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 November 26, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from _______________ to __________________
Commission File Number: 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)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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 12b-2 of the Act). Yes _X_ No ____.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ No __X__
The number of outstanding shares of Common Stock as of January 2, 2006 was
40,035,774.
THE TOPPS COMPANY, INC.
AND SUBSIDIARIES
--------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
--------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
Index Page
---- ----
Condensed Consolidated Balance Sheets as of November 26,
2005 and February 26, 2005 3
Condensed Consolidated Statements of Operations for the
thirteen and the thirty-nine week periods ended November
26, 2005 and November 27, 2004 4
Condensed Consolidated Statements of Comprehensive Income
(Loss) for the thirteen and the thirty-nine week periods
ended November 26, 2005 and November 27, 2004 5
Condensed Consolidated Statements of Cash Flows for the
thirty-nine weeks ended November 26, 2005 and November 27,
2004 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 23
ITEM 4. CONTROLS AND PROCEDURES 23
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PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 2. REPURCHASE OF SECURITIES 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
2
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
November February
26, 2005 26, 2005
-------- --------
(amounts in thousands,
except share data)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 31,854 $ 36,442
Short-term investments ............................. 60,593 69,955
Accounts receivable, net ........................... 27,441 27,851
Inventories, net.................................... 35,904 32,936
Income tax receivable .............................. 549 338
Deferred tax assets ................................ 3,304 3,616
Prepaid expenses and other current assets .......... 13,378 14,541
--------- ---------
TOTAL CURRENT ASSETS ......................... 173,023 185,679
PROPERTY, PLANT AND EQUIPMENT ........................ 30,572 34,983
Less: accumulated depreciation and amortization ... 19,274 22,430
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, NET............ 11,298 12,553
GOODWILL ............................................. 63,405 67,566
INTANGIBLE ASSETS, net of accumulated amortization ... 7,126 8,544
DEFERRED TAX ASSETS .................................. 4,502 4,222
OTHER ASSETS ......................................... 14,742 11,847
--------- ---------
TOTAL ASSETS ................................. $ 274,096 $ 290,411
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................... $ 10,853 $ 12,658
Accrued expenses and other liabilities ............. 25,390 27,485
Deferred tax liabilities ........................... 19 -
Income taxes payable ............................... 2,886 7,390
--------- ---------
TOTAL CURRENT LIABILITIES .................... 39,148 47,533
OTHER LIABILITIES .................................... 24,770 23,689
--------- ---------
TOTAL LIABILITIES ............................ 63,918 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 November 26, 2005 and February 26, 2005 ........ 492 492
Additional paid-in capital ......................... 28,293 28,293
Treasury stock, 9,017,000 shares and 8,790,000 shares
as of November 26, 2005 and February 26, 2005 ...... (87,099) (85,060)
Retained earnings .................................. 272,434 275,226
Minimum pension liability adjustment ............... (5,824) (5,824)
Cumulative foreign currency adjustment.............. 1,882 6,062
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................... 210,178 219,189
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $ 274,096 $ 290,411
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Thirteen weeks ended Thirty-nine weeks ended
November November November November
26, 2005 27, 2004 26, 2005 27, 2004
------------ ------------ ------------ ------------
(amounts in thousands, except share data)
Net sales $ 72,808 $ 70,278 $ 226,328 $ 226,275
Cost of sales 51,502 46,657 149,001 142,724
------------ ------------ ------------ ------------
Gross profit on sales 21,306 23,621 77,327 83,551
Other income (expense), net 437 (54) 1,582 790
Selling, general and
administrative expenses 23,044 20,200 76,325 70,282
------------ ------------ ------------ ------------
(Loss) income from operations (1,301) 3,367 2,584 14,059
Interest income, net 1,044 883 2,581 1,924
------------ ------------ ------------ ------------
Income (loss) before (benefit)
provision for income taxes (257) 4,250 5,165 15,983
(Benefit) provision
for income taxes (286) 1,377 (716) 5,211
------------ ------------ ------------ ------------
Net income from continuing
operations 29 2,873 5,881 10,772
Loss from discontinued
operations - net of tax (3,691) ( 82) (3,809) ( 224)
------------ ------------ ------------ ------------
Net (loss) income $ (3,662) $ 2,791 $ 2,072 $ 10,548
============ ============ ============ ============
Basic net income (loss) per share
-From continuing operations $ 0.00 $ 0.07 $ 0.15 $ 0.27
-After discontinued operations $ (0.09) $ 0.07 $ 0.05 $ 0.26
Fully diluted net income (loss)
per share
-From continuing operations $ 0.00 $ 0.07 $ 0.14 $ 0.26
-After discontinued operations $ (0.09) $ 0.07 $ 0.05 $ 0.26
Weighted average shares
outstanding - basic 40,464,000 40,412,000 40,477,000 40,482,000
- diluted 41,139,000 41,253,000 41,315,000 41,280,000
See Notes to Condensed Consolidated Financial Statements.
