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 August 27, 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: 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 126-2 of the Act). Yes _X_ No ____.
The number of outstanding shares of Common Stock as of October 1, 2005 was
40,606,186.
THE TOPPS COMPANY, INC.
AND SUBSIDIARIES
--------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
--------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
Index Page
---- ----
Condensed Consolidated Balance Sheets as of August 27,
2005 (Unaudited) and February 26, 2005 3
Condensed Consolidated Statements of Operations for the
thriteen and twenty-six week periods ended August 27, 2005
and August 28, 2004 (Unaudited) 4
Condensed Consolidated Statements of Comprehensive Income
for the thirteen and twenty-six week periods ended August
27, 2005 and August 28, 2004 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
twenty-six weeks ended August 27, 2005 and August 28, 2004
(Unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Report of Independent Registered Public Accounting Firm 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 17
ITEM 3. DISCLOSURES ABOUT MARKET RISK 22
ITEM 4. CONTROLS AND PROCEDURES 22
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PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
2
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
August February
27, 2005 26, 2005
-------- --------
(amounts in thousands,
except share data)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 32,180 $ 36,442
Short-term investments ............................. 64,754 69,955
Accounts receivable, net ........................... 27,578 27,851
Inventories ........................................ 37,275 32,936
Income tax receivable .............................. 834 338
Deferred tax assets ................................ 3,809 3,616
Prepaid expenses and other current assets .......... 12,250 14,541
--------- ---------
TOTAL CURRENT ASSETS ......................... 178,680 185,679
PROPERTY, PLANT AND EQUIPMENT ........................ 36,288 34,983
Less: accumulated depreciation and amortization ... 23,910 22,430
--------- ---------
PROPERTY, PLANT AND EQUIPMENT ................ 12,378 12,553
GOODWILL ............................................. 67,566 67,566
INTANGIBLE ASSETS, net of accumulated amortization ... 7,646 8,544
DEFERRED TAX ASSETS .................................. 4,502 4,222
OTHER ASSETS ......................................... 13,332 11,847
--------- ---------
TOTAL ASSETS ................................. $ 284,104 $ 290,411
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................... $ 10,132 $ 12,658
Accrued expenses and other liabilities ............. 24,757 27,485
Deferred tax liabilities ........................... 19 -
Income taxes payable ............................... 5,117 7,390
--------- ---------
TOTAL CURRENT LIABILITIES .................... 40,025 47,533
OTHER LIABILITIES .................................... 24,160 23,689
--------- ---------
TOTAL LIABILITIES ............................ 64,185 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
of August 27, 2005 and February 26, 2005 ......... 492 492
Additional paid-in capital ......................... 28,293 28,293
Treasury stock, 8,689,000 shares and 8,790,000 shares
as of August 27, 2005 and February 26, 2005 ...... (84,383) (85,060)
Retained earnings .................................. 277,721 275,226
Accumulated other comprehensive (loss)/ income,
net of tax ......................................... (2,204) 238
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................... 219,919 219,189
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $ 284,104 $ 290,411
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen weeks ended Twenty-six weeks ended
August 27, August 28, August 27, August 28,
2005 2004 2005 2004
------------ ------------ ------------ ------------
(amounts in thousands, except share data)
Net sales $ 75,277 $ 68,781 $ 154,143 $ 156,870
Cost of sales 46,857 42,501 98,049 96,791
------------ ------------ ------------ ------------
Gross profit on sales 28,420 26,280 56,094 60,079
Other income 195 411 1,147 844
Selling, general and
administrative expenses 25,330 21,879 53,559 50,472
------------ ------------ ------------ ------------
Income from operations 3,285 4,812 3,682 10,451
Interest income, net 798 557 1,537 1,041
------------ ------------ ------------ ------------
Income before (benefit)/
provision for income taxes 4,083 5,369 5,219 11,492
(Benefit)/provision
for income taxes (754) 1,714 (515) 3,735
------------ ------------ ------------ ------------
Net income $ 4,837 $ 3,655 $ 5,734 $ 7,757
============ ============ ============ ============
Net income per share - basic $ 0.12 $ 0.09 0.14 $ 0.19
- diluted $ 0.12 $ 0.09 0.14 $ 0.19
Weighted average shares
outstanding - basic 40,512,000 40,459,000 40,484,000 40,513,000
- diluted 41,547,000 41,511,000 41,429,000 41,565,000
See Notes to Condensed Consolidated Financial Statements.
4
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Unaudited)
Thirteen weeks ended Twenty-six weeks ended
August 27, August 28, August 27, August 28,
2005 2004 2005 2004
---------- ---------- ---------- ---------
(amounts in thousands, except share data)
Net income $ 4,837 $ 3,655 $ 5,734 $ 7,757
Currency translation adjustment (636) (756) (2,442) (1,623)
------- ------- ------- -------
Comprehensive income $ 4,201 $ 2,899 $ 3,292 $ 6,134
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements.
