UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ NO FEE REQUIRED] For the fiscal year
ended March 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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) (Zip Code)
(212) 376-0300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.01
(Title of class)
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 _.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]
The aggregate market value of Common Stock held by non-affiliates as of May
15, 1997 was approximately 152,000,000.
The number of outstanding shares of Common Stock as of May 15, 1997 was
46,400,010.
Documents incorporated by reference Part
Annual Report to Stockholders for the Year Ended March 1, 1997 I,II,IV
Proxy Statement for the 1997 Annual Meeting of Stockholders III
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PART I
ITEM 1. BUSINESS
General Development
The Topps Company, Inc. was incorporated in Delaware on February 24, 1987.
The Company is the successor to Topps Chewing Gum, Inc., which was established
as a partnership in 1938 and was incorporated under the laws of New York in
1947. All references in this Annual Report on Form 10-K to "Topps" or the
"Company" are to The Topps Company, Inc. and its subsidiaries.
Topps is a leading marketer of collectible picture products featuring
professional athletes as well as popular television, movie and comic book
characters. The Company also distributes Bazooka brand bubble gum as well as
branded lollipops, such as Ring Pop and Push Pop, novelty candy products,
collectible toys, comic books and sticker and album collections.
The sports card category in which the Company competes continued to
contract in calendar 1996, albeit at a lesser rate than in 1995. The five-year
industry decline has occurred as a result of several factors, including: product
and brand proliferation which have led to consumer confusion and oversupply, a
competitive rise in other sports-related merchandise choices, a reduction in
retailer support and labor strife which has left fans feeling disenfranchised.
Further category declines may occur near term, although the Company believes
that these trends have begun to moderate.
On July 6, 1995, the Company acquired Merlin Publishing International
Limited ("Merlin"), a U.K.-based publisher and marketer of licensed
collectibles, primarily sticker and album collections and, to a lesser extent,
trading cards and stationery. While continuing to market products under the
Merlin brand name, Merlin Publishing International Limited changed its corporate
name to Topps Europe Ltd. in March 1997. All references in the Annual Report on
Form 10-K to Merlin are to Topps Europe Ltd. Merlin has subsidiaries in France,
Spain, Italy and the Netherlands (which also serves Germany, Belgium and other
countries.)
The Company has significantly expanded its international operations
over the last several years, establishing new subsidiaries in Canada and Mexico
in fiscal 1996 and Brazil and Argentina in fiscal 1997. The Company currently
distributes in over forty countries and has employees in twelve and licensees in
five international markets.
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Trademarks of The Topps Company, Inc. and Subsidiaries appearing in this report:
Baby Wild Animals, Bazooka, Bazooka Blasts, Bazooka Joe, Bowman, Bowman's Best,
Collect `Ems, Garage Pail Kids, Juice Bar, Mars Attacks, Merlin, Push Pop, Ring
Pop, Roller Pop, Tongue Sucker, Topps, Topps Chrome, Topps Finest, Topps
Gallery, Topps Stadium Club, Triple Blasts and Wacky Packages.
Unless otherwise indicated, all date references refer to calendar years.
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Products
Sports Picture Products. The Company is a leading marketer of
collectible picture products featuring players of major league baseball, NBA
basketball, NFL football and professional soccer. In the U.S. and Canada,
picture products are generally in the form of cards, while in the rest of the
world picture products are typically in the form of sticker and album
collections, which are a popular medium for licensed collectibles in these
countries.
Card products feature photographs of athletes and contain summary
statistics and biographical material. Over the years, sports picture cards have
been marketed in packages with and without bubble gum. The Company markets
sports picture cards in various size packages, as well as complete sets, for
distribution through a variety of trade channels.
The Company distributes sports cards under the brand names Topps, Topps
Stadium Club, Topps Finest, Topps Gallery, Bowman, Bowman's Best and Topps
Chrome. Each brand of sports cards has its own unique positioning in the
marketplace and is designed to appeal to specific groups of consumers. All
brands of sports cards are of a high-quality and feature laminated paperboard
and state-of-the-art reproduction techniques. Certain brands feature borderless
cards and also contain foil stamping. Prices range from a suggested retail
price of $1.29 per pack for popular-priced Topps cards to a suggested retail
price of $5.00 per pack for the Topps Finest brand. The Company is constantly
updating the technology and features of its cards. In 1997, plans call for
introduction of a set of cards using technology from Kodak which will feature
several seconds of crisp, full-motion action.
Sticker and album collections, which are sold under the Merlin and Topps
brand names, are marketed throughout Europe and in certain Latin American
countries. Stickers display photos of popular local athletes and sports teams
and are typically sold in packages of six. Stickers are to be inserted in
designated places in an associated album, which usually contains more detailed
information and statistics regarding the players and teams. The Company is
expanding its sports licenses beyond the Premier League in the U.K. and has
recently obtained sticker and album rights for soccer in Brazil, Korea and
Denmark and basketball in France. The Premier League contract was renewed in
fiscal 1997 and now extends through the year 2000. The Company also plans to
introduce sticker products in the U.S. and Canada under the Topps brand name in
1997.
In December 1995, the Company entered into a joint venture with a
technology company, Data Systems & Software, Inc., ("DSSI"), to manufacture and
distribute sports-oriented CD-ROMs. Topps sold its 50% interest to DSSI in
February 1997, thus ending its involvement in the joint venture.
Bazooka Brand Bubble Gum. The Company has been marketing Bazooka brand
bubble gum since 1947. Traditional chunk Bazooka bubble gum is produced in
individually-wrapped rectangular pieces in a variety of flavors and sold for
five cents a
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piece. In the United States and many foreign countries, individual pieces of
Bazooka brand bubble gum include a comic printed in the appropriate language
usually featuring Bazooka Joe, a copyrighted cartoon character created by the
Company in 1953.
The Company also sells Bazooka Blasts, a bubble gum product manufactured
with super flavor crystals designed to enhance flavor impact and extend its
duration. This product is being sold in four flavors in 1997.
The Company sells multiple piece packs of Bazooka which over the years
have included a six-piece pack of soft sugarless bubble gum, a ten-piece pack,
forty-five and seventy-five count bags of traditional chunk Bazooka, as well as
various box, bucket and canister configurations. These packages are designed
for distribution in supermarkets, convenience stores, drug store chains and mass
merchandisers.
In 1997, the Company is investing in Bazooka in a number of areas including
development of a new logo and packaging, an expanded range of contemporary
flavors, updated comics and new consumer promotions.
Lollipops. The Company markets several lollipop products throughout the
United States and many foreign countries. Products include Ring Pop (a lollipop
made of candy molded into the form of an exaggerated precious gem stone,
anchored to a plastic ring) and Push Pop (a cylinder-shaped lollipop packaged in
a plastic container with a removable cap, designed to enable consumers to eat a
portion of the pop and save the rest). In 1997, the Company plans to increase
the number of flavors and advertising support behind both Ring Pop and Push Pop.
Introductions of other lollipop products over the last several years
include Roller Pop (a pop in the shape of a paint roller overwrapped in a
plastic tray with a packet of fruit-flavored, mouth-coloring powder into which
the pop is rolled), Triple Blasts (a ball-shaped pop on a stick that changes
color and flavor three times and has a bubble gum center) and Tongue Sucker (a
tongue-shaped pop on a stick with plastic lips).
Novelty Candy Products. From time to time, the Company markets various
other candy and candy-coated gum products. Past examples of these products
include Juice Bar, a flavored candy-coated bubble gum packaged in miniature
juice cartons, as well as candy and/or gum-filled container products replicating
licensed characters and themes such as Batman, Jurassic Park, The Flintstones,
Casper and Power Rangers. These container products provide entertainment value
and are designed for impulse purchase.
Other Collectibles. The Company has introduced two series of collectible
plastic animals under the names Puppy In My Pocket and Baby Wild Animals. Each
series consists of 24 different animals which are packaged individually with
candy and a
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collector card. The Company intends to expand this new segment of its
collectible business in 1997 by introducing additional products under the
Collect `Ems brand name.
Entertainment and Other Picture Products. The Company's activities in
this area began in the 1950's. Since then, the Company has marketed many
picture products featuring the dominant entertainment properties of the time,
including The Beatles, Elvis Presley, Star Wars, Michael Jackson, E.T., Indiana
Jones, Batman, Teenage Mutant Ninja Turtles, Jurassic Park, Goosebumps and The
X-Files. Occasionally, the Company has also created products detailing events
of national interest, such as Desert Storm, or parodying popular brands and
properties such as Wacky Packages and Garbage Pail Kids. Over the years,
products of this nature have experienced peaks and valleys in terms of consumer
interest.
In fiscal 1997, the Company plans to reduce the number of products it will
offer and will focus its entertainment card efforts on a few of the most
prominent licenses in the entertainment field. Minimally, the Company
will produce cards based on The Lost World: Jurassic Park, Star Wars and The
X-Files, representing three of the strongest and most enduring entertainment
franchises in the card-collecting community.
The Merlin sticker and album product line also features a number of
entertainment-based properties. In fiscal 1997, the Company marketed over 15
different properties throughout Europe, some in multiple languages, formats and
series. Examples of licenses for sticker album entertainment properties held in
fiscal 1997 include Goosebumps, Dragonball and Sailor Moon. In fiscal 1998,
Merlin will also scale back the number of its releases and will focus on
properties such as The Lost World: Jurassic Park, Star Wars, The X-Files and
Goosebumps.
Magazine Publishing. The Company is currently publishing one periodical
and single issues of souvenir and poster magazines based on subjects of interest
in the entertainment field. The quarterly Star Wars Galaxy Magazine features,
among other things, interviews with popular Star Wars artists, excerpts of new
works of Star Wars fiction, original comics adventures and information regarding
the next trilogy of Star Wars films. A special Star Wars twentieth anniversary
commemorative magazine and two commemorative poster magazines were published in
February 1997.
The Company is also publishing movie souvenir magazines in conjunction with
the summer release of two major motion pictures: The Lost World: Jurassic Park
and Batman and Robin.
Comic Books. The Company creates and markets a limited selection of
high-quality color comic books for distribution in specialty shops and
newsstands. During fiscal 1997, more than 16 different comic books featuring
titles such as The X-Files and Mars Attacks were published. In fiscal 1998, the
Company plans to publish
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fewer titles, focusing greater attention on its stronger properties and
removing non-performing lines from the publishing program.
For a schedule of net sales by major product group for the past three
fiscal years, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 8 of the Company's Annual Report to
Stockholders for the year ended March 1, 1997 (the "Annual Report"), which is
hereby incorporated by reference.
Distribution and Marketing
Sales and Distribution. The Company's products are sold throughout the
United States, Canada and Europe, and in many Latin American and Asian markets.
In March 1997, the Company reorganized its U.S. Sales Force. As a
result, U.S. card sales and national accounts are handled by the Company's own
Sales Force, while U.S. confectionery sales to all classes of trade (excluding
national accounts) are handled through broker organizations. Together, the
Sales Force and brokers sell to more than 3,000 wholesale tobacco and
confectionery jobbers, hobby distributors, wholesale clubs, newsdealers, mass
merchandisers and direct-buying grocery, convenience, drug, variety, discount
and toy store chains. Sales to more than 3,700 collectible products dealers
and hobby shops are made by direct mail solicitation.
The Company develops card products for exclusive distribution in the
U.S. hobby channel of trade. Recent examples include the Topps Gallery
products that feature unique, top-quality sports star photographs and artwork
by renowned artist Peter Max.
The Company also has a direct response membership club through which it
markets special sets of Topps Stadium Club baseball, football and basketball
cards as well as other products.
In Canada, sales of collectible products and confectionery are handled
by a small direct Sales Force and brokers.
In the U.K., sales of both confectionery products and collectibles are
handled by a dedicated Sales Force which calls on major chains as well as
wholesalers selling to independents. Together, the Sales Force and wholesalers
reach approximately 50,000 retail news and confectionery outlets. Elsewhere in
Europe, sales are primarily through candy and snack food distributors as well
as through newstrade agents or distributors. In some markets, such as Germany
and the Netherlands, national distributors are used. In others, such as Italy
and France, a more regional approach is taken. In all cases, the distributors
and agents are managed closely by a Topps manager from the appropriate local
subsidiary.
