UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended May 27, 2006
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer | | Accelerated filer |X| Non-accelerated filer | |
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 June 28, 2006 was
39,147,060.
1
THE TOPPS COMPANY, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index Page
----- ----
Condensed Consolidated Balance Sheets as of May 27, 2006
and February 25, 2006 3
Condensed Consolidated Statements of Operations for the
thirteen weeks ended May 27, 2006 and May 28, 2005 4
Condensed Consolidated Statements of Comprehensive Income (Loss)
for the thirteen weeks ended May 27, 2006 and May 28, 2005 5
Condensed Consolidated Statements of Cash Flows for the thirteen
weeks ended May 27, 2006 and May 28, 2005 6
Notes to Condensed Consolidated Financial Statements 7
Report of Independent Registered Public Accounting Firm 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 3. DISCLOSURES ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 19
--------------------------------------------------------------------------------
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 1A RISK FACTORS 21
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 21
ITEM 6. EXHIBITS 22
2
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share and share data)
(Unaudited)
May February
27, 2006 25, 2006
-------- --------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents .......................... $27,557 $28,174
Short-term investments ............................. 52,071 53,269
Accounts receivable, net ........................... 38,384 31,180
Inventories ........................................ 42,153 36,781
Income tax receivable .............................. 1,330 1,407
Deferred tax assets ................................ 5,672 5,687
Prepaid expenses and other current assets .......... 9,060 11,134
--------- ---------
TOTAL CURRENT ASSETS ......................... 176,227 167,632
PROPERTY, PLANT AND EQUIPMENT ........................ 31,073 30,430
Less: accumulated depreciation and amortization ... 20,219 19,402
--------- ---------
PROPERTY, PLANT AND EQUIPMENT ................ 10,854 11,028
--------- ---------
GOODWILL ............................................. 63,405 63,405
INTANGIBLE ASSETS, net ............................... 5,998 6,424
DEFERRED TAX ASSETS .................................. 7,269 6,334
OTHER ASSETS ......................................... 12,087 13,815
--------- ---------
TOTAL ASSETS ................................. $ 275,840 $ 268,638
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................... $ 12,212 $ 11,263
Accrued expenses and other liabilities ............. 31,586 25,345
Income taxes payable ............................... 4,121 3,311
--------- ---------
TOTAL CURRENT LIABILITIES .................... 47,919 39,919
OTHER LIABILITIES .................................... 24,202 24,083
--------- ---------
TOTAL LIABILITIES ............................ 72,121 64,002
--------- ----------
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 May 27, 2006 and February 25, 2006 ............ 492 492
Additional paid-in capital ......................... 28,699 28,644
Treasury stock, 9,915,000 shares and 9,539,000 shares
as of May 27, 2006 and February 25, 2006 ......... (94,947) (91,376)
Retained earnings .................................. 270,014 269,954
Minimum pension liability adjustment ............... (5,551) (5,551)
Unrealized loss on securities available for sale ... (311) --
Cummulative foreign currency adjustment ............ 5,323 2,473
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................... 203,719 204,636
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $ 275,840 $ 268,638
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share and share data)
(Unaudited)
Thirteen weeks ended
May May
27, 2006 28, 2005
-------- --------
Net sales $ 80,971 $ 78,584
Cost of sales 53,043 50,940
-------- --------
Gross profit on sales 27,928 27,644
Selling, general and administrative expenses 26,288 27,137
-------- --------
Income from operations 1,640 507
Interest income, net 757 740
-------- --------
Income before provision for income taxes 2,397 1,247
Provision for income taxes 760 285
-------- --------
Net income from continuing operations 1,637 962
Loss from discontinued operations -net of tax 32 65
-------- --------
Net income $ 1,605 $ 897
======== ========
Basic net income per share
- From continuing operations $ 0.04 $ 0.02
- From discontinued operations $ -- $ --
-------- --------
Basic net income per share $ 0.04 $ 0.02
======== ========
Diluted net income per share:
- From continuing operations $ 0.04 $ 0.02
- From discontinued operations $ -- $ --
-------- --------
Diluted net income per share $ 0.04 $ 0.02
======== ========
Weighted average shares outstanding
- basic 39,497,000 40,455,000
- diluted 40,354,000 41,255,000
See Notes to Condensed Consolidated Financial Statements.
