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 August 31, 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 October 8, 2002 was
41,256,000.
THE TOPPS COMPANY, INC.
AND SUBSIDIARIES
--------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
--------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
Index Page
----
Condensed Consolidated Balance Sheets as of
August 31, 2002 and March 2, 2002 3
Condensed Consolidated Statements of Operations
for the thirteen and twenty-six weeks ended
August 31, 2002 and September 1, 2001 4
Condensed Consolidated Statements of Comprehensive
Income for the thirteen and twenty-six weeks ended
August 31, 2002 and September 1, 2001 5
Condensed Consolidated Statements of Cash Flows
for the twenty-six weeks ended August 31, 2002
and September 1, 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 18
--------------------------------------------------------------------------------
PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
ITEM 14. CONTROLS AND PROCEDURES 20
2
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
August March
31, 2002 2, 2002
-------- -------
(amounts in thousands
except share data)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents ...................... $118,484 $121,057
Accounts receivable - net ...................... 19,526 20,039
Inventories .................................... 28,538 23,096
Income tax receivable .......................... 989 3,230
Deferred tax assets ............................ 3,089 4,343
Prepaid expenses and other current assets ...... 10,793 11,807
-------- --------
TOTAL CURRENT ASSETS ......................... 181,419 183,572
-------- --------
PROPERTY, PLANT & EQUIPMENT ...................... 27,028 25,134
Less: accumulated depreciation and amortization 12,435 10,528
-------- --------
NET PROPERTY, PLANT & EQUIPMENT .............. 14,593 14,606
-------- --------
GOODWILL ......................................... 48,840 46,773
INTANGIBLE ASSETS, net of accumulated amortization
of $31,088 and $30,509 as of August 31, 2002
and March 2, 2002, respectively ................ 6,671 7,250
OTHER ASSETS ..................................... 7,722 5,749
-------- --------
TOTAL ASSETS .............................. $259,245 $257,950
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable ............................... $ 9,683 $ 10,966
Accrued expenses and other liabilities ......... 27,701 30,274
Income taxes payable ........................... 4,257 5,943
-------- --------
TOTAL CURRENT LIABILITIES .................... 41,641 47,183
DEFERRED INCOME TAXES ............................ - -
OTHER LIABILITIES ................................ 17,290 16,713
-------- --------
TOTAL LIABILITIES ............................ 58,931 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 August 31, 2002 and
March 2, 2002, respectively 492 492
Additional paid-in capital 27,818 26,824
Treasury stock, 7,989,000 shares and 7,143,000
shares as of August 31, 2002 and March 2, 2002,
respectively (76,507) (67,415)
Retained earnings 257,974 245,941
Accumulated other comprehensive loss, net of
income taxes (9,463) (11,788)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 200,314 194,054
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $259,245 $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 Twenty-six weeks ended
August September August September
31, 2002 1, 2001 31, 2002 1, 2001
-------- --------- -------- ---------
(amounts in thousands, except share data)
Net sales ......................... $ 69,999 $ 81,214 $157,738 $168,106
Cost of sales ..................... 44,703 45,007 99,807 94,197
-------- -------- -------- --------
Gross profit on sales ....... 25,296 36,207 57,931 73,909
Other income (expense) ............ 288 (2,568) 222 (1,840)
-------- -------- -------- ---------
25,584 33,639 58,153 72,069
Selling, general and administrative
expenses ........................ 19,273 21,344 41,177 42,781
-------- -------- -------- --------
Income from operations ....... 6,311 12,295 16,976 29,288
Interest income, net .............. 568 1,249 1,200 2,714
-------- -------- -------- --------
Income before provision for
income taxes .................... 6,879 13,544 18,176 32,002
Provision for income taxes ........ 2,187 4,692 6,143 11,521
-------- -------- -------- --------
Net income ............. $ 4,692 $ 8,852 $ 12,033 $ 20,481
======== ======== ======== ========
Net income per share - basic ...... $ 0.11 $ 0.20 $ 0.29 $ 0.47
- diluted .... 0.11 0.20 0.28 0.46
Weighted average shares
outstanding - basic ...... 41,622,000 43,376,000 41,811,000 43,615,000
- diluted .... 42,466,000 44,709,000 42,717,000 44,878,000
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
August September August September
31, 2002 1, 2001 31, 2002 1, 2001
-------- --------- -------- ---------
(amounts in thousands)
Net income ...................... $ 4,692 $ 8,852 $ 12,033 $ 20,481
Currency translation adjustment.. 1,466 2,893 2,325 (1,101)
-------- ------- -------- --------
Comprehensive income ............ $ 6,158 $ 11,745 $ 14,358 $ 19,380
======== ======== ======== ========
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
August September
31, 2002 1, 2001
-------- ---------
(amounts in thousands)
Cash flows from operating activities:
Net income .......................................... $ 12,033 $ 20,481
Add/(subtract) non-cash items included in net income:
Depreciation and amortization ................... 2,433 2,581
Deferred income taxes ........................... 1,254 14
Change in operating assets and liabilities:
Accounts receivable ............................. 513 (11,548)
Inventories ..................................... (5,442) (6,651)
Income tax receivable ........................... 2,241 4,753
Prepaid expenses and other current assets ....... 1,014 523
Payables and other current liabilities .......... (5,542) (9,133)
Other liabilities ............................... (3,626) 239
-------- -------
Cash provided by operating activities ...... 4,878 1,259
-------- -------
Cash flows from investing activities:
Purchase of subsidiary .......................... - (5,671)
Additions to property, plant and equipment ...... (1,894) (3,096)
------- --------
Cash used in investing activities .......... (1,894) (8,767)
-------- --------
Cash flows from financing activities:
Exercise of stock options ....................... 1,333 2,061
Repurchase of common stock ...................... (9,431) (17,422)
-------- --------
Cash used in financing activities .......... (8,098) (15,361)
-------- --------
Effect of exchange rates on cash and cash equivalents . 2,541 (1,415)
Net increase (decrease) in cash and cash equivalents .. (2,573) (24,284)
Cash and cash equivalents at beginning of period ...... 121,057 158,741
------- -------
Cash and cash equivalents at end of period ............ $118,484 $134,457
======== ========
Supplemental disclosure of cash flow information:
Interest paid ........................................ $ 36 $ 19
Income taxes paid .................................... $ 6,875 $ 13,851
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 AUGUST 31, 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 twenty-six weeks ended August 31, 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 the timing
of sports and entertainment releases, new product introductions, seasonal
products, the timing of various expenses such as advertising and variations
in shipping and factory scheduling requirements, among others. Thus,
quarterly results vary.
3. Accounts Receivable
(Unaudited)
August March
31, 2002 2, 2002
-------- -------
(amounts in thousands)
Gross receivables $ 38,327 $ 37,148
Reserve for returns (17,618) (15,875)
Reserve for bad debt (1,183) (1,234)
--------- ---------
Net $ 19,526 $ 20,039
========= =========
4. Inventories
(Unaudited)
August March
31, 2002 2, 2002
-------- -------
(amounts in thousands)
Raw materials $ 7,753 $ 6,395
Work in process 1,634 1,274
Finished product 19,151 15,427
-------- --------
Total $ 28,538 $ 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 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 sales from thePit, etopps and Topps Vault 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
(expense), 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 Twenty-six weeks ended
August September August September
31, 2002 1, 2001 31, 2002 1, 2001
-------- --------- -------- ---------
(amounts in thousands)
Net Sales
Confectionery ................... $ 42,248 $ 44,442 $ 85,328 $ 89,250
Collectible Sports Products ..... 24,365 28,727 58,708 59,638
Entertainment Products .......... 3,386 8,045 13,702 19,218
-------- -------- -------- --------
Total ........................... $ 69,999 $ 81,214 $157,738 $168,106
======== ======== ======== ========
Contributed Margin
Confectionery ................... $ 15,138 $ 16,841 $ 31,158 $ 34,576
Collectible Sports Products ..... 5,526 9,826 14,190 20,895
Entertainment Products .......... 1,966 5,914 4,905 11,159
-------- -------- -------- --------
Total ........................... $ 22,630 $ 32,581 $ 50,253 $ 66,630
======== ======== ======== ========
Reconciliation of Contributed Margin
to Income Before Provision for
Income Taxes:
Total Contributed Margin ........ $ 22,630 $ 32,581 $ 50,253 $ 66,630
Unallocated General and
Administrative Expenses and
Manufacturing Overhead .. (15,334) (16,340) (31,066) (32,921)
Depreciation & Amortization ..... (1,273) (1,378) (2,433) (2,581)
Other Income (Expense) .......... 288 (2,568) 222 (1,840)
-------- --------- -------- ---------
Income from Operations .......... 6,311 12,295 16,976 29,288
Interest Income, Net ............ 568 1,249 1,200 2,714
-------- --------- -------- ---------
Income Before Provision for
Income Taxes $ 6,879 $ 13,544 $ 18,176 $ 32,002
======== ======== ========= ========
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 of Topps common
stock 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 reclassified. As a result, trade promotion expenses
for fiscal 2003 of $868,000 in the second quarter and $1,666,000 in the six
month period have been reported as a reduction of net sales rather than as
marketing expense. Fiscal 2002 financials reflect similar treatment of
these expenses which totaled $445,000 in the second quarter and $1,004,000
in the six months. These changes did not impact reported 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 and the
twenty-six weeks ended August 31, 2002 with earnings and earnings per share
assuming proforma application of the new accounting standards for the
thirteen and the twenty-six weeks ended September 1, 2001.
Thirteen weeks ended Twenty-six weeks ended
August September August September
31, 2002 1, 2001 31, 2002 1, 2001
-------- --------- -------- ---------
Net income ...................... $ 4,692 $ 8,852 $ 12,033 $ 20,481
Add back:
Goodwill amortization ........... - 392 - 784
------- ------- -------- --------
Adjusted net income ............. $ 4,692 $ 9,244 $ 12,033 $ 21,265
======= ======= ======== ========
Basic net income per share ...... $ 0.11 $ 0.20 $ 0.29 $ 0.47
Goodwill amortization ........... $ - $ 0.01 $ - $ 0.02
------- ------- -------- --------
Adjusted basic net income
per share .................... $ 0.11 $ 0.21 $ 0.29 $ 0.49
======= ======= ======== ========
Diluted net income per share .... $ 0.11 $ 0.20 $ 0.28 $ 0.46
Goodwill amortization ........... $ - $ 0.01 $ - $ 0.02
------- ------- -------- --------
Adjusted diluted net income
per share .................... $ 0.11 $ 0.21 $ 0.28 $ 0.48
======= ======= ======== ========
9
The Company has evaluated its goodwill and intangible assets acquired prior
to June 30, 2001 using the criteria of SFAS 141, and has determined that no
intangible assets should be reclassified to goodwill. The Company has also
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 intangible assets to review for any
necessary amortization period adjustments. Based on that assessment, no
adjustments were made to the amortization period or residual values of the
intangible assets. In order to conform with the definitions contained in
SFAS 142, the Company reclassified $1.5 million in deferred financing fees
from intangible assets to other assets and $0.8 million in software
development costs from intangible assets to property, plant and equipment.
Additionally, $1.9 million of deferred tax assets related to thePit.com
acquisition were reclassified to goodwill.
SFAS 142 prescribes a two-phase process for impairment testing of goodwill.
The first phase, completed on 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 has completed the first phase
and has concluded that no impairment of goodwill exists. Therefore,
completion of phase two of the transitional impairment test is not
necessary.
For the six months ended August 31, 2002, no goodwill or other intangibles
were acquired, impaired or disposed. Intangible assets consisted of the
following as of August 31, 2002 and September 1, 2001:
(amounts in thousands)
August 31, 2002 September 1, 2001
Gross ' Gross
Carrying Accumulated ' Carrying Accumulated
Value Amortization Net ' Value Amortization Net
-------- ------------ ------- ' -------- ------------ -------
Licenses & Contracts $ 21,879 $ 16,155 $ 5,724 ' $ 21,879 $ 15,279 $ 6,600
Intellectual Property 12,584 12,394 190 ' 12,584 12,235 349
Software & Other 2,952 2,539 413 ' 2,952 2,414 538
FAS 132 Pension 344 - 344 ' - - -
-------- -------- ------- ' -------- -------- -------
Total Intangibles $ 37,759 $ 31,088 $ 6,671 ' $ 37,415 $ 29,928 $ 7,487
======== ======== ======= ' ======== ======== =======
Over the next five years the Company expects the annual amortization of the
intangible assets detailed above to be as follows:
Fiscal Year Amount
----------- ------
(in thousands)
2003 $1,160
2004 $1,060
2005 $ 826
2006 $ 826
2007 $ 826
In addition to the amortization of intangibles listed above, reported
amortization expense, which was $642,000 for the six months ended August 31,
2002 and $1,340,000 for the six months ended September 1, 2001, included
amortization of deferred financing fees and, in fiscal 2002, goodwill
amortization of $784,000.
10
9. 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 sought 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. On August 20, 2002, the Ninth Circuit affirmed the dismissal
of the RICO claims. If the Class Action were reinstated on further appeal,
an adverse outcome in the Class Action could materially affect the
Company's future plans and results.
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 August 31, 2002, and
the related condensed consolidated statements of operations and cash flows for
the twenty-six weeks ended August 31, 2002 and September 1, 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
States 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
October 11, 2002
New York, New York
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
Second Quarter Fiscal Year 2003 (thirteen weeks ended August 31, 2002) versus
Second Quarter Fiscal Year 2002 (thirteen weeks ended September 1, 2001)
The following table sets forth, for the periods indicated, net sales by key
business segment:
Thirteen weeks ended Twenty-six weeks ended
August September August September
31, 2002 1, 2001 31, 2002 1, 2001
-------- --------- -------- ---------
(In thousands of dollars)
Net Sales
---------
Confectionery $ 42,248 $ 44,442 $ 85,328 $ 89,250
Collectible Sports Products 24,365 28,727 58,708 59,638
Entertainment Products 3,386 8,045 13,702 19,218
-------- -------- -------- --------
Total $ 69,999 $ 81,214 $157,738 $168,106
======== ======== ======== ========
Net sales for the second quarter of fiscal 2003 decreased 13.8% to $70.0 million
from $81.2 million for the same period last year, in part as a result of a
decrease in sales of Pokemon products from $8.7 million last year to $1.7
million this year. Included in Pokemon sales were return provision reversals of
$1.0 million this year versus $4.8 million 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 second quarters of fiscal 2003 and 2002 by
$868,000 and $445,000, respectively, but did not impact reported 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 4.9% in the second quarter of this year to $42.2 million from $44.4
million in fiscal 2002. Included in fiscal 2003 second quarter sales were
$462,000 of Pokemon confectionery products versus $3.2 million in the second
quarter of fiscal 2002. Topps branded (non-Pokemon) confectionery sales in the
quarter were $41.8 million, 1.4% higher than last year due to growth of Ring Pop
and Push Pop in the U.S. and the introduction of Pro Flip Pop in Japan,
partially offset by lower sales this year of Baby Bottle Pop.
Net sales of collectible sports products, which consist of traditional sports
cards, sports sticker album products and the sports Internet businesses,
decreased 15.2% to $24.4 million in the second quarter of fiscal 2003 from $28.7
million in the comparable period last year. Within collectible sports, sales of
traditional products decreased 23.9% to $21.7 million, reflecting lower sales of
football products and the prospect of a baseball strike which caused retailers
to scale back orders of baseball products in anticipation of lower demand.
Reported Internet sales increased to $2.7 million from $222,000 last year, as a
result of the launch of etopps (which occurred in the third quarter of fiscal
2002) and the acquisition of thePit.com (which occurred at the end of the second
quarter of fiscal 2002). Cash received from etopps sales in the second quarter
of fiscal 2003 was $1.9 million higher than reported sales; however, in
accordance with accounting regulations, recognition of the sales associated with
these higher cash receipts has been deferred pending production of the related
inventory.
Net sales of entertainment products, which consist of entertainment trading
cards and the Merlin line of entertainment sticker album products, decreased to
$3.4 million in the second quarter of fiscal 2003 from $8.0 million in fiscal
2002, in part the result of lower sales of Pokemon products. Included in the
second quarter this year were $1.3 million of Pokemon sales versus $5.4 million
13
last year. Non-Pokemon entertainment sales, which in the quarter this year
consisted primarily of products based on the Lord of the Rings, Spiderman and
World Wrestling Enterprises ("WWE") licenses, decreased to $2.1 million from
$2.6 million last year.
Gross profit as a percentage of net sales for the second quarter of fiscal 2003
decreased to 36.1% from 44.6% for the same period last year. This was primarily
the result of a reduction in high-margin Pokemon sales, a mix shift in the U.S.
toward lower margin items including transactions on thePit.com which was
acquired last year, the absence of a one-time French distributor rebate received
in the second quarter last year and an increase in European returns provisions
on this year's entertainment products.
Other income/(expense) was $288,000 this year versus an expense of $2.6 million
last year reflecting the absence of charges taken last year related to the
impact of the weakening dollar on U.S. dollar-denominated cash balances held in
Europe.
SG&A increased as a percentage of net sales to 27.5% in the second quarter of
fiscal 2003 from 26.3% a year ago, while SG&A dollar spending decreased to $19.3
million from $21.3 million. The dollar decrease was driven by the absence this
quarter of an accrual for year-end employee incentive bonus payments, lower
expenditures for consumer promotions in the U.S., a reduction in etopps overhead
costs and the elimination of goodwill amortization resulting from the adoption
of FAS 142. Accruals for year-end employee incentive bonus payments may be made
in future quarters depending upon the Company's estimate of the amounts to be
paid. Increased etopps advertising and a full quarter of overhead costs
associated with thePit business, which was acquired in the final week of the
second quarter last year, offset some of this favorability.
Net interest income in the quarter decreased to $568,000 in fiscal 2003 from
$1.2 million in fiscal 2002 due to a decrease in cash on hand and lower interest
rates.
The tax rate in the second quarter of fiscal 2003 was 31.8% versus 34.6% in the
second quarter of fiscal 2002, in part the result of the new accounting
treatment for goodwill.
Net income for the second quarter of fiscal 2003 was $4.7 million, or $0.11 per
diluted share, compared with $8.9 million, or $0.20 per diluted share last year.
First Half Fiscal 2003 (twenty-six weeks ended August 31, 2002) compared to
First Half Fiscal 2002 (twenty-six weeks ended September 1, 2001)
-----------------------------------------------------------------
Net sales in the first half of fiscal 2003 decreased 6.2% to $157.7 million from
$168.1 million for the same period last year. This decrease was a function of a
significant reduction in Pokemon sales to $3.7 million in the first half this
year from $18.8 million last year. Included in Pokemon sales were return
provision reversals of $1.7 million this year versus $7.9 million 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 SG&A. Adoption of
these requirements reduced both net sales and marketing expenses by $1.7 million
in fiscal 2003 and $1.0 million in fiscal 2002. These changes did not impact
reported earnings in either year.
Net sales of confectionery products decreased 4.4% in the first half this year
to $85.3 million from $89.3 million in fiscal 2002. Included in fiscal 2003
sales were $838,000 of Pokemon confectionery products versus $4.7 million a year
ago. Excluding Pokemon products, sales of branded confectionery products were
basically unchanged, with strong growth of Ring Pop and Push Pop in the U.S. and
the introduction of Pro Flip Pop in Japan offset by lower sales of Baby Bottle
Pop.
14
Net sales of collectible sports products decreased 1.6% to $58.7 million in the
first half of fiscal 2003 from $59.6 million in the comparable period last year.
This decrease was primarily the result of lower sales of U.S. football and
baseball products. Partially offsetting the decrease were stronger sales of
Premier League Soccer and the addition of World Cup Soccer products in Europe,
as well as Internet sales which were $5.7 million this year versus $222,000 last
year.
Net sales of entertainment products decreased 28.7% to $13.7 million in the
first half of fiscal 2003 from $19.2 million in fiscal 2002 reflecting a
decrease in sales of Pokemon entertainment products from $14.1 million last year
to $2.8 million this year. Non-Pokemon sales, which this year consisted
primarily of products related to the Star Wars, Spiderman, Lord of the Rings and
WWE licenses, increased to $10.9 million from $5.1 million last year.
Gross profit as a percentage of net sales for the first half of fiscal 2003
decreased to 36.7% as compared with 44.0% for the same period last year. This
was primarily the result of a reduction in high-margin Pokemon sales, a mix
shift in the U.S. favoring lower margin products including transactions on
thePit.com which was acquired last year, the absence of a one-time French
distributor rebate received in the second quarter last year and an increase in
European returns provisions on this year's entertainment products.