In Latin America and Asia, Topps sales of both confectionery and
collectible products are handled by national distributors under the supervision
of the local Topps general manager.
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Advertising and Promotion. The Company utilizes a variety of promotional
activities, including television, radio and print advertising campaigns,
designed to create consumer awareness and increase retail sales of its
products, particularly Topps and Topps Stadium Club brand sports cards and Ring
Pop and Push Pop lollipops. Worldwide advertising and promotional
expenditures as a percentage of net sales for the fiscal years ended 1995, 1996
and 1997 were 6.8%, 7.8% and 7.0%, respectively.
Traditionally, the Company has relied on the popularity of its sports and
other licensed products and the consumer recognition of its brand names in
order to promote its products. In addition, as described above, the Company
has often become a licensee for characters and personalities with well-
publicized and well-advertised names. Similarly, picture products based on
movies have relied on the extensive national promotional campaigns for these
films. The Company also uses print advertising on its own product wrappers and
promotional insert cards to increase consumer awareness of its products and
promotions.
Approximately 70% of the Company's sales are made on a returnable basis.
Industry practices require that the Company provide the right to return on
sales of sports card products excluding those to hobby dealers, on comic book
products sold to mass merchandisers and on sales of most of the sticker and
album products in Europe. Returns significantly in excess of the Company's
returns provisions could have a material adverse effect on the Company.
Consolidated return provisions as a percentage of gross sales for the fiscal
years ended 1995, 1996 and 1997 were 10.9%, 16.5% and 14.2%, respectively.
Production
In December 1996, the Company discontinued operations at its Duryea,
Pennsylvania manufacturing facility and took a related one-time charge of
$30,000,000. As a result of the Duryea plant closure, Bazooka gum is being
manufactured by a single contractor in the U.S. The cutting, collating and
packaging of card products previously performed at the Duryea facility have
been outsourced to several manufacturers in the U.S.
Collectible Picture Products. In the U.S., photographs of athletes are
generally taken by photographers under contract with the Company or by
free-lance photographers on special assignment. In addition, certain
photography is provided by the organization representing the leagues and their
member teams. Pictures of entertainment subjects are generally furnished by
the licensor or created by artists retained by the Company. Computerized
graphic artwork and design development for all the Company's products is done
by staff artists and through independent design agencies under the Company's
direction. The Company's Graphic Services Department also utilizes state-of-
the-art computerized technology to enhance and color-correct photography and
computer imaging to create interesting and unusual backgrounds and visual
effects.
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High-quality paperboard is sent directly to outside printers by the
Company's suppliers. Pictures are printed utilizing a variety of techniques
and processes, including waterless printing, which allows for a tighter line
screen resulting in sharper and more intense photo reproduction. Sheets of
printed cards are then often sent to additional suppliers who foil stamp and UV
(ultra violet) coat the sheets before they are delivered to contract packagers
where they are then cut into individual cards, collated and wrapped in a
variety of package configurations.
Merlin brand sticker products are sourced from a single supplier in Italy,
with which the Company has a five-year agreement containing certain exclusivity
provisions. Based on anticipated growth, the supplier has recently expanded
its capacity. If this relationship were to end, the Company believes that
there would be other suitable sources available to meet its requirements.
Confectionery. As a result of the Company's decision to close its Duryea,
Pennsylvania plant, the Company now purchases all of its U.S. Bazooka bubble
gum requirements from a single contract manufacturer, under the terms of a
three-year agreement entered into in November 1996. This agreement requires
the Company to source all of its U.S. Bazooka production needs from this
manufacturer, provided the manufacturer can fulfill the orders on a timely
basis. Given the shortage of alternative manufacturers for Bazooka gum,
failure by this manufacturer to supply the Company on a timely basis could
have a material adverse affect on product availability and, therefore, on sales
of Bazooka. Bazooka and other bubble gum products for international sales
continue to be manufactured by the Company's factory in the Republic of
Ireland.
Push Pop lollipops are manufactured by a single supplier in factories
located in Taiwan, Thailand and China. The loss of production at one or more
of these facilities due to civil unrest or for any other reason could have a
significant negative impact on sales of Push Pop until an alternative source
could be arranged.
Ring Pop lollipops for domestic sales are manufactured at the Company's
Scranton, Pennsylvania factory. Ring Pop lollipops for sale in international
markets are manufactured by a single supplier in factories located in Thailand
and China.
The Company's other candy products are also manufactured, to the Company's
specifications, by outside suppliers abroad and delivered to the Company as
finished product.
Sweeteners, flavors, paperboard, packaging materials, foil stamping and
UV coating are required to manufacture the Company's total line of collectible
picture and confectionery products and are generally available to the Company.
The Company does rely on single producers for several of these ingredients or
processes. While alternative suppliers are generally available, some
adjustment in product specification might be required if these single sources
were no longer available to the Company.
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Trademarks and License Agreements
The Company considers its trademarks and license agreements to be of
material importance to its business. The Company's principal trademarks have
been registered in the United States and many foreign countries where its
products are sold. The sports picture products marketed by the Company in the
U.S. are all based on rights under license agreements with individual athletes
or their players' associations, as well as the licensing bodies of the
professional sports leagues. These agreements cover the following sports:
Major League Baseball, NBA Basketball and NFL Football. The Company also has a
contract with the Premier Soccer League in the U.K. and with players and teams
with regard to soccer in Brazil, Korea and Denmark and basketball in France.
The Company's inability to successfully renegotiate its Major League Baseball,
NBA Basketball, NFL Football or Premier League Soccer agreements upon
expiration, or the loss of any of these license agreements, could have a
material adverse effect on the Company. The Company chose not to renew its NHL
Hockey license upon its expiration in June 1996.
The Company has an individual license agreement with virtually every
major league baseball player. Each baseball player's license agreement is
initially for four major league baseball seasons and may be extended for
additional seasons as rights are used, if the player and the Company agree.
Typically, these agreements are extended annually. Among the rights the
Company receives are rights to use a player's name, picture, facsimile
signature and biographical description in the form of two or three dimensional
pictures, trading cards, postcards, stickers, stamps, transfers, decals,
medallions or coins, each within certain size limitations, provided such
products are marketed alone or with chewing gum or candy. The licenses granted
to the Company by athletes permit the athlete to grant others rights to the use
of his name, picture and facsimile signature on other products, including
collectible picture cards sold alone or with products other than gum and (with
certain exceptions) candy. The Company has a related agreement with the Major
League Baseball Players Association, which governs certain terms of the
individual player contracts (and which expires in January 1998) and an
agreement with Major League Baseball Properties, Inc., which covers the use of
the names and insignias of the baseball teams and leagues in connection with
its baseball picture products and which expires at the end of the year 2000.
The Company conducts a related active licensing program with minor league
baseball players and continuously seeks to supplement its relationship with
the baseball community by personal visits and corporate identification. The
Company considers such relationships to be good and to be of great importance
to it. However, should an appreciable number of Major League Baseball players
refuse to sign the Company's license agreement, it could have a material
adverse effect on the Company.
The Company also enters into license agreements with entertainment
companies to produce certain products. The terms of such contracts depend on a
variety of factors. Total royalty expense under the Company's sports and
entertainment licensing contracts for the fiscal years ended 1995, 1996 and
1997 was $35,967,000, $34,614,000 and $37,960,000, respectively. See Note 16
of Notes to Consolidated Financial Statements in the Annual Report, which is
incorporated herein by reference, for a description of minimum guarantee
payments required under the Company's existing sports contracts.
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International Licensing Operations
The Company, which licenses its technology and trademarks, currently has
license agreements with manufacturers in five foreign countries to
manufacture and distribute the Company's products. These licensees have the
right to sell licensed products in countries of their location and, in certain
instances, other countries as well. The Company receives royalties from its
licensees based on sales of licensed products and, in certain instances, the
licensee's sale of non-Company brands. Prior to fiscal 1996, the licensee in
Canada, which had the rights with respect to both collectible picture and
confectionery products, accounted for the largest percentage of the Company's
royalty income. In fiscal 1996, the Canadian license was restricted to
confectionery products only and in fiscal 1997, it was terminated completely.
As a result, the Company now markets and distributes all products directly in
Canada through Topps Canada Inc., a wholly-owned subsidiary. In addition, in
April 1996, the Company's licensing agreement with Productos Stani for the sale
of Bazooka in Argentina expired, and Productos Stani became the owner of the
Bazooka trademark in Argentina.
Royalties are generally based on sales volume in local currency and are
payable in U.S. dollars. The Company's royalties from international operations
are subject to foreign currency fluctuations. Although the Company has from
time-to-time experienced delays in the receipt of payment for royalties from
various licensees because of foreign exchange control regulations, to date,
such regulations have not materially affected the Company's results.
Competition
The Company competes for sales as well as counter and shelf space with
large corporations in the food, candy, publishing, toy and other industries.
Many of these corporations have substantially greater resources than the
Company. More narrowly, the Company competes with other companies, large and
small, which market gum and candy, and with a number of collectible picture
product companies for the spending money of children and adult collectors. The
Company believes that the industries in which it operates are highly
competitive.
Seasonality
The Company's sports picture products are sold throughout the year in
the U.S., spanning the three major sports seasons in which the Company
participates, i.e., baseball, football, basketball. Sales of entertainment
card products tend to be driven by the property on which they are based, often
peaking with the release of a movie or the rise in popularity of a television
program. Sales of confectionery products are relatively stable throughout the
year, although they are impacted by the introduction of new products and the
use of consumer advertising that can occur at any point in the year. Merlin's
sales are driven largely by the shipment of products relating to Premier League
Soccer, with much of the sales activity occurring in January and February.
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Environment
The Company believes that it is in compliance in all material respects
with existing federal, state and local regulations relating to the protection
of the environment. Such environmental regulations have not had a material
impact on the Company's capital expenditures, earnings or competitive position.
Employees
In December 1996, the Company discontinued manufacturing operations at
its Duryea, Pennsylvania facility. Many of the employees at the Duryea
facility were represented by Teamster's Union Local 229 which filed an unfair
labor practice charge relating to the closure. See "Cautionary Statements -
Legal Proceedings" and "Item 3 - Legal Proceedings." Excluding those affected
by the Duryea closure, the Company employed approximately 500 people in fiscal
1997. All of the production employees at the Company's factories in Scranton,
Pennsylvania and the Republic of Ireland are represented by unions. The Company
considers relations with its employees to be good.
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. The Company wishes to ensure that any forward-looking statements are
accompanied by meaningful cautionary statements in order to maximize to the
fullest extent possible the protections of the safe harbor established in the
Reform Act. Accordingly, any such statements are qualified in their entirety by
reference to, and are accompanied by, the following important factors, among
others, that could cause the Company's actual results to differ materially from
those projected in forward-looking statements of the Company.
Dependence on Licenses. The Company's trading card and sticker and album
businesses are highly dependent upon licensing arrangements with third parties.
These licenses, which have varying expiration dates, are obtained from
entertainment companies, the various professional sports leagues, players
associations and, in certain instances, the players themselves. The Company's
inability to renew or retain these licenses, or the lack of vitality of these
licenses, could materially affect its future plans and results.
Contraction in Sports Card Industry and Competition. The Company believes
that the sports card industry continued to contract during calendar 1996. That
contraction, caused in part by product and brand proliferation and labor
strife, has resulted in an increasingly competitive environment in the sports
card industry. Further prolonged and material contraction in the sports card
industry could materially adversely affect the Company's future plans and
results.
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Returns. Approximately 70% of the Company's sales are made on a
returnable basis. Although the Company maintains provisions for returns,
returns considerably in excess of the Company's provisions could materially
affect its future plans and results.
Leverage. On June 30, 1995 the Company entered into a $65 million credit
facility (the "Credit Agreement") with a syndicate of banks. The Credit
Agreement consists of a $50 million term loan used to finance the acquisition
of Merlin, a $2 million letter of credit facility and a $13 million revolving
credit facility to be used for working capital and general corporate purposes.
The Credit Agreement contains restrictions and prohibitions of a nature
generally found in loan agreements of this type (including restrictions on the
ability to pay dividends) and requires the Company, among other things, to
comply with certain financial covenants. In December 1996, certain covenants
of the Credit Agreement were amended to exclude one-time charges related to the
closure of the plant in Duryea, Pennsylvania and the impairment of assets at
the Cork, Ireland plant. Although the Company was in compliance with the
financial covenants at March 1, 1997, there can be no assurance that the
Company will continue to be in compliance with such covenants, or as to the
impact of any such failure on the Company.
