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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended August 28, 2004
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: 0-15817
THE TOPPS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2849283
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Whitehall Street, New York, NY 10004
(Address of principal executive offices, including zip code)
(212) 376-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No .
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Act). Yes _X_ No .
The number of outstanding shares of Common Stock as of October 1, 2004 was
40,414,831.
THE TOPPS COMPANY, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
Index Page
----- ----
Condensed Consolidated Balance Sheets as of August 28, 2004
(unaudited) and February 28, 2004 3
Condensed Consolidated Statements of Operations for the
thirteen and twenty-six week periods ended August 28,
2004 and August 30, 2003 4
Condensed Consolidated Statements of Comprehensive Income
for the thirteen and twenty-six week periods ended
August 28, 2004 and August 30, 2003 5
Condensed Consolidated Statements of Cash Flows for the
twenty-six weeks ended August 28, 2004 and August 30, 2003 6
Notes to Condensed Consolidated Financial Statements 7
Report of Independent Registered Public Accounting Firm 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 15
ITEM 3. DISCLOSURES ABOUT MARKET RISK 19
ITEM 4. CONTROLS AND PROCEDURES 20
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
2
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
August February
28, 2004 28, 2004
-------- --------
(amounts in thousands,
except share data)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 110,599 $ 93,837
Accounts receivable - net .......................... 19,391 30,109
Inventories ........................................ 30,953 33,009
Income tax receivable .............................. 1,542 2,697
Deferred tax assets ................................ 951 1,505
Prepaid expenses and other current assets .......... 9,775 11,691
--------- ---------
TOTAL CURRENT ASSETS ......................... 173,211 172,848
PROPERTY, PLANT AND EQUIPMENT ........................ 33,414 32,349
Less: accumulated depreciation and amortization ... 20,392 18,563
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT ............ 13,022 13,786
GOODWILL ............................................. 67,566 67,586
INTANGIBLE ASSETS, net of accumulated amortization ... 9,575 10,474
OTHER ASSETS ......................................... 10,765 10,769
--------- ---------
TOTAL ASSETS ................................. $ 274,169 $ 275,463
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................... $ 10,312 $ 10,946
Accrued expenses and other liabilities ............. 23,902 26,249
Income taxes payable ............................... 3,378 2,354
--------- ---------
TOTAL CURRENT LIABILITIES .................... 37,592 39,549
DEFERRED INCOME TAXES ................................ 1,719 1,956
OTHER LIABILITIES .................................... 23,254 22,681
--------- ---------
TOTAL LIABILITIES ............................ 62,565 64,186
--------- --------
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 August 28, 2004 and February 28, 2004 . 492 492
Additional paid-in capital ......................... 27,829 27,829
Treasury stock, 8,846,000 shares and 8,632,000
shares as of August 28, 2004 and February 28, 2004,
respectively ....................................... (84,840) (82,287)
Retained earnings .................................. 275,207 270,704
Accumulated other comprehensive loss,
net of income taxes ................................ (7,084) (5,461)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................... 211,604 211,277
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $ 274,169 $ 275,463
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen weeks ended Twenty-six weeks ended
August 28, August 30, August 28, August 30,
2004 2003 2004 2003
---- ---- ---- ----
(amounts in thousands, except share date)
Net sales $ 68,781 $ 73,319 $ 156,870 $ 149,311
Cost of sales 42,501 44,560 96,791 92,428
-------- -------- --------- ---------
Gross profit on sales 26,280 28,759 60,079 56,883
Selling, general and
administrative expenses 21,879 21,543 50,472 45,886
Other income, net 411 342 844 944
-------- -------- --------- ---------
Income from operations 4,812 7,558 10,451 11,941
Interest income, net 557 450 1,041 1,484
-------- -------- --------- ---------
Income before provision for
income taxes 5,369 8,008 11,492 13,425
Provision for income taxes 1,714 2,736 3,735 4,632
-------- -------- --------- ---------
Net income $ 3,655 $ 5,272 $ 7,757 $ 8,793
======== ======== ========= =========
Net income per share - basic $ 0.09 $ 0.13 $ 0.19 $ 0.22
- diluted $ 0.09 $ 0.13 $ 0.19 $ 0.21
Weighted average shares
outstanding - basic 40,459,000 40,605,000 40,513,000 40,650,000
-diluted 41,511,000 41,386,000 41,565,000 41,433,000
See Notes to Condensed Consolidated Financial Statements.
4
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Unaudited)
Thirteen weeks ended Twenty-six weeks ended
August 28, August 30, August 28, August 30,
2004 2003 2004 2003
---- ---- ---- ----
(amounts in thousands, except share date)
Net income $ 3,655 $ 5,272 $ 7,757 $ 8,793
Currency translation adjustment (756) (1,340) (1,623) 970
--------- --------- --------- --------
Comprehensive income $ 2,899 $ 3,932 $ 6,134 $ 9,763
========= ========= ========= ========
See Notes to Condensed Consolidated Financial Statements.
