10-Q 1 0001.txt QUARTERLY REPORT 08/26/00 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 26, 2000 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 6, 2000 was 44,792,000. THE TOPPS COMPANY, INC. -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION -------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS Index Page ----- ---- Condensed Consolidated Balance Sheets as of August 26, 2000 and February 26, 2000 3 Condensed Consolidated Statements of Operations for the thirteen and twenty-six weeks ended August 26, 2000 and August 28, 1999 4 Condensed Consolidated Statements of Comprehensive Income for the thirteen and twenty-six weeks ended August 26, 2000 and August 28, 1999 5 Condensed Consolidated Statements of Cash Flows for the twenty-six weeks ended August 26, 2000 and August 28, 1999 6 Notes to Condensed Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11 -------------------------------------------------------------------------------- PART II - OTHER INFORMATION -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS 15 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 The condensed consolidated financial statements for the thirteen weeks ended August 26, 2000 included herein have been reviewed by Deloitte & Touche LLP independent public accountants, in accordance with established professional standards for such a review. The report of Deloitte & Touche LLP is included on page 10. 2 THE TOPPS COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) August February 26, 2000 26, 2000 -------- -------- (amounts in thousands except share data) ASSETS CURRENT ASSETS: Cash and cash equivalents .......................... $ 140,249 $ 75,853 Accounts receivable - net .......................... 34,341 25,730 Inventories - net .................................. 18,186 20,738 Income tax receivable .............................. 145 253 Deferred tax assets ................................ 3,863 5,737 Prepaid expenses and other current assets .......... 7,102 5,357 ------- ------- TOTAL CURRENT ASSETS ........................... 203,886 133,668 ------- ------- PROPERTY, PLANT, & EQUIPMENT ........................... 17,058 15,768 Less: accumulated depreciation and amortization ... 7,143 6,587 ------ ------ NET PROPERTY, PLANT & EQUIPMENT ................ 9,915 9,181 ------ ------ INTANGIBLE ASSETS, net of accumulated amortization of $44,621 and $43,312 as of August 26, 56,279 57,588 2000 and February 26, 2000, respectively OTHER ASSETS ........................................... 3,218 2,876 ------- ------- TOTAL ASSETS ................................... $ 273,298 $ 203,313 ------- ------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ................................... $ 17,886 $ 18,958 Accrued expenses and other liabilities ............. 39,811 36,941 Income taxes payable ............................... 24,796 6,641 ------ ------ TOTAL CURRENT LIABILITIES ...................... 82,493 62,540 DEFERRED INCOME TAXES .................................. 2,532 2,630 OTHER LIABILITIES ...................................... 9,472 8,968 ------ ------ TOTAL LIABILITIES .............................. 94,497 74,138 ------ ------ STOCKHOLDERS' EQUITY: Preferred stock, par value $.01 per share authorized 10,000,000 shares, none issued ................. -- -- Common stock, par value $.01 per share, authorized 100,000,000 shares; issued 48,261,341 shares and 47,835,758 shares as of August 26, 2000 and .... 483 478 February 26, 2000, respectively Additional paid-in capital ........................... 20,064 18,498 Treasury stock, 3,136,000 shares and 2,012,500 shares as of August 26, 2000 and February 26, 2000, .... (27,046) (16,677) respectively Retained earnings .................................... 189,979 128,990 Accumulated other comprehensive loss ................. (4,679) (2,114) ------- ------- TOTAL STOCKHOLDERS' EQUITY .................... 178,801 129,175 ------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................ $ 273,298 $ 203,313 ======= ======= 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 August August August 26, 2000 28, 1999 26, 2000 28, 1999 -------- -------- -------- -------- (amounts in thousands, except share data) Net sales .................................. $141,708 $ 80,391 $286,040 $165,332 Cost of sales .............................. 67,216 43,105 139,135 90,299 -------- -------- -------- -------- Gross profit on sales ................ 74,492 37,286 146,905 75,033 Other income ............................... 324 557 971 465 -------- -------- -------- -------- 74,816 37,843 147,876 75,498 Selling, general and administrative expenses 24,369 21,318 51,419 43,395 -------- -------- -------- -------- Income from operations ................ 50,447 16,525 96,457 32,103 Interest income (expense), net ............. 1,106 223 1,917 352 -------- -------- -------- -------- Income before provision for income taxes ... 51,553 16,748 98,374 32,455 Provision for income taxes ................. 19,589 6,867 37,381 13,307 -------- -------- -------- -------- Net income ............... $ 31,964 $ 9,881 $ 60,993 $ 19,148 ======== ======== ======== ======== Net income per share - basic $ 0.71 $ 0.21 $ 1.34 $ 0.41 - diluted 0.68 0.21 1.30 0.40 Weighted average shares outstanding - basic 45,307,000 46,495,000 45,444,000 46,462,000 - diluted 46,732,000 47,541,000 46,765,000 47,295,000 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 August August August 26, 2000 28, 1999 26, 2000 28, 1999 (amounts in thousands) Net income .................... $ 31,964 $ 9,881 $ 60,993 $ 19,148 Currency translation adjustment (423) (170) (2,565) 236 ------ ----- ------- ------ Comprehensive income .......... $ 31,541 $ 9,711 $ 58,428 $ 19,384 ====== ===== ====== ======