Legal Proceedings. In connection with the closure of the Company's Duryea,
Pennsylvania manufacturing plant, Local 229 of the Teamster's Union filed an
unfair labor practice charge against the Company. In April 1997, the National
Labor Relations Board advised the Company that it intended to issue a complaint
based on that charge. In addition, in August 1996, the Company was named a
defendant in a class action lawsuit alleging among other things, that the
Company violated the federal Racketeer Influenced and Corrupt Organizations Act
by its practice of selling sports and entertainment cards with randomly
inserted "insert" cards, allegedly in violation of state and federal
anti-gambling statutes. Although the Company believes it has meritorious
defenses and intends to defend both of these actions vigorously, a negative
outcome to either of these actions could materially adversely affect the
Company's future plans and results. See "Item 3 - Legal Proceedings."
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Financial Information About Industry Segments, Foreign and Domestic Operations
and Export Sales
The Company operates in one business segment which is the marketing and
distribution of collectible picture and confectionery products, including the
licensing of its technology and trademarks. Geographic area information
contained in Note 13 of the Notes to Consolidated Financial Statements included
in the Annual Report is hereby incorporated by reference.
Executive Officers of the Company
The information required by this item with respect to the directors of
the Company and as to those executive officers who are also directors appearing
in the Proxy Statement for the annual meeting of stockholders scheduled to be
held on June 25, 1997 ("1997 Proxy Statement") is hereby incorporated by
reference thereto. Set forth below is information required by this item
covering the other executive officers of the Company.
Name Position with the Company and business
experience during the past five years
Ronald L. Boyum Vice President - Marketing and Sales of
the Company since March 1995, Vice
President- Marketing of the Company since
April 1994 and Vice President-Sales since
April 1990. Mr. Boyum is 45 years of age.
Edward P. Camp Vice President - Sales of the Company
since April 1997 and President of the
Hobby Division since October 1995. Mr.
Camp held a number of sales related
positions within the Company prior thereto.
Mr. Camp is 50 years of age.
Michael P. Clancy Vice President of the Company since
February 1995. Mr. Clancy has been
Managing Director of Topps Ireland since
July 1990 and Joint Managing Director -
Topps Europe Ltd. since January 1997.
Mr. Clancy is 42 years of age.
13
<PAGE>
Name Position with the Company and business
experience during the past five years
Michael J. Drewniak Vice President - Manufacturing of the
Company since March 1991. Mr. Drewniak
held the position of General Manager-
Manufacturing Operations prior thereto.
Mr. Drewniak is 60 years of age.
Ira Friedman Vice President - Publishing and New
Product Development of the Company since
September 1991. Mr. Friedman joined the
Company in October 1988 as Director of New
Product Development. Mr. Friedman is 43
years of age.
Jeffrey M. Goodman Vice President - Sales of the Company
since October 1995. Prior to joining the
Company, Mr. Goodman was Vice President,
Sales and Marketing of Lincoln Snacks
Company, Inc.(a snack food company) from
October 1992 to October 1995. Mr. Goodman
held various positions with Nestle Food
Company (a food products company) from
1986 to 1992. Mr. Goodman is 38 year
of age.
Catherine K. Jessup Vice President - Chief Financial Officer
of the Company since July 1995. Prior to
joining the Company, Ms. Jessup held a
number of positions with PepsiCo (a food
products company) from 1981 to July 1995
including Director of Planning and C.F.O.
PepsiCo Wines and Spirits. Ms. Jessup is
41 years of age.
Steven Kosoff Vice President - Marketing - New Products
of the Company since April 1994. Mr.
Kosoff held the position of Vice President-
Marketing - Sports from September 1991.
Mr. Kosoff held the position of Director of
Marketing prior thereto. Mr. Kosoff is
48 years of age.
14
<PAGE>
Name Position with the Company and business
experience during the past five years
William G. O'Connor Vice President - Administration of the
Company since September 1991. Mr.
O'Connor was an Assistant Secretary of
the Company from June 1982 until June
1994. Mr. O'Connor is 48 years of age.
John Perillo Vice President - Operations of the Company
since April 1995 and Vice President-
Controller and Chief Financial Officer of
the Company from April 1990 to July 1995.
Mr. Perillo is 40 years of age.
Thomas R. Pisano Vice President - International of the
Company since February 1995. Prior to
joining the Company, Mr. Pisano was Vice
President - Global New Business Development
of Avon Products, Inc. (a beauty products
company) from December 1992. Mr. Pisano
held various positions with Avon Products,
Inc. from 1987 to February 1995. Mr.
Pisano is 52 years of age.
Scott Silverstein Vice President - Business Affairs and
General Counsel of the Company since
February 1995. Mr. Silverstein held the
position of General Counsel from July 1993
until February 1995. Prior to joining the
Company, Mr. Silverstein was an attorney
with the law firm of Hutton Ingram Yuzek
Gainen Carroll & Bertolotti from April
1990 until July 1993. Prior thereto,
he was an attorney with the law firm of
Shea & Gould. Mr. Silverstein is the
son-in-law of Mr. Shorin, the Company's
Chairman of the Board and Chief Executive
Officer. Mr. Silverstein is 35 years
of age.
Peter Warsop Joint Managing Director - Topps Europe Ltd.
since January 1997. Mr. Warsop joined
the Company in July 1995 as Managing
Director of Merlin Publishing International
Limited (now Topps Europe Ltd.) and held
the position of Managing Director of
Merlin Publishing Group since the formation
of Merlin in 1989. Mr. Warsop is 50 years
of age.
15
<PAGE>
ITEM 2. PROPERTIES
The location and general description of the principal properties owned
or leased by the Company are as follows:
<TABLE>
<CAPTION>
Owned or Leased;
Area/Facility If Leased,
Location Type of Facility Square Footage Expiration Year
<S> <C>
Duryea, Pennsylvania office and inactive plant 389,000 Owned
Scranton, Pennsylvania manufacturing plant 41,000 Owned
Cork, Ireland manufacturing plant 101,000 Owned
and office
New York, New York executive offices 60,000 Leased; 2010
Milton Keynes, United warehouse/office 10,000 Leased; 2014
Kingdom
</TABLE>
The Company also has offices in Canada, Brazil, Argentina, Mexico, France,
Spain, Italy and the Netherlands.
The Company believes that its active facilities are in good repair and
provide suitable production capacity for its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In August 1996, the Company was named a defendant in a class action in
the United States District Court for the Eastern District of New York entitled
Sullivan, et.al. v. The Topps Company, Inc., No. CV-96-3779 (EDNY) (the
"Action"). The Action alleges, among other things, that the Company has
violated the federal Racketeer Influenced and Corrupt Organizations Act by its
practice of selling sports and entertainment cards with randomly-inserted
"insert" cards, allegedly in violation of state and federal anti-gambling
statutes. Each of the Company's principal competitors, as well as several of
its principal licensors, has been separately sued in its home state for
employing, or participating in, the same or similar practices. The Action
seeks treble damages and attorneys fees on behalf of all purchasers of packs of
cards potentially including "insert" cards over a four-year period. In March
1997, a similar action against The Upper Deck Company (Schwartz, et.al. v.
Upper Deck, No. 96CV3408-B (AJB) (S.D.Cal.)) was dismissed without prejudice
with leave to replead. The plaintiffs in that action then filed an amended
complaint in March 1997. In April 1997, a similar action against Pinnacle
Brands, Inc. (Price, et.al. v. Pinnacle Brands, No. 3:96-CV-2150-T
(N.D. Tex.)), was dismissed with prejudice. The Company's motion to dismiss in
the Sullivan Action is currently pending. The Company believes it has
meritorious defenses and intends to
16
<PAGE>
defend the Action vigorously. Given the early stage of the litigation,
however, the Company is unable to assess the likelihood of a materially adverse
outcome or to estimate the amount or range, if any, of any probable loss.
In November 1996, Teamsters Local 229 (the "Union") filed an unfair
labor practice charge with the National Labor Relations Board (the "NLRB")
relating to the Duryea plant closing. In April 1997, the Company was advised
that the NLRB intends to issue a complaint against the Company based upon the
Union's charge. According to the NLRB, the complaint will allege that the
Company implemented a decision to close the Duryea plant prior to reaching a
bargaining impasse with the Union concerning the decision. The remedy the
complaint will seek to obtain will include gross back pay for affected
employees (less such employees' other earnings) from October 28, 1996 to the
date that the parties renew negotiations and either (i) reach impasse or (ii)
reach an agreement relating to the Duryea closure or (iii) work is restored in
Duryea under a new Collective Bargaining Agreement. Gross backpay
(without reduction for other earnings) is approximately $3.75 million per
quarter. The Company believes it has meritorious defenses and intends to
defend the Action vigorously. Given the early stage of the litigation,
however, the Company is unable to assess the likelihood of a materially adverse
outcome .
The Company is a defendant in several other civil actions which are
routine and incidental to its business. In management's opinion, after
consultation with legal counsel, settlement of these actions will not have a
material adverse affect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
17
<PAGE>
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Reference is made to the data appearing on page 31 of the Annual Report
under the heading "Market and Dividend Information" which is hereby
incorporated by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Reference is made to the data appearing on page 32 of the Annual Report
under the heading "Selected Consolidated Financial Data" which is hereby
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to the data appearing on pages 8 through 10 of the
Annual Report under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which is hereby incorporated by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the data appearing on pages 11 through 29 and to
the Report of Independent Public Accountants appearing on page 30 of the Annual
Report which are hereby incorporated by reference.
ITEM 9. CHANGES IN ACCOUNTANTS AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information required by this item appears in Part I of this Report on
Form 10-K under the heading "Executive Officers of the Company" and in the 1997
Proxy Statement and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item appears in the 1997 Proxy Statement and
is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item appears in the 1997 Proxy Statement and
is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item appears in the 1997 Proxy Statement and
is hereby incorporated by reference.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1&2) Financial Statements and Financial Statement Schedules
See index on page 22.
(3) Listing of Exhibits
See index on pages 23-25.
(b) Reports on Form 8-K
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: May 22, 1997 THE TOPPS COMPANY, INC.
------------------------
Registrant
/s/ Arthur T. Shorin
-------------------------
Arthur T. Shorin
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed on the 22nd day of May, 1997 by the following
persons on behalf of the Registrant and in the capacities indicated.
/s/ Arthur T. Shorin /s/ Catherine K. Jessup
- ----------------------------- ---------------------------------
Arthur T. Shorin Catherine K. Jessup
Chairman of the Board and Vice President-Chief Financial Officer
Chief Executive Officer (Principal Financial and
(Principal Executive Officer) Accounting Officer)
/s/ Seymour P. Berger /s/ John J. Langdon
- ----------------------------- ---------------------------------
Seymour P. Berger John J. Langdon
Vice President President
Sports and Licensing and Chief Operating Officer and
Director Director
/s/ Allan A. Feder /s/ David M. Mauer
- ----------------------------- ---------------------------------
Allan A. Feder David M. Mauer
Director Director
/s/ Stephen D. Greenberg /s/ Jack H. Nusbaum
- ----------------------------- ---------------------------------
Stephen D. Greenberg Jack H. Nusbaum
Director Director
/s/ Wm. Brian Little /s/ Stanley Tulchin
- ----------------------------- ---------------------------------
Wm. Brian Little Stanley Tulchin
Director Director
21
<PAGE>
THE TOPPS COMPANY, INC..
FORM 10-K ITEM 14(a)(1), (2) AND (3)
LIST OF FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
(a)(1) Index to Financial Statements:
The following Consolidated Financial Statements included in the Annual
Report are hereby incorporated by reference to Item 8:
Consolidated Statements of Operations -- Years Ended February 25, 1995,
March 2, 1996 and March 1, 1997.
Consolidated Balance Sheets -- March 2, 1996 and March 1, 1997.
Consolidated Statements of Cash Flows -- Years Ended February 25, 1995,
March 2, 1996 and March 1, 1997.
Consolidated Statements of Stockholders' Equity -- Years Ended February
25, 1995, March 2, 1996 and March 1, 1997.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
(a)(2) Index to Independent Public Accountants'
Report and Financial Statement Schedules Page No.
