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 December 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 January 11, 2002 was
42,637,000.
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 December 1, 2001 and March 3, 2001 3
Condensed Consolidated Statements of Operations
for the thirteen and thirty-nine weeks ended
December 1, 2001 and November 25, 2000 4
Condensed Consolidated Statements of Comprehensive
Income for the thirteen and thirty-nine weeks ended
December 1, 2001 and November 25, 2000 5
Condensed Consolidated Statements of Cash Flows
for the thirty-nine weeks ended December 1, 2001 and
November 25, 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)
December March
1, 2001 3, 2001
-------- -------
(amounts in thousands
except share data)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 127,389 $ 158,741
Accounts receivable - net ........................... 21,481 10,770
Inventories ......................................... 27,840 22,926
Income tax receivable ............................... 7,790 11,570
Deferred tax assets ................................. 3,528 2,444
Prepaid expenses and other current assets ........... 3,777 4,328
------- -------
TOTAL CURRENT ASSETS ............................ 191,805 210,779
------- -------
PROPERTY, PLANT & EQUIPMENT ............................. 24,063 19,136
Less: accumulated depreciation and amortization .... 10,050 7,955
------ ------
NET PROPERTY, PLANT & EQUIPMENT ................. 14,013 11,181
------ ------
INTANGIBLE ASSETS, net of accumulated
amortization of $47,934 and $45,930 ................. 55,755 54,970
OTHER ASSETS ............................................ 4,221 3,342
------- -------
TOTAL ASSETS .................................... $ 265,794 $ 280,272
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable .................................... $ 11,781 $ 13,705
Accrued expenses and other liabilities .............. 38,165 36,969
Income taxes payable ................................ 3,114 22,026
------ ------
TOTAL CURRENT LIABILITIES ....................... 53,060 72,700
DEFERRED INCOME TAXES ................................... 493 1,344
OTHER LIABILITIES ....................................... 10,385 9,686
------ ------
TOTAL LIABILITIES ............................... 63,938 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 48,970,000 shares
and 48,421,000 shares as of December 1, 2001
and March 3, 2001, respectively .................. 490 484
Additional paid-in capital ............................ 24,569 21,758
Treasury stock, 6,418,000 shares and 4,329,000 shares
as of Dec. 1, 2001 and March 3, 2001, respectively (60,307) (38,051)
Retained earnings ..................................... 244,492 217,479
Accumulated other comprehensive loss .................. (7,388) (5,128)
------- -------
TOTAL STOCKHOLDERS' EQUITY ..................... 201,856 196,542
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $265,794 $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 Thirty-nine weeks ended
December November December November
1, 2001 25, 2000 1, 2001 25, 2000
------- -------- -------- --------
(amounts in thousands, except share data)
Net sales ......................... $ 72,917 $ 92,700 $ 242,027 $ 378,740
Cost of sales ..................... 49,793 49,090 143,990 194,994
------------ ------------ ------------ ------------
Gross profit on sales ............. 23,124 43,610 98,037 183,746
Other income (expense) ............ 718 195 (1,122) 1,166
------------ ------------ ------------ ------------
23,842 43,805 96,915 184,912
Selling, general and administrative
expenses .......................... 17,925 18,989 61,710 63,639
------------ ------------ ------------ ------------
Income from operations ............ 5,917 24,816 35,205 121,273
Interest income, net .............. 949 1,613 3,663 3,530
------------ ------------ ------------ ------------
Income before provision for income
taxes ............................. 6,866 26,429 38,868 124,803
Provision for income taxes ........ 334 7,548 11,855 44,929
------------ ------------ ------------ ------------
Net income ........................ $ 6,532 $ 18,881 $ 27,013 $ 79,874
============ ============ ============ ============
Net income per share - basic ...... $ 0.15 $ 0.42 $ 0.62 $ 1.77
- diluted .... 0.15 0.41 0.61 1.72
Weighted average shares outstanding
- basic ....... 42,595,000 44,796,000 43,275,000 45,228,000
- diluted ..... 43,818,000 45,959,000 44,557,000 46,487,000
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 Thirty-nine weeks ended
December November December November
1, 2001 25, 2000 1, 2001 25, 2000
-------- -------- -------- --------
(amounts in thousands)
Net income .................... $ 6,532 $ 18,881 $ 27,013 $ 79,874
Currency translation adjustment (1,159) (3,609) (2,260) (6,174)
-------- -------- -------- --------
Comprehensive income .......... $ 5,373 $ 15,272 $ 24,753 $ 73,700
======== ======== ======== ========
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)
Thirty-nine weeks ended
December November
1, 2001 25, 2000
-------- --------
(amounts in thousands)