5
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six weeks ended
August August
28, 2004 30, 2003
-------- --------
(amounts in thousands)
Cash flows from operating activities:
Net income ........................................... $ 7,757 $ 8,793
Add non-cash items included in net income:
Depreciation and amortization ...................... 3,161 2,844
Deferred income taxes .............................. 317 83
Changes in operating assets and liabilities:
Accounts receivable .................................. 10,718 6,239
Inventories .......................................... 2,007 (2,573)
Income tax receivable/payable ........................ 2,178 921
Prepaid expenses and other current assets ............ 1,916 (433)
Payables and other current liabilities ............... 2,982 (5,624)
Other assets and liabilities ......................... (218) 566
------- ---------
Cash provided by operating activities ............. 24,854 10,816
Cash flows from investing activities:
Acquisition of business, net of cash acquired -- (27,923)
Additions to property, plant and equipment ........... (1,065) (1,063)
-------- --------
Cash used in investing activities ................ (1,065) (28,986)
Cash flows from financing activities:
Dividends paid to stockholders ....................... (3,254) (1,631)
Purchase of treasury stock and exercise
of stock options ................................... (2,553) (1,591)
------- ---------
Cash used in by financing activities ............. (5,807) (3,222)
Effect of exchange rates on cash and cash equivalents .. (1,220) 305
-------- ---------
Net increase (decrease) in cash and cash equivalents ... $16,762 $(21,087)
======== =========
Cash and cash equivalents at beginning of period ....... $ 93,837 $114,259
Cash and cash equivalents at end period ................ $110,599 $ 93,172
Supplemental disclosure of cash flow information:
Interest paid ........................................ $ 137 $ 70
Income taxes paid .................................... $ 1,792 $ 3,718
See Notes to Condensed Consolidated Financial Statements.
6
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AUGUST 28, 2004 AND FEBRUARY 28, 2004
AND FOR THE THIRTEEN AND TWENTY-SIX WEEK PERIODS
ENDED AUGUST 28, 2004 AND AUGUST 30, 2003
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 August 28, 2004 and August 30, 2003 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 28, 2004.
Employee Stock Options: The Company accounts for stock-based employee
compensation based on the intrinsic value of stock options granted in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees." Information
relating to stock-based employee compensation, including the pro forma
effects, had the Company accounted for stock-based employee compensation
based on the fair value of stock options granted (net of tax) in accordance
with SFAS 123, "Accounting for Stock-Based Compensation," is shown below:
For the thirteen weeks ended
August 28, 2004 August 30, 2003
----------------------- ------------------------
As reported Pro forma As reported Pro forma
----------------------- ------------------------
Net income, as reported $ 3,655 $ 3,655 $ 5,272 $ 5,272
Less: Stock-based employee
compensation (170) (349)
-------- --------
Pro forma net income ..... $ 3,485 $ 4,923
======== ========
Earnings per share:
Basic ................. $ 0.09 $ 0.09 $ 0.13 $ 0.12
Diluted ............... $ 0.09 $ 0.09 $ 0.13 $ 0.12
For the twenty-six weeks ended
August 28, 2004 August 30, 2003
----------------------- ------------------------
As reported Pro forma As reported Pro forma
----------------------- ------------------------
Net income, as reported $ 7,757 $ 7,757 $ 8,793 $ 8,793
Less: Stock-based employee
compensation (311) (549)
-------- --------
Pro forma net income ..... $ 7,446 $ 8,244
======== ========
Earnings per share:
Basic ................. $ 0.19 $ 0.18 $ 0.22 $ 0.20
Diluted ............... $ 0.19 $ 0.18 $ 0.21 $ 0.20
Options have an exercise price equal to the market price on the date prior
to the grant date and typically vest over a three-year period. In
determining the preceding pro forma amounts under Statement of Financial
Accounting Standards ("SFAS") 123, the fair value of each option grant is
estimated as of the date of grant using the Black-Scholes option pricing
model with the following assumptions: $0.16 per share dividend on fiscal
2005 and fiscal 2004 options, but no dividend on fiscal 2003 options;
risk-free interest rate, estimated volatility and expected life as follows:
fiscal 2005 options - 4.4%, 32% and 6.0 years, respectively; fiscal 2004
options - 4.4%, 38% and 6.5 years, respectively; fiscal 2003 options -
4.5%, 35% and 6.5 years, respectively.
7
2. Quarterly Comparison
Management believes that quarter-to-quarter comparisons of sales and
operating results are affected by a number of factors, including, but not
limited to, the timing of sports and entertainment releases, new product
introductions, seasonal products, the timing of various expenses such as
advertising and variations in shipping and factory scheduling requirements.
Thus, quarterly results may vary.
3. Accounts Receivable
(Unaudited)
August February
28, 2004 28, 2004
-------- --------
(amounts in thousands)
Gross receivables ............. $ 46,229 $ 52,843
Reserve for returns ........... (23,028) (19,516)
Other reserves ................ (3,810) (3,218)
-------- --------
Net receivables ............ $ 19,391 $ 30,109
======== ========
Other reserves consist of allowances for discounts, doubtful accounts and
customer deductions for promotional marketing programs.
4. Inventories
(Unaudited)
August February
28, 2004 28, 2004
-------- --------
(amounts in thousands)
Raw materials .................. $ 7,627 $ 5,571
Work in process ................ 4,961 2,824
Finished products .............. 18,365 24,614
-------- --------
Total inventories ......... $ 30,953 $ 33,009
======== ========
5. Segment Information
Following is the breakdown of industry segments as required by SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
The Company has two reportable business segments: Confectionery and
Entertainment.
The Confectionery segment consists of a variety of candy products including
Ring Pop, Push Pop and Baby Bottle Pop, Juicy Drop Pop, the Bazooka bubble
gum line and, from time to time, confectionery products based on licensed
characters, such as Pokemon and Yu-Gi-Oh!.
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,
the National Football League, and the National Hockey League (although our
contract with the NHL has expired), as well as characters from popular
films, television shows and other entertainment properties. Sticker album
products feature players from the English Premier League and characters
from entertainment properties such as Pokemon and Yu-Gi-Oh! This segment
also includes results from WizKids, a designer and marketer of strategy
games acquired in July 2003.
The Company's chief decision-maker regularly evaluates the performance of
each segment based upon its contributed margin, which is profit after cost
of goods, product development, advertising and promotional costs and
obsolescence, but before unallocated general and administrative expenses
and manufacturing overhead, depreciation and amortization, other income
(expense), net interest and income taxes.