4
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
(Unaudited)
Thirteen weeks ended
May May
27, 2006 28, 2005
-------- --------
Net income $ 1,605 $ 897
Unrealized loss on securities
available for sale (311) --
Currency translation adjustment 2,850 (1,806)
--------- ---------
Comprehensive income (loss) $ 4,144 $ (909)
========= =========
See Notes to Condensed Consolidated Financial Statements.
5
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(Unaudited)
Thirteen weeks ended
May May
27, 2006 28, 2005
-------- --------
Cash flows from operating activities:
Net income from continuing operations................. $ 1,637 $ 962
Adjustments to reconcile net income to cash flows
provided by (used in) operating activities:
Depreciation and amortization ........................ 1,243 1,394
Share based compensation 55 --
Deferred income taxes ................................ (920) (689)
Net effect of changes in:
Accounts receivable .................................. (7,204) 291
Inventories .......................................... (5,372) (4,969)
Income tax receivable ................................ 77 11
Income tax payable ................................... 810 (864)
Prepaid expenses and other current assets ............ 2,074 1,425
Payables and other current liabilities ............... 7,190 (5,406)
All other ............................................ 943 (1,517)
------- -------
Cash provided by (used in) operating activities
-- continuing operations ......................... 533 (9,362)
Cash used in operating activites -- discontinued
operations ....................................... (32) (73)
------- -------
Cash provided by (used in) operating activites --total 501 (9,435)
Cash flows from investing activities:
Purchase of short-term investments ................... (29,880) (101,901)
Sale of short-term investments ....................... 30,767 100,975
Purchases of property, plant and equipment ........... (643) (673)
--------- ---------
Cash provided by (used in) investing activities .... 244 (1,599)
Cash flows from financing activities:
Dividends paid ........................................ (1,545) (1,618)
Exercise of stock options ............................. 1,389 40
Purchase of treasury stock ............................ (4,960) --
--------- --------
Cash used in financing activities - continuing
operations ........................................ (5,116) (1,578)
Effect of exchange rates on cash and cash equivalents ... 3,754 (1,782)
Net decrease in cash and cash equivalents ............... ( 617) (14,394)
Cash and cash equivalents at beginning of period ........ 28,174 36,442
--------- ---------
Cash and cash equivalents at end of period .............. $ 27,557 $ 22,048
========= =========
Supplemental disclosure of cash flow information:
Interest paid ......................................... $ 33 $ 28
======== ========
Income taxes paid ..................................... $ 676 $ 1,123
======== ========
See Notes to Condensed Consolidated Financial Statements.
6
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 27, 2006 AND FEBRUARY 25, 2006
AND FOR THE THIRTEEN WEEKS ENDED MAY 27, 2006 AND MAY 28, 2005
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed interim consolidated financial statements
have been prepared by The Topps Company, Inc. and its subsidiaries (the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission and reflect all adjustments which are, in the opinion of management,
considered necessary for a fair presentation. Operating results for the thirteen
week periods ended May 27, 2006 and May 28, 2005 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 25, 2006.
Impact of Recent Accounting Pronouncements
Share-Based Compensation Plans
Effective February 26, 2006, the Company adopted the provisions of Financial
Accounting Standards Board ("FASB") Statement No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R") using the modified prospective transition
method. Under this method, prior periods are not revised for comparative
purposes and the Company recognizes compensation cost using a fair-value based
method for all share-based payments granted after February 25, 2006, plus any
awards granted to employees up through February 25, 2006 that remain unvested at
that time. Prior to February 26, 2006, the Company accounted for its share-based
compensation plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25. "Accounting for Stock Issued to Employees", and
related interpretations including FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation--An Interpretation of APB
Opinion No. 25". On November 10, 2005, the FASB issued FASB Staff Position No.
FAS 123(R)-3, "Transition Election Related to Accounting for Tax Effects of
Share-Based Payment Awards." The Company has elected to adopt the alternative
transition method provided in this FASB Staff Position for purposes of
calculating the pool of excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS 123R.
The Company has Stock Option Plans that provide for the granting of
non-qualified stock options, incentive stock options and stock appreciation
rights (SARs) to employees, non-employee directors and consultants within the
meaning of Section 422A of the Internal Revenue Code. Options are granted with
an exercise price equal to the closing market price of the stock on the grant
date, generally vest within three years and expire ten years after the grant
date. The Company re-issues treasury shares when stock options are exercised and
the Company anticipates that it will have enough treasury shares purchased to
cover all outstanding stock options.
