Edgar Filing: TOPPS CO INC

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

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended May 28, 2005

[ ] 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: 000-15817

THE TOPPS COMPANY, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation or organization)

11-2849283
(I.R.S. Employer Identification No.)

One Whitehall Street, New York, NY 10004
(Address of principal executive offices, including zip code)

(212) 376-0300
(Registrant's telephone number, including area code)

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 whether the registrant is an accelerated filer (as
defined in Rule 12(b)-2 of the Act). Yes X No _. -

The number of outstanding shares of Common Stock as of July 5, 2005 was
40,511,639.

THE TOPPS COMPANY, INC.
AND SUBSIDIARIES

--------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
--------------------------------------------------------------------------------

ITEM 1. FINANCIAL STATEMENTS

Index Page
---- ----

Condensed Consolidated Balance Sheets as of May 28,
2005 (unaudited) and February 26, 2005 3

Condensed Consolidated Statements of Operations for the
thirteen weeks ended May 28, 2005 and May 29, 2004 4

Condensed Consolidated Statements of Comprehensive Income
for the thirteen weeks ended May 28, 2005 and May 29, 2004 5

Condensed Consolidated Statements of Cash Flows for the
thirteen weeks ended May 28, 2005 and May 29, 2004 6

Notes to Condensed Consolidated Financial Statements 7

Report of Independent Registered Public Accounting Firm 14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15

ITEM 3. DISCLOSURES ABOUT MARKET RISK 19

ITEM 4. CONTROLS AND PROCEDURES 20

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PART II - OTHER INFORMATION
--------------------------------------------------------------------------------

ITEM 1. LEGAL PROCEEDINGS 21

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 22

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23

THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)
May February
28, 2005 26, 2005
-------- --------
(amounts in thousands,
except share data)

ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 22,048 $ 36,442
Short-term investments ............................. 70,881 69,955
Accounts receivable - net .......................... 27,560 27,851
Inventories ........................................ 37,949 32,936
Income tax receivable .............................. 327 338
Deferred tax assets ................................ 4,025 3,616
Prepaid expenses and other current assets .......... 13,113 14,541
--------- ---------
TOTAL CURRENT ASSETS ......................... 175,903 185,679

PROPERTY, PLANT AND EQUIPMENT ........................ 35,656 34,983
Less: accumulated depreciation and amortization ... 23,125 22,430
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT ............ 12,531 12,553

GOODWILL ............................................. 67,566 67,566
INTANGIBLE ASSETS, net of accumulated amortization ... 8,095 8,544
DEFERRED TAX ASSETS .................................. 4,502 4,222
OTHER ASSETS ......................................... 13,281 11,847
--------- ---------
TOTAL ASSETS ................................. $ 281,878 $ 290,411
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................... $ 12,166 $ 12,658
Accrued expenses and other liabilities ............. 22,566 27,485
Income taxes payable ............................... 6,526 7,390
--------- ---------
TOTAL CURRENT LIABILITIES .................... 41,258 47,533

OTHER LIABILITIES .................................... 23,918 23,689
--------- ---------
TOTAL LIABILITIES ............................ 65,176 71,222
--------- ----------

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
shares as of May 28, 2005 and February 26, 2005 .... 492 492

Additional paid-in capital ......................... 28,333 28,293

Treasury stock, 8,790,000 shares as of both
May 28, 2005 and February 26, 2005, respectively ... (85,060) (85,060)

Retained earnings .................................. 274,505 275,226
Accumulated other comprehensive (loss) income
net of tax ......................................... (1,568) 238
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................... 216,702 219,189
--------- ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $ 281,878 $ 290,411
========= =========

See Notes to Condensed Consolidated Financial Statements.

THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
Thirteen weeks ended
May 28, 2005 May 29, 2004
------------ ------------
(amounts in thousands,
except share data)

Net sales ................................... $ 78,866 $ 88,089

Cost of sales ............................... 51,192 54,290
-------- --------
Gross profit on sales ................. 27,674 33,799

Other income, net ........................... 952 433

Selling, general and administrative expenses 28,229 28,593
-------- --------
Income from operations ................. 397 5,639

Interest income, net ........................ 739 484
-------- --------
Income before provision for income taxes .... 1,136 6,123

Provision for income taxes .................. 239 2,021
-------- --------
Net income ................ $ 897 $ 4,102
======== ========

Net income per share - basic ................ $ 0.02 $ 0.10
- diluted .............. 0.02 0.10

Weighted average shares outstanding - basic . 40,455,000 40,567,000
- diluted 41,255,000 41,372,000

See Notes to Condensed Consolidated Financial Statements.

THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME

(Unaudited)
Thirteen weeks ended
May May
28, 2005 29, 2004
-------- --------
(amounts in thousands)

Net income ........................ $ 897 $ 4,102

Currency translation adjustment ... (1,806) (867)
--------- --------

Comprehensive income .............. $ ( 909) $ 3,235
======== ========

See Notes to Condensed Consolidated Financial Statements.

THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)
Thirteen weeks ended
May May
28, 2005 29, 2004
-------- --------
(amounts in thousands)

Cash flows from operating activities:
Net income ........................................... $ 897 $ 4,102
Adjustments to reconcile net income to cash flow
provided by (used in) operating activities:
Depreciation and amortization ........................ 1,431 1,592
Deferred income taxes ................................ (689) 227

Changes in operating assets and liabilities:
Accounts receivable .................................. 291 (2,231)
Inventories .......................................... (5,013) (2,976)
Income tax receivable/payable ........................ (853) 1,727
Prepaid expenses and other current assets ............ 1,428 1,783
Payables and other current liabilities ............... (5,411) 2,706
Cumulative foreign currency adjustment and other ..... (1,516) (176)
-------- --------
Cash (used in) provided by operating activities ... (9,435) 6,754
-------- --------
Cash flows from investing activities:
Net purchases of short-term investments .............. (926) (5,210)
Additions to property, plant and equipment ........... (673) (747)
-------- --------
Cash used in investing activities ................ (1,599) (5,957)
-------- --------
Cash flows from financing activities:
Dividends paid to stockholders ....................... (1,618) (1,625)
Purchase of treasury stock, exercise of stock
options, and stock compensation....................... 40 (1,277)
------- --------
Cash used in financing activities ................ (1,578) (2,902)

Effect of exchange rates on cash and cash equivalents .. (1,782) (569)

Net (decrease) increase in cash and cash equivalents ... $(14,394) $ (2,674)

Cash and cash equivalents at beginning of period ....... $ 36,442 $ 56,959
--------- ---------
Cash and cash equivalents at end of period ............. $ 22,048 $ 54,285
========= =========

Supplemental disclosure of cash flow information:

Interest paid ........................................ $ 28 $ 58

Income taxes paid .................................... $ 1,123 $ 897

See Notes to Condensed Consolidated Financial Statements.

THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 28, 2005 AND FEBRUARY 26, 2005
AND FOR THE THIRTEEN WEEKS ENDED MAY 28, 2005 AND MAY 29, 2004

1. Summary of Significant Accounting Policies
------------------------------------------

Basis of Presentation:
The accompanying unaudited condensed interim consolidated financial
statements have been prepared by The Topps Company, Inc. and its
subsidiaries (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission and reflect all adjustments which are,
in the opinion of management, considered necessary for a fair presentation.
Operating results for the thirteen-week periods ended May 28, 2005 and May
29, 2004 are not necessarily indicative of the results that may be expected
for the year. For further information, refer to the consolidated financial
statements and notes thereto in the Company's annual report for the year
ended February 26, 2005.

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 Accounting Principles Board ("APB") Opinion 25, "Accounting for Stock
Issued to Employees." Information relating to stock-based employee
compensation, including the pro forma effects, 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:

May 28, 2005 May 29, 2004
----------------------- ------------------------
As reported Pro forma As reported Pro forma
----------------------- ------------------------
Net income, as reported $ 897 $ 897 $ 4,102 $ 4,102
Less: Stock-based
employee compensation -- (116) (141)
Pro forma net income ..... $ 897 $ 781 $ 4,102 $ 3,961
Earnings per share:
Basic ................. $ 0.02 $ 0.02 $ 0.10 $ 0.10
Diluted ............... $ 0.02 $ 0.02 $ 0.10 $ 0.10

Options have an exercise price equal to the closing market price on the
date prior to the grant date and typically vest over a three-year period.
No options were issued in the first quarter of fiscal 2006. With respect to
options issued in prior years, 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 with the
following assumptions: $0.16 per share dividend on fiscal 2005 and fiscal
2004 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.