The majority of the Company's assets are shared across both segments, and
the Company's chief decision-maker does not evaluate the performance of
each segment utilizing asset-based measures. Therefore, the Company does
not include a breakdown of assets or depreciation and amortization by
segment.
8
Thirteen weeks ended Twenty-six weeks ended
August 28, August 30, August 28, August 30,
2004 2003 2004 2003
---- ---- ---- ----
(amounts in thousands)
Net Sales
Confectionery $ 39,982 $ 42,008 $ 84,189 $ 87,538
Entertainment 28,799 31,311 72,681 61,773
-------- -------- -------- --------
Total $ 68,781 $ 73,319 $156,870 $149,311
======== ======== ======== ========
Contributed Margin
Confectionery $ 15,777 $ 15,491 $ 28,779 $ 29,260
Entertainment 8,998 10,276 22,426 17,399
-------- -------- -------- --------
Total $ 24,775 $ 25,767 $ 51,205 $ 46,659
======== ======== ======== ========
Reconciliation of Contributed
Margin to Income Before Provision
for Income Taxes:
Total contributed margin $ 24,775 $ 25,767 $ 51,205 $ 46,659
Unallocated general and
administrative expense
and manufacturing overhead (18,805) (16,986) (38,437) (32,818)
Depreciation and amortization (1,569) (1,565) (3,161) (2,844)
Other income, net 411 342 844 944
--------- --------- --------- ---------
Income from operations 4,812 7,558 10,451 11,941
Interest income, net 557 450 1,041 1,484
--------- --------- --------- ---------
Income before provision for
income taxes $ 5,369 $ 8,008 $ 11,492 $ 13,425
========= ========= ========= =========
6. Dividend and Share Repurchase Programs
In June 2003, the Board of Directors of the Company initiated a quarterly
dividend of $0.04 per share.
On July 1, 2004, the Board of Directors declared its second quarter cash
dividend of $0.04 per share payable on August 2, 2004 to shareholders of
record on July 19, 2004.
In October 1999, the Company's Board of Directors authorized the repurchase
of up to 5 million shares of the Company's common stock. In October 2001,
the Company completed the authorization and the Board approved the purchase
of another 5 million shares. As of August 28, 2004, under these two
programs, the Company has purchased 8,296,700 common shares.
7. Credit Agreement
On June 26, 2000, the Company entered into a credit agreement with Chase
Manhattan Bank and LaSalle Bank National Association for a term of four
years, which ended on June 26, 2004. On June 25, 2004, the credit agreement
was amended, however, to extend the expiration date for 90 days in order to
provide the Company sufficient time to complete refinancing arrangements.
This credit agreement has now expired.
On September 14, 2004, the Company entered into a new credit agreement with
JPMorgan Chase Bank. The agreement provides for a $30.0 million unsecured
facility to cover revolver and letter of credit needs and expires on
September 13, 2007. Interest rates are variable and a function of market
rates and the Company's EBITDA. The credit agreement contains restrictions
and prohibitions of a nature generally found in loan agreements of this
type and requires the Company, among other things, to comply with certain
financial covenants, limits the Company's ability to sell or acquire assets
or borrow additional money and places certain restrictions on the purchase
of Company shares and the payment of dividends. The credit agreement may be
terminated by the Company at any point over the three-year term (provided
the Company repays all outstanding amounts thereunder) without penalty.
There was no debt outstanding under either credit agreement as of February
28, 2004 or August 28, 2004.
9
8. Reclassifications
Certain items in the prior years' financial statements have been
reclassified to conform with the current year's presentation.
9. Goodwill and Intangible Assets
On March 3, 2002, the Company adopted SFAS 141 "Business Combinations" and
SFAS 142 "Goodwill and Other Intangible Assets" which require the Company
to prospectively cease amortization of goodwill and instead conduct
periodic tests of goodwill for impairment.
As a result of the acquisition of WizKids in July 2003, goodwill increased
by $18.7 million, and other intangibles increased by $6.2 million (included
in intellectual property) (see Note 11). Intangible assets as of August 28,
2004 and February 28, 204 were as follows:
(amounts in thousands)
August 28, 2004 ' February 28, 2004
(Unaudited) '
Gross ' Gross
Carrying Accumulated ' Carrying Accumulated
Value Amortization Net ' Value Amortization Net
-------- ------------ -------- ' -------- ------------ --------
Licenses and Contracts ........ $ 21,569 $(17,607) $ 3,962 ' $ 21,569 $(17,272) $ 4,297
Intellectual Property ......... 18,784 (13,767) 5,017 ' 18,784 (13,251) 5,533
Software and Other ............ 2,953 (2,765) 188 ' 2,953 (2,717) 236
Min. Pension Liab ............ 408 -- 408 ' 408 -- 408
-------- --------- -------- ' -------- --------- --------
Total Intangibles ............. $ 43,714 $(34,139) $ 9,575 ' $ 43,714 $(33,240) $ 10,474
======== ========= ======== ' ======== ========= ========
Useful lives of the Company's intangible assets have been established based
on the Company's intended use of such assets and their estimated period of
future benefit, which are reviewed periodically. Useful lives are as
follows:
Weighted Average
Category Useful Life Remaining Useful Life
-------- ----------- ---------------------
Licenses and Contracts 15 years 5.9 years
Intellectual Property 6 years 4.9 years
Software and Other 5 years 2.0 years
The weighted average remaining useful life for the Company's intangible
assets in aggregate is 5.2 years. Over the next five years, the Company
estimates amortization of the intangible assets detailed above to be as
follows:
Fiscal Year Amount
----------- ------
(in thousands)
2005 $ 1,797
2006 $ 1,797
2007 $ 1,750
2008 $ 1,703
2009 and thereafter $ 2,528
In addition to the amortization of intangibles listed above, reported
amortization expense, which was $1,268,000 and $894,000 for the twenty-six
weeks ended August 28, 2004 and August 30, 2003, respectively, included
amortization of deferred financing fees and deferred compensation costs.
