10-Q 1 0001.txt QUARTERLY REPORT 05/27/2000 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 May 27, 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 (I.R.S. Employer incorporation or organization) Identification No.) One Whitehall Street, New York, NY 10004 (Address of principal executive offices, including zip code) (212) 376-0300 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . The number of outstanding shares of Common Stock as of July 5, 2000 was 45,460,000. THE TOPPS COMPANY, INC. -------------------------------------------------------------------------------- PART I - FINANCIAL INFORMATION -------------------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS Index Page Condensed Consolidated Balance Sheets as of May 27, 2000 and February 26, 2000 3 Condensed Consolidated Statements of Operations for the thirteen weeks ended May 27, 2000 and May 29, 1999 4 Condensed Consolidated Statements of Comprehensive Income for the thirteen weeks ended May 27, 2000 and May 29, 1999 5 Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended May 27, 2000 and May 29, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 The condensed consolidated financial statements for the thirteen weeks ended May 27, 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) May February 27, 2000 26, 2000 -------- -------- (amounts in thousands except share data) CURRENT ASSETS: Cash and cash equivalents .............................. $ 87,373 $ 75,853 Accounts receivable - net .............................. 57,772 25,730 Inventories ............................................ 18,259 20,738 Income tax receivable .................................. 474 253 Deferred tax assets .................................... 4,347 5,737 Prepaid expenses and other current assets .............. 6,609 5,357 ------- ------- TOTAL CURRENT ASSETS ............................... 174,834 133,668 ------- ------- PROPERTY, PLANT, & EQUIPMENT ............................... 16,500 15,768 Less: accumulated depreciation and amortization ....... 6,841 6,587 ------- ------- NET PROPERTY, PLANT & EQUIPMENT .................... 9,659 9,181 ------- ------- INTANGIBLE ASSETS, net of accumulated amortization of $43,966 and $43,312 as of May 27, 2000 . 56,934 57,588 and February 26, 2000, respectively OTHER ASSETS ............................................... 2,931 2,876 --------- --------- TOTAL ASSETS ....................................... $ 244,358 $ 203,313 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ....................................... $ 20,181 $ 18,958 Accrued expenses and other liabilities ................. 43,538 36,941 Income taxes payable ................................... 16,126 6,641 -------- -------- TOTAL CURRENT LIABILITIES .......................... 79,845 62,540 DEFERRED INCOME TAXES ...................................... 2,381 2,630 OTHER LIABILITIES .......................................... 9,221 8,968 -------- -------- TOTAL LIABILITIES .................................. 91,447 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 47,971,683 shares and 47,835,758 shares as of May 27, 2000 and February .. 480 478 26, 2000, respectively Additional paid-in capital ............................... 18,981 18,498 Treasury stock, 2,585,500 shares and 2,012,500 shares as of May 27, 2000 and February 26, 2000 respectively (21,133) (16,677) Retained earnings ........................................ 158,015 128,990 Accumulated other comprehensive loss ..................... (3,432) (2,114) ------- -------- TOTAL STOCKHOLDERS' EQUITY ........................ 152,911 129,175 ------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........ $ 244,358 $ 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 May May 27, 2000 29, 1999 -------- -------- (amounts in thousands, except share data) Net sales ................................... $ 144,332 $ 84,941 Cost of sales ............................... 71,919 47,194 ------- ------- Gross profit on sales ................. 72,413 37,747 Other income (expense) ...................... 647 (92) ------- ------- 73,060 37,655 Selling, general and administrative expenses 27,050 22,077 ------- ------- Income from operations ................ 46,010 15,578 Interest income (expense), net .............. 811 129 ------- ------- Income before provision for income taxes .... 46,821 15,707 Provision for income taxes .................. 17,792 6,440 ------- ------- Net income ............................ $ 29,029 $ 9,267 ======= ======= Net income per share - Basic ................ $ .64 $ .20 Net income per share - Diluted .............. $ .62 $ .20 Weighted average shares outstanding - basic . 45,581,000 46,427,000 Weighted average shares outstanding - diluted 46,789,000 47,176,000

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 May May 27, 2000 29, 1999 -------- -------- (amounts in thousands) Net income .................... $ 29,029 $ 9,267 Currency translation adjustment (1,318) 406 -------- -------- Comprehensive income .......... $ 27,711 $ 9,673 See Notes to Condensed Consolidated Financial Statements and Accountants' Review Report. 5 THE TOPPS COMPANY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) Thirteen weeks ended May May 27, 2000 29, 1999 (amounts in thousands) Cash flows from operating activities: Net income ........................................... $ 29,029 $ 9,267 Add(subtract) non-cash items included in net income: Depreciation and amortization ................... 983 1,116 Deferred income taxes ........................... 1,141 (1,841) Change in operating assets and liabilities: Accounts receivable ............................. (32,042) (8,639) Inventories ..................................... 2,479 1,513 Income tax receivable ........................... (221) 56 Prepaid expenses and other current assets ....... (1,252) 268 Payables and other current liabilities .......... 17,305 9,305 Other assets, liabilities, and comprehensive loss (1,113) 648 -------- ------- Cash provided by operating activities .... 16,309 11,693 -------- ------- Cash flows from investing activities: Additions to property, plant and equipment ...... (818) (546) -------- ------- Cash used in investing activities ........ (818) (546) -------- ------- Cash flows from financing activities: Reduction of debt ................................ -- (2,500) Exercise of stock options ........................ 485 64 Repurchase of common stock ....................... (4,456) -- ------- ------- Cash used in financing activities ....... (3,971) (2,436) ------- ------- Net increase in cash and cash equivalents ............... 11,520 8,711 Cash and cash equivalents at beginning of quarter ....... 75,853 41,728 ------- ------- Cash and cash equivalents at end of quarter ............. $ 87,373 $ 50,439 ======= ======= Supplemental disclosures of cash flow information: Interest paid ........................................... $ 26 $ 315 Income taxes paid ....................................... $ 3,610 $ 3,124

See Notes to Condensed Consolidated Financial Statements and Accountants' Review Report. 6 THE TOPPS COMPANY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THIRTEEN WEEKS ENDED MAY 27, 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 May 27, 2000 and May 29, 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 (Unaudited) May February 27, 2000 26, 2000 -------- -------- (amounts in thousands) Raw materials ....................... $ 2,804 $ 3,171 Work in process .................... 805 529 Finished products .................. 14,650 17,038 ------- ------- Total $18,259 $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, Baby Bottle Pop and Flip 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 (expense), 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 May May 27, 2000 29, 1999 (In thousands of dollars) Net Sales Collectible Sports Products ................... $ 29,110 $ 40,308 Confectionery ................................. 52,442 33,887 Entertainment Products ........................ 62,780 10,746 ------- ------- Total ......................................... $144,332 $ 84,941 ======= ======= Contributed Margin Collectible Sports Products ................... $ 12,853 $ 16,178 Confectionery ................................. 17,541 8,609 Entertainment Products ........................ 31,570 5,029 ------- ------- Total ......................................... $ 61,964 $ 29,816 ======= ======= Reconciliation of contributed margin to income before provision for income taxes: Total contributed margin ...................... $ 61,964 $ 29,816 Unallocated general and administrative expenses and manufacturing overhead ................. (15,618) (13,030) Depreciation & amortization ................... (983) (1,116) Other income (expense) ........................ 647 (92) ------- ------- Income from operations ........................ 46,010 15,578 Interest income (expense), net ................ 811 129 ------- ------- Income before provision for income taxes ...... $ 46,821 $ 15,707 ======= =======

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 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. 8 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 May 27, 2000 and February 26, 2000. 7. 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 nunc pro tunc with prejudice and without leave to replead, and dismissed the pendent state law claims without prejudice. Plaintiffs are likely to appeal the California Court's June 21, 2000 dismissal of the Class Action. 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. 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 May 27, 2000, and the related condensed consolidated statements of operations and cash flows for the thirteen week periods ended May 27, 2000 and May 29, 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/ June 22, 2000 New York, New York 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS First Quarter Fiscal Year 2001 versus Fiscal Year 2000 ------------------------------------------------------ The following table sets forth, for the periods indicated, net sales by key business segment: May May 27, 2000 29, 1999 -------- -------- (In thousands of dollars) Collectible Sports Products.... $ 29,110 $ 40,308 Confectionery ................. 52,442 33,887 Entertainment Products ........ 62,780 10,746 ------- ------ Total ......................... $144,332 $ 84,941 ======= ====== Net sales for the first quarter of fiscal 2001 increased 69.9% to $144.3 million from $84.9 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. Net sales of collectible sports products, which consist of both sports cards and sports sticker/album products, decreased 27.8% to $29.1 million in the first quarter of fiscal 2001 from $40.3 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 year ago period. Sales of baseball cards and European soccer sticker/album products were also less this year than last. Net sales of confectionery products increased 54.8% in the first quarter of this year to $52.4 million from $33.9 million in fiscal 2000. Included in fiscal 2001 sales are $13.0 million of Pokemon confectionery products. Excluding Pokemon products, sales of core confectionery products increased 16.5%, primarily driven by the further success of Baby Bottle Pop worldwide and growth of Push Pop in Japan and the U.S. Net sales of entertainment products, which consist of entertainment cards and sticker/album products, increased to $62.8 million in the first quarter of fiscal 2001 from $10.7 million in fiscal 2000, primarily due to the success of Pokemon cards and sticker/album products in Europe. Gross profit as a percentage of net sales for the first quarter of fiscal 2001 increased to 50.2% as compared with 44.4% 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 (expense) of $647,000 this year versus an expense of $92,000 last year was the result of higher levels of prompt payment discounts on European inventory purchases and a reduction in foreign exchange translation losses. Selling, general and administrative ("SG&A") expenses decreased as a percentage of net sales to 18.7% in the first quarter of fiscal 2001 from 26.0% a year ago as a result of higher sales. SG&A dollar spending increased to $27.1 million from $22.1 million due to higher freight costs and broker commissions as a result of the increase in sales, greater expenditures for advertising and marketing, earlier recognition of the annual incentive bonus plan and the Company's investment in its Internet initiative. 11 Net interest income (expense) increased to $811,000 in fiscal 2001 from $129,000 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 quarter of fiscal 2001 was $29.0 million, or $0.62 per fully diluted share, as compared with $9.3 million, or $0.20 per fully diluted share last year. Liquidity and Capital Resources ------------------------------- On June 27, 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. In October 1999, the Board of Directors authorized the Company to repurchase up to 5 million shares of its stock. As of May 27, 2000, the Company had repurchased a total of 1,483,000 shares at an average price of $8.22. During the first quarter of fiscal 2001 alone, the Company repurchased 543,000 shares at an average price of $8.17. As of May 27, 2000, the Company had $87.4 million in cash and cash equivalents. During the first quarter of fiscal 2001, the Company's net increase in cash and cash equivalents was $11.5 million versus $8.7 million in fiscal 2000. Cash provided by operating activities in the first quarter of this year was $16.3 million versus $11.7 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 this quarter reflects $818,000 in capital expenditures compared with $546,000 in capital expenditures last year. Cash used in financing activities reflects the use of $4.5 million to repurchase Company stock this year versus debt payments of $2.5 million in the first quarter of last year. Management believes that the Company has adequate means to meet its liquidity and capital resource needs over the foreseeable future. 12 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) 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; 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. . 13 THE TOPPS COMPANY, INC. PART II OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of the Company took place on June 29, 2000 for the following purposes: 1. To elect three directors; 2. To ratify the appointment of auditors. The results of the matters voted on are as follows: For Against Abstentions --- ------- ----------- 1. Election of Directors Arthur T. Shorin 41,421,017 983,452 0 Wm. Brian Little 41,478,315 926,154 0 Stanley Tulchin 41,461,414 943,055 0 2. Ratification of appointment of auditors 42,150,870 140,230 113,369 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits as required by Item 601 of Regulation S-K 10.39 Credit Agreement dated June 26, 2000 with The Chase Manhattan Bank 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE TOPPS COMPANY, INC. ----------------------- Registrant /s/ Catherine Jessup ------------------------------ Vice President-Chief Financial Officer July 11, 2000 16