4
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
Thirteen weeks ended Thirty-nine weeks ended
November November November November
26, 2005 27, 2004 26, 2005 27, 2004
-------- -------- -------- --------
(amounts in thousands, except share data)
Net income (loss) $(3,662) $ 2,791 $ 2,072 $10,548
Currency translation adjustment (1,738) (504) (4,180) (2,127)
------- ------- ------- -------
Comprehensive income (loss) $(5,400) $ 2,287 $(2,108) $ 8,421
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements.
5
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Thirty-nine weeks ended
November November
26, 2005 27, 2004
-------- --------
(amounts in thousands)
Cash flows from operating activities:
Net income $ 2,072 $ 10,548
Adjustments to reconcile net income to cash
(used in)/ provided by operating activities:
Depreciation and amortization 4,725 4,717
Deferred income taxes 51 2,699
Net asset impairment write-down related to
discontinued operations 3,541 --
Changes in operating assets and liabilities:
Accounts receivable 410 9,783
Inventories (2,968) 2,895
Income tax receivable/payable (4,715) 363
Prepaid expenses and other current assets 1,163 (834)
Payables and other current liabilities (3,900) 116
Cumulative foreign currency adjustment and other (1,605) 1,410
-------- --------
Cash (used in)/provided by operating activities (1,226) 31,697
-------- --------
Cash flows from investing activities:
Purchases of short-term investments (298,891) (137,110)
Proceeds from the sale of short-term investments 308,253 114,015
Additions to property, plant and equipment (2,192) (1,660)
-------- --------
Cash provided by/(used in) investing activities 7,170 (24,755)
-------- --------
Cash flows from financing activities:
Dividends paid to stockholders (4,864) (4,887)
Purchase of treasury stock (3,080) (4,123)
Exercise of stock options 1,041 1,049
-------- --------
Cash used in financing activities (6,903) (7,961)
-------- --------
Effect of exchange rates on cash and cash equivalents (3,629) 790
-------- --------
Net decrease in cash and cash equivalents $ (4,588) $ (229)
======== ========
Cash and cash equivalents at beginning of year 36,442 56,959
-------- --------
Cash and cash equivalents at end of period $ 31,854 $ 56,730
-------- --------
Supplemental disclosure of cash flow information:
Interest paid $ 74 $ 203
Income taxes paid $ 2,019 $ 2,941
===============================================================================
See Notes to Condensed Consolidated Financial Statements.
6
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 26, 2005 AND FEBRUARY 26, 2005
AND FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED
NOVEMBER 26, 2005 AND NOVEMBER 27, 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 thirty-nine week periods ended November 26, 2005
and November 27, 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
November 26, 2005 November 27, 2004
----------------------- ------------------------
As reported Pro forma As reported Pro forma
----------------------- ------------------------
(amounts in thousands)
Net (loss) income,
as reported $ (3,662) $ (3,662) $ 2,791 $ 2,791
Less: Stock-based
employee compensation -- (41) -- (173)
Pro forma net (loss) income $ (3,662) $ (3,703) $ 2,791 $ 2,618
Net (loss) income per share:
Basic ................. $ (0.09) $ (0.09) $ 0.07 $ 0.06
Diluted ............... $ (0.09) $ (0.09) $ 0.07 $ 0.06
--------------------------------------------------------------------------
For the thirty-nine weeks ended
November 26, 2005 November 27, 2004
----------------------- ------------------------
As reported Pro forma As reported Pro forma
----------------------- ------------------------
(amounts in thousands)
Net (loss) income,
as reported $ 2,072 $ 2,072 $ 10,548 $ 10,548
Less: Stock-based
employee compensation -- (245) -- (485)
Pro forma net (loss) income $ 2,072 $ 1,827 $ 10,548 $ 10,063
Net (loss) income per share:
Basic ................. $ 0.05 $ 0.05 $ 0.26 $ 0.25
Diluted ............... $ 0.05 $ 0.04 $ 0.26 $ 0.24
--------------------------------------------------------------------------
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 thirty-nine weeks 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
November February
26, 2005 26, 2005
--------- --------
(amounts in thousands)
Gross receivables $ 53,271 $ 51,265
Reserve for returns (22,532) (20,824)
Other reserves (3,298) (2,590)
-------- --------
Net receivables $ 27,441 $ 27,851
======== ========
Other reserves consist of allowances for discounts, doubtful accounts and
customer deductions for marketing promotional programs.
