<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED AUGUST 26, 1995 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) (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 3, 1995 was
47,047,510.
<PAGE>
THE TOPPS COMPANY, INC.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Index Page
----- ----
Condensed Consolidated Balance Sheets as of
August 26, 1995 and February 25, 1995 3
Condensed Consolidated Statements of Operations
for the thirteen and twenty-six weeks ended August 26,
1995 and August 27, 1994 4
Condensed Consolidated Statements of Cash Flows
for the twenty-six weeks ended August 26, 1995 and
August 27, 1994 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
The condensed consolidated financial statements for the thirteen and twenty-six
weeks ended August 26, 1995 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 7.
2
<PAGE>
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
August February
26, 1995 25, 1995
-------- --------
(amounts in thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 26,966 $ 17,785
Accounts receivable - net 49,067 24,228
Inventories 28,372 27,222
Income tax receivable 1,351 552
Prepaid expenses and other current assets 14,823 10,158
-------- --------
TOTAL CURRENT ASSETS 120,579 79,945
-------- --------
PROPERTY, PLANT, & EQUIPMENT 52,445 50,095
Less: accumulated depreciation 20,132 18,131
-------- --------
NET PROPERTY, PLANT & EQUIPMENT 32,313 31,964
-------- --------
INTANGIBLE ASSETS, net of accumulated
amortization of $31,361 and $30,532 68,878 22,901
OTHER ASSETS 1,930 1,514
-------- --------
TOTAL ASSETS $223,700 $136,324
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 21,431 $ 22,396
Accrued expenses and other liabilities 49,671 25,599
Current portion of long-term debt 5,600 -
Income taxes payable 6,998 1,033
-------- --------
TOTAL CURRENT LIABILITIES 83,700 49,028
LONG-TERM DEBT, less current portion 42,500 -
DEFERRED INCOME TAXES 13,916 9,630
OTHER LIABILITIES 4,185 3,797
-------- --------
TOTAL LIABILITIES 144,301 62,455
-------- --------
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 47,502,510 shares,
less 455,000 shares in Treasury Stock 475 475
Additional paid-in capital 16,812 16,792
Treasury stock, at cost (6,120) (6,120)
Retained earnings 66,970 61,325
Cumulative foreign currency adjustment 1,262 1,397
-------- --------
TOTAL STOCKHOLDERS' EQUITY 79,399 73,869
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $223,700 $136,324
-------- --------
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements and Accountants' Review
Report.
3
<PAGE>
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited)
Thirteen weeks ended Twenty-six weeks ended
August August August August
26, 1995 27, 1994 26, 1995 27, 1994
-------- -------- -------- --------
(amounts in thousands, except share data)
<S> <C> <C> <C> <C>
Net sales $ 60,661 $ 61,348 $ 128,093 $ 155,846
Cost of sales 42,209 45,730 86,540 103,538
---------- ---------- ----------- ----------
Gross profit on sales 18,452 15,618 41,553 52,308
Royalties and other income 374 771 941 1,348
---------- ---------- ----------- ----------
18,826 16,389 42,494 53,656
Selling, general and administrative expenses 16,052 12,104 31,717 30,567
---------- ---------- ----------- ----------
Income from operations 2,774 4,285 10,777 23,089
Interest income (expense), net (364) 81 (226) 129
---------- ---------- ----------- ----------
Income before provision for income taxes 2,410 4,366 10,551 23,218
Provision for income taxes 1,405 1,878 4,906 9,984
---------- ---------- ----------- ----------
Net Income $ 1,005 $ 2,488 $ 5,645 $ 13,234
---------- ---------- ----------- ----------
---------- ---------- ----------- ----------
Income per share $ .02 $ .05 $ .12 $ .28
Dividends paid per share - $ .07 - $ .14
Weighted average shares outstanding 47,047,510 47,036,456 47,046,982 47,036,127
</TABLE>
See Notes to Condensed Consolidated Financial Statements and Accountants' Review
Report.
