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 June 1, 2002
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 July 9, 2002 was
41,816,000.
THE TOPPS COMPANY, INC.
AND SUBSIDIARIES
--------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
--------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
Index Page
Condensed Consolidated Balance Sheets as of
June 1, 2002 and March 2, 2002 3
Condensed Consolidated Statements of Operations
for the thirteen weeks ended June 1, 2002 and
June 2, 2001 4
Condensed Consolidated Statements of Comprehensive
Income for the thirteen weeks ended June 1, 2002
and June 2, 2001 5
Condensed Consolidated Statements of Cash Flows
for the thirteen weeks ended June 1, 2002 and
June 2, 2001 6
Notes to Condensed Consolidated Financial Statements 7
Report of Independent Public Accountants 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. DISCLOSURES ABOUT MARKET RISK 16
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PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
2
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 1, March 2,
2002 2002
------- --------
(amounts in thousands
except share data)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 109,351 $ 121,057
Accounts receivable - net .......................... 35,838 20,039
Inventories ........................................ 24,436 23,096
Income tax receivable .............................. 874 3,230
Deferred tax assets ................................ 2,628 4,343
Prepaid expenses and other current assets .......... 10,654 11,807
--------- ---------
TOTAL CURRENT ASSETS ............................ 183,781 183,572
--------- ---------
PROPERTY, PLANT & EQUIPMENT ........................... 26,383 25,134
Less: accumulated depreciation and amortization .... 11,419 10,528
--------- ---------
NET PROPERTY, PLANT & EQUIPMENT ................. 14,964 14,606
--------- ---------
GOODWILL .............................................. 48,710 46,773
INTANGIBLE ASSETS, net of accumulated amortization
of $30,799 and $30,509 as of June 1, 2002 and
March 2, 2002, respectively ........................ 6,960 7,250
OTHER ASSETS .......................................... 7,618 5,749
--------- ---------
TOTAL ASSETS .................................... $ 262,033 $ 257,950
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ................................... $ 10,597 $ 10,966
Accrued expenses and other liabilities ............. 27,284 30,274
Income taxes payable ............................... 7,212 5,943
--------- --------
TOTAL CURRENT LIABILITIES ....................... 45,093 47,183
DEFERRED INCOME TAXES ................................. -- --
OTHER LIABILITIES ..................................... 17,073 16,713
--------- --------
TOTAL LIABILITIES ............................... 62,166 63,896
--------- --------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share authorized
10,000,000 shares, none issued ................... -- --
Common stock, par value $.01 per share, authorized
100,000,000 shares; issued 49,244,000 shares and
49,189,000 shares as of June 1, 2002 and March 2,
2002, respectively ............................... 492 492
Additional paid-in capital ......................... 27,214 26,824
Treasury stock, 7,363,000 shares and 7,143,000 shares
as of June 1, 2002 and March 2, 2002, respectively. (70,192) (67,415)
Retained earnings ................................. 253,282 245,941
Accumulated other comprehensive loss, net of income
taxes ............................................ (10,929) (11,788)
--------- --------
TOTAL STOCKHOLDERS' EQUITY ................ 199,867 194,054
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 262,033 $ 257,950
========= =========
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
June 1, June 2,
2002 2001
------- -------
(amounts in thousands,
except share data)
Net sales ................................... $ 87,739 $ 86,892
Cost of sales ............................... 55,104 49,190
-------- --------
Gross profit on sales ................. 32,635 37,702
Other income (expense) ...................... (66) 728
-------- --------
32,569 38,430
Selling, general and administrative expenses 21,904 21,437
-------- --------
Income from operations ................ 10,665 16,993
Interest income, net ........................ 632 1,465
-------- --------
Income before provision for income taxes .... 11,297 18,458
Provision for income taxes .................. 3,956 6,829
-------- --------
Net income ............................ $ 7,341 $ 11,629
======== ========
Net income per share - basic ................ $ 0.17 $ 0.27
Net income per share - diluted .............. $ 0.17 $ 0.26
Weighted average shares outstanding - basic . 42,000,000 43,854,000
Weighted average shares outstanding - diluted 42,960,000 45,049,000
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
June 1, June 2,
2002 2001
------- -------
(amounts in thousands)
Net income ....................... $ 7,341 $11,629
Currency translation adjustment 859 (3,994)
------- -------
Comprehensive income ............. $ 8,200 $ 7,635
======= =======
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)
Thirteen weeks ended
June 1, June 2,
2002 2001
------- -------
(amounts in thousands)