4. Inventories
November February
26, 2005 26, 2005
--------- --------
(amounts in thousands)
Raw materials $ 9,757 $ 7,468
Work in process 4,265 3,703
Finished products 21,882 21,765
-------- --------
Total inventory, net $ 35,904 $ 32,936
======== ========
Obsolete inventory reserves for each category are included in the amounts
shown above.
8
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, Baby Bottle Pop, Juicy Drop Pop, the Bazooka bubble gum
line and, from time to time, confectionery products based on licensed
characters, such as Pokemon and Yu-Gi-Oh!.
The Entertainment segment primarily consists of cards and sticker album
products featuring sports and non-sports subjects. Trading cards feature
players from Major League Baseball, the National Basketball Association 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 Thirty-nine weeks ended
November November November November
26, 2005 27, 2004 26, 2005 27, 2004
-------- -------- --------- ---------
(amounts in thousands)
Net Sales
Confectionery $ 27,397 $ 28,992 $113,684 $113,181
Entertainment 45,411 41,286 112,644 113,094
-------- -------- -------- --------
Total $ 72,808 $ 70,278 $226,328 $226,275
======== ======== ======== ========
Contributed Margin
Confectionery $ 7,464 $ 8,885 $ 33,371 $ 37,664
Entertainment 9,681 12,883 27,943 35,174
-------- -------- -------- --------
Total $ 17,145 $ 21,768 $ 61,314 $ 72,838
======== ======== ======== ========
Reconciliation of Contributed
Margin to (Loss) Income Before
Provision for Income Taxes:
Total contributed margin $ 17,145 $ 21,768 $ 61,314 $ 72,838
Unallocated selling, general
and administrative expenses
and manufacturing overhead (16,870) (16,791) (55,447) (54,852)
Depreciation and amortization (2,013) (1,556) (4,865) (4,717)
Other income (expense), net 437 ( 54) 1,582 790
-------- -------- -------- --------
(Loss) income from operations (1,301) 3,367 2,584 14,059
Interest income, net 1,044 883 2,581 1,924
-------- -------- -------- --------
(Loss) income before provision
for income taxes ( 257) 4,250 5,165 15,983
-------- -------- -------- --------
(Benefit) provision for taxes ( 286) 1,377 ( 716) 5,211
Loss from discontinued operations,
net of tax (3,691) ( 82) (3,809) ( 224)
-------- -------- -------- --------
Net (loss) income $ (3,662) $ 2,791 $ 2,072 $ 10,548
======== ======== ======== ========
9
6. Common Stock
In June 2003, the Board of Directors of the Company initiated a regular
quarterly cash dividend of $0.04 per share. On October 5, 2005, the Board
of Directors declared its third quarter cash dividend of $0.04 per share,
or $1,625,000 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.
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 under the Securities
and Exchange Act of 1934, as amended, which provides for the purchase of up
to 500,000 shares for each of the next four quarters starting in the third
quarter of fiscal 2006 at the prevailing market price, per share, subject
to certain conditions. In addition, the Board of Directors increased the
outstanding share authorization by 3,390,700 shares to 5 million shares. As
of November 26, 2005, the Company had purchased 429,586 shares under this
amended authorization, leaving 4,570,414 shares available for future
purchases.
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 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 earnings before interest, taxes, depreciation and
amortizaiton. 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 November 26,
2005 or February 26, 2005.
