UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 1, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from__________________to__________________
Commission File Number: 0-15817
THE TOPPS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2849283
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Whitehall Street, New York, NY 10004
(Address of principal executive offices, including zip code)
(212) 376-0300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
The number of outstanding shares of Common Stock as of October 10, 2001 was
42,442,000.
THE TOPPS COMPANY, INC.
AND SUBSIDIARIES
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PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
Index Page
Condensed Consolidated Balance Sheets as of
September 1, 2001 and March 3, 2001 3
Condensed Consolidated Statements of Operations
for the thirteen and twenty-six weeks ended
September 1, 2001 and August 26, 2000 4
Condensed Consolidated Statements of Comprehensive
Income for the thirteen and twenty-six weeks ended
September 1, 2001 and August 26, 2000 5
Condensed Consolidated Statements of Cash Flows
for the twenty-six weeks ended September 1, 2001
and August 26, 2000 6
Notes to Condensed Consolidated Financial Statements 7
Report of Independent Public Accountants 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. DISCLOSURES ABOUT MARKET RISK 14
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PART II - OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
2
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September March
1, 2001 3, 2001
--------- -------
(amounts in thousands
except share data)
ASSETS
---------
CURRENT ASSETS:
Cash and cash equivalents .............................. $ 134,457 $ 158,741
Accounts receivable - net .............................. 22,432 10,770
Inventories ............................................ 30,548 22,926
Income tax receivable .................................. 6,817 11,570
Deferred tax assets .................................... 3,457 2,444
Prepaid expenses and other current assets .............. 3,875 4,328
--------- ---------
TOTAL CURRENT ASSETS ............................... 201,586 210,779
--------- ---------
PROPERTY, PLANT, & EQUIPMENT ............................... 23,094 19,136
Less: accumulated depreciation and amortization ....... 9,451 7,955
--------- ---------
NET PROPERTY, PLANT & EQUIPMENT .................... 13,643 11,181
--------- ---------
INTANGIBLE ASSETS, net of accumulated amortization
of $46,586 and $45,931 ................................. 56,525 54,970
OTHER ASSETS ............................................... 4,159 3,342
--------- ---------
TOTAL ASSETS ....................................... $ 275,913 $ 280,272
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ....................................... $ 12,512 $ 13,705
Accrued expenses and other liabilities ................. 38,134 36,969
Income taxes payable ................................... 14,117 22,026
--------- ---------
TOTAL CURRENT LIABILITIES .......................... 64,763 72,700
DEFERRED INCOME TAXES ...................................... 434 1,344
OTHER LIABILITIES .......................................... 10,155 9,686
--------- ---------
TOTAL LIABILITIES .................................. 75,352 83,730
--------- ---------
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 48,554,300 shares and
48,421,000 shares as of September 1, 2001 and
March 3, 2001, respectively ......................... 486 484
Additional paid-in capital ............................... 23,817 21,758
Treasury stock, 5,022,000 shares and 4,329,000 shares
as of Sept. 1, 2001 and March 3, 2001, respectively . (55,473) (38,051)
Retained earnings ........................................ 237,960 217,479
Accumulated other comprehensive loss ..................... (6,229) (5,128)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ........................ 200,561 196,542
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ............................................ $ 275,913 $ 280,272
========= =========
See Notes to Condensed Consolidated Financial Statements and Accountants' Review Report.