Report of Independent Public Accountants............................S-1
Schedule VIII -- Valuation and Qualifying Accounts - Years
Ended March 2, 1996 and March 1, 1997............................. S-2
Schedules other than those listed above are omitted because they are
either not required or not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto.
22
<PAGE>
(a)(3) Index to Exhibits
3.1 - Restated Certificate of Incorporation of the
Company (Incorporated by reference to Exhibit 3.1
to the Company's Report on Form 8-K dated December
3, 1991).
3.2 - Restated By-laws of the Company (Incorporated by
reference to Exhibit 3.2 to the Company's Report on
Form 8-K dated December 3, 1991).
4.1 - Rights Agreement, dated as of December 3, 1991, with
Manufacturers Hanover Trust Company, as rights agent
(Incorporated by reference to Exhibit 4.1 to the Company's
Report on Form 8-K dated December 3, 1991).
10.1 - Credit Agreement, dated June 30, 1995, among The Topps
Company, Inc. and NationsBank, N.A. (Carolinas), Chemical
and the additional lenders party thereto
(Incorporated by reference to the Company's Report on
Form 8-K filed July 10, 1995).
10.2 - Amendment Number 1 to Credit Agreement (Incorporated by
reference to Exhibit 10.27 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
August 31,1996).
10.3 - Amendment Number 2 to Credit Agreement (Incorporated by
reference to Exhibit 10.28 to the Company's Quarterly
Report on Form 10-Q for the quarter ended
November 30, 1996).
.
10.4 - The Topps Company, Inc. Annual Bonus Plan.
10.5 - Retirement Plan and Trust as amended and restated
effective February 28, 1993 (Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal
year ended February 26, 1994).
10.6 - Supplemental Pension Agreement with Arthur T. Shorin
(Incorporated by reference to Exhibit 10.16 to the
Company's Registration Statement on Form S-1
(No. 33-130821)).
10.7 - Amendment to Supplemental Pension Agreement with
Arthur T. Shorin dated May 18, 1994 (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended February 25, 1995).
10.8 - License Agreement and Letter Amendment thereto with Major
League Baseball Promotion Corporation (Incorporated by
reference to Exhibit 10.12 to the Company's Annual Report
on Form 10-K for the fiscal year ended March 2, 1991).
10.9 - Memorandum of Agreement with Major League Baseball
Players Association dated April 10, 1995 (Incorporated by
reference to Exhibit 10.12 to the Company's Annual Report
on Form 10-K for the fiscal year ended
February 25, 1995).
23
<PAGE>
Index to Exhibits (continued)
10.10 - Settlement Agreement with Major League Baseball Players
Association (Incorporated by reference to the Company's
Annual Report on Form 10-K for the fiscal year ended
February 26, 1994).
10.11 - Employment Agreement with Arthur T. Shorin (Incorporated
by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-3 (No. 33-43567)).
10.12 - Amendment to Employment Agreement with Arthur T. Shorin
dated May 18, 1994 (Incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 25, 1995).
10.13 - Stock Option Agreement with Arthur T. Shorin dated
March 29, 1995 (Incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 25, 1995).
10.14 - Employment Agreement with John J. Langdon (Incorporated
by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-3 (No. 33-43567)).
10.15 - Amendment to Employment Agreement with John J. Langdon
dated June 23, 1993 (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal
year ended February 26, 1994).
10.16 - Amendment to Employment Agreement with John J. Langdon
dated May 18, 1994 (Incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 25, 1995).
10.17 - Amendment to Employment Agreement with John J. Langdon
dated March 27, 1995 (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 25, 1995).
10.18 - Retail License Agreement with NBA Properties, Inc. dated
July 25, 1995 (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
November 25, 1995).
10.19 - Agreement of Lease with One Whitehall Company dated
February 24, 1994 (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended February 26, 1994).
10.20 - 1994 Non-Employee Director Stock Option Plan
(Incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended
February 26, 1994).
24
<PAGE>
Index to Exhibits (continued)
10.21 - 1994 Stock Appreciation Rights Agreement with John J.
Langdon dated as of March 30, 1994 (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended February 26, 1994).
10.22 - Agreement for the acquisition of the issued share capital
of Merlin Publishing International plc dated May 17, 1995
(Incorporated by reference to the Company's Annual Report
on Form 10-K for the fiscal year ended February 25, 1995).
10.23 - Corporate Guaranty in favor of the Bank of Scotland
(Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended
November 25, 1995).
10.24 - 1996 Stock Option Plan and form of agreement pursuant to
1996 Stock Option Plan. (Incorporated by reference to
the Company's Annual Report on Form 10-K for the fiscal
year ended March 2, 1996).
10.25 - Employment Agreement between Peter Warsop and Merlin
Publishing Limited dated June 9, 1989. (Incorporated by
reference to the Company's Annual Report on Form 10-K for
the fiscal year ended March 2, 1996).
10.26 - Amendment to Employment Agreement between Peter Warsop
and Merlin Publishing International plc dated
July 6, 1995. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 2, 1996).
10.27 - Amendment to Employment Agreement with Arthur T. Shorin
dated May 22, 1996. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 2, 1996).
10.28 - Amendment to Employment Agreement with Arthur T. Shorin
dated May 21, 1997.
10.29 - License Agreement and Letter Amendment thereto between
the Football Association Premier League Limited and
Merlin Publishing International plc dated
August 3, 1994 and July 2, 1996, respectively.
13 - Annual Report (Except for those portions specifically
incorporated by reference, the 1997 Annual Report to
Stockholders is furnished for the information of the
Commission and is not to be deemed "filed" as part of
this filing).
21 - Significant Subsidiaries of the Company.
23 - Consent of Independent Public Accountants.
27 - Financial Data Schedule.
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
The Topps Company, Inc.:
We have audited the consolidated balance sheets of The Topps Company, Inc. and
Subsidiaries as of March 1, 1997 and March 2, 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended March 1, 1997, and have issued our report
thereon dated April 1, 1997; such consolidated financial statements and report
are included in your 1997 Annual Report to Stockholders and are incorporated
herein by reference. Our audits also included the consolidated financial
statement schedule of The Topps Company, Inc. and Subsidiaries listed in Item
14. This consolidated financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such consolidated financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
New York, New York
April 1, 1997
S-1
<PAGE>
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Column A Column B Column C Column D Column E
- ----------------------------------- --------------- ---------------------------------- --------------- ---------------
Balance Charged to Charged Balance
at Beginning Costs and Against Additions At End
Description of Period Expenses Sales (Deductions) of Period
--------------- --------------- --------------- --------------- ---------------
Year Ended February 25, 1995:
Amortization of Sports,
Entertainment and
Proprietary Products $21,739 $1,594 $23,333
Amortization of Other
Intangible Assets 6,522 677 $7,199
--------------- --------------- ---------------
$28,261 $2,271 $30,532
=============== =============== ===============
Allowance for Estimated Losses
on Sales Returns $14,403 $33,688 $(35,171) (a) $12,920
=============== =============== =============== ===============
Inventory Valuation Adjustment $27,807 $10,647 $ (9,029) (b) $29,425
=============== =============== =============== ===============
=================================================================================================================================
Year Ended March 2, 1996:
Amortization of Sports,
Entertainment and
Proprietary Products $23,333 $1,610 $24,943
Amortization of Other
Intangible Assets 7,199 702 $7,901
--------------- --------------- ---------------
$30,532 $2,312 $32,844
=============== =============== ===============
Allowance for Estimated Losses
on Sales Returns $12,920 $53,256 $(44,053) (a) $22,123
=============== =============== =============== ===============
Inventory Valuation Adjustment $29,425 $7,082 $(13,092) (b) $23,415
=============== =============== =============== ===============
=================================================================================================================================
Year Ended March 1, 1997:
Amortization of Sports,
Entertainment and
Proprietary Products $24,943 $1,932 $26,875
Amortization of Other
Intangible Assets 7,901 717 $(36) $8,582
--------------- --------------- --------------- ---------------
$32,844 $2,649 $(36) $35,457
=============== =============== =============== ===============
Allowance for Estimated Losses
on Sales Returns $22,123 $46,096 $(44,980) (a) $23,239
=============== =============== =============== ===============
Inventory Valuation Adjustment $23,415 $6,418 $(11,381) (b) $18,452
=============== =============== =============== ===============
=================================================================================================================================
</TABLE>
(a) Returns charged against provision, net of recoveries.
(b) Disposals, net of recoveries
S-2
Exhibit 10.4
The Topps Company, Inc.
Annual Bonus Plan
1. Purposes
The purpose of The Topps Company, Inc. Annual Bonus Plan (the "Plan")
is to attract and retain highly-qualified executives by providing appropriate
performance-based short-term incentive awards.
2. Definitions.
The following terms, as used herein, shall have the following meanings:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Bonus" shall mean an annual incentive bonus award granted
pursuant to the Plan, the payment of which shall be contingent
upon the attainment of Performance Goals with respect to a
Plan Year, unless otherwise determined by the Committee.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
(d) "Committee" shall mean the Compensation Committee of the Board.
(e) "Company" shall mean The Topps Company, Inc., a corporation
organized under the laws of the State of Delaware, or any
successor corporation.
(f) "Participant" shall mean, for any Plan Year, a key employee of
the Company or a Subsidiary who has been designated by the
Committee to participate in the Plan for such year. If a key
employee becomes a Participant other than at the beginning of
a Plan year, the Committee may establish a target Bonus for
such Participant and such Participant shall be eligible to
earn a prorated Bonus for such year.
(g) "Performance Goals" shall mean the criteria and objectives
which must be met during the Plan Year as a condition of the
Participant's receipt of payment with respect to a Bonus, as
described in Section 3 hereof.
<PAGE>
2
(h) "Plan" shall mean The Topps Company, Inc. Annual Bonus Plan, as
amended from time to time.
(i) "Plan Year" shall mean the Company's fiscal year.
(j) "Subsidiary" shall mean any subsidiary of the Company which
has been approved for participation in the Plan by the
Committee so that its executives may be selected for
participation in the Plan.
3. Performance Goals.
(a) Unless otherwise determined by the Committee, Performance Goals for
each Plan Year shall be established by the Committee not later than 90 days
after the commencement of the Plan Year for which the Bonus awards are being
granted. Performance Goals may be expressed in terms of one or more of the
following: Consolidated Operating Profit, Consolidated Net Income, return on or
growth in shareholders' equity, return on net assets, attainment of specified
levels of earnings per share or improvements in the Company's revenues, stock
price performance, attainment of expense levels, and implementation or
completion of critical projects. Performance Goals may also be based on the
extent to which line of business net income contributed to Consolidated
Operating Profit, or may include such other financial or individual goals as
the Committee may establish.
(b) With respect to corporate Performance Goals, the Committee shall
specify a minimum level of performance below which no Bonus will be paid for
attainment of corporate objectives and may specify a separate base level of
performance below which, other than as permitted under Section 3(c), no Bonus
payment may be made based on attainment of corporate or individual objectives.
The Committee shall also specify the levels of corporate performance at which
the target and maximum Bonus will be earned for attainment of corporate
objectives. The Performance Goals established by the Committee may (but need
not) be different for each Plan Year and different Performance Goals may apply
to different Participants.
<PAGE>
3
(c) In the event threshold corporate Performance Goals established for
one or more Participants ("Eligible Discretionary Pool Participants") are not
attained for any Plan Year, the Committee may at any time establish a
discretionary Bonus pool, in an amount not exceeding 33-1/3% of the Bonuses
that would have been paid to such eligible Participants had the individual and
corporate Performance Goals required for target awards been attained for such
year. If the Committee establishes a discretionary Bonus pool, it shall
allocate such pool among the Eligible Discretionary Pool Participants that it
selects to receive discretionary Bonuses for such year by taking into account
such individual, corporate and line of business criteria, or any of them, as it
deems appropriate. No discretionary Bonus may exceed the maximum Bonus
limitation established under Section 4(c).
(d) For purposes of certain of the Performance Goals established under
Section 3(a) above:
(i) "Consolidated Net Income" for any Plan year shall mean the
net income or net loss of the Company and its subsidiaries for such
Plan Year determined in accordance with GAAP on a consolidated basis.