8. Discontinued Operations - thePit.com
In August 2001 the Company acquired all the outstanding common stock of
thePit.com, Inc., which operated a sports card exchange, for a net cash
purchase price of $5.7 million. The acquisition was accounted for using the
purchase method of accounting and resulted in recognizing $0.8 million in
intangible assets and $4.1 million in goodwill. The Company included this
subsidiary in the Entertainment segment of its business. The Company was
unable to operate the subsidiary profitably and in November 2005 received
an offer to purchase the subsidiary for $360,000, with payments to be made
over four years. This amount is the Company's best estimate for the fair
value of the business.
10
Per Statement of Accounting Standards No. 144 "Accounting for the
Impairment of Long-Lived Assets", the net book value of the assets of
thePit.com, Inc., which consisted primarily of the $4.1 million goodwill
from the acquisition as well as smaller amounts of inventory, and
unamortized intangibles, was written down $3,541,000 net of tax to
$360,000, which is the fair value of the assets based on the expected
proceeds from the sale of the subsidiary. The $360,000 fair value is
included in prepaid expenses and other current assets as of November 26,
2005. These assets and liabilities are classified as held for sale.
The $3,541,000 write-down of the assets to fair value and, additionally,
the $268,000 loss from operations net of tax of the Pit.com, Inc. for the
thirty-nine weeks of fiscal 2006, which total $3,809,000, are being
reported as Loss from discontinued operations - net of tax on a separate
line on the Condensed Consolidated Statements of Operations. Results for
the quarter of $3,691,000 and the loss from operations for the prior year
are also reported separately net of tax on the Condensed Consolidated
Statements of Operations and comprises the $3,541,000 write-off of the
assets to fair value and $150,000 loss from operations net of tax for the
Pit.com, Inc.
Third quarter year-to-date fiscal 2006 revenue for the Pit.com, Inc. was
$874,000 and pre-tax loss was $229,000. Third quarter fiscal 2006 revenue
was $252,000 and pretax loss was $74,000. Third quarter fiscal 2005 revenue
was $373,000 and pretax loss was $116,000.
9. 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
$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 November 27,
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 ($23,095)
for the period ended November 27, 2004.
10. 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 November
26, 2005 and February 26, 2005 were as follows:
(amounts in thousands)
November 26, 2005 February 26, 2005
Gross ' Gross
Carrying Accumulated ' Carrying Accumulated
Value Amortization Net ' Value Amortization Net
-------- ------------ -------- ' -------- ------------ --------
Licenses and Contracts ........ $ 21,569 $(18,443) $ 3,126 ' $ 21,569 $(17,942) $ 3,627
Intellectual Property ......... 18,784 (15,059) 3,725 ' 18,784 (14,284) 4,500
Software and Other ............ 2,483 ( 2,483) - ' 2,953 ( 2,811) 142
Minimum Pension Liability...... 275 - 275 ' 275 - 275
-------- --------- -------- ' -------- --------- --------
Total Intangibles ............. $ 43,111 $(35,985) $ 7,126 ' $ 43,581 $(35,037) $ 8,544
======== ========= ======== ' ======== ========= ========
11
In connection with the classification of the fair value of the assets of
thePit.com as available for sale $0.1 million of intangible assets and $4.1
million of goodwill were determined to be impaired and were written off in
the third quarter of fiscal 2006.
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 4.7 years
Intellectual Property 6 years 3.6 years
The weighted average remaining useful life for the Company's intangible
assets in aggregate is 4.0 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 $ 1,844
2007 $ 1,703
2008 $ 1,703
2009 $ 1,703
2010 and thereafter $ 1,316
In addition to the amortization of intangibles listed above, reported
amortization expense, which was $1,715,000 and $1,863,000 for the
thirty-nine weeks ended November 26, 2005 and November 27, 2004,
respectively, included amortization of deferred financing fees and deferred
compensation costs.
Following the write-down of the goodwill associated with thePit.com, Inc.,
reported goodwill was reduced from $67,566,000 as of February 26, 2005 to
$63,405,000 as of November 26, 2005, as follows:
November February
26, 2005 26, 2005
-------- --------
(amounts in thousands)
Confectionery ............... $ 7,699 $ 7,699
Entertainment ............... 55,706 59,867
-------- --------
Total goodwill ............ $ 63,405 $ 67,566
======== ========
11. Legal Proceedings
On November 19, 2001 Media Technologies, Inc. sued the Company and nine
other manufacturers of trading cards 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 which is being amortized over the term of the contract. 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.
12
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 demanded 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. In 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 case is scheduled for trial in March 2006. If the Company ultimately
prevails in this litigation, it could have a material impact on the
Company's consolidated financial statements.
