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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 November 27, 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 January 3, 2005 was
40,431,571.
THE TOPPS COMPANY, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
Index Page
----- ----
Condensed Consolidated Balance Sheets as of November 27, 2004
(unaudited) and February 28, 2004 3
Condensed Consolidated Statements of Operations for the
thirteen and thirty-nine week periods ended November 27,
2004 and November 29, 2003 4
Condensed Consolidated Statements of Comprehensive Income
for the thirteen and thirty-nine week periods ended
November 27, 2004 and November 29, 2003 5
Condensed Consolidated Statements of Cash Flows for the thirty-
nine weeks ended November 27, 2004 and November 29, 2003 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 20
ITEM 4. CONTROLS AND PROCEDURES 21
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
2
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
November February
27, 2004 28, 2004
-------- --------
(amounts in thousands,
except share data)
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 116,703 $ 93,837
Accounts receivable, net ........................... 20,326 30,109
Inventories ........................................ 30,114 33,009
Income tax receivable .............................. 2,369 2,697
Deferred tax assets ................................ 915 1,505
Prepaid expenses and other current assets .......... 12,525 11,691
--------- ---------
TOTAL CURRENT ASSETS ......................... 182,952 172,848
PROPERTY, PLANT AND EQUIPMENT ........................ 34,009 32,349
Less: accumulated depreciation and amortization ... 21,488 18,563
--------- ---------
NET PROPERTY, PLANT AND EQUIPMENT ............ 12,521 13,786
GOODWILL ............................................. 67,566 67,586
INTANGIBLE ASSETS, net of accumulated amortization ... 9,126 10,474
OTHER ASSETS ......................................... 10,971 10,769
--------- ---------
TOTAL ASSETS ................................. $ 283,136 $ 275,463
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................... $ 9,637 $ 10,946
Accrued expenses and other liabilities ............. 27,674 26,249
Income taxes payable ............................... 2,389 2,354
--------- ---------
TOTAL CURRENT LIABILITIES .................... 39,700 39,549
DEFERRED INCOME TAXES ................................ 4,065 1,956
OTHER LIABILITIES .................................... 23,380 22,681
--------- ---------
TOTAL LIABILITIES ............................ 67,145 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 November 27, 2004 and February 28, 2004 . 492 492
Additional paid-in capital ......................... 27,829 27,829
Treasury stock, 8,823,000 shares and 8,632,000
shares as of November 27, 2004 and February 28, 2004,
respectively ....................................... (85,361) (82,287)
Retained earnings .................................. 276,365 270,704
Accumulated other comprehensive loss,
net of income taxes ................................ (3,334) (5,461)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................... 215,991 211,277
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ... $ 283,136 $ 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 Thirty-nine weeks ended
November, November November November
27, 2004 29, 2003 27, 2004 29, 2003
--------- -------- -------- --------
(amounts in thousands, except share data)
Net sales $ 70,650 $ 78,470 $ 227,520 $ 227,781
Cost of sales 46,990 54,148 143,781 146,576
-------- -------- --------- ---------
Gross profit on sales 23,660 24,322 83,739 81,205
Selling, general and
administrative expenses 20,378 23,265 70,850 69,151
Other income (expense), net (54) (402) 790 542
-------- -------- --------- ---------
Income from operations 3,228 655 13,679 12,596
Interest income, net 883 445 1,924 1,929
-------- -------- --------- ---------
Income before provision for
income taxes 4,111 1,100 15,603 14,525
Provision for income taxes 1,320 118 5,055 4,750
-------- -------- --------- ---------
Net income $ 2,791 $ 982 $ 10,548 $ 9,775
======== ======== ========= =========
Net income per share - basic $ 0.07 $ 0.02 $ 0.26 $ 0.24
- diluted $ 0.07 $ 0.02 $ 0.26 $ 0.23
Weighted average shares
outstanding - basic 40,412,000 40,530,000 40,482,000 40,610,000
- diluted 41,253,000 41,822,000 41,280,000 41,726,000
See Notes to Condensed Consolidated Financial Statements.