5
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six weeks ended
August August
27, 2005 28, 2004
-------- --------
(amounts in thousands)
Cash flows from operating activities:
Net income $ 5,734 $ 7,757
Adjustments to reconcile net income to cash
(used in)/ provided by operating activities:
Depreciation and amortization 2,852 3,161
Deferred income taxes (454) 317
Changes in operating assets and liabilities:
Accounts receivable 273 10,718
Inventories (4,339) 2,007
Income tax receivable/payable (2,769) 2,178
Prepaid expenses and other current assets 2,291 1,916
Payables and other current liabilities (5,254) (2,982)
Cumulative foreign currency adjustment and other (1,400) (218)
-------- --------
Cash (used in)/provided by operating activities (3,066) 24,854
-------- --------
Cash flows from investing activities:
Proceeds from sales/(purchase) of
short-term investments 5,201 (10,525)
Additions to property, plant and equipment (1,305) (1,065)
-------- --------
Cash provided by/(used in) investing activities 3,896 (11,590)
-------- --------
Cash flows from financing activities:
Dividends paid to stockholders (3,239) (3,254)
Purchase of treasury stock -- (3,202)
Exercise of stock options 677 649
-------- --------
Cash used in financing activities (2,562) (5,807)
-------- --------
Effect of exchange rates on cash and cash equivalents (2,530) (1,220)
-------- --------
Net (decrease)/increase in cash $ (4,262) $ 6,237
======== ========
Cash at beginning of year 36,442 56,959
-------- --------
Cash at end of period $ 32,180 $ 63,196
-------- --------
Supplemental disclosure of cash flow information:
Interest paid $ 38 $ 137
Income taxes paid $ 1,797 $ 1,792
===============================================================================
See Notes to Condensed Consolidated Financial Statements.
6
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AUGUST 27, 2005 AND FEBRUARY 26, 2005
AND FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS ENDED
AUGUST 27, 2005 AND AUGUST 28, 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 twenty-six week periods
ended August 27, 2005 and August 28, 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 (net of tax) in accordance
with Statement of Financial Accounting Standards ("SFAS") 123, "Accounting
for Stock-Based Compensation," is shown below:
For the thirteen weeks ended
August 27, 2005 August 28, 2004
----------------------- ------------------------
As reported Pro forma As reported Pro forma
----------------------- ------------------------
Net income, as reported $ 4,837 $ 4,837 $ 3,655 $ 3,655
Less: Stock-based
employee compensation -- (88) (170)
Pro forma net income ..... $ 4,749 $ 3,485
Earnings per share:
Basic ................. $ 0.12 $ 0.12 $ 0.09 $ 0.09
Diluted ............... $ 0.12 $ 0.11 $ 0.09 $ 0.08
--------------------------------------------------------------------------
For the twenty-six weeks ended
August 27, 2005 August 28, 2004
----------------------- ------------------------
As reported Pro forma As reported Pro forma
----------------------- ------------------------
Net income, as reported $ 5,734 $ 5,734 $ 7,757 $ 7,757
Less: Stock-based
employee compensation -- (204) (311)
Pro forma net income ..... $ 5,530 $ 7,446
Earnings per share:
Basic ................. $ 0.14 $ 0.14 $ 0.19 $ 0.18
Diluted ............... $ 0.14 $ 0.13 $ 0.19 $ 0.18
--------------------------------------------------------------------------
7
Options have an exercise price equal to the 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 six months 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
August February
27, 2005 26, 2005
--------- --------
(amounts in thousands)
Gross receivables $ 50,904 $ 51,265
Reserve for returns (20,240) (20,824)
Other reserves (3,086) (2,590)
-------- --------
Net receivables $ 27,578 $ 27,851
======== ========
Other reserves consist of allowances for discounts, doubtful accounts and
customer deductions for marketing promotional programs.
4. Inventories
August February
27, 2005 26, 2005
--------- --------
(amounts in thousands)
Raw materials $ 11,181 $ 7,468
Work in process 5,269 3,703
Finished products 20,825 21,765
-------- --------
Total inventories $ 37,275 $ 32,936
======== ========
5. Segment 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 and 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!.
8
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 and
the National Football League, 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 results 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 unallocated 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.