2. Quarterly Comparison
--------------------

Management believes that quarter-to-quarter comparisons of sales and
operating results are affected by a number of factors, including, but not
limited to, the timing of sports and entertainment releases, new product
introductions, seasonal products, the timing of various expenses such as
advertising and variations in shipping and factory scheduling requirements.
Thus, quarterly results may vary.

3. Accounts Receivable
-------------------

(Unaudited)
May February
28, 2005 26, 2005
-------- --------
(amounts in thousands)

Gross receivables ............. $ 51,574 $ 51,265
Reserve for returns ........... (21,293) (20,824)
Other reserves ................ (2,721) (2,590)
-------- --------
Net receivables ............ $ 27,560 $ 27,851
======== ========

Other reserves consist of allowances for discounts, doubtful accounts and
customer deductions for promotional marketing programs.

4. Inventories
-----------

(Unaudited)
May February
28, 2005 26, 2005
-------- --------
(amounts in thousands)

Raw materials .................. $ 8,881 $ 7,468
Work in process ................ 4,934 3,703
Finished products .............. 24,134 21,765
-------- --------
Total inventories ......... $ 37,949 $ 32,936
======== ========

5. Segment Information
-------------------

Following is the breakdown of industry segments as required by SFAS No.
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 and Juicy Drop Pop, the Bazooka bubble
gum line and confectionery products based on licensed characters, such as
Pokemon and Yu-Gi-Oh!.

The Entertainment segment includes 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, historically, the National Hockey League, as
well as characters from popular films, television shows and other
entertainment properties, from time to time. 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 results
from WizKids, a designer and marketer of strategy games that the Company
acquired in July 2003.

The Company's Chief Executive Officer regularly evaluates the performance
of each segment based upon its contributed margin, which is profit after
cost of sales, product development, advertising and promotional costs and
obsolescence, but before unallocated general and administrative expenses
and manufacturing overhead, depreciation and amortization, other income,
net interest and income taxes.

The majority of the Company's assets are shared across both segments and,
accordingly, the Company's Chief Executive Officer 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.

Thirteen weeks ended
May May
28, 2005 29, 2004
(amounts in thousands)
Net Sales
---------
Confectionery $ 44,039 $ 44,207
Entertainment 34,827 43,882
-------- --------
Total $ 78,866 $ 88,089
======== ========

Contributed Margin
------------------
Confectionery $ 11,840 $ 13,002
Entertainment 8,281 13,428
-------- --------
Total $ 20,121 $ 26,430
======== ========

Reconciliation of Contributed Margin
to Income Before Provision
for Income Taxes:

Total contributed margin $ 20,121 $ 26,430
Unallocated general and
administrative expense
and manufacturing overhead (19,245) (19,632)
Depreciation and amortization (1,431) (1,592)
Other income, net 952 433
--------- ---------
Income from operations 397 5,639
Interest income, net 739 484
--------- ---------
Income before provision
for income taxes $ 1,136 $ 6,123
========= =========

6. Dividend and Share Repurchase Programs
--------------------------------------

In June 2003, the Board of Directors of the Company initiated a quarterly
dividend of $0.04 per share which has been paid each quarter since that
date.

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 the authorization and the Board approved the purchase
of another 5 million shares. To-date under these two programs, the Company
has purchased 8,390,700 shares.

7. Credit Agreement
----------------

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 set aside for
letters of credit, the entire credit line was available as of May 28, 2005.

Interest rates are variable and are a function of the Company's earnings
before interest, taxes, depreciation and amortization ("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 repurchase its shares, sell or acquire assets or
borrow additional money. There was no debt outstanding as of February 26,
2005 or May 28, 2005.

8. Reclassifications
-----------------

Certain items in the prior years' financial statements have been
reclassified to conform with the current year's presentation.