Cash flows from operating activities:
Net income ........................................ $ 7,341 $ 11,629
Add/(subtract) non-cash items included
in net income:
Depreciation and amortization ................... 1,160 1,203
Deferred income taxes ........................... 1,715 (126)
Change in operating assets and liabilities:
Accounts receivable ............................... (15,799) (10,815)
Inventories ....................................... (1,340) (3,864)
Income tax receivable ............................. 2,356 4,482
Prepaid expenses and other current assets ......... 1,153 388
Payables and other current liabilities ............ (2,090) (5,682)
Currency translation adjustment and other
liabilities ....................................... (1,840) (9,207)
------- --------
Cash used in operating activities .............. (7,344) (11,992)
------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ........ (1,249) (1,333)
------- -------
Cash used in investing activities .............. (1,249) (1,333)
------- -------
Cash flows from financing activities:
Exercise of stock options ......................... 727 782
Repurchase of common stock ........................ (2,792) (6,618)
------- -------
Cash used in financing activities ................... (2,065) (5,836)
------- -------
Effect of exchange rates on cash and cash equivalents (1,048) 4,642
Net decrease in cash and cash equivalents ........... (11,706) (14,519)
Cash and cash equivalents at beginning of quarter ... 121,057 158,741
-------- --------
Cash and cash equivalents at end of quarter ......... $109,351 $144,222
======== ========
Supplemental disclosure of cash flow information:
Interest paid ....................................... $ 23 $ 70
Income taxes paid ................................... $ 1,256 $ 3,645
See Notes to Condensed Consolidated Financial Statements and Accountants' Review
Report.
6
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THIRTEEN WEEKS ENDED JUNE 1, 2002
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 thirteen weeks ended June 1, 2002 are not
necessarily indicative of the results that may be expected for the year
ending March 1, 2003. For further information refer to the consolidated
financial statements and notes thereto in the Company's annual report for
the year ended March 2, 2002.
2. Quarterly Comparison
Management believes that quarter-to-quarter comparisons of sales and
operating results are affected by a number of factors, including new
product introductions, seasonal products, the timing of various expenses
such as advertising and variations in shipping and factory scheduling
requirements. Thus, quarterly results vary.
3. Accounts Receivable
(Unaudited)
June 1, March 2,
2002 2002
------- --------
(amounts in thousands)
Gross receivables $ 54,507 $ 37,148
Reserve for returns (17,699) (15,875)
Reserve for bad debt (970) ( 1,234)
-------- --------
Net $ 35,838 $ 20,039
======== ========
4. Inventories
(Unaudited)
June 1, March 2,
2002 2002
------- --------
(amounts in thousands)
Raw materials $ 6,651 $ 6,395
Work in process 1,053 1,274
Finished products 16,732 15,427
-------- --------
Total $ 24,436 $ 23,096
======== ========
5. Segment Information
Following is the breakdown of industry segments as required by SFAS No.
131. The Company has three reportable business segments: Confectionery,
Collectible Sports Products and Entertainment Products.
7
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 confections including Pokemon 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 thePit, etopps and ToppsVault Internet businesses.
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 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 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
June 1, June 2,
2002 2001
------- -------
(In thousands of dollars)
Net Sales
---------
Confectionery ............................. $ 43,080 $ 44,808
Collectible Sports Products ............... 34,343 30,911
Entertainment Products .................... 10,316 11,173
-------- --------
Total ..................................... $ 87,739 $ 86,892
======== ========
Contributed Margin
------------------
Confectionery ............................. $ 16,020 $ 17,735
Collectible Sports Products ............... 8,664 11,069
Entertainment Products .................... 2,939 5,245
-------- --------
Total ..................................... $ 27,623 $ 34,049
======== ========
Reconciliation of contributed margin
to income before provision for income taxes:
--------------------------------------------
Total contributed margin .................. $ 27,623 $ 34,049
Unallocated general and administrative
expenses and manufacturing overhead ....... (15,732) (16,581)
Depreciation and amortization ............. (1,160) (1,203)
Other income (expense)..................... (66) 728
-------- --------
Income from operations .................... 10,665 16,993
Interest income, net ...................... 632 1,465
-------- --------
Income before provision for income taxes .. $ 11,297 $ 18,458
======== ========
8
6. Credit Agreement
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. On June 1, 2002, the credit agreement was
amended to provide for an increase in the number of shares permitted to be
repurchased.