4
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Unaudited)
Thirteen weeks ended Thirty-nine weeks ended
November November November November
27, 2004 29, 2003 27, 2004 29, 2003
-------- -------- -------- --------
(amounts in thousands, except share data)
Net income $ 2,791 $ 982 $ 10,548 $ 9,775
Currency translation adjustment (504) 3,301 (2,127) 4,271
--------- --------- --------- --------
Comprehensive income $ 2,287 $ 4,283 $ 8,421 $ 14,046
========= ========= ========= ========
See Notes to Condensed Consolidated Financial Statements.
5
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Thirty-nine weeks ended
November November
27, 2004 29, 2003
-------- --------
(amounts in thousands)
Cash flows from operating activities:
Net income ........................................... $ 10,548 $ 9,775
Add non-cash items included in net income:
Depreciation and amortization ...................... 4,717 4,798
Deferred income taxes .............................. 2,699 (207)
Changes in operating assets and liabilities:
Accounts receivable .................................. 9,783 4,133
Inventories .......................................... 2,895 (1,120)
Income tax receivable/payable ........................ 363 (1,019)
Prepaid expenses and other current assets ............ (834) (1,542)
Payables and other current liabilities ............... 116 (7,574)
Other assets and liabilities ......................... 1,410 359
------- ---------
Cash provided by operating activities ............. 31,697 7,603
Cash flows from investing activities:
Acquisition of business, net of cash acquired -- (28,593)
Additions to property, plant and equipment ........... (1,660) (1,989)
-------- --------
Cash used in investing activities ................ (1,660) (30,582)
Cash flows from financing activities:
Dividends paid to stockholders ....................... (4,887) (3,262)
Purchase of treasury stock and exercise
of stock options ................................... (3,074) (1,406)
------- ---------
Cash used in financing activities ................ (7,961) (4,668)
Effect of exchange rates on cash and cash equivalents .. 790 2,940
-------- ---------
Net increase (decrease) in cash and cash equivalents ... $22,866 $ (24,707)
======== =========
Cash and cash equivalents at beginning of year ......... $ 93,837 $114,259
Cash and cash equivalents at period end ................ $116,703 $ 89,552
Supplemental disclosure of cash flow information:
Interest paid ........................................ $ 203 $ 133
Income taxes paid .................................... $ 2,941 $ 4,741
See Notes to Condensed Consolidated Financial Statements.
6
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF NOVEMBER 27, 2004 AND FEBRUARY 28, 2004
AND FOR THE THIRTEEN AND THIRTY-NINE WEEK PERIODS ENDED
NOVEMBER 27, 2004 AND NOVEMBER 29, 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 and
thirty-nine week periods ended November 27, 2004 and November 29, 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 Statement of Financial Accounting Standards ("SFAS") 123, "Accounting
for Stock-Based Compensation," is shown below (amounts in thousands):
For the thirteen weeks ended
November 27, 2004 November 29, 2003
----------------------- ------------------------
As reported Pro forma As reported Pro forma
----------------------- ------------------------
Net income, as reported $ 2,791 $ 2,791 $ 982 $ 982
Less: Stock-based employee
compensation (173) (349)
-------- --------
Pro forma net income ..... $ 2,618 $ 633
======== ========
Earnings per share:
Basic ................. $ 0.07 $ 0.06 $ 0.02 $ 0.02
Diluted ............... $ 0.07 $ 0.06 $ 0.02 $ 0.02
For the thirty-nine weeks ended
November 27, 2004 November 29, 2003
----------------------- ------------------------
As reported Pro forma As reported Pro forma
----------------------- ------------------------
Net income, as reported $10,548 $10,548 $ 9,775 $ 9,775
Less: Stock-based employee
compensation (485) (898)
-------- --------
Pro forma net income ..... $10,063 $ 8,877
======== ========
Earnings per share:
Basic ................. $ 0.26 $ 0.25 $ 0.24 $ 0.22
Diluted ............... $ 0.26 $ 0.24 $ 0.23 $ 0.21
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 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)
November February
27, 2004 28, 2004
-------- --------
(amounts in thousands)
Gross receivables ............. $ 45,133 $ 52,843
Reserve for returns ........... (22,131) (19,516)
Other reserves ................ (2,676) (3,218)
-------- --------
Net receivables ............ $ 20,326 $ 30,109
======== ========
Other reserves consist of allowances for discounts, doubtful accounts and
customer deductions for promotional marketing programs.
4. Inventories
(Unaudited)
November February
27, 2004 28, 2004
-------- --------
(amounts in thousands)
Raw materials .................. $ 7,831 $ 5,571
Work in process ................ 6,222 2,824
Finished products .............. 16,061 24,614
-------- --------
Total inventories ......... $ 30,114 $ 33,009
======== ========
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,
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 products 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 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 Thirty-nine weeks ended
November November November November
27, 2004 29, 2003 27, 2004 29, 2003
-------- -------- -------- --------
(amounts in thousands)
Net Sales
Confectionery $ 28,992 $ 31,819 $113,181 $119,357
Entertainment 41,658 46,651 114,339 108,424
-------- -------- -------- --------
Total $ 70,650 $ 78,470 $227,520 $227,781
======== ======== ======== ========
Contributed Margin
Confectionery $ 8,885 $ 9,253 $ 37,664 $ 38,493
Entertainment 12,923 10,964 35,349 28,383
-------- -------- -------- --------
Total $ 21,808 $ 20,217 $ 73,013 $ 66,876
======== ======== ======== ========
Reconciliation of Contributed
Margin to Net Income:
Total contributed margin $ 21,808 $ 20,217 $ 73,013 $ 66,876
General and administrative
expense and manufacturing
overhead (16,970) (17,206) (55,407) (50,024)
Depreciation and amortization (1,556) (1,954) (4,717) (4,798)
Other income, net (54) (402) 790 542
--------- --------- --------- ---------
Income from operations 3,228 655 13,679 12,596
Interest income, net 883 445 1,924 1,929
--------- --------- --------- ---------
Income before provision for
income taxes 4,111 1,100 15,603 14,525
Provision for income taxes 1,320 118 5,055 4,750
--------- --------- --------- ---------
Net Income $ 2,791 $ 982 $ 10,548 $ 9,775
========= ========= ========= =========
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 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. As of November 27, 2004, the Company had
purchased 8,390,700 common shares under these two programs.
7. Credit Agreement
On June 26, 2000, the Company entered into a credit agreement with Chase
Manhattan Bank and LaSalle Bank National Association for a term of four
years, which ended on June 26, 2004. On June 25, 2004, the credit agreement
was amended to extend the expiration date for 90 days in order to provide
the Company sufficient time to complete refinancing arrangements. 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 November
27, 2004 or February 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. The Company has elected to
conduct its annual impairment test at the end of each fiscal third quarter.
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 November
27, 2004 and February 28, 2004 were as follows:
(amounts in thousands)
November 27, 2004 ' February 28, 2004
(Unaudited) '
Gross ' Gross
Carrying Accumulated ' Carrying Accumulated
Value Amortization Net ' Value Amortization Net
-------- ------------ -------- ' -------- ------------ --------
Licenses and Contracts ........ $ 21,569 $(17,774) $ 3,795 ' $ 21,569 $(17,272) $ 4,297
Intellectual Property ......... 18,784 (14,026) 4,758 ' 18,784 (13,251) 5,533
Software and Other ............ 2,953 (2,788) 165 ' 2,953 (2,717) 236
Min. Pension Liab. ............ 408 -- 408 ' 408 -- 408
-------- --------- -------- ' -------- --------- --------
Total Intangibles ............. $ 43,714 $(34,588) $ 9,126 ' $ 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 5.7 years
Intellectual Property 6 years 4.6 years
Software and Other 5 years 1.8 years
The weighted average remaining useful life for the Company's intangible
assets in aggregate is 5.1 years. Going forward, the Company estimates
amortization of the intangible assets detailed above to be as follows:
Fiscal Year(s) Amount
-------------- ------
(in thousands)
2005 $ 1,797
2006 $ 1,797
2007 $ 1,750
2008 $ 1,703
2009 and thereafter $ 3,019
In addition to the amortization of intangibles listed above, reported
amortization expense, which was $1,863,000 and $1,802,000 for the
thirty-nine weeks ended November 27, 2004 and November 29, 2003,
respectively, included amortization of deferred financing fees and deferred
compensation costs.
10
10. Legal Proceedings
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 was
returned to Judge Stotler in the Central District of California for trial.
On October 16, 2003, Media Technologies amended its complaint by alleging
that Defendants' sale of relic cards additionally infringed U.S. Patent No.
6,142,532 (the "532 Patent") which was issued on November 7, 2000 and is
similar to the 501 Patent.
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 resumed. On September 15, 2004, defendant
Upper Deck Company, LLC ("Upper Deck") moved for a separate trial on the
issues of infringement, damages, willfulness and counterclaims, a motion
the other defendants subsequently joined. On October 26, 2004, the court
ruled that the patent validity issues would be tried first, before those of
infringement.
On October 4, 2004, Defendants petitioned the United States Patent &
Trademark Office (the "USPTO") to reexamine the patentability of both the
501 Patent and the 532 Patent. On October 25, 2004, Defendants also filed a
motion with the district court requesting a stay of the proceedings pending
the petition with the USPTO. On December 2, 2004, the court denied the
motion for the stay. On December 13, 2004, the USPTO granted the petition
for reexamination of the 501 Patent and on December 15, 2004, the USPTO
granted the petition for reexamination of the 532 Patent. On December 29,
2004, Defendants once again filed a motion with the district court
requesting a stay of the proceedings while the USPTO reexamines the
patentability of the 501 Patent and the 532 Patent.
The trial is still currently scheduled for February 2005. An adverse
outcome in the litigation could result in a substantial liability for the
Company. It is not possible 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.
11
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.
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 ============
This figure differs from the amount shown for Acquisition of business, net of
cash acquired in the Condensed Consolidated Statement of Cash flows on page 6,
which reflects preliminary transaction costs as of November 29, 2003. 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 Thirty-nine weeks ended
November 29, 2003 November 29, 2003
----------------- -----------------
(amounts in thousands, except share data)
Net sales $ 78,470 $241,169
Income from operations 655 10,793
Net income 982 8,664
Net income per share - basic $ 0.02 $ 0.21
- diluted $ 0.02 $ 0.21
12
12. Employee Benefit Plans
The components of net periodic benefit costs for the thirteen and
thirty-nine weeks ended November 27, 2004 and November 29, 2003 are as
follows:
Postretirement
Pension Healthcare
- --------------------------------------------------------------------------------
Thirteen weeks ended November November November November
- -------------------- 27, 2004 29, 2003 27, 2004 29, 2003
- --------------------------------------------------------------------------------
(amounts in thousands)
Service cost $ 345 $ 346 $ 82 $ 71
Interest cost 594 597 163 150
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 $ 601 $ 880 $ 322 $ 283
===== ===== ===== =====
- --------------------------------------------------------------------------------
Postretirement
Pension Healthcare
- --------------------------------------------------------------------------------
Thirty-nine weeks ended November November November November
- ----------------------- 27, 2004 29, 2003 27, 2004 29, 2003
- --------------------------------------------------------------------------------
(amounts in thousands)
Service cost $ 1,035 $ 1,038 $ 246 $ 213
Interest cost 1,781 1,792 487 450
Expected return on plan assets (1,604) (1,089) - -
Amortization of:
Initial transition obligation ( 45) ( 37) 150 150
Prior service cost 99 99 - -
Actuarial (gains) losses 537 837 81 36
------- ------- ------- ------
Net periodic benefit cost $ 1,803 $ 2,640 $ 964 $ 849
======= ======= ======= ======
- --------------------------------------------------------------------------------
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 has evaluated 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 reflects the
effects of the Medicare Prescription Drug Act. Specific guidance on the
accounting for the federal subsidy was issued during the Company's third
quarter of fiscal 2005, and there was no change to previously reported
information. The Medicare Prescription Drug Act will serve to reduce the
Company's Fiscal 2005 postretirement medical expenses by $0.2 million to
$1.1 million.