On December 12, 2003, WizKids, Inc. ("Wizkids") and Jordan Weisman filed a
complaint in Washington state court 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
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. In a settlement reached on October
31, 2005, defendants agreed to pay Wizkids $2,950,000. This amount is
included net of the related legal fees in selling, general, and
administrative expenses in the third quarter of fiscal 2006.
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.
13
12. Employee Benefit Plans
The components of net periodic benefit costs for the thirteen and
thirty-nine weeks ended November 26, 2005 and November 27, 2004 are as
follows:
Postretirement
Pension Healthcare
---------------------------------------------------------------------------
November November November November
Thirteen Weeks 26, 2005 27, 2004 26, 2005 27, 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
---------------------------------------------------------------------------
November November November November
Thirty-nine weeks 26, 2005 27, 2004 26, 2005 27, 2004
---------------------------------------------------------------------------
(amounts in thousands)
Service cost $1,197 $1,065 $ 279 $ 228
Interest cost 1,854 1,811 429 426
Expected return on plan assets (1,653) (1,572) - -
Amortization of:
Initial transition obligation ( 48) ( 45) 150 150
Prior service cost 39 99 - -
Actuarial losses 714 606 30 -
------ ------ ------ ------
Net periodic benefit cost $2,103 $1,964 $ 888 $ 804
====== ====== ====== ======
---------------------------------------------------------------------------
The fiscal 2006 costs are estimated based on actuarial assumptions, and
actual costs will be adjusted at the end of the fiscal year.
13. Recently Issued Accounting Pronouncements
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.
14
In December 2004, the 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.
In December 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 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.
14. 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.
15. Restructuring Charge
On September 29, 2005, a restructuring program was announced which
separates the Confectionery and Entertainment businesses to the extent
practical and streamlines the organizational structure through headcount
reductions. In connection with the headcount reductions, the Company
incurred a charge of approximately $1.3 million in the third quarter (of
which $0.2 million was paid within the third quarter) and will incur a
charge of approximately $1.4 million in the fourth quarter.
15
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 November 26, 2005,
and the related condensed consolidated statements of operations, and
comprehensive income (loss) for the thirteen and thirty-nine week periods ended
November 26, 2005 and November 27, 2004 and of cash flows for the thirty-nine
week periods ended November 26, 2005 and November 27, 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 the 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 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
---------------------------
DELIOTTE & TOUCHE LLP
New York, New York
January 5, 2006
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 Thirty-nine weeks ended
November November November November
26, 2005 27, 2004 26, 2005 27, 2004
-------- -------- ---------- --------
(in thousands of dollars)
Net Sales
Confectionery $ 27,397 $ 28,992 $ 113,684 $ 113,181
Entertainment 45,411 41,286 112,644 113,094
-------- -------- -------- ---------
Total $ 72,808 $ 70,278 $ 226,328 $ 226,275
======== ======== ========= =========
-----------------------------------------------------------------------
Third Quarter Fiscal Year 2006 (thirteen weeks ended November 26, 2005) versus
Third Quarter Fiscal Year 2005 (thirteen weeks ended November 27, 2004)
Net sales for the third quarter of fiscal 2006 were $72.8 million, an increase
of $2.5 million, or 3.6%, from $70.3 million in the same period last year.
Changes in foreign currency rates versus the dollar reduced revenue by $0.5
million in this year's quarter, without which sales would have increased $3.0
million.
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 $27.4 million in the third quarter of this year, a
decrease of $1.6 million, or 5.5%, from $29.0 million in fiscal 2005. This
decrease was largely a function of lower US sales of Ring Pop and Push Pop,
partially offset by continued distribution gains of Juicy Drop Pop and improved
performance of Baby Bottle Pop driven by successful advertising and promotional
campaigns. Weaker foreign currencies had a modestly negative impact on
confectionery sales in this year's quarter.
Net sales of entertainment products, which include cards, stickers, sticker
albums and the WizKids line of strategy games, were $45.4 million in the third
quarter of fiscal 2006, an increase of $4.1 million, or 10.0%, from $41.3
million in the same period last year. This increase reflected double-digit
growth of US sports cards sales, despite the negative impact of a new baseball
agreement which prevents shipment of new season products until February.