9. Goodwill and Intangible Assets
------------------------------

On March 3, 2002, the Company adopted SFAS 141 "Business Combinations" and
SFAS 142 "Goodwill and Other Intangible Assets" which require the Company
to prospectively cease amortization of goodwill and instead conduct
periodic tests of goodwill for impairment. Intangible assets as of May 28,
2005 and February 26, 2005 were as follows:

(Unaudited)
May 28, 2005 February 26, 2005
(amounts in thousands)
Gross ' Gross
Carrying Accumulated ' Carrying Accumulated
Value Amortization Net ' Value Amortization Net
-------- ------------ -------- ' -------- ------------ --------

Licenses and Contracts ........ $ 21,569 $(18,109) $ 3,460 ' $ 21,569 $(17,942) $ 3,627
Intellectual Property ......... 18,784 (14,542) 4,242 ' 18,784 (14,284) 4,500
Software and Other ............ 2,953 (2,835) 118 ' 2,953 ( 2,811) 142
Min. Pension Liab. ............ 275 -- 275 ' 275 -- 275
-------- --------- -------- ' -------- --------- --------
Total Intangibles ............. $ 43,581 $(35,486) $ 8,095 ' $ 43,581 $(35,037) $ 8,544
======== ========= ======== ' ======== ========= ========

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
Category Useful Life Remaining 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
estimates annual amortization of the intangible assets detailed above to be
as follows:

Fiscal Year Amount
----------- ------
(in thousands)
2006 $ 1,797
2007 $ 1,750
2008 $ 1,703
2009 $ 1,703
2010 and thereafter $ 1,591

In addition to the amortization of intangibles listed above, reported
amortization expense, which was $595,000 and $655,000 for the thirteen
weeks ended May 28, 2005 and May 29, 2004, respectively, included
amortization of deferred financing fees and deferred compensation costs.

10. Legal Proceedings
-----------------

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 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 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
petitioned the PTO to vacate the reexaminations and 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
reexamined 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. On May 23, 2005 the Company
entered into a settlement agreement with Media Technologies, Inc. in which
it paid Media Technologies, Inc. a sum of $2,000,000. Plaintiff agreed to
dismiss all claims against the Company and to issue a license to the
Company to distribute relic cards for seven years. The Company further
agreed that under certain conditions which may arise in the future, it
would make additional payments to Media Technologies, Inc. as part of the
ongoing license. The Company has accounted for the payment as an advance
against future royalties which will be amortized over the next seven years.

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 financial condition or results of operations.

11. Employee Benefit Plans
----------------------

The components of net periodic benefit costs for the thirteeen weeks ended
May 28, 2005 and May 29, 2004 are as follows:

Postretirement
Pension Healthcare
--------------------------------------------------------------------------------
May May May May
28, 2005 29, 2004 28, 2005 29, 2004
--------------------------------------------------------------------------------
(amounts in thousands)

Service cost $ 399 $ 345 $ 93 $ 82
Interest cost 618 594 143 161
Expected return on plan assets (551) (534) - -
Amortization of:
Initial transition obligation ( 16) ( 15) 50 50
Prior service cost 13 33 - -
Actuarial losses 238 179 10 27
----- ----- ----- -----
Net periodic benefit cost $ 701 $ 602 $ 296 $ 320
--------------------------------------------------------------------------------

The fiscal 2006 costs are estimates based on using actuarial assumptions,
and actual costs will be adjusted accordingly during the year.

12. Recently Issued Accounting Pronouncements
-----------------------------------------

On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards 123 ("SFAS 123")
(revised 2004), Share-Based Payments, 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 5, 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 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) (revised 2004) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB 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 ("FSP") 109-b,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision With the American Job Creation Act of 2004". 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 provision shall apply the
provisions of Statement 109 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.

13. Off-Balance Sheet Arrangements
------------------------------

The Company does not have any off-balance sheet arrangements and,
therefore, there is no effect on its financial condition, changes in
financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources from these types of arrangements.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------

To the Board of Directors and Stockholders of
The Topps Company, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of The
Topps Company, Inc. and subsidiaries (the "Company") as of May 28, 2005, and the
related condensed consolidated statements of operations, comprehensive income,
and cash flows for the thirteen week periods ended May 28, 2005 and May 29,
2004. These interim financial statements are the responsibility of the Company's
management.

We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.

