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 November 30, 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 January 8, 2002 was
40,779,901.
THE TOPPS COMPANY, INC.
AND SUBSIDIARIES
--------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
--------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
Index Page
Condensed Consolidated Balance Sheets as of
November 30, 2002 and March 2, 2002 3
Condensed Consolidated Statements of Operations
for the thirteen and thirty-nine weeks ended
November 30, 2002 and December 1, 2001 4
Condensed Consolidated Statements of Comprehensive
Income for the thirteen and thirty-nine weeks ended
November 30, 2002 and December 1, 2001 5
Condensed Consolidated Statements of Cash Flows
for the thirty-nine weeks ended November 30, 2002
and December 1, 2001 6
Notes to Condensed Consolidated Financial Statements 7
Report of Independent Public Accountants 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. DISCLOSURES ABOUT MARKET RISK 19
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PART II - OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
ITEM 14. CONTROLS AND PROCEDURES 21
2
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
November March
30, 2002 2, 2002
(amounts in thousands
except share data)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 118,211 $ 121,057
Accounts receivable - net ......................... 15,888 20,039
Inventories ....................................... 28,229 23,096
Income tax receivable ............................. 561 3,230
Deferred tax assets ............................... 4,204 4,343
Prepaid expenses and other current assets ......... 13,986 11,807
------- -------
TOTAL CURRENT ASSETS ........................... 181,079 183,572
------- -------
PROPERTY, PLANT & EQUIPMENT .......................... 28,129 25,134
Less: accumulated depreciation and amortization .. 13,371 10,528
------- -------
NET PROPERTY, PLANT & EQUIPMENT ................ 14,758 14,606
------- -------
GOODWILL ............................................. 48,840 46,773
INTANGIBLE ASSETS, net of accumulated
amortization of $31,378 and $30,509 as of
November 30, 2002 and March 2, 2002, respectively . 6,381 7,250
OTHER ASSETS ......................................... 7,815 5,749
------- -------
TOTAL ASSETS ................................... $ 258,873 $ 257,950
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable .................................. $ 8,143 $ 10,966
Accrued expenses and other liabilities ............ 31,200 30,274
Income taxes payable .............................. 2,534 5,943
------ ------
TOTAL CURRENT LIABILITIES ...................... 41,877 47,183
------ ------
DEFERRED INCOME TAXES ................................ -- --
OTHER LIABILITIES .................................... 17,627 16,713
------ ------
TOTAL LIABILITIES .............................. 59,504 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 November 30, 2002 and
March 2, 2002, respectively ..................... 492 492
Additional paid-in capital ........................ 27,819 26,824
Treasury stock, 8,466,000 shares and 7,143,000 shares
as of Nov 30, 2002 and March 2, 2002, respectively (80,494) (67,415)
Retained earnings .................................... 260,884 245,941
Accumulated other comprehensive loss,
net of income taxes ............................... (9,332) (11,788)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ........................... 199,369 194,054
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........... $ 258,873 $ 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 Thirty-nine weeks ended
November December November December
30, 2002 1, 2001 30, 2002 1, 2001
-------- -------- -------- --------
(amounts in thousands, except share data)
Net sales ........................................ $ 66,656 $ 72,058 $ 224,394 $ 240,164
Cost of sales .................................... 45,007 49,793 144,814 143,990
--------- --------- --------- ---------
Gross profit on sales ......................... 21,649 22,265 79,580 96,174
Other income (expense) ........................... (360) 718 (138) (1,122)
---------- --------- ---------- ----------
21,289 22,983 79,442 95,052
Selling, general and administrative expenses ..... 20,476 17,066 61,653 59,847
--------- --------- --------- ---------
Income from operations ........................ 813 5,917 17,789 35,205
Interest income, net ............................. 673 949 1,873 3,663
--------- --------- --------- ---------
Income before (benefit) provision for income taxes 1,486 6,866 19,662 38,868
(Benefit) provision for income taxes ............. (1,424) 334 4,719 11,855
---------- --------- --------- ---------
Net income ................................ $ 2,910 $ 6,532 $ 14,943 $ 27,013
========= ========= ========= =========
Net income per share - basic ..................... $ 0.07 $ 0.15 $ 0.36 $ 0.62
- diluted ................... 0.07 0.15 0.35 0.61
Weighted average shares outstanding
- basic ....... 41,064,000 42,595,000 41,562,000 43,275,000
- diluted ..... 41,850,000 43,818,000 42,457,000 44,557,000
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 Thrity-nine weeks ended
November December November December
30, 2002 1, 2001 30, 2002 1, 2001
-------- -------- -------- --------
Net income .................... $ 2,910 $ 6,532 $ 14,943 $ 27,013
Currency translation adjustment 131 (1,159) 2,456 (2,260)
-------- --------- -------- ---------
Comprehensive income .......... $ 3,041 $ 5,373 $ 17,399 $ 24,753
======== ======== ======== ========
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
November December
30, 2002 1, 2001
-------- --------
(amounts in thousands)
Cash flows from operating activities:
Net income .......................................... $ 14,943 $ 27,013
Add/(subtract) non-cash items included in net income:
Depreciation and amortization .................. 3,681 4,196
Deferred income taxes .......................... 139 --
Change in operating assets and liabilities:
Accounts receivable ............................ 4,151 (10,617)
Inventories .................................... (5,133) (3,953)
Income tax receivable .......................... 2,669 3,781
Prepaid expenses and other current assets ...... (2,178) 581
Payables and other current liabilities ......... (5,306) (20,560)
Other assets and liabilities ................... (3,414) 402
-------- --------
Cash provided by operating activities ... 9,552 843
-------- --------
Cash flows from investing activities:
Purchase of subsidiary ......................... -- (5,597)
Additions to property, plant and equipment ..... (2,995) (4,084)
-------- --------
Cash used in investing activities ....... (2,995) (9,681)
-------- --------
Cash flows from financing activities:
Exercise of stock options ....................... 995 2,061
Repurchase of common stock ...................... (13,079) (17,422)
-------- --------
Cash used in financing activities ...... (12,084) (19,443)
-------- --------
Effect of exchange rates on cash and cash equivalents . 2,681 (3,071)
Net increase (decrease) in cash and cash equivalents .. (2,846) (31,352)
Cash and cash equivalents at beginning of period ...... 121,057 158,741
--------- ---------
Cash and cash equivalents at end of period ............ $ 118,211 $ 127,389
========= =========
Supplemental disclosure of cash flow information:
Interest paid .......................................... $ 82 $ 40
Income taxes paid ...................................... $ 8,242 $ 19,759
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 NOVEMBER 30, 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 thirty-nine weeks ended November 30, 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, but not
limited to, 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.
Thus, quarterly results vary.
3. Accounts Receivable
(Unaudited)
November March
30, 2002 2, 2002
-------- -------
(amounts in thousands)
Gross receivables ............ $ 37,426 $ 37,148
Reserve for returns .......... (20,336) (15,875)
Reserve for bad debt ......... (1,202) (1,234)
--------- ---------
Net .................. $ 15,888 $ 20,039
========= =========
4. Inventories
(Unaudited)
November March
30, 2002 2, 2002
-------- -------
(amounts in thousands)
Raw materials ............... $ 6,386 $ 6,395
Work in process ............. 2,297 1,274
Finished product ............ 19,546 15,427
-------- --------
Total ............... $ 28,229 $ 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 licensed confections including Pokemon and Yu-Gi-Oh! 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 and Yu-Gi-Oh!. In
addition, in the third quarter of fiscal 2003 this segment reflects costs
associated with the launch of the Cool Junk collectible toy line.
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.
(Unaudited)
Thirteen weeks ended Thirty-nine weeks ended
November December November December
30, 2002 1, 2001 30, 2002 1, 2001
-------- -------- -------- --------
(amounts in thousands)
Net Sales
---------
Confectionery ....................................... $ 29,214 $ 30,662 $114,542 $119,912
Collectible Sports Products ......................... 32,891 34,930 91,599 94,568
Entertainment Products .............................. 4,551 6,466 18,253 25,684
-------- -------- -------- --------
Total ............................................... $ 66,656 $ 72,058 $224,394 $240,164
======== ======== ======== ========
Contributed Margin
------------------
Confectionery ....................................... $ 9,808 $ 10,214 $ 40,966 $ 44,790
Collectible Sports Products ......................... 8,510 6,373 22,700 27,268
Entertainment Products .............................. 1,092 3,318 5,997 14,477
-------- -------- -------- --------
Total ............................................... $ 19,410 $ 19,905 $ 69,663 $ 86,535
======== ======== ======== ========
Reconciliation of Contributed Margin to Income
Before (Benefit) Provision for income Taxes:
Total Contributed Margin ............................ $ 19,410 $ 19,905 $ 69,663 $ 86,535
Unallocated General and Administrative Expenses
and Manufacturing Overhead (16,989) (13,091) (48,055) (46,012)
Depreciation & Amortization ......................... (1,248) (1,615) (3,681) (4,196)
Other Income (Expense) .............................. (360) 718 (138) (1,122)
--------- -------- --------- ---------
Income from Operations .............................. 813 5,917 17,789 35,205
Interest Income, Net ................................ 673 949 1,873 3,663
-------- -------- -------- --------
Income Before (Benefit) Provision for Income Taxes .. $ 1,486 $ 6,866 $ 19,662 $ 38,868
======== ======== ======== ========
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 $584,000 in the third quarter and $2,250,000 in the
nine-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 $864,000 in the third quarter and
$1,868,000 in the nine 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
thirty-nine weeks ended November 30, 2002 with earnings and earnings per
share assuming proforma application of the new accounting standards for the
thirteen and the thirty-nine weeks ended December 1, 2001.
(Unaudited)
Thirteen weeks ended Thirty-nine weeks ended
November December November December
30, 2002 1, 2001 30, 2002 1, 2001
-------- -------- -------- --------
(amounts in thousands, except share data)
Net income .......................... $ 2,910 $ 6,532 $ 14,943 $ 27,013
Add back:
Goodwill amortization ............... -- 392 -- 1,176
-------- -------- -------- ---------
Adjusted net income ................. $ 2,910 $ 6,924 $ 14,943 $ 28,189
======== ======== ======== =========
Basic net income per share .......... $ 0.07 $ 0.15 $ 0.36 $ 0.62
Goodwill amortization ............... -- $ 0.01 -- $ 0.03
-------- -------- -------- ---------
Adjusted basic net income per share . $ 0.07 $ 0.16 $ 0.36 $ 0.65
======== ======== ======== =========
Diluted net income per share ........ $ 0.07 $ 0.15 $ 0.35 $ 0.61
Goodwill amortization ............... -- $ 0.01 -- $ 0.03
-------- -------- -------- ---------
Adjusted diluted net income per share $ 0.07 $ 0.16 $ 0.35 $ 0.64
======== ======== ======== =========
9
The Company has evaluated its goodwill and intangible assets acquired prior
to June 30, 2002 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 nine months ended November 30, 2002, no goodwill or other
intangibles were acquired, impaired or disposed. Intangible assets
consisted of the following as of November 30, 2002 and December 1, 2001:
(amounts in thousands)
November 30, 2002 ' December 1, 2001
'
Gross ' Gross
Carrying Accumulated ' Carrying Accumulated
Value Amortization Net ' Value Amortization Net
-----------------------------------------------------------------------------
Licenses & Contracts ... $ 21,879 $ 16,375 $ 5,504 ' $ 21,879 $ 15,498 $ 6,381
Intellectual Property .. 12,584 12,433 151 ' 12,584 12,275 308
Software & Other ....... 2,952 2,570 382 ' 2,952 2,445 507
FAS 132 Pension ........ 344 -- 344 ' -- -- --
-------- -------- -------- ' -------- -------- -------
Total Intangibles ... $ 37,759 $ 31,378 $ 6,381 ' $ 37,415 $ 30,219 $ 7,196
======== ======== ======== ' ======== ======== =======
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 $ 748
In addition to the amortization of intangibles listed above, reported
amortization expense, which was $962,000 for the nine months ended November
30, 2002 and $2,056,000 for the nine months ended December 1, 2001,
included amortization of deferred financing fees and, in fiscal 2002,
goodwill amortization of $1,176,000.
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
"California Federal Action"). The California Federal 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 California Federal 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 California Federal 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
California Federal Action to the Eastern District of New York or stay the
California Federal 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 California Federal Action but granted the Company's motion to
stay the California Federal Action pending the outcome of the Declaratory
Judgment Action. The California Court also denied plaintiffs' motion to
consolidate the California Federal Action with similar purported class
actions. On April 18, 2000, the California Court entered an order requiring
plaintiffs in the California Federal 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 California Federal 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. Plaintiffs' time to seek review of the Ninth
Circuit's decision has now expired, and the dismissal of the California
Federal Action has now become final.
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 State
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
State 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 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
11
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. The California State Action is proceeding with discovery.
In the fall of 2002, the parties reached a tentative settlement of the
California State Action which calls for the defendants collectively,
without admitting liability, to make a payment toward the cost and
attorneys' fees incurred by plaintiffs. Topps' share of this payment would
be slightly in excess of $1.6 million. The tentative settlement is subject
to the final agreement of the parties on precise settlement details and on
appropriate documentation.
The Company is a defendant in several other civil actions which are routine
and incidental to its business. In management's opinion, after consultation
with legal counsel, these actions will not have a material adverse effect
on the Company's financial condition or results of operations.
12
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 November 30, 2002,
and the related condensed consolidated statements of operations and cash flows
for the thirty-nine weeks ended November 30, 2002 and December 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
January 7, 2003
New York, New York
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Third Quarter Fiscal Year 2003 (thirteen weeks ended November 30, 2002) versus
------------------------------------------------------------------------------
Third Quarter Fiscal Year 2002 (thirteen weeks ended December 1, 2001)
----------------------------------------------------------------------
The following table sets forth, for the periods indicated, net sales by key
business segment:
Thirteen weeks ended Thirty-nine weeks ended
November December November December
30, 2002 1, 2001 30, 2002 1, 2001
-------- -------- -------- --------
(amounts in thousands)
Net Sales
---------
Confectionery ............. $ 29,214 $ 30,662 $114,542 $119,912
Collectible Sports Products 32,891 34,930 91,599 94,568
Entertainment Products .... 4,551 6,466 18,253 25,684
-------- -------- -------- --------
Total ..................... $ 66,656 $ 72,058 $224,394 $240,164
======== ======== ======== ========
Net sales for the third quarter of fiscal 2003 decreased 7.5% to $66.7 million
from $72.1 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 third quarters of fiscal 2003 and 2002 by $0.6 million
and $0.9 million, 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 4.7% in the third quarter of this year to $29.2 million from $30.7
million in fiscal 2002. The single largest reason for lower sales this year was
a decline in Baby Bottle Pop; however, sales of both Ring Pop and Push Pop were
also below year ago levels. Included in fiscal 2003 third quarter, were $0.6
million of Pokemon confectionery sales, versus $0.3 million in the third quarter
of fiscal 2002.