Cash flows from operating activities:
Net income ...................................... $ 27,013 $ 79,874
Add non-cash items included in net income:
Depreciation and amortization .............. 4,196 3,400
Deferred income taxes ...................... -- 602
Change in operating assets and liabilities:
Accounts receivable ........................ (10,617) 3,240
Inventories ................................ (3,953) (2,733)
Income tax receivable ...................... 3,781 (754)
Prepaid expenses and other current assets .. 581 626
Payables and other current liabilities ..... (20,560) 15,964
Other liabilities .......................... 402 (5,813)
------ ------
Cash provided by operating activities 843 94,406
------ ------
Cash flows from investing activities:
Purchase of subsidiary, net of cash ........ (5,597) --
Additions to property, plant and equipment . (4,084) (3,157)
------- -------
Cash used in investing activities ... (9,681) (3,157)
------- -------
Cash flows from financing activities:
Exercise of stock options ................... 2,819 1,826
Repurchase of common stock .................. (22,262) (15,853)
-------- --------
Cash used in financing activities .. (19,443) (14,027)
-------- -------
Net increase/(decrease) in cash
and cash equivalents ............................ (28,281) 77,222
Effect of exchange rate changes on cash
and cash equivalents ............................ (3,071) (217)
Cash and cash equivalents at beginning of period .. 158,741 75,853
------- -------
Cash and cash equivalents at end of period ........ $ 127,389 $ 152,858
======= =======
Supplemental disclosure of cash flow information:
Interest paid ...................................... $ 40 $ 98
Income taxes paid .................................. $ 19,759 $ 24,822
See Notes to Condensed Consolidated Financial Statements and Accountants' Review
Report.
6
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THIRTY-NINE WEEKS ENDED DECEMBER 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 thirty-nine weeks ended December 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)
December March
1, 2001 3, 2001
------- -------
(amounts in thousands)
Raw Materials $ 4,860 $ 2,804
Work In Process 2,927 805
Finished Product 20,053 19,317
------- -------
Total $27,840 $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,
sticker/album products featuring players from certain European soccer
leagues as well as the Company's sports Internet activities.
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 sold,
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 Thirty-nine weeks ended
December November December November
1, 2001 25, 2000 1, 2001 25, 2000
-------- -------- -------- --------
(In thousands of dollars)
Net Sales
---------
Confectionery ........................... $ 31,521 $ 33,472 $ 121,770 $ 143,135
Collectible Sports Products ............. 34,930 36,489 94,568 100,070
Entertainment Products .................. 6,466 22,739 25,689 135,535
------ ------ ------- -------
Total ................................... $ 72,917 $ 92,700 $ 242,027 $ 378,740
====== ====== ======= =======
Contributed Margin
------------------
Confectionery ........................... $ 10,214 $ 12,913 $ 44,790 $ 54,616
Collectible Sports Products ............. 6,373 11,061 27,268 36,776
Entertainment Products .................. 3,318 16,200 14,477 77,441
------ ------ ------ -------
Total ................................... $ 19,905 $ 40,174 $ 86,535 $ 168,833
====== ====== ====== =======
Reconciliation of contributed margin
to income before provision for
income taxes:
Total contributed margin ................ $ 19,905 $ 40,174 $ 86,535 $ 168,833
Unallocated general and administrative
expenses and manufacturing overhead ... (13,091) (14,115) (46,012) (45,326)
Depreciation & amortization ............. (1,615) (1,438) (4,196) (3,400)
Other income (expense) .................. 718 195 (1,122) 1,166
------ ------ ------ -------
Income from operations .................. 5,917 24,816 35,205 121,273
Interest income, net .................... 949 1,613 3,663 3,530
------ ------ ------ -------
Income before provision for income taxes $ 6,866 $ 26,429 $ 38,868 $ 124,803
====== ====== ====== =======
8
5. Reclassifications
Beginning in the first quarter of fiscal 2001 the Company 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 December 1, 2001 and
March 3, 2001 and the Statement of Operations for the thirteen and
thirty-nine week periods ended December 1, 2001 and November 25, 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
of thePit.com, Inc., which operates a sports card exchange, for $5.6
million in cash, net. 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
allocation of the purchase price is complete and, accordingly, $780,000
($470,000 for technology and $310,000 for marketing agreements) has been
reclassified from goodwill to intangibles and is being amortized over 5
years. The amount of goodwill remaining after the reclassification is $2.0
million. $39,000 in quarterly amortization of these intangibles has been
included in the Consolidated Statement of Operations for the period ended
December 1, 2001.