(ii) "Consolidated Operating Profit" for any Plan Year shall
mean the sum of (A) plus (B) where (A) equals Consolidated Net Income,
after providing for all Bonuses payment of which is approved by the
Committee with respect to such Plan Year, but excluding extraordinary
gains and losses, of the Company and its subsidiaries for such Plan
Year, and (B) equals the sum of (1) net interest expense, (2) depreciation,
(3) amortization, and (4) income taxes expensed during such Plan Year, in
each of cases (1) through (4), to the extent reflected in the statement of
Consolidated Net Income for such Plan Year.
(iii) "GAAP" shall mean generally accepted accounting principles, as
in effect from time to time.
(iv) Measurement of Consolidated Net Income and Consolidated
Operating Profit shall be determined in accordance with the Company's
audited financial statements and generally accepted accounting
principles as reported by the Company's independent accountants.
(v) Notwithstanding any other provision of the Plan, in
determining whether Performance Goals have been achieved for any
Participant, the Committee may exclude items it deems to be extraordinary,
nonrecurring items, regardless of whether such items are excludable or
otherwise dealt with under GAAP.
<PAGE>
4
4. Bonuses.
(a) In General. For the Plan Year commencing in 1997 and each
subsequent Plan Year, the Committee shall, no later than the time specified in
Section 3(a) hereof, determine the Participants, establish each Participant's
target Bonus, and specify the Performance Goals applicable to such Participants
for such Plan Year and the extent to which target Bonuses will be increased or
decreased for attainment of Performance Goals that are above or below target. A
Participant's target Bonus for each Plan Year may be expressed as a dollar
amount or as a percentage of such Participant's base salary for such Plan Year.
Unless otherwise provided by the Committee in its discretion in connection with
termination of employment, payment of a Bonus for a particular Plan Year shall
be made only if and to the extent the Performance Goals with respect to such
Plan Year are attained and only if the Participant is employed by the Company
or one of its subsidiaries on the last day of such Plan Year.
(b) Discretionary Adjustments. The Committee may, taking into
account such factors as it deems relevant, increase or decrease the amount
payable to any Participant by an amount not exceeding 15% of the amount
otherwise payable as a result of the level of performance attained relative to
corporate Performance Goals for the Plan Year.
(c) Limitation on Bonuses. Notwithstanding anything to the
contrary contained in this Plan, the maximum Bonus which may be earned by any
Participant under the Plan in respect of any Plan Year shall not exceed 75% of
the Participant's base salary payable with respect to the calendar year in
which such Plan Year commences.
(d) Time of Payment. Unless otherwise determined by the Committee,
all payments in respect of Bonuses granted under this Section 4 shall be made
in a cash lump sum no later than 90 days after the end of the Plan Year.
(e) Form of Payment. Payment of each Participant's Bonus for any
Plan Year shall be made in cash, less the appropriate withholding taxes as set
forth in Section 6(c).
<PAGE>
5
5. Administration.
The Plan shall be administered by the Committee. The Committee shall have
the authority in its sole discretion, subject to and not inconsistent with the
express provisions of the Plan, to administer the Plan and to exercise all the
powers and authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan, including, without
limitation, (i) to grant Bonuses, (ii) to determine the persons to whom and the
time or times at which Bonuses shall be granted, (iii) to determine the terms,
conditions, restrictions and Performance Goals relating to any Bonus, (iv) to
make adjustments in the Performance Goals in response to changes in applicable
laws, regulations, or accounting principles, (v) to make discretionary
adjustments in the amounts payable upon attainment of Performance Goals, (vi)
to construe and interpret the Plan, (vii) to prescribe, amend and rescind rules
and regulations relating to the Plan, and (viii) to make all other
determinations deemed necessary or advisable for the administration of the
Plan.
The Committee shall consist of two or more persons each of whom is an
"outside director" within the meaning of Section 162(m) of the Code. The
Committee may appoint a chairperson and a secretary and may make such rules and
regulations for the conduct of its business as it shall deem advisable, and
shall keep minutes of its meetings. All determinations of the Committee shall
be made by a majority of its members either present or participating by
conference telephone at a meeting or by unanimous written consent. The
Committee may delegate to one or more of its members or one or more agents such
administrative duties as it may deem advisable, and the Committee or any person
to whom it has delegated duties as aforesaid may employ one or more persons to
render advice with respect to any responsibility the Committee or such person
may have under the Plan. All decisions, determinations and interpretations of
the Committee, including, without limitation, decisions as to an employee's
selection as a Participant, whether individual or corporate Performance Goals
have been attained and the amount of Bonus to which the Participant is
entitled, shall be final and binding on all persons, including the Company, the
Participant (or any person claiming any rights under the Plan from or through
any Participants) and any shareholder.
<PAGE>
6
No member of the Board or the Committee shall be liable for any action
taken or determination made in good faith with respect to the Plan or any
Bonus granted hereunder.
6. General Provisions.
(a) Compliance with Legal Requirements. The Plan and the granting
of Bonuses, and other obligations of the Company under the Plan shall be
subject to all applicable federal and state laws, rules and regulations, and to
such approvals by any regulatory or governmental agency as may be required.
(b) No right To Continued Employment. Nothing in the Plan or in
any Bonus granted shall confer upon any Participant the right to continue in
the employ of the Company or any of its subsidiaries or to be entitled to any
remuneration or benefits not set forth in the Plan or to interfere with or
limit in any way the right of the Company to terminate such Participant's
employment.
(c) Withholding Taxes. The Company or subsidiary employing any
Participant shall deduct from all payments and distributions under the Plan any
taxes required to be withheld by federal, state or local or other governmental
authority.
(d) Amendment and Termination of the Plan. The Committee or the
Board may at any time and from time to time alter, amend, suspend, or terminate
the Plan in whole or in part. Additionally, the Committee may make such
amendments as it deems necessary to comply with other applicable laws, rules
and regulations. Notwithstanding the foregoing, no amendment shall affect
adversely the right of any Participant, without such Participant's consent, to
receive a Bonus theretofore granted under the Plan or, once a Participant has
been notified of his selection as a Participant and of the amount of his target
Bonus for a Plan Year, to have his right to receive a Bonus be determined in
accordance with the provisions of the Plan as in effect immediately prior to
such amendment.
(e) Participant Rights. No Participant shall have any claim to be
granted any Bonus under the Plan, and there is no obligation for uniformity of
treatment among Participants.
(f) Designation of Beneficiary. A Participant may designate a
beneficiary or beneficiaries who shall receive payment of any Bonus earned
under the Plan in the event of the Participant's death prior to payment. The
Participant may, at any time, change or revoke such designation. A beneficiary
designation, or revocation of a prior beneficiary designation, will be
effective only if it is made in writing signed by the Participant and received
by the Secretary of the Company.
<PAGE>
7
(g) Unfunded Status of Bonuses. The Plan is intended to constitute
an "unfunded" plan for incentive compensation. With respect to any payments
which at any time are not yet made to a Participant pursuant to a Bonus,
nothing contained in the Plan or any Bonus shall give any such Participant any
rights that are greater than those of a general creditor of the Company.
(h) Governing Law. The Plan and the rights of all persons claiming
hereunder shall be construed and determined in accordance with the laws of the
State of Delaware without giving effect to the choices of law principles
thereof.
(i) Effective Date. The Plan shall first be effective with respect
to the Plan Year commencing in 1997.
(j) Term. No Bonus may be granted under the Plan with respect to
any Plan Year after the Plan Year commencing in 2006.
EXHIBIT 10.28
May __, 1997
Mr. Arthur T. Shorin
400 East 56th Street
New York, New York 10022
Dear Mr. Shorin:
The Topps Company, Inc. (the "Company") hereby agrees with you to the following
amendment (the "Amendment") to your Employment Agreement with the Company,
dated as of October 28, 1991, as amended on May 18, 1994, May 19, 1995 and
May 22, 1996 (the "Agreement").
This will confirm your consent (i) to the limited waiver of the 10% increase in
the annual base salary to be paid to you pursuant to section 5(a) of the
Agreement for your services rendered during the Company's fiscal year ending
February 28, 1998 only, and (ii) to a target annual bonus opportunity of 20% of
annual base salary for the Company's fiscal year ending February 28, 1998 only.
The amendments set forth herein shall be limited precisely as written and
shall not be deemed to be a modification or waiver of any right or remedy which
the parties hereto may not have or may have in the future under or in
connection with the Agreement, including, without limitation, the right to have
all termination payments required to be made under Section 7 of the Agreement
calculated to include all salary increases required to have been provided under
the terms of the Agreement, without regard to the limited waivers of such
increases made by the amendments to the Agreement dated May 18, 1994, May 19,
1995 and May 22, 1996. Except as provided herein, the Agreement shall remain
unchanged and in full force and effect. This Amendment may be executed in
counterparts, which taken together shall constitute one and the same amendatory
instrument.
<PAGE>
Mr. Arthur T. Shorin
May- ,1997
Page 2
This Amendment shall be governed by and construed and enforced in accordance
with the laws of the State of New York.
Very truly yours,
TOPPS COMPANY, INC.
By:________________________ ______________________
Catherine Jessup Arthur T. Shorin
Vice President-Chief
Financial Officer
EXHIBIT 10.29
LICENSE AGREEMENT
THIS AGREEMENT is made the 3rd day of August 1994
BETWEEN:
(1) THE FOOTBALL ASSOCIATION PREMIER LEAGUE LIMITED ("the Licensor") whose
registered office is at 16 Lancaster Gate, London W2 3LW
AND
(2) MERLIN PUBLISHING INTERNATIONAL plc ("the Licensee") registered number:
2331336 whose registered office is at 18 Vincent Avenue, Crownhill,
Milton Keynes, MK8 OAW
WHEREAS:
(A) The Licensee is a manufacturer and distributor of football and other
sports cards stickers and sticker albums; and
(B) The Licensor wishes to grant to the Licensee as its sole and exclusive
licensee rights to manufacture and distribute cards stickers and albums
bearing the insignia and badges of the Licensor and its member clubs,
and also the photographic images of all players registered with those
clubs.
NOW IT IS HEREBY AGREED as follows:
1. DEFINITIONS
1.1 In this Agreement (which expression shall include the Schedule hereto)
the following words and expressions shall have the meanings ascribed to
them below:
<PAGE>
"Clubs": in respect of each football season during the Term, those
football clubs who at the commencement of the relevant
season are affiliated to and members of the Football
Association Premier League (a list of the Clubs for the
1993/94 season being attached as Schedule One);
"the Clubs'
Designs": the official logos designs badges and insignia owned or used
by each of the Clubs during the Term the current ones of
which have been made available to the Licensee so as to
enable it to exercise its rights hereunder;
"the Clubs'
Photographs": the photographic images of all those players from time to
time registered with each of the Clubs the copyright in which
is at any time during the Term owned or controlled by any of
the Clubs;
"the
Designs": the Clubs' Designs and the Licensor's Designs;
"F.A.": Football Association Limited;
"the F.A.
Marks": the trademarks "F.A." and "Football Association" but only as
the same may be incorporated within the Designs and not
otherwise;
"the Licensed
Articles": the stickers and trading cards bearing the Marks, the
Designs and the Players' Photographs and such other
photographs of Players as the Licensee may from time to time
determine, together with the sticker albums incorporating
the Marks and Designs;
2
<PAGE>
"the
Licensor's
Designs": the official logos designs badges and insignia owned or used
by the Licensor during the Term the current ones of which are
shown in Schedule 2;
"the
Licensor's
Photographs": the photographic images of all those players from time to
time registered with each of the Clubs the copyright in which
is at any time during the Term owned or controlled by the
Licensor;
"the
Licensor's
Royalties": the payments to the Licensor as calculated in accordance with
Clause 3.2 and 3.3;
"the Marks": the trademarks incorporating the Designs which are now or
hereafter owned or controlled by the Licensor;
"the Minimum
Guarantee": the non-refundable advance payments made by the Licensee to
the Licensor pursuant to Clause 8 below;
"the Net
Invoice
Amount": the gross invoice price billed by or on behalf of the
Licensee to wholesalers and/or retailers less Value Added Tax
(at the prevailing rate) where applicable;
"the Net
Sales": the Packets sold by and not returned to the Licensee under
this Agreement;
"Packet:" the unit in which stickers and trading cards are respectively
offered for sale to the public;
3
<PAGE>
"the
Performance
Targets": the performance targets to be met by the Licensee during each
year of the Term, as set out in Clause 9 below;
"the Player": a player as defined in the Rules of the Football Association
Premier League who is at the relevant time registered with a
Club;
"the Players'
Photographs": the Clubs' Photographs and the Licensors' Photographs;
"the Quarter:" the period beginning on 1st January, 1st April, 1st July or
1st October in any Year;
"the Rights": those rights granted to the Licensee pursuant to Clause 2.1;
"the Term": the term of this Agreement which shall commence upon the 1st
January 1994 and shall expire on the third anniversary of
such date unless extended pursuant to Clause 10 or terminated
earlier by either party pursuant to Clause 11;
"the
Territory": the United Kingdom of Great Britain and Northern Ireland, the
Isle of Man, the Channel Islands and the Republic of Ireland;
"the Year": the calendar year.