The Company recorded compensation cost arising from share-based payment
arrangements in selling, general and administrative expenses on the Consolidated
Statement of Operations for the Company's Stock Option Plans of $55,000 and zero
for the thirteen weeks ended May 27, 2006 and May 28, 2005, respectively.
As a result of adopting SFAS 123R, the Company's income before provision for
income taxes and net income for the thirteen weeks ended May 27, 2006 was
$55,000 and $38,000 lower, respectively. Basic and diluted income per share for
the thirteen weeks ended May 27, 2006, did not change materially from the
reported $0.04 and $0.04, respectively, upon the Company's adoption of SFAS
123R.
Determining Fair Value
Valuation and Amortization Method: The fair value of stock options granted under
the Company's Stock Option Plans is estimated using the Black-Scholes option
pricing model. The fair value of stock options granted after February 25, 2006
will be amortized on a straight-line basis. Compensation expense is amortized
over the requisite service periods of the awards, which are generally the
vesting periods.
7
Expected Volatility: Volatility is a measure of the amount by which a financial
variable, such as share price, has fluctuated (historical volatility) or is
expected to fluctuate (expected volatility). The expected volatility of stock
option awards at the date of grant is estimated based on the historical selling
price of the Company's securities. The decision to use historical volatility was
based upon the lack of availability of actively traded options on the Company's
common stock. Prior to the adoption of SFAS 123R, the Company calculated
expected volatility using historical stock price volatility.
Expected Term: The expected term of an employee share option is the period of
time for which the option is expected to be outstanding. The Company has made a
determination of expected term by analyzing employees' historical exercise
experience and post-vesting employment termination behavior from its history of
grants and exercises in the Company's option database. The historical pattern of
options exercised has been analyzed in an effort to determine if there were any
discernable patterns of activity based on certain demographic characteristics
such as employees' length of service, salary and job level.
Risk-Free Interest Rate: The risk-free interest rate used in the Black-Scholes
option pricing model is based on the implied yield available on U.S. Treasury
zero-coupon issues with a remaining term equal to the expected term used.
Dividends: On June 26, 2003, the Board of Directors of the Company initiated a
regular quarterly cash dividend of $0.04 per share. An expected dividend yield
of $0.16 was used in the Black-Scholes valuation model.
Forfeiture: The Company uses historical data to estimate pre-vesting option
forfeitures. Share-based compensation expense is recorded only for those awards
that are expected to vest.
The following assumptions were used to estimate the fair value of options
granted under the Company's Stock Option Plans for the thirteen weeks ended May
27, 2006 and May 28, 2005:
Stock Options
Thirteen Weeks Ended
May May
27, 2006 28, 2005
--------------------------------------------------------------------------------
Expected term (years) 5.7 5.8
Expected volatility 29% 32%
Risk-free interest rate 4.9% 4.4%
Expected dividend $0.16 $0.16
--------------------------------------------------------------------------------
Stock Option Activity and Share-Based Compensation Expense
Stock option activity for the thirteen weeks ended May 27, 2006 is summarized as
follows:
Weighted Weighted
Average Average
Exercise Remaining Aggregate
Number of Price Contractual Intrinsic Value
Shares Per Share Term (Years) (in thousands)
Outstanding at February 25, 2006 3,427,543(1) $ 7.30
Granted 43,000 7.94
Exercised (199,649) 6.74
Forfeitures (116,460) 8.73
-----------
Outstanding at May 27, 2006 3,154,434 7.29 4.71 $ 3,802
Vested or expected to vest 3,065,345 7.25 4.61 $ 3,816
Exercisable at May 27, 2006 2,687,182 $ 7.06 4.12 $ 3,879
(1) The number of shares outstanding has been adjusted from previously reported
figures due to 13,333 shares incorrectly reported as forfeited during the
year ended February 25, 2006.
8
The weighted average fair value of options granted during the thirteen weeks
ended May 27, 2006 was $2.32 and there were no stock options granted during the
thirteen weeks ended May 28, 2005. The aggregate intrinsic value of options
outstanding at May 27, 2006 is calculated as the difference between the exercise
price of the underlying options and the market price of the Company's common
stock for the 1,982,167 shares that had exercise prices that were lower than the
$8.80 market price of the Company's common stock at May 26, 2006. The total
intrinsic value of options exercised during the thirteen weeks ended May 27,
2006 and May 28, 2005 was $413,000 and $0, respectively, determined as of the
date of exercise.