We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
The Topps Company, Inc. and subsidiaries as of February 26, 2005, and the
related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for the year then ended (not presented
herein); and in our report dated May 10, 2005, (May 23, 2005 as to Note 22), we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of February 26, 2005 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.

s/ DELOITTE & TOUCHE LLP
-------------------------

New York, New York
July 6, 2005

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

First Quarter Fiscal Year 2006 (thirteen weeks ended May 28, 2005) versus First
Quarter Fiscal Year 2005 (thirteen weeks ended May 29, 2004)
------------------------------------------------------------

The following table sets forth, for the periods indicated, net sales by key
business segment:

Thirteen weeks ended
May May
28, 2005 29, 2004
-------- --------
(amounts in thousands)
Net Sales
---------
Confectionery $ 44,039 $ 44,207
Entertainment 34,827 43,882
------ ------
Total $ 78,866 $ 88,089
======== ========

Net sales for the first quarter of fiscal 2006 were $78.9 million, a decrease of
$9.2 million, or 10.5%, from $88.1 million in the same period in fiscal 2005.
Stronger foreign currencies versus the dollar increased sales in the quarter
this year by $1.5 million.

Net sales of confectionery products, which include, among others, Ring Pop, Push
Pop, Baby Bottle Pop, Juicy Drop Pop, Bazooka brand bubble gum and licensed
candy products, were $44.0 million in the first quarter of this year, a decrease
of $0.2 million, or 0.4%, from $44.2 million in fiscal 2005. Stronger foreign
currencies contributed $0.8 million to this year's sales. Confectionery sales in
the first quarter of fiscal 2006 were impacted by the timing of the Easter
holiday, which fell in March 2005 (fourth quarter) versus April 2004 (first
quarter). Excluding the Easter impact, consolidated confectionery sales
increased 4.0%. In the first quarter of fiscal 2006, sales were also affected by
the discontinuation of our chewy products and the maturation of Juicy Drop Pop
in Japan, offset by significant distribution gains of Juicy Drop Pop in the U.S.
and the roll out of new products including Mega Mouth Spray in Europe and Japan.
Crunchy Snakes in Europe and Bazooka Booster in a number of markets around the
world, added to sales in the first quarter of fiscal 2006, as well.

Net sales of entertainment products, which include trading cards, sticker album
collections and the WizKids line of strategy games, were $34.8 million in the
first quarter of fiscal 2006, a decrease of $9.1 million, or 20.6%, from $43.9
million in the same period in fiscal 2005. Stronger foreign currencies provided
a $0.7 million benefit this year. Fiscal 2006 results reflect the absence of the
European Championship which occurs once every four years and lower sales of
European sports stickers and U.S. sports cards. Sales of non-sports publishing
products in the quarter surpassed year ago levels, driven by cards and sticker
album products featuring the new Star Wars film, as well as WWE products in
Italy. Also within the entertainment segment, sales of WizKids products
increased over the first quarter of fiscal 2005, reflecting the success of their
new Pirates constructible strategy game products.

Gross profit as a percentage of net sales in the first quarter of fiscal 2006
was 35.1% as compared with 38.4% in the first quarter of fiscal 2005. Lower
margins this year were a function of several factors: the sales mix shift toward
lower-margin confectionery products; the introduction of enhanced confectionery
products, such as Jumpin' Push Pop and Bubble Gum Booster, which have generally
below-average gross margins; increased trade spending in the form of price
support to the trade as the Company transitions to higher confectionery pricing;
and a reduction in sales per sports card release.

SG&A expense was $28.2 million in the first quarter of fiscal 2006, down from
$28.6 million in fiscal 2005. As a percentage of net sales, SG&A in the first
quarter of fiscal 2006 was 35.8% as compared with 32.5% in the same period in
fiscal 2005. Excluding the European fine reported in the first quarter of fiscal
2005, SG&A last year was $26.7 million, or 30.3% sales. Higher merchandising
costs associated with our new U.S. confectionery broker arrangement and an
increase in professional fees specifically related to the Media Technologies
litigation settled in the quarter, the recently resolved proxy contest and
strategic consulting initiatives also served to increase SG&A in this year's
quarter.

Other expense in the first quarter of fiscal 2006 was $952,000 as compared with
$433,000 in the quarter last year. This increase was largely the result of
favorable mark-to-market adjustments on forward contracts this year.

Net interest income was $739,000 in the first quarter of fiscal 2006 versus
$484,000 in the first quarter of fiscal 2005 due to higher interest rates.