1.2 References in this Agreement to Clauses and Schedules are references
to the Clauses and Schedules contained in or forming part of this
Agreement.
1.3 The headings in this Agreement are for ease of reference only and it
is not intended by the parties that they should be used for the
purpose of interpreting or construing any of the provisions hereof.
4
<PAGE>
2. LICENSE OF RIGHTS
2.1 In consideration of payment of the Minimum Guarantee and the
Licensor's Royalties, the Licensor hereby grants to the
Licensee solely and exclusively the following rights throughout the
Territory and for the duration of the Term:
(a) the right to produce, manufacture, distribute and sell the
Licensed Articles incorporating the Marks, the Designs the Players'
Photographs and such other photographs of Players as the Licensee may
determine (to the extent the Licensor is empowered so to do);
(b) the right to incorporate the Marks, the Designs the Players'
Photographs and (to the extent the Licensor is empowered so to do)
such other photographs of Players as the Licensee may determine in all
types of advertising material (such as press advertising, catalogues,
packaging, price tags, etc.) serving the distribution and sale of the
Licensed Articles.
2.2 All rights not expressly granted to the Licensee hereunder are
reserved to the Licensor who shall be free to use such rights in any
manner in its sole discretion.
2.3 The Licensor shall supply, or produce the supply by the Clubs of
materials (including Players' Photographs, and artwork and
transparencies used in the Designs) which are reasonably necessary for
the production of the Licensed Articles. Such supply will be at no
cost to the Licensee, other than where processing or handling costs
are involved, in which case a reasonable charge (payable to the
Licensor or Clubs as appropriate) may be made to cover such costs.
2.4 Any materials supplied to the Licensee hereunder shall as between the
parties hereto remain the property of the Licensor (or the Clubs,
where applicable).
5
3. LICENSEE'S OBLIGATIONS
3.1 In consideration of the Rights granted under this Agreement the
Licensee shall pay to the Licensor the following fees:
(a) the Minimum Guarantee ( in accordance with the provisions of
Clause 8); and
(b) a royalty on Net Sales (in accordance with the provisions of
this Clause).
<PAGE>
3.2 The rate of royalty shall be determined by reference to the volume of
Net Sales during the Year in question as follows:
1 2
Volume of Net Sales in the Year Royalty Rate Payable
Less than 10,000,000 [INFORMATION SUBJECT TO REQUEST FOR
CONFIDENTIAL TREATMENT]
10,000,000 - 19,999,999 [INFORMATION SUBJECT TO REQUEST FOR
CONFIDENTIAL TREATMENT]
20,000,000 - 29,999,999 [INFORMATION SUBJECT TO REQUEST FOR
CONFIDENTIAL TREATMENT]
30,000,000 - and over [INFORMATION SUBJECT TO REQUEST FOR
CONFIDENTIAL TREATMENT]
but:
3.2.1 (for the avoidance of doubt) where the Net Sales in the Year exceed
the maximum figure given in any of the bands of column 1 above the
higher rate of royalty given in the next band of column 2 shall apply
only in respect of that number of Net Sales which fall within the
corresponding band of column 1;
6
<PAGE>
3.2.2 the rate of royalty assumes that each Packet of stickers shall contain
6 stickers. If, over the Year, the average number per Packet is
materially more than 6, then (for the purposes of calculating the
royalty pursuant to this Clause 3) the volume of Net Sales shall be
reduced pro rata.
3.3 The amount of Licensor's Royalties:
3.3.1 shall, as regards Packets of stickers, be calculated by applying
the appropriate percentage rates set out in Clause 3.2 to the Net
Invoice Amount. No deductions ( such as commissions freight packing
cost or trade discounts) shall be allowed in determining the Net
Invoice Amount. The amount of Licensor's Royalties shall not be less
than [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] per
Packet of stickers.
3.3.2 shall, as regards Packets of trading cards, be such amount as
the parties hereto may agree.
3.4 The Licensor's Royalties and Minimum Guarantee are expressed exclusive
of value added tax which shall be charged by the Licensor and paid by
the Licensee against accurate invoices at the prevailing rates.
3.5 The Licensee acknowledges that it shall have no right to set off any
debts owed to it by the Licensor against any payments due from it to
the Licensor hereunder.
3.6 Subject to Clauses 8 and 12.4 below the Licensee undertakes that it
shall pay the Licensor's Royalties within 21 days of the last day of
December, March, June and September in each Year of the Term by
delivering a cheque to the Licensor at the above address or such
other address as shall be notified by the Licensor to the Licensee the
Licensor undertaking that it shall promptly supply an accurate VAT
invoice for the amount thereof charged at the prevailing rates.
7
<PAGE>
3.7 In accounting for and paying Licensor's Royalties the Licensee will
assume that [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT]
per cent of Packets sold by the Licensee during the preceding quarter
will be returned and the Licensee will be entitled to retain
[INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] per cent
of the Net Invoice Amount of such Packets as a provision against
returns. No later than 21st January in each Year the Licensee will
supply the Licensor with an account of Net Sales (including the
average number of Stickers per Packet) for the preceding Year adjusted
for actual returns together with a balancing payment of Licensor's
Royalties if any is payable. The Licensor will immediately pay to the
Licensee the amount by which sums paid to the Licensor under Clause
3.6 in the preceding Year exceed the Net Sales for that Year.
3.8 Any sum due under this Agreement which remains unpaid after the date
on which it became due shall subject to Clause 11.1 incur interest at
the rate of three per cent (3%) per annum over Barclays Bank plc
Minimum Base Lending Rate from time to time (which interest shall be
paid to the Licensor at the same time as the principal amount).
3.9 Throughout the Term and for one year after expiration or termination
of this Agreement the Licensee shall keep at the address above shown
full and accurate books of account, records, contracts and prices
showing all dealings in the Licensed Articles including the total
number of units of each of the Licensed Articles manufactured,
distributed and returned whether by wholesale or retail, or
distributed without charge for promotional purposes and of all units
lost, damaged or stolen, and a calculation of the Licensor's Royalties
in respect of the Licensed Articles.
3.10 Within 21 days of the last day of March, June, September and December
in each Year of the Term and the last day of the Quarter in which
termination occurs the Licensee shall provide a detailed summary of
the information referred to in Clause 3.9 above.
8
<PAGE>
3.11 The Licensee agrees that the Licensor shall be entitled to arrange for
an annual audit to inspect and make copies of the Licensee's books of
account, records, contracts and any other relevant material relating
to the Agreement in order to verify the sums due to the Licensor. If
such audit reveals that the Licensee owes an additional sum in excess
of 10% of the last payment, then the Licensee shall pay the cost of
the audit.
<PAGE>
3.12 The Licensee agrees to include the following copyright notice in and
on the Licensed Articles and in all publicity, advertising,
promotional and packaging material in respect of the marketing and
distribution of the Licensed Articles: "(Copyright) FA Premier League
Limited [Year of publication]", and an appropriate trademark notice
whenever the Marks or the F.A. Marks are used.
3.13 The Licensee agrees that the Licensor shall be entitled to approve the
Licensed Articles prior to manufacture and distribution such approval
not to be unreasonably withheld or delayed PROVIDED that if the
Licensor proposes to exercise the right to approve it will notify the
Licensee in timely manner and the Licensee undertakes in a timely
manner to supply such samples of each of the Licensed Articles in the
exact form and material in which the Licensee proposes to manufacture,
distribute and sell them. The Licensee acknowledges that such
approval if so required must be in writing.
3.14 The Licensee agrees that the Licensor shall be entitled to approve all
publicity promotional advertising and packaging material in respect of
each of the Licensed Articles such approval not to be unreasonably
withheld or delayed PROVIDED that if the Licensor proposes to exercise
the right to approve it will notify the Licensee in timely manner and
the Licensee undertakes in a timely manner to supply such samples of
all such material. The Licensee acknowledges that such approval if so
required must be in writing.
9
<PAGE>
3.15 The Licensee acknowledges that all copyright, trademarks and any other
intellectual property rights in the Marks the Designs and the Players'
Photographs together with any goodwill attaching thereto shall as
between Licensor and Licensee remain the sole property of the
Licensor.
3.16 The Licensee may not assign the Rights granted under this Agreement in
total or in part to any third party (without the Licensor's prior
written consent).
3.17 The Licensee acknowledges that it is solely responsible for all costs
incurred by the Licensee in the commercial exploitation of the
Licensed Articles including the manufacturing, distribution, selling,
advertising and promotion thereof.
3.18 The Licensee agrees to provide free of charge to the Licensor five (5)
copies of each of the Licensed Articles in the form in which they are
released to the general public.
4. LICENSOR'S WARRANTIES
The Licensor undertakes and warrants that:
4.1 it is fully entitled to enter into this Agreement and to grant the
Rights hereunder;
4.2 it is the sole owner of or controls to the extent necessary:
(i) the Marks;
(ii) the Licensor's Designs;
(iii) the Licensor's Photographs;
4.3 it has been licensed by the Clubs to sub-license to the Licensee the
rights in the Clubs' Designs and Clubs' Photographs as provided in
Clause 2.1;
10
<PAGE>
4.4 the exercise by the Licensee of the rights as provided in this
Agreement will not infringe the rights of any third party;
4.5 there is not in force at the date hereof any sponsorship or other
commercial contract between it or any Club granting and neither it nor
any Club will during the Term grant to any third party engaged
concerned or interested in or who proposes to be engaged concerned or
interested in the manufacture distribution or sale of football
stickers or football cards or football sticker or card albums any
right in the Territory in the Players' Photographs the Marks or the
Designs;
4.6 in the event that any articles substantially similar to the Licensed
Articles are without the prior written approval of the Licensor and
Licensee distributed or proposed for distribution by a third party the
party made aware will immediately notify and consult with the other
party and the Licensor will use all reasonable endeavours (including
undertaking legal action where in its reasonable opinion it deems this
necessary or appropriate) to procure the removal of the unauthorised
articles from the market;
4.7 it shall procure that any Club granting permission to a photographer
to take photographs on its premises shall, as a condition of such
grant, request the photographer to assign to the Club copyright in all
photographs taken on the Club's premises.
5. LICENSEE'S WARRANTIES
The Licensee undertakes and warrants that:
5.1 it is free and entitled to enter into this Agreement and to perform
the obligations undertaken by it hereunder;
5.2 it will not do or omit to do anything which might undermine the
validity of the Marks as registered Trade Marks;
11
<PAGE>
5.3 if required by the Licensor it will execute and register at its own
expense a Registered User Agreement in relation to its use of the
Marks and in accordance with the provisions of the Trade Mark Act 1938
and the Trade Mark Rules 1938 and any re-enactments and modifications
thereof;
5.4 it will not adopt or use (otherwise than in accordance with the
provisions of this Agreement) any trade mark or symbol, emblem, logo,
mark or designation which includes or is confusingly similar to or is
a simulation or colourable imitation of the Designs or the Marks or
which unfairly competes with the same;
5.5 if requested by the Licensor on behalf of the F.A. it will enter into
an undertaking on terms reasonably satisfactory to the Licensor on
behalf of the F.A. that it will comply with such terms and conditions
regarding the use of the F.A. Marks as may reasonably be required by
the F.A. and that it shall also enter into a Registered User Agreement
in any territory where such an Agreement is, in the F.A.'s reasonable
opinion, necessary or desirable to protect the F.A.'s position in
relation to the F.A.