For the thirteen weeks ended May 27, 2006, the Company recognized approximately
$55,000 in share-based compensation expense for stock options granted under the
Company's Stock Option Plans. As of May 27, 2006, there was $353,000 of total
unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the Company's Stock Option Plans. This amount assumes
the Company's expected forfeiture rate. That cost is expected to be recognized
over a weighted average period of 1.88 years. The Company utilizes treasury
shares to satisfy the exercise of stock options.
Comparable Disclosures
The following table illustrates the pro forma effect on the Company's net income
and net income per share as if the Company had adopted the fair value based
method of accounting for stock-based compensation under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," for the
thirteen weeks ended May 28, 2005. See the assumptions disclosed previously in
this note that were used to estimate the fair value of options granted under the
stock option plans for the thirteen weeks ended May 28, 2005.
Thirteen Weeks Ended
May, 28, 2005
(In thousands, except
per share amounts)
Net income, as reported $ 897
Add: Stock-based employee compensation expense
included in net income, tax effected --
Deduct: Total share-based employee compensation
expense determined under fair value method for
all awards, net of income taxes (116)
------
Pro forma net income $ 781
======
Net income per share
Basic - as reported $ 0.02
Basic - pro forma $ 0.02
Diluted - as reported $ 0.02
Diluted - pro forma $ 0.02
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
May February
27, 2006 25, 2006
--------- ---------
(in thousands of dollars)
Gross receivables $ 65,612 $ 55,244
Reserve for estimated returns (23,806) (21,181)
Other reserves ( 3,422) ( 2,883)
---------- ----------
Net receivables $ 38,384 $ 31,180
========= ==========
Other reserves consist of allowances for discounts, doubtful accounts and
customer deductions for marketing promotional programs.
9
4. Inventories
May February
27, 2006 25, 2006
--------- ---------
(in thousands of dollars)
Raw materials $ 12,553 $ 10,123
Work in process 6,769 4,623
Finished products 22,831 22,035
---------- ----------
Total inventory $ 42,153 $ 36,781
========= ==========
Obsolete inventory reserves for each category are included in the amounts shown
above.
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.
Beginning with the quarter ended May 27, 2006, the Company began evaluating
performance of each segment based upon its operating profit after direct
overhead which is defined as net sales less cost of goods, product development,
advertising and promotional costs, obsolescence and personnel and other direct
costs, but before unallocated general and administrative expenses including
rent, most insurance, professional fees and corporate personnel costs such as
finance, management information systems, legal and human resources, 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.
The information provided below for the thirteen weeks ended May 28, 2005, has
been reclassified to conform with the current year's presentation.
Thirteen Weeks Ended
May 27, 2006 May 28, 2005
------------ ------------
(amounts in thousands)
Net Sales
Candy $ 40,470 $ 40,407
Gum 2,239 3,632
--------- ---------
Total Confectionery 42,709 44,039
--------- ---------
Sports 27,638 15,033
Non-Sports 10,624 19,512
--------- ---------
Entertainment Products 38,262 34,545
--------- ---------
Total $ 80,971 $ 78,584
========= =========
Contributed Margin
Confectionery $ 13,212 $ 11,840
Entertainment Products 7,555 8,255
--------- ---------
Total $ 20,767 $ 20,095
========= =========
10
Direct Overhead
Confectionery $ 5,679 $ 6,240
Entertainment Products 5,905 5,753
--------- ---------
Total $ 11,584 $ 11,993
========= =========
Operating Profit Net of Direct Overhead
Confectionery $ 7,533 $ 5,600
Entertainment Products 1,650 2,502
--------- ---------
Total $ 9,183 $ 8,102
========= ==========
Reconciliation of Operating Profit to
Income Before Provision for Income Taxes:
Total operating profit,
net of direct overhead $ 9,183 $ 8,102
Indirect overhead (6,418) (7,283)
Other income, net 240 1,058
Depreciation & amortization (1,365) (1,370)
---------- ----------
Income from operations 1,640 507
Interest income, net 757 740
---------- ----------
Income before provision
for income taxes $ 2,397 $ 1,247
========== ==========
6. Common Stock
In June 2003, the Board of Directors of the Company initiated a regular
quarterly cash dividend of $0.04 per share which has been paid each quarter
since that date.
In October 1999, the Company's Board of Directors authorized the repurchase of
up to 5 million shares of the Company's common stock. In October 2001, the
Company completed the authorization and the Board approved the purchase of
another 5 million shares of the Company's common stock.
