Based Compensation", and supercedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". The
Company is currently evaluating the impact of adopting this standard on its
future financial statements.
On December 21, 2004, the FASB issued FASB Staff Position No. 109-2 "Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision With the
American Job Creation Act of 2004" ("FSP 109-2"). The Act introduces a one-time
dividend received deduction on the repatriation of certain foreign earnings to a
U.S. taxpayer provided certain criteria are met. An enterprise that is
evaluating the repatriation statute shall apply the requirements of FSP 109-2 as
it decides on a plan for reinvestment or repatriation of its unremitted foreign
earnings. The enterprise shall measure the income tax effects of such
repatriation without the effects of the repatriation provision until it has
decided on a plan. The range of possible amounts the Company is considering for
repatriation under this provision is between zero and $11 million. The related
potential range of income tax effects is between zero and $0.4 million.
In March 2004, the FASB ratified EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments"
("EITF No. 03-1"). In September 2004, the recognition and measurement provisions
of EITF No. 03-1 were delayed. For reporting periods beginning after June 15,
2004, only the disclosure requirements for available-for-sale securities and
cost method investment are required. The Company does not expect the adoption of
EITF No. 03-1 to have a material effect on its financial condition or results of
operations.
NOTE 2 - EARNINGS PER SHARE
Earnings per share ("EPS") is computed in accordance with SFAS No. 128 "Earnings
Per Share" and both basic and diluted EPS figures are provided in this report.
Basic EPS is computed using weighted average shares outstanding. Diluted EPS is
computed using weighted average shares outstanding plus additional shares issued
as if in-the-money options were exercised (utilizing the treasury stock method).
The following table represents the computation of weighted average diluted
shares outstanding:
Year Ended
-----------------------------------------------------------------------
February February March
26, 2005 28, 2004 1, 2003
-----------------------------------------------------------------------
Weighted average
shares outstanding:
Basic 40,471,000 40,604,000 41,353,000
-----------------------------------------------------------------------
Dilutive stock options 856,000 911,000 712,000
-----------------------------------------------------------------------
Diluted 41,327,000 41,515,000 42,065,000
=======================================================================
In the above calculation, the impact of out-of-the-money options, (i.e. where
the exercise price exceeds current market price) was not included. These
incremental shares totaled 823,765 in 2005, 1,070,103 in 2004 and 1,532,000 in
2003.
NOTE 3 - ACCOUNTS RECEIVABLE
February February
26, 2005 28, 2004
---------------------------------------------------------------------------
(in thousands of dollars)
Gross receivables $ 51,265 $ 52,843
---------------------------------------------------------------------------
Reserve for estimated returns (20,824) (19,516)
---------------------------------------------------------------------------
Other reserves (2,590) (3,218)
---------------------------------------------------------------------------
Net receivables $ 27,851 $ 30,109
===========================================================================
Other reserves consist of allowances for discounts, doubtful accounts and
customer deductions for marketing promotion programs.
NOTE 4 - INVENTORIES
February February
26, 2005 28, 2004
-------------------------------------------------------------
(in thousands of dollars)
Raw materials $ 7,468 $ 5,571
-------------------------------------------------------------
Work in process 3,703 2,824
-------------------------------------------------------------
Finished product 21,765 24,614
-------------------------------------------------------------
Total inventory $ 32,936 $ 33,009
=============================================================
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
February February
26, 2005 28, 2004
---------------------------------------------------------
(in thousands of dollars)
Land $ 42 $ 42
---------------------------------------------------------
Buildings and improvements 2,722 2,676
---------------------------------------------------------
Machinery, equipment
and software 32,219 29,631
---------------------------------------------------------
Total PP&E 34,983 32,349
---------------------------------------------------------
Accumulated depreciation (22,430) (18,563)
---------------------------------------------------------
Net PP&E $ 12,553 $ 13,786
=========================================================
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Goodwill and Intangible Assets represent amounts paid for the purchase of
businesses in excess of the fair value of the acquired assets. Intangible assets
consist principally of licenses and contracts, intellectual property, and
software; amortization is by the straight-line method over estimated lives of up
to fifteen years. Goodwill represents the purchase price less the fair value of
acquired assets and less the appraised value of the intangible assets. Goodwill
is not amortized. Management evaluates the recoverability of goodwill and
finite-lived intangible assets on the first day of each fiscal fourth quarter
under the provisions of SFAS 142, based on the projected undiscounted cash flows
attributable to the individual assets, among other methods. Prior to fiscal
2004, the measurement date was the first day of each fiscal first quarter.
Licenses and contracts consist primarily of licensing rights to produce sticker
albums featuring Premier League soccer players obtained as a part of the Merlin
Publishing Group acquisition in July 1995. Intellectual property refers to
rights including trademarks and copyrights related to branded products obtained
as part of the July 2003 acquisition of Wizkids, LLC. Software and other
consists of proprietary software developed by thePit.com and acquired by Topps
in August 2001.
Intangible assets consisted of the following as of February 26, 2005 and
February 28, 2004:
February 26, 2005
================================================================================
Gross Accumulated
Carrying Value Amortization Net
--------------------------------------------------------------------------------
(in thousands of dollars)
Licenses and contracts ........... $ 21,569 $(17,942) $ 3,627
Intellectual property ............ 18,784 (14,284) 4,500
Software and other ............... 2,953 (2,811) 142
FAS 132 pension .................. 275 -- 275
-------- --------- --------
Total intangibles ................ $ 43,581 $(35,037) $ 8,544
================================================================================
February 28, 2004
================================================================================
Gross Accumulated
Carrying Value Amortization Net
--------------------------------------------------------------------------------
(in thousands of dollars)
Licenses and contracts ........... $ 21,569 $(17,272) $ 4,297
Intellectual property ............ 18,784 (13,251) 5,533
Software and other ............... 2,953 (2,717) 236
FAS 132 pension .................. 408 -- 408
-------- --------- --------
Total intangibles ................ $ 43,714 $(33,240) $ 10,474
================================================================================
Useful lives of the Company's intangible assets have been established based on
the Company's intended use of such assets and their estimated period of future
benefit, which are reviewed periodically. Useful lives are as follows:
Weighted Average
Remaining
Category Useful Life Useful Life
-------- ----------- -----------
Licenses and contracts 15 years 5.4 years
Intellectual property 6 years 4.4 years
Software and other 5 years 1.5 years
The weighted average remaining useful life for the Company's intangible assets
in aggregate is 4.8 years. Over the next five years the Company expects the
annual amortization of intangible assets to be as follows:
Fiscal Year Amount
----------- ------
(in thousands)
2006 $ 1,797
2007 $ 1,750
2008 $ 1,703
2009 $ 1,703
2010 and thereafter $ 1,315
In addition to the amortization of intangibles listed above, reported
amortization expense, which was $2,458,000 and $2,456,000 for the years ended
February 26, 2005 and February 28, 2004, respectively, included amortization of
deferred financing fees and deferred compensation costs.