Marks;
5.6 it will in no way alter the photographic negatives or images of the
Players' Photographs provided that the Licensor will not prevent the
Licensee from reproducing part only of such photographic negatives or
images;
5.7 the Licensed Articles shall not make use of the Players' Photographs,
Marks or Designs in any way which might be obscene or defamatory;
5.8 the Licensed Articles shall be produced to sample or (if none is
required) reasonable quality and shall conform to all regulations of
government or other relevant authority;
5.9 it will not without the prior written consent of the Licensor enter
into any agreement with a third party for the sponsorship of any of
the Licensed Articles.
12
<PAGE>
6. MUTUAL INDEMNITY
6.1 The Licensor and the Licensee mutually undertake to indemnify the
other against all liabilities, claims, demands, actions, costs,
damages and loss suffered by the party not in breach arising out of
any breach by the other party of any of the terms of this Agreement.
This undertaking shall not, however, extend to and neither party shall
have any liability to the other for loss of profits or goodwill even
if such loss was reasonably foreseeable or the party not in breach had
been advised of the possibility of the other incurring the same.
6.2 In the event of any claim, dispute, action, writ or summons being
brought by any third party against either party in connection with
this Agreement the Licensor and the Licensee agree to provide full
details to the other party at the earliest opportunity and shall not
settle any such matter without first consulting the other party.
7. CONFIDENTIALITY
The Licensor and the Licensee shall not disclose to any third party
any confidential information relating to the business or future plans
of the other party at any time acquired during the existence of this
Agreement save in so far as such information has come into the public
domain through no fault of the recipient or its agents or employees or
its disclosure is required by law and no reference shall be made to
the terms of this Agreement by either party in any advertising,
publicity or promotional material without the prior consent of the
other party.
8. MINIMUM GUARANTEE
8.1 By way of Minimum Guarantee of its obligation to pay Licensor's
Royalty the Licensee shall pay to the Licensor sums at the rate of
[INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT]per annum.
13
<PAGE>
8.2 The Minimum Guarantee shall accrue Quarterly on the first day of each
Quarter during the Term and shall be paid in equal instalments each of
[INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] as to the
first instalment on the date of signature of this Agreement and as to
subsequent instalments on the last day of each preceding Quarter by
the Licensee delivering a cheque drawn on a UK clearing bank to the
Licensor at the above address or at such other address as shall be
notified by the Licensor to the Licensee.
8.3 The Minimum Guarantee may be set off against the Licensor's Royalties
provided such are paid in accordance with the provisions of Clause 3
so that with respect to each Quarter during the Term if the Licensor's
Royalties due and payable by the Licensee exceed the amount of Minimum
Guarantee paid then only the excess shall be payable by the Licensee.
8.4 For the avoidance of doubt if in any Quarter during the Term the
Licensor's Royalties fail to exceed the level of the Minimum Guarantee
paid in respect of such Quarter then the Licensee shall not be
entitled to any rebate of the Minimum Guarantee payment.
9. LICENSEE'S PERFORMANCE TARGETS
9.1 The Licensee shall procure that by the following dates the following
cumulative retail performance targets are met or exceeded:
By Number of Packets Sold Cumulative Number Sold
31st July 1994 [INFORMATION SUBJECT TO REQUEST FOR
CONFIDENTIAL TREATMENT]
31st July 1995 [INFORMATION SUBJECT TO REQUEST FOR
CONFIDENTIAL TREATMENT]
31st July 1996 [INFORMATION SUBJECT TO REQUEST FOR
CONFIDENTIAL TREATMENT]
9.2 If by any of the dates given in column 1 of Clause 9.1 the
corresponding number of packets given in column 2 has not been sold
the Licensor shall have the right within one month of receipt of such
information to serve on the Licensee notice terminating this
Agreement.
14
<PAGE>
10. EXTENSION
Subject to due performance of its respective obligations hereunder,
either party shall at its option be entitled to extend the Term for a
further period of twelve (12) months from the date when the Term would
otherwise have expired by giving notice in writing to that effect to
the other party not later than six (6) months before the original
expiry date. If such notice of extension is served this Agreement
shall continue in force upon terms which shall be substantially the
same as those stated herein, excluding this Clause and Clause 9.
11. TERMINATION
11.1 Either party shall be entitled to terminate this Agreement forthwith
if the other is in material breach of any of its obligations under
this Agreement and has not remedied the same (where capable of remedy)
within fourteen (14) days of service of notice by the other party
specifying such breach and indicating an intention to terminate if the
breach is not remedied (if capable of remedy).
11.2 Either party shall be entitled by notice in writing to the other to
terminate this Agreement forthwith if the other goes into liquidation
(except for the purposes of amalgamation or reconstruction) or
receivership (including administrative receivership) or has an
administrator appointed or makes any arrangement or composition with
its creditors.
12. EFFECT OF TERMINATION
12.1 Termination of this Agreement shall not affect rights and obligations
(other than the Rights which shall forthwith revert to the Licensor)
which may have accrued to either party before the date of such
termination.
15
<PAGE>
12.2 Upon termination of this Agreement the Licensee shall deliver to the
Licensor any materials supplied to it in pursuance of Clause 2.3
above.
12.3 In the event the Licensor terminates this Agreement:
(a) for any reason pursuant to Clause 9.2 or Clause 11 or Clause 14,
the Licensee shall in no way be entitled as a result thereof to any
refund of any monies previously paid by it under this Agreement;
(b) by reason of breach of Clause 3.1 pursuant to Clause 11.1, or
for any reason pursuant to Clause 11.2, the Licensee's liability in
respect of the Minimum Guarantee shall be for the amount which would
have become due under Clause 8 during the balance of the Term (if the
Agreement had not been terminated).
<PAGE>
12.4 Notwithstanding termination of this Agreement pursuant to the
provisions of Clause 9.2, 11 or 14, the following clauses of this
Agreement shall be deemed to survive termination or expiry hereof:
Clauses 3.3, 3.4, 3.5, 3.6, 3.7, 3.8, 7 and 13.
13 SELL-OFF PERIOD
The Licensee shall be entitled to sell off, on a non-exclusive basis,
Licensed Articles previously manufactured under this Agreement for the
purpose of commercial sale for a period of three (3) months from the
date of expiry or termination provided that the Licensee adheres to
the terms of this Agreement.
14. FORCE MAJEURE
If either party to this Agreement is prevented or delayed in the
performance of any of its obligations under this Agreement by a cause
affecting the performance of such obligation which is beyond the
reasonable control of that party and if such party gives written
notice thereof to the other party within 7 days after the
16
<PAGE>
commencement of the cause in question and specifying the matters
constituting such cause and the period for which it is estimated that
such prevention or delay will continue together with such evidence of
such matters as it is reasonably able then to give as from the date of
such notice for so long as such cause of prevention or delay shall
continue the party so prevented or delayed shall be excused the
performance or the punctual performance (as the case may be) of the
particular obligation or obligations which it is prevented or delayed
from performing PROVIDED that said party shall use its best endeavours
to bring to an end such cause as soon as possible and PROVIDED FURTHER
that is such cause continues for more than 60 days the other party
shall be entitled to terminate this Agreement by notice in writing.
15. GRANT OF RIGHTS
The rights granted to the Licensee under this Agreement are personal
to the Licensee and not capable of transmission in any form
whatsoever to the successors of the Licensee.
16. NO ASSIGNMENT
Neither party may assign, transfer, charge or otherwise dispose of or
subcontract any of its rights or obligations under this Agreement, or
agree so to do, without the prior written consent of the other party.
The Licensee is hereby authorised to sub-contract certain additional
functions subcontracted at the date hereof, and printing packaging and
distribution of the Licensed Articles PROVIDED THAT the Licensee shall
remain fully liable to the Licensor for its obligations and
undertakings in this Agreement.
17. NO PARTNERSHIP
This Agreement shall not constitute a partnership or joint venture
between the parties hereto.
17
<PAGE>
18. WHOLE AGREEMENT
This Agreement constitutes the entire agreement between the parties
with regard to the subject matter hereof and may only be amended in
writing signed by the duly authorised representatives of both parties.
19. NOTICES
Any notice to be served under this Agreement shall be in writing and
served upon the recipient at its address hereinbefore set out (or such
other address as may be notified for this purpose) either by hand, by
first class post, by telex or facsimile and shall be deemed served
seventy-two hours after posting if sent by first class post, on
delivery if delivered by hand, on receipt of correct answerback if
sent by telex and on completion of transmission if sent by facsimile.
20. LEGAL COSTS
Each party shall bear the legal costs incurred by it in relation to
the preparation of this Agreement.
21. GOVERNING LAW
This Agreement shall be governed by the laws of England and the
parties hereby submit to the exclusive jurisdiction of the courts of
England.
22. RESTRICTIVE TRADE PRACTICES ACT 1976
Any provisions in this Agreement or in any arrangement of which this
Agreement forms part by virtue of which this Agreement or such
arrangement is subject to registration under the Restrictive Trade
Practices Act 1976 shall not come into effect until the date following
the day on which particulars of this Agreement and of any such
arrangement shall have been furnished to the Office of Fair
18
<PAGE>
Trading (or on such later date as may be provided for in relation to
such restriction).
AS WITNESS the hands of the duly authorised representatives of the parties
the day and year first before written
19
<PAGE>
SCHEDULE ONE
The Clubs who are members of the Premier League
for the 1993/94 Season
Arsenal Football Club
Aston Villa Football Club
Blackburn Rovers Football Club
Chelsea Football Club
Coventry City Football Club
Everton Football Club
Ipswich Town Football Club
Leeds United Football Club
Liverpool Football Club
Manchester City Football Club
Manchester United Football Club
Newcastle United Football Club
Norwich City Football Club
Oldham Athletic Football Club
Queens Park Rangers Football Club
Sheffield United Football Club
Sheffield Wednesday Football Club
Southampton Football Club
Swindon Town Football Club
Tottenham Hotspur Football Club
West Ham United Football Club
Wimbledon Football Club
20
<PAGE>
SCHEDULE TWO
The Licensor's Designs
21
<PAGE>
Signed by RICK PARRY
Duly authorised on behalf of
THE FOOTBALL ASSOCIATION
PREMIER LEAGUE LIMITED
in the presence of:-
Signed by
Duly authorised on behalf of
MERLIN PUBLISHING
INTERNATIONAL plc
in the presence of:-
22
<PAGE>
R.N. Parry Esq.
F.A. Premier League
16 Lancaster Gate
London W2 3LW
2nd July 1996
Dear Rick,
License Agreement dated 3rd August 1994 between F.A. Premier League
Ltd. and Merlin Publishing International plc (the `License Agreement')
This letter will serve as confirmation of our agreement to extend the term of
our current License Agreement for cards, stickers and albums.
All conditions expressed in the License Agreement will remain in force and
fully applicable in the Additional Period except as expressly set forth herein.
All terms used herein without definition shall have the meaning ascribed to
them in the License Agreement.
1) Term
The term of the License Agreement is extended so that it shall extend through
to 31st December 2000. The period from 1st January 1997 through to 31st
December 2000 is hereinafter referred to as the `Additional Period'.
2) Exclusivity
Notwithstanding paragraph (B) of the recitals to the License Agreement, as from
1st April 1997 collectable trading cards will be licensed to Merlin on a
non-exclusive basis. Collectable stickers and albums will continue to be
licensed on an exclusive basis.
3) Licensed articles
During the Additional Period, the following new items will be included among
the Licensed Articles, on a non-exclusive basis:
Dry and wet transfers
Tattoos
Stickers sold on rolls or packs without album
The royalty rate applicable for these new Licensed Articles will be
[INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT].
<PAGE>
4) Consideration
In consideration of the granting of the Additional Period, and the other
variations contained herein, the Minimum Guarantee payable in each year of the
Additional Period shall be [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL
TREATMENT].
The License Agreement remains in full force and effect and shall only be deemed
amended to the extent expressly set forth in this letter.
Signed for and on behalf of Signed for and on behalf of
Merlin Publishing International F.A. Premier League Ltd.
Kelvyn Gardner R.N. Parry
Group Licensing Director Chief Executive
<PAGE>
TABLE OF CONTENTS
Page
Letter to Stockholders........................................................2
Financial Highlights..........................................................6
Management's Discussion and Analysis of
Financial Condition and Results of Operations................................8
Consolidated Financial Statements............................................11
Notes to Consolidated Finacial Statements....................................16
Report of Independent Public Accountants.....................................30
Market and Dividend Information..............................................31
Selected Consolidated Financial Data.........................................32
Directors, Officers and Stockholder Information...............Inside Back Cover
<PAGE>
TO OUR STOCKHOLDERS
Despite the Company reporting a net loss for Fiscal Year 1997,
performance of the business during this past year was comparatively strong.