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 May 27, 2006, the Company had
purchased 1,611,211 shares under this amended authorization, leaving 3,388,789
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 worth 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 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.
There was no debt outstanding under the credit agreement as of May 27, 2006 or
February 25, 2006.
11
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 January 2006 sold the subsidiary for $360,000, with
scheduled payments to be made over four years.
Per Statement of Financial Accounting Standards ("SFAS") 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 $2,432,000 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 Company incurred an additional $32,000 in expense, net of tax, related to
the discontinued operations during the quarter ended May 27, 2006.
The purchaser has paid the Company $30,000 of the $360,000 sales price as of May
27, 2006. The remaining $330,000 is reported in prepaid expenses and other
current assets and other assets on the Consolidated Balance Sheet as of May 27,
2006. The Company has restated its Consolidated Statements of Cash Flows for the
thirteen weeks ended May 28, 2005 to reflect this discontinued operation.
9. Goodwill and Intangible Assets
On March 3, 2002, the Company adopted SFAS 141, Business Combinations and SFAS
142, Goodwill and Other Intangible Assets which require the Company to
prospectively cease amortization of goodwill and instead conduct periodic tests
of goodwill for impairment. Intangible assets as of May 27, 2006 and February
25, 2006 were as follows:
May 27, 2006 February 25, 2006
---------------------------------- ----------------------------------
Gross ' Gross
Carrying Accumulated ' Carrying Accumulated
Value Amortization Net ' Value Amortization Net
-------- ------------ -------- ' -------- ------------ --------
(in thousands of dollars)
Licenses and contracts ........ $ 21,569 $(18,779) $ 2,790 ' $ 21,569 $(18,611) $ 2,958
Intellectual property ......... 18,784 (15,576) 3,208 ' 18,784 (15,318) 3,466
Software and other ............ 2,482 (2,482) -- ' 2,482 ( 2,482) --
-------- --------- -------- ' -------- --------- --------
Total intangibles ............. $ 42,835 $(36,837) $ 5,998 ' $ 42,835 $(36,411) $ 6,424
======== ========= ======== ' ======== ========= ========
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 4.2 years
Intellectual property 6 years 3.1 years
12
The weighted average remaining useful life for the Company's intangible assets
in aggregate is 3.5 years. Over the next five years, the Company estimates
annual amortization of the intangible assets detailed above to be as follows (in
thousands):
Fiscal Year Amount
----------- ------
2007 $ 1,703
2008 $ 1,703
2009 $ 1,703
2010 $ 1,036
2011 and thereafter $ 279
In addition to the amortization of intangibles listed above, reported
amortization expense, which was $572,000 and $595,000 for the thirteen weeks
ended May 27, 2006 and May 28, 2005, respectively, included amortization of
deferred financing fees and deferred compensation costs.
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 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 another matter, 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 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.
On February 9, 2006, the Court adjourned the trial which had been scheduled for
March 13, 2006 and ruled it would consider a new motion by Stani for partial
summary judgment which argues that the Agreement permitted Stani to use the
Company's information and trade secrets after the Agreement's expiration in
1996. Oral argument was held on March 15, 2006 and the parties await a decision.
If the Company ultimately prevails in this litigation, it could have a material
impact on the Company's consolidated financial statements.
13
In another matter, 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.
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 weeks ended May
27, 2006 and May 28, 2005 are as follows (in thousands):
Postretirement
Pension Healthcare
--------------------------------------------------------------------------------
May May May May
27, 2006 28, 2005 27, 2006 28, 2005
--------------------------------------------------------------------------------
Service cost $ 181 $ 399 $ 67 $ 93
Interest cost 560 618 151 143
Expected return on plan assets (574) (551) - -
Initial transition obligation ( 14) ( 16) 50 50
Prior service cost 7 13 (46) -
Actuarial losses 134 238 41 10
----- ----- ----- -----
Net periodic benefit cost $ 294 $ 701 $ 263 $ 296
================================================================================
The fiscal 2007 costs are estimated based on actuarial assumptions, and actual
costs will be adjusted at the end of the fiscal year.
12. 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.
13. 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 charges of
approximately $3.7 million; consisting of $1.3 million for termination costs in
each of the third and fourth quarters of fiscal 2006 and $1.1 million for
pension settlement costs in the fourth quarter. These charges are reflected in
selling, general and administrative expenses in the Consolidated Statements of
Operations for the year ended February 25, 2006. The table below reconciles the
activity to the liability related to the restructuring from February 25, 2006,
through May 27, 2006 (in thousands):
February May
25, 2006 Payments Additions 27, 2006
-------- -------- --------- --------
Termination costs $ 980 $ (61) $ -- $ 919
Pension settlement 1,050 -- -- 1,050
------- -------- --------- -------
$ 2,030 $ (61) $ -- $ 1,969
======= ======== ========= =======
14. Subsequent Event
In June 2006, the Company internally announced a restructuring program,
principally related to its entertainment operations in New York, Pennsylvania
and Seattle (WizKids' headquarters.) This program will result in estimated
annual savings of approximately $3.3 million. The Company expects to incur a
charge of approximately $1.7 million in connection with this restructuring in
the second quarter of fiscal 2007.
14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To The Board of Directors and Stockholders of The Topps Company, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of The
Topps Company, Inc. and subsidiaries (the "Company") as of May 27, 2006, and the
related condensed consolidated statements of operations, comprehensive income
(loss) and cash flows for the thirteen week periods ended May 27, 2006 and May
28, 2005. 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.
As discussed in Note 1 to the condensed consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, effective February 26, 2006.
We have previously audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet of the Company as of February 25, 2006, 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 9, 2006, 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 25, 2006 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
/s/ DELOITTE & TOUCHE LLP
---------------------------
New York, New York
July 5, 2006
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
First Quarter Fiscal Year 2007 (thirteen weeks ended May 27, 2006) versus First
Quarter Fiscal Year 2006 (thirteen weeks ended May 28, 2005)
The following table sets forth, for the periods indicated, net sales by key
business segment:
NET SALES
Thirteen Weeks Ended
May May
27, 2006 28, 2005
-------- --------
(amounts in thousands)
Net Sales
---------
Confectionery $ 42,709 $ 44,039
Entertainment 38,262 34,545
------ ------
Total $ 80,971 $ 78,584
======== ========
Net sales for the first quarter of fiscal 2007 were $81.0 million, an increase
of $2.4 million, or 3.1%, from $78.6 million in the same period last year.
Weaker foreign currencies versus the prior year reduced 2007 first quarter sales
by $1.0 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 $42.7 million in the first quarter of this year, a
decrease of $1.3 million, or 3.0%, from $44.0 million in fiscal 2006. This
decrease was largely a function of the later shipment this year of the GrandSlam
pre-pack (a combined sports card and candy product sold primarily to smaller
retail accounts) as a function of the new baseball agreement, and lower sales of
Bazooka in the period leading up to the relaunch. U.S. sales of Baby Bottle Pop
increased in the quarter this year, reflecting the success of the new 2DMax line
extension, as did international confectionery sales, driven by Mega Mouth Spray
and Juicy Drop Pop in Europe and stronger lollipop sales in Latin America.
Weaker foreign currencies versus the prior year reduced 2007 first quarter
confectionery sales by $0.2 million.
Net sales of entertainment products, which include cards, stickers, sticker
albums and the WizKids line of strategy games, were $38.3 million in the first
quarter of fiscal 2007, an increase of $3.7 million, or 10.8%, from $34.5
million in the same period last year. This increase reflected significantly
higher sales of US sports cards, driven by a new arrangement with the baseball
licensors as well as the Company's strong product line up and marketing campaign
which encompasses national television advertising and in-stadium promotions.
Sales of European sports products also showed strong gains as a result of the
addition of products surrounding the World Cup tournament held once every four
years. Sales of non-sports publishing products declined year-over-year due to
last year's strong Star Wars release. Additionally, sales of WizKids products
were impacted by a softer gaming industry and lower sales of Pirates products
introduced last year. Weaker foreign currencies versus the prior year reduced
2007 first quarter entertainment sales by $0.8 million.
RESULTS of OPERATIONS
Thirteen Weeks Ended
May 27, 2006 May 28, 2005
------------ ------------
(amounts in thousands)
Net Sales $ 80,971 100.0% $ 78,584 100.0%
Cost of Sales 53,043 65.5% 50,940 64.8%
-------- ----- -------- ------
Gross Profit 27,928 34.5% 27,644 35.2%
Selling, General & Administrative 26,288 32.5% 27,137 34.5%
--------- ------ -------- ------
Income from Operations 1,640 2.2% 507 0.6%
16
Gross profit as a percentage of net sales in the first quarter of fiscal 2007
was 34.5% as compared with 35.2% in the first quarter of last year.
Approximately half of the margin decline was a function of the higher proportion
of entertainment sales, which have a lower gross profit margin. The remainder of
the margin decline was a result of higher costs, primarily for autographs and
relics for U.S. sports products as well as related to returns on sales of
European entertainment products.
SG&A expense was $26.3 million in the first quarter fiscal 2007, down from $27.1
million in fiscal 2006. As a percentage of net sales, SG&A was 32.5% in the
first quarter of fiscal 2007 versus 34.5% in the first quarter of fiscal 2006.
Lower costs this year reflect the Company's cost reduction initiatives,
specifically the September 2005 workforce reduction as well as cost savings put
in place at year end related to pension, post retirement medical, consulting,
legal and insurance expenses. Marketing expenditures for the quarter this year
were flat with prior year as increases in advertising and promotional support
for U.S. baseball card products were offset by lower spending at WizKids and in
Canada.
Net interest income of $757,000 in the first quarter of fiscal 2007 was roughly
flat with that in the first quarter of fiscal 2006 due to more favorable
interest rates offset by a lower average cash balance.
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 31.7% in the first quarter of fiscal 2007 versus an effective tax
rate of 22.9% in the first quarter of fiscal 2006.
The Company reported net income in the first quarter of fiscal 2007 of $1.6
million, or $0.04 per diluted share, versus $897,000, or $0.02 per diluted share
in the first quarter of fiscal 2006.
Other Matters
In June 2006, the Company internally announced a restructuring program,
principally related to its entertainment operations in New York, Pennsylvania
and Seattle (WizKids' headquarters.) This program will result in estimated
annual savings of approximately $3.3 million. The Company expects to recognize a
charge of approximately $1.7 million in connection with the restructuring in the
second quarter of fiscal 2007.
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 May 27, 2006, the Company had $27.6 million in cash and cash equivalents and
$52.1 million in short-term investments.
On September 14, 2004, the Company entered into a 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.
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 May 27, 2006, the Company had
purchased 1,611,211 shares under this amended authorization leaving 3,388,789
shares available for future purchases.
17
In the thirteen weeks ended May 27, 2006, the Company's net decrease in cash and
cash equivalents was $0.6 million versus a decrease of $14.4 million in the
comparable period of fiscal 2006.
Cash provided by operating activities during the first quarter of fiscal 2007
was $0.5 million versus cash used of $9.4 million during the first quarter of
fiscal 2006. This was primarily due to a $7.2 million increase in accounts
payable and other current liabilities, a $2.1 million increase in prepaid
expenses, $1.2 million in depreciation and amortization and $1.6 million in net
income. Partially offsetting these were a $7.2 million increase in accounts
receivable due to higher sales compared to the fourth quarter of fiscal 2006 and
a $5.4 million increase in inventories stemming from the timing of board stock
purchases and the acquisition of autographs for future sports products. The
prior periods unfavorable cash performance reflected lower net income, a
substantial increase in inventories and decreases in accounts payable and other
current liabilities.
Cash provided by investing activities was $0.2 million in the first quarter of
fiscal 2007 versus a use of cash of $1.6 million last year. Year-to-date this
year, short-term investments were reduced by $0.9 million, partially offset by
capital spending of $0.6 million, largely related to the rollout of new ERP
system. Last year's use of cash of $1.6 million reflected the net purchase of
$0.9 million of short-term investments and $0.7 million in capital spending.
Fiscal 2007 full year capital spending is projected to be $4.0 - $5.0 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 $5.1 million this period reflects $1.5
million in cash dividends and $5.0 million in treasury stock purchases,
partially offset by $1.4 million in cash from options exercised. This compares
with a total outlay for financing activities of $1.6 million in the same period
last year, comprised of $1.6 million in cash dividends. There were no treasury
stock purchases or options exercised in the first quarter of fiscal 2006.
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 25, 2006.
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.
18
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 25, 2006, "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 $9.4 million in the first thirteen weeks
of fiscal 2007 and $7.6 million in 2006, which equates to 11.6% and 9.6% of net
sales, respectively. The increase in the provision this year was partially the
result of higher returns on certain European publishing products and on 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 $0.8 million.
Intangible Assets: Intangible assets include trademarks and the value of sports,
entertainment and proprietary product rights. Amortization is by the
straight-line method over estimated lives which range between three and fifteen
years. Management evaluates the recoverability of finite-lived intangible assets
under the provisions of SFAS No. 144 Accounting for the Impairment or Disposal
of Long-lived Assets.
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
$0.7 million in the first thirteen weeks of fiscal 2007 and $1.3 million in
fiscal 2006, which equates to 0.9% and 1.6% 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 $0.8 million.
ITEM 3. DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk associated with activities in derivative
financial instruments (e.g., hedging or currency swap agreements), other
financial instruments and derivative commodity instruments is confined to the
impact of mark-to-market changes in foreign currency rates on the Company's
forward contracts and options. The Company has no debt outstanding and does not
engage in any commodity-related derivative transactions. As of May 27, 2006, the
Company had $21.7 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.
19
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 another matter, 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 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.
On February 9, 2006, the Court adjourned the trial which had been scheduled for
March 13, 2006 and ruled it would consider a new motion by Stani for partial
summary judgment which argues that the Agreement permitted Stani to use the
Company's information and trade secrets after the Agreement's expiration in
1996. Oral argument was held on March 15, 2006 and the parties await a decision.
If the Company ultimately prevails in this litigation, it could have a material
impact on the Company's consolidated financial statements.
In another matter, 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.
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.
20
ITEM 1A. RISK FACTORS
Dependence on Licenses. The Company's trading card and sticker album businesses
are highly dependent upon licensing arrangements with third parties. These
licenses, which have varying expiration dates, are obtained from the various
professional sports leagues, players associations and, in certain instances, the
players themselves as well as from non-sports entertainment companies. The
Company's inability to renew or retain certain of these licenses, or the lack of
vitality of these licenses, could have a material adverse affect on its future
plans and results.
Contraction in Sports Card Industry. The sports card industry as a whole has
contracted significantly over at least the last ten years. Further prolonged and
material contraction in the sports card industry, whether caused by labor strife
or otherwise, could have a material adverse affect on the Company's future plans
and results.
New Products. The Company may be unable to produce timely, or at all, certain
new planned products. The inability of the Company to produce planned products
could have a material adverse affect on its future plans and results.
Returns. Approximately 68% of the Company's fiscal 2006 sales were made on a
returnable basis. Although the Company maintains returns provisions, returns
considerably in excess of the Company's provisions could have a material adverse
affect on its future plans and results.
Suppliers. The Company has a single source of supply for most of its lollipop
products. The loss of this supplier due to civil unrest or for any other reason
could have a material adverse affect on the Company's future plans and results.
Additionally, failure of the new Bazooka manufacturer to supply the Company with
quality products on a timely basis could have a material adverse affect on the
sales of Bazooka.
Customers. The Company has several large customers, some of which are serviced
by single distributors. The loss of any of these customers or distributors could
have a material adverse affect on the Company's future plans and results.
International, Political and Economic Risk. There is an increase in risk
generally associated with operating outside of the U.S. Events such as civil
unrest, currency devaluation, political upheaval and health-related issues could
have a material adverse affect on the Company's future plans and results.
Legal Proceedings. See Part II Item 1: Legal Proceedings for a discussion of
legal matters that could have a material adverse affect on the Company's future
plans and results.
Raw materials. Raw materials required for production of the Company's products
are generally available. However, the unavailability of certain raw materials or
a significant increase in their cost could have a material adverse affect on
future plans and results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table lays out the information required by Item 703 of Reg S-K:
Total Average Maximum Number of
Number Price Total Number of Shares that may
of Paid Shares Purchased as yet be Purchased
Shares per Part of Publicly Under the Plans
Period Purchased Share Announced Plans or Programs
-------------------- --------- ------- ------------------- -----------------
February 26, 2006
to March 25, 2006 166,660 $ 8.18 166,660 3,805,441
-------------------- --------- -------- ------------------- -----------------
March 26, 2006 to
April 29, 2006 219,992 8.38 219,992 3,585,449
-------------------- --------- -------- ------------------- -----------------
April 30, 2006 to
May 27, 2006 196,660 8.84 196,660 3,388,789
-------------------- --------- --------- ------------------- -----------------
Total 583,312 $ 8.48 583,312 3,388,789
==================== ========= ========= =================== =================
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ITEM 6. EXHIBITS AND REPORTS
(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, as amended.
31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a)
and 15d-14(a) under the Securities Exchange Act of 1934, as amended.
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.
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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
July 6, 2006
23