7. Reclassifications
Effective March 3, 2002, the Company adopted the EITF Issue No. 00-14
accounting standards that require certain trade promotion expenses, such as
slotting fees, to be reported as a reduction of net sales rather than as
marketing expense. Adoption of these requirements reduced both net sales
and marketing expenses in the first quarters of fiscal 2003 and 2002 by
$798,000 and $559,000, respectively, but did not impact net earnings in
either year.
8. Accounting Changes
On March 3, 2002 the Company adopted Statements of Financial Accounting
Standards Board standards Nos. 141, Business Combinations (SFAS 141), and
142, Goodwill and Other Intangible Assets (SFAS 142) which require 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 thirteen weeks ended June
1, 2002 with earnings and earnings per share assuming proforma applications
of the new accounting standards for the thirteen weeks ended June 2, 2001.
Thirteen weeks ended
June 1, 2002 June 2, 2001
------------ ------------
(amounts in thousands)
Net income $7,341 $11,629
Add back:
Goodwill amortization - 392
------ -------
Adjusted net income $7,341 $12,021
====== =======
Basic net income per share $0.17 $0.27
Goodwill amortization - $0.01
----- -----
Adjusted basic net income per share $0.17 $0.28
===== =====
Diluted net income per share $0.17 $0.26
Goodwill amortization - $0.01
----- -----
Adjusted diluted net income per share $0.17 $0.27
===== =====
9
The Company has evaluated its goodwill and intangible assets acquired prior
to June 30, 2001 using the criteria of SFAS 141, which resulted in no other
intangible being included in goodwill. The Company has evaluated its
intangible assets and determined that all such assets have determinable
lives. Furthermore, the Company has reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, no adjustments
were made to the amortization period or residual values of the intangible
assets. 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
in order to conform with the definitions contained in SFAS 142.
SFAS 142 prescribes a two-phase process for impairment testing of goodwill.
The first phase, required to be completed by August 31, 2002, screens for
impairment; while the second phase (if necessary), required to be completed
by March 1, 2003 measures the impairment. The Company is in the process of
completing the first phase and will report the results of that process in
the second quarter Form 10-Q.
For the three months ended June 1, 2002 no goodwill or other intangibles
were acquired, impaired or disposed. Other intangibles consisted of the
following:
(amounts in thousands)
June 1, 2002 June 2, 2001
------------ ------------
Gross ' Gross
Carrying Accumulated ' Carrying Accumulated
Value Amortization Net ' Value Amortization Net
----------------------------------'----------------------------------
Licenses & Contracts $ 21,879 $ 15,936 $ 5,943 ' $ 21,569 $ 14,261 $ 7,308
Intellectual Property 12,584 12,355 229 ' 12,584 12,038 546
Software & Other 2,952 2,508 444 ' 2,482 2,375 107
FAS 132 Pension 344 - 344 ' - - -
-------- -------- ------- ' -------- -------- -------
'
Total Intangibles $ 37,759 $ 30,799 $ 6,960 ' $ 36,635 $ 28,674 $ 7,961
======== ======== ======= ' ======== ======== =======
Over the next five years we expect the annual amortization of the
intangible assets described to be as follows:
Fiscal Year Amount
----------- ------
(in thousands)
2003 $ 1,160
2004 $ 1,060
2005 $ 826
2006 $ 826
2007 $ 826
Amortization expense was $321,000 for the three months ended June 1, 2002
and $670,000 including goodwill amortization of $392,000 for the three
months ended June 2, 2001.