Excluding charges associated with closing the Company's gum and card
manufacturing facility in Pennsylvania and impairment of certain European
based assets in compliance with a new accounting standard, net income for the
Company would have been $9,493,000, an increase of 13% over the prior year.
That number includes one-time charges in connection with reorganizing our Sales
Force and relocating two European offices.
All of the charges mentioned above were the result of actions taken to create a
more solid foundation for future growth and increased profitability. In
combination, they will save Topps millions of dollars in expenses going
forward and help focus the Company as it moves to higher ground.
Let us share with you key elements of our long-term strategy and some
interesting specifics about various business categories within which we compete.
Long-term Strategy
Responding to changes in the Company's consumer markets and distribution
channels during recent years, we've examined and reformulated our strategic
vision for Topps. The financial goal of double digit growth remains constant.
However, our thinking as to the best means of achieving that goal and others
has changed due to factors such as continued contraction of the sports and
entertainment card markets, dramatic shifts in the volume potential of various
trade channels, and the breadth of entertainment product alternatives.
In general, we will continue to focus attention on collectibles, confectionery
and specialty publishing. There will, however, be more emphasis on new
initiatives which broaden our participation in these categories. More
specifically, we will seek long and short- term growth from:
* Expansion of our U.S. candy business, primarily through increased new
product development and acquisition.
* Continued international development, with greater emphasis placed on local
sports licensing opportunities, especially as they relate to sticker album
collections and card products.
* Increased retail availability and in-store merchandising of our existing
lollipop and Bazooka brands.
* New products based on the equity of our Topps sports and entertainment
collectibles franchise.
Company Activities
Sports Collectibles
Fiscal 1997 was a good year for the Company's sports card business (still our
largest segment). Although the market for sports cards in general was off 10%,
the fifth straight year of decline, Topps sales and profits were actually ahead
of the prior year.
Our marketing strategy of offering a portfolio of clearly defined brands, each
relevant to a specific consumer group, has proven to be correct. That strategy
began to pay off this past year as confusion in the market led more consumers
to turn to brands they trust. We believe that no company benefited from that
more than Topps.
Besides gaining market share, Topps products dominated industry awards, winning
eight of the eleven presented by Card Trade magazine, including one for best
customer service. Here are some highlights of our many offerings last year:
* Topps Brand -- Topps Baseball and Topps Football contained exclusive
insert sets you may have read about honoring Mickey Mantle and Joe Namath,
respectively.
* Bowman Brand -- Bowman stands for rookies, and we assign experienced scouts
to identify the most promising young prospects in baseball for inclusion in
our set. This past year Bowman was the first to debut players such as
Wilton and Vladimir Guerrero, Jose Guillen and Katsuhiro Maeda.
* Topps Finest Brand -- Topps Finest made collecting even more fun this year
through the introduction of Mystery Finest cards. Players' images on these
cards are hidden until a special opaque protector is peeled away.
* NBA at 50 -- We produced a special card set of the NBA's 50 greatest
players of all time, commemorating the 50th anniversary of the NBA. This
archival set, drawing on our heritage, was a big hit with collectors, fans
and even the players themselves.
Looking ahead we have a host of exciting offerings in store for collectors.
For instance, in support of our Topps Gallery brand, we have commissioned famed
artist Peter Max to create original works of art featuring certain popular
athletes. Reproductions of these originals will form a
2
<PAGE>
unique set of insert cards. We also plan to produce a set of cards utilizing
cutting-edge technology from Kodak. These cards will show several seconds of
crisp, full-motion action, making them a perfect vehicle for capturing the
power and grace of professional athletes. In addition, we have completely
repositioned and redesigned our Topps Stadium Club brand. A number of
significant improvements have been made to the brand recently, including some
of the best sports photography available anywhere, reproduced using state of
the art printing technology. Early indications are that collectors
enthusiastically approve.
We have entered into an agreement with the Baseball Hall of Fame and are
negotiating similar agreements with the Halls of Fame for Pro Football and
Basketball. These sponsorships are consistent with Topps heritage and
reputation for authenticity, and will provide valuable exposure for Topps and
its products. We will also be able to implement one-of-a-kind promotions and
create insert sets with Hall of Fame themes.
On the customer service/distribution side, Topps has established a successful
trade program called Home Team Advantage to help hobby shop proprietors attract
more consumers and manage their businesses more efficiently. The program is
ongoing and includes a series of "Retailing for Success" seminars given in a
variety of cities around the country, providing tips on how to generate more
store traffic and significantly increase store sales. These seminars have been
well attended and universally praised. In addition, we have established a
toll-free number which consumers can use to locate their nearest hobby shops.
We have also introduced an automated telephone ordering system for hobby
customers and a newsletter which informs dealers of upcoming products and
promotions. All of our programs should help strengthen this important channel
of trade, and bind Topps more closely to the community of serious collectors.
With respect to manufacturing, the closure of the Duryea plant has already
resulted in improved product quality and greater production flexibility.
We are undertaking several, growth-oriented initiatives in Fiscal 1998 which
will capitalize on our heritage and existing strengths, building outward into
new sports-related categories, including specialized memorabilia. We will also
continue exploring the applications of new, electronic media to our business.
In summary, the Topps sports business -- through its branded products,
effective promotions, trade programs, new external manufacturing capabilities
and new initiatives -- is positioned to remain profitable in current market
conditions, and to benefit from an industry uptick, which we cannot forecast
but feel is reasonable to expect within the next 24 months.
Entertainment
The domestic market for entertainment cards is going through an extremely
difficult period. Industry-wide sales for Calendar 1996 were off a staggering
70% compared with 1995. This is due in part to a dearth of new "breakout"
properties. But there seems to be something even more fundamental, at least
for the present -- people just aren't viewing entertainment based picture cards
as favorably as they did in the past. We found evidence of this in the
consumer reception to some of the properties that we licensed last year. By
way of example, Independence Day, one of the most popular films of all time,
generated only a modicum of interest for ID4 cards at retail. We should add
that this type of malaise has occurred before only to reverse itself sometime
later. For now, however, the category is depressed and the "caution" light is
on.
This is not to say that we haven't enjoyed at least some measure of success
with entertainment cards, because we have. The Star Wars franchise remained
strong with the re-release of the original trilogy in theaters. Topps marketed
several high-quality card sets, a 20th anniversary magazine, poster magazines,
and new editions of Star Wars Galaxy Magazine. Likewise, The X-Files continued
to demonstrate vitality, with our comic book series and card sets doing well.
Topps cards based on Goosebumps also delivered positive results, appealing to
young fans of this best selling children's book series. All of this translated
to a sales decline of only 12% for us compared to the industry's 70%, leading
to a big increase in market share -- some small solace.
Considering current market conditions, we are convinced that, at least near
term, only the strongest franchise properties can be expected to generate
success of any magnitude. Accordingly, we will be highly selective in choosing
properties to market. For Fiscal Year 1998, that means more Star Wars and The
X-Files, The Lost World (Steven Spielberg's sequel to Jurassic Park), and
little else. We will keep our eyes open and remain sufficiently active in the
marketplace to take advantage of opportunities.
3
<PAGE>
Confectionery
Fiscal 1997 was a year of transition in the confectionery business. We began
outsourcing our gum requirements after closing the Duryea plant. This move
created a number of short-term logistics challenges, all of which we are
confident will be overcome, in time. The Company also made a strategic
decision to reduce its focus on short-term novelty confectionery items and
concentrate greater resources on developing, supporting and growing enduring
brand franchises.
Our lollipop brands, most notably Ring Pop and Push Pop, will benefit from
wider flavor variety, new television commercials, more advertising media weight
and improved packaging. Many of these changes have already begun, and initial
results are promising. We are pleased that both Ring Pop and Push Pop, the
number three and four lollipop brands according to IRI data, experienced sales
and market share increases in the U.S. in 1996.
Prospects for Bazooka brand products are brightening as well. Based on a
considerable amount of research, we've decided to bring back consumer offers
for free and discounted merchandise as a reward for collecting Bazooka comics.
Even Bazooka Joe and his cast of characters have a new look to them. Also, we
anticipate distribution gains as a result of Sales Force initiatives described
later in this letter, and plan to reach new consumers through extensive
sampling. Fiscal 1998 will see the launch of Bazooka Blasts, a brand extension
incorporating longer-lasting flavor, a softer chew and new flavor varieties.
Improved packaging graphics will be used on all Bazooka products to freshen the
brand's image and increase on-counter appeal.
New Products/New Business
Marketing of Topps mini-collectible products is progressing nicely. Puppy In
My Pocket, our first mini-collectible, featured an assortment of 24 plastic
replica puppies, each packaged with a tasty candy bone and collector aids.
Baby Wild Animals, our second entry, was a success both domestically and
abroad, and encouraged us to develop and launch additional products of this
kind during the new year under the name Collect'Ems. We believe that
sequential releases of these products will make this category even more
attractive to retailers. New distribution channels will be tested as well.
In order to accelerate new product development across all of our lines, we have
formed an in-house team entitled New Products Services. In collaboration with
Marketing, this group which incorporates personnel from several key disciplines
- -- R&D, licensing, purchasing, quality assurance and market research -- has the
mandate to identify, develop and test new products derived from both internal
and external creative sources. Early results from this activity are
encouraging.
As to acquisitions and other strategic alliances, we continue to pursue them as
part of our growth plan. Focused programs targeting specific industries and
areas of strategic interest are in place.
International
Expanding internationally continues to be one of our top priorities. This past
year, we opened new subsidiaries in Brazil and Argentina. Both are expected to
show progress in Fiscal 1998. Sports licensing also became more global in
scope as we added soccer licenses in Brazil, Korea, and Denmark, and a
basketball license in France. We are aggressively pursuing additional sports
licenses around the world.
We opened a variety of new confectionery markets through agreements with local
distributors. These include Japan, Russia, Australia, New Zealand and South
Africa. Our entertainment cards are also being distributed in more
international markets, with Star Wars cards being sold in Japan (in both
English and Japanese), and X-Files being sold in France, Italy and Germany in
local language versions.
During the year, all of our Merlin operations in Europe were folded into a new
organization called Topps Europe Limited. As part of this reorganization, some
of our offices were relocated to better match resources with the business
opportunities at hand. This new organization will provide better coordination
and focus for our European effort.
In England, the Company's Premier League Soccer sticker and album collection
had another outstanding year, and we extended our exclusive license for this
property through the year 2000. This success was offset somewhat by diminished
consumer interest in entertainment sticker and album collections across Europe,
akin to what the card industry experienced in the United States. Accordingly,
we plan to be more selective overseas, only producing collections that feature
the most enduring of entertainment franchises. More importantly, we will
devote the majority of our editorial resources and expertise to sports related
products and to expanding our confectionery franchises geographically.
4
<PAGE>
Operations
Operationally, the most significant event to occur during Fiscal 1997 was the
closing of the Company's gum and card manufacturing facility in Duryea, PA, a
decision which will fundamentally change the focus of our activities and result
in significant annual savings. Closing the plant was painful given the impact
on Duryea employees, the community and, quite frankly, the rest of our
organization. But after thorough analysis, we realized that continuing
operations at Duryea rather than outsourcing production would cost in excess of
$9,000,000 extra each year and distract the Company from concentrating
resources on marketing and sales efforts which we believe will lead to
long-term growth. In our highly competitive marketplace, the benefits
associated with closure could not be ignored and alternative solutions could
not be found by either management or the union. We remain convinced that
closing the plant was the right thing to do under the circumstances.
Fiscal 1997 also saw full implementation of cost reductions in sports card
design and prepress, and the results were as strong as expected, with overall
savings of 30% versus Fiscal Year 1996. Improvements stemmed from reorganizing
several internal teams, instituting new logistics processes and more efficient
vendor management.
We also continued to reduce obsolescence costs, primarily through improved
capacity planning and reduced manufacturing lead times. Finally, we decreased
our confectionery inventory by over 25% which freed up cash and moved product
to retail faