F'04 STOCKHOLDERS LETTER
Dear Stockholders,
For the fiscal year 2004, ended February 28, 2004, consolidated net sales were
$297.3 million versus $290.1 million in fiscal 2003, with stronger European
currencies versus the prior year providing a $9.7 million benefit. Fiscal '04
sales reflect domestic confectionery shortfalls and a reduction in our U.S.
sports card offerings partially offset by strong international performance and
the acquisition of WizKids in July. Net income in fiscal 2004 was $12.7 million,
versus $16.9 million in the prior year, short of our expectations.
Fiscal '04 however, marked another year of measurable success in two other
significant respects. We achieved a number of strategic goals, as discussed
further on in this letter, in a company-wide program devoted towards future
growth. We also maintained a strong financial position as evidenced by the
initiation of a regular quarterly dividend of $0.04 a share and the continuation
of our stock repurchase program. As of February 28, 2004, the Company had $93.8
million in cash, no debt and stockholders' equity of $211.3 million, an increase
of $14.5 million over the prior year.
Fiscal 2004 was a busy year for the Topps organization in terms of activities
and accomplishments. For your review, here are some highlights regarding our two
business segments---Confectionery and Entertainment. Please refer to
Management's Discussion and Analysis of Financial Condition and Results of
Operations beginning on page 6 for financial and other details.
CONFECTIONERY
Last year we indicated that it was important to broaden our product offerings
outside of the lollipop category. In fiscal '04, we did just that, launching a
total of three non-lollipop products late in the year---Big Mouth Candy Spray,
Juicy Drop Chews and Juicy Bugs. Initial trade and consumer reaction to all
three products has been encouraging. We have high hopes for each of them to
build in acceptance over time. We are also excited about additional new
non-lollipop entries planned for fiscal '05 introduction.
New products, in general, are becoming a prerequisite for success in today's
confectionery business, and Topps has a solid record of creativity. However, we
know that creativity is not enough. This was clearly demonstrated by the impact
of delayed new product introductions last year. Accordingly, in fiscal '05, we
intend to streamline our development process to bring new products to market
more quickly.
We are also focusing on another challenge, specifically retail consolidation, a
trend that has the entire industry's attention, and certainly ours. Simply said,
there are fewer retailers in business today than there were a year ago, meaning
less neighborhood outlets carrying our products. Larger retailers have taken
significant share, making it increasingly difficult for independents to survive.
Addressing this reality, in the latter part of last year, we began realigning
our confectionery sales, customer marketing and distribution networks to focus
on, and better serve, customers representing the strongest opportunities for
profitable growth.
Overall, we believe that responding to market changes, enhancing existing
lollipop product lines with new flavors and packaging, and accentuating our new
product programs will help offset the impact of present market factors.
Overseas, things were particularly good in fiscal '04. Expanded European
confectionery distribution was one of our strategic targets, with a view toward
further brand building and increased sustainability. We achieved those goals and
more, gaining important placements at major accounts in the U.K., France,
Germany and Ireland. We also generated increased sales volume through the roll
out of Juicy Drop Pops and Yu-Gi-Oh! and Pokemon candy containers.
ENTERTAINMENT
This segment is comprised of sports and non-sports trading cards, sticker album
collections, Internet activities and the WizKids line of strategy games. During
fiscal '04, we leveraged our sports equity by extending the "mini album with
bubble gum" concept overseas to include not only Calcio Football in Italy, but
also the English Premier (Football) League. We also began applying the mini
album concept to non-sports licenses such as Barbie, which was initially
launched in Italy. Coming off a strong international sports year, we plan to
build on that success in fiscal '05 with a collection featuring teams and
players participating in the European Football Championship, a bi-annual
tournament that is extremely popular throughout Europe.
In the U.S., we restructured our sports business early in the year, paring down
the product line to focus on the more profitable releases and reducing overhead
costs by over $1.5 million on an annualized basis. All of this was accomplished
without sacrificing the quality or appeal of our offerings. In fact, hobby
dealers voted Topps card products "Best" in 7 of 9 categories in which we were
eligible. And, despite persistent negative industry trends affecting overall
volume, we are well poised to lead the competition again in '05.
On the non-sport publishing front, we won "Best Entertainment Card Set" with a
recent Lord of the Rings release and experienced good results in '04 with our
own Garbage Pail Kids property. We plan to issue at least one additional Garbage
Pail Kids series in the U.S. during fiscal '05 and test the product in various
European markets this spring. Those of you who remember our Wacky Packages
product---another self-created property, this one featuring parodies of famous
brands---may be pleased to learn that we are introducing an all-new series of
"Wacky Packs" this summer. Early trade buzz is strong, usually a good sign.
As regards Internet activities, we are beginning to leverage this growing medium
in order to enhance the appeal of traditional products like Push Pops
(www.pushpops.nick.com) and Garbage Pail Kids (www.garbagepailkidsworld.com).
Moreover, we recently launched 2004 etopps Baseball with the addition of two
exciting interactive features worth checking out online (www.etopps.com). The
first is "etopps games," where consumers use etopps cards to play fantasy games.
Topps will host tournaments and provide a platform where people can challenge
friends to "play for keeps." The second new feature makes it possible for people
to easily trade cards with one another from their respective portfolios on the
"etopps trade post." In the first four weeks after going live, over 21,000
trades were completed.
Turning to WizKids, we're making good progress in our integration efforts. We
have strengthened the management group, reduced overhead, taken steps to drive
other costs out of the system and installed a rigorous discipline regarding
inventory control that already appears to be paying dividends. Additionally, as
originally envisioned, Topps' sales force is now assisting with mass-market
distribution of WizKids products, and Topps Europe has begun applying its
know-how to the WizKids business overseas.
On the product side, WizKids has rationalized its line and is placing greater
focus on the remaining core products within its Mage Knight, HeroClix and
MechWarrior lines. We've also begun introduction of SportsClix, a product under
license from Major League Baseball, to the hobby and gaming channels. Going
forward, one of Wizkids priorities is successful new game development with the
goal of expanding our target audience and leveraging our overall company
strengths. Based on what we see today, we expect that the addition of WizKids
will serve as a catalyst for growth at Topps.
CONCLUSION
Our plans for fiscal 2005 call for financial improvement over 2004, and we'll be
working hard to make that happen in an ever-challenging environment. Also
important is the achievement of further strategic progress domestically and
abroad.
For Confectionery, that means increased marketing focus on new products and a
stepped-up process for their development. It also entails better alignment of
our resources with today's market realities. On the Entertainment side, that
means reinvigorating our brands through innovation, effecting operational
improvements, harnessing Internet assets, expanding distribution and utilizing
WizKids to positively impact offerings among our various product lines.
In closing, we'd like to acknowledge the talented, hard-working people behind
the scenes -- our colleagues in Asia, Europe, North and South America -- who
share our commitment to progress. We thank them sincerely for their tireless
efforts.
On behalf of the organization, we also thank our consumers, fans, collectors,
licensors, stockholders and suppliers for their valued support.
/s/ Arthur T. Shorin
----------------------
Arthur T. Shorin
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
/s/ Edward P. Camp /s/ Mike Drewniak /s/ Ira Friedman
------------------- ------------------ ------------------
Edward P. Camp Mike Drewniak Ira Friedman
/s/ Catherine K. Jessup /s/ William G. O'Connor /s/ Ronald L. Boyum
------------------------ ------------------------ --------------------
Catherine K. Jessup William G. O'Connor Ronald L. Boyum
/s/ Michael P. Clancy /s/ Leon J. Gutmann /s/ John Perillo
---------------------- -------------------- -----------------
Michael P. Clancy Leon J. Gutmann John Perillo
/s/ Scott Silverstein /s/ Warren Friss
---------------------- -----------------
Scott Silverstein Warren Friss
OFFICERS OF THE TOPPS COMPANY, INC.
Table of Contents
Page
Stockholders Letter............................................. 1
Financial Highlights............................................ 4
Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 5
Consolidated Financial Statements............................... 13
Notes to Consolidated Financial Statements...................... 17
Report of Independent Public Accountants
& Market and Dividend Information............................ 37
Selected Consolidated Financial Data............................ 38
Directors, Officers, Subsidiaries
and Corporate Information.................................... 39
FINANCIAL HIGHLIGHTS
================================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- --------------------------------------------------------------------------------
(in thousands of dollars, except share data)
Net sales ........................ $ 297,338 $ 290,115 $ 300,180
Income from operations ........... 14,595 20,782 36,564
Net income ....................... 12,695 16,936 28,462
Cash provided by operations ...... 11,954 6,200 1,619
Working capital .................. 133,299 141,484 136,389
Stockholders' equity ............. 211,277 196,768 194,054
Per share items:
Net diluted earnings .......... $ 0.31 $ 0.40 $ 0.64
Cash dividend paid ............ $ 0.12 -- --
Average diluted shares outstanding 41,515,000 42,065,000 44,276,000
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This section provides an analysis of the Company's operating results, cash flow,
critical accounting policies, and other matters. It includes or incorporates
"forward-looking" statements as that term is defined by the U.S. federal
securities laws. In particular, statements using words such as "may", "should",
"estimate", "anticipate", "intend", "believe", "predict", "potential", or words
of similar import generally involve forward-looking statements. We based these
forward-looking statements on our current expectations and projections about
future events, and therefore, these statements are subject to numerous risks and
uncertainties. Accordingly, actual results may differ materially from those
expressed or implied by the forward-looking statements. We caution readers not
to place undue reliance on these forward-looking statements which speak only as
of the date of this report.
The Company has two reportable business segments, Confectionery and
Entertainment. The following table sets forth, for the periods indicated, net
sales by business segment:
================================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- --------------------------------------------------------------------------------
(in thousands of dollars)
Confectionery ........................ $147,254 $146,901 $152,127
Entertainment ........................ 150,084 143,214 148,053
-------- -------- --------
Total ........................... $297,338 $290,115 $300,180
================================================================================
|X|Fiscal 2004 Versus 2003*
- ---------------------------
CONSOLIDATED NET SALES
In fiscal 2004, the Company's consolidated net sales increased 2.5% to $297.3
million from $290.1 million in fiscal 2003. The July 2003 acquisition of WizKids
added $15.9 million to sales in fiscal 2004, and stronger European currencies
increased sales by $9.7 million. Excluding these two factors, fiscal 2004 net
sales were below 2003 levels, largely the result of declines in sales of U.S.
sports cards and U.S. confectionery products.