13
On November 24, 2004, the FASB issued Statement 151 to clarify the accounting
for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). This statement requires that those items are
recognized as current period charges regardless of whether they meet the
criterion of "so abnormal" as defined by ARB 43. This Statement did not have a
material effect on the Company's consolidated results of operation or financial
position.
On December 16, 2004, the FASB issued SFAS 123 (revised 2004), Share-Based
Payment, which requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements starting with interim
statements issued after June 15, 2005. This statement establishes fair value as
the measurement objective in accounting for share-based payment arrangements and
requires all entities to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees, except for
equity instruments held by employee share ownership plans. SFAS 123 also
establishes fair value as the measurement objective for transactions in which an
entity acquires goods or services from non-employees in share-based payment
transactions. With limited exceptions, the amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will be remeasured each
reporting period. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. SFAS 123 (revised 2004)
replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. The
Company is currently evaluating the impact of adopting this standard on its
future financial statements.
On December 21, 2004 the FASB issued FSP 109-b, "Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision With the American Job
Creation Act of 2004". The Act introduces a one-time dividend received deduction
on the repatriation of certain foreign earnings to a U.S. taxpayer provided
certain criteria are met. An enterprise that is evaluating the repatriation
provision shall apply the provisions of Statement 109 as it decides on a plan
for reinvestment or repatriation of its unremitted foreign earnings. The
enterprise shall measure the income tax effects of such repatriation without the
effects of the repatriation provision until it has decided on a plan for
repatriation that would be subject to the repatriation provision. The Company is
currently evaluating the impact of adopting this standard on its future
financial statements.
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.
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 November 27, 2004 and
the related condensed consolidated statements of operations and comprehensive
income for the thirteen and thirty-nine week periods ended November 27, 2004 and
November 29, 2003, and of cash flows for the thirty-nine week periods ended
November 27, 2004 and November 29, 2003. These interim financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with the 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 the
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 the 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
- -------------------------
New York, NY
January 6, 2005
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Third Quarter Fiscal Year 2005 (thirteen weeks ended November 27, 2004) versus
- ------------------------------------------------------------------------------
Third Quarter Fiscal Year 2004 (thirteen weeks ended November 29, 2003)
- -----------------------------------------------------------------------
The following table sets forth, for the periods indicated, net sales by key
business segment:
Thirteen weeks ended Thirty-nine weeks ended
November November November November
27, 2004 29, 2003 27, 2004 29, 2003
-------- -------- -------- --------
(in thousands of dollars)
Net Sales
---------
Confectionery $ 28,992 $ 31,819 $113,181 $119,357
Entertainment 41,658 46,651 114,339 108,424
-------- -------- -------- --------
Total $ 70,650 $ 78,470 $227,520 $227,781
======== ======== ======== ========
Net sales for the third quarter of fiscal 2005 were $70.7 million, a decrease of
$7.8 million, or 10.0%, from $78.5 million in the same period last year.
Stronger foreign currencies versus the dollar increased sales in the quarter
this year by $1.4 million.
Net sales of confectionery products, which include, among others, Ring Pop, Push
Pop, Baby Bottle Pop, Bazooka brand bubble gum and licensed candy products, were
$29.0 million in the third quarter of this year, a decrease of $2.8 million, or
8.9%, from $31.8 million in fiscal 2004. Stronger foreign currencies contributed
$0.6 million to this year's sales. U.S. confectionery sales continued to be
impacted by industry issues such as concern over childhood nutrition and retail
consolidation. In particular, sales of Baby Bottle Pop were below year ago
levels. International confectionery sales also declined due to lower sales of
Push Pop Flip N' Dip in Japan.