Net sales of collectible sports products, which consist of traditional sports
cards, sports sticker album products and the sports Internet businesses,
decreased 5.8% to $32.9 million in the third quarter of fiscal 2003 from $34.9
million in the same period last year. Within collectible sports, sales of
traditional products decreased 7.9% to $29.5 million, reflecting lower sales of
U.S. sports card products, partially offset by almost $2 million in returns
reversals related to the strong sell-through of 2002 European soccer products.
Reported Internet sales in the quarter increased to $3.4 million from $2.9
million last year.
Net sales of entertainment products, which consist of entertainment trading
cards and the Merlin line of entertainment sticker album products, decreased to
$4.6 million in the third quarter of fiscal 2003 from $6.5 million in fiscal
2002. Included in the third quarter this year were $1.3 million of Pokemon sales
versus $1.8 million last year. Non-Pokemon entertainment sales, which in the
quarter this year consisted primarily of products based on the Lord of the Rings
and Yu-Gi-Oh! licenses, decreased to $3.3 million from $4.7 million last year.
Gross profit as a percentage of net sales for the third quarter of fiscal 2003
increased to 32.5% from 30.9% for the same period last year. This improvement
was primarily a function of unusually high obsolescence costs last year
associated with the launch of both etopps and the seasonal confectionery
businesses, combined with lower autograph and relics costs this year on the U.S.
sports business.
14
Other income (expense) was an expense of $0.4 million this year versus income of
$0.7 million last year reflecting the absence of the beneficial impact in the
quarter last year of the strengthening dollar on U.S. dollar-denominated cash
balances held in Europe.
SG&A increased as a percentage of net sales to 30.7% in the third quarter of
fiscal 2003 from 23.7% a year ago, and SG&A dollar spending increased to $20.5
million from $17.1 million. The dollar increase was driven by the timing of an
accrual for year-end employee incentive bonus payments and a $1.6 million
reserve for Topps' share of the anticipated legal settlement of the Chaset class
action.
Net interest income in the quarter decreased to $0.7 million in fiscal 2003 from
$0.9 million in fiscal 2002 due to a decrease in cash on hand and lower interest
rates.
The Company recorded a tax credit of $1.4 million in the quarter this year
versus a tax expense of $0.3 million in the same period last year. In both
years, taxes were favorably impacted by a reduction in the full year forecasted
tax rate, which triggered a catch-up adjustment in the quarter.
Net income for the third quarter of fiscal 2003 was $2.9 million, or $0.07 per
diluted share, compared with $6.5 million, or $0.15 per diluted share last year.
Nine Months Fiscal 2003 (thirty-nine weeks ended November 30, 2002) compared to
--------------------------------------------------------------------------------
Nine Months Fiscal 2002 (thirty-nine weeks ended December 1, 2001)
------------------------------------------------------------------
Net sales in the first nine months of fiscal 2003 decreased 6.6% to 224.4
million from $240.2 million for the same period last year. This decrease was
largely a function of the reduction in Pokemon sales to $5.6 million this year
from $20.9 million last year. Included in Pokemon sales were return provision
reversals of $2.2 million this year versus $8.5 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 $2.3 million
in fiscal 2003 and $1.9 million in fiscal 2002. These changes did not impact
reported earnings in either year.
Net sales of confectionery products decreased 4.5% in the first nine months of
this year to $114.5 million from $119.9 million in fiscal 2002. Included in
fiscal 2003 sales were $1.4 million of Pokemon confectionery products versus
$5.0 million a year ago. Excluding Pokemon products, sales of branded
confectionery products decreased to $113.1 million from $114.9 million last
year, largely the result of lower sales of Baby Bottle Pop, partially offset by
double-digit growth of Ring Pop and Push Pop in the U.S. and the introduction of
Pro Flip Pop in Japan.