Increases in sports card sales were a function of an almost doubling in sales of
football products driven by 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. Sales of WizKids' gaming products also exceeded prior
year, a function of the expansion of the constructible strategy game format to
include additional Pirates releases and the introduction of Nascar-themed
products. Sales of non-sports publishing products decreased in the period this
year, reflecting a significant slowing in sales of products featuring WWE in
Europe. Additionally, sales of European sports sticker album products were below
year ago levels, primarily as a result of the timing of shipment of the Italian
Calcio product. Weaker foreign currencies had a modestly negative impact on
sales in the quarter this year.
Gross profit as a percentage of net sales in the third quarter of fiscal 2006
was 29.3% as compared with the third quarter of last year which was 33.6%. This
decline reflected higher provisions for returns driven by the slowdown in WWE
product sales and WizKids' expansion into the mass market which carries return
privileges. Higher US confectionery trade spending and an increase in listing
and slotting fees as we expand distribution in Europe put further pressure on
gross profit margins.
17
SG&A expense was $23.0 million in the third quarter fiscal 2006, up from $20.2
million in fiscal 2005. As a percentage of net sales, SG&A was 31.7% in the
third quarter of fiscal 2006 versus 28.7% in the third quarter of fiscal 2005. A
key factor in higher SG&A was an increase in marketing expenses caused by the
return to more normalized levels of advertising on the US confectionery business
as well as promotions associated with European entertainment releases. Also in
the third quarter fiscal 2006, the Company recognized certain one-time expenses.
A total of $1.3 million in restructuring-related severance, pension and medical
costs were recorded in the period related to the September 2005 reorganization.
A related expense of $1.4 million will be recorded in the fourth quarter of this
year. The Company expects to save $2.5 million in salaries and related costs
annually as a result of this reorganization. Additionally, associated with the
implementation of a new fixed asset register, the Company recognized a $0.8
million write-down of net fixed assets in the quarter, split equally between net
assets that had been previously taken out of service and certain assets that had
been under-depreciated. Additionally, SG&A expense benefited from a $2.3 million
legal settlement, net of legal costs, stemming from WizKid's patent litigation.
Lastly, overhead expenses were higher in the quarter this year due to increases
associated with confectionery merchandising, bad debt and normal salary
inflation.
Net interest income of $1,044,000 in the third quarter of fiscal 2006 was higher
than the third quarter of fiscal 2005 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 reported an effective
tax rate of 111.3% in the third quarter of fiscal 2006, resulting from a tax
benefit recorded over a pre-tax loss, versus an effective tax rate of 32.4% in
the third quarter of fiscal 2005. The benefit results from permanent items such
as an R&D credit, tax-exempt interest, and other tax planning. The rate
difference from last year's quarter results from the magnitude of these
permanent items relative to the lower pre-tax income base.
The Company reported net income before discontinued operations in the third
quarter of fiscal 2006 of $29,000 versus $2.9 million in the third quarter of
fiscal 2005. Additionally, the Company recognized a net loss net of tax from the
discontinuation of thePit.com business of $3.7 million this year versus an
after-tax loss of $82,000 last year. Net loss after discontinued operations was
$3.7 million, or $0.09 per diluted share in the period this year, versus net
income of $2.8 million, or $0.07 per diluted share last year.
Fiscal 2006 (thirty-nine weeks ended November 26, 2005) compared to Fiscal 2005
(thirty-nine weeks ended November 27, 2004)
Net sales in the third quarter fiscal 2006 year-to-date in fiscal 2006 period of
$226.3 million were flat versus the third quarter year-to-date period in fiscal
2005. Stronger foreign currencies versus the dollar served to increase this
year's sales by $1.0 million, primarily in the first quarter, without which
sales would have decreased by a like amount.
Net sales of confectionery products were $113.7 million in the third quarter
fiscal 2006 year-to-date period, an increase of $0.5 million, or 0.4%, from
$113.2 million in fiscal 2005. Stronger foreign currencies contributed $0.7
million, without which sales would have decreased by $0.2 million. Higher sales
were a function of distribution gains of Juicy Drop Pop in the U.S., the roll
out of Mega Mouth Spray in Japan and Argentina and a resurgence in sales of
Pokemon products, now in its fifth year.
Net sales of entertainment products in the third quarter fiscal 2006
year-to-date period were $112.6 million, a decrease of $0.5 million, or 0.4%,
from $113.1 million in the third quarter year-to-date period in fiscal 2005.
