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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
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THE TOPPS COMPANY, INC.
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(Name of Registrant as Specified in Its Charter)
PEMBRIDGE VALUE OPPORTUNITY FUND LP
PEMBRIDGE CAPITAL MANAGEMENT LLC
CRESCENDO PARTNERS II L.P. SERIES Y
CRESCENDO INVESTMENTS II, LLC
CRESCENDO ADVISORS LLC
ERIC ROSENFELD
TIMOTHY E. BROG
ARNAUD AJDLER
JOHN J. JONES
TOPPS FULL VALUE COMMITTEE
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(Name of Persons(s) Filing Proxy Statement, if Other Than the Registrant)
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On June 23, 2006, the Topps Full Value Committee (the "Committee"),
together with the other participants (as defined below), made a definitive
filing with the Securities and Exchange Commission ("SEC") of a proxy statement
and accompanying GOLD proxy card to be used to solicit votes for the election of
its slate of director nominees and certain business proposals at the 2006 annual
meeting of stockholders scheduled to be held July 28, 2006 (the "2006 Annual
Meeting") of The Topps Company, Inc., a Delaware corporation (the "Company").
Item 1: On July 8, 2006, The Wall Street Journal published the following
news story:
TROUBLE FOR TOPPS: EX-CUSTOMERS NOW RUN HEDGE FUNDS
CANDY, BASEBALL-CARD MAKER FACES PRESSURE TO SELL OUT;
THE FICKLE TASTES OF KIDS
BAZOOKA IN A TOOTHPASTE TUBE
By KAREN RICHARDSON July 8, 2006; Page A1
Topps Co. is famous for making the stuff of sugar-coated childhood memories:
baseball and Pokemon cards, Baby Bottle Pops and Bazooka bubble gum.
Now, the company is under siege by a group composed mostly of former
baseball-card fans who happened to grow up to run hedge funds.
Their champion, Timothy Brog, has been waging a year-long battle to split up
Topps or sell the whole company outright. He figures a deep-pocketed owner would
be better able to run the company than members of the founding family while
investing more on promoting the brand. Later this month he hopes to oust three
board members at the annual meeting.
"It's time for a change," says Mr. Brog, who heads a two-year-old hedge fund
called Pembridge Capital Management LLC. "Management has been running Topps like
it's a candy store from the 1950s."
Topps's CEO, Arthur Shorin, an energetic septuagenarian and second-generation
candy maker, sees things differently. He says Mr. Brog and his supporters don't
know the first thing about running a complex candy-and-cards empire.
"Shareholders need to be protected from them," he says.
Such clashes are on the rise as hedge funds struggle to differentiate themselves
in an increasingly crowded field -- there are now more than 8,000 of these
investment pools for the wealthy. One strategy among bigger funds has been to
put pressure on corporations including McDonald's Corp., General Motors Corp.
and Time Warner Inc. to make changes such as selling assets or shaking up
management. Now, smaller funds are becoming more aggressive with tiny companies
using some of the same tricks.
-3-
Just last month El Segundo, Calif.-based Chapman Capital LLC, which manages a
six-month-old hedge fund, succeeded in getting Carreker Corp., a maker of
banking software with about $100 million in annual revenue, to hire an
investment bank to explore a sale. In April, Santa Monica Partners, with only
$90 million in assets, sued Warwick Valley Telephone Co., a rural phone company
in New York state, in an effort to replace its board. And earlier this year,
Pirate Capital, Norwalk, Conn., launched an attack against Virginia coal-miner
James River Coal Co. with a letter saying it was "outraged" by the "gross
mismanagement" of the $450 million company.
The barriers to entry are low: Mr. Brog's Pembridge Capital invested only about
$3 million last year for nearly 1% of Topps before it started demanding that
Topps break itself up. Since then, Mr. Brog has lined up support from a number
of other small hedge-fund operators and longtime baseball-card buffs. The
biggest is Eric Rosenfeld, who says he was a "rabid collector" as a boy. He now
runs Crescendo Partners, an eight-year-old activist hedge fund that has almost a
dozen battles like these under its belt. Pembridge and Crescendo control 7.4% of
Topps and their supporters have been building up stakes as well.