Net sales of collectible sports products decreased 3.1% to $91.6 million in the
first nine months of fiscal 2003 from $94.6 million in the comparable period
last year. This decrease was the result of lower sales of traditional sports
cards in the U.S., partially offset by strong sales of European soccer products
(which included the World Cup this year) and an increase in reported Internet
sales to $9.1 million this year versus $3.2 million last year. Cash received
from etopps sales in fiscal 2003 was $1.8 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 decreased 28.9% to $18.3 million in the
first nine months of fiscal 2003 from $25.7 million in fiscal 2002, reflecting a
decrease in sales of Pokemon entertainment products from $15.9 million last year
to $4.1 million this year. Non-Pokemon sales, which this year consisted
primarily of products related to the Star Wars, Spiderman, Lord of the Rings and
Yu-Gi-Oh! licenses, increased to $14.2 million from $9.8 million last year.
15
Gross profit as a percentage of net sales for the first nine months of fiscal
2003 decreased to 35.5% as compared with 40.0% 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, and the absence of a one-time rebate from our French distributor
received last year.
Other income (expense) improved to an expense of $0.1 million this year versus
an expense of $1.1 million last year primarily reflecting the absence of charges
in the first half of last year related to the impact of the weakening dollar on
U.S. dollar-denominated cash balances held in Europe.
SG&A expenses increased as a percentage of net sales to 27.5% in the first nine
months of fiscal 2003 from 24.9% a year ago. SG&A dollar spending increased to
$61.7 million from $59.8 million. The dollar increase was primarily driven by
the timing of accruals for year-end employee incentive bonus payments and a $1.6
million reserve for the anticipated settlement of the Chaset class action.
Net interest income for the nine month period decreased to $1.9 million in
fiscal 2003 from $3.7 million in fiscal 2002 primarily due to lower interest
rates.
The tax rate through the first nine months of fiscal 2003 was 24.0% versus 30.5%
for the same period last year, largely due to the favorable impact of foreign
and R&D tax credits recognized in the third quarter of this year.
Net income in the first nine months of fiscal 2003 was $14.9 million, or $0.35
per diluted share, as compared with $27.0 million, or $0.61 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 November 30, 2002, the Company had $118.2 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 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 November 30, 2002, the
Company had repurchased a total of 7.5 million shares at an average price per
share of $9.52 under these authorizations. During the third quarter of fiscal
2003, the Company repurchased 481,000 shares at an average price per share of
$8.28.
During the nine-month period ended November 30, 2002, the Company's net decrease
in cash and cash equivalents was $2.8 million versus a decrease of $31.4 million
in the comparable period of fiscal 2002. Cash provided by operating activities
in the nine months this year was $9.6 million versus $0.8 million last year. The
favorable operating cash performance this year was the result of a decrease in
accounts receivable, in part the result of an increase in the return reserve for
sports and entertainment products, as well as lower European income tax
16
payments, partially offset by lower net income this year. Cash used in investing
activities consisted of $3.0 million in capital expenditures this year as
compared with $5.6 million for the acquisition of thePit.com and $4.1 million in
capital expenditures last year. Cash used in financing activities reflects
expenditures for the repurchase of Company stock, net of cash from the exercise
of stock options, of $12.1 million this year versus $19.4 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 2, 2002 for
details.
17
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 14, 2003
18
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 November 30, 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.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as required by Item 601 of Regulation S-K
99.3 Certification of Arthur T. Shorin, Chief Executive Officer and President,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.4 Certification of Catherine K. Jessup, Vice-President and Chief Financial
Officer and pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
20
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls 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 internal 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 evaluation. 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; and
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;
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: January 14, 2003 THE TOPPS COMPANY, INC.
-----------------------
REGISTRANT
/s/ Arthur T. Shorin
-------------------------
Chairman, Chief Executive
Officer and President
21
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; and
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;
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: January 14, 2003 THE TOPPS COMPANY, INC.
-----------------------
REGISTRANT
/s/ Catherine K. Jessup
------------------------------
Vice President-Chief Financial
Officer
22