Worldwide net sales of the Confectionery segment, which includes Ring Pop, Push
Pop, Baby Bottle Pop, and Bazooka brand bubble gum, increased 0.2% to $147.3
million in 2004 from $146.9 million in 2003. Confectionery products accounted
for 50% of the Company's net sales in 2004 and 51% in 2003.
U.S. confectionery sales decreased year-over-year, in part the result of
softness in wholesale clubs, the effects of delayed new product introductions
and a reduction in promotional activity undertaken by certain retailers in
fiscal 2003. Going forward, the Company is working to address these issues. It
has realigned its sales, customer marketing and distribution networks to better
meet the needs of retail accounts with the greatest potential for profitability
and is targeting promotional spending in a similar fashion. Changes have been
made to packaging and product configurations to better reflect the needs of the
wholesale club customer. Additionally, refinements are being made to processes
associated with the development of new products.
- -------
*Unless otherwise indicated, all date references to 2004, 2003 and 2002 refer to
the fiscal years ended February 28, 2004, March 1, 2003, and March 2, 2002,
respectively.
Net sales of international confectionery products increased in 2004, offsetting
the U.S. declines. Increases were largely driven by the roll out of Juicy Drop
Pop, solid sales of licensed confectionery products and stronger European
currencies. International sales represented 31% of total confectionery sales in
fiscal 2004.
Net sales of the Entertainment segment, which includes cards, sticker album
collections, Internet activities and strategy games, increased 4.8% in fiscal
2004 to $150.1 million. Entertainment products represented 50% of the Company's
net sales in 2004 and 49% in fiscal 2003.
Within the segment, sales of international sports sticker albums increased, a
function of the expansion and further success of the mini album format, higher
sales of traditional Premier League sticker album collections and the impact of
stronger European currencies. The acquisition of WizKids, a developer and
marketer of strategy games, added $15.9 million to segment sales. In addition,
sales of non-sports publishing products exceeded those in fiscal 2003 due to the
strength of products featuring the Yu-Gi-Oh!, Garbage Pail Kids and Hamtaro
properties.
Also within the Entertainment segment, sales of traditional U.S. sports cards
declined in fiscal 2004, a function of continued industry softness and reduced
product offerings. The Company believes that the U.S. sports card industry has
been on a decline since the early 1990's, a function of a proliferation of
sports cards and memorabilia products, labor disruption in a number of sports
and childrens' general inclination towards more interactive products. As a
result of these trends, the Company reduced the number of sports products it
released in fiscal 2004 by almost 20%, and restructured the sports organization,
eliminating over $1.5 million in costs on an annualized basis.
Finally, sales of product sold via the Internet decreased in fiscal 2004,
primarily as a result of declines experienced at thePit.com. The Company plans
to continue its Internet efforts in fiscal 2005 and has refocused the etopps
website to feature trading capabilities and fantasy-style games played with
etopps cards.
RESULTS OF OPERATIONS
Fiscal 2004 consolidated gross profit as a percentage of net sales was 35.0%,
virtually flat with 2003's figure of 35.1%. Margins this year were negatively
impacted by higher obsolescence costs which reflected write-offs associated with
slow-moving WizKids product, excess domestic confectionery inventories and
components related to an Italian publishing product. Going forward, the Company
expects obsolescence costs to be lower than in fiscal 2004, largely due to
recent changes in inventory purchasing practices at WizKids. Lower royalty costs
as a function of the smaller U.S. sports business and reduced costs at our
Scranton, Pennsylvania manufacturing facility largely offset the higher
obsolescence costs.
Other income was $631,000 this year versus $184,000 last year. This increase was
primarily due to favorable mark-to-market adjustments on forward currency
contracts which were partially offset by translation losses on non-local
currency cash balances in Europe. The licensing-out of intellectual property
associated with WizKids and the confectionery business also contributed
favorably in fiscal 2004.
Selling, general & administrative expenses ("SG&A") increased as a percentage of
net sales to 30.3% in 2004 from 28.0% a year ago. SG&A dollar spending increased
to $90.0 million from $81.1 million, largely as a result of the addition of
WizKids. Additionally, advertising and marketing costs were higher in fiscal
2004 due to increased media activity and stronger foreign currencies.
Partially offsetting these increases in SG&A was a reduction in overhead
expenses achieved through the restructuring of the U.S. sports card organization
and headcount eliminations at the Internet operations. Fiscal 2004 SG&A also
benefited from reduced costs associated with employee incentive compensation and
the absence of a payment related to a legal settlement that occurred in fiscal
2003.
Net interest income decreased slightly to $2.4 million in fiscal 2004 from $2.5
million in fiscal 2003, reflecting less favorable interest rates and a lower
average cash balance following the WizKids acquisition.
The fiscal 2004 effective tax rate was 25.4% . The decrease versus the 2003 rate
of 27.3% was primarily a function of foreign tax benefits received in 2004.
Net income in fiscal 2004 was $12.7 million, or $0.31 per diluted share, versus
$16.9 million, or $0.40 per diluted share in 2003.
|X|Fiscal 2003 Versus 2002
- --------------------------
CONSOLIDATED NET SALES
In fiscal 2003, the Company's consolidated net sales decreased 3.4% to $290.1
million from $300.2 million in fiscal 2002. This decrease was primarily a
function of a reduction in the popularity of products featuring Pokemon, which
generated $6.0 million in sales in fiscal 2003 versus $24.1 million in fiscal
2002. Stronger European currencies served to increase fiscal 2003 sales by $3.9
million.
Net sales of the Confectionery segment decreased 3.5% in 2003 to $146.9 million
from $152.1 million in 2002. Excluding sales of Pokemon products, confectionery
sales decreased 0.7%. Sales results reflected solid growth in the U.S. of Ring
Pop and Push Pop, the successful roll out of Pro Flip Pop in Japan and the
introduction of Yu-Gi-Oh! sticker pops in the U.S. and Canada. These gains were
offset by lower sales of Baby Bottle Pop. Confectionery products accounted for
51% of the Company's consolidated net sales in both 2003 and 2002.
Net sales of the Entertainment segment decreased 3.3% in fiscal 2003 to $143.2
million. Excluding sales of Pokemon products which decreased to $4.5 million in
fiscal 2003 from $18.2 million, Entertainment sales increased 6.9%. Sales of
European sports sticker albums increased significantly, driven by the World Cup
which occurs once every four years, substantial increases in sales of U.K.
Premier League soccer products and the successful introduction of a new concept
- -- bubble gum with mini sticker albums -- in Italy. Internet activities, which
include etopps (cards sold online via an IPO format) and thePit.com (an online
sports card exchange), generated $11.9 million in sales and $0.7 million in
contributed margin losses (before overhead) in 2003 versus $5.8 million in sales
and $1.4 million in contributed margin losses in the prior year. Sales of
traditional U.S. sports cards were lower in fiscal 2003, reflecting continued
industry declines. In February 2003, the Company restructured its U.S. sports
operations, reducing headcount and the number of products to be released. In
fiscal 2003, the Company also marketed products featuring the Star Wars,
Spiderman, Yu-Gi-Oh! and Hamtaro properties, among others. Entertainment
products represented 49% of the Company's consolidated net sales in both 2003
and 2002.
RESULTS OF OPERATIONS
Consolidated gross profit as a percentage of net sales decreased to 35.1% in
2003 from 37.9% in 2002. Fiscal 2003 margins were negatively impacted by the
reduction in sales of high-margin Pokemon products, an increase in sales of
lower margin products and the absence of rebates received last year from a
foreign distributor.
Other income (expense) was $184,000 in fiscal 2003 versus an expense of $215,000
in fiscal 2002, in part the result of government cash incentives to maintain our
New York office location received in 2003, versus non-cash foreign exchange
losses in 2002 on dollar-denominated cash balances held in Europe.
Selling, general & administrative expenses increased as a percentage of net
sales to 28.0% in 2003 from 25.7% in the prior year. SG&A dollar spending
increased to $81.1 million from $77.1 million due to the absence of a $2.4
million favorable Internet-related legal settlement received in 2002, a $1.6
million unfavorable legal settlement recorded in 2003 and an increase in
marketing costs primarily related to etopps. Partially offsetting these
increases was the elimination of goodwill amortization in 2003 in accordance
with FAS 142 which totaled $1.6 million and lower costs associated with the
employee incentive compensation program.
Net interest income decreased to $2.5 million in fiscal 2003 from $4.9 million
in fiscal 2002 reflecting less favorable interest rates and a lower average cash
balance.
The fiscal 2003 effective tax rate was 27.3%. The decrease versus the 2002 rate
of 31.3% was a function of certain one-time R&D and foreign tax benefits.
Net income in fiscal 2003 was $16.9 million, or $0.40 per diluted share, versus
$28.5 million, or $0.64 per diluted share in 2002.
[X]Quarterly Comparisons
- -------------------------
Management believes that quarter-to-quarter comparisons of sales and operating
results are affected by a number of factors, including but not limited to new
product introductions, the scheduling of product releases, seasonal products and
the timing of various expenses such as advertising. Thus, quarterly results
vary. See Note 20 of Notes to Consolidated Financial Statements.
[X]Inflation
- ------------
In the opinion of management, inflation has not had a material effect on the
operations or financial results of the Company.
[X]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.
As of February 28, 2004, the Company had $93.8 million in cash and cash
equivalents.
During fiscal 2004, the Company's net decrease in cash and cash equivalents was
$20.4 million versus a decrease of $6.8 million in 2003. The fiscal 2004 use of
cash was primarily the result of the purchase of WizKids for $28.7 million.
Cash provided by operating activities in 2004 was $12.0 million versus $6.2
million in 2003. This was primarily due to a decrease in inventories this year
(excluding Wizkids), versus an increase last year, and the impact of stronger
foreign currencies on non-cash balance sheet items. These and other items more
than offset the $4.2 million decline in net income in 2004.