Thirteen weeks ended Twenty-six weeks ended
August 27, August 28, August 27, August 28,
2005 2004 2005 2004
--------- ---------- ---------- ----------
(amounts in thousands)
Net Sales
Confectionery $ 42,248 $ 39,982 $ 86,287 $ 84,189
Entertainment 33,029 28,799 67,856 72,681
-------- -------- -------- --------
Total $ 75,277 $ 68,781 $154,143 $156,870
======== ======== ======== ========
Contributed Margin
Confectionery $ 14,067 $ 15,777 $ 25,907 $ 28,779
Entertainment 10,046 8,998 18,327 22,426
-------- -------- -------- --------
Total $ 24,113 $ 24,775 $ 44,234 $ 51,205
======== ======== ======== ========
Reconciliation of Contributed
Margin to Income Before
Provision for Income Taxes:
Total contributed margin $ 24,113 $ 24,775 $ 44,234 $ 51,205
Unallocated selling, general
and administrative expenses
and manufacturing overhead (19,602) (18,805) (38,847) (38,437)
Depreciation and amortization (1,421) (1,569) (2,852) (3,161)
Other income, net 195 411 1,147 844
-------- -------- -------- --------
Income from operations 3,285 4,812 3,682 10,451
Interest income, net 798 557 1,537 1,041
-------- -------- -------- --------
Income before provision/
(benefit) for income taxes $ 4,083 $ 5,369 $ 5,219 $ 11,492
======== ======== ======== ========
9
6. Common Stock
In June 2003, the Board of Directors of the Company initiated a quarterly
cash dividend of $0.04 per share. On June 30, 2005, the Board of Directors
declared its second quarter cash dividend of $0.04 per share payable on
August 1, 2005 to shareholders of record on July 18, 2005. On October 5,
2005, the Board of Directors declared its third quarter cash dividend of
$0.04 per share payable on November 1, 2005 to shareholders of record on
October 18, 2005.
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. As of August 27, 2005, under these two
programs, the Company has purchased 8,390,700 common shares. During the
first half of fiscal 2006, the Company did not purchase any shares due to a
strategic business review being performed by investment banking and
consulting firms. In September 2005, the Company entered into a written
trading plan that complies with Rule 10b5-1 of the Securities and Exchange
Commission which provides for the purchase of up to 500,000 shares for each
of the next four quarters at the prevailing market price per share, subject
to certain conditions. Subsequently, as of October 1, 2005, the Company had
repurchased 11,333 shares. In addition, the Board of Directors has
increased the outstanding share authorization to 5 million shares.
Each of the members of the Board of Directors who is not an employee of the
Company annually receives $20,000 of restricted stock, which is issued out
of treasury stock and vests over one year.
7. Credit Agreement
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. This
credit agreement has now expired.
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.
There was no debt outstanding under the credit agreement as of August 27,
2005 or February 26, 2005.
8. Reclassifications
Cash and cash equivalents and short-term investments in the prior years'
financial statements have been reclassified to conform with the current
year's presentation.
The Company has reclassified 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
10
$69,955,000 as of February 26, 2005 and reclassified $36,878,000 and
$47,403,000 in investments in ARS as of February 28, 2004 and August 28,
2004, respectively. Year-over-year changes in the amounts 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
($10,525,000) for the period ended August 28, 2004.
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 August
27, 2005 and February 26, 2005 were as follows:
(amounts in thousands)
August 27, 2005 February 26, 2005
Gross ' Gross
Carrying Accumulated ' Carrying Accumulated
Value Amortization Net ' Value Amortization Net
-------- ------------ -------- ' -------- ------------ --------
Licenses and Contracts ........ $ 21,569 $(18,276) $ 3,293 ' $ 21,569 $(17,942) $ 3,627
Intellectual Property ......... 18,784 (14,801) 3,983 ' 18,784 (14,284) 4,500
Software and Other ............ 2,953 (2,858) 95 ' 2,953 ( 2,811) 142
Minimum Pension Liability...... 275 -- 275 ' 275 -- 275
-------- --------- -------- ' -------- --------- --------
Total Intangibles ............. $ 43,581 $(35,935) $ 7,646 ' $ 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 4.9 years
Intellectual Property 6 years 3.9 years
Software and Other 5 years 1.0 years
The weighted average remaining useful life for the Company's intangible
assets in aggregate is 4.3 years. Over the next five years, the Company
estimates annual amortization of the intangible assets detailed above to be
as follows:
Fiscal Year(s) 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 $1,191,000 and $1,268,000 for the
twenty-six weeks ended August 27, 2005 and August 28, 2004, respectively,
included amortization of deferred financing fees and deferred compensation
costs.
11
10. Legal Proceedings
On November 19, 2001 Media Technologies, Inc. sued the Company and nine
other manufacturers of trading cards (the "Defendants") in the Federal
District Court for the Central District of California for their sales of
all types of "relic" cards that contain an authentic piece of equipment,
i.e., a piece of sporting equipment or jersey. Plaintiffs alleged
infringement of U.S. Patent Nos. 5,803,501 and 6,142,532. On May 23, 2005
the Company entered into a settlement agreement 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
ongoing license.