10
9. 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 (CLRA) 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 the 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 the defendant's practices do not constitute
illegal gambling as a matter of law, but denying the demurrer 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 the California State practice, the Court heard oral argument on
whether or not its tentative ruling should stand as a final ruling. On June
12, 2001, the Court denied both motions. On September 21, 2001, plaintiff
moved for class certification. Briefing and discovery concerning the class
certification issue was completed in January 2002, and oral argument was
heard on February 27, 2002. On March 7, 2002, Judge Sabraw of the
California State Court issued a ruling denying class certification under
the CUBPA and granting class certification under the CLRA. On April 2,
2002, the defendants filed a joint motion to dismiss the CLRA cause of
action. This motion was granted on May 6, 2002. Plaintiff has indicated
that he intends to appeal both the ruling denying class certification under
the CUBPA and the ruling dismissing the CLRA cause of action.
11
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
The Topps Company, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of The
Topps Company, Inc. and subsidiaries (the "Company") as of June 1, 2002, and the
related condensed consolidated statements of operations and cash flows for the
thirteen week periods ended June 1, 2002 and June 2, 2001. 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 accounting principles generally accepted in the United
Sates of America.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of The Company as of March 2, 2002,
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 3, 2002 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 2, 2002 is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
DELOITTE & TOUCHE LLP
SIGNATURE
June 24, 2002
New York, New York
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
First Quarter Fiscal Year 2003 versus Fiscal Year 2002
------------------------------------------------------
The following table sets forth, for the periods indicated, net sales by key
business segment:
June 1, June 2,
2002 2001
-------- -------
(In thousands of dollars)
Confectionery $ 43,080 $ 44,808
Collectible Sports Products 34,343 30,911
Entertainment Products 10,316 11,173
-------- --------
Total $ 87,739 $ 86,892
======== ========
Net sales for the first quarter of fiscal 2003 increased 1% to $87.7 million
from $86.9 million for the same period last year.
Effective March 3, 2002, the Company adopted the EITF Issue No. 00-14 accounting
standards that require certain trade promotion expenses, such as slotting fees,
to be reported as a reduction of net sales rather than as selling, general and
administrative expense ("SG&A"). Adoption of these requirements reduced both net
sales and marketing expenses in the first quarters of fiscal 2003 and 2002 by
$798,000 and $559,000, respectively, but did not impact net earnings in either
year.
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 3.9% in the first quarter of this year to $43.1 million from $44.8
million in fiscal 2002. Included in first quarter fiscal 2003 sales were
$376,000 of Pokemon confectionery products versus $1.4 million in the first
quarter of fiscal 2002. Topps branded (non-Pokemon) confectionery sales in the
quarter were 1.5% below last year due to lower sales of Baby Bottle Pop in the
U.S. and Japan.
Net sales of collectible sports products, which consist of traditional sports
cards and sports sticker albums, as well as the sports Internet businesses,
increased 11.1% to $34.3 million in the first quarter of fiscal 2003 from $30.9
million in the comparable period last year. This increase reflects $3.0 million
in sales from the Internet businesses which did not generate sales a year ago,
strong sales of Premier League soccer products and the release of stickers and
albums featuring players from World Cup Soccer. Sales of traditional sports
cards in the U.S. declined, the result of continuing weak industry conditions.
Net sales of entertainment products, which consist of entertainment trading
cards and the Merlin line of entertainment sticker album products, decreased to
$10.3 million in the first quarter of fiscal 2003 from $11.2 million in fiscal
2002 reflecting lower sales of Pokemon products. Included in the first quarter
this year were $1.6 million of Pokemon sales versus $8.7 million last year. Also
included in reported sales are Pokemon return reserve reversals totaling $0.7
million this year versus $3.1 million last year, the result of higher than
expected sell-through of product at retail. As of June 1, 2002, the return
reserve balance for Pokemon products was $4.5 million. Non-Pokemon entertainment
sales, which consisted primarily of products associated with the recently
released Star Wars and Spiderman films, increased to $8.7 million from $2.5
million last year.
13
Gross profit as a percentage of net sales for the first quarter of fiscal 2003
decreased to 37.2% from 43.4% for the same period last year. This was primarily
the result of a reduction in high-margin Pokemon sales, lower margins on sales
of traditional sports card products and the addition of thePit business, which
has a lower gross profit margin on average.
Other income (expense) was an expense of $66,000 this year versus income of
$728,000 last year, reflecting less favorable mark-to-market adjustments on
foreign currency contracts this year than last.