Cash used in investing activities this year of $31.5 million reflects the $28.7
million acquisition of WizKids and $2.8 million in capital expenditures,
principally on computer software and hardware and Ring Pop production-related
equipment, versus $3.8 million in capital expenditures last year.
Cash used in financing activities this year of $5.9 million reflects $1.0
million of treasury stock purchases net of options exercised, versus $12.9
million last year, plus $4.9 million in dividend payments.
Finally, the $5.0 million favorable effect of exchange rate changes on cash and
cash equivalents, which is due to the impact of stronger currencies on foreign
subsidiaries' cash balances when translated into U.S. dollars, was $1.3 million
better than last year.
In October 2001, the Board of Directors authorized the purchase of up to 5
million shares of Company stock. As of February 2004, the Company had purchased
2.9 million shares against this authorization. See Note 13 - Capital Stock. The
Company anticipates purchasing additional shares in the future to complete the
authorization.
[X]Commitments
- --------------
Future minimum payments under existing key contractual obligations are as
follows:
================================================================
Fiscal Non-Cancelable Purchase Royalty
Year Leases Obligations Contracts Total
----------------------------------------------------------------
(in thousands of dollars)
2005 $ 2,741 $8,836 $11,307 $22,884
2006 2,598 - 6,898 9,496
2007 2,174 - 4,351 6,525
2008 1,872 - - 1,872
2009 1,854 - - 1,854
Thereafter 1,442 - - 1,442
================================================================
The Company anticipates making a payment of approximately $4.6 million in fiscal
2005 for the funding of its qualified pension plans.
The Company has entered into a credit agreement with Chase Manhattan Bank and
LaSalle Bank National Association which expires on June 26, 2004. The agreement
provides for a $35.0 million unsecured facility to cover revolver and letter of
credit needs. The full $35.0 million credit line was available as of February
28, 2004. See Note 9 - Long-Term Debt.
[X]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 under different
assumptions or conditions.
Note 1 to the Company's consolidated financial statements "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, trends in product sell-through
by sales channel, and other factors. The provision for returns was $17.4 million
in 2004 and $22.4 million in 2003, which equates to 5.9% and 7.7% of net sales,
respectively. An increase or decrease in the provisions for returns by 1% of
sales would increase or decrease operating income by approximately $3.0 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 of up to twenty years. Management evaluates the recoverability
of finite-lived intangible assets under the provisions of SFAS No. 144
"Accounting for the Impairment of Long-lived Assets", based on the projected
undiscounted cash flows attributable to the individual assets, among other
methods.
Accruals for Obsolete Inventory: The Company's accrual for obsolete inventory
reflects the cost of items in inventory not anticipated to be sold. This accrual
may be deemed necessary as a result of discontinued items or packaging or a
reduction in forecasted sales. The provision for obsolete inventory was $7.5
million in fiscal 2004 and $3.3 million in fiscal 2003, which equates to 2.5%
and 1.1% of net sales, respectively. An increase or decrease in the provision
for obsolescence by 1% of sales would increase or decrease operating income by
approximately $3.0 million.
[X}Disclosures About Market Risk
- --------------------------------
There is no material risk to financial results due to market risk. The Company's
exposure to market risk is largely related to the impact of mark-to-market
changes in foreign currency rates on forward contracts and options. As of
February 28, 2004, the Company had $23.0 million in forward contracts which were
entered into for the purpose of reducing the impact of changes in foreign
currency rates associated with firm and forecasted receipts and disbursements.
The Company's primary exchange rate exposure is with the Euro against the
British pound, the Japanese yen and the U.S. dollar. At maturity, the proceeds
or outlays from the contracts offset a corresponding additional or reduced
outlay in the underlying currency. The recognition of mark-to-market gains and
losses on these contracts accelerates the gains and losses that would otherwise
be recognized when the contracts mature and, so, generally does not result in an
incremental impact on earnings or cash flows. The Company has no long-term debt
and does not engage in any commodity-related derivative transactions.
[X]New Accounting Pronouncements
- --------------------------------
In January 2004, the FASB issued FASB Staff Position (FSP) 106-1, "Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003", 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 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. The Company's accumulated
post-retirement benefit obligation and net post-retirement benefit cost for 2003
do not reflect the effects of the Medicare Prescription Drug Act. Once specific
guidance on the accounting for the federal subsidy is issued, it could result in
a change to previously reported information.
In January of 2003, FASB Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities and Interpretation of ARB No. 51" was issued and went
into immediate effect. On December 24, 2003, the FASB issued a replacement of
FIN 46 ("FIN 46R"), which clarified certain complexities of FIN 46. FIN 46R is
applicable for financial statements issued for reporting periods that end after
March 5, 2004. Because the Company does not possess any variable interest
entities, this Statement will not have an impact on its financial results or
statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
The Topps Company, Inc. and Subsidiaries
(in thousands of dollars, except share data)
====================================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- ------------------------------------------------------------------------------------
Net sales $ 297,338 $ 290,115 $ 300,180
Cost of sales 193,417 188,375 186,339
--------- --------- ----------
Gross profit on sales 103,921 101,740 113,841
Other income (expense) 631 184 (215)
Selling, general and administrative expenses 89,957 81,142 77,062
--------- --------- ----------
Income from operations 14,595 20,782 36,564
Interest income, net 2,426 2,516 4,894
--------- --------- ----------
Income before provision for income taxes 17,021 23,298 41,458
Provision for income taxes 4,326 6,362 12,996
--------- --------- ----------
Net income $ 12,695 $ 16,936 $ 28,462
====================================================================================
Net income per share - basic $ 0.31 $ 0.41 $ 0.66
- diluted $ 0.31 $ 0.40 $ 0.64
- ------------------------------------------------------------------------------------
Cash dividends per share $ 0.12 $ - $ -
Weighted average shares outstanding - basic 40,604,000 41,353,000 43,073,000
- diluted 41,515,000 42,065,000 44,276,000
====================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
The Topps Company, Inc. and Subsidiaries
(in thousands of dollars)
================================================================================
February March
28, 2004 1, 2003
- --------------------------------------------------------------------------------
ASSETS
- --------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents ....................... $ 93,837 $114,259
Accounts receivable, net ........................ 30,109 24,677
Inventories ..................................... 33,009 30,337
Income tax receivable ........................... 2,697 2,029
Deferred tax assets ............................. 1,505 3,267
Prepaid expenses and other current assets ....... 11,691 10,302
-------- --------
Total current assets ........................ 172,848 184,871
Property, plant and equipment, net ................... 13,786 14,606
Goodwill ............................................. 67,586 48,839
Intangible assets, net ............................... 10,474 6,286
Other assets ......................................... 10,769 8,399
-------- --------
TOTAL ASSETS ......................................... $275,463 $263,001
======== ========
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable ................................ $ 10,946 $ 9,074
Accrued expenses and other liabilities .......... 26,249 30,371
Income taxes payable ............................ 2,354 3,942
-------- --------
Total current liabilities ................... 39,549 43,387
Deferred income taxes ................................ 1,956 --
Other liabilities .................................... 22,681 22,846
-------- --------
Total liabilities ....................... 64,186 66,233
-------- --------
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 in 2004 and 2003 ........... 492 492
Additional paid-in capital ...................... 27,829 27,344
Treasury stock, 8,632,000 shares in 2004
and 8,564,000 shares in 2003 ................ (82,287) (80,791)
Retained earnings ............................... 270,704 262,877
Accumulated other comprehensive loss, net of tax (5,461) (13,154)
--------- ---------
Total stockholders' equity ............. 211,277 196,768
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $275,463 $263,001
======== =========
================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Topss Company, Inc. and Subsidiaries
(in thousands of dollars)
========================================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- ----------------------------------------------------------------------------------------
Operating Activities
Net income ................................... $ 12,695 $ 16,936 $ 28,462
Non-cash items included in net income:
Depreciation and amortization ............. 6,593 5,038 5,525
Deferred taxes on income .................. 1,905 1,076 (3,242)
Net effect of changes in:
Receivables ............................... (2,538) (4,638) (9,176)
Inventories ............................... 562 (7,241) 789
Income taxes receivable/payable ........... (2,256) 1,201 8,339
Prepaid expenses and other current assets . (1,048) 1,505 (7,446)
Payables and other current liabilities .... (7,696) (3,796) (26,439)
All other ................................. 3,737 (3,881) 4,807
--------- --------- ---------
Cash provided by operating activities . 11,954 6,200 1,619
Investing Activities
Purchase of subsidiary ....................... (28,650) -- (5,680)
Additions to property, plant and equipment ... (2,842) (3,807) (5,108)
--------- --------- ---------
Cash used in investing activities ..... (31,492) (3,807) (10,788)
Financing Activities
Exercise of employee stock options ........... 1,770 1,449 5,074
Dividends paid to shareholders ............... (4,868) -- --
Purchase of treasury stock ................... (2,781) (14,305) (29,364)
--------- --------- ---------
Cash used in financing activities ...... (5,879) (12,856) (24,290)
Effect of exchange rate changes on cash
and cash equivalents ......................... 4,995 3,665 (4,225)
--------- --------- ---------
Net decrease in cash and cash equivalents ....... $ (20,422) $ (6,798) $ (37,684)
- ----------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year .. $ 114,259 $ 121,057 $ 158,741
Cash and cash equivalents at end of year ........ $ 93,837 $ 114,259 $ 121,057
- ----------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid .............................. $ 322 $ 91 $ 83
Income taxes paid .......................... $ 6,398 $ 12,578 $ 24,024
========================================================================================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
The Topps Company, Inc. and Subsidiaries
(in thousands of dollars)
============================================================================================================================
Additional Other
Common Paid-in Treasury Retained Comprehensive
Total Stock Capital Stock Earnings Income (Loss)
- ----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity as of 3/4/2001 ........... $ 196,542 $ 484 $ 21,758 $ (38,051) $ 217,479 $ (5,128)
Net income .................................... 28,462 -- -- -- 28,462 --
Translation adjustment, net of tax ............ (3,304) -- -- -- -- (3,304)
Minimum pension liability, net of tax ......... (3,356) -- -- -- -- (3,356)
Total comprehensive income ................ 21,802 -- -- -- 28,462 (6,660)
Purchase of treasury stock .................... (29,364) -- -- (29,364) -- --
Exercise of employee stock options ............ 5,074 8 5,066 -- -- --
Stockholders' equity as of 3/2/2002 ........... $ 194,054 $ 492 $ 26,824 $ (67,415) $ 245,941 $ (11,788)
- ----------------------------------------------------------------------------------------------------------------------------
Net income .................................... 16,936 -- -- -- 16,936 --
Translation adjustment, net of tax ............ 3,399 -- -- -- -- 3,399
Minimum pension liability, net of tax ......... (4,765) -- -- -- -- (4,765)
Total comprehensive income ................ 15,570 -- -- -- 16,936 (1,366)
Purchase of treasury stock .................... (14,305) -- -- (14,305) -- --
Exercise of employee stock options ............ 1,449 -- 520 929 -- --
Stockholders' equity as of 3/1/2003 ........... $ 196,768 $ 492 $ 27,344 $ (80,791) $ 262,877 $ (13,154)
- ----------------------------------------------------------------------------------------------------------------------------
Net income .................................... 12,695 -- -- -- 12,695 --
Cash dividends ................................ (4,868) -- -- -- (4,868) --
Translation adjustment, net of tax ............ 6,823 -- -- -- -- 6,823
Minimum pension liability, net of tax ......... 870 -- -- -- -- 870
Total comprehensive income ................ 15,520 -- -- -- 7,827 7,693
Purchase of treasury stock .................... (2,781) -- -- (2,781) -- --
Exercise of employee stock options ............ 1,770 -- 485 1,285 -- --
Stockholders' equity as of 2/28/2004 .......... $ 211,277 $ 492 $ 27,829 $ (82,287) $ 270,704 $ (5,461)
============================================================================================================================
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of The Topps Company,
Inc. and its subsidiaries (the "Company"). All intercompany items and
transactions have been eliminated in consolidation.