In September of 1999, the Company filed a lawsuit against Cadbury Stani
S.A.I.C. ("Stani"), a corporation organized and existing under the laws of
Argentina, in federal court in the Southern District of New York. The case
centers on the licensing relationship the parties had since 1957 in which
the Company had granted Stani the exclusive right to manufacuture and
distribute gum using the Bazooka brand and related formulas and
technologies in Argentina, Bolivia, Chile, Paraguay and Uruguay. In
particular, at issue is a 1980 Licensing Agreement (the "Agreement")
between the parties and a 1985 Amendment to that Agreement. In its
September 17, 2003 Fourth Amended complaint, the Company alleges that Stani
continued to use the Company's proprietary and specialized knowledge and
experience, and its trade secrets, regarding the production of gum after
the Agreement's expiration in April 1996, that it unlawfully disclosed this
information to Cadbury Schweppes PLC ("Schweppes") which purchased Stani in
1993 and that it deliberately concealed its use and disclosure from the
Company. The Company has filed claims for breach of contract,
misappropriation of trade secrets and fraudulent inducement to enter into
the 1985 Amendment. The Company is seeking to recover disgorgement of
Stani's profits, certain lost royalties and punitive damages, interest and
costs. It is also seeking a permanent injunction against Stani's future use
and dissemination of the Company's proprietary information and trade
secrets. In the Fourth Amended Complaint, the Company demands damages in
excess of $250 million. The Fourth Amended Complaint also initially
contained claims against Schweppes, which the parties agreed to dismiss on
February 4, 2003.
On December 17, 2003, Stani moved for partial summary judgment and to limit
the Company's possible damages. In part, Stani alleged that certain claims
were barred by the statute of limitations and that neither disgorgement of
Stani's profits nor punitive damages were available remedies to the Company
on any of its claims. The Court heard oral argument from counsel on January
14, 2005. By its August 2, 2005 decision, the Court denied Stani's summary
judgment motion, in part, and ruled that (i) the Company's claims were not
barred by the statute of limitations; and (ii) disgorgement of profits and
punitive damages are available remedies on the Company's misappropriation
of trade secrets claims. The Court granted Stani's summary judgment motion,
in part, and ruled that (i) disgorgement of profits and punitive damages
are not available remedies on the Company's breach of contract and
fraudulent inducement claims: and (ii) Stani was not estopped from claiming
the 1985 Amendment altered the 1980 Agreement.
The parties await a trial date. If the Company ultimately prevails in this
litigation, it could have a material impact on the Company's consolidated
financial statements.
WizKids, Inc. ("Wizkids") and Jordan Weisman filed a complaint for
professional malpractice, breach of fiduciary duty and disgorgement of fees
against the law firm Michael, Best & Friedrich, LLP ("MB&F), and Timothy
Kelley, one of its partners, based on their submission of the PCT patent
12
application for WizKids' combat dial that is alleged to have prejudiced
WizKids' United States patent rights by failing to designate the United
States as one of the member states for subsequent conversion to a national
application.
WizKids has received a patent from The United States Patent and Trade
Office (the "PTO"). The rights conferred by the patent are dependent,
however, on the PTO issuing an order granting a pending petition to rectify
the error referenced above. Prior petitions have not been successful in
correcting the error, and the pending petition is the sixth petition filed
with the PTO. In the event the PTO grants the petition, it may affirm
WizKids' patent rights, but WizKids alleges it would still retain claims
against MB&F for prior damage incurred as a result of the error.
The complaint against MB&F and Mr. Kelley was filed in Washington state
court on December 12, 2003. The parties have indicated they will file
motions for summary judgment with respect to the various claims, and a
hearing is scheduled for December 2005. Trial is scheduled for January 23,
2006. Whether the petition is granted or denied, and/or if WizKids
ultimately prevails in this litigation, it could have a material impact on
the Company's consolidated financial statements.
The Company is a party 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 thirteen and
twenty-six weeks ended August 27, 2005 and August 28, 2004 are as follows:
Postretirement
Pension Healthcare
---------------------------------------------------------------------------
August August August August
Thirteen Weeks 27, 2005 28, 2004 27, 2005 28, 2004
---------------------------------------------------------------------------
(amounts in thousands)
Service cost $ 399 $ 355 $ 93 $ 76
Interest cost 618 604 143 142
Expected return on plan assets (551) (524) - -
Amortization of:
Initial transition obligation ( 16) ( 15) 50 50
Prior service cost 13 33 - -
Actuarial losses 238 202 10 -
------ ------ ------ ------
Net periodic benefit cost $ 701 $ 655 $ 296 $ 268
====== ====== ====== ======
---------------------------------------------------------------------------
Postretirement
Pension Healthcare
---------------------------------------------------------------------------
August August August August
Twenty-six weeks 27, 2005 28, 2004 27, 2005 28, 2004
---------------------------------------------------------------------------
(amounts in thousands)
Service cost $ 798 $ 710 $ 186 $ 152
Interest cost 1,236 1,207 286 284
Expected return on plan assets (1,102) (1,048) - -
Amortization of:
Initial transition obligation ( 32) ( 30) 100 100
Prior service cost 26 66 - -
Actuarial losses 476 404 20 -
------ ------ ------ ------
Net periodic benefit cost $1,402 $1,309 $ 592 $ 536
====== ====== ====== ======
---------------------------------------------------------------------------
The fiscal 2006 costs are estimated based on actuarial assumptions, and
actual costs will be adjusted accordingly during the year.
13
12. Recently Issued Accounting Pronouncements
On December 2004, the Financial Accounting Standards Board ("FASB") issued
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. 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 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 that provision is between zero and $11 million. The
related potential range of income tax effects is between zero and $0.4
million.