The effective tax rate reflects provisions for federal, state and local income
taxes in accordance with statutory income tax rates. The Company's tax rate was
21.1% in the first quarter of fiscal 2006 versus 33.0% in the quarter last year,
a function of the non-deductible European fine reported last year and a higher
mix of earnings this year in low tax rate international markets.

Net income for the first quarter of fiscal 2006 was $0.9 million, or $0.02 per
diluted share, compared with $4.1 million, or $0.10 per diluted share for the
first quarter of fiscal 2005.

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.

At May 28, 2005, the Company had $92.9 million in combined cash and cash
equivalents and short-term investments.

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 26, 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 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.

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. The Company has repurchased a total of 3.4 million
shares under this second authorization and a total of 8.4 million shares under
both authorizations.

Cash used in operating activities during the first quarter of fiscal 2006 was
$9.4 million versus cash provided of $6.8 million during the first quarter of
fiscal 2005. This change was primarily due to a reduction in net income, a $5.0
million increase in inventories compared with a $3.0 million increase last year,
and a reduction in payables this year stemming, in part, from the timing of
payments for inventory and to tax payments in the U.S. and in Europe. A $2
million payment in settlement of the Media Technologies, Inc. litigation was
accounted for principally as a long-term advance against future royalties and
increased other assets.

Cash used in investing activities in the first quarter of fiscal 2006 reflects a
$0.9 million increase in short term investments, as well as $0.7 million in
capital spending, which was flat versus the first quarter of fiscal 2005. Full
year fiscal 2006 capital spending is projected to be approximately $3 million,
driven by investments in computer software and hardware and in Ring Pop
production equipment. Capital spending will be funded out of cash flow from
operating activities.

Cash used in financing activities of $1.6 million in the first quarter of fiscal
2006 reflects a quarterly cash dividend of $0.04 per share, the same as in the
first quarter of fiscal 2005. There were no treasury stock purchases or options
exercised in the first quarter this year, versus a net use of cash of $1.3
million for these activities last year. There was $40,000 in restricted stock
issued in connection with outside directors' compensation recognized in the
quarter.

There were no material changes outside the ordinary course of business in the
first quarter of fiscal 2006 with respect to the Company's purchase obligations
as presented in the Commitments table included in its Annual Report on Form 10-K
for the year ended February 26, 2005.

The Company does not have any off-balance sheet arrangements and, therefore,
there is no effect on its financial condition, changes in financial condition,
revenue or expenses, results of operations, liquidity, capital expenditures or
capital resources from this type of arrangement.

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. Among the factors that could cause the Company's actual results to
differ materially from those indicated in any such forward statements are: (i)
the failure of certain of the Company's principal products, particularly sports
cards, entertainment cards, lollipops, sticker album collections and WizKids
games, to achieve expected sales levels; (ii) the Company's inability to produce
timely, or at all, certain new planned confectionery products; (iii) quarterly
fluctuations in results; (iv) the Company's loss of important licensing
arrangements; (v) the failure of etopps, the Company's on-line trading card
initiative, to achieve expected levels of success; (vi) the Company's loss of
important supply arrangements with third parties; (vii) the loss of any of the
Company's key customers or distributors; (viii) further prolonged and material
contraction in the trading card industry as a whole; (ix) excessive returns of
the Company's products; (x) and civil unrest, currency devaluation,
health-related issues, or political upheaval in certain foreign countries in
which the Company conducts business; as well as other risks detailed from time
to time in the Company's reports and registration statements filed with the
Securities and Exchange Commission.

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, included in its
Annual Report on Form 10-K for the year ended February 26, 2005, "Summary of
Significant Accounting Policies," lists its significant accounting policies.
Following are 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 for each product sold, trends in
product sell-through by sales channel, and other factors. The provision for
returns was $7.6 million in the first quarter of fiscal 2006 and $7.2 million in
the comparable quarter in 2005, which equates to 9.6% and 8.2% of net sales,
respectively. The increase in the provision in the quarter this year was largely
the result of higher rates on U.S. sports products and a comparably low rate on
last year's European Championship products which was increased later in the
year. An increase or decrease in the quarter's provision for returns by 1% of
net sales would decrease or increase operating income by approximately $0.8
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 which range between three and fifteen years. Management
evaluates the recoverability of finite-lived intangible assets under the
provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-lived Assets" based on the projected undiscounted cash flows attributable
to the individual assets, among other methods.