4
<PAGE>
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Twenty-six weeks ended
August August
26, 1995 27, 1994
-------- --------
(amounts in thousands)
<S> <C> <C>
Cash provided by (used for) operations:
Net income $ 5,645 $13,234
Add(subtract) non-cash items included
in net income:
Depreciation and amortization 2,403 2,625
Deferred income taxes 1,199 (1,558)
Change in assets and liabilities net of
effects from purchase of subsidiary:
Receivables (3,875) (3,896)
Inventories 421 1,646
Income tax receivable (799) -
Prepaid expenses and other current assets (2,929) 823
Other assets (416) -
Payables and other current liabilities 438 (2,177)
Other liabilities 256 376
-------- --------
Cash provided by operations 2,343 11,073
-------- --------
Cash used for investing activities:
Additions to property, plant and equipment (1,284) (2,058)
Purchase of subsidiary, net of cash acquired (39,998) -
-------- --------
Cash used for investing activities (41,282) (2,058)
-------- --------
Cash provided by (used for) financing activities:
Proceeds from long-term debt 50,000 -
Payments of long-term debt (1,900) -
Dividends paid - (6,585)
Exercise of employee stock options 20 27
-------- --------
Cash used for financing activities 48,120 (6,558)
-------- --------
Net increase in cash 9,181 2,457
Cash at beginning of year 17,785 27,737
-------- --------
Cash at end of quarter $26,966 $30,194
-------- --------
-------- --------
Supplemental information:
Interest paid $ 91 $ 75
Income taxes paid $ 7,041 $ 8,780
</TABLE>
See Notes to Condensed Consolidated Financial Statements and Accountants' Review
Report.
5
<PAGE>
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED AUGUST 26, 1995
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 and twenty-six weeks ended August 26,
1995 and August 27, 1994 are not necessarily indicative of the results that
may be expected for the year ending March 2, 1996. For further information
refer to the consolidated financial statements and notes thereto in the
Company's annual report for the year ended February 25, 1995.
2. ACQUISITION
On July 6, 1995, the Company acquired 100% of the shares of Merlin
Publishing International plc ("Merlin"), a privately-held U.K. publisher
and marketer of sticker and album collections (the "Acquisition"). The
purchase price for the Acquisition was $46,244,700. The Company financed
the Acquisition using a $50 million term loan with a five-year amortization
schedule provided by a syndicate of banks. Interest rates under the loan
are variable and are a function of short-term indices and the Company's
consolidated leverage ratio. The current interest rate is LIBOR plus 125
basis points.
The Acquisition has been accounted for using the purchase method of
accounting. The cost of the Acquisition has been allocated to tangible and
intangible assets acquired and liabilities assumed based upon management's
present estimate of their respective fair values at the acquisition date.
Management is presently finalizing its estimate of these respective fair
values. The excess of purchase price over the fair value of the net assets
acquired (goodwill) is being amortized on a straight-line basis over a
forty year period.
Merlin's fiscal year ends on January 31. The accompanying financial
statements reflect the operations of Merlin for one month.
3. 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.
4. INVENTORIES
<TABLE>
<CAPTION>
(Unaudited)
August February
26, 1995 25, 1995
--------- ---------
(amounts in thousands)
<S> <C> <C>
Raw materials $ 7,053 $ 9,683
Work in process 3,393 3,738
Finished products 17,926 13,801
------- -------
Total $28,372 $27,222
------- -------
------- -------
</TABLE>
6
<PAGE>
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 as of August 26, 1995, and the related
condensed consolidated statements of operations and cash flows for the thirteen
week and twenty-six week periods ended August 26, 1995 and August 27, 1994.
These financial statements are the responsibility of the Company's management.
We conducted our review in accordance with the standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope that an audit conducted
in accordance with generally accepted auditing standards, 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 such 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 Topps Company, Inc. and
subsidiaries as of February 25, 1995, 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 25, 1995 (May 17,
1995 as to Note 12), 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 25, 1995 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
DELOITTE & TOUCHE LLP
September 14, 1995
New York, New York
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net sales for the second quarter of fiscal 1996 decreased 1.1%, to $60,661,000
from $61,348,000 for the same period last year. The decrease, largely offset by
the inclusion of Merlin Publishing International plc's ("Merlin") sales for the
month of July, reflects lower shipments and higher provisions for returns of
sports card products, primarily baseball.
Net sales for the first half of fiscal 1996 decreased 17.8%, to $128,093,000
from $155,846,000 for the same period last year. This decrease resulted from
lower shipments of sports card products, principally baseball cards, reflecting
lower trade and consumer demand for these products during the period. The sports
card decline is partially offset by growth in the Company's confectionery
business and the recent addition of Merlin.