10. Legal Proceedings
In November 2000, the Commission of the European Communities (the
"Commission") began an investigation into whether Topps Europe's past
distribution arrangements for the sale of Pokemon products complied with
European law (the "EU investigation"). On June 17, 2003, the Commission
filed a Statement of Objections against The Topps Company, Inc. and its
10
European subsidiaries, therein coming to a preliminary conclusion that
these entities infringed Article 81 of the EC treaty during 2000 by
preventing parallel trade between member states of the European Union. A
hearing in front of the European Commission Tribunal took place on October
23, 2003, and on May 27, 2004, the Commission found The Topps Company, Inc.
and its European subsidiaries jointly and severally liable for infringement
of Article 81(1) of the EC treaty. The Commission imposed a total fine of
1.6 million euros ($1.9 million) which was included in accrued expenses in
the condensed consolidated balance sheet as of May 29, 2004 and in SG&A
expense for the thirteen weeks ended May 29, 2004. The fine has now been
paid.
On February 17, 2000, Telepresence, Inc. sued Topps and nine other
manufacturers of trading cards (the "Defendants") in the Federal District
Court for the Central District of California for infringement of U.S.
Patent No. 5,803,501 which was issued on September 8, 1998 (the "501
Patent"). In its suit, Telepresence contended that the patent covers all
types of "relic" cards that contain an authentic piece of equipment, i.e.,
a piece of sporting equipment or jersey. After initial discovery, on
November 15, 2000, the Defendants jointly moved for summary judgment on the
grounds that the named Plaintiff (Telepresence, Inc.) did not have standing
to sue for infringement of the 501 Patent. The motion was granted and the
Telepresence litigation was dismissed with prejudice on March 28, 2001.
After the dismissal, the 501 Patent was assigned to a company called Media
Technologies, Inc. Media Technologies is under the control of the same
person (the inventor, Adrian Gluck) who brought the Telepresence action. On
November 19, 2001, Media Technologies sued essentially the same group of
defendants in the same court for infringement of the 501 Patent. On March
13, 2002, the Defendants again moved for summary judgment based on the fact
that the Telepresence action was dismissed with prejudice. That motion was
granted by the District Court on April 22, 2002. Plaintiff (Media
Technologies, Inc.) appealed on May 2, 2002. The Court of Appeals for the
Federal Circuit reversed the judgment on July 11, 2003, and the case has
been returned to Judge Stotler in the Central District of California for
trial.
Discovery in the case commenced September 29, 2003 and was stayed pending
the outcome of two summary judgment motions filed by defendants. On March
17, 2004, Topps filed a motion for summary judgment based on
non-infringement while other defendants filed a motion for summary judgment
based on patent invalidity because of prior art. Both motions were denied
on July 26, 2004 and discovery has now resumed. On September 15th, 2004,
defendant Upper Deck Company, LLC moved for a separate trial on the issues
of infringement, damages, willfulness and counterclaims.
The trial is currently scheduled for February 2005. An adverse outcome in
the litigation could result in a substantial liability for the Company. It
is still too early in the matter to determine the likelihood of damages or
to estimate the range of loss, if any, and, accordingly, no provision has
been recorded for this matter in the accompanying condensed consolidated
financial statements.
The Company is a defendant in several other civil actions which are routine
and incidental to its business. In management's opinion, after consultation
with legal counsel, these other actions are not likely to have a material
adverse effect on the Company's consolidated financial statements.
11. Acquisition of Wizkids, LLC
On July 9, 2003, the Company acquired Wizkids, LLC ("WizKids"), a designer
and marketer of collectible strategy games, for a cash purchase price of
approximately $28.4 million. It is believed that the acquisition will serve
to enhance and accelerate the expansion of the Company's entertainment
business. The acquisition is being accounted for using the purchase method
of accounting. The financial statements of WizKids have been consolidated
into the financial statements of the Company subsequent to the acquisition.
The allocation of the purchase price is reflected in the financial
statements contained herein.
The total consideration paid by the Company to WizKids' shareholders was
comprised of $29,500,000 in cash, net of a working capital adjustment of
$1,123,500. The purchase price also reflected a $1,326,130 payment to a
third party for associated licenses and legal, accounting, and investment
banking fees of $679,075. The purchase price was determined based on
discounted cash flow projections, which reflected expected synergies with
the Company.
11
The purchase price includes a $6.2 million allocation for intellectual
property rights associated with the WizKids product line, which is being
amortized over an estimated useful life of 6 years. There were no
contingent payments with the purchase price.
Contemporaneous with the acquisition, the Company entered into an
employment agreement with Jordan Weisman, the majority shareholder and
founder of WizKids, for a forty-eight month period following the closing.
As part of this employment agreement, $2 million of the consideration paid
to Mr. Weisman as a shareholder is being accounted for as deferred
compensation and is being amortized over four years. If Mr. Weisman does
not remain a WizKids employee for the full four years of the agreement, he
will be required to pay the Company the unamortized balance of his deferred
compensation. As an additional part of his employment agreement, Mr.
Weisman is entitled to contingent payments during the forty-eight months
subsequent to the closing equal to 2% of WizKids' annual net revenue in
excess of $35 million, assuming that certain operating margin targets are
met. In addition, Mr. Weisman was granted 165,000 options to acquire the
Company's common stock, which were granted at fair market value on the date
of grant and vest over a four-year period.
The following table sets forth the components of the purchase price:
Total consideration $ 29,500,000
Less: Working capital adjustment (1,123,500)
Deferred compensation agreement (2,000,000)
Add: Purchase of license 1,326,130
Transaction costs 679,075
-------------
Total purchase price $ 28,381,705
=============
The following table provides the fair value of the acquired assets and
liabilities assumed based upon WizKids' July 9, 2003 balance sheet:
Current assets $ 8,201,851
Property and equipment 564,743
Other assets 115,000
Liabilities assumed, current (5,426,072)
-------------
Fair value of net assets acquired 3,455,522
Intangible assets 6,200,000
Goodwill 18,726,183
------------
Total estimated fair value of net $ 28,381,705
assets acquired and estimated goodwill ============
The goodwill of $18.7 million is included in the Entertainment business
segment and is deductible for tax purposes over a fifteen-year period.
The impact of including WizKids in the condensed consolidated statements of
operations on a pro forma basis as if the acquisition had occurred on March
2, 2003 is as follows:
(Unaudited)
Thirteen weeks ended Twenty-six weeks ended
August 30, 2003 August 30, 2003
--------------- ---------------
(amounts in thousands, except share data)
Net sales $ 78,152 $162,699
Income from operations 5,965 10,138
Net income 4,280 7,682
======== ========
Net income per share - basic $ 0.11 $ 0.19
- diluted $ 0.10 $ 0.19
12
12. Employee Benefit Plans
The components of net periodic benefit costs for the thirteen and
twenty-six weeks ended August 28, 2004 and August 30, 2003 are as follows:
Postretirement
Pension Healthcare
- --------------------------------------------------------------------------------
Thirteen weeks August August August August
- -------------- 28, 2004 30, 2003 28, 2004 30, 2003
- --------------------------------------------------------------------------------
(amounts in thousands)
Service Cost $ 345 $ 346 $ 82 $ 71
Interest cost 593 597 163 150
Expected return on plan assets (535) (363) - -
Amortization of:
Initial transition obligation ( 15) ( 12) 50 50
Prior service cost 33 33 - -
Actuarial (gains) losses 179 279 27 12
----- ----- ----- -----
Net periodic benefit cost $ 600 $ 880 $ 322 $ 283
===== ===== ===== =====
- --------------------------------------------------------------------------------
Postretirement
Pension Healthcare
- --------------------------------------------------------------------------------
Twenty-six weeks August August August August
- ---------------- 28, 2004 30, 2003 28, 2004 30, 2003
- --------------------------------------------------------------------------------
(amounts in thousands)
Service Cost $ 690 $ 692 $ 164 $ 142
Interest cost 1,187 1,195 324 300
Expected return on plan assets (1,069) (726) - -
Amortization of:
Initial transition obligation ( 30) ( 25) 100 100
Prior service cost 66 66 - -
Actuarial (gains) losses 358 558 54 24
------- ------- ------- ------
Net periodic benefit cost $ 1,202 $ 1,760 $ 642 $ 566
======= ======= ======= ======
- --------------------------------------------------------------------------------
The fiscal 2005 costs are estimated based on actuarial assumptions, and
actual costs will be adjusted accordingly during the year.
13. Recently Issued Accounting Pronouncements
In January 2004, the Financial Accounting Standards Board ("FASB") issued
FSP 106-1, which allows companies to elect a one-time deferral of the
recognition of effects of the Medicare Prescription Drug Act and
disclosures related to the postretirement healthcare plan. The FASB allows
the one-time deferral due to a lack of clarification regarding its
accounting and uncertainties regarding the effects of the Medicare
Prescription Drug Act on plan participants. For companies electing the
one-time deferral, the deferral remains in effect until guidance on the
accounting for the federal subsidy is issued, or until certain other
events, such as a plan amendment, settlement or curtailment, occur. The
Company is currently evaluating the effects of the Medicare Prescription
Drug Act on the postretirement benefit plan and its participants, and has
elected the one-time deferral. In May 2004, the FASB issued FSP No. 106-2
("FSP 106-2"), which superseded FSP 106-1. FSP 106-2 provides authoritative
guidance on the accounting for the Act and specifies the disclosure
requirements for employers who have adopted FSP 106-2. FSP 106-2 is
effective for the interim or annual period beginning after June 15, 2004.
The Company's accumulated post-retirement benefit obligation and net
post-retirement benefit cost for fiscal 2004 and fiscal 2005 do not reflect
the effects of the Medicare Prescription Drug Act. Once specific guidance
on the accounting for the federal subsidy is issued, anticipated by the
Company's third quarter of fiscal 2005, it could result in a change to
previously reported information.
14. Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements and,
therefore, there is no effect on its financial condition, changes in
financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources from this type of arrangement.
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------
Board of Directors and Stockholders of
The Topps Company, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of The
Topps Company, Inc. and subsidiaries (the "Company") as of August 28, 2004, and
the related condensed consolidated statements of operations and comprehensive
income for the thirteen and twenty-six week periods ended August 28, 2004 and
August 30, 2003 and of cash flows for the twenty-six week periods ended August
28, 2004 and August 30, 2003. These interim financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
the Company as of February 28, 2004, 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 4, 2004, we
expressed an unqualified opinion on those consolidated financial statements and
included an explanatory paragraph relating to the Company's change in method of
accounting for goodwill and other intangible assets to conform to Statement of
Financial Accounting Standard 142. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of February 28, 2004 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
s/ DELOITTE & TOUCHE LLP
- --------------------------
October 7, 2004
New York, New York
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Second Quarter Fiscal Year 2005 (thirteen weeks ended August 28, 2004) versus
Second Quarter Fiscal Year 2004 (thirteen weeks ended August 30, 2003)
- -----------------------------------------------------------------------------
The following table sets forth, for the periods indicated, net sales by key
business segment:
Thirteen weeks ended Twenty-six weeks ended
August August August August
28, 2004 30, 2003 28, 2004 30, 2003
-------- -------- -------- --------
(amounts in thousands)
Net Sales
Confectionery $ 39,982 $ 42,008 $ 84,189 $ 87,538
Entertainment 28,799 31,311 72,681 61,773
-------- -------- -------- --------
Total $ 68,781 $ 73,319 $156,870 $149,311
======== ======== ======== ========
Net sales for the second quarter of fiscal 2005 were $68.8 million, a decrease
of $4.5 million, or 6.2%, from $73.3 million in the same period last year.