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 December 1,
2001, and the related condensed consolidated statements of operations and cash
flows for the thirteen week periods ended December 1, 2001 and November 25,
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
January 8, 2002
New York, New York
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Third Quarter Fiscal Year 2002 (thirteen weeks ended December 1, 2001) versus
-----------------------------------------------------------------------------
Third Quarter Fiscal Year 2001 (thirteen weeks ended November 25, 2000)
-----------------------------------------------------------------------
The following table sets forth, for the periods indicated, net sales by key
business segment:
Thirteen weeks ended Thirty-nine weeks ended
December November December November
1, 2001 25, 2000 1, 2001 25, 2000
-------- -------- -------- --------
(In thousands of dollars)
Net Sales
Confectionery ............. $ 31,521 $ 33,472 $121,770 $143,135
Collectible Sports Products 34,930 36,489 94,568 100,070
Entertainment Products .... 6,466 22,739 25,689 135,535
------- ------- ------- -------
Total ............ $ 72,917 $ 92,700 $242,027 $378,740
======= ======= ======= =======
Net sales in the third quarter of fiscal 2002 decreased 21.3% to $72.9 million
from $92.7 million for the same period last year. This decrease was primarily a
function of a significant reduction in the popularity of Topps' products
featuring Pokemon, which was a hot property for the Company last year. Pokemon
sales decreased to $2.1 million in the quarter this year from $30.5 million last
year, a difference of $28.4 million.
Net sales of confectionery products which include, among others, Bazooka brand
bubble gum and Ring Pop, Push Pop, Baby Bottle Pop and Pokemon candies,
decreased 5.8% in the third quarter of this year to $31.5 million from $33.5
million in fiscal 2001. Included in fiscal 2002 sales is $0.3 million from
Pokemon confectionery products, a decrease of $6.5 million versus 2001. Sales of
branded (non-Pokemon) confectionery products increased 16.8% in the quarter to
$31.2 million, reflecting strong domestic growth of Ring Pop and Push Pop, as
well as the introduction of seasonal products and solid gains overseas,
particularly in Japan, Canada and Mexico.
Net sales of collectible sports products, which consist of traditional cards and
sticker/album products as well as sports Internet activities, decreased 4.3% to
$34.9 million in the third quarter of fiscal 2002 from $36.5 million last year.
Sales of traditional sports products decreased 12% in the quarter to $31.9
million, a function of higher sales of baseball products which were more than
offset by lower sales of football and basketball products. Internet activities,
specifically etopps (cards sold online in an IPO format) and thePit (an online
sports card exchange), generated $3.0 million in sales and $1.8 million in
contributed margin losses (before overhead) in the quarter versus no sales and
contributed margin impact a year ago.
Net sales of entertainment products, which consist of entertainment cards and
the Merlin line of entertainment sticker/album products, decreased to $6.5
million in the third quarter of fiscal 2002 from $22.7 million in fiscal 2001
reflecting a $22.0 million decline in sales of Pokemon products to $1.8 million.