In November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, "Inventory Costs", which clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and
wasted material. SFAS No. 151 will be effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. The Company is
currently evaluating the impact of adopting this standard in its future
financial statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non-monetary
Assets", which eliminates the exception for non-monetary exchanges of
similar productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial substance.
SFAS No. 153 will be effective for non-monetary asset exchanges occurring
in fiscal periods beginning after June 15, 2005. The Company is currently
evaluating the impact of adopting this standard in its future financial
statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No.20, "Accounting Changes" and
SFAS No.3, "Reporting Accounting Changes in Interim Financial Statements",
which changes the requirements for the accounting and reporting of a change
in accounting principle. SFAS No. 154 applies to all voluntary changes in
accounting principle as well as to changes required by an accounting
pronouncement that does not include specific transition provisions. SFAS
No. 154 will be effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The Company is
currently evaluating the impact of adopting this standard in its future
financial statements.
13. Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements and,
therefore, there is no effect on its financial position, changes in
financial position, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources from this type of arrangement.
14
14. Subsequent Event
On September 29, 2005, a restructuring program was announced which will
separate the Confectionery and Entertainment businesses to the extent
practical and streamline the organizational structure through headcount
reductions. In connection with the headcount reductions, the Company will
incur a charge of approximately $2.4 million, of which 50% will be
recognized in the third quarter and the balance in the fourth quarter. In
addition, the Company announced that it will exit one of its Internet
operations, thePit.com, through either sale or closure, and will record an
after-tax charge of approximately $5 million in the third quarter.
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REVIEW
--------------------------------------------------------------
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 August 27, 2005, and
the related condensed consolidated statements of operations, comprehensive
income, and cash flows for the thirteen and twenty-six week periods ended August
27, 2005 and August 28, 2004 and of cash flows for the twenty-six week periods
ended August 27, 2005 and August 28, 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 Company as of February 26, 2005, and the related consolidated statements of
operations, stockholders' equity, 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 August 27, 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
--------------------------
DELOITTE & TOUCHE LLP
New York, New York
October 5, 2005
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table sets forth, for the periods indicated, net sales by key
business segment:
Thirteen weeks ended Twenty-six weeks ended
August 27, August 28, August 27, August 28,
2005 2004 2005 2004
---------- ---------- ---------- -----------
(in thousands of dollars)
Net Sales
Confectionery $ 42,248 $ 39,982 $ 86,287 $ 84,189
Entertainment 33,029 28,799 67,856 72,681
-------- -------- -------- --------
Total $ 75,277 $ 68,781 $154,143 $156,870
======== ======== ======== ========
-----------------------------------------------------------------------
Second Quarter Fiscal Year 2006 (thirteen weeks ended August 27, 2005) versus
Second Quarter Fiscal Year 2005 (thirteen weeks ended August 28, 2004)
-----------------------------------------------------------------------------
Net sales for the second quarter of fiscal 2006 were $75.3 million, an increase
of $6.5 million, or 9.4%, from $68.8 million in the same period last year.
Changes in foreign currency rates versus the dollar did not materially impact
revenue.
Net sales of confectionery products, which include, among other things, Ring
Pop, Push Pop, Baby Bottle Pop, Juicy Drop Pop, Bazooka brand bubble gum and
licensed candy products, were $42.2 million in the second quarter of this year,
an increase of $2.3 million, or 5.7%, from $40.0 million in fiscal 2005. This
increase was the result of strong performance in the U.S. of Ring Pop, Push Pop
and Baby Bottle Pop. Growth was driven by new television commercials and higher
levels of advertising, as well as by increased promotional support at club
stores. Juicy Drop Pop distribution gains also added to year-over-year sales.
The impact of stronger foreign currencies on sales this year was negligible.
Net sales of entertainment products, which include cards, stickers, sticker
albums and the WizKids line of strategy games, were $33.0 million in the second
quarter of fiscal 2006, an increase of $4.2 million, or 14.7%, from $28.8
million in the same period last year. The increase reflected a very favorable
performance of football cards which benefited from a strong rookie line up,
products and promotions featuring Topps' 50th anniversary of marketing football
products and a reduction in the number of other football products in the market
due to the liquidation of a long-term competitor. Additionally, strong sales of
non-sports publishing products, specifically those featuring WWE in Italy, Star
Wars and Wacky Packages added to sales in the quarter. Finally, Wizkids sales in
the quarter surpassed year ago levels, driven by positive acceptance of Pirates
products both in the gaming channel and mass market. Weaker foreign currencies
(a function of a different product mix than confectionery sales) had a modestly
negative impact on sales in the quarter this year.
Gross profit as a percentage of net sales in the second quarter of fiscal 2005
was 37.8% as compared with last year's level of 38.2%. This decline reflected
higher provisions for returns driven by a somewhat sluggish sports card market,
particularly as regards previously shipped baseball and basketball products and
WizKids' mass market sales.
17
SG&A expense was $25.3 million in the quarter this year, up from $21.9 million
in fiscal 2005. As a percentage of net sales, SG&A was 33.6% this year versus
31.8% a year ago. Higher SG&A dollar spending was primarily the result of a $2.8
million increase in marketing costs due to a return to historical levels of
advertising on the U.S. confectionery business and the launch of new products in
Japan. Overhead expenses also increased year-over-year due to the extension of
the Chairman's employment contract, implementation of new systems, higher audit
and Sarbanes-Oxley expenses and normal salary inflation.
Net interest income of $798,000 in the second quarter of this year was higher
than a year ago due to more favorable interest rates.
The Company reflects provisions for federal, state and local income taxes in
accordance with statutory income tax rates. The Company's tax rate of (18.5%) in
the second quarter of this year versus 31.9% last year reflected a non-cash
reversal of approximately $1.6 million of tax reserves following the completion
of a tax audit. Excluding this reversal, the Company's tax rate was 20.6%, which
reflects the benefit of foreign tax credits and other tax planning.
Net income for the second quarter of fiscal 2006 was $4.8 million, or $0.12 per
diluted share, compared with $3.7 million, or $0.09, per diluted share last
year. The reversal of tax reserves in the quarter this year added $1.6 million
to net income and $0.04 to E.P.S.
First Half Fiscal 2006 (twenty-six weeks ended August 27, 2005) compared to
First Half Fiscal 2005 (twenty-six weeks ended August 28, 2004)
---------------------------------------------------------------------------
Net sales in the first half of fiscal 2006 were $154.1 million, a decrease of
$2.7 million, or 1.7%, from $156.9 million in the same period last year.
Stronger foreign currencies versus the dollar served to increase this year's
sales by $1.6 million, primarily in the first quarter.
Net sales of confectionery products were $86.3 million in the first half of this
year, an increase of $2.1 million, or 2.5%, from $84.2 million in fiscal 2005.
Stronger foreign currencies contributed $1.0 million. Higher sales were a
function of distribution gains of Juicy Drop Pop in the U.S., the launch of
Bazooka Booster worldwide and roll out of Mega Mouth Spray in Japan and
Argentina.
Net sales of entertainment products in the first half of this year were $67.9
million, a decrease of $4.8 million, or 6.6%, from $72.7 million last year.
Stronger foreign currencies added $0.6 million to sales this year. The absence
of the European Football Championship and related products in the twenty-six
weeks this year and softer first quarter U.S. sports sales were the primary
reasons for the year-over-year sales decline. Net sales of non-sports publishing
products increased in the period this year driven by strong releases featuring
WWE, Wacky Packages and Barbie.
Gross profit as a percentage of net sales in the first half of fiscal 2006 was
36.4% as compared with 38.3% for the same period last year. This decline
reflected an increase in provisions for returns associated primarily with the
U.S. entertainment segment, including WizKids, as well as higher price support
for U.S. confectionery products. Additionally, product mix changes and the
introduction of lower margin confectionery products in the first quarter served
to reduce gross profit margins this year.
18
SG&A expense was $53.6 million for the first half of fiscal 2006 compared with
$50.5 million for the same period in fiscal 2005. As a percent of net sales,
SG&A was 34.7%, 2.5% points higher than last year. Excluding the impact of a
$1.9 million European Community fine in the fiscal 2005 first quarter, the
year-over-year increase in SG&A for the six-month period was $5.0 million. This
increase was the result of higher advertising and marketing costs due to the
reinstatement of U.S. confectionery advertising levels and a national television
campaign in support of WizKids' launch of their Pirates products in the mass
market. Other costs associated with the extension of the Chairman's contract,
normal salary inflation, increased merchandising support for the U.S.
confectionery business and the implementation of new systems also contributed to
the increase in SG&A.
Net interest income for the first half of fiscal 2006 increased to $1.5 million
from $1.0 million in fiscal 2005 due to higher interest rates.
The Company's tax rate for the first half this year of (9.9%) versus 32.5% last
year reflected a one-time non-cash reversal of approximately $1.6 million of tax
reserves following the completion of a tax audit. Without the reversal of these
reserves, the Company's tax rate would have been 20.6%, which reflects the
benefit of foreign tax credits and other tax planning.
Net income in the first half of fiscal 2006 was $5.7 million, or $0.14 per
diluted share, compared with $7.8 million, or $0.19 per diluted share last year.
The reversal of tax reserves in the second quarter this year added $1.6 million
to net income and $0.04 to EPS.
Other Matters
-------------
On September 29, 2005, a restructuring program was announced which will separate
the Confectionery and Entertainment businesses to the extent practical, and
streamline the organizational structure through headcount reductions. In
connection with the headcount reductions, the Company will incur a charge of
approximately $2.4 million, of which 50% will be recognized in the third quarter
and the balance in the fourth quarter. In addition, the Company announced that
it will exit one of its Internet operations, thePit.com, through either sale or
closure, and will record an after-tax charge of approximately $5 million in the
third quarter.
Liquidity and Capital Resources
-------------------------------
Management believes that the Company has adequate reserves to meet its liquidity
and capital needs over the foreseeable future as a result of the combination of
cash on hand, anticipated cash from operations and credit line availability.