Net sales of entertainment products, which include trading cards, sticker album
collections and the WizKids line of strategy games, were $41.7 million in the
third quarter of fiscal 2005, a decrease of $5.0 million, or 10.7%, from $46.7
million in the same period last year. Stronger foreign currencies provided a
$0.8 million benefit this year. Lower entertainment sales were in part a
function of continued declines in the U.S. sports card market and the Company's
decision not to release hockey cards this year given an uncertain NHL season.
Sales of WizKids products were also below year ago due to one fewer release and
softer sales of core products in general. However, WizKids was modestly
profitable for the third consecutive quarter after acquisition-related
amortization expenses. Also, within the entertainment segment, net sales of
non-sports publishing products in the quarter were above year ago due to success
of products featuring World Wide Wrestling and Barbie in Europe and Star Wars
both domestically and overseas.
Gross profit as a percentage of net sales in the third quarter of fiscal 2005
was 33.5% as compared with 31.0% in the third quarter of fiscal 2004. Margin
improvement was primarily the result of a significant reduction in obsolete
inventory provisions from levels taken last year at WizKids. In addition,
autograph and relic costs were below prior year due to lower U.S. sports sales
and better utilization of these items.
SG&A expense was $20.4 million in the third quarter of this year, down from
$23.3 million in fiscal 2004. As a percentage of net sales, SG&A this year was
28.8% versus 29.6% a year ago. Favorable SG&A was the result of reduced
advertising and marketing costs behind U.S. confectionery products and etopps,
as well as cost reduction initiatives and layoffs instituted at WizKids at the
end of fiscal 2004. The Company intends to reinstate advertising support behind
its U.S. confectionery products to at least historical levels in the fourth
quarter.
Other expense in the third quarter was $54,000 as compared with $402,000 in the
quarter last year. This improvement was largely the result of favorable exchange
on foreign-denominated balances.
Net interest income was $883,000 in the third quarter of this year versus
$445,000 last year due to higher interest rates and a higher cash balance.
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 was
32.1% in the quarter this year versus 10.7% in the third quarter last year when
an adjustment was made in line with a reduction in the full year forecasted
rate.
Net income for the third quarter of fiscal 2005 was $2.8 million, or $0.07 per
diluted share, compared with $1.0 million, or $0.02 per diluted share last year.
Included in last year's third quarter results was a WizKids loss of $0.05 per
diluted share.
16
Nine Months Fiscal 2005 (thirty-nine weeks ended November 27, 2004) versus Nine
- -------------------------------------------------------------------------------
Months Fiscal 2004 (thirty-nine weeks ended November 29, 2003)
- --------------------------------------------------------------
Net sales in the first nine months of fiscal 2005 were $227.5 million, a
decrease of $0.3 million, or 0.1%, from $227.8 million in the same period last
year. Stronger foreign currencies versus the dollar served to increase this
year's sales by $5.4 million.
Net sales of confectionery products were $113.2 million in the first nine months
of this year, a decrease of $6.2 million, or 5.2%, from $119.4 million in fiscal
2004. Stronger foreign currencies contributed $2.2 million versus the prior
year. Domestic confectionery sales continued to be impacted by industry factors,
with Baby Bottle Pop experiencing the greatest declines versus prior year.
International sales were also below last year primarily as a function of the
fiscal 2004 successful roll out of Flip N' Dip Push Pop in Japan. Newer
products, particularly Juicy Drop Pop, as well as Juicy Drop Chews and Juicy
Bugs, added incrementally to this year's sales both in the U.S. and
internationally.