At the heart of the battle are two men with different ideas about Topps's
products. Mr. Brog is a former lawyer and investment banker who works out of a
150-square-foot office. He fondly recalls the role Topps products played in his
first big financial coup: As a teenager in the 1970s, he paid $90 to a
schoolmate for a pile of baseball cards that he later sold separately for
$4,000.
Mr. Shorin remembers wearing hand-me-down clothes between the ages of 11 and 17,
while his father labored to get the postwar bubble-gum business off the ground.
Visitors to his memorabilia-filled office near Wall Street can expect to be
plied with potato chips, soda, Oreo cookies, pickles and fistfuls of candy.
ECHOES OF RING POPS
For Mr. Shorin, the battle represents one of his company's biggest corporate
crises since the 1970s, when Topps was unable to fill orders for its popular
line of Ring Pops (a lickable sugar bomb worn on the finger) for over a year due
to equipment trouble.
Mr. Shorin's father and three uncles founded Topps as a tobacco-and-gum
wholesaler in Brooklyn in 1938. One of its first big hits was Bazooka, launched
after World War II. The gum targeted kids with its distinctive wax-paper
wrapping that featured a corny comic strip starring Bazooka Joe.
Mr. Shorin, who studied music at Julliard, initially wanted to be a composer. He
wrote a few songs including "You're Everything Wonderful," recorded by 1950s
crooner Steve Lawrence. By the time he joined Topps in 1958 at the urging of his
father, Topps was the industry leader in what were then known as "bubble-gum
cards" -- baseball cards packed with a stick of gum. For the next 22 years, it
enjoyed a monopoly in the market as the only licensee printing major-league
cards.
Then came the Ring Pop debacle. They were a sensation when prototypes were
introduced at candy shows in 1975, says Ron Werner, head of Topps's candy R&D
then and still today. Orders flooded in. But the manufacturing equipment was a
-4-
disaster: The candy simply wouldn't stay attached to the wearable plastic ring.
It took almost 12 months to work out the kinks and restore its reputation among
angry buyers. "It was so discouraging," recalls Mr. Werner.
Once it mastered the production woes, Ring Pops established a niche market for
Topps -- toys with an edible element. Along with its trading cards, Topps's
current products include Baby Bottle Pops (a baby-bottle toy filled with sugary
crystals and topped with a hard-candy nipple) and Mega Mouth Candy Spray (a
spritzer for squirting candy into your mouth).
The switch to a novelty-candy company also planted the roots of Topps's current
woes. Toys like these are tricky to develop, and usually have a short life span.
That means revenue can spike and fall rapidly as products soar or decline in
popularity.
Consider Squeeze Bazooka, gum in a toothpaste-like tube that Topps rolled out in
1984. It took "forever" to develop, says Mr. Werner, the candy R&D man. The gum
base needed to be soft enough to be squeezable but firm enough to maintain
"bubbleability," meaning a kid could still blow a bubble with it. It was the
"holy grail of gum," Mr. Werner says.
The product was a big hit -- but only for five years. Today, it's no longer
sold.
At the same time, the baseball-card business fell off a cliff. A U.S. District
court ruled in 1980 that Topps's exclusive licenses illegally prevented
competition. The decision was reversed a year later, but by then Topps's rivals
had already entered the market. The new entrants flooded store shelves with
baseball cards. Ironically, the wealth of cards made collecting less fun,
helping to turn kids off of the hobby.
For reasons like these, Topps has been struggling in recent years. It hasn't had
a hit trading-card product since it got the license to make cards for Pokemon,
the Japanese cartoon, in the late 1990s. Its revenue in its fiscal 2006 ended
Feb. 25 was $293.8 million, 33% below 2001, at the tail end of the Pokemon rage.