Intangible assets and goodwill for the reporting units is tested for impairment
on an annual basis and between annual tests in certain circumstances. The
impairment test is conducted at the reporting unit level by comparing the
reporting unit's carrying amount, including intangible assets and goodwill, to
the fair value of the reporting unit. If the carrying amount of the reporting
unit exceeds its fair value, a second step is performed to measure the amount of
impairment, if any. Further, in the event that the carrying amount of the
Company as a whole is greater than its market capitalization, there is a
potential that some or all of its intangible assets and goodwill would be
considered impaired. The Company completed its annual impairment testing for
each of the years presented, and no impairment was found. However, no assurances
can be given that future impairment tests of goodwill will not result in an
impairment.
NOTE 7 - DEPRECIATION AND AMORTIZATION
Year Ended
--------------------------------------------------------------------
February February March
26, 2005 28, 2004 1, 2003
--------------------------------------------------------------------
(in thousands of dollars)
Depreciation expense $3,803 $ 4,137 $3,756
--------------------------------------------------------------------
Amortization of:
Intangible assets 1,797 1,881 1,160
Compensation & other 570 452 --
Deferred financing fees 91 123 122
--------------------------------------------------------------------
Total $6,261 $ 6,593 $5,038
====================================================================
NOTE 8 - ACCRUED EXPENSES AND OTHER LIABILITIES
February February
26, 2005 28, 2004
------------------------------------------------------------
(in thousands of dollars)
Royalties $ 5,400 $ 5,665
------------------------------------------------------------
Advertising and
marketing expenses 5,079 3,713
------------------------------------------------------------
Employee compensation 4,031 2,946
------------------------------------------------------------
Payments received in advance 1,555 1,768
------------------------------------------------------------
Inventory in transit 1,363 1,472
------------------------------------------------------------
Deferred rent expense 1,123 1,215
------------------------------------------------------------
Other 8,934 9,470
------------------------------------------------------------
Total $ 27,485 $ 26,249
============================================================
NOTE 9 - LONG-TERM DEBT
On June 26, 2000, the Company entered into a credit agreement with Chase
Manhattan Bank and LaSalle Bank National Association for a term of four years,
which ended on June 25, 2004. On June 25, 2004, the credit agreement was amended
to extend the expiration date for 90 days in order to provide the Company
sufficient time to complete refinancing arrangements. On September 14, 2004, the
Company entered into a new credit agreement with JPMorgan Chase Bank. The
agreement provides for a $30.0 million unsecured facility to cover revolver and
letter of credit needs and expires on September 13, 2007. Interest rates are
variable and a function of market rates and the Company's EBITDA. The credit
agreement contains restrictions and prohibitions of a nature generally found in
loan agreements of this type and requires the Company, among other things, to
comply with certain financial covenants, limits the Company's ability to sell or
acquire assets or borrow additional money and places certain restrictions on the
purchase of Company shares and the payment of dividends. The Company cannot pay
dividends and/or purchase Company shares where the total cash outlay exceeds $30
million in three consecutive quarters or $50 million over the term of the credit
agreement.
The credit agreement may be terminated by the Company at any point over the
three-year term (provided the Company repays all outstanding amounts thereunder)
without penalty. With the exception of $2.1 million currently reserved for
letters of credit, the $30.0 million credit line was available as of February
26, 2005.
NOTE 10 - INCOME TAXES
The Company provides for deferred income taxes resulting from temporary
differences between the valuation of assets and liabilities in the financial
statements and the carrying amounts for tax purposes. Such differences are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
U.S. and foreign operations contributed to income/(loss) before provision for
income taxes as follows:
Year Ended
-----------------------------------------------------------------
February February March
26, 2005 28, 2004 1, 2003
-----------------------------------------------------------------
(in thousands of dollars)
United States $ 11,650 $ 7,581 $ 14,157
Europe 4,049 10,941 7,861
Canada (1,282) (996) 992
Latin America 256 (505) 288
-----------------------------------------
Total $ 14,673 $17,021 $ 23,298
=================================================================
Provision for income taxes consists of:
Year Ended
-----------------------------------------------------------------
February February March
26, 2005 28, 2004 1, 2003
-----------------------------------------------------------------
(in thousands of dollars)
Current income taxes/(benefit):
-----------------------------------------------------------------
Federal $ (321) $ (460) $ 3,899
-----------------------------------------------------------------
Foreign 1,031 2,771 3,301
-----------------------------------------------------------------
State and local 1,069 110 146
-----------------------------------------------------------------
Total current $ 1,779 $ 2,421 $ 7,346
-----------------------------------------------------------------
Deferred income taxes /(benefit):
-----------------------------------------------------------------
Federal $ 1,678 $ 1,341 $ (434)
-----------------------------------------------------------------
Foreign 41 373 (330)
-----------------------------------------------------------------
State and local 176 191 (220)
-----------------------------------------------------------------
Total deferred $ 1,895 $ 1,905 $ (984)
-----------------------------------------------------------------
Total provision
for income taxes $ 3,674 $ 4,326 $ 6,362
=================================================================
The total provision for income taxes is less than the amount computed by
applying the statutory federal income tax rate to income before provision for
income taxes. This difference is largely due to foreign tax planning and the
impact of lower tax rates in foreign countries as shown below:
Year Ended
------------------------------------------------------------------------
February February March
26, 2005 28, 2004 1, 2003
------------------------------------------------------------------------
(in thousands of dollars)
Computed expected
tax provision $ 5,135 $ 5,957 $ 8,154
------------------------------------------------------------------------
Increase in taxes resulting from:
------------------------------------------------------------------------
Dividend income from
foreign affiliates 6,292 1,636 -
------------------------------------------------------------------------
State and local taxes,
net of federal tax benefit 871 213 572
------------------------------------------------------------------------
European Commission fine 578 - -
------------------------------------------------------------------------
Foreign tax credits (8,556) (2,550) (1,343)
------------------------------------------------------------------------
Tax-exempt interest income (285) (208) (206)
------------------------------------------------------------------------
R & D tax credits (210) (310) (503)
------------------------------------------------------------------------
Other items (151) (412) (312)
------------------------------------------------------------------------
Provision for income taxes $ 3,674 $ 4,326 $ 6,362
========================================================================
U. S. income taxes have not been provided on undistributed earnings of foreign
subsidiaries as the Company considers such earnings to be permanently reinvested
in the businesses. As of February 26, 2005, the cumulative amount of unremitted
earnings from foreign subsidiaries that is expected to be permanently reinvested
was approximately $21 million. These undistributed foreign earnings could become
subject to U.S. income tax if remitted, or deemed remitted, as a dividend.
Management has determined that the U.S. income tax liability on these unremitted
earnings should not be material, although it is dependent on circumstances
existing at the time of the remittance. During the year, the Company remitted
non-recurring dividends from two foreign subsidiaries in the aggregate amount of
$9.6 million. The taxes payable on these dividends were fully offset by foreign
tax credits.
In December 2004, the FASB issued FSP No. 109-2, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision with the American Job
Creation Act of 2004". FSP No. 109-2 provides guidance for reporting and
disclosing certain foreign earnings that are repatriated, as defined by the Act,
which was signed into law on October 22, 2004. The Act allows the company to
deduct 85% of certain qualifying foreign earnings available for repatriation to
the United States during the fiscal years ended 2005 and 2006. The Act is
expected to be supplemented by additional legislation during the fiscal year
ended 2006, which will clarify the manner in which repatriated earnings will be
taxed. The Company has begun to evaluate the potential impact of repatriating
earnings pursuant to the Act; however, until such technical corrections to the
Act are enacted, the Company is not in a position to finalize its analysis. The
range of possible amounts the Company is considering for repatriation under this
provision is between zero and $11 million. The related potential range of income
tax effects is between zero and $0.4 million.
The Company is currently under audit by the Internal Revenue Service and New
York State. Taxing authorities periodically challenge positions taken by the
Company on its tax returns. On the basis of present information, it is the
opinion of the Company's management that the Company has appropriately accrued
tax reserves for probable exposures and, as a result, any assessments resulting
from current tax audits should not have a materially adverse effect on the
Company's consolidated financial statements. To the extent the Company were to
prevail in matters for which accrued tax reserves have been established or be
required to pay amounts in excess of such reserves, the Company's consolidated
financial statements for a given period could be materially impacted. The
Company has $5.5 million of tax reserves within income taxes payable in fiscal
2005. In fiscal 2004, $3.7 million of tax reserves are included within deferred
tax liabilities.
The components of deferred income tax assets and liabilities are as follows:
Year Ended
---------------------------------------------------------------------
February February
26, 2005 28, 2004
---------------------------------------------------------------------
(in thousands of dollars)
Deferred income tax assets:
Pension $ 4,047 $ -
---------------------------------------------------------------------
Inventory 3,034 1,005
---------------------------------------------------------------------
Postretirement benefits 1,969 2,232
---------------------------------------------------------------------
Foreign tax credits 1,399 -
---------------------------------------------------------------------
Estimated losses on sales returns 470 500
---------------------------------------------------------------------
Rent 463 -
---------------------------------------------------------------------
Other 755 -
---------------------------------------------------------------------
Total deferred income tax assets $ 12,137 $ 3,737
---------------------------------------------------------------------
Deferred income tax liabilities:
Depreciation (1,808) (1,911)
---------------------------------------------------------------------
Package design (1,204) -
---------------------------------------------------------------------
Prepaid expenses (1,287) -
---------------------------------------------------------------------
Other - (2,277)
---------------------------------------------------------------------
Total deferred income tax liabilities (4,299) (4,188)
---------------------------------------------------------------------
Net Deferred $ 7,838 $ (451)
---------------------------------------------------------------------
Historically, the Company has not recorded a deferred income tax asset relating
to its minimum pension obligation (which is included within accumulated other
comprehensive income). As of February 26, 2005, the Company recorded a deferred
income tax asset of $4.0 million relating to the minimum pension obligation at
February 26, 2005. Amounts relating to prior periods were not considered
material.
The deferred tax assets and liabilities reflected in the previous table are
included on the Company's balance sheets as net current deferred tax assets of
$3.6 million and $1.5 million in fiscal 2005 and fiscal 2004, respectively, and
as a net long term deferred tax asset of $4.2 million, which is included in
other assets in fiscal 2005, and a net long term deferred tax liability of $2.0
million in fiscal 2004.
As of February 26, 2005, the Company had foreign tax credits of approximately
$1.4 million available for use that will expire beginning in 2009 through 2015.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company maintains qualified and non-qualified defined benefit pensions in
the U.S. and Ireland as well as a postretirement healthcare plan in the U.S. for
all eligible non-union personnel (the "Plans"). The Company also contributes to
a multi-employer defined pension plan for its union employees. The Company's
policy is to fund the domestic plans in accordance with the limits defined by
the Employee Retirement Income Security Act of 1971 and U.S. income tax
regulations. The Ireland plan is funded in accordance with local regulations.
The Company contributed a total of $3.7 million in funding to its pension plans
in fiscal 2005 and estimates fiscal 2006 contributions at approximately $3 - 4
million.
In addition, the Company sponsors a defined contribution plan, which qualifies
under Sections 401(a) and 401(k) of the Internal Revenue Code (the "401(k)
Plan"). While all non-union employees are eligible to participate in the 401(k)
Plan, participation is optional. With the exception of one recently-acquired
subsidiary, the Company does not contribute to the 401(k) Plan.
The Company's strategy is to fund its defined benefit plan obligations. The need
for future contributions will be based on changes in the value of plan assets,
movements in interest rates and assumptions regarding employee demographics and
compensation. The asset allocation for the Company's U.S. qualified pension plan
at the end of 2005 and 2004 and the projection for 2006 are as follows:
Percentage of Plan Assets
2006 2005 2004
---- ---- ----
Asset Category
--------------
Equity Securities 65% 54% 58%
Debt Securities 35% 40% 38%
Cash - 6% 4%
The expected rate of return on plan assets is estimated using a variety of
factors including long-term historical returns, the targeted allocation of plan
assets and expectations regarding future market returns for both equity and debt
securities. The measurement date for all Topps plans is February 26, 2005.
The following tables summarize benefit costs, benefit obligations, plan assets
and the funded status of the Company's U.S. and Ireland pension plans and U.S.
postretirement healthcare benefit plan:
================================================================================================
Postretirement
Pension Healthcare
------------------------------------------------------------------------------------------------
February February February February
26, 2005 28, 2004 26, 2005 28, 2004
------------------------------------------------------------------------------------------------
(in thousands of dollars)
Change In Benefits Obligation
-----------------------------
Benefits obligation at beginning of year ....... $ 39,709 $ 37,858 $ 10,755 $ 9,518
Service cost ................................ 1,419 1,383 305 283
Interest cost ............................... 2,414 2,390 568 602
Benefits paid ............................... (1,462) (2,524) (619) (576)
Actuarial (gains)/losses .................... 2,786 (98) (440) 928
Participants' contributions ................. 19 25 -- --
Foreign currency impact...................... 306 675 -- --
-------- -------- -------- --------
Benefit obligation at end of year .............. $ 45,191 $ 39,709 $ 10,569 $ 10,755
================================================================================================
Change in Plan Assets
---------------------
Fair value of plan assets at beginning of year . $ 25,551 $ 18,191 $ -- $ --
Actual return on plan assets ................ 1,722 4,396 -- --
Employer contributions ...................... 3,666 4,999 619 576
Benefits .................................... (1,462) (2,524) (619) (576)
Participants' contributions ................. 19 25 -- --
Foreign currency impact ..................... 255 464 -- --
-------- -------- -------- --------
Fair value of plan assets at end of year ....... $ 29,751 $ 25,551 $ -- $ --
================================================================================================
================================================================================================
Postretirement
Pension Healthcare
------------------------------------------------------------------------------------------------
February February February February
26, 2005 28, 2004 26, 2005 28, 2004
------------------------------------------------------------------------------------------------
(in thousands of dollars)
Funded status
-------------
Funded status at year end ...................... $(15,440) $(14,158) $(10,568) $(10,754)
Unrecognized actuarial losses .................. 14,599 12,151 1,789 2,229
Unamortized prior service cost ................. 276 408 -- --
Unrecognized initial transition
obligation/(asset) ........................... (744) (761) 1,900 2,099
-------- -------- -------- --------
Accrued benefit cost ........................... $ (1,309) $ (2,360) $ (6,879) $ (6,426)
================================================================================================
Amounts recognized in the consolidated balance sheets are as follows:
================================================================================================
Postretirement
Pension Healthcare
------------------------------------------------------------------------------------------------
February February February February
26, 2005 28, 2004 26, 2005 28, 2004
------------------------------------------------------------------------------------------------
(in thousands of dollars)
Prepaid benefit cost ........................... $ 5,353 $ 3,827 $ -- $ --
Accrued benefit liability ...................... (16,808) (16,254) (6,879) (6,426)
Intangible asset ............................... 275 408 -- --
Accumulated other comprehensive expense ........ 9,871 9,659 -- --
Net amount recognized in the
consolidated balance sheets .................. $ (1,309) $ (2,360) $ (6,879) $ (6,426)
================================================================================================
Prior service cost changes are amortized on a straight-line basis over the
average remaining service period for employees active on the date of an
amendment. Gains and losses are amortized on a straight-line basis over the
average remaining service period of employees active on the valuation date.
At the end of fiscal 2005 and 2004 the qualified and non-qualified pension plans
had projected and accumulated benefit obligations in excess of plan assets, as
follows:
For Pension Plans Where:
======================================================================================================================
Projected Benefit Obligation Accumulated Benefit Obligation
Exceeds the Fair Value of Plan Assets Exceeds the Fair Value of Plan Assets
----------------------------------------------------------------------------------------------------------------------
February February February February
26, 2005 28, 2004 26, 2005 28, 2004
----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) (in thousands of dollars)
Projected benefit obligation $ 45,191 $ 39,709 $ 40,081 $ 35,055
Accumulated benefit obligation 40,591 37,657 36,429 33,872
Fair value of plan assets $ 29,751 $ 25,551 $ 24,851 $ 21,299
======================================================================================================================
The accumulated benefit obligation is less than the fair value of plan assets
for the Ireland pension plan.
The postretirement medical plan has no assets, and the premiums are paid on an
on-going basis. The accumulated postretirement benefit obligation at the end of
fiscal 2005 and 2004 was $10,568,000 and $10,755,000, respectively, and is
included in non-current liabilities.
The weighted-average assumptions used to calculate net period benefit costs are
as follows:
=====================================================================================================
U.S. Pension Plan Postretirement Healthcare Plan
-----------------------------------------------------------------------------------------------------
2005 2004 2003 2005 2004 2003
-----------------------------------------------------------------------------------------------------
Discount rate 6.0% 6.3% 7.0% 6.0% 6.3% 7.0%
Expected return on plan assets 8.0% 8.0% 8.5% N/A N/A N/A
Rate of compensation increase 4.0% 4.5% 5.0% N/A N/A N/A
Healthcare cost trend on
covered charges N/A N/A N/A 10.0%, 10.0%, 7.0%,
decreasing to decreasing to decreasing to
5.0% in 2009 5.0% in 2008 5.5% in 2005
=====================================================================================================
The discount rate and rate of compensation increase for the Ireland Pension Plan
are 5.3% and 3.3%, respectively, for 2005, 5.5% and 3.8%, respectively, for 2004
and 6.0% and 4.0%, respectively, for 2003.
The components of net periodic benefit cost are as follows:
====================================================================================================
Pension Postretirement Healthcare
----------------------------------------------------------------------------------------------------
February February March February February March
26, 2005 28, 2004 1, 2003 26, 2005 28, 2004 1, 2003
----------------------------------------------------------------------------------------------------
(in thousands of dollars)
Service cost ................... $ 1,419 $ 1,384 $ 1,184 $ 304 $ 283 $ 225
Interest cost .................. 2,414 2,390 2,316 568 602 514
Expected return on plan assets . (2,096) (1,451) (1,643) -- -- --
Amortization of:
Initial transition obligation (59) (51) (51) 199 199 221
Prior service cost .......... 132 131 133 -- -- --
Actuarial (gains) losses .... 808 1,117 688 -- 47 --
Curtailments and special
termination benefits ...... -- -- 187 -- -- 337
------- ------- ------- ------- ------- -------
Net periodic benefit cost ...... $ 2,618 $ 3,520 $ 2,814 $ 1,071 $ 1,131 $ 1,297
====================================================================================================
Expected benefit payments are as follows:
============================================================
Pension Postretirement Total
------------------------------------------------------------
2006 $ 2,459,361 $ 677,996 $ 3,137,357
2007 $ 3,108,988 $ 732,126 $ 3,841,114
2008 $ 3,628,888 $ 790,188 $ 4,419,076
2009 $ 3,483,036 $ 849,470 $ 4,332,506
2010 $ 3,301,677 $ 893,135 $ 4,194,812
2011-2015 $17,843,331 $ 4,744,350 $22,587,681
============================================================
The postretirement benefits payments do not include the impact of any Medicare D
subsidies, which are not expected to be material.
Increases in healthcare costs could significantly affect reported postretirement
benefits cost and benefit obligations. A one-percentage point change in assumed
healthcare benefit cost trends would have the following effect:
One Percentage Point
-------------------------------------------------------------------------
Increase Decrease
-------------------------------------------------------------------------
(in thousands of dollars)
On total service and interest
cost component ......................... $ 137 $ (113)
On postretirement benefit
obligation ............................. $ 1,225 $ (1,038)
=========================================================================
NOTE 12 - STOCK OPTION PLANS
The Company has Stock Option Plans that provide for the granting of
non-qualified stock options, incentive stock options and stock appreciation
rights (SARs) to employees, non-employee directors and consultants within the
meaning of Section 422A of the Internal Revenue Code. Options are granted with
an exercise price equal to the closing market price of the stock on the grant
date, vest within three years and expire ten years after the grant date.
The following table summarizes information about the Stock Option Plans.
February 26, 2005 February 28, 2004 March 1, 2003
-------------------------------------------------------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
-------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 3,800,407 $ 6.90 3,756,977 $ 6.73 3,956,127 $ 6.88
Granted 262,000 $ 9.34 890,000 $ 8.52 166,000 $ 10.12
Exercised (270,550) $ 4.55 (234,680) $ 4.85 (220,750) $ 6.21
Forfeited ( 28,938) $ 9.50 (611,890) $ 9.01 (144,400) $ 15.68
Outstanding at end of year 3,762,919 $ 7.22 3,800,407 $ 6.90 3,756,977 $ 6.73
Options exercisable at end of year 2,973,416 $ 6.80 2,973,323 $ 6.44 3,383,854 $ 6.32
Weighted average fair value of
options granted during the year $ 2.99 $ 2.70 $ 4.12
============================================================================================================
In 2005, the shares forfeited represent those cancelled due to termination of
employment; none expired during the year. In 2004, of the 611,890 stock options
shown as forfeited, 90,390 were unvested options which were lost when employees
were terminated from the Company. The remaining 521,500 "forfeited" options were
the results of the expiration of options in the normal course.
Summarized information about stock options outstanding and exercisable at
February 26, 2005 is as follows:
=========================================================================================================
Options Outstanding Options Exercisable
---------------------------------------------------------------------------------------------------------
Weighted Weighted
Outstanding Weighted Average Average Exercisable Average
as of Remaining Exercise as of Exercise
Exercise Price Range 2/26/2005 Contractual Life Price 2/26/2005 Price
---------------------------------------------------------------------------------------------------------
$ 1.76 - $ 3.53 753,984 2.9 $ 2.60 753,984 $ 2.60
$ 3.54 - $ 5.29 511,436 3.7 $ 4.51 511,436 $ 4.51
$ 5.30 - $ 7.05 98,500 4.3 $ 6.94 98,500 $ 6.94
$ 7.06 - $ 8.81 1,091,584 7.6 $ 8.27 564,081 $ 8.04
$ 8.82 - $10.57 1,077,165 6.9 $ 9.83 815,165 $ 9.98
$10.58 - $12.34 230,250 5.9 $11.24 230,250 $11.24
---------------------------------------------------------------------------------------------------------
3,762,919 5.7 $ 7.22 2,973,416 $ 6.80
=========================================================================================================
NOTE 13 - CAPITAL STOCK
In October 1999, the Company's Board of Directors authorized the repurchase of
up to 5 million shares of the Company's common stock. In October 2001, the
Company completed purchases against this authorization and the Company's Board
of Directors authorized the repurchase of up to another 5 million shares of the
Company's common stock. During fiscal 2005, the Company purchased 444,400 shares
at an average price of $9.25 per share.
There were no shares purchased as part of publicly announced plans in the most
recent quarter. The maximum number of shares that may yet be purchased under the
plan is 1,609,300 shares.
NOTE 14 - DIVIDENDS
On June 26, 2003, the Board of Directors of the Company initiated a regular
quarterly cash dividend of $0.04 per share. In fiscal 2005, four quarterly
payments totaling $0.16 per share or $6.5 million, were made and in 2004, three
quarterly payments totaling $0.12 per share, or $4.9 million, were made.
NOTE 15 - LEGAL PROCEEDINGS
In November 2000, the Commission of the European Communities (the "Commission")
began an investigation into whether Topps Europe's past distribution
arrangements for the sale of Pokemon products complied with European law (the
"EU investigation"). On June 17, 2003, the Commission filed a Statement of
Objections against The Topps Company, Inc. and its European subsidiaries,
therein coming to a preliminary conclusion that these entities infringed Article
81 of the EC treaty during 2000 by preventing parallel trade between member
states of the European Union. A hearing in front of the European Commission
Tribunal took place on October 23, 2003, and on May 27, 2004, the Commission
found The Topps Company, Inc. and its European subsidiaries jointly and
severally liable for infringement of Article 81(1) of the EC treaty. The
Commission imposed a total fine of 1.6 million euros ($1.9 million) which was
paid during fiscal 2005.
On February 17, 2000, Telepresence, Inc. sued Topps and nine other manufacturers
of trading cards (the "Defendants") in the Federal District Court for the
Central District of California for infringement of U.S. Patent No. 5,803,501
which was issued on September 8, 1998 (the "501 Patent"). In its suit,
Telepresence contended that the patent covers all types of "relic" cards that
contain an authentic piece of equipment, i.e., a piece of sporting equipment or
jersey. The court awarded summary judgment to the Defendants on the grounds that
the named Plaintiff (Telepresence, Inc.) did not have standing to sue for
infringement of the 501 patent. The motion was granted, and the litigation was
dismissed with prejudice on March 28, 2001.
After the dismissal, the 501 Patent was assigned to Media Technologies, Inc.
which is under the control of the same person (the inventor, Adrian Gluck) who
brought the Telepresence action. On November 19, 2001, Media Technologies sued
essentially the same group of defendants in the same court for infringement of
the 501 Patent. The court once again granted summary judgment and dismissed the
case with prejudice. The Court of Appeals for the Federal Circuit reversed the
judgment on July 11, 2003, and the case was returned to Judge Stotler in the
Central District of California for trial. On October 16, 2003, Media
Technologies amended its complaint by alleging that Defendants' sale of relic
cards additionally infringed U.S. Patent No. 6,142,532 (the "532 Patent") which
was issued on November 7, 2000 and is similar to the 501 Patent.
On March 17, 2004, Topps filed a motion for summary judgment based on
non-infringement while other defendants filed a motion for summary judgment
based on patent invalidity because of prior art. Both motions were denied on
July 26, 2004. On September 15, 2004, defendant Upper Deck Company, LLC ("Upper
Deck") moved for a separate trial on the issues of infringement, damages,
willfulness and counterclaims, a motion the other defendants subsequently
joined. On October 26, 2004, the court ruled that the patent validity issues
would be tried first, before those of infringement. The court otherwise refused
to bifurcate the trial.
On October 4, 2004, Defendants petitioned the United States Patent & Trademark
Office (the "PTO") to reexamine the patentability of both the 501 Patent and the
532 Patent. On October 25, 2004, Defendants also filed a motion with the
district court requesting a stay of the proceedings pending the petition with
the PTO. On December 2, 2004, the court denied the motion for the stay. In
mid-December, the PTO granted the petition for reexamination of the 501 and 532
Patents. Plaintiffs have petitioned the PTO to vacate the reexaminations and
have also filed papers requesting the PTO, in the event it decides to proceed
with the reexamination, to hold its claims patentable.
On December 29, 2004, Defendants once again filed a motion with the district
court requesting a stay of the proceedings while the PTO reexamines the
patentability of the 501 Patent and the 532 Patent. That motion was denied on
February 28, 2005, along with another motion to dismiss the case based on lack
of standing. The pretrial conference was held on March 21, 2005. Both parties
requested that the judge construe Plaintiff's issued patent claims, and
Defendants once again asked that the damages and infringement issues be tried
separately as to each party.
The trial was initially scheduled for February 2005 but was adjourned to June
2005. An adverse outcome in the litigation could result in a substantial
liability for the Company and could have a material impact on the Company's
financial statements. Plaintiff argues it is entitled to a royalty on all sales
of all product releases containing relic cards since issuance of the patent,
treble damages, and is also seeking to enjoin us from future distribution of
relic cards. It is not possible to determine the likelihood of any damages or
equitable relief , or to estimate the range of loss, if any. Accordingly, no
provision has been recorded for this matter in the accompanying condensed
consolidated financial statements.
The Company is a defendant in several other civil actions which are routine and
incidental to its business. In management's opinion, after consultation with
legal counsel, these other actions will not have a material adverse effect on
the Company's consolidated financial statements or results of operations.
NOTE 16 - SEGMENT AND GEOGRAPHIC INFORMATION
Following is the breakdown of industry segments as required by SFAS 131,
"Disclosures About Segments of an Enterprise and Related Information." The
Company has two reportable business segments: Confectionery and Entertainment.
The Confectionery segment consists of a variety of candy products including Ring
Pop, Push Pop, Baby Bottle Pop, Juicy Drop Pop, the Bazooka bubble gum line and,
from time to time, confectionery products based on licensed characters, such as
Pokemon and Yu-Gi-Oh!
The Entertainment segment primarily consists of cards and sticker album products
featuring sports and non-sports subjects. Trading cards feature players from
Major League Baseball, the National Basketball Association, the National
Football League, and the National Hockey League (although our contract with the
NHL has expired), as well as characters from popular films, television shows and
other entertainment properties. Sticker album products feature players from the
English Premier League and characters from entertainment properties such as
Pokemon and Yu-Gi-Oh! This segment also includes products from WizKids, a
designer and marketer of strategy games acquired in July 2003.
The Company's chief decision-maker regularly evaluates the performance of each
segment based upon its contributed margin, which is profit after cost of goods,
product development, advertising and promotional costs and obsolescence, but
before general and administrative expenses and manufacturing overhead,
depreciation and amortization, other income (expense), net interest and income
taxes.
The majority of the Company's assets are shared across both segments, and the
Company's chief decision-maker does not evaluate the performance of each segment
utilizing asset-based measures. Therefore, the Company does not include a
breakdown of assets or depreciation and amortization by segment.
BUSINESS SEGMENTS
Year Ended
================================================================================
February February March
26, 2005 28, 2004 1, 2003
--------------------------------------------------------------------------------
(in thousands of dollars)
Net sales
---------
Confectionery ............................. $ 143,762 $ 147,188 $ 146,901
Entertainment ............................. 152,103 150,150 143,214
--------- --------- ---------
Total net sales ......................... $ 295,865 $ 297,338 $ 290,115
_______________________________________________________________________________
Contributed margin
------------------
Confectionery ............................. $ 46,781 $ 45,734 $ 52,101
Entertainment ............................. 45,135 42,467 39,313
--------- -------- --------
Total contributed margin ................ $ 91,916 $ 88,201 $ 91,414
_______________________________________________________________________________
Reconciliation of contributed margin to
income before provision for income taxes
----------------------------------------
Total contributed margin .................. $ 91,916 $ 88,201 $ 91,414
Unallocated general and administrative
expenses and manufacturing overhead ...... (75,363) (67,644) (65,778)
Depreciation & amortization ............... (6,261) (6,593) (5,038)
Other income .............................. 1,675 631 184
--------------------------------------------------------------------------------
Income from operations ................. 11,967 14,595 20,782
Interest income, net ...................... 2,706 2,426 2,516
--------------------------------------------------------------------------------
Income before provision for income taxes $ 14,673 $ 17,021 $ 23,298
================================================================================
Net sales to unaffiliated customers and income from operations are based on the
location of the ultimate customer. Income from operations is defined as
contributed margin less unallocated general and administrative expenses and
manufacturing overhead, depreciation and amortization, and other income. Certain
foreign markets are in part supported from the U.S. and Europe; however, the
full costs of this support have not been allocated to them. Identifiable assets
are those assets located in each geographic area.
GEOGRAPHIC AREAS
Year Ended
=========================================================================
February February March
26, 2005 28, 2004 1, 2003
-------------------------------------------------------------------------
(in thousands of dollars)
Net Sales
---------
United States ..................... $ 199,632 $ 203,602 $ 212,496
Europe ............................ 70,252 65,135 48,555
Canada, Latin America and Asia .... 25,981 28,601 29,064
--------- --------- ---------
Total Net Sales ............... $ 295,865 $ 297,338 $ 290,115
_________________________________________________________________________
Income from Operations
----------------------
United States ..................... $ 6,315 $ 1,410 $ 9,428
Europe ............................ 795 9,535 5,406
Canada, Latin America and Asia .... 4,857 3,650 5,948
--------- --------- ---------
Total Income from Operations... $ 11,967 $ 14,595 $ 20,782
_________________________________________________________________________
Identifiable Assets
-------------------
United States ..................... $ 236,995 $ 214,615 $ 214,525
Europe ............................ 47,623 55,520 41,020
Canada, Latin America and Asia .... 5,793 5,328 7,456
--------- --------- ---------
Total Identifiable Assets ..... $ 290,411 $ 275,463 $ 263,001
=========================================================================
NOTE 17 - ACQUISITION OF WIZKIDS, LLC
On July 9, 2003, the Company acquired Wizkids, LLC ("WizKids"), a designer and
marketer of collectible strategy games, for a cash purchase price of
approximately $28.4 million. It is believed that the acquisition will serve to
enhance and accelerate the expansion of the Company's entertainment business.
The acquisition was accounted for using the purchase method of accounting. The
financial statements of WizKids have been consolidated into the financial
statements of the Company subsequent to the acquisition. The allocation of the
purchase price is reflected in the financial statements contained herein.
The total consideration paid by the Company to WizKids' shareholders was
comprised of $29,500,000 in cash, net of a working capital adjustment of
$1,123,500. The purchase price also reflected a $1,326,130 payment to a third
party for associated licenses and legal, accounting, and investment banking fees
of $679,075. The purchase price was determined based on discounted cash flow
projections, which reflected expected synergies with the Company.
The purchase price includes a $6.2 million allocation for intellectual property
rights associated with the WizKids product line, which is being amortized over
an estimated useful life of 6 years. There were no contingent payments with the
purchase price.
Contemporaneous with the acquisition, the Company entered into an employment
agreement with Jordan Weisman, the majority shareholder and founder of WizKids,
for a forty-eight month period following the closing. As part of this employment
agreement, $2 million of the consideration paid to Mr. Weisman as a shareholder
is being accounted for as deferred compensation, and is being amortized over
four years. If Mr. Weisman does not remain a WizKids' employee for the full four
years of the agreement, he will be required to pay the Company the unamortized
balance of his deferred compensation. As an additional part of his employment
agreement, Mr. Weisman is entitled to contingent payments during the forty-eight
months subsequent to the closing equal to 2% of WizKids' annual net revenue in
excess of $35 million, assuming that certain operating margin targets are met.
In addition, Mr. Weisman was granted 165,000 options to acquire the Company's
common stock, which were granted at fair market value on the date of grant and
vest over a four-year period.
The following table sets forth the components of the purchase price:
Total consideration $ 29,500,000
Less: Working capital adjustment (1,123,500)
Deferred compensation agreement (2,000,000)
Add: Purchase of license 1,326,130
Transaction costs 679,075
-------------
Total purchase price $ 28,381,705
=============
The following table provides the fair value of the acquired assets and
liabilities assumed based upon WizKids' July 9, 2003 balance sheet:
Current assets $ 8,201,851
Property and equipment 564,743
Other assets 115,000
Liabilities assumed, current (5,426,072)
-------------
Fair value of net assets acquired 3,455,522
Intangible assets 6,200,000
Goodwill 18,726,183
-------------
Total estimated fair value of net
assets acquired and goodwill $ 28,381,705
=============
The final purchase price differs slightly from the amount shown for Purchase of
Subsidiary in the Consolidated Statement of Cash Flows which reflects estimated
transaction costs as of February 28, 2004.
The goodwill of $18.7 million is included in the Entertainment business segment
and is deductible for tax purposes over a fifteen-year period.
The impact of including WizKids in the consolidated statements of operations on
a pro forma basis as if the acquisition had occurred on March 3, 2002, is as
follows:
Year Ended
=========================================================================
February March
28, 2004 1, 2003
-------------------------------------------------------------------------
(amounts in thousands, except share data)
Net sales ....................... $ 310,726 $ 324,119
Income from operations .......... 12,792 25,587
Net income ...................... $ 11,584 $ 20,043
--------- ---------
Net income per share - basic .... $ 0.29 $ 0.48
- diluted .. $ 0.28 $ 0.48
=========================================================================
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable and accrued
liabilities approximates fair value due to their short-term nature.