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 August 26, 2000 28, 1999 (amounts in thousands) Cash flows from operating activities: Net income ....................................... $ 60,993 $ 19,148 Add (subtract) non-cash items included in income: Depreciation and amortization ............... 1,962 2,225 Deferred taxes on income .................... 1,776 (2,674) Change in operating assets and liabilities: Accounts receivables ........................ (8,611) 2,941 Inventories ................................. 2,552 (314) Income tax receivable ....................... 108 57 Prepaid expenses and other current assets ... (1,745) 997 Payables and other current liabilities ...... 19,953 (1,480) Other ....................................... (2,493) 667 ------- ------ Cash provided by operating activities 74,495 21,567 ------ ------ Cash flows from investing activities: Additions to property, plant and equipment ....... (1,301) (1,338) ------- ------- Cash used in investing activities .... (1,301) (1,338) ------- ------- Cash flows from financing activities: Reduction of debt ............................... -- (5,417) Exercise of stock options ....................... 1,571 550 Repurchase of common stock ...................... (10,369) -- -------- ------- Cash used in financing activities ... (8,798) (4,867) -------- ------- Net increase in cash ................................. 64,396 15,362 Cash at beginning of year ............................ 75,853 41,728 ------ ------- Cash at end of period ................................ $ 140,249 $ 57,090 ======= =======

Supplemental disclosures of cash flow information: Interest paid ........................................ $ 102 $ 603 Income taxes paid .................................... $ 18,762 $ 4,330 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 26, 2000 1. Basis of Presentation The accompanying unaudited condensed interim consolidated financial statements have been prepared by The Topps Company, Inc. and 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. These statements do not include all information required by generally accepted accounting principles to be included in a full set of financial statements. Operating results for the thirteen weeks ended August 26, 2000 and August 28, 1999 are not necessarily indicative of the results that may be expected for the year ending March 3, 2001. For further information refer to the consolidated financial statements and notes thereto in the Company's annual report for the year ended February 26, 2000. 2. Quarterly Comparison Management believes that quarter-to-quarter comparisons of sales and operating results are affected by a number of factors, including the timing of product introductions and variations in shipping and factory scheduling requirements. Thus, annual sales and earnings amounts are unlikely to consist of equal quarterly portions. 3. Inventories, Net (Unaudited) August February 26, 2000 26, 2000 (amounts in thousands) Raw materials $ 3,689 $ 3,171 Work in process 548 529 Finished products 13,949 17,038 ------ ------ Total $ 18,186 $ 20,738 ====== ====== 4. Segment Information Following is the breakdown of industry segments as required by SFAS No. 131. The Company has three reportable business segments: Collectible Sports Products, Confectionery and Entertainment Products. The Collectible Sports Products segment primarily consists of trading cards featuring players from Major League Baseball, the National Basketball Association, the National Football League and the National Hockey League as well as sticker/album products featuring players from certain European soccer leagues. The Confectionery segment consists of a variety of lollipop products including Ring Pop, Push Pop and Baby Bottle Pop, the Bazooka bubble gum line and other novelty confectionery products, including Pokemon confectionery products. 7 The Entertainment Products segment consists of trading cards, sticker/album products and magazines featuring licenses from popular films, television shows and other entertainment properties. The Company's management evaluates the performance of each segment based upon its contributed margin, which is profit after cost of goods, product development, advertising and promotional costs and obsolescence, but before unallocated general and administrative expenses and manufacturing overhead, depreciation and amortization, other income, interest and income taxes. The Company does not allocate assets among its business segments and therefore does not include a breakdown of assets or depreciation and amortization by segment.

Thirteen weeks ended Twenty-six weeks ended August August August August 26, 2000 28, 1999 26, 2000 28, 1999 (In thousands of dollars) Net Sales --------- Collectible Sports Products ............ $ 34,471 $ 29,721 $ 63,581 $ 70,029 Confectionery .......................... 57,221 36,488 109,663 70,375 Entertainment Products ................. 50,016 14,182 112,796 24,928 --------- --------- --------- --------- Total .................................. $ 141,708 $ 80,391 $ 286,040 $ 165,332 ========= ========= ========= ========= Contributed Margin ------------------ Collectible Sports Products ............ $ 12,860 $ 11,534 $ 25,715 $ 27,712 Confectionery .......................... 24,187 12,008 41,703 20,617 Entertainment Products ................. 29,989 7,168 61,241 12,197 --------- --------- --------- --------- Total .................................. $ 67,036 $ 30,710 $ 128,659 $ 60,526 ========= ========= ========= ========= Reconciliation of contributed margin to income before provision for income taxes: Total contributed margin ............... $ 67,036 $ 30,710 $ 128,659 $ 60,526 Unallocated general and administrative expenses and manufacturing overhead . (15,934) (13,633) (31,211) (26,663) Depreciation & amortization ............ (979) (1,109) (1,962) (2,225) Other income ........................... 324 557 971 465 --------- --------- --------- --------- Income from operations ................. 50,447 16,525 96,457 32,103 Interest income (expense), net ......... 1,106 223 1,917 352 --------- --------- --------- --------- Income before provision for income taxes $ 51,553 $ 16,748 $ 98,374 $ 32,455 ========= ========= ========= =========

8 5. Credit Agreement On June 26, 2000, the Company entered into a credit agreement with Chase Manhattan Bank and LaSalle Bank National Association. This credit agreement replaced the previous agreement with Chase Manhattan Bank which was set to expire on July 6, 2000. The new 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 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. 6. Accrued Expenses and Other Liabilities The provision for estimated losses on sales returns, which previously had been included in the balance of accrued expenses and other liabilities, has been reclassified as a contra account to accounts receivable. This presentation has been reflected on the condensed and consolidated balance sheets as of August 26, 2000 and February 26, 2000. 9 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors and Stockholders The Topps Company, Inc. We have made a review of the accompanying condensed consolidated balance sheet of The Topps Company, Inc. and subsidiaries (the "Company") as of August 26, 2000, and the related condensed consolidated statements of operations and cash flows for the thirteen and twenty-six week periods ended August 26, 2000 and August 28, 1999. These financial statements are the responsibility of the Corporation's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of obtaining an understanding of the system for the preparation of interim financial information, applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Company as of February 26, 2000, 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 March 30, 2000 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 February 26, 2000 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. DELOITTE & TOUCHE LLP SIGNATURE September 19, 2000 New York, New York 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Second Quarter Fiscal 2001 (thirteen weeks ended August 26, 2000) compared to -------------------------------------------------------------------------------- Second Quarter Fiscal 2000 (thirteen weeks ended August 28, 1999) ----------------------------------------------------------------- The following table sets forth, for the periods indicated, net sales by key business segment: Thirteen weeks ended Twenty-six weeks ended August August August August 26, 2000 28, 1999 26, 2000 28, 1999 (In thousands of dollars) Net Sales Collectible Sports Products $ 34,471 $ 29,721 $ 63,581 $ 70,029 Confectionery ............. 57,221 36,488 109,663 70,375 Entertainment Products .... 50,016 14,182 112,796 24,928 -------- -------- -------- -------- Total ..................... $141,708 $ 80,391 $286,040 $165,332 ======== ======== ======== ======== Net sales for the second quarter of fiscal 2001 increased 76.3% to $141.7 million from $80.4 million for the same period last year. This was the result of increased sales in all three business segments. Sales were negatively affected by weaker European currencies this year than last and would have been approximately $7 million higher had the currencies remained constant year-over-year. Net sales of collectible sports products, which consist of both sports cards and sports sticker/album products, increased 16.0% to $34.5 million in the second quarter of fiscal 2001 from $29.7 million in the comparable period last year. Sales of football products increased as a result of favorable timing of releases, introduction to Gallery brand and