Net income has fallen about 98% and expenses have risen 24% since 2001.
The hedge funds believe Topps could dramatically increase its margins if it was
sold to a bigger, deeper-pocketed company, or companies, which could spend more
money on marketing and exploring other revenue streams, such as licensing out
the Bazooka and Topps brands to makers of other products. Also, recent sales of
candy companies have commanded handsome prices: In 2005, Wrigley bought Kraft's
candy assets, such as Altoids and Life Savers, for about $1.8 billion, or 2.4
times its 2004 sales. Tootsie Roll in 2004 bought Concord Confections, maker of
Dubble Bubble, for $197 million, or 2.8 times its 2003 sales.
Mr. Shorin and his son-in-law, Scott Silverstein, Topps' president and chief
operating officer, say they have been working hard to jump-start the company,
relaunching Bazooka this year with new packaging and flavors, successfully
negotiating with Major League Baseball to cut down the number of competing
products in the baseball-card market and restructuring operations.
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Still, the stock has languished. The shares are down more than 25% from last
year's high of about $11 last June and off 38% from their 1999 intra-day high of
$13.38. On Friday, Topps shares fell 14 cents to $8.24 in Nasdaq Stock Market
composite trading.
The falling stock attracted hedge-fund investors like Mr. Brog. His company,
Pembridge Capital Management, is a minnow in the world of activist hedge funds
-- a one-man show with less than $25 million in assets under management. His
only staffer quit a few months ago "because he wasn't making enough money," he
says.
Mr. Brog is a former mergers and acquisitions associate at the powerful Skadden
Arps law firm. He later became an investment banker at his own boutique firm
called the Edward Andrews Group in New York. He decided to start a hedge fund
after successfully launching a bitter proxy battle against marketing firm
Vestcom International Inc., a former client. The battle led to the sale of
Vestcom in 2002 -- at a healthy profit for Mr. Brog. He launched Pembridge in
2004, and by 2005, Topps was his new fund's biggest single position.
Messrs. Shorin and Brog met for the first time in May 2005, after Mr. Brog sent
Topps a letter saying he planned to nominate a slate of directors the board. At
the meeting, which took place at Mr. Brog's office, Mr. Brog says he pleaded
with Mr. Shorin to "do something" with Topps to increase shareholder value, such
as trying to sell it, or simply buying back more shares.
'I WOULD HAVE GONE AWAY'
Just a few weeks after the meeting, Topps made a public statement that a few
months earlier it had retained Lehman Brothers as an adviser to explore a sale
of its candy business. Mr. Brog was incredulous. "If they had told me that when
I met with Arthur, I would have gone away," he says. Mr. Shorin, who remembers
the meeting, says he doesn't disclose nonpublic information to shareholders as a
matter of policy.
In June, Mr. Brog agreed to call off his fight for board seats for a year, while
Topps tried to sell its candy business. Topps's stock climbed during the summer
as investors anticipated a sale.
The cease-fire was short-lived. On Sep. 12, Topps said it was calling off the
sale because it didn't get good enough offers. Its stock price dived, falling
more than 30% from the year's high by the end of the year.
Mr. Brog started receiving phone calls from supportive hedge-fund managers after
Topps called off the sale. One of those calls was from Randy Saluck, head of
Mortar Rock Capital Management LLC. Like others in Mr. Brog's camp, Mr. Saluck,
40, has an emotional bond to the company: "One of my fondest memories is of
walking to the store with my grandfather in the summertime to buy a new pack of
Topps baseball cards," he says.
Within months, Mr. Brog was back in the ring -- this time with more support from
the other hedge funds. On April 26, he sent Topps a 20-page letter lamenting,
among other things, "the payment of egregious salaries and bonuses to executives
at Topps in light of management's inability to stem chronic declining revenue
-6-
and earnings" -- a swipe at Mr. Shorin, who received a $500,000 bonus last year
plus his salary of $980,000.