The Company enters into foreign currency forward contracts to hedge its foreign
currency exposure. As of February 26, 2005, the Company had outstanding foreign
currency forward contracts, which will mature at various dates during fiscal
2006, in the amount of $26,563,000, as compared to $22,996,000 as of February
28, 2004. Over 67% of the contracts will mature within six months.
The fair value of these forward contracts is the amount the Company would
receive or pay to terminate them. The approximate pre-tax benefit or cost to the
Company to terminate these agreements as of February 26, 2005 and February 28,
2004 would have been $49,000 and $(127,000) respectively. The Company may be
exposed to credit losses in the event of non-performance by counterparties to
these instruments. Management believes, however, the risk of incurring such
losses is remote as the contracts are entered into with major financial
institutions.
NOTE 19 - OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
expected to be material.
NOTE 20- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
================================================================================'===================================================
2005 ' 2004
________________________________________________________________________________'___________________________________________________
1st 2nd 3rd 4th ' 1st 2nd 3rd 4th
--------------------------------------------------------------------------------'---------------------------------------------------
(in thousands of dollars, except share data)
Net sales $ 88,089 $ 68,781 $ 70,650 $ 68,345 ' $ 75,992 $ 73,319 $ 78,470 $ 69,557
Gross profit on sales 33,799 26,280 23,660 21,459 ' 28,124 28,759 24,322 22,716
Income from operations 5,639 4,812 3,228 (1,712)' 4,383 7,558 655 1,999
--------------------------------------------------------------------------------'---------------------------------------------------
Net income 4,102 3,655 2,791 451 ' 3,521 5,272 982 2,920
--------------------------------------------------------------------------------'---------------------------------------------------
Net income per share-basic $ 0.10 $ 0.09 $ 0.07 $ 0.01 ' $ 0.09 $ 0.13 $ 0.02 $ 0.07
-diluted $ 0.10 $ 0.09 $ 0.07 $ 0.01 ' $ 0.08 $ 0.13 $ 0.02 $ 0.07
================================================================================'===================================================
NOTE 21- CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Future minimum payments under existing key contractual obligations are as
follows:
Future Future
Payments Payments
Under Non- Under
Fiscal Cancelable Purchase Royalty
Year Leases Obligations Contracts Total
---- ------ ----------- --------- -----
(in thousands of dollars)
2006 $ 2,733 $12,198 $12,088 $27,019
2007 2,361 175 10,944 13,480
2008 1,956 - 3,726 5,682
2009 1,770 - - 1,770
2010 1,644 - - 1,644
Thereafter 1,139 - - 1,139
The Company anticipates making a payment of approximately $3 - 4 million in
fiscal 2006 for the funding of its qualified pension plans.
Historically, lease expense under the Company's contracts was $3,141,000 (2005),
$2,752,000 (2004) and $2,332,000 (2003).
Historically, the total royalty expense under the Company's sports and
entertainment licensing contracts was $24,916,000 (2005), $23,912,000 (2004) and
$25,344,000 (2003).
NOTE 22 - SUBSEQUENT EVENT
On May 23, 2005 the Company entered into a settlement agreement with Media
Technologies, Inc. ("Plaintiff") in which it would pay Plaintiff an immediate
sum of $2,000,000. Plaintiff agreed to dismiss all claims against the Company
and issue a license to the Company to distribute relic cards. The Company
further agreed that under certain conditions which may arise in the future, it
would make additional payments to the Plaintiff as part of the ongoing license.
The Company is currently evaluating the accounting of the settlement and the
license agreement.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONSOLIDATED
FINANCIAL STATEMENTS
To the Board of Directors and Stockholders of The Topps Company, Inc.
We have audited the accompanying consolidated balance sheets of The Topps
Company, Inc. and its subsidiaries (the "Company") as of February 26, 2005 and
February 28, 2004, and the related consolidated statements of operations,
stockholders' equity and comprehensive income, and of cash flows for each of the
three years in the period ended February 26, 2005. Our audits also include the
consolidated financial statement schedule listed in the Index at Item 15. These
consolidated financial statements and consolidated financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of February 26, 2005
and February 28, 2004, and the results of their operations and of their cash
flows for each of the three years in the period ended February 26, 2005, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
New York, New York
May 10, 2005 (May 23, 2005 as to note 22)
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of The Topps Company, Inc. (the "Company") is responsible for
establishing and maintaining adequate internal control over financial reporting.
The Company's internal control over financial reporting is designed to provide
reasonable assurance to the Company's management and to the Board of Directors
regarding the preparation and presentation of financial statements in accordance
with accounting principles generally accepted in the United States of America
("GAAP").
Internal control over financial reporting, no matter how well designed, has
inherent limitations. Therefore, even those internal controls determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of February 26, 2005. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control --- Integrated Framework. Based
on this assessment and those criteria, we believe that, as of February 26, 2005,
the Company's internal control over financial reporting was effective.
Deloitte & Touche LLP, the Company's independent registered public accounting
firm, has issued an audit report on management's assessment of the Company's
internal control over financial reporting, and their report is included herein.
The Topps Company, Inc.
New York, NY
May 23, 2005
REPORT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Board of Directors and Stockholders
The Topps Company, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting that The Topps
Company, Inc. and its subsidiaries ("the "Company") maintained effective
internal control over financial reporting as of February 26, 2005, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO
criteria). The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States) ("PCAOB"). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control over
financial reporting, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
A Company's internal control over financial reporting is a process designed by
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and disposition of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of February 26, 2005 is fairly
stated, in all material respects, based on the criteria established in Internal
Control-Integrated Framework issued by COSO. Also, in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of February 26, 2005, based on the criteria established in Internal
Control-Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the PCAOB, the
Company's consolidated financial statements and financial statement schedule as
of and for the year ended February 26, 2005 and our report dated May 10, 2005
(May 23, 2005 as to Note 22)expressed an unqualified opinion on those
consolidated financial statements and financial statement schedule.
DELOITTE & TOUCHE LLP
New York, New York
May 23, 2005
MARKET AND DIVIDEND INFORMATION
The Company's common stock is traded on the Nasdaq National Market under the
symbol TOPP. The following table sets forth, for the periods indicated, the high
and low stock price for the common stock as reported on the Nasdaq National
Market as well as cash dividends per share paid by the Company. As of February
26, 2005, there were approximately 4,500 shareholders of record.