On August 27, 2005, the Company had $32.2 million in cash and cash equivalents
and $64.8 million in 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. This credit agreement has
now expired.
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
19
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 2001, the Board of Directors authorized the purchase of up to 5
million shares of stock. To-date, the Company has repurchased a total of 3.4
million shares under this authorization. During the first half of fiscal 2006,
the Company did not purchase any shares due to a strategic business review being
performed by investment banking and consulting firms. In September 2005, the
Company entered into a written trading plan that complies with Rule 10b5-1 of
the Securities and Exchange Commission which provides for the purchase of up to
500,000 shares for each of the next four quarters at the prevailing market price
per share, subject to certain conditions. Subsequently, as of October 1, 2005,
the Company had repurchased 11,333 shares. In addition, the Board of Directors
has increased the outstanding share authorization to 5 million shares.
In the twenty-six weeks ended August 27, 2005, the Company's net decrease in
cash and cash equivalents was $4.3 million versus an increase of $6.2 million in
the comparable period of fiscal 2005.
Cash used by operating activities in the first twenty-six weeks of this period
was $3.1 million versus cash provided of $24.9 million last year. This use of
cash was primarily due to a $5.3 million reduction in payables related to
payment of fiscal 2005 bonuses and the timing of European purchases, as well as
to a $4.3 million increase in inventories stemming from the timing of board
stock purchases and the acquisition of autographs for future sports products.
Prior period's favorable cash performance reflected higher net income and a
substantial reduction in accounts receivable due to an increase in the returns
reserve related to sales of European entertainment products.
Cash provided by investing activities was $3.9 million this period versus a use
of cash of $11.6 million last year. In the first six months of this year,
short-term investments were reduced by $5.2 million, partially offset by capital
spending of $1.3 million, largely related to the rollout of new systems. Last
year's use of cash of $11.6 million reflected the purchase of $10.5 million of
short-term investments and $1.1 million in capital spending. Fiscal 2006 full
year capital spending is projected to be approximately $3 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 of $2.6 million this period reflects $3.2
million in cash dividends, partially offset by $0.6 million in cash from options
exercised. This compares with a total outlay for financing activities of $5.8
million in the same period last year, comprised of $3.2 million in cash
dividends and $3.2 million in treasury stock purchases less $0.6 million in
stock option exercises. Dividend payments and treasury stock purchases are being
funded out of cash flow from operating activities.
There are no material changes outside the ordinary course of business with
respect to 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 position, 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-looking statements
are: (i) the failure of certain of the Company's principal products,
20
particularly sports cards, entertainment cards, WizKids strategy games,
confectionery products and sticker album collections, 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 Company's loss
of important supply arrangements with third parties; (vi) the loss of any of the
Company's key customers or distributors; (vii) further material contraction in
the trading card industry as a whole; (viii) excessive returns of the Company's
products; (ix) civil unrest, currency devaluation, health-related issues, or
political upheaval in certain foreign countries in which the Company conducts
business; and 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.
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," summarizes its significant accounting
policies. 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 for each
product sold, trends in product sell-through by sales channel, and other
factors. The provision for returns was $12.4 million in the first twenty-six
weeks of fiscal 2006 and $11.2 million in 2005, which equates to 8.0% and 7.1%
of net sales, respectively. The increase in the provision this year was
partially the result of higher expected returns on various U.S. sports card
products and on certain WizKids products sold to retail channels. An increase or
decrease in the provision for returns by 1% of net sales would have decreased or
increased operating income by approximately $1.5 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
$2.0 million in the twenty-six weeks of fiscal 2006 and $1.9 million in fiscal
2005, which equates to 1.3% and 1.2% of net sales, respectively. An increase or
decrease in the provision for obsolescence by 1% of net sales would have
decreased or increased operating income by approximately $1.5 million.
21
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 August 27, 2005,
the Company had $18.7 million of contracts which were entered into for the
purpose of hedging forecasted receipts and disbursements in various foreign
currencies.
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 quarterly 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. There were no significant deficiencies or material weaknesses, and
therefore there were no corrective actions taken.
22
PART II
ITEM 1. LEGAL PROCEEDINGS
On November 19, 2001 Media Technologies, Inc. sued the Company and nine other
manufacturers of trading cards (the "Defendants") in the Federal District Court
for the Central District of California for their sales of all types of "relic"
cards that contain an authentic piece of equipment, i.e., a piece of sporting
equipment or jersey. Plaintiffs alleged infringement of U.S. Patent Nos.
5,803,501 and 6,142,532. On May 23, 2005 the Company entered into a settlement
agreement 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
ongoing license.
In September of 1999, the Company filed a lawsuit against Cadbury Stani S.A.I.C.
