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| TOPP > SEC Filings for TOPP > Form 10-Q on 13-Jan-2004 | All Recent SEC Filings |
13-Jan-2004
Quarterly Report
Third Quarter Fiscal Year 2004 (thirteen weeks ended November 29, 2003) versus Third Quarter Fiscal Year 2003 (thirteen weeks ended November 30, 2002) -
The following table sets forth, for the periods indicated, net sales by key business segment:
Thirteen weeks ended Thirty-nine weeks ended
November 29, November 30, November 29, November 30,
2003 2002 2003 2002
---- ---- ---- ----
(In thousands of dollars)
Net Sales
-
Confectionery $ 31,886 $ 29,225 $ 119,227 $ 114,575
Entertainment 46,694 37,442 108,336 109,852
--------- --------- --------- ---------
Total $ 78,580 $ 66,667 $ 227,563 $ 224,427
========= ========= ========= =========
Net sales for the third quarter of fiscal 2004 increased $11.9 million, or 17.9%, to $78.6 million from $66.7 million for the same period last year. WizKids, acquired in July of this year, contributed $6.8 million of this increase, and stronger foreign currencies versus the dollar increased sales by another $2.0 million.
Net sales of confectionery products, which include, among other things, Ring Pop, Push Pop, Baby Bottle Pop, Bazooka brand bubble gum and licensed candy products, increased $2.7 million, or 9.1%, in the third quarter of this year to $31.9 million from $29.2 million in fiscal 2003. The increase, the majority of which occurred in international markets, was largely due to the roll out of Juicy Drop Pop, sales of licensed candy containers in Europe and stronger sales of seasonal products domestically.
Net sales of entertainment products, which consist of cards, stickers, albums and the WizKids line of strategy games, increased $9.2 million, or 24.7%, to $46.7 million in the third quarter of fiscal 2004 from $37.4 million in the same period last year. This increase was primarily the result of the WizKids acquisition. Additionally, sales of non-sports publishing products were above last year, driven by sales of Yu-Gi-Oh! products in Europe and Garbage Pail Kids stickers domestically. Sales of traditional sports cards were flat in the quarter versus last year, with the timing of football products and higher sales of basketball products offseting a 20% reduction in the number of releases. Internet sales continued to run below year-ago levels.
Gross profit as a percentage of net sales of 30.4% in the third quarter of fiscal 2004 was lower than last year's 32.5% primarily due to costs associated with slow-moving products at WizKids.
SG&A as a percentage of net sales was 29.6% in the third quarter of fiscal 2004 versus 30.7% a year ago, and SG&A dollar spending increased to $23.3 million from $20.5 million. The dollar increase was largely the result of the WizKids acquisition, increased marketing costs due to new product introductions and increased media activity worldwide as well as legal expense associated with the European Commission legal case. The increase in SG&A expense versus last year was partially offset by an accrual last year for a legal settlement.
Interest income, net of $445,000 in the quarter this year was below year-ago levels due to lower interest rates and reduced cash balances following the WizKids acquisition.
The effective tax rate reflects provisions for federal, state and local income taxes in accordance with statutory income tax rates. The Company`s tax rate was 10.7% in the third quarter of this year versus a credit last year. In both years, the unusually low tax rate was a function of a reduction in the full year tax rate outlook.
Net income for the third quarter of fiscal 2004 was $982,000, or $0.02 per diluted share, compared with $2.9 million, or $0.07 per diluted share last year. Contained within the fiscal 2004 figures is a WizKids pre-tax loss of $3.0 million, or $0.05 per diluted share.
Nine Months Fiscal 2004 (thirty-nine weeks ended November 29, 2003) versus Nine Months Fiscal 2003 (thirty-nine weeks ended November 30, 2002) -
Net sales in the first nine months of fiscal 2004 increased $3.2 million, or 1.4%, to $227.6 million from $224.4 million for the same period last year. WizKids added $11.8 million in sales, and stronger foreign currencies versus the dollar increased sales by another $6.6 million this year.
Net sales of confectionery products increased $4.6 million, or 4.1%, in the first nine months of this year to $119.2 million from $114.6 million in fiscal 2003, primarily as the result of the introduction of Juicy Drop Pop and Baby Bottle Pop with Candy Juice as well as higher sales of Pokemon and Yu-Gi-Oh! confectionery products in Europe.