Stronger foreign currencies added $0.3 million to sales this year, without which
sales would have decreased $0.8 million. The absence of the European Football
Championship, which occurs every four years, and related products this year and
the fourth quarter versus third quarter release in Italian soccer products 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 first-half sales of WWE products as well as solid performances from Star
Wars, Barbie and Wacky Packages.
18
Gross profit as a percentage of net sales in the third quarter fiscal 2006
year-to-date was 34.2% as compared with 36.9% for the same period in fiscal
2005. This decline reflected an increase in provisions for returns associated
with WWE in Italy, and WizKids' expansion into the mass market. Higher levels of
trade spending associated with the US and European confectionery businesses also
contributed to lower gross profit margins this year.
Third quarter year-to-date SG&A expense was $76.3 million for fiscal 2006
compared with $70.3 million during the same period in fiscal 2005. As a percent
of net sales, SG&A was 33.7%, 2.6% 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 period was $7.9 million.
This increase was in part 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. Additionally, SG&A was driven up this year by costs associated
with the September 2005 reorganization and the write-down of fixed assets. SG&A
expenses benefited in the period this year by $1.8 million due to the WizKids'
legal settlement, net of year-to-date legal costs. Other overhead increases this
year are associated with merchandising support for the US confectionery
business, implementation of ERP and other new systems and increases in bad debt
and legal costs.
Third quarter year-to-date net interest income fiscal 2006 increased to $2.6
million from $1.9 million in fiscal 2005 due to higher interest rates.
Included in the third quarter fiscal 2006 year-to-date tax benefit line, the
Company recognized a tax credit due to the 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 16.9%, which
reflects the benefit of foreign tax credits and other tax planning, versus an
effective tax rate of 32.6% in the third quarter fiscal 2005 year-to-date
provision.
The Company reported net income before discontinued operations in the
third-quarter fiscal 2006 year-to-date period of $5.9 million as compared to
$10.8 million in the third-wuarter fiscal 2005 year-to-date period.
Additionally, the Company reported an after-tax loss on discontinued operations
of $3.8 million in the third-quarter fiscal 2006 year-to-date period, and
$224,000 in the third-quarter fiscal 2005 year-to-date period, reflecting the
decision to exit thePit.com internet business. Net income after discontinued
operations in the third-quarter fiscal 2006 year-to-date period was $2.1 million
this year, or $0.05 per diluted share, versus $10.5 million last year, or $0.26
per diluted share in the third-quarter fiscal 2005 year-to-date period.
Other Matters
-------------
On September 28, 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 incurred charges of
approximately $2.7 million, of which $1.3 million was recognized in the third
quarter, with the balance to be recognized in the fourth quarter.
In November 2005, the Company received an offer to purchase the Pit.com, Inc., a
subsidiary purchased in August 2001 which operates a sports card exchange, for
$360,000, with scheduled payments to be made over four years. This amount is the
Company's best estimate for the fair value of the business. A letter of intent
was signed in December 2005 and an initial payment was received. Accordingly,
the net assets of thePit.com, Inc. were written down by $4.6 million to this
$360,000 amount. Included in this write-down was $4.3 million of goodwill and
net intangible assets. There was a $762,000 tax benefit associated with this
write-down which is being reported as Loss on discontinued operations - net of
tax on the Condensed and Consolidated Statements of Operations.
Finally, associated with the implementation of a new fixed asset register, the
Company recognized a $0.8 million write-down of net fixed assets in the quarter,
split equally between net assets that had been previously taken out of service
and certain assets that had been under-depreciated.
19
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 November 26, 2005, the Company had $31.9 million in cash and cash equivalents
and $60.6 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 earnings before interest, taxes, depreciation, and amortization. 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 the authorization and the Board approved the purchase of
another 5 million 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 under the Securities and Exchange Act of
1934, as amended which provides for the purchase of up to 500,000 shares for
each of the next four quarters starting in the third quarter of fiscal 2006 at
the prevailing market price, per share, subject to certain conditions. In
addition, the Board of Directors increased the outstanding share authorization
by 3390,700 shares to 5 million shares. As of November 26, 2005, the Company had
purchased 429,586 shares under this amended authorization leaving 4,570,414
shares available for future purchases.
In the thirty-nine weeks ended November 26, 2005, the Company's net decrease in
cash and cash equivalents was $4.6 million versus a decrease of $0.2 million in
the comparable period of fiscal 2005.