The Company and its subsidiaries operate and report financial results on a
fiscal year of 52 or 53 weeks which ends on the Saturday closest to the end of
February. Fiscal 2002, fiscal 2003 and fiscal 2004 were all comprised of 52
weeks.
Foreign Currency Translation:
The financial statements of subsidiaries outside the United States, except those
subsidiaries located in highly inflationary economies or where costs are
primarily U.S. dollar-based, are generally measured using the local currency as
the functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange as of the balance sheet date, with the
resultant translation adjustments included in accumulated other comprehensive
income. Income and expense items are translated at the average exchange rate for
the month. Gains and losses from foreign currency transactions of these
subsidiaries are included in net income. For subsidiaries operating in highly
inflationary economies or where inventory costs are U.S. dollar-based, the
financial statements are measured using the U.S. dollar as the functional
currency. Gains and losses from balance sheet translation adjustments are also
included in net income.
Derivative Financial Instruments:
From time to time, the Company enters into contracts that are intended and
effective as hedges of foreign currency risks associated with the anticipated
purchase of confectionery inventories from foreign suppliers. It also enters
into contracts in order to hedge risks associated with the collection of
receivables from certain foreign countries. The Company does not hold or issue
derivative financial instruments for trading purposes.
Gains or losses arising from derivative financial instruments are recorded in
earnings. On March 4, 2001, the Company adopted the provisions of SFAS 133
"Accounting for Derivative Instruments and Hedging Activities," as amended. SFAS
133 provides a comprehensive standard for the recognition and measurement of
derivatives and hedging activities.
Cash Equivalents:
The Company considers investments in highly liquid debt instruments with a
maturity of three months or less to be cash equivalents.
Inventories:
Inventories are stated at lower of cost or market. Cost is determined on the
first-in, first-out basis.
Property, Plant and Equipment ("PP&E"):
PP&E is stated at cost. Depreciation is computed using the straight-line method
based on estimated useful lives of twenty-five years for buildings, three to
twelve years for machinery, equipment and software, and the remaining lease
period for leasehold improvements. Expenditures for new property, plant or
equipment that substantially extend the useful life of an asset are capitalized.
Ordinary repair and maintenance costs are expensed as incurred. In accordance
with SFAS 144, the Company periodically evaluates the carrying value of its PP&E
for circumstances which may indicate impairment.
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 of up to twenty years. Under the provisions of SFAS 144, the
Company reviews intangibles on at least an annual basis to determine if there
are indicators of impairment. See Note 6 - Intangible Assets.
Revenue Recognition:
The Company recognizes revenue when the following criteria are met: the 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.
Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates which affect the
reporting of assets and liabilities as of the dates of the financial statements
and revenues and expenses during the reporting period. These estimates primarily
relate to the provision for sales returns, allowance for doubtful accounts and
inventory obsolescence. In each case, prior to booking an accounting entry, the
Company does an in-depth review of available information including wholesale and
retail inventory levels and product sell-through in the case of returns,
receivables aging and account credit-worthiness for the allowance for doubtful
accounts and component and finished goods inventory levels and product
sell-through for obsolescence. Actual results could differ from these estimates.
Reclassifications:
Certain items in the prior years' financial statements have been reclassified to
conform with the current year's presentation. Beginning in the first quarter of
fiscal 2002, certain development expenses and autograph and relic costs related
to future period releases, which previously had been included in prepaid
expenses and other current assets, were reclassified to inventory. Autograph,
relic and freight costs related to merchandise sold in the period, which
previously were included in selling, general and administrative expenses, were
reclassified to cost of goods sold.
The Company has adopted EITF Issue 01-9 "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)" which
requires certain trade promotion expenses, such as slotting fees, to be reported
as a reduction of net sales rather than as marketing expense. This presentation
has been reflected on the Consolidated Statements of Operations for the fiscal
years ended February 28, 2004, March 1, 2003 and March 2, 2002.
Income Taxes:
The Company provides for deferred income taxes resulting from temporary
differences between the valuation of assets and liabilities in the financial
statements and the carrying amounts for tax purposes. Such differences are
measured using the tax rates and laws in effect for the years in which the
differences are expected to reverse.
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
APB 25, "Accounting for Stock Issued to Employees." The pro forma effect, had
the Company accounted for stock-based employee compensation based on the fair
value of stock options granted in accordance with SFAS 123, "Accounting for
Stock-Based Compensation," is shown below:
=====================================================
As reported Pro forma
(in thousands of dollars,
except share data)
- -----------------------------------------------------
2004
-------------------------
Net income $ 12,695 $ 11,448
Diluted earnings per share $ 0.31 $ 0.28
- -----------------------------------------------------
2003
-------------------------
Net income $ 16,936 $ 15,586
Diluted earnings per share $ 0.40 $ 0.37
- -----------------------------------------------------
2002
-------------------------
Net income $ 28,462 $ 26,721
Diluted earnings per share $ 0.64 $ 0.60
=====================================================
Options 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.
Following are the key assumptions: $0.16 per share dividend on fiscal 2004
options, but no dividend on fiscal 2003 and fiscal 2002 options; risk free
interest rate, estimated volatility and expected life as follows: fiscal 2004
options - 4.4%, 38% and 6.5 years, respectively; fiscal 2003 options - 4.5%, 35%
and 6.5 years, respectively; fiscal 2002 options - 5.7%, 59% and 6.7 years,
respectively.
Advertising and Marketing Expenses:
Advertising and marketing expenses (which encompass media spending, customer
promotions and research) included in selling, general and administrative
expenses amounted to $23,820,000 in fiscal 2004, $20,145,000 in fiscal 2003 and
$18,790,000 in fiscal 2002. Advertising and marketing expenses are recognized as
incurred, except when the costs relate to a future period, in which case they
are classified as prepaid.
New Accounting Pronouncements:
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45") effective for guarantees issued
after December 31, 2002. FIN 45 elaborates on the disclosures that a guarantor
must make in its financial statements regarding guarantees that it has issued.
Because the Company did not initiate any guarantees in fiscal 2004, the adoption
did not have an effect on its consolidated financial statements.
The Company adopted the provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS No. 148") effective March 1,
2003. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and provides transition methodology for a
voluntary change to the fair value-based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 requires disclosure in both
annual and interim financial statements regarding the method of accounting for
stock-based employee compensation and its impact on reported results. The
Company currently accounts for stock option-based employee compensation based on
the intrinsic value of stock options. SFAS No. 148 did not require the Company
to change its accounting.
In December 2003, the FASB issued SFAS No. 132 (revised 2003) "Employers'
Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132R").
This Statement amends the SFAS 132 disclosure requirements to require more
complete information about pension and postretirement benefits in both annual
and interim financial statements as well as to increase the transparency of
financial reporting related to those plans and benefits. Effective February 28,
2004, the Company adopted the disclosure requirements of SFAS No. 132R. The
required disclosures under the provisions of SFAS No. 132R are included in Note
11 - Employee Benefit Plans.
In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities", which is effective for contracts
and hedging activities entered into after June 30, 2003. This Statement
clarifies financial accounting and reporting for derivative instruments. This
Statement did not have a material effect on the Company's consolidated financial
statements.
In August 2003, the Company adopted SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
Statement requires that certain financial instruments with characteristics of
both liabilities and equity be classified as liabilities, whereas previously,
many of these instruments were classified as equity. This Statement did not have
any impact on the Company's consolidated results of operations or financial
position.
NOTE 2 - EARNINGS PER SHARE
Earnings per share ("EPS")is computed in accordance with SFAS No. 128 "Earnings
Per Share" and both basic and diluted EPS figures are provided in this report.
Basic EPS is computed using weighted average shares outstanding. Diluted EPS is
computed using weighted average shares outstanding plus additional shares issued
as if in-the-money options were exercised (utilizing the treasury stock method).
The following table represents the computation of weighted average diluted
shares outstanding:
================================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- --------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic ................................ 40,604,000 41,353,000 43,073,000
Dilutive stock options ............... 911,000 712,000 1,203,000
Diluted .............................. 41,515,000 42,065,000 44,276,000
================================================================================
In the above calculation, the impact of antidilutive shares, (i.e., where the
exercise price exceeds the current market price) were not included. These shares
totaled 1,070,103 in 2004, 1,532,000 in 2003 and 469,000 in 2002.