================================================================================
Fiscal Year Ended Fiscal Year Ended
February 26, 2005 February 28, 2004
________________________________________________________________________________
Stock Price Dividends Stock Price Dividends
High Low Paid High Low Paid
--------------------------------------------------------------------------------
First quarter $ 9.76 $ 8.40 $ 0.04 $ 9.52 $ 7.24 $ -
Second quarter $ 10.09 $ 8.82 $ 0.04 $ 9.25 $ 8.00 $ 0.04
Third quarter $ 10.55 $ 9.23 $ 0.04 $ 10.75 $ 8.92 $ 0.04
Fourth quarter $ 10.00 $ 9.38 $ 0.04 $ 10.69 $ 8.97 $ 0.04
================================================================================
SELECTED CONSOLIDATED FINANCIAL DATA
===========================================================================================================
2005 2004 2003 2002 2001
___________________________________________________________________________________________________________
(in thousands of dollars, except share data, unaudited)
OPERATING DATA:
Net sales ........................... $ 295,865 $ 297,338 $ 290,115 $ 300,180 $ 437,440
Gross profit on sales ............... 105,198 103,921 101,740 113,841 199,911
Selling, general and
administrative expenses ............ 94,906 89,957 81,142 77,062 80,958
Income from operations .............. 11,967 14,595 20,782 36,564 121,917
Interest income, net ................ 2,706 2,426 2,516 4,894 5,717
Net income .......................... 10,999 12,695 16,936 28,462 88,489
Net income per share - basic ........ $ 0.27 $ 0.31 $ 0.41 $ 0.66 $ 1.97
- diluted ...... $ 0.27 $ 0.31 $ 0.40 $ 0.64 $ 1.91
Dividends per share ................. $ 0.16 0.12 -- -- --
Wtd. avg. shares outstanding - basic 40,471,000 40,604,000 41,353,000 43,073,000 45,011,000
- diluted 41,327,000 41,515,000 42,065,000 44,276,000 46,366,000
___________________________________________________________________________________________________________
BALANCE SHEET DATA:
Cash and equivalents ................ $ 36,442 $ 56,959 $ 85,684 $ 98,007 $ 134,391
Short-term investments .............. 69,955 36,878 28,575 23,050 24,350
Working capital ..................... 138,146 133,299 141,484 136,389 140,487
Net property, plant and equipment ... 12,553 13,786 14,606 14,606 11,181
Long-term debt ...................... -- -- -- -- --
Total assets ........................ 290,411 275,463 263,001 257,950 280,272
Stockholders' equity ................ 219,189 211,277 196,768 194,054 196,542
===========================================================================================================
Certain items in the prior years' financial statements have been reclassified to
conform with the current year's presentation.
BOARD OF DIRECTORS
------------------
Arthur T. Shorin Ann Kirschner* Jack H. Nusbaum
Chairman and Chief President Partner and Chairman
Executive Officer Comma International Willkie Farr & Gallagher, LLP
Allan A. Feder David Mauer Richard Tarlow*
Independent Business Chief Executive Officer Chairman
Consultant E&B Giftware, LLC Roberts & Tarlow
Stephen D. Greenberg* Edward D. Miller Stanley Tulchin
Managing Director Former President and CEO Chairman
Allen & Company, LLC AXA Financial, Inc. STA International
*Nominated to stand for re-election to the Company's Board of Directors at the
2005 Annual Meeting of Stockholders.
OFFICERS
--------
Arthur T. Shorin Michael P. Clancy Warren Friss William G. O'Connor
Chairman and Chief Vice President - Vice President - Vice President -
Executive Officer International and Managing General Counsel and Administration
Director, Topps General Manager Sports
International Limited
Scott Silverstein Michael J. Drewniak Catherine K. Jessup John Perillo
President and Chief Vice President - Vice President - Vice President -
Operating Officer Manufacturing Chief Financial Officer Operations
and Treasurer
Ronald L. Boyum Ira Friedman Michael K. Murray Christopher Rodman
Vice President - Marketing Vice President - Vice President - Vice President -
and Sales and General Publishing and New Product Confectionery Sales Topps Europe
Manager Confectionery Development
Edward P. Camp
Vice President and
President - Hobby Division
SUBSIDIARIES
------------
Topps Argentina, SRL Topps Canada, Inc. Topps International Limited Topps UK Limited
Managing Director - General Manager - Managing Director - Managing Director -
Juan P. Georgalos Michael Pearl Michael P. Clancy Jeremy Charter
Topps Europe Limited Topps Italia, SRL WizKids, Inc. Topps Finance, Inc.
Managing Director - Managing Director - President -
Christopher Rodman Furio Cicogna Jordan Weisman Topps Enterprises, Inc.
CORPORATE INFORMATION
Annual Meeting Corporate Counsel Registrar and Transfer Agent
Thursday, June 30, 2005 Willkie Farr & Gallagher, LLP American Stock Transfer & Trust Company
10:30 A.M. 787 Seventh Avenue 59 Maiden Lane
J.P. Morgan Chase & Co. New York, NY 10019 New York, NY 10038
One Chase Manhattan Plaza 877-777-0800 ext 6820
New York, NY 10081
Investor Relations Independent Auditors
Brod & Schaffer, LLC Deloitte & Touche LLP
230 Park Avenue, Suite 1831 Two World Financial Center
New York, NY 10169 New York, NY 10281
Form 10-K -- A copy of the Company's Annual Report on Form 10-K as filed with
the Securities and Exchange Commission is available without charge at the Topps
website www.topps.com or upon written request to the Chief Financial Officer.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No.
333-116234 of The Topps Company, Inc. on Form S-8 of our report dated May 10,
2005 (May 23, 2005, as to Note 22) relating to the consolidated financial
statements and consolidated financial statement schedule of The Topps Company,
Inc. and its subsidiaries and our report dated May 23, 2005 relating to
management's report on the effectiveness of internal control over financial
reporting appearing in the Annual Report on Form 10-K/A of the The Topps
Company, Inc., for the year ended February 26, 2005.
DELOITTE & TOUCHE LLP
New York, New York
May 23, 2005
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Arthur T. Shorin, certify that:
1. I have reviewed this annual report on Form 10-K of The Topps Company,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
controls over financial reporting (as defined under Exchange Act Rules
13a-15(f) and 15a-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
(b) Designed such internal control over financial reporting or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of the financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
(c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
annual report based on such evaluation; and
(d) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 23, 2005
/s/ Arthur T. Shorin
------------------------------------
Arthur T. Shorin
Chairman and Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Catherine K. Jessup, certify that:
1. I have reviewed this annual report on Form 10-K of The Topps Company,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) )) and internal
controls over financial reporting (as defined under Exchange Act Rules
13a-15(f) and 15a-15(f)for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this annual report is being prepared;
(b) Designed such internal control over financial reporting or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of the financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
(c) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this annual report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
annual report based on such evaluation; and
(d) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and(b) Any fraud, whether or not material, that
involves management or other employees who have a significant
role in the registrant's internal control over financial
reporting.
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 23, 2005
/s/ Catherine K. Jessup
-------------------------------------
Catherine K. Jessup
Chief Financial Officer and Treasurer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Topps Company, Inc. (the "Company")
on Form 10-K for the year ended February 26, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Arthur T. Shorin,
Chairman, Chief Executive Officer and President of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Arthur T. Shorin
----------------------------
Arthur T. Shorin
Chairman and Chief Executive
Officer
May 23, 2005
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of The Topps Company, Inc. (the "Company")
on Form 10-K for the year ended February 26, 2005 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), I, Catherine K.
Jessup, Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934 as amended; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Catherine K. Jessup
--------------------------------
Catherine K. Jessup
Vice President - Chief Financial
Officer and Treasurer
May 23, 2005