Cash used by operating activities year-to-date this year was $1.2 million versus
cash provided of $31.7 million last year. This use of cash was primarily due to
a $4.7 million reduction in income taxes payable which included a $1.6 million
reversal of a tax reserve following the completion of a tax audit and tax
payments in Europe, to a $3.9 million reduction in payables, in part related to
payment of fiscal 2005 bonuses, and to a $3.0 million increase in inventories
stemming from the timing of board stock purchases and the acquisition of
autographs for future sports products. Partially offsetting these uses of cash
were net income, depreciation and amortization and a reduction in other assets
which included a $4.3 million write-down of the goodwill and net intangible
assets from thePit.com, Inc. The prior period 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.
20
Cash provided by investing activities was $7.2 million this year versus a use of
cash of $24.8 million last year. Year-to-date this year, short-term investments
were reduced by $9.4 million, partially offset by capital spending of $2.2
million, largely related to the rollout of new ERP system. Last year's use of
cash of $24.8 million reflected the net purchase of $23.1 million of short-term
investments and $1.7 million in capital spending. Fiscal 2006 full year capital
spending is projected to be approximately $3.0 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. The proceeds
from the sale of thePit.com, Inc. will be received over the next four years.
Cash used in financing activities of $6.9 million this period reflects $4.9
million in cash dividends and $3.1 million in treasury stock purchases,
partially offset by $1.0 million in cash from options exercised. This compares
with a total outlay for financing activities of $8.0 million in the same period
last year, comprised of $4.9 million in cash dividends and $4.1 million in
treasury stock purchases less $1.0 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 condition, changes in financial position,
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,
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.
Additionally, the Company is considering moving production of the Bazooka bubble
gum line to a new contract manufacturer in Mexico and to change product formats
beginning in fiscal 2007. Should the transition not go as planned, there is a
risk of out-of-stocks and lost profit. Additionally, as with any new product
format, there is a risk that consumer acceptance will be less than anticipated.
21
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 $23.2 million in the first thirty-nine weeks of fiscal 2006 and
$16.9 million in 2005, which equates to 10.3% and 7.4% of net sales,
respectively. The increase in the provision this year was partially the result
of higher expected returns on various US sports card and European publishing
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 $2.3 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 $3.5 million in the
thirty-nine weeks of fiscal 2006 and $2.9 million in fiscal 2005, which equates
to 1.3% and 1.1% 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 $2.3 million.
22
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 November 26,
2005, the Company had $18.7 million in 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. Associated with the implementation of a fixed asset register, the
lack of which had been identified as a significant deficiency as of February 26,
2005, the Company recognized a $0.8 million write-down of net fixed assets in
the thirteen weeks ended November 26, 2005, split equally between net assets
that had been previously taken out of service and certain assets that had been
under-depreciated. There were no significant deficiencies or material weaknesses
identified, and therefore there were no corrective actions taken.
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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 which is being amortized over the
term of the contract. 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 demanded 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. In 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 case is scheduled for trial in March 2006. If the Company ultimately
prevails in this litigation, it could have a material impact on the
Company's consolidated financial statements.
On December 12, 2003, WizKids, Inc. ("Wizkids") and Jordan Weisman filed a
complaint in Washington state court 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
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. In a settlement reached on October
31, 2005, defendants agreed to pay Wizkids $2,950,000. This amount is
included net of the related legal fees in selling, general, and
administrative expenses in the third quarter of fiscal 2006.
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.
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ITEM 2. REPURCHASE OF SECURITIES
The following table lays out the information rquired by Item 703 of Reg S-K:
----------------------------------------------------------------------------------------------------
Total No. of Shares Maximum No. of
Total No. Average Purchased as Part of Shares that May Yet
of Shares Price Paid Publicly Announced be Purchased Under
Period Purchased Per Share Plans or Programs Plans or Programs
------ --------- ---------- -------------------- --------------------
August 28, 2005 through
September 24, 2005 -- -- -- --
September 25, 2005 through
October 22, 2005 208,861 $7.74 141,661 4,719,139
October 23, 2005 through
November 26, 2005 220,725 $7.52 199,992 4,570,414
------- -------
Total 429,586 $7.63 341,653
----------------------------------------------------------------------------------------------------
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, 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.
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
January 5, 2006
25