3
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen weeks ended Twenty-six weeks ended
September August September August
1, 2001 26, 2000 1, 2001 26, 2000
--------- -------- --------- --------
(amounts in thousands, except share data)
Net sales .................................. $ 81,659 $141,708 $169,110 $286,040
Cost of sales .............................. 45,007 69,981 94,197 145,903
------- ------- ------- -------
Gross profit on sales ................ 36,652 71,727 74,913 140,137
Other income (expense) ..................... (2,568) 324 (1,840) 971
------- ------- ------- -------
34,084 72,051 73,073 141,108
Selling, general and administrative expenses 21,789 21,604 43,785 44,651
------- ------- ------- -------
Income from operations ................ 12,295 50,447 29,288 96,457
Interest income, net ....................... 1,249 1,106 2,714 1,917
------- ------- ------- -------
Income before provision for income taxes ... 13,544 51,553 32,002 98,374
Provision for income taxes ................. 4,692 19,589 11,521 37,381
------- ------- ------- -------
Net income ............... $ 8,852 $ 31,964 $ 20,481 $ 60,993
======= ======= ======= =======
Net income per share - basic ............... $ 0.20 $ 0.71 $ 0.47 $ 1.34
- diluted ............. 0.20 0.68 0.46 1.30
Weighted average shares outstanding - basic 43,376,000 45,307,000 43,615,000 45,444,000
- diluted 44,709,000 46,732,000 44,878,000 46,765,000
See Notes to Condensed Consolidated Financial Statements and Accountants' Review Report.
4
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Unaudited)
Thirteen weeks ended Twenty-six weeks ended
September August September August
1, 2001 26, 2000 1, 2001 26, 2000
--------- -------- --------- --------
(Amounts in thousands)
Net income .................... $ 8,852 $ 31,964 $ 20,481 $ 60,993
Currency translation adjustment 2,893 (423) (1,101) (2,565)
-------- -------- -------- --------
Comprehensive income .......... $ 11,745 $ 31,541 $ 19,380 $ 58,428
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements and Accountants' Review
Report.
5
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Twenty-six weeks ended
September August
1, 2001 26, 2000
--------- --------
(amounts in thousands)
Cash flows from operating activities:
Net income ................................................ $ 20,481 $ 60,993
Add non-cash items included in net income:
Depreciation and amortization ........................ 2,581 1,962
Deferred income taxes ................................ 14 1,776
Change in operating assets and liabilities:
Accounts receivable .................................. (11,548) (8,611)
Inventories .......................................... (6,651) 484
Income tax receivable ................................ 4,753 108
Prepaid expenses and other current assets ............ 523 323
Payables and other current liabilities ............... (9,133) 19,953
Other liabilities .................................... 239 (1,523)
--------- ---------
Cash provided by operating activities 1,259 75,465
--------- ---------
Cash flows from investing activities:
Purchase of subsidiary, net of cash .................. (5,671) -
Additions to property, plant and equipment ........... (3,096) (1,301)
--------- ---------
Cash used in investing activities ............. (8,767) (1,301)
--------- ---------
Cash flows from financing activities:
Exercise of stock options ............................. 2,061 1,571
Repurchase of common stock ............................ (17,422) (10,369)
--------- ---------
Cash used in financing activities ............ (15,361) (8,798)
--------- ---------
Net (decrease)/increase in cash and cash equivalents ........ (22,869) 65,366
Effect of exchange rate changes on cash and cash equivalents. (1,415) (970)
Cash and cash equivalents at beginning of period ............ 158,741 75,853
--------- ---------
Cash and cash equivalents at end of period .................. $ 134,457 $ 140,249
========= =========
Supplemental disclosures of cash flow information:
Interest paid ................................................ $ 19 $ 26
Income taxes paid ............................................ $ 13,851 $ 3,610
See Notes to Condensed Consolidated Financial Statements and Accountants' Review Report.
6
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED SEPTEMBER 1, 2001
1. Basis of Presentation
The accompanying unaudited condensed interim consolidated financial
statements have been prepared by The Topps Company, Inc. and its
subsidiaries (the "Company") pursuant to the rules and regulations of
the Securities and Exchange Commission and reflect all adjustments
which are, in the opinion of management, considered necessary for a
fair presentation. Operating results for the twenty-six weeks ended
September 1, 2001 are not necessarily indicative of the results that
may be expected for the year ending March 2, 2002. For further
information refer to the consolidated financial statements and notes
thereto in the Company's annual report for the year ended March 3,
2001.
2. Quarterly Comparison
Management believes that quarter-to-quarter comparisons of sales and
operating results are affected by a number of factors, including the
timing of product introductions and variations in shipping and factory
scheduling requirements. Thus, annual sales and earnings amounts are
unlikely to be equal each quarter.
3. Inventories
(Unaudited)
September March
1, 2001 3, 2001
--------- -------
(amounts in thousands)
Raw materials $ 4,985 $ 2,804
Work in process 2,235 805
Finished product 23,328 19,317
-------- --------
Total $ 30,548 $ 22,926
======== ========
4. Segment Information
The Company has three reportable business segments: Confectionery,
Collectible Sports Products and Entertainment Products.
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 confectionery products, including Pokemon
confectionery products.
The Collectible Sports Products segment primarily consists of trading
cards featuring players from Major League Baseball, the National
Basketball Association, the National Football League and the National
Hockey League as well as sticker/album products featuring players from
certain European soccer leagues.
7
The Entertainment Products segment consists of trading cards and
sticker/album products featuring licenses from popular films,
television shows and other entertainment properties including Pokemon.
The Company's management 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, interest 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.
Thirteen weeks ended Twenty-six weeks ended
September August September August
1, 2001 26, 2000 1, 2001 26, 2000
--------- -------- --------- --------
(in thousands of dollars)
Net Sales
---------
Confectionery ............. $ 44,882 $ 57,221 $ 90,249 $109,663
Collectible Sports Products 28,727 34,471 59,638 63,581
Entertainment Products .... 8,050 50,016 19,223 112,796
-------- -------- -------- --------
Total ..................... $ 81,659 $141,708 $169,110 $286,040
======== ======== ======== ========
Contributed Margin
------------------
Confectionery ............. $ 16,841 $ 24,162 $ 34,576 $ 41,703
Collectible Sports Products 9,826 12,862 20,895 25,715
Entertainment Products .... 5,914 29,671 11,159 61,241
-------- -------- -------- --------
Total ..................... $ 32,581 $ 66,695 $ 66,630 $128,659
======== ======== ======== ========
Reconciliation of contributed
margin to income before
provision for income taxes:
-----------------------------
Total contributed margin .... $ 32,581 $ 66,695 $ 66,630 $128,659
Unallocated general and
adminstrative expenses and
manufacturing overhead ...... (16,340) (15,593) (32,921) (31,211)
Depreciation & amortization . (1,378) (979) (2,581) (1,962)
Other income (expense) ...... (2,568) 324 (1,840) 971
--------- --------- --------- --------
Income from operations ...... 12,295 50,447 29,288 96,457
Interest income, net ........ 1,249 1,106 2,714 1,917
--------- --------- --------- --------
Income before provision
for income taxes ............ $ 13,544 $ 51,553 $ 32,002 $ 98,374
========= ========= ========= =========
8
5. Reclassifications
The Company has changed the classification of certain accounts.
Prepress, autograph and relic costs related to future period releases,
which previously had been included in the balance of prepaid expenses
and other current assets, have been reclassified to inventory. The
cost of autographs, relics, and freight related to merchandise sold in
the period, which previously had been included in selling, general and
administrative expenses, has been reclassified to cost of goods sold.
This presentation has been reflected on the Condensed and Consolidated
Balance Sheets as of September 1, 2001 and March 3, 2001 and the
Statement of Operations for the thirteen and twenty-six week periods
ended September 1, 2001 and August 26, 2000. There is no impact on
reported income from operations, net income or working capital as a
result of these reclassifications.
6. Acquisition of thePit.com, Inc.
On August 26, 2001 the Company acquired all of the outstanding common
stock in thePit.com, Inc., which operates a sports card exchange, for
$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. The impact on the Company's financial statements is not
material, and, accordingly, proforma information has not been
provided. Additionally, the allocation of the purchase price had not
been completed and, accordingly, no amortization of intangibles was
included in the Consolidated Statement of Operations for the period
ended September 1, 2001, although the impact would not have been
material. Management expects that the allocation of the purchase price
will be completed by December 1, 2001 and reflected in the financial
statements as of that date.
9
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
The Topps Company, Inc.
We have made a review of the accompanying condensed consolidated balance sheet
of The Topps Company, Inc. and subsidiaries (the "Company") as of September 1,
2001, and the related condensed consolidated statements of operations and cash
flows for the thirteen week periods ended September 1, 2001 and August 26, 2000.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of obtaining an understanding of the system for
the preparation of interim financial information, applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the United
States of America, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The Company as of March 3, 2001,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated April 4, 2001 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of March 3, 2001 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
DELOITTE & TOUCHE LLP
SIGNATURE
October 1, 2001
New York, New York
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Second Quarter Fiscal Year 2002 (thirteen weeks ended September 1, 2001) versus
Second Quarter Fiscal Year 2001 (thirteen weeks ended August 26, 2000)
The following table sets forth, for the periods indicated, net sales by key
business segment:
Thirteen weeks ended Twenty-six weeks ended
September August September August
1, 2001 26, 2000 1, 2001 26, 2000
--------- -------- --------- --------
(In thousands of dollars)
Net Sales
---------
Confectionery .................... $ 44,882 $ 57,221 $ 90,249 $109,663
Collectible Sports Products ...... 28,727 34,471 59,638 63,581
Entertainment Products ........... 8,050 50,016 19,223 112,796
-------- -------- -------- --------
Total ................... $ 81,659 $141,708 $169,110 $286,040
======== ======== ======== ========
Net sales in the second quarter of fiscal 2002 decreased 42.4% to $81.7 million
from $141.7 million for the same period last year. This decrease was primarily a
function of a significant reduction in sales of Pokemon products to $8.7 million
in the quarter this year from $64.1 million last year. Approximately $4.8
million of the Pokemon sales in the quarter this year, versus $2.0 million last
year, were the result of a reversal of the provision for returns.
Net sales of confectionery products, which include among other things, Bazooka
brand bubble gum and Ring Pop, Push Pop, Baby Bottle Pop and Pokemon candies,
decreased 21.6% in the second quarter of this year to $44.9 million from $57.2
million in fiscal 2001. Included in fiscal 2002 sales are $3.2 million of
Pokemon confectionery products principally overseas versus $16.2 million
worldwide in 2001. Sales of branded (non-Pokemon) confectionery products
increased 2% in the quarter this year to $41.6 million, reflecting continued
growth in the U.S., partially offset by weaker sales internationally.
Net sales of collectible sports products, which consist of both sports cards and
sports sticker/album products, decreased 16.7% to $28.7 million in the second
quarter of fiscal 2002 from $34.5 million in the comparable period last year.
This decrease was principally the result of lower sales of football products in
the U.S.
Net sales of entertainment products, which consist of entertainment cards and
the Merlin line of entertainment sticker/album products, decreased to $8.1
million in the second quarter of fiscal 2002 from $50.0 million in fiscal 2001
reflecting lower sales of Pokemon products.
Gross profit as a percentage of net sales in the second quarter of fiscal 2002
decreased to 44.9% as compared with 50.6% in the same period last year. Margins
this year were negatively impacted by the reduction in sales of high-margin
Pokemon products as well as an increase in sports autograph and relic costs and
higher product development costs, partially offset by a volume rebate from a
French distributor.
Other income/(expense) was an expense of $2.6 million this year versus income of
$324,000 last year primarily as a result of a non-cash foreign exchange loss of
$2.7 million on substantial dollar-denominated cash balances held in Europe.
11
Selling, general and administrative ("SG&A") expenses increased as a percentage
of net sales to 26.7% in the second quarter of fiscal 2002 from 15.2% a year ago
primarily as a result of lower sales. SG&A dollar spending increased to $21.8
million this year from $21.6 million in the quarter last year as a result of the
timing of the accrual for employee incentive compensation and increased legal,
pension and depreciation expenses, partially offset by lower expenditures this
year for marketing and the Company's Internet initiative.
Net income in the second quarter of fiscal 2002 was $8.9 million, or $0.20 per
fully diluted share, as compared with $32.0 million, or $0.68 per fully diluted
share last year.
First Half Fiscal 2002 (twenty-six weeks ended September 1, 2001) compared to
First Half Fiscal 2001 (twenty-six weeks ended August 26, 2000)
---------------------------------------------------------------
Net sales in the first half of fiscal 2002 decreased 40.9% to $169.1 million
from $286.0 million for the same period last year. This decrease was a function
of a significant reduction in Pokemon sales to $18.8 million in the first half
this year from $139.5 million last year. Approximately $7.9 million of the
Pokemon sales in the period this year, versus $1.7 million last year, were the
result of reversals of the provision for returns.
Net sales of confectionery products decreased 17.7% in the first half this year
to $90.2 million from $109.7 million in fiscal 2001. Included in fiscal 2002
sales are $4.7 million of Pokemon confectionery products principally overseas
versus $29.2 million worldwide a year ago. Excluding Pokemon products, sales of
branded confectionery products increased 6.3%, primarily driven by growth of
Baby Bottle Pop.
Net sales of collectible sports products decreased 6.2% to $59.6 million in the
first half of fiscal 2002 from $63.6 million in the comparable period last year.
Sales of U.S. football cards, basketball cards and European soccer sticker/album
products were less this year than last.
Net sales of entertainment products decreased to $19.2 million in the first half
of fiscal 2002 from $112.8 million in fiscal 2001 reflecting lower sales of
Pokemon products.
Gross profit as a percentage of net sales for the first half of fiscal 2002
decreased to 44.3% as compared with 49.0% for the same period last year. Margins
this year were negatively impacted by the reduction in sales of high-margin
Pokemon products as well as an increase in sports autograph and relic costs and
higher product development costs, partially offset by a volume rebate from a
French distributor.
Other income/(expense) was an expense of $1.8 million this year versus income of
$971,000 last year primarily as a result of a non-cash foreign exchange loss of
$2.7 million on substantial dollar-denominated cash balances held in Europe.
Selling, general and administrative ("SG&A") expenses increased as a percentage
of net sales to 25.9% in the first half of fiscal 2002 from 15.6% a year ago as
a result of lower sales. SG&A dollar spending decreased to $43.8 million this
year from $44.7 million last year as a result of lower marketing expenses
partially offset by increased costs for legal, pension and depreciation.
Net interest income increased to $2.7 million in fiscal 2002 from $1.9 million
in fiscal 2001 as a result of higher average cash balances.
Net income in the first half of fiscal 2002 was $20.5 million, or $.46 per fully
diluted share, as compared with $61.0 million, or $1.30 per fully diluted share
last year.
12
Liquidity and Capital Resources
-------------------------------
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 are 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 point
over the four year term (provided the Company repays all outstanding amounts
thereunder) without penalty.
In October 1999, the Board of Directors authorized the Company to repurchase up
to 5 million shares of its stock. During the second quarter of fiscal 2002, the
Company repurchased 903,500 shares at an average price of $11.93, bringing total
shares purchased under this authorization as of September 1, 2001 to 4.8
million. On October 1, 2001, the Board of Directors authorized the Company to
repurchase up to an additional 5 million shares of its stock.
As of September 1, 2001, the Company had $134.5 million in cash and cash
equivalents.
During the first half of fiscal 2002, the Company's net decrease in cash and
cash equivalents was $22.9 million versus an increase of $65.4 million in the
first half of fiscal 2001. Cash provided by operating activities in the first
half of this year was $1.3 million versus $75.5 million last year, primarily as
a result of lower net income and tax payments in Europe. Cash used in investing
activities this year reflects the $5.7 million acquisition of thePit.com as well
as $3.1 million in capital expenditures compared with $1.3 in capital
expenditures last year. Cash used in financing activities reflects expenditures
for the repurchase of Company stock net of the exercise of stock options of
$15.4 million this year versus $8.8 million last year.
Management believes that the Company has adequate means to meet its liquidity
and capital resource needs over the foreseeable future.
13
Cautionary Statements
---------------------
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby filing
cautionary statements identifying important factors that could cause actual
results to differ materially from those projected in any forward-looking
statements of the Company made by or on behalf of the Company, whether oral or
written. Among the factors that could cause the Company's actual results to
differ materially from those indicated in any such forward statements are: (i)
the failure of certain of the Company's principal products, particularly sports
cards, entertainment cards, lollipops and sticker/album collections, to achieve
expected sales levels; (ii) quarterly fluctuations in results; (iii) the
Company's loss of important licensing arrangements; (iv) the failure of the
Company's Internet initiative to achieve expected levels of success for any
reason whatsoever; (v) the Company's loss of important supply arrangements with
third parties; (vi) the loss of any of the Company's key customers or
distributors; (vii) further prolonged and material contraction in the trading
card industry as a whole; (viii) further declines in the sale of U.K. Premier
League sticker/album collections; (ix) excessive returns of the Company's
products; (x) civil unrest, currency devaluation, terrorism or political
upheaval in the U.S. or certain foreign countries in which the Company conducts
business; as well as other risks detailed from time to time in the Company's
reports and registration statements filed with the Securities and Exchange
Commission.
ITEM 3. DISCLOSURES ABOUT MARKET RISK
The Company's exposures to market risk associated with activities in derivative
financial instruments (e.g., hedging or currency swap agreements), other
financial instruments and derivative commodity instruments is confined to the
impact of mark-to-market changes in foreign currency rates on the Company's
forward contracts and options. The Company has no debt and does not engage in
any commodity-related derivative transactions. As of September 1, 2001, the
Company had contracts and options which were entered into for the purpose of
hedging forecasted receipts and disbursements as well as cash balances in
various foreign currencies and which, due to the weakening of the U.S. dollar,
resulted in an unfavorable mark-to-market in the quarter.
14
ITEM 1. LEGAL PROCEEDINGS
On August 21, 2000, the Company was named as a defendant in a
purported class action commenced in the Superior Court of the State of
California for the County of Alameda (the "California State Court")
entitled Chaset, et al. v. The Upper Deck Company, et al., No.
830257-9 (the "California Class Action"). The California Class Action
alleges that the Company and other manufacturers and licensors of
sports and entertainment trading cards committed unlawful, unfair and
fraudulent business acts under the California Unfair Business
Practices Act (CUBPA) and the California Consumer Legal Remedies Act
by the practice of selling trading cards with randomly-inserted
"insert" cards allegedly in violation of state and federal
anti-gambling laws and state consumer laws. The California Class
Action asserts three claims for relief and seeks declaratory,
equitable and injunctive relief and attorneys' fees on behalf of a
purported nationwide class of trading card purchasers. Plaintiff filed
an amended complaint on October 13, 2000, including an amendment to
demand compensatory and punitive damages and restitution. On December
14, 2000, plaintiff moved for summary judgment on one of his CUBPA
claims. On December 15, 2000, all defendants filed a motion to dismiss
two of the claims for failure to state a claim upon which relief can
be granted; a motion for summary judgment dismissing the remaining
claim; and a motion to strike all allegations of fraudulent or
deceptive representations and all references to plaintiff's prayer for
monetary relief. On March 29, 2001, the Court issued a tentative
ruling granting defendants' motion for summary judgment on the grounds
that defendants' practices do not constitute illegal gambling as a
matter of law, but denying the motion to dismiss to the extent that
the remaining two claims allege false or misleading advertising
practices unrelated to the gambling issue. On March 30, 2001, in
accordance with California state practice, the Court heard oral
argument on whether or not its tentative ruling should stand as a
final ruling. Thereafter, the Court issued a tentative ruling denying
the motion for summary judgment and motion to dismiss, and set a
hearing for June 1, 2001 to hear additional argument on the motions.
On June 12, 2001, the Court entered an order denying defendants'
motion for summary judgment and their motions to dismiss and to
strike. At a case management conference on June 29, 2001, the Court
stayed discovery pending defendants' appeal of the summary judgment
decision and ruled that, if the appeal is denied, the parties are to
address issues relating to the certification of a plaintiff class
before proceeding to merits discovery. In addition, the Court has
ruled that plaintiff's motion for summary judgment will not be heard
until the Court had ruled on the class certification issue.
Subsequently, review of the Court's decision denying defendants'
motion for summary judgment was denied by the California Court of
Appeal and the California Supreme Court. On September 21, 2001,
plaintiff moved for class certification. Briefing and discovery
concerning the class certification issue is not expected to be
completed until January 2002, with a hearing on that issue set for
February 4, 2002. An adverse outcome in the California Class Action
could materially effect the Company's future plans and results. The
Company's management believes that it has meritorious defenses and
intends to vigorously defend against these claims.
On February 26, 2001, The Upper Deck Company LLP ("Upper Deck") and
Ken Griffey, Jr. commenced an action in the United States District
Court for the Southern District of California against the Company for
alleged unfair competition and invasion of privacy arising from the
Company's planned launch of its 2001 Gold Label trading card series
featuring trading cards containing game-used memorabilia of Griffey,
Sammy Sosa, Jose Canseco and Alex Rodriguez, amount others. Upper Deck
alleges that it has the exclusive right to sell memorabilia trading
cards of the foregoing players. Plaintiffs seek unspecified damages,
injunctive and declaratory relief and attorneys' fees and costs of
suit. On February 28, 2001, Upper Deck and Griffey sought a temporary
restraining order enjoining the Company from using the baseball
pictures of the foregoing four players with trading cards containing
game-used items. The Company submitted a written opposition on March
5, 2001. On March 6, 2001, Judge Judith Keep, U.S.D.J., ruling from
the bench, denied Upper Deck's and Griffey's motion for a temporary
restraining order. Judge Keep found, among other things, that in light
of the Company's factual showing regarding the existence and scope of
the players' licenses to the Company, as set forth in the BPPLA, Upper
Deck and Griffey failed to establish any likelihood of success on the
merits of their claims. In light of Judge Keep's ruling and the
MLBPA's subsequent decision to commence an arbitration (see below),
Upper Deck and Griffey agreed to a temporary stay of this litigation
pending agreement on the terms of a formal stipulation between the
parties pursuant to which the action may be dismissed or stayed
pending a ruling in the arbitration between the MLBPA and the Company.
On June 12, 2001, Upper Deck and Griffey voluntarily dismissed their
Complaint with Prejudice.
15
On March 16, 2001, the MLBPA served upon the Company a notice of
intention to arbitrate, contending that the Company does not have a
license from the Major League baseball players authorizing it to
manufacture and sell trading cards containing game-used items, such as
jerseys and bats. The MLBPA alleges that absent a specific license
from the Major League baseball players regarding such game-used items,
the Company should not be permitted to manufacture and sell such
trading cards. The MLBPA seeks unspecified damages and injunctive and
declaratory relief. The Company believes that the Major League
baseball players have authorized it to manufacture and sell trading
cards containing memorabilia pursuant to the grant of a license
contained in the standard Baseball Players Picture License Agreement
("BPPLA") between Topps and the ball players. On March 28, 2001,
pursuant to the arbitration clause of the BPPLA, the Company
designated David G. Ebert, Esq. and the MLBPA designated Steven Fehr
as their respective partisan arbitrators, who in turn, have selected
Frank H. Wohl, Esq. to serve as the neutral arbitrator. However, the
MLBPA and the Company have agreed to settle the dispute and are in the
process of preparing a written settlement agreement.
The Company is a defendant in several other civil actions which are
routine and incidental to its business. In management's opinion, after
consultation with legal counsel, these actions will not have a
material adverse effect on the Company's financial condition or
results of operations.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as required by Item 601 of Regulation S-K
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TOPPS COMPANY, INC.
----------------------
REGISTRANT
/s/ Catherine Jessup
------------------------------
Vice President-Chief Financial
Officer
October 16, 2001
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