Gross profit as a percentage of net sales for the second quarter increased to
30.4% from 25.5% for the same period last year. This increase resulted from a
reduction in the provision for inventory obsolescence as well as lower labor,
material, overhead and product development costs both in absolute dollars and as
a percent of sales. For the first half, the gross profit margin decreased to
32.4% from 33.6% last year. For this period, although labor, material,
overhead, obsolescence and product development costs were lower, they increased
as a percentage of net sales due to lower sales volume.
Selling, general and administrative expenses as a percentage of net sales for
the second quarter of fiscal 1996 increased to 26.5% from 19.7% for the same
period last year primarily as a result of higher advertising in connection with
confectionery products abroad. For the six month period, selling, general and
administrative expenses as a percentage of net sales increased to 24.8% from
19.6% for the same period a year ago. This increase was due to higher general
and administrative costs and the overall decline in net sales.
Interest expense, net of interest income, was $364,000 and $226,000 for the
second quarter and the first six months of fiscal 1996, respectively. This
expense reflects interest costs of $531,000 associated with the term loan
facility entered into in connection with the Merlin acquisition.
To finance the acquisition of Merlin and provide additional working capital, the
Company entered into a Credit Agreement with a syndicate of banks on July 6,
1995. The Credit Agreement consists of a $50 million term loan, a $13 million
revolving credit facility and a letter of credit facility of up to $2 million
for the issuance of standby letters of credit. Principal payments under the
Credit Agreement are due in quarterly installments over a five-year period.
Interest is to be paid at a floating rate based upon the Company's election of
either, (i) LIBOR plus an applicable spread or (ii) the prime rate. The
applicable spread, which ranges from 75 to 125 basis points, is determined by
the Company's consolidated leverage ratio and is currently 125 basis points.
The credit facility is secured by a pledge of 65% of Merlin's capital stock, and
contains affirmative and negative covenants customary for a credit agreement of
this type, including financial covenants, restrictions on additional
indebtedness and a prohibition on the payment of dividends.
Effective tax rates were 58.3% for the second quarter and 46.5% for the first
half of fiscal 1996 versus 43% for both periods last year. These increases were
driven by the Merlin acquisition, and for the second quarter, retroactive
application of the new tax rate on first quarter earnings.
Net income for the second quarter of fiscal 1996 was $1,005,000, or $.02 per
share, as compared with $2,488,000, or $.05 per share for the same period last
year. For the first half of fiscal 1996, net income was $5,645,000 or $.12 per
share, as compared with $13,234,000 or $.28 per share for the first half of
fiscal 1995.
Management believes that given $26,966,000 of cash on hand as of August 26, 1995
and cash flow from operations, plus if necessary, the Company's additional
borrowing capacity, the Company has adequate means to meet its working capital,
capital expenditure and principal repayment requirements for the foreseeable
future.
8
<PAGE>
THE TOPPS COMPANY, INC.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K in connection with the Merlin acquisition
on July 10, 1995. The Company reported under Item 2 and Item 7 of Form 8-K.
The Company filed audited financial statements of Merlin Publishing
International plc for the fiscal year ended January 31, 1995 and unaudited pro
forma financial statements of the Company which give effect to the acquisition
of Merlin.
9
<PAGE>
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, 1995
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAR-02-1996
<PERIOD-END> AUG-26-1995
<CASH> 26,966
<SECURITIES> 0
<RECEIVABLES> 49,067
<ALLOWANCES> 0
<INVENTORY> 28,372
<CURRENT-ASSETS> 120,579
<PP&E> 52,445
<DEPRECIATION> 20,132
<TOTAL-ASSETS> 223,700
<CURRENT-LIABILITIES> 80,700
<BONDS> 0
<COMMON> 475
0
0
<OTHER-SE> 78,924
<TOTAL-LIABILITY-AND-EQUITY> 223,700
<SALES> 60,661
<TOTAL-REVENUES> 61,035
<CGS> 42,209
<TOTAL-COSTS> 58,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 364
<INCOME-PRETAX> 2,410
<INCOME-TAX> 1,405
<INCOME-CONTINUING> 1,005
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,005
<EPS-PRIMARY> .021
<EPS-DILUTED> .021
</TABLE>