Other income/(expense) was $222,000 this year versus an expense of $1.8 million
last year primarily reflecting the absence of charges taken last year related to
the impact of the weakening dollar on U.S. cash balances held in Europe.
SG&A expenses increased as a percentage of net sales to 26.1% in the first half
of fiscal 2003 from 25.4% a year ago as a result of lower sales. SG&A dollar
spending decreased to $41.2 million from $42.8 million. The dollar decrease was
driven by the absence this quarter of an accrual for year-end employee incentive
bonus payments, lower expenditures for consumer promotions in the U.S., a
reduction in etopps overhead costs and the elimination of goodwill amortization
resulting from the adoption of FAS 142. Accruals for year-end employee incentive
bonus payments may be made in future quarters depending upon the Company's
estimate of the amounts to be paid. Increased etopps advertising and six months
of overhead costs associated with thePit business, which was acquired in August
of last year, offset some of this favorability.
Net interest income for the six month period decreased to $1.2 million in fiscal
2003 from $2.7 million in fiscal 2002 due to a decrease in cash on hand and
lower interest rates.
The tax rate through the first six months of fiscal 2003 was 33.8% versus 36.0%
for the same period last year, in part the result of the new accounting
treatment for goodwill.
Net income in the first half of fiscal 2003 was $12.0 million, or $0.28 per
diluted share, as compared with $20.5 million, or $0.46 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 August 31, 2002, the Company had $118.5 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
15
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 of Topps common stock
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 August 31, 2002, the
Company had repurchased a total of 7.0 million shares at an average price per
share of $9.60 under these authorizations. During the second quarter of fiscal
2003, the Company repurchased 716,500 million shares at an average price per
share of $9.13.
During the first half of fiscal 2003, the Company's net decrease in cash and
cash equivalents was $2.6 million versus a decrease of $24.3 million in fiscal
2002. Cash provided by operating activities in the six month period of this year
was $4.9 million, versus $1.3 million last year, primarily reflecting a $513,000
decrease in receivables over the period this year versus an increase of $11.5
million last year. Cash used in investing activities reflects $1.9 million in
capital expenditures this year as compared with $5.7 million for the acquisition
of thePit.com as well as $3.1 million in capital expenditures last year. Cash
used in financing activities reflects expenditures for the repurchase of Company
stock of $9.4 million this year versus $17.4 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) the Company's inability to produce timely, or at
all, certain new planned confectionery products; (iii) quarterly fluctuations in
results; (iv) the Company's loss of important licensing arrangements; (v) the
failure of etopps, the Company's on-line trading card 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.
Critical Accounting Policies
----------------------------
Refer to the Company's Annual Report for the year ended March, 2002 for details.
16
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 15, 2002
17
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 August 31, 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 an unfavorable
mark-to-market adjustment in the quarter.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as required by Item 601 of Regulation S-K
10.28 License Agreement between the Company and The National Football League
Players Association, dated March 1, 2000.
10.29 Service Agreement between the Company and The National Football League
Incorporated, dated March 1, 2000.
99.1 Certification of Arthur T. Shorin, Chief Executive Officer and President,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Secion 906 of
the Sarbanes-Oxley Act of 2002.
99.2 Certification of Catherine K. Jessup, Vice-President and Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
19
ITEM 14. CONTROLS AND PROCEDURES
a) Evaluation of disclosure controles and procedures.
Based on their evaluation as of a date within 90 days of the filing date of this
Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934 (the "Exchange Act")) are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms.
b) Changes in inter controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluaiton. There were no significant deficiencies or material weaknesses,
and therefore there were no corrective actions taken.
I, Arthur T. Shorin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Topps Company,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defied
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent function);
a) all significant deficiencies in the design of operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 15, 2002 THE TOPPS COMPANY, INC.
-----------------------
REGISTRANT
/s/ Arthur T. Shorin
-------------------------
Chairman, Chief Executive
Officer and President
20
I, Catherine K. Jessup, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Topps Company,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defied
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or person performing the
equivalent function);
a) all significant deficiencies in the design of operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 15, 2002 THE TOPPS COMPANY, INC.
-----------------------
REGISTRANT
/s/ Catherine K. Jessup
-------------------------
Vice President -
Chief Financial Officer
21