SG&A increased as a percentage of net sales to 25.0% in the first quarter of
fiscal 2003 from 24.7% a year ago, while SG&A dollar spending increased to $21.9
million from $21.4 million. The dollar increase was driven by higher marketing
spending, primarily on the etopps and European businesses. Overhead costs in the
quarter were lower this year than last due to a smaller accrual for employee
incentive bonus payments, a reduction in etopps programming costs and the
elimination of goodwill amortization resulting from the adoption of FAS 142.
Net interest income decreased to $632,000 in fiscal 2003 from $1.5 million in
fiscal 2002 due to a decrease in cash on hand and lower interest rates.
The tax rate in the first quarter of fiscal 2003 was 35.0% versus 37.0% in the
first quarter of fiscal 2002, primarily as a result of the new accounting
treatment for goodwill amortization.
Net income for the first quarter of fiscal 2003 was $7.3 million, or $0.17 per
diluted share, compared with $11.6 million, or $0.26 per diluted share last
year.
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 June 1, 2003, the Company had $109.4 million in cash and cash equivalents.
On June 26, 2000, the Company entered into a credit agreement with Chase
Manhattan Bank and LaSalle Bank National Association. 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. On June 1, 2002, the credit agreement was amended
to provide for an increase in the number of shares permitted to be repurchased.
In October 1999, the Board of Directors 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 stock. As of June 1, 2002, the
Company had repurchased a total of 6.3 million shares at an average price of
$9.66. During the first quarter of fiscal 2003, the Company repurchased 291,000
shares at an average price of $9.92 and used 70,500 shares for the exercise of
stock options.
14
During the first quarter of fiscal 2003, the Company's net decrease in cash and
cash equivalents was $11.7 million versus a decrease of $14.5 million in the
first quarter of fiscal 2002. Cash used in operating activities in the first
quarter of this year was $7.3 million versus $12.0 million last year, primarily
as a result of lower European income tax payments in the current fiscal period.
Cash used in investing activities reflects $1.2 million in capital expenditures
this year compared with $1.3 million last year. Cash used in financing
activities reflects expenditures for the repurchase of Company stock of $2.8
million this year versus $6.6 million last year.
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) a player strike or lock-out in Major League
Baseball; (iii) quarterly fluctuations in results; (iv) the Company's loss of
important licensing arrangements; (v) the failure of the Company's Internet
initiative to achieve expected levels of success; (vi) the Company's loss of
important supply arrangements with third parties; (vii) the loss of any of the
Company's key customers or distributors; (viii) further prolonged and material
contraction in the trading card industry as a whole; (ix) excessive returns of
the Company's products; (x) civil unrest, currency devaluation or political
upheaval in 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.
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ITEM 3. DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk associated with activities in derivative
financial instruments (e.g., hedging or currency swap agreements), other
financial instruments and derivative commodity instruments is confined to the
impact of mark-to-market changes in foreign currency rates on the Company's
forward contracts and options. The Company has no debt and does not engage in
any commodity-related derivative transactions. As of June 1, 2002, the Company
had contracts and options which were entered into for the purpose of hedging
forecasted receipts and disbursements in various foreign currencies and which,
due to the weakening of the U.S. dollar, resulted in a unfavorable
mark-to-market in the quarter.
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THE TOPPS COMPANY, INC.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company took place on June 27, 2002
for the following purposes:
1. To elect three directors;
2. To ratify and approve an amendment and restatement of the Company's
1994 Directors' stock option plan;
3. To ratify the appointment of auditors.
The results of the matters voted on are as follows:
For Withheld
---------- ----------
1. Election of Directors
Stephen D. Greenberg 37,844,214 551,316
Ann Kirschner 27,208,665 11,186,865
Richard Tarlow 37,775,789 619,741
For Against Abstentions
---------- ---------- -----------
2. Approval of amendment to
Directors' stock
option plan 32,851,870 1,687,043 3,856,617
3. Ratification of appointment
of auditors 37,581,082 763,869 50,579
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as required by Item 601 of Regulation S-K
10.26 1994 Non-Employee Director Stock Option Plan as Amended and Restated as
of June 27, 2002
10.27 Amended and Restated Supplemental Pension Agreement with Arthur T.
Shorin
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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
July 16, 2002
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