NOTE 3 - ACCOUNTS RECEIVABLE
===============================================================
February March
28, 2004 1, 2003
- ---------------------------------------------------------------
(in thousands of dollars)
Gross receivables $ 52,843 $ 43,250
Reserve for estimated returns (19,516) (16,443)
Other reserves (3,218) (2,130)
-------- --------
Net receivables $ 30,109 $ 24,677
===============================================================
Other reserves consist of allowances for discounts and doubtful accounts, and
customer deductions for marketing promotion programs.
NOTE 4 - INVENTORIES
===============================================================
February March
28, 2004 1, 2003
- ---------------------------------------------------------------
(in thousands of dollars)
Raw materials $ 5,571 $ 6,162
Work in process 2,824 2,229
Finished product 24,614 21,946
-------- --------
Total inventory $ 33,009 $ 30,337
===============================================================
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
===============================================================
February March
28, 2004 1, 2003
- ---------------------------------------------------------------
(in thousands of dollars)
Land $ 42 $ 42
Buildings and improvements 2,676 2,278
Machinery, equipment and software 29,631 26,621
-------- --------
Total PP&E $ 32,349 $ 28,941
Accumulated depreciation
and amortization (18,563) (14,335)
-------- --------
Net PP&E $ 13,786 $ 14,606
===============================================================
NOTE 6 - INTANGIBLE ASSETS
On March 3, 2002, the Company adopted SFAS 141 "Business Combinations" and SFAS
142 "Goodwill and Other Intangible Assets" which required the Company to
prospectively cease amortization of goodwill and instead conduct periodic tests
of goodwill for impairment.
The table below compares reported earnings and earnings per share for the year
ended March 2, 2002 with reported earnings and earnings per share assuming pro
forma application of the new accounting standard as of the beginning of the
year.
========================================================
March 2, 2002
- --------------------------------------------------------
(in thousands of dollars, except share data)
Net income $ 28,462
Add back: Goodwill amortization 1,019
--------
Adjusted net income $ 29,481
========
Adjusted basic net income per share $ 0.68
Adjusted diluted net income per share $ 0.67
========================================================
As part of the adoption process, the Company evaluated its goodwill and
intangible assets acquired prior to June 30, 2002, and determined that no
intangible assets should be reclassified to goodwill and that all its intangible
assets had finite lives. Furthermore, the Company reassessed the useful lives
and residual values of its intangible assets and determined that no changes
needed to be made. In order to conform with the definitions contained in SFAS
142, the Company reclassified $1.5 million in deferred financing fees from
intangible assets to other assets and $0.8 million in software development costs
from intangible assets to property, plant and equipment. Additionally, separate
from the implementation of SFAS 142, $1.9 million of deferred tax assets related
to thePit.com acquisition were reclassified to goodwill. As a result of the
acquisition of WizKids in July 2003, goodwill and other intangibles increased by
$18.7 million and $6.2 million, respectively. (See Note 17 - Acquisition of
WizKids, LLC.)
Intangible assets consisted of the following as of February 28, 2004 and March
1, 2003:
================================================================================
Gross Accumulated
February 28, 2004 Carrying Value Amortization Net
- --------------------------------------------------------------------------------
(in thousands of dollars)
Licenses & contracts ............. $ 21,569 $(17,272) $ 4,297
Intellectual property ............ 18,784 (13,251) 5,533
Software & other ................. 2,953 (2,717) 236
FAS 132 pension .................. 408 -- 408
-------- --------- --------
Total intangibles ................ $ 43,714 $(33,240) $ 10,474
================================================================================
Gross Accumulated
March 1, 2003 Carrying Value Amortization Net
- --------------------------------------------------------------------------------
(in thousands of dollars)
Licenses & contracts ............. $ 21,879 $(16,594) $ 5,285
Intellectual property ............ 12,584 (12,473) 111
Software & other ................. 2,953 (2,602) 351
FAS 132 pension .................. 539 -- 539
-------- --------- --------
Total intangibles ................ $ 37,955 $(31,669) $ 6,286
================================================================================
Over the next five years the Company expects the annual amortization of
intangible assets to be as follows:
______________________________________
Fiscal Year Amount
----------- ------
(in thousands)
2005 $ 1,869
2006 $ 1,844
2007 $ 1,797
2008 $ 1,750
2009 $ 1,750
_____________________________________
Goodwill of the reporting units is tested for impairment on an annual basis and
between annual tests in certain circumstances. The impairment test is conducted
at the reporting unit level by comparing the reporting unit's carrying amount,
including goodwill, to the fair value of the reporting unit. If the carrying
amount of the reporting unit exceeds its fair value, a second step is performed
to measure the amount of impairment, if any. Further, in the event that the
carrying amount of the Company as a whole is greater than its market
capitalization, there is a potential that some or all of its goodwill would be
considered impaired. The Company conducted an impairment test in connection with
its adoption of SFAS 142 and subsequently in 2003 and 2004, and no impairment
was found as a result of these tests. However, no assurances can be given that
future impairment tests of goodwill will not result in an impairment.
Historically, the Company performed its annual goodwill impairment test during
its fiscal first quarter. In fiscal 2004, the date of the test was moved to the
first day of the fourth quarter, in order to provide the Company with adequate
time to meet future public reporting requirements. The Company believes that the
accounting change described above is an alternative accounting principle that is
preferable under the circumstances and that the change was not intended to
delay, accelerate or avoid an impairment charge.
NOTE 7 - ACCRUED EXPENSES AND OTHER LIABILITIES
================================================================================
February March
28, 2004 1, 2003
- --------------------------------------------------------------------------------
(in thousands of dollars)
Royalties ........................................ $ 5,665 $ 6,407
Advertising and marketing expenses ............... 3,713 2,271
Employee compensation ............................ 2,946 5,563
Payments received in advance ..................... 1,768 3,700
Inventory in transit ............................. 1,472 1,656
Deferred rent expense ............................ 1,215 1,308
Legal settlement ................................. -- 1,612
Other ............................................ 9,470 7,854
------- -------
Total ......................................... $26,249 $30,371
================================================================================
NOTE 8 - DEPRECIATION AND AMORTIZATION
======================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- ----------------------------------------------------------------------
(in thousands of dollars)
Depreciation expense $ 4,137 $ 3,756 $ 2,601
Amortization of:
Intangible assets 2,333 1,160 1,237
Goodwill - - 1,568
Deferred financing fees 123 122 119
------- ------- -------
Total $ 6,593 $ 5,038 $ 5,525
======================================================================
NOTE 9 - LONG-TERM DEBT
On June 26, 2000, the Company entered into a credit agreement with Chase
Manhattan Bank and LaSalle Bank National Association. The agreement provides for
a $35.0 million unsecured facility to cover revolver and letter of credit needs
and expires on June 26, 2004. Interest rates are variable and a function of 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 repurchase its shares, sell or acquire assets or borrow
additional money and prohibits the payment of dividends. The credit agreement
may be terminated by the Company at any time over the four year term (provided
the Company repays all outstanding amounts thereunder) without penalty. On June
1, 2002, the credit agreement was amended to provide for an increase in the
number of shares of Topps common stock permitted to be repurchased, and the
credit agreement was subsequently amended to permit the payment of dividends
subject to existing limitations on share repurchases. The full $35.0 million
credit line was available as of February 28, 2004. The Company is in discussions
with the banks regarding the upcoming renewal of its credit agreement.
NOTE 10 - INCOME TAXES
The Company provides for deferred income taxes resulting from temporary
differences between the valuation of assets and liabilities in the financial
statements and the carrying amounts for tax purposes. Such differences are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
U.S. and foreign operations contributed to income before provision for income
taxes as follows:
===============================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- ---------------------------------------------------------------
(in thousands of dollars)
United States $ 7,581 $ 14,157 $ 25,275
Europe 10,941 7,861 15,744
Canada (996) 992 739
Latin America (505) 288 (300)
--------- -------- ---------
Total $ 17,021 $ 23,298 $ 41,458
===============================================================
Provision for income taxes consists of:
=========================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- -------------------------------------------------------------------------
(in thousands of dollars)
Current income taxes:
Federal $ (460) $ 3,899 $ 8,609
Foreign 2,771 3,301 3,889
State and local 110 146 614
------- ------- -------
Total current $ 2,421 $ 7,346 $13,112
------- ------- -------
Deferred income taxes (benefit):
Federal $ 1,341 $ (434) $ (719)
Foreign 373 (330) 262
State and local 191 (220) 341
------- -------- --------
Total deferred $ 1,905 $ (984) $ (116)
------- -------- --------
Total provision for income taxes $ 4,326 $ 6,362 $12,996
=========================================================================
The total provision for income taxes was less than the amount computed by
applying the statutory federal income tax rate to income before provision for
income taxes. This difference is largely due to foreign tax planning and the
impact of lower tax rates in foreign countries as shown below:
================================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- --------------------------------------------------------------------------------
(in thousands of dollars)
Computed expected tax provision ............ $ 5,956 $ 8,154 $ 14,510
Increase in taxes resulting from:
State and local taxes,
net of federal tax benefit ............. 196 617 900
Foreign and U.S. tax effects
attributable to foreign operations...... (2,482) (1,387) (2,274)
Amortization of goodwill ................ -- -- 549
R&D tax credits ......................... (310) (502) --
Other permanent differences ............. 966 (520) (689)
-------- -------- --------
Provision for income taxes ................. $ 4,326 $ 6,362 $ 12,996
================================================================================
U.S. income taxes have not been provided on undistributed earnings of foreign
subsidiaries, as the Company considers such earnings to be permanently
reinvested in the businesses. As of February 28, 2004, the cumulative amount of
unremitted earnings from foreign subsidiaries that is expected to be permanently
reinvested was approximately $33.9 million. These undistributed foreign earnings
could become subject to U.S. income tax if remitted, or deemed remitted, as a
dividend. Determination of the U.S. income tax liability on these unremitted
earnings is not practical, since such liability, if any, is dependent on
circumstances existing at the time of the remittance. During the year, the
Company remitted non-recurring dividends from two foreign subsidiaries in the
aggregate amount of $0.7 million. The taxes provided on these dividends were
fully offset by foreign tax credits.
During the year, the Company concluded an audit with the Internal Revenue
Service. The audit related to the fiscal years ended 2000 and 2001 and resulted
in a small refund.
Taxing authorities periodically challenge positions taken by the Company on its
tax returns. On the basis of present information, it is the opinion of the
Company's management that any assessments resulting from current tax audits will
not have a material adverse effect on the Company's consolidated results of
operations or its consolidated financial position.
The components of current deferred income tax assets and liabilities are as
follows:
================================================================================
February March
Year Ended 28, 2004 1, 2003
- --------------------------------------------------------------------------------
(in thousands of dollars)
Deferred income tax assets:
Provision for inventory obsolescence ............... $ 1,005 852
Provision for estimated losses on sales returns .... 500 1,290
Tax assets of thePit.com .......................... -- 581
------- --------
Total deferred income tax assets ................... $ 1,505 $ 2,723
- --------------------------------------------------------------------------------
Deferred income tax liabilities:
Amortization ....................................... $ 1,201 $ 1,224
Depreciation ....................................... 710 625
Post-retirement benefits ........................... (2,232) (1,889)
Other .............................................. 2,277 (504)
------- --------
Total deferred income tax liabilities .............. $ 1,956 $ (544)
================================================================================
In fiscal 2003, deferred income tax assets and deferred income tax liabilities
have been combined and are shown as a net $3,267,000 deferred tax asset on the
balance sheet.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company maintains qualified and non-qualified defined benefit pensions in
the U.S. and Ireland as well as a postretirement healthcare plan in the U.S. for
all eligible non-union personnel (the "Plans"). The Company also contributes to
a multi-employer defined pension plan for its union employees. The Company's
policy is to fund the domestic plans in accordance with the limits defined by
the Employee Retirement Income Security Act of 1971 and U.S. income tax
regulations. The Ireland plan is funded in accordance with local regulations.
The Company contributed a total of $5.0 million in funding to its pension plans
in fiscal 2004 and estimates fiscal 2005 contributions at approximately $4.6
million.
In addition, the Company sponsors a defined contribution plan, which qualifies
under Sections 401(a) and 401(k) of the Internal Revenue Code (the "401(k)
Plan"). While all non-union employees are eligible to participate in the 401(k)
Plan, participation is optional. The Company does not contribute to the 401(k)
Plan.
The Company's strategy is to fund its defined benefit plan obligations. The need
for future contributions will be based on changes in the value of plan assets,
movements in interest rates and assumptions regarding employee demographics and
compensation. The asset allocation for the Company's U.S. pension plans at the
end of 2004 and 2003, and the target allocation for 2005 by asset category is as
follows:
=========================================================
Percentage of Plan Assets
2005 2004 2003
- ---------------------------------------------------------
Asset Category
- --------------
Equity Securities 59% 58% 43%
Debt Securities 41% 38% 49%
Cash - 4% 8%
=========================================================
The expected rate of return on plan assets is estimated using a variety of
factors including long-term historical returns, the targeted allocation of plan
assets and expectations regarding future market returns for both equity and debt
securities. The measurement date for all Topps plans is February 28, 2004.
The following tables summarize benefit costs, benefit obligations, plan assets
and the funded status of the Company's U.S. and Irish pension plans and U.S.
postretirement healthcare benefit plan:
================================================================================================
Postretirement
Pension Healthcare
- ------------------------------------------------------------------------------------------------
February March February March
28, 2004 1, 2003 28, 2004 1, 2003
- ------------------------------------------------------------------------------------------------
(in thousands of dollars)
Change In Benefits Obligation
- -----------------------------
Benefits obligation at beginning of year ....... $ 37,858 $ 31,662 $ 9,518 $ 6,981
Service cost ................................ 1,383 1,184 283 225
Interest cost ............................... 2,390 2,316 602 514
Benefits paid ............................... (2,524) (1,120) (576) (546)
Actuarial (gains) losses .................... (98) 3,376 928 2,390
Participants' contributions ................. 25 23 -- --
Curtailments and special termination benefits -- (201) -- --
Foreign currency impact...................... 675 618 -- (46)
-------- -------- -------- --------
Benefit obligation at end of year .............. $ 39,709 $ 37,858 $ 10,755 $ 9,518
================================================================================================
Change in Plan Assets
- ---------------------
Fair value of plan assets at beginning of year . $ 18,191 $ 20,329 $ -- $ --
Actual return on plan assets ................ 4,396 (2,445) -- --
Employer contributions ...................... 4,999 689 576 546
Benefits paid ............................... (2,524) (1,120) (576) (546)
Participants' contributions ................. 25 23 -- --
Foreign currency impact ..................... 464 715 -- --
-------- -------- -------- --------
Fair value of plan assets at end of year ....... $ 25,551 $ 18,191 $ -- $ --
================================================================================================
================================================================================================
Postretirement
Pension Healthcare
- ------------------------------------------------------------------------------------------------
February March February March
28, 2004 1, 2003 28, 2004 1, 2003
- ------------------------------------------------------------------------------------------------
(in thousands of dollars)
Funded status
- -------------
Funded status at year end ...................... $(14,158) $(19,667) $(10,754) $ (9,518)
Unrecognized actuarial (gains) losses .......... 12,151 15,995 2,229 1,347
Unamortized prior service cost ................. 408 539 -- --
Unrecognized initial transition
obligation (asset) ............................ (761) (707) 2,099 2,298
-------- -------- -------- --------
Prepaid (accrued) benefit cost ................. $ (2,360) $ (3,840) $ (6,426) $ (5,873)
================================================================================================
Amounts recognized in the consolidated balance sheets are as follows:
================================================================================================
Postretirement
Pension Healthcare
- ------------------------------------------------------------------------------------------------
February March February March
28, 2004 1, 2003 28, 2004 1, 2003
- ------------------------------------------------------------------------------------------------
(in thousands of dollars)
Prepaid benefit cost ........................... $ 3,827 $ 1,890 $ -- $ --
Accrued benefit liability ...................... (16,254) (16,879) (6,426) (5,873)
Intangible asset ............................... 408 539 -- --
Accumulated other comprehensive expense ........ 9,659 10,610 -- --
Net amount recognized in the consolidated
balance sheets .............................. $ (2,360) $ (3,840) $ (6,426) $ (5,873)
================================================================================================
Prior service cost changes are amortized on a straight-line basis over the
average remaining service period for employees active on the date of an
amendment. Gains and losses are amortized on a straight-line basis over the
average remaining service period of employees active on the valuation date.
At the end of fiscal 2004 and 2003, the qualified and non-qualified pension
plans had projected and accumulated benefit obligations in excess of plan
assets, as follows:
======================================================================================================================
For Pension Plans Where: Projected Benefit Obligation Accumulated Benefit Obligation
Exceeds the Fair Value of Plan Assets Exceeds the Fair Value of Plan Assets
- ----------------------------------------------------------------------------------------------------------------------
February 28, 2004 March 1, 2003 February 28, 2004 March 1, 2003
- ----------------------------------------------------------------------------------------------------------------------
(in thousands of dollars) (in thousands of dollars)
Projected benefit obligation $ 39,709 $ 37,858 $ 35,055 $ 33,990
Accumulated benefit obligation 37,657 33,367 33,872 30,495
- ----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets $ 25,551 $ 18,191 $ 21,299 $ 15,280
======================================================================================================================
The accumulated benefit obligation is less than the fair value of plan assets
for the Irish pension plan.
The postretirement medical plan has no assets, and the premiums are paid on an
on-going basis. The accumulated postretirement benefit obligation at the end of
fiscal 2004 and 2003 was $10,755,000 and $9,518,000, respectively.
The weighted-average assumptions used to calculate net period benefit costs are
as follows:
=====================================================================================================
U.S. Pension Plan Postretirement Healthcare Plan
- -----------------------------------------------------------------------------------------------------
2004 2003 2002 2004 2003 2002
- -----------------------------------------------------------------------------------------------------
Discount rate 6.3% 7.0% 7.0% 6.3% 7.0% 7.0%
Expected return on plan assets 8.0% 8.5% 8.5% N/A N/A N/A
Rate of compensation increase 4.5% 5.0% 5.0% N/A N/A N/A
Healthcare cost trend on N/A N/A N/A 10.0%, 7.0%, 7.5%,
covered charges decreasing to decreasing to decreasing to
5.0% in 2008 5.5% in 2005 5.5% in 2005
=====================================================================================================
The discount rate and rate of compensation increase for the Ireland Pension Plan
are 5.5% and 3.8%, respectively for 2004, 6.0% and 4.0%, respectively for 2003
and 3.8% and 4.0%, respectively for 2002.
The components of net periodic benefit cost are as follows:
====================================================================================================
Pension Postretirement Healthcare
- ----------------------------------------------------------------------------------------------------
February March March February March March
28, 2004 1, 2003 2, 2002 28, 2004 1, 2003 2, 2002
- ----------------------------------------------------------------------------------------------------
(in thousands of dollars)
Service cost ................... $ 1,384 $ 1,184 $ 1,003 $ 283 $ 225 $ 217
Interest cost .................. 2,390 2,316 1,984 602 514 479
Expected return on plan assets . (1,451) (1,643) (1,457) -- -- --
Amortization of:
Initial transition obligation (51) (51) 180 199 221 221
Prior service cost .......... 131 133 66 -- -- --
Actuarial (gains) losses .... 1,117 688 491 47 -- (22)
Curtailments and special
termination benefits ........ -- 187 -- -- 337 --
------- ------- ------- ------- ------- -------
Net periodic benefit cost ...... $ 3,520 $ 2,814 $ 2,267 $ 1,131 $ 1,297 $ 895
====================================================================================================
Expected benefit payments are as follows:
============================================================
Pension Postretirement Total
- ------------------------------------------------------------
2005 $ 1,536,000 $ 619,000 $ 2,155,000
2006 $ 2,441,000 $ 650,000 $ 3,091,000
2007 $ 2,402,000 $ 671,000 $ 3,073,000
2008 $ 2,430,000 $ 685,000 $ 3,115,000
2009 $ 3,646,000 $ 721,000 $ 4,367,000
2010-2014 $17,459,000 $ 4,019,000 $21,478,000
============================================================
Increases in healthcare costs could significantly affect reported postretirement
benefits cost and benefit obligations. A one percentage point change in assumed
healthcare benefit cost trends would have the following effect:
=========================================================================
Increase Decrease
- -------------------------------------------------------------------------
(in thousands of dollars)
On total service and interest
cost component ......................... $ 134 $ (110)
On postretirement benefit
obligation ............................. $ 1,174 $ (1,002)
=========================================================================
NOTE 12 - STOCK OPTION PLANS
The Company has Stock Option Plans that provide for the granting of
non-qualified stock options, incentive stock options and stock appreciation
rights (SARs) to employees, non-employee directors and consultants within the
meaning of Section 422A of the Internal Revenue Code. Options granted generally
vest over two or three years and expire ten years after the grant date.