During the quarter this year, the Company also sold entertainment products
featuring Enduring Freedom (which chronicles the nation's war on terrorism), WWF
in international markets, Lord of the Rings and Monsters, Inc.
11
Gross profit as a percentage of net sales in the third quarter of fiscal 2002
decreased to 31.7% as compared with 47.0% in the same period last year. Margins
this year were impacted by the reduction in sales of high-margin Pokemon
products, increased costs associated with sports autographs and relics, higher
product development costs and an increase in product obsolescence associated
with the launch of etopps.
Other income/(expense) was $718,000 this year versus $195,000 last year. This
increase was primarily the result of non-cash foreign exchange gains this year
on dollar-denominated cash balances held in Europe.
Selling, general and administrative ("SG&A") expenses increased as a percentage
of net sales to 24.6% in the third quarter of fiscal 2002 from 20.5% a year ago
primarily as a result of lower sales. SG&A dollar spending decreased to $17.9
million this year from $19.0 million in the quarter last year as a result of a
reduction in the accrual for employee incentive compensation and lower marketing
expenditures overseas.
Net interest income in the third quarter was $949,000 this year versus $1.6
million last year, the result of lower interest rates and a lower cash balance,
on average, than last year.
Net income in the third quarter of fiscal 2002 was $6.5 million, or $0.15 per
fully diluted share, as compared with $18.9 million, or $0.41 per fully diluted
share last year.
Nine Months Fiscal 2002 (thirty-nine weeks ended December 1, 2001) compared to
------------------------------------------------------------------------------
Nine Months Fiscal 2001 (thirty-nine weeks ended November 25, 2000)
-------------------------------------------------------------------
Net sales for the first nine months of fiscal 2002 decreased 36.1% to $242.0
million from $378.7 million for the same period last year. This decrease was a
function of a significant reduction in Pokemon sales to $20.9 million in the
period this year from $170.0 million last year. Approximately $8.5 million of
the Pokemon sales in the period this year, versus $11.0 million last year, were
the result of reversals of the provision for returns.
Net sales of confectionery products decreased 14.9% in the nine months this year
to $121.8 million from $143.1 million in fiscal 2001, the result of a $30.9
million decline in Pokemon confectionery sales to $5.0 million this year.
Excluding Pokemon products, sales of branded confectionery products increased
9.0%, driven by strong domestic growth of Ring Pop, Push Pop and Baby Bottle Pop
and the introduction of seasonal products.
Net sales of collectible sports products decreased 5.5% to $94.6 million in the
first nine months of fiscal 2002 from $100.1 million in the comparable period
last year. Sales of traditional sports products decreased 8.7% in the period,
primarily the result of lower sales of football and basketball products which
were partially offset by higher sales of baseball products. Internet activities,
specifically etopps (card sold online in an IPO format) and thePit (an online
sports card exchange), generated $3.2 million in sales and $1.9 million in
contributed margin losses (before overhead) in the nine months versus no sales
and contributed margin impact a year ago.
Net sales of entertainment products decreased to $25.7 million in the first nine
months of fiscal 2002 from $135.5 million in fiscal 2001 reflecting a $118.1
million decrease in sales of Pokemon products to $15.9 million this year.
12
Gross profit as a percentage of net sales for the first nine months of fiscal
2002 decreased to 40.5% as compared with 48.5% for the same period last year.
Margins this year were 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) through nine months was an expense of $1.1 million this
year versus income of $1.2 million last year, primarily as a result of non-cash
foreign exchange losses of $2.0 million this year on dollar-denominated cash
balances held in Europe.
Selling, general and administrative ("SG&A") expenses increased as a percentage
of net sales to 25.5% in the first nine months of fiscal 2002 from 16.8% a year
ago as a result of lower sales. SG&A dollar spending decreased to $61.7 million
this year from $63.6 million last year as a result of lower marketing
expenditures, particularly overseas, and lower costs associated with employee
incentive compensation.