Net sales of entertainment products in the first nine months of fiscal 2005 were
$114.3 million, an increase of $5.9 million, or 5.5%, from $108.4 million last
year. Stronger foreign currencies added $3.2 million this year. Sales of
European sports products exceeded year ago levels due to the addition of
products featuring the European Championship, a soccer tournament held every
four years, as well as to higher sales of Premier League products. In addition,
reported WizKids sales were above prior year due to the mid-fiscal 2004
acquisition. Finally, sales of non-sports publishing products showed increases
driven by the success of products featuring WWE, Barbie, Pokemon and Garbage
Pail Kids. Sales of U. S. sports cards were below year ago levels due to the
decision not to produce hockey products in the face of labor unrest as well as
to continued industry declines.
Gross profit as a percentage of net sales in the first nine months of fiscal
2005 was 36.8% as compared with 35.7% for the same period last year. Lower
sports autograph and relic costs and a reduction in obsolescence expenses
associated with WizKids and Cool Junk inventory last year were the primary
reasons for the 1.1% point margin improvement.
SG&A expense was $70.9 million for the nine months of fiscal 2005 compared with
$69.2 million in fiscal 2004. As a percent of net sales, SG&A this year of 31.1%
was 0.7% points higher than last year. The increase in dollar costs was
primarily a function of a $1.9 million fine levied by the European Commission in
the first quarter of this year, a full nine months of WizKids ownership, and
increased consulting and legal expenses. Advertising and marketing costs were
below last year for the nine-month period due to reduced spending on the U.S.
confectionery business and etopps, partially offset by higher spending behind
new product launches overseas.
Other income was $790,000 through nine months this year versus $542,000 last
year. This increase was largely due to higher licensing income from
confectionery brands and WizKids. The year-to-date impact of foreign exchange on
foreign denominated balances and forward contracts was largely unchanged year
over year.
Net interest income for the first nine months of fiscal 2005 was flat with
fiscal 2004 at $1.9 million. This was a function of rising interest rates and
higher cash balances this year offset by interest received from the IRS on a tax
refund in the first quarter of last year.
The tax rate for the first nine months this year was 32.4%, reflecting the
current full-year tax rate outlook, versus 32.7% for the same period last year.
Net income in the first nine months of fiscal 2005 was $10.5 million, or $0.26
per diluted share, compared with $9.8 million, or $0.23 per diluted share last
year. Excluding the impact of the European Commission fine, net income in the
first nine months of this year was $12.4 million, or $0.30 per diluted share.
17
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 November 27, 2004, the Company had $116.7 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. 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 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 purchases against this authorization, and the Company's Board
of Directors authorized the repurchase of up to another 5 million shares of the
Company's common stock. During the first nine months of fiscal 2005, the Company
purchased 444,400 shares at an average price of $9.25 per share. The Company has
repurchased a total of 3.4 million shares under this authorization.
In the nine months ended November 27, 2004, the Company's net increase in cash
and cash equivalents was $22.9 million versus a decrease of $24.7 million in the
comparable period of fiscal 2004. The cash use last year was largely a function
of the acquisition of WizKids.
Cash provided by operating activities through nine months of this year was $31.7
million versus $7.6 million last year. This improvement was primarily due to a
$9.8 million reduction in receivables (versus a $4.1 million reduction last
year) resulting from the collection of seasonal confectionery and European
sports billings and an increase in the returns reserve related to sales of
European entertainment products. Additionally, lower confectionery stocks
resulted in a $2.9 million reduction in inventories in the first nine months of
this year, versus an increase in the comparable period last year.
Cash used in investing activities this year reflects $1.7 million in capital
spending. Last year's figure of $30.6 million includes the WizKids net
acquisition cost of $28.6 million plus $2.0 million in capital spending. Fiscal
2005 full year capital spending is projected to be approximately $3 million,
driven by investments in Ring Pop production equipment and computer software and
hardware. Capital spending will be funded out of cash flow from operating
activities.
Cash used in financing activities of $8.0 million this year reflects $4.9
million in cash dividends and $3.1 million of net treasury stock purchases,
which includes $1.0 million from the exercise of options. This spending compares
with an outlay of $4.7 million last year, comprised of $3.3 million in cash
dividends and $1.4 million of net treasury stock purchases, which includes $1.3
million from the exercise of options. 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 the 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.