Net sales of entertainment products decreased $1.6 million, or 1.4%, in first nine months of this year to $108.3 million from $109.9 million despite the WizKids acquisition which added $11.8 million to sales during the period. The decrease was primarily the result of lower sales of traditional sports cards in the U.S., a larger reversal last year of the returns provision for European sports products, and lower sales of products sold via the Internet.
Gross profit as a percentage of net sales for the first nine months of fiscal 2004 increased slightly to 35.8% as compared with 35.5% for the same period last year. This improvement was the result of lower royalty expense due to a reduced percentage of licensed products this year as well as to a reduction in overhead costs at our Scranton, Pennsylvania manufacturing facility. Partially offsetting these improvements were costs associated with slow-moving products at WizKids.
SG&A expense was $69.2 million for the first nine months of fiscal 2004 compared to $61.7 million in 2003. The acquisition of WizKids added $4.1 million in overhead and $0.7 million in amortization costs. In addition, increased marketing associated with new product introductions and media activity in the U.S. and Europe, stronger European currencies and higher legal expenses contributed to greater costs this year. The absence of costs associated with a legal settlement last year served to reduce expenses.
Interest income, net for the thirty-nine week period was unchanged at $1.9 million in fiscal 2004 versus $1.9 million in fiscal 2003, as interest from a tax refund received in the first quarter of this year offset the impact of lower interest rates and reduced cash balances following the WizKids acquisition.
The tax rate for the first nine months of fiscal 2004 was 32.7% versus 24.0% for the same period last year which was favorably impacted by income tax credits.
Net income in first nine months of fiscal 2004 was $9.8 million, or $0.23 per diluted share, compared with $14.9 million, or $0.35 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.
At November 29, 2003, the Company had $89.6 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, and the credit agreement was subsequently amended to permit the payment of dividends subject to the same limitation for share repurchases. There was no debt outstanding as of November 29, 2003.
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. During the third quarter of fiscal 2004, the Company did not purchase any shares. The Company has repurchased a total of 2.9 million shares under the second authorization.
In the nine months ended November 29, 2003, the Company's net decrease in cash and cash equivalents was $24.7 million versus a decrease of $2.8 million in the comparable period of fiscal 2003. Cash provided by operating activities this year was $7.6 million versus $9.6 million last year largely due to a reduction in net income and a greater cash pension contribution, partially offset by a lesser increase in inventory this year than last.
Cash used in investing activities of $30.6 million this year versus $3.0 million last year, reflects the $28.6 million purchase of WizKids this year. Outside of the WizKids acquisition, the cash use in both periods reflects the Company's capital spending.
Cash used in financing activities reflects $3.3 million in cash dividends and $1.4 million of net treasury stock purchases this year, versus net treasury stock purchases of $12.1 million in fiscal 2003. There were no purchases of treasury stock in the third quarter of this 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, health-related issues, or political upheaval in certain foreign countries in which the Company conducts business; (xi) an adverse outcome in the EU investigation; and (xii) the failure of certain new products being introduced by WizKids to achieve expected levels of success; 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
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires Topps management to make estimates and assumptions that affect the reported amounts of revenue, expenses, assets, liabilities and the disclosure of contingent assets and liabilities.
On an on-going basis, Topps management evaluates its estimates and judgments, including those related to revenue recognition, goodwill and intangible assets, and reserves, based on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Note 1 to the Company's Annual Report "Summary of Significant Accounting Policies" summarizes each of its significant accounting policies. Additionally, Topps management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:
Revenue Recognition: Revenue related to sales of the Company's products is generally recognized when products are shipped, the title and risk of loss has passed to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. Sales made on a returnable basis are recorded net of a provision for estimated returns. These estimates are revised, as necessary, to reflect actual experience and market conditions.
Intangible Assets: Intangible assets include trademarks and the value of sports, entertainment and proprietary product rights. Amortization is by the straight-line method over estimated lives of up to twenty years. Management evaluates the recoverability of intangible assets under the provisions of SFAS 144, using several approaches including market multiples and undiscounted projections of future cash flows attributable to the individual assets.
Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires Topps management to make estimates and assumptions which affect the reporting of assets and liabilities as of the dates of the financial statements and revenues and expenses during the reporting period. These estimates primarily relate to the provision for sales returns, allowance for doubtful accounts, inventory obsolescence and asset valuations. Actual results could differ from these estimates.
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