Accrual for Obsolete Inventory:
-------------------------------
The Company's accrual for obsolete inventory reflects the cost of items in
inventory not anticipated to be sold. This accrual is deemed necessary as a
result of discontinued items and packaging or a reduction in forecasted sales
and is adjusted periodically based on a review of inventory levels and sales
projections. The provision for obsolete inventory was $1.3 million in the first
quarter of fiscal 2006 and $1.1 million in the comparable quarter in fiscal
2005, which equates to 1.6% and 1.2% of net sales, respectively. A decrease or
increase in the quarter's provision for obsolescence by 1% of net sales would
increase or decrease operating income by approximately $0.8 million.

ITEM 3. DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk associated with activities in derivative
financial instruments (e.g., hedging or currency swap agreements), other
financial instruments and derivative commodity instruments is confined to the
impact of mark-to-market changes in foreign currency rates on the Company's
forward contracts and options. The Company has no debt outstanding and does not
engage in any commodity-related derivative transactions. As of May 28, 2005, the
Company had contracts and options which were entered into for the purpose of
hedging forecasted receipts and disbursements in various foreign currencies and
which, primarily due to the stabilization of the U.S. dollar, resulted in a
relatively small mark-to-market adjustment in the quarter.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, our disclosure controls and procedures are effective in
recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act.

Changes in internal controls.

There have not been any changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

On December 29, 2004, Defendants once again filed a motion with the
district court requesting a stay of the proceedings while the PTO
reexamined 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. On May 23, 2005 the Company
entered into a settlement agreement with Media Technologies, Inc. in which
it paid Media Technologies, Inc. a sum of $2,000,000. Media Technologies,
Inc. agreed to dismiss all claims against the Company and to issue a
license to the Company to distribute relic cards for seven years. The
Company further agreed that under certain conditions which may arise in the
future, it would make additional payments to Media Technologies, Inc. as
part of the on going license. The Company has accounted for the payment as
an advance against future royalties expense which will be amortized over
the next seven years.

PART II

OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Stockholders of the Company took place on June 30, 2005
for the following purposes:

1. To elect three directors;

2. To ratify the appointment of the Company's independent auditors.

The results of the matters voted on are as follows:

For Withheld
--- --------
1. Election of Directors

Stephen D. Greenberg 32,486,861 5,727,963
Ann Kirschner 32,551,936 5,662,888
Richard Tarlow 32,500,161 5,714,663

For Withheld Against
--- -------- -------

2. Ratification of Appointment
of the Company's Independent
Auditors 38,004,224 183,195 27,405

On June 9, 2005 the Company issued a press release announcing that it had
settled with shareholders who had filed separate proxy statements. The
press release was filed in an 8-K on June 13, 2005.

ITEM 4(b). DIRECTORS

Arthur T. Shorin Ann Kirschner Jack H. Nusbaum

Allan A. Feder David Mauer Richard Tarlow

Stephen D. Greenberg Edward D. Miller Stanley Tulchin

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits as required by Item 601 of Regulation S-K filed herewith:

31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a)
and 15d-14(a) under the Securities Exchange Act of 1934.

31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a)
and 15d-14(a) under the Securities Exchange Act of 1934.

32.1 Certification of Arthur T. Shorin, Chief Executive Officer and President,
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 - Chief Financial
Officer and Treasurer pursuant to U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

1. Form 8-K, dated June 30, 2005, with press release, dated June 30, 2005,
reporting the Company's first quarter dividend declaration.

2. Form 8-K, dated June 28, 2005, with press release, dated June 28, 2005,
reporting the Company's first quarter earnings.

3. Form 8-K, dated June 13, 2005, with press release, dated June 9, 2005,
reporting the Company's settlement with shareholders who had filed separate
proxy statements.

4. Form 8-K, dated May 17, 2005, with press release, dated May 17, 2005,
regarding the pursuit of various strategic initiatives.

SIGNATURE

Pursuant to the requirements 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.

THE TOPPS COMPANY, INC.
-----------------------
REGISTRANT

s/ Catherine K. Jessup
----------------------------
Catherine K. Jessup
Duly Authorized Officer

July 7, 2005