18
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 $16.9 million in the first thirty-nine
weeks of fiscal 2005 and $13.1 million in 2004, which equates to 7.4% and 5.7%
of net sales, respectively. The increase in the provision this year was the
result of higher 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
$2.3 million.
Intangible Assets: Intangible assets include trademarks and the value of sports,
entertainment and proprietary product rights. Amortization is by the
straight-line method over estimated lives which range between three and fifteen
years. Management evaluates the recoverability of finite-lived intangible assets
under the provisions of SFAS 144 "Accounting for the Impairment or Disposal of
Long-lived Assets" based on the projected undiscounted cash flows attributable
to the individual assets, among other methods.
Accrual for Obsolete Inventory: The Company's accrual for obsolete inventory
reflects the cost of items in inventory not anticipated to be sold. This accrual
is deemed necessary as a result of discontinued items and packaging or a
reduction in forecasted sales and is adjusted periodically based on a review of
inventory levels and sales projections. The provision for obsolete inventory was
$2.9 million in the thirty-nine weeks of fiscal 2005 and $4.6 million in fiscal
2004, which equates to 1.3% and 2.0% 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 $2.3 million.
19
ITEM 3. DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk associated with activities in derivative
financial instruments (e.g., hedging or currency swap agreements), other
financial instruments and derivative commodity instruments is confined to the
impact of mark-to-market changes in foreign currency rates on the Company's
forward contracts and options. The Company has no debt outstanding and does not
engage in any commodity-related derivative transactions. As of November 27,
2004, the Company had contracts and options which were entered into for the
purpose of hedging forecasted receipts and disbursements in various foreign
currencies.
20
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.
21
PART II
ITEM 1. LEGAL PROCEEDINGS
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 was
returned to Judge Stotler in the Central District of California for trial.
On October 16, 2003, Media Technologies amended its complaint by alleging
that Defendants' sale of relic cards additionally infringed U.S. Patent No.
6,142,532 (the "532 Patent") which was issued on November 7, 2000 and is
similar to the 501 Patent.
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 resumed. On September 15, 2004, defendant
Upper Deck Company, LLC ("Upper Deck") moved for a separate trial on the
issues of infringement, damages, willfulness and counterclaims, a motion
the other defendants subsequently joined. On October 26, 2004, the court
ruled that the patent validity issues would be tried first, before those of
infringement.
On October 4, 2004, Defendants petitioned the United States Patent &
Trademark Office (the "USPTO") to reexamine the patentability of both the
501 Patent and the 532 Patent. On October 25, 2004, Defendants also filed a
motion with the district court requesting a stay of the proceedings pending
the petition with the USPTO. On December 2, 2004, the court denied the
motion for the stay. On December 13, 2004, the USPTO granted the petition
for reexamination of the 501 Patent and on December 15, 2004, the USPTO
granted the petition for reexamination of the 532 Patent. On December 29,
2004, Defendants once again filed a motion with the district court
requesting a stay of the proceedings while the USPTO reexamines the
patentability of the 501 Patent and the 532 Patent.
The trial is still currently scheduled for February 2005. An adverse
outcome in the litigation could result in a substantial liability for the
Company. It is not possible 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.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as required by Item 601 of Regulation S-K filed herewith:
10.25 Amendment to Employment Agreement effective as of the 1st day of June,
2001, by and between The Topps Company, Inc. and Arthur T. Shorin.
31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a)
and 15d-14(a) under the Securities Exchange Act of 1934.
31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a)
and 15d-14(a) under the Securities Exchange Act of 1934.
32.1 Certification of Arthur T. Shorin, Chairman and Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Catherine K. Jessup, Vice-President - Chief Financial
Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
1. Form 8-K, dated January 6, 2005, with press release, dated January 6,
2005, reporting the Company's fiscal 2005 third quarter earnings.
23
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.
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REGISTRANT
s/ Catherine K. Jessup
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Catherine K. Jessup
Duly Authorized Officer
January 6, 2005
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