growth of other football products. Sales of baseball cards were also above the prior year, while sales of basketball products were below year ago levels primarily due to changes in the timing of certain releases. Net sales of confectionery products increased 56.8% in the second quarter of this year to $57.2 million from $36.5 million in fiscal 2000. Included in fiscal 2001 sales are $16.2 million of Pokemon confectionery products. Excluding Pokemon products, sales of core confectionery products increased 12.4%, primarily driven by the further success of Baby Bottle Pop and growth of Push Pop in Japan, the U.S. and Canada. Net sales of entertainment products, which consist of entertainment cards and sticker/album products, increased to $50.0 million in the second quarter of fiscal 2001 from $14.2 million in fiscal 2000 as a result of the success of Pokemon cards and sticker/album products in Europe and, to a lesser extent, product returns which were lower than had been anticipated. In fiscal 2000, entertainment product sales consisted primarily of Star Wars products. Gross profit as a percentage of net sales for the second quarter of fiscal 2001 increased to 52.6% as compared with 46.4% for the same period last year. This margin improvement was largely the result of the increased mix of high-margin entertainment products and higher reveneues in general, which provided for the further leverage of fixed costs. The decrease in other income to $324,000 this year from $557,000 last year was primarily due to the collection of a Mexican VAT receivable last year. Selling, general and administrative ("SG&A") expenses decreased as a percentage of net sales to 17.2% in the second quarter of fiscal 2001 from 26.5% a year ago as a result of higher sales. SG&A dollar spending increased to $24.4 million from $21.3 million due to the Company's investment in its Internet initiative and greater expenditures for advertising and marketing in the U.S. and Canada. 11 Net interest income increased to $1.1 million in fiscal 2001 from $223,000 in fiscal 2000 due to the elimination of the Company's loan balance and an increase in cash on hand. Net income for the second quarter of fiscal 2001 was $32.0 million, or $0.68 per fully diluted share, as compared with $9.9 million, or $0.21 per fully diluted share last year. First Half Fiscal 2001 (twenty-six weeks ended August 26, 2000) compared to -------------------------------------------------------------------------------- First Half Fiscal 2000 (twenty-six weeks ended August 28, 1999) --------------------------------------------------------------- Net sales for the first half of fiscal 2001 increased 73.0% to $286.0 million from $165.3 million for the same period last year. This was the result of increased sales of confectionery and entertainment products which more than offset a decline in collectible sports products. Sales were negatively affected by weaker European currencies this year versus last and would have been approximately $12 million higher had currencies remained constant year-over-year. Net sales of collectible sports products decreased 9.2% to 63.6 million in the first half of fiscal 2001 from $70.0 million in the comparable period last year. Sales comparisons this year versus last were affected by the NBA lockout which resulted in an unusual quantity of basketball product being shipped in the first quarter of fiscal 2000. Sales of baseball cards, hockey cards and Europen soccer sticker/album products were also less this year than last. Sales of football products increased year-over-year as a result of favorable timing of releases, introduction of the Gallery brand and growth of other football products. Net sales of confectionery products increased 55.8% in the first half of this year to $109.7 million from $70.4 million in fiscal 2000. Included in fiscal 2001 sales are $29.2 million of Pokemon confectionery products. Excluding Pokemon products, sales of core confectionery products increased 14.3%, primarily driven by the further success of Baby Bottle Pop and growth of Push Pop in Japan and the U.S. Net sales of entertainment products increased to $112.8 million in the first half of fiscal 2001 from $24.9 million in fiscal 2000 largley due to the success of Pokemon cards and sticker/album products in Europe and to a lesser extent, product returns which were lower than had been anticipated. In fiscal 2000, entertainment product sales consisted primarily of Star War products. Gross profit as a percentage of net sales for the first half of fiscal 2001 increased to 51.4% as compared with 45.4% for the same period last year. This margin improvement was the result of several factors, including the increased mix of high-margin entertainment products, higher revenues, in general, which provided for the further leverage of fixed costs, and real cost improvements, particularly in the area of obsolescence. Other income increased to $971,000 this year from $465,000 last year primarily as a result of a reduction in foreign exchange translation losses and higher levels of prompt payment discounts on European inventory purchases. Selling, general and administrative ("SG&A") expenses decreased as a percentage of net sales to 18.0% in the first half of fiscal 2001 from 26.2% a year ago as a result of higher sales. SG&A dollar spending increased to $51.4 million from $43.4 million due to greater expenditures for advertising and marketing, the Company's investment in its Internet initiative, earlier recognition of the annual incentive bonus plan and higher freight costs in Europe as a result of the increased sales. 12 Net interest income increased to $1.9 million in fiscal 2001 from $352,000 in fiscal 2000 due to the elimination of the Company's loan balance and an increase in cash on hand. Net income for the first half of fiscal 2001 was $61.0 million, or $1.30 per fully diluted share, as compared with $19.1 million, or $0.40 per fully diluted share last year. Liquidity and Capital Resources ------------------------------- On June 26, 2000, the Company entered into a credit agreement with Chase Manhattan Bank and LaSalle Bank National Association. This credit agreement replaced the previous agreement with Chase Manhattan Bank which was set to expire on July 6, 2000. The new agreement provides for a $35.0 million unsecured facility to cover revolver and letter of credit needs and expires on June 26, 2004. Interest rates are variable and are a function of the Company's EBITDA. The credit agreement contains restrictions and prohibitions of a nature generally found in loan agreements of this type and requires the Company, among other things, to comply with certain financial covenants, limits the Company's ability to repurchase its shares, sell or acquire assets or borrow additional money and prohibits the payment of dividends. The credit agreement may be terminated by the Company at any point over the four-year term (provided the Company repays all outstanding amounts thereunder) without penalty. In October 1999, the Board of Directors authorized the Company to repurchase up to 5 million shares of its stock. As of August 26, 2000, the Company had repurchased a total of 2,033,500 shares at an average price of $8.93. During the second quarter of fiscal 2001, the Company repurchased 550,500 shares at an average price of $10.70. As of August 26, 2000, the Company had $140.2 million in cash and cash equivalents. During the first half of fiscal 2001, the Company's net increase in cash and cash equivalents was $64.4 million versus $15.4 million in the first half of fiscal 2000. Cash provided by operating activities in the first half of this year was $74.5 million versus $21.6 million last year, as higher net income and an increase in payables and other current liabilities were partially offset by an increase in receivables. Cash used in investing activities reflects $1.3 million in capital expenditures in the first half of fiscal 2001 and fiscal 2000, respectively. Cash used in financing activities reflects the use of $10.4 million to repurchase Company stock this year versus debt payments of $5.4 million in the first half of last year. Management believes that the Company has adequate means to meet its liquidity and capital resource needs over the foreseeable future. 13 Cautionary Statements --------------------- In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"), the Company is hereby filing cautionary statements identifying important factors that could cause actual results to differ materially from those projected in any forward-looking statements of the Company made by or on behalf of the Company, whether oral or written. Among the factors that could cause the Company's actual results to differ materially from those indicated in any such forward-looking statements are: (i) the failure of certain of the Company's principal products, particularly sports cards, entertainment cards, lollipops and sticker/album collections, to achieve expected sales levels; (ii) quarterly fluctuations in results; (iii) the Company's loss of important licensing arrangements; (iv) technological, production, legal costs or other problems which result in the Company's inability to launch its Internet initiative; (v) the failure of the Company's Internet initiative to achieve expected levels of success; (vi) the Company's loss of important supply arrangements with third parties; (vii) the loss of any of the Company's key customers or distributors; (viii) further prolonged and material contraction in the trading card industry as a whole; (ix) further declines in the sale of U.K. Premier League sticker/album collections; (x) excessive returns of the Company's products; (xi) civil unrest, currency devaluation or political upheaval in certain foreign countries in which the Company conducts business; (xii) further significant decreases in the vitality of the Company's Pokemon license; 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. 