The following table summarizes information about the Stock Option Plans.
============================================================================================================
February 28, 2004 March 1, 2003 March 2, 2002
- -------------------------------------------------------------------------------------------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 3,756,977 $ 6.73 3,956,127 $ 6.88 4,309,369 $ 6.34
Granted 890,000 $ 8.52 166,000 $ 10.12 599,306 $ 10.55
Exercised (234,680) $ 4.85 (220,750) $ 6.21 (768,335) $ 4.93
Forfeited (611,890) $ 9.01 (144,400) $ 15.68 (184,213) $ 14.24
Outstanding at end of year 3,800,407 $ 6.90 3,756,977 $ 6.73 3,956,127 $ 6.88
Options exercisable at end of year 2,973,323 $ 6.44 3,383,854 $ 6.32 3,181,109 $ 6.08
Weighted average fair value of
options granted during the year $ 2.70 $ 4.12 $ 6.86
============================================================================================================
Summarized information about stock options outstanding and exercisable at
February 28, 2004 is as follows:
=========================================================================================================
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------
Weighted Weighted
Outstanding Weighted Average Average Exercisable Average
as of Remaining Exercise as of Exercise
Exercise Price Range 2/28/04 Contractual Life Price 2/28/04 Price
- ---------------------------------------------------------------------------------------------------------
$ 1.76 - $ 3.53 852,534 3.9 $ 2.55 852,534 $ 2.55
$ 3.54 - $ 5.29 539,936 4.6 $ 4.53 539,936 $ 4.53
$ 5.30 - $ 7.05 223,000 2.8 $ 6.25 223,000 $ 6.25
$ 7.06 - $ 8.81 1,113,584 8.6 $ 8.27 294,834 $ 7.59
$ 8.82 - $10.57 841,103 7.2 $ 9.98 832,769 $ 9.98
$10.58 - $12.34 230,250 6.9 $11.24 230,250 $11.24
- ---------------------------------------------------------------------------------------------------------
3,800,407 6.2 $ 6.90 2,973,323 $ 6.44
=========================================================================================================
NOTE 13 - CAPITAL STOCK
In October 1999, the Board of Directors of the Company authorized the Company to
purchase up to 5 million shares of its stock. In October 2001, purchases against
this authorization were completed, and the Board of Directors authorized the
purchase of up to an additional 5 million shares of its stock. As of February
28, 2004, the Company had purchased 2.9 million shares against this new
authorization. During fiscal 2004, the Company purchased a total of 318,800
shares at an average price per share of $8.69. Purchases in the most recent
quarter were as follows:
============================================================================================================
Total Number of Maximum Number
Total Number Average Shares Purchased as of Shares that May
of Shares Price Paid Part of Publicly Yet be Purchased
Period Purchased per Share Announced Plans Under Plans
- -------------------------------------------------------------------------------------------------------------
November 30 - December 27, 2003 -- -- 2,116,900
December 28, 2003 - January 24, 2004 -- -- 2,116,900
January 25 - February 28, 2004 63,200 $ 9.06 63,200 2,053,700
------ ------
Total 63,200 63,200
============================================================================================================
NOTE 14 - DIVIDENDS
On June 26, 2003, the Board of Directors of the Company initiated a regular
quarterly cash dividend of $0.04 per share. In fiscal 2004, three quarterly
payments totaling $0.12 per share, or $4.9 million, were made.
NOTE 15 - LEGAL PROCEEDINGS
The Commission of the European Communities (the "Commission") is investigating
whether some of Topps Europe's past distribution arrangements may have violated
European law. Topps and Topps Europe each formally responded to a Statement of
Objections that was issued against both companies, and a hearing in front of the
European Commission Tribunal took place on October 23, 2003. If the Commission
were to levy a fine that is ultimately upheld, it could be substantial. The
maximum amount of the fine that could be levied against Topps and Topps Europe
is 10% of annual revenues.
NOTE 16 - SEGMENT AND GEOGRAPHIC 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 lollipop products including
Ring Pop, Push Pop and Baby Bottle Pop, the Bazooka bubble gum line and other
novelty confectioneries including licensed products.
The Entertainment segment primarily consists of trading cards, sticker album
products and collectible games.
The Company's management 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, net interest income and income
taxes.
The Company does not allocate assets among its business segments and therefore
does not include a breakdown of assets or depreciation and amortization by
segment.
BUSINESS SEGMENTS
================================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- --------------------------------------------------------------------------------
(in thousands of dollars)
Net Sales
- ---------
Confectionery ............................. $147,254 $146,901 $152,127
Entertainment ............................. 150,084 143,214 148,053
-------- -------- --------
Total Net Sales ......................... $297,338 $290,115 $300,180
________________________________________________________________________________
Contributed Margin
- ------------------
Confectionery ............................. $ 45,734 $ 52,101 $ 54,880
Entertainment ............................. 42,467 39,313 47,464
-------- -------- --------
Total Contributed Margin ................ $ 88,201 $ 91,414 $102,344
________________________________________________________________________________
Reconciliation of Contributed Margin to
Income Before Provision for Income Taxes
- ----------------------------------------
Total contributed margin .................. $ 88,201 $ 91,414 $102,344
Unallocated general and administrative
expenses and manufacturing overhead ...... (67,644) (65,778) (60,040)
Depreciation & amortization ............... (6,593) (5,038) (5,525)
Other income .............................. 631 184 (215)
- --------------------------------------------------------------------------------
Income from operations ................. 14,595 20,782 36,564
Interest income, net ...................... 2,426 2,516 4,894
- --------------------------------------------------------------------------------
Income before provision for income taxes $ 17,021 $ 23,298 $ 41,458
================================================================================
Net sales to unaffiliated customers and income from operations, as presented
below, are based on the location of the ultimate customer. Income from
operations is defined as contributed margin less unallocated general and
administrative expenses and manufacturing overhead, depreciation and
amortization, and other income. The Canadian entertainment, Latin American, and
Asian (excluding Japan) businesses are in part supported from the U.S., however,
overhead costs have not been allocated to them. Identifiable assets, as
presented below, are those assets located in each geographic area.
GEOGRAPHIC AREAS
=========================================================================
February March March
Year Ended 28, 2004 1, 2003 2, 2002
- -------------------------------------------------------------------------
(in thousands of dollars)
Net Sales
- ---------
United States ..................... $ 203,602 $ 212,496 $ 220,332
Europe ............................ 65,135 48,555 48,387
Canada, Latin America and Asia .... 28,601 29,064 31,461
--------- --------- ---------
Total Net Sales ............... $ 297,338 $ 290,115 $ 300,180
_________________________________________________________________________
Income from Operations
- ----------------------
United States ..................... $ 1,410 $ 9,428 $ 20,589
Europe ............................ 9,535 5,406 11,216
Canada, Latin America and Asia .... 3,650 5,948 4,759
--------- --------- ---------
Total Income from Operations... $ 14,595 $ 20,782 $ 36,564
_________________________________________________________________________
Identifiable Assets
- -------------------
United States ..................... $ 214,615 $ 214,525 $ 214,271
Europe ............................ 55,520 41,020 35,271
Canada, Latin America and Asia .... 5,328 7,456 8,408
--------- --------- ---------
Total Identifiable Assets ..... $ 275,463 $ 263,001 $ 257,950
_________________________________________________________________________
=========================================================================
NOTE 17 - 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. The acquisition was 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 its date
of 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 $29.5 million in cash, offset by an adjustment based on the level
of WizKids working capital at the closing. The working capital adjustment of
$1,123,500 is the amount by which net working capital at the closing was short
of the required $3.7 million benchmark level. The purchase price also reflects a
$1,326,130 payment to a third party for associated licenses and estimated legal,
accounting and investment banking fees of $700,000. 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.
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 is being
accounted for as deferred compensation and is being amortized over four years.
If Mr. Weisman does not remain a Topps employee for the full four years of the
agreement, he will be required to pay to 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
vested 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)
Plus: Purchase of licenses 1,326,130
Estimated transaction costs 700,000
-------------
Total purchase price $ 28,402,630
=====================================================
The reconciliation of the purchase price above to Purchase of Subsidiary shown
on the Consolidated Statement of Cash Flows is as follows:
=====================================================
Total purchase price $ 28,402,630
Add: Deferred compensation agreement 2,000,000
Less: Cash in subsidiary accounts (1,732,401)
Accrued transaction costs ( 20,555)
-------------
Purchase of Subsidiary in
Consolidated Statement of Cash Flows $ 28,649,674
=====================================================
The following table provides the estimated 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 (5,426,072)
-------------
Fair value of net assets acquired 3,455,522
Intangible assets 6,200,000
Goodwill 18,747,108
------------
Total estimated fair value of net
assets acquired and estimated goodwill $ 28,402,630
=====================================================
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 3,
2002 is as follows:
=========================================================================
February March
Year Ended 28, 2004 1, 2003
-------------------------------------------------------------------------
(amounts in thousands, except share data)
Net sales ....................... $ 310,726 $ 324,119
Income from operations .......... 12,792 25,587
Net income ...................... $ 11,584 $ 20,043
--------- ---------
Net income per share - basic .... $ 0.29 $ 0.48
- diluted .. $ 0.28 $ 0.48
=========================================================================
NOTE 18 - ACQUISITION OF THEPIT.COM, INC.