("Stani"), a corporation organized and existing under the laws of Argentina, in
federal court in the Southern District of New York. The case centers on the
licensing relationship the parties had since 1957 in which the Company had
granted Stani the exclusive right to manufacture and distribute gum using the
Bazooka brand and related formulas and technologies in Argentina, Bolivia,
Chile, Paraguay and Uruguay. In particular, at issue is a 1980 Licensing
Agreement (the "Agreement") between the parties and a 1985 Amendment to that
Agreement. In its September 17, 2003 Fourth Amended complaint, the Company
alleges that Stani continued to use the Company's proprietary and specialized
knowledge and experience, and its trade secrets, regarding the production of gum
after the Agreement's expiration in April 1996, that it unlawfully disclosed
this information to Cadbury Schweppes PLC ("Schweppes") which purchased Stani in
1993 and that it deliberately concealed its use and disclosure from the Company.
The Company has filed claims for breach of contract, misappropriation of trade
secrets and fraudulent inducement to enter into the 1985 Amendment. The Company
is seeking to recover disgorgement of Stani's profits, certain lost royalties
and punitive damages, interest and costs. It is also seeking a permanent
injunction against Stani's future use and dissemination of the Company's
proprietary information and trade secrets. In the Fourth Amended Complaint, the
Company demands damages in excess of $250 million. The Fourth Amended Complaint
also initially contained claims against Schweppes, which the parties agreed to
dismiss on February 4, 2003.
On December 17, 2003, Stani moved for partial summary judgment and to limit the
Company's possible damages. In part, Stani alleged that certain claims were
barred by the statute of limitations and that neither disgorgement of Stani's
profits nor punitive damages were available remedies to the Company on any of
its claims. The Court heard oral argument from counsel on January 14, 2005. By
its August 2, 2005 decision, the Court denied Stani's summary judgment motion,
in part, and ruled that (i) the Company's claims were not barred by the statute
of limitations; and (ii) disgorgement of profits and punitive damages are
available remedies on the Company's misappropriation of trade secrets claims.
The Court granted Stani's summary judgment motion, in part, and ruled that (i)
disgorgement of profits and punitive damages are not available remedies on the
Company's breach of contract and fraudulent inducement claims: and (ii) Stani
was not estopped from claiming the 1985 Amendment altered the 1980 Agreement.
The parties await a trial date. If the Company ultimately prevails in this
litigation, it could have a material impact on the Company's consolidated
financial statements.
23
WizKids, Inc. ("Wizkids") and Jordan Weisman filed a complaint for professional
malpractice, breach of fiduciary duty and disgorgement of fees against the law
firm Michael, Best & Friedrich, LLP ("MB&F), and Timothy Kelley, one of its
partners, based on their submission of a PCT patent application for WizKids'
combat dial that is alleged to have prejudiced WizKids' United States patent
rights by failing to designate the United States as one of the member states for
subsequent conversion to a national application.
WizKids has recieved a patent from The United States Patent and Trademark Office
(the "PTO"). The rights conferred by the patent are dependent, however, on the
PTO issuing an order granting a pending petition to rectify the error referenced
above. Prior petitions have not been successful in correcting the error, and the
pending petition is the sixth petition filed with the PTO. In the event the PTO
grants the petition, it may affirm WizKids' patent rights, but WizKids alleges
it would still retain claims against MB&F for prior damage incurred as a result
of the error.
The complaint against MB&F and Mr. Kelley was filed in Washington state cour on
December 12, 2003. The parties have indicated they will file motions for summary
judgment with respect to the various claims, and a hearing is scheduled for
December 2005. Trial is scheduled for January 23, 2006. Whether the petition is
granted or denied, and/or if WizKids ultimately prevails in this litigation, it
could have a material impact on the Company's consolidated financial statements.
The Company is a party 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.
24
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. Shortin Ann Kirschner Jack H. Nusbaum
Allan A. Feder David Mauer Richard Tarlow
Stephen D. Greenberg Edward D. Miller Stanley Tulchin
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as required by Item 601 of Regulation S-K filed herewith:
10.1 Letter Amendment, effective July 19, 2005, to the Memorandum of Agreement,
dated January 6, 2003, between the Company and Major League Baseball
Players Association. Confidential treatment has been requested with respect
to portions of this exhibit. Omitted portions have been filed with the
Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.
10.2 The Topps Company, Inc. 2001 Stock Incentive Plan, Amended and Restated as
of June 30, 2005.
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, 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 - Chief Financial
Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
1. Form 8-K, filed on July 7, 2005, reporting the Company's updated stock
incentive, stock option, and executive severance plans.
2. Form 8-K, filed on July 25, 2005, reporting the Company's new
agreement with the Major League Baseball Players Association.
3. Form 8-K, filed on September 14, 2005, with press release, dated
September 12, 2005, reporting the Company's termination of the process
of evaluating the possible sale of the Confectionery business.
4. Form 8-K, filed on September 29, 2005, with press release, dated
September 29, 2005, reporting the Company's results of operations and
financial position for the second fiscal quarter.
5. Form 8-K, filed on October 5, 2005, with press release, dated October
5, 2005, reporting the Company's fiscal third quarter cash dividend
declaration.
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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
October 6, 2005
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