Mr. Brog also attacked what he calls the "nepotism" of hiring Mr. Silverstein as
president, since he's married to Mr. Shorin's daughter. He nominated three new
directors, including himself.
Topps fired back with a list of initiatives such as making the heads of the
candy and card businesses accountable for their divisions' profitability by
tying it to their bonuses. It also announced the Bazooka relaunch, its first
major effort to spruce the product since the early 1980s. The campaign includes
new flavors like watermelon, a splashy new advertising campaign and a crew of
hipper, more ethnically diverse cartoon friends for an updated Bazooka Joe. It
announced a plan to sharply reduce its expenses and headcount.
Mr. Brog says the changes are too little too late. He formally launched his
effort to put candidates on the board on May 31 this year -- his second such
effort in 12 months -- demanding the 68-year-old firm put all or part of itself
up for sale and use the proceeds to pay shareholders.
He points to the company's Ring Pops factory in Scranton, Pa., where some 80
workers, whose average age is nearly 62, have been making candies since 1975. He
says the operation should be moved abroad to a cheaper location, like Topps's
other candy operations.
Mr. Shorin says "the needle is pointing up" at Topps these days. The
baseball-card business has improved dramatically since the number of makers was
cut back to two. In this year's first quarter, sales jumped 27% in the
baseball-card category.
Still, both sides are digging in ahead of Topps' annual meeting on July 28. "The
company isn't going to be able to hold off the barbarians at the gate with a
promise to sell itself," says Chris Young of Institutional Shareholder Services,
a proxy adviser. "Because it already did that last year."
Item 2: On July 10, 2006, the National Post, a Canadian newspaper,
published the following news story:
ACTIVIST HEDGE FUNDS TARGET TOPPS
'Outrageous' salaries, 'dismal' stock performance
EMILY MATHIEU
Financial Post
MONDAY, JULY 10, 2006
A family fortune built on candy and trading cards, a brewing battle over
control, scathing letters, a pile of surplus cash and speculation that even
Warren Buffett could get interested.
It has all the elements of a great American novel, or comedic opera.
At the end of this month, The Topps Company Inc., a New York- based
confectionary and trading-card firm, will hold a proxy battle with dissident
shareholders Pembridge Capital Management LLC and Crescendo Partners.
The two hedge funds, who in the proxy statement refer to themselves as the
"Topps Full Value Committee," are headed by Timothy Brog, who runs Pembridge
Capital Management LLC, and Eric Rosenfeld, who runs Crescendo Partners.
Together they own over 7% of Topps' common stock. "It's time for a change," Mr.
Brog told the Wall Street Journal. "Management has been running Topps like it's
a candy store from the 1950s."
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Mr. Brog would like to split up the company or sell it outright.
Canadian investors will remember Mr. Rosenfeld for how he shook up the likes of
Spar Aerospace, Geac Computer Corp., Pivotal Corp. and AD OPT Technologies Inc.
He eventually pushed the companies to be sold.
In a letter to shareholders filed with the U.S. Securities and Exchange
Commission, the hedge funds complained about "outrageous" salaries and bonuses
paid to Topps senior staff, a "dismal" stock performance, brand mismanagement
and how it has been sitting on US$100-million of cash for the past five years.
The letter also contained a promise: "If stockholders do not act now to demand
that the board improve the profitability of Topps and explore strategic
alternatives to enhance stockholder value, we will be engaged in this debate
again at this time next year."
Two days later, Topps sent a letter to shareholders urging them to cut "through
Pembridge's rhetoric and self-serving criticism of Topps." It asked them to
question the qualifications of the individuals the dissidents wanted to elect to
the board, among them "a consultant lawyer who also worked at this 'boutique'
investment bank; and a 30-year-old" three years out of business school, and to
have faith in company's plans to increase shareholder value.
What's at stake is the fate of an American icon. Topps is the offspring of
Morris Shorin's American Leaf Tobacco Co., founded in the late 19th century. In
1938, Mr. Shorin's sons turned away from tobacco and the company was renamed
Topps Chewing Gum. The company's gum was called Bazooka, after the musical
instrument, and comics with the character Bazooka Joe, complete with eye patch,
came on the scene in the early 1950s. At the same time, the company started
selling baseball cards.
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Bazooka Joe comics still circulate and popular products like Ring Pops, Push
Pops and Baby Bottle Pop lollipops have been added to Topps' roster of candy.
The entertainment side of the business still sells trading cards, as well as
board games.
As a publicly traded company, the past five years have not been sweet. The stock
-- which closed on Friday at US$8.24 -- has pretty much stalled since 1999.
Sales last quarter were US$81-million, less than they were in the same quarter
in fiscal 2000. Profit was US4 cents per share, double the year before, but far
off the US68 cents per share the company earned in one quarter in fiscal 2001.
Much of the drop off can be blamed on Pokemon cards. "Topps to a certain degree
is a victim of its own success," said Robert Routh, senior media and
entertainment analyst with Jeffries and Company Inc.
After purchasing exclusive rights to Pokemon in 1999, profits from the
phenomenon were so significant that Topps posted Pokemon financial results
separately, Mr. Routh said. There's no need to do that any longer.
In fact, sales in the sports-card industry have plummeted from US$1-billion
annually to US$120-million over the past 10 years, Mr. Routh said. "There are no
signs that the collectable sports card business will ever grow again."
In 2001, Topps attempted to revive interest in cards, buying www.thePit.com, an
online "stock market" for trading cards, for US$5.7-million. Topps named the
site "etopps." Traders were offered an "initial player offering" and could
purchase and swap cards for a profit. But the venture failed. Mr. Routh blames
poor marketing.
"There obviously was incredible interest at first, but it fell off a cliff," he
said.
It's little wonder Topps has become a target for activist hedge funds. The
conflict actually started last year, when Pembridge first filed a proxy fight.
That contest was called off after Topps hired Lehman Brothers Inc. to help sell
the confectionary side of the business. Arthur Shorin, Topps chief executive,
didn't find a buyer and called off the sale in September. Reports on Topps' Web
site say no one offered to pay what the company was worth. Topps executives
declined to comment for this story.
According to a recent feature in the Wall Street Journal, Arthur Shorin joined
Topps in 1958 on the urging of his father. Before that, he dreamed of being a
composer, even penning a hit for Steve Lawrence (You're Everything Wonderful) in
the 1950s.
Media reports say the two hedge funds this year want to replace Topps' board,
want directors to stand for annual election and want investors holding more than
15% to be able to call a special meeting of shareholders.
Topps currently pays a quarterly dividend of US4 cents per share. According to a
recent shareholders presentation, Topps has paid US$6.5-million in dividends
each year over the past three years, has repurchased 9.3 million shares, worth
US$87-million, since 1999, and more than 1.3 million of those shares were
repurchased in the past 12 months.
In total, Topps said it has returned US$76-million to shareholders over the past
five years. (Topps has approximately 39 million shares outstanding.) But that
may not be enough to keep shareholders on their side at the company's annual
meeting on July 28.
At least one shareholder does not believe Topps executives can turn their
business around. "I'm always skeptical of companies that have these great new
strategies after activists become involved," said Randy Saluck, managing partner
at Mortar Rock Capital Management LLC, a hedge fund in New York.
Mortar Rock started picking up shares in February. Mr. Saluck declined to say
how many the company has.
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Mr. Saluck said big payments to Topps executives are an example of poorly
managed finances. According to Pembridge's posted letter, those payments include
Mr. Shorin's $980,000 annual salary and a $500,000 bonus last year.
"I like companies where pay is reflective of their performance. It seems like
there is a divorce of that concept here," he said. "I don't see why this has to
be, in management's minds, a war as opposed to something trying to generate
value. I just think they should be willing to work with the shareholders."
Topps still has potential, Mr. Routh said.
"Management is great," he said. "The franchise is great. I just don't think they
want to keep going through proxy fight after proxy fight. [But] just keeping
things status quo, it's just not working."
Key shareholders might be fed up, Mr. Routh said, but they also cannot sell such
an illiquid stock easily. "They are stuck. You can't sell a size position in
that particular equity without driving down the stock considerably."
(The average six month volume is about 300,000 shares traded a day.)
The meeting isn't for three weeks, but perhaps a buyer will come along soon.
Warren Buffett's company, Berkshire Hathaway Inc., typically has an interest in
family-based companies like Topps, Mr. Routh noted.
"Why Warren Buffett hasn't looked at it is an enigma," he said. "Warren Buffett
could end up being Shorin's white knight."
THE FUND MANAGERS
TIMOTHY BROG
Firm: Pembridge Capital Management
Investment in Topps: Paid US$3-million for a 1% stake
Background: lawyer and investment banker
Previous wins: As a teenager, paid US$90 for a collection of baseball cards,
which he broke up and sold for a total of US$4,000; launched a proxy battle that
led to the sale of Vestcom International Inc.
Eric Rosenfeld
Firm: Crescendo Partners
Initial Investment in Topps: Owned 2.4 million shares as of the end of June, a
6% stake now valued at about US$20-million
Background: Harvard MBA and investment banker
Previous wins: Pushed the sales of companies including Geac Computer Corp., Spar
Aerospace Ltd., and Pivotal Corp.
(c) National Post 2006
CERTAIN INFORMATION CONCERNING THE PARTICIPANTS
THE TOPPS FULL VALUE COMMITTEE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
("SEC") ON JUNE 23, 2006 A DEFINITIVE PROXY STATEMENT AND ACCOMPANYING GOLD
PROXY CARD, TO BE USED TO SOLICIT VOTES FOR THE ELECTION OF ITS SLATE OF
DIRECTOR NOMINEES AND CERTAIN BUSINESS PROPOSALS FOR USE AT THE 2006 ANNUAL
MEETING. THE COMMITTEE STRONGLY ADVISES ALL TOPPS STOCKHOLDERS TO READ THE PROXY
STATEMENTS AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY
CONTAIN IMPORTANT INFORMATION.
STOCKHOLDERS WILL BE ABLE TO OBTAIN FREE COPIES OF THE PROXY STATEMENT FILED
WITH THE SEC BY THE TOPPS FULL VALUE COMMITTEE THROUGH THE WEBSITE MAINTAINED BY
THE SEC AT WWW.SEC.GOV. IN ADDITION, INVESTORS WILL BE ABLE TO OBTAIN FREE
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COPIES OF THE PROXY STATEMENT FROM THE TOPPS FULL VALUE COMMITTEE BY CONTACTING
TIMOTHY BROG, PEMBRIDGE CAPITAL, 708 THIRD AVENUE, NEW YORK, NY 10017 OR BY
CALLING D.F. KING & CO., INC. AT (800) 628-8532.
THE PARTICIPANTS IN THE PROXY SOLICITATION ARE PEMBRIDGE VALUE OPPORTUNITY FUND
LP, A DELAWARE LIMITED PARTNERSHIP, PEMBRIDGE CAPITAL MANAGEMENT LLC, A DELAWARE
LIMITED LIABILITY COMPANY, TIMOTHY E. BROG, CRESCENDO PARTNERS II, L.P., SERIES
Y, A DELAWARE LIMITED PARTNERSHIP, CRESCENDO INVESTMENTS II, LLC, A DELAWARE
LIMITED LIABILITY COMPANY, CRESCENDO ADVISORS LLC, A DELAWARE LIMITED LIABILITY
COMPANY, ERIC ROSENFELD, ARNAUD AJDLER AND JOHN J. JONES.
INFORMATION CONCERNING THE PARTICIPANTS AND THEIR INTERESTS IN THE SOLICITATION
IS SET FORTH IN THE PROXY STATEMENT FILED WITH THE SEC.
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