Net interest income increased to $3.7 million in fiscal 2002 from $3.5 million
in fiscal 2001 as a result of higher cash balances, on average, than last year.
Net income in the first nine months of fiscal 2002 was $27.0 million, or $.61
per fully diluted share, as compared with $79.9 million, or $1.72 per fully
diluted share last year.
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. In October 1, 2001, repurchases against this
authorization were completed, and the Board of Directors authorized the purchase
of up to an additional 5 million shares of stock. During the third quarter of
fiscal 2002, the Company repurchased 493,000 shares at an average price of
$9.76, bringing total shares purchased as of December 1, 2001 to 5.3 million
under these two authorizations.
As of December 1, 2001, the Company had $127.4 million in cash and cash
equivalents.
During the first nine months of fiscal 2002, the Company's net decrease in cash
and cash equivalents was $28.3 million versus an increase of $77.2 million in
the first nine months of fiscal 2001. Cash provided by operating activities in
the nine months of this year was $0.8 million versus $94.4 million last year,
primarily as a result of lower net income, the payment of almost $20 million in
European taxes and an increase in receivable balances (driven by higher U.S
sales and unusually low receivable balances at the end of last year). Cash used
in investing activities this year reflects the $5.6 million acquisition of
thePit.com as well as $4.1 million in capital expenditures compared with $3.2
million 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 $19.4 million this year versus $14.0 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 or 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 initiatives 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) an adverse outcome in any of the Company's material legal
proceedings; (xi) 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 December 1, 2001, the
Company had $9.1 million in forward contracts which were entered into for the
purpose of hedging forecasted receipts and disbursements.
14
ITEM 1. LEGAL PROCEEDINGS
In November 1998, the Company was named as a defendant in a purported class
action commenced in the United States District Court for the Southern
District of California (the "California Court") entitled Rodriquez, et. al.
v. The Topps Company, Inc., No. CV 2121-B (AJB) (S.D. Cal.) (the "Class
Action"). The Class Action alleges that the Company violated the Racketeer
Influenced and Corrupt Organizations Act ("RICO") and the California Unfair
Business Practices Act, by its practice of selling sports and entertainment
trading cards with randomly-inserted "insert" cards, allegedly in violation
of state and federal anti-gambling laws. The Class Action seeks treble
damages and attorneys' fees on behalf of all individuals who purchased
packs of cards at least in part to obtain an "insert" card over a four-year
period. On January 22, 1999, plaintiffs moved to consolidate the Class
Action with similar class actions pending against several of the Company's
principal competitors and licensors in the California Court. On January 25,
1999, the Company moved to dismiss the complaint, or, alternatively, to
transfer the Class Action to the Eastern District of New York or stay the
Class Action pending the outcome of the Declaratory Judgment Action pending
in the Eastern District of New York. By orders dated May 14, 1999, the
California Court denied the Company's motions to dismiss or transfer the
Class Action but granted the Company's motion to stay the Class Action
pending the outcome of the Declaratory Judgment Action. The California
Court also denied plaintiffs' motion to consolidate the Class Action with
similar purported class actions. On April 18, 2000, the California Court
entered an order requiring plaintiffs in the Class Action as well as in the
other purported Class Actions to show cause why all such actions should not
be dismissed. By order dated June 21, 2000, the California Court vacated
its May 14, 2000 order denying the Company's motion to dismiss the Class,
dismissed the RICO claim in the Class Action with prejudice and without
leave to replead, and dismissed the pendent state law claims without
prejudice. Plaintiffs filed a notice of appeal of the California Court's
decision to the United States Court of Appeals for the Ninth Circuit on
July 21, 2000. Briefing has been completed, and oral argument was held on
December 5, 2001 but the Court has not yet issued a decision. If the Class
Action were reinstated on appeal, an adverse outcome in the Class Action
could materially effect the Company's future plans and results. The Company
intends to vigorously defend against the appeal.
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
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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 ruled that plaintiff's motion for
summary judgment will not be heard until the Court has 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 27, 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as required by Item 601 of Regulation S-K
None
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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
January 15, 2002
18