14 ITEM 1. LEGAL PROCEEDINGS In November 1998, the Company was named as a defendant in a purported class action commenced in the United States District Court for the Southern District of California (the "California Court") entitled Rodriquez, et. al. v. The Topps Company, Inc., No. CV 2121-B (AJB) (S.D. Cal.) (the "Class Action"). The Class Action alleges that the Company violated the Racketeer Influenced and Corrupt Organizations Act ("RICO") and the California Unfair Business Practices Act, by its practice of selling sports and entertainment trading cards with randomly-inserted "insert" cards, allegedly in violation of state and federal anti-gambling laws. The Class Action seeks treble damages and attorneys' fees on behalf of all individuals who purchased packs of cards at least in part to obtain an "insert" card over a four-year period. On January 22, 1999, plaintiffs moved to consolidate the Class Action with similar class actions pending against several of the Company's principal competitors and licensors in the California Court. On January 25, 1999, the Company moved to dismiss the complaint, or, alternatively, to transfer the Class Action to the Eastern District of New York or stay the Class Action pending the outcome of the Declaratory Judgment Action pending in the Eastern District of New York. By orders dated May 14, 1999, the California Court denied the Company's motions to dismiss or transfer the Class Action but granted the Company's motion to stay the Class Action pending the outcome of the Declaratory Judgment Action. The California Court also denied plaintiffs' motion to consolidate the Class Action with similar purported class actions. On April 18, 2000, the California Court entered an order requiring plaintiffs in the Class Action as well as in the other purported Class Actions to show cause why all such actions should not be dismissed. By order dated June 21, 2000, the California Court vacated its May 14, 2000 order denying the Company's motion to dismiss the Class, dismissed the RICO claim in the Class Action with prejudice and without leave to replead, and dismissed the pendent state law claims without prejudice. Plaintiffs filed a notice of appeal of the California Court's decision to the United States Court of Appeals for the Ninth Circuit on July 21, 2000. If the Class Action were reinstated on appeal, an adverse outcome in the Class Action could materially effect the Company's future plans and results. On August 21, 2000, the Company was named as a defendant in a purported class action commenced in the Superior Court of the State of California for the County of Alameda (the "California State Court") entitled Chaset, et al. v. The Upper Deck Company, et al., No. 830257-9 (the "California Class Action"). The California Class Action alleges that the Company and other manufacturers and licensors of sports and entertainment trading cards committed unlawful, unfair and fraudulent business acts under the California Unfair Business Practices Act and the California Consumer Legal Remedies Act by the practice of selling trading cards with randomly-inserted "insert" cards allegedly in violation of state and federal anti-gambling laws and state consumer laws. The California Class Action seeks declaratory, equitable and injunctive relief and attorneys' fees on behalf of a purported nationwide class of trading card purchasers. Plantiff has indicated that he intends to amend his complaint, including an amendment to demand compensatory and punitive damages and restitution, and all parties to the action have jointly applied to the California State Court for an order providing that plantiff shall file an amended complaint on or before October 18, 2000 and that defendants shall file an answer or other responsive pleading on or before December 15, 2000. An adverse outcome in the California Class Action could materially effect the Company's future plans and results. 15 On February 18, 2000, the Company was named as a defedant in an action commenced in the Central District Court of California, entitled Telepresense Technologies, LLC vs. The Topps Company, Inc. No. SA CV 00-181. The Company is one of ten trading card manufacturers who have been sued by Telepresense Technologies, LLC, under 35 U.S.C. Section 271, 281, et seq, for alleged patent infringement. The action alleges that through the practice of selling relic cards which include pieces of game-worn jerseys, the Company has infringed U.S. Patent No. 5,803,501. The action seeks injunctive relief, treble damages and attorneys fees. The Company has entered into a joint defense agreement with eight of the other defendants and on April 21, 2000 filed an Answer, which was amended on September 22, 2000 to add an affirmative defense that Telepresense Technologies, LLC lacks standing to sue. An adverse outcome in this case could materially effect the Company's future plans and results. In all the above matters, the Company's management believes that it has mentioned defenses and intends to vigorously defend against these claims. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits as required by Item 601 of Regulation S-K None 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 10, 2000 17