Stronger foreign currencies versus the dollar increased sales in the quarter
this year by $1.3 million.
Net sales of confectionery products, which include, among other things, Ring
Pop, Push Pop, Baby Bottle Pop, Bazooka brand bubble gum and licensed candy
products, were $40.0 million in the second quarter of this year, a decrease of
$2.0 million, or 4.8%, from $42.0 million in fiscal 2004. Stronger foreign
currencies contributed $0.6 million. Confectionery sales in the second quarter
continued to be impacted by industry issues such as retail consolidation,
increased promotional spending by competitors (including price discounting) and
childhood nutritional concerns. Partially offsetting these factors was a
favorable contribution from the growing sales of Juicy Drop Pop and the further
roll-out of two new Topps chewy products--Juicy Drop Chews and Juicy Bugs.
Net sales of entertainment products, which include cards, stickers, sticker
albums and the WizKids line of strategy games, were $28.8 million in the second
quarter of fiscal 2005, a decrease of $2.5 million, or 8.0%, from $31.3 million
in the same period last year. Stronger foreign currencies provided a $0.7
million benefit. The decline was a function of the decision not to release
hockey cards due to an uncertain NHL season and difficult comparisons to last
year's basketball sales, which benefited from a highly anticipated rookie class.
Additionally, net sales were impacted by higher returns provisions for European
sports and publishing products. Sales at WizKids, acquired in July of last year,
were higher due to the full quarter of ownership this year. Worldwide publishing
sales increased slightly year-over-year driven by Pokemon, Wacky Packages,
Garbage Pail Kids and Yu-Gi-Oh! releases.
Gross profit as a percentage of net sales in the second quarter of fiscal 2005
was 38.2% as compared with last year's level of 39.2%. This decline was
primarily the result of the higher returns provisions in the European
entertainment business, which reduced net sales. Lower autograph and relic costs
on U.S. sports products partly offset the impact of increased provisions.
Other income/expense in the quarter was $411,000 as compared with last year's
figure of $342,000. This was largely the result of the absence of exchange
losses on foreign cash balances recorded last year, and, to a lesser degree,
increased licensing income from confectionery brands and WizKids.
SG&A expense was $21.9 million in the quarter this year, up from $21.5 million
in fiscal 2004. As a percentage of net sales, SG&A was 31.8% this year versus
29.4% a year ago. The modest increase in SG&A dollar spending was the result of
costs associated with a strategic planning project and higher selling-related
expenses in the U.S. and Europe, in part offset by reduced advertising and
marketing costs behind U.S. confectionery products and etopps.
Net interest income of $557,000 in the second quarter this year was higher than
a year-ago due to higher interest rates.
The effective tax rate reflects provisions for federal, state and local income
taxes in accordance with statutory income tax rates. The Company`s tax rate of
31.9% in the second quarter this year versus 34.2% last year reflects the
adjustment necessary to reduce the full year forecasted rate to 32.5% from
33.0%.
15
Net income for the second quarter of fiscal 2005 was $3.7 million, or $0.09 per
diluted share, compared with $5.3 million, or $0.13 per diluted share last year.
First Half Fiscal 2005 (twenty-six weeks ended August 28, 2004) compared to
First Half Fiscal 2004 (twenty-six weeks ended August 30, 2003)
- ---------------------------------------------------------------------------
Net sales in the first half of fiscal 2005 were $156.9 million, an increase of
$7.6 million, or 5.1%, from $149.3 million in the same period last year.
Stronger foreign currencies versus the dollar served to increase sales by $4.1
million.
Net sales of confectionery products were $84.2 million in the first half this
year, a decrease of $3.3 million, or 3.8%, from $87.5 million in fiscal 2004.
Stronger foreign currencies contributed $1.7 million. Confectionery sales this
year were impacted largely by industry issues in the U.S. and reduced demand for
Yu-Gi-Oh! confectionery products in Europe. Newer items, particularly Juicy Drop
Pop, as well as Juicy Drop Chews and Juicy Bugs, added incrementally to sales in
the first half this year.
Net sales of entertainment products in the first half of this year were $72.7
million, an increase of $10.9 million, or 17.7%, from $61.8 million last year.
Stronger foreign currencies added $2.4 million this year. Year-over-year first
half growth was attributable to sales of sticker album collections featuring the
European Championship, a soccer tournament held every four years, as well as to
higher sales of English Premier League products, more than offseting lower sales
of U.S. sports cards and internet products in the period. In addition, sales at
WizKids, acquired in July of last year, added an incremental $6.4 million in
sales in the six months of ownership this year.
Gross profit as a percentage of net sales in the first half of fiscal 2005 was
38.3% as compared with 38.1% for the same period last year. Lower sports
autograph and relic costs, the absence of expenses associated with Cool Junk
last year and a reduction in product development costs associated with the U.S.
sports business offset the impact of higher returns provisions on the sale of
European entertainment products.
Other income was $844,000 this year versus $944,000 last year. This reduction
was largely due to the recent relative stabilization of the U.S. dollar which
resulted in lower mark-to-market gains this year on foreign exchange contracts.
SG&A expense was $50.5 million for the first half of fiscal 2005 compared with
$45.9 million in fiscal 2004. As a percent of net sales, SG&A of 32.2% was 1.5%
points higher than last year. The increase in dollar costs was primarily a
function of a full six months of WizKids ownership, as well as a $1.9 million
fine levied by the European Commission in the first quarter of this year. (see
Note 10 - Legal Proceedings.) Cost savings initiatives instituted last year in
the U.S. sports, Internet and WizKids operations helped offset higher consulting
and selling expenses, salary inflation and the impact of stronger European
currencies. Advertising and marketing costs were below last year for the
six-month period due to reduced spending on the U.S. confectionery business and
etopps, partially offset by higher spending behind new product launches
overseas.
16
Net interest income for the first half of fiscal 2005 decreased to $1.0 million
from $1.5 million in fiscal 2004 due to interest received from the IRS on a tax
refund in the first quarter of last year.
The tax rate for the first half this year was 32.5%, reflecting the current
full-year tax rate outlook, versus 34.5% for the same period last year.
Net income in the first half of fiscal 2005 was $7.8 million, or $0.19 per
diluted share, compared with $8.8 million, or $0.21 per diluted share last year.
Excluding the impact of the European Commission fine, net income in the first
half this year was $9.7 million, or $0.23 per diluted share.
Liquidity and Capital Resources
- -------------------------------
Management believes that the Company has adequate means to meet its liquidity
and capital resource needs over the foreseeable future as a result of the
combination of cash on hand, anticipated cash from operations and credit line
availability.
At August 28, 2004, the Company had $110.6 million in cash and cash equivalents.
On June 26, 2000, the Company entered into a credit agreement with Chase
Manhattan Bank and LaSalle Bank National Association for a term of four years,
which ended on June 26, 2004. On June 25, 2004, the credit agreement was amended
to extend the expiration date for 90 days in order to provide the Company
sufficient time to complete refinancing arrangements. This credit agreement has
now expired.
On September 14, 2004, the Company entered into a new credit agreement with
JPMorgan Chase Bank. The agreement provides for a $30.0 million unsecured
facility to cover revolver and letter of credit needs and expires on September
13, 2007. Interest rates are variable and a function of market rates and the
Company's EBITDA. The credit agreement contains restrictions and prohibitions of
a nature generally found in loan agreements of this type and requires the
Company, among other things, to comply with certain financial covenants, limits
the Company's ability to sell or acquire assets or borrow additional money and
places certain restrictions on the purchase of Company shares and the payment of
dividends. The credit agreement may be terminated by the Company at any point
over the three-year term (provided the Company repays all outstanding amounts
thereunder) without penalty.
In October 2001, the Board of Directors authorized the purchase of up to 5
million shares of stock. During the first half of fiscal 2005, the Company
purchased 350,400 shares at an average price of $9.11 per share. The Company has
repurchased a total of 3.3 million shares under this authorization.
In the six months ended August 28, 2004, the Company's net increase in cash and
cash equivalents was $16.8 million versus a decrease of $21.1 million in the
comparable period of fiscal 2004. The cash use last year was largely a function
of the purchase of WizKids net of cash acquired of $27.9 million.
Cash provided by operating activities this year was $24.9 million versus $10.8
million last year. This improvement was primarily due to a $10.7 million
reduction in receivables resulting from the collection of seasonal confectionery
and European sports billings and the increase in the returns reserve related to
sales of European entertainment products. Additionally, better management of
confectionery stocks resulted in a reduction in inventories in the first half
this year.
Cash used in investing activities was $1.1 million this year for the Company's
capital spending. Last year's figure of $29.0 million includes the WizKids net
purchase price of $27.9 million and $1.1 million in capital spending. Fiscal
2005 full year capital spending is projected to be in the $3 million to $4
million range, driven by investments in Ring Pop production equipment and
computer software and hardware. Capital spending dividend payments and treasury
stock purchases are being funded out of cash flow from operating activities.
Cash used in financing activities of $5.8 million this year reflects $3.2
million in cash dividends and $2.6 million in treasury stock purchases (net of
$0.6 million options exercised). This spending compares with an outlay of $3.2
million last year, comprised of $1.6 million in cash dividends and $1.6 million
in net treasury stock purchases. Dividend payments and treasury stock purchases
are being funded out of cash flow from operating activities.
17
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 28, 2004.
The Company does not have any off-balance sheet arrangements and, therefore,
there is no effect on its financial condition, changes in financial condition,
revenue or expenses, results of operations, liquidity, capital expenditures or
capital resources from this type of arrangement.
Cautionary Statements
- ---------------------
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby filing
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in any forward-looking
statements of the Company made by or on behalf of the Company, whether oral or
written. Among the factors that could cause the Company's actual results to
differ materially from those indicated in any such forward-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.
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 28, 2004, "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 $11.2 million in the first twenty-six
weeks of fiscal 2005 and $5.8 million in 2004, which equates to 7.1% and 3.9% of
higher net sales, respectively. The increase in the provision this year the
result of anticipated returns of sticker album products featuring the European
Championship, which occurs once every four years, as well as other entertainment
properties. An increase or decrease in the provision for returns by 1% of net
sales would decrease or increase operating income by approximately $1.6 million.
Intangible Assets: Intangible assets include trademarks and the value of sports,
entertainment and proprietary product rights. Amortization is by the
straight-line method over estimated lives which range between three and fifteen
years. Management evaluates the recoverability of finite-lived intangible assets
under the provisions of SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-lived Assets" based on the projected undiscounted cash flows
attributable to the individual assets, among other methods.
Accrual for Obsolete Inventory: The Company's accrual for obsolete inventory
reflects the cost of items in inventory not anticipated to be sold. This accrual
is deemed necessary as a result of discontinued items and packaging or a
reduction in forecasted sales and is adjusted periodically based on a review of
inventory stocks and sales projections. The provision for obsolete inventory was
$1.9 million in the twenty-six weeks of fiscal 2005 and $2.0 million in fiscal
2004, which equates to 1.2% and 1.3% of net sales, respectively. An increase or
decrease in the provision for obsolescence by 1% of net sales would decrease or
increase operating income by approximately $1.6 million.
18
ITEM 3. DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk associated with activities in derivative
financial instruments (e.g., hedging or currency swap agreements), other
financial instruments and derivative commodity instruments is confined to the
impact of mark-to-market changes in foreign currency rates on the Company's
forward contracts and options. The Company has no debt outstanding and does not
engage in any commodity-related derivative transactions. As of August 28, 2004,
the Company had contracts and options which were entered into for the purpose of
hedging forecasted receipts and disbursements in various foreign currencies.
19
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this quarterly report. Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as
of the end of such period, our disclosure controls and procedures are effective
in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act.
Changes in internal controls
There have not been any changes in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during the most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. There were no significant deficiencies or material weaknesses, and
therefore there were no corrective actions taken.
20
PART II
ITEM 1. LEGAL PROCEEDINGS
In November 2000, the Commission of the European Communities (the "Commission")
began an investigation into whether Topps Europe's past distribution
arrangements for the sale of Pokemon products complied with European law (the
"EU investigation"). On June 17, 2003, the Commission filed a Statement of
Objections against The Topps Company, Inc. and its European subsidiaries,
therein coming to a preliminary conclusion that these entities infringed Article
81 of the EC treaty during 2000 by preventing parallel trade between member
states of the European Union. A hearing in front of the European Commission
Tribunal took place on October 23, 2003, and on May 27, 2004, the Commission
found The Topps Company, Inc. and its European subsidiaries jointly and
severally liable for infringement of Article 81(1) of the EC treaty. The
Commission imposed a total fine of 1.6 million euros ($1.9 million) which was
included in accrued expenses in the condensed consolidated balance sheet as of
May 29, 2004 and in SG&A expense for the thirteen weeks ended May 29, 2004. The
fine has now been paid.
On February 17, 2000, Telepresence, Inc. sued Topps and nine other manufacturers
of trading cards (the "Defendants") in the Federal District Court for the
Central District of California for infringement of U.S. Patent No. 5,803,501
which was issued on September 8, 1998 (the "501 Patent"). In its suit,
Telepresence contended that the patent covers all types of "relic" cards that
contain an authentic piece of equipment, i.e., a piece of sporting equipment or
jersey. After initial discovery, on November 15, 2000, the Defendants jointly
moved for summary judgment on the grounds that the named Plaintiff
(Telepresence, Inc.) did not have standing to sue for infringement of the 501
Patent. The motion was granted and the Telepresence litigation was dismissed
with prejudice on March 28, 2001.
After the dismissal, the 501 Patent was assigned to a company called Media
Technologies, Inc. Media Technologies is under the control of the same person
(the inventor, Adrian Gluck) who brought the Telepresence action. On November
19, 2001, Media Technologies sued essentially the same group of defendants in
the same court for infringement of the 501 Patent. On March 13, 2002, the
Defendants again moved for summary judgment based on the fact that the
Telepresence action was dismissed with prejudice. That motion was granted by the
District Court on April 22, 2002. Plaintiff (Media Technologies, Inc.) appealed
on May 2, 2002. The Court of Appeals for the Federal Circuit reversed the
judgment on July 11, 2003, and the case has been returned to Judge Stotler in
the Central District of California for trial.
Discovery in the case commenced September 29, 2003 and was stayed pending the
outcome of two summary judgment motions filed by defendants. On March 17, 2004,
Topps filed a motion for summary judgment based on non-infringement while other
defendants filed a motion for summary judgment based on patent invalidity
because of prior art. Both motions were denied on July 26, 2004 and discovery
has now resumed. On September 15th, 2004 defendant Upper Deck Company, LLC moved
for a separate trial on the issues of infringement, damages, willfulness and
counterclaims.
The trial is currently scheduled for February 2005. An adverse outcome in the
litigation could result in a substantial liability for the Company. It is still
too early in the matter to determine the likelihood of damages or to estimate
the range of loss, if any, and, accordingly, no provision has been recorded for
this matter in the accompanying condensed consolidated financial statements.
The Company is a defendant in several other civil actions which are routine and
incidental to its business. In management's opinion, after consultation with
legal counsel, these other actions are not likely to have a material adverse
effect on the Company's consolidated financial statements.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as required by Item 601 of Regulation S-K filed herewith:
10.22 Credit agreement, dated September 14, 2004, between the Company and
JPMorgan Chase Bank.
10.23 The Topps Company, Inc. Bonus Plan for Scott Silverstein, effective
August 4, 2004.
10.24 License Agreement between the Football Association Premier League Limited
and Topps Europe, LTD dated September 30, 2003.
31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a)
and 15d-14(a) under the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a)
and 15d-14(a) under the Securities Exchange Act of 1934.
32.1 Certification of Arthur T. Shorin, Chairman and Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Catherine K. Jessup, Vice-President-Chief Financial
Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Form 8-K, dated August 4, 2004, with press release, reporting the
appointment of Scott Silverstein as President and Chief Operating
Officer.
2. Form 8-K, dated September 24, 2004, with press release, dated
September 23, 2004, reporting the Company's fiscal 2005 second quarter
earnings.
3. Form 8-K, dated October 7, 2004, with press release, dated October 6,
2004, reporting the Company's fiscal 2005 third quarter dividend
declaration.
22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TOPPS COMPANY, INC.
-----------------------
REGISTRANT
s/ Catherine K. Jessup
------------------------
Catherine K. Jessup
Duly Authorized Officer
October 7, 2004
23