On August 26, 2001, the Company acquired all of the outstanding common stock of
thePit.com, Inc., which operates a sports card exchange, for a net $5.7 million
in cash. The acquisition was accounted for using the purchase method of
accounting. The financial statements of thePit.com, Inc. have been consolidated
into the financial statements of the Company. As part of the purchase price
allocation, $780,000 ($470,000 for technology and $310,000 for marketing
agreements) was reclassified from goodwill to intangibles and is being amortized
over 5 years. The unamortized balance of the marketing agreements was
subsequently written off in fiscal 2004. The amount of goodwill remaining after
the reclassification was $4.1 million.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable and accrued
liabilities approximates fair value due to their short-term nature.
The Company enters into foreign currency forward contracts to hedge its foreign
currency exposure. As of February 28, 2004, the Company had outstanding foreign
currency forward contracts, which will mature at various dates during fiscal
2005, in the amount of $22,996,000, as compared to $27,286,000 as of March 1,
2003. Over 66% of the contracts will mature within six months.
The fair value of these forward contracts is the amount the Company would
receive or pay to terminate the contracts. The approximate pre-tax cost to the
Company to terminate these agreements as of February 28, 2004 and March 1, 2003
would have been $(127,000) and $(400,000), respectively. The Company may be
exposed to credit losses in the event of non-performance by counterparties to
these instruments. Management believes, however, the risk of incurring such
losses is remote as the contracts are entered into with major financial
institutions.
NOTE 20 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
====================================================================================================================================
2004 2003
____________________________________________________________________________________________________________________________________
1st 2nd 3rd 4th 1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands of dollars, except share data)
Net sales $ 75,992 $ 73,319 $ 78,470 $ 69,557 $ 87,751 $ 70,009 $ 66,667 $ 65,688
Gross profit on sales 28,137 28,767 24,338 22,679 32,635 25,296 21,654 22,155
Income from operations 4,383 7,558 655 1,999 10,665 6,311 813 2,993
- ------------------------------------------------------------------------------------------------------------------------------------
Net income 3,521 5,272 982 2,920 7,341 4,692 2,910 1,993
- ------------------------------------------------------------------------------------------------------------------------------------
Net income per share-basic $ 0.09 $ 0.13 $ 0.02 $ 0.07 $ 0.17 $ 0.11 $ 0.07 $ 0.05
-diluted $ 0.08 $ 0.13 $ 0.02 $ 0.07 $ 0.17 $ 0.11 $ 0.07 $ 0.05
====================================================================================================================================
NOTE 21 - OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenue or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
expected to be material.
NOTE 22- COMMITMENTS AND CONTINGENCIES
Future minimum payments under non-cancelable leases which extend into the year
2014 are: $2,741,000 (2005), $2,598,000 (2006), $2,174,000 (2007), $1,872,000
(2008), $1,854,000 (2009) and $1,442,000 thereafter. Historically, lease expense
under the Company's contracts was $2,378,000 (2004), $1,951,000 (2003) and
$1,875,000 (2002).
Future minimum payments required under the Company's existing sports and
entertainment contracts, with various expiration dates extending into the year
2007, are estimated to be: $11,307,000 (2005), $6,898,000 (2006), and $4,351,000
(2007). Historically, the total royalty expense under the Company's sports and
entertainment licensing contracts was $23,912,000 (2004), $25,344,000 (2003) and
$25,669,000 (2002).
The Company has purchase obligations for inventory and various other items
totaling $8,836,000 in fiscal 2005.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
The Topps Company, Inc.:
We have audited the accompanying consolidated balance sheets of The Topps
Company, Inc. and Subsidiaries as of February 28, 2004 and March 1, 2003, and
the related consolidated statements of operations, stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended February 28, 2004. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The Topps Company, Inc. and Subsidiaries as
of February 28, 2004 and March 1, 2003, and the results of their operations and
their cash flows for each of the three years in the period ended February 28,
2004, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 6 of the notes to the consolidated financial statements,
the Company changed its method of accounting for goodwill and other intangible
assets in 2003.
DELOITTE & TOUCHE LLP
New York, New York
May 4, 2004
MARKET AND DIVIDEND INFORMATION
The Company's common stock is traded on the Nasdaq National Market under the
symbol TOPP. The following table sets forth, for the periods indicated, the high
and low stock price for the common stock as reported on the Nasdaq National
Market as well as cash dividends per share paid by the Company. As of February
28, 2004, there were approximately 4,500 shareholders of record.
================================================================================
Fiscal Year ended Fiscal Year ended
February 28, 2004 March 1, 2003
________________________________________________________________________________
Stock Price Dividends Stock Price Dividends
High Low Paid High Low Paid
- --------------------------------------------------------------------------------
First quarter $ 9.52 $ 7.24 $ - $ 11.06 $ 9.35 $ -
Second quarter $ 9.25 $ 8.00 $ 0.04 $ 10.57 $ 8.20 $ -
Third quarter $ 10.75 $ 8.92 $ 0.04 $ 9.93 $ 7.36 $ -
Fourth quarter $ 10.69 $ 8.97 $ 0.04 $ 9.97 $ 7.79 $ -
================================================================================
SELECTED CONSOLIDATED FINANCIAL DATA
===========================================================================================================
2004 2003 2002 2001 2000
___________________________________________________________________________________________________________
(in thousands of dollars, except share data, unaudited)
OPERATING DATA:
Net sales ........................... $ 297,338 $ 290,115 $ 300,180 $ 437,440 $ 374,193
Gross profit on sales ............... 103,921 101,740 113,841 199,911 166,895
Selling, general and
administrative expenses ............ 89,957 81,142 77,062 80,958 72,798
Income from operations .............. 14,595 20,782 36,564 121,917 94,852
Interest income, net ................ 2,426 2,516 4,894 5,717 1,712
Net income .......................... 12,695 16,936 28,462 88,489 59,215
Net income per share - basic ........ $ 0.31 $ 0.41 $ 0.66 $ 1.97 $ 1.28
- diluted ...... $ 0.31 $ 0.40 $ 0.64 $ 1.91 $ 1.25
Dividends per share ................. $ 0.12 -- -- -- --
Wtd. avg. shares outstanding - basic 40,604,000 41,353,000 43,073,000 45,011,000 46,398,000
- diluted 41,515,000 42,065,000 44,276,000 46,366,000 47,463,000
___________________________________________________________________________________________________________
BALANCE SHEET DATA:
Cash and equivalents ................ $ 93,837 $ 114,259 $ 121,057 $ 158,741 $ 75,853
Working capital ..................... 133,299 141,484 136,389 140,487 71,952
Net property, plant and equipment ... 13,786 14,606 14,606 11,181 9,181
Long-term debt ...................... -- -- -- -- --
Total assets ........................ 275,463 263,001 257,950 280,272 203,313
Stockholders' equity ................ 211,277 196,768 194,054 196,542 129,175
===========================================================================================================
Certain items in the prior years' financial statements have been reclassified to
conform with the current year's presentation.
Fiscal 2000 Net sales and SG&A do not reflect the reclassification of slotting
expenses included in the figures for fiscal 2001, 2002, 2003 and 2004.
BOARD OF DIRECTORS
- ------------------
Arthur T. Shorin Ann Kirschner Jack H. Nusbaum*
Chairman, Chief Executive President Partner and Chairman
Officer and President Comma International Willkie Farr & Gallagher, LLP
Allan A. Feder* David Mauer* Richard Tarlow
Independent Business Chief Executive Officer Chairman
Consultant E&B Giftware, LLC Carlson & Partners
Stephen D. Greenberg Edward D. Miller Stanley Tulchin
Managing Director Former President and CEO Chairman
Allen & Company, LLC AXA Financial, Inc. STA International
*Nominated to stand for re-election to the Company's Board of Directors at the
2004 Annual Meeting of Stockholders.
OFFICERS
- --------
Arthur T. Shorin Edward P. Camp Ira Friedman Catherine K. Jessup
Chairman, Chief Executive Vice President and President Vice President - Publishing and Vice President - Chief
Officer and President - Hobby Division New Product Development Financial Officer
Scott Silverstein Michael P. Clancy Warren Friss William G. O'Connor
Executive Vice President Vice President - Vice President - Internet Vice President -
International and Managing Business and General Counsel Administration
Director, Topps
International Limited
Ronald L. Boyum Michael J. Drewniak Leon J. Gutmann John Perillo
Vice President - Marketing Vice President - Assistant Treasurer and Vice President - Operations
and Sales and General Manufacturing Assistant Secretary
Manager Confectionery
SUBSIDIARIES
- ------------
Topps Argentina, SRL Topps Canada, Inc. Topps International Limited Topps UK Limited
Managing Director - General Manager - Managing Director - Managing Director -
Juan P. Georgalos Michael Pearl Michael P. Clancy Jeremy Charter
Topps Europe Limited Topps Italia, SRL WizKids, Inc. Topps Finance, Inc.
Managing Director - Managing Director - President -
Christopher Rodman Furio Cicogna Jordan Weisman Topps Enterprises, Inc.
CORPORATE INFORMATION
Annual Meeting Corporate Counsel Registrar and Transfer Agent
Thursday, July 1, 2004 Willkie Farr & Gallagher, LLP American Stock Transfer & Trust Company
10:30 A.M. 787 Seventh Avenue 59 Maiden Lane
J.P. Morgan Chase & Co. New York, NY 10019 New York, NY 10038
270 Park Avenue 877-777-0800 ext 6820
New York, NY 10017
Investor Relations Independent Auditors
Brod & Schaffer, LLC Deloitte & Touche LLP
230 Park Avenue, Suite 1831 Two World Financial Center
New York, NY 10169 New York, NY 10281
212-750-5800
Form 10-K -- A copy of the Company's Annual Report on Form 10-K as filed with
the Securities and Exchange Commission is available without charge at the Topps
website www.topps.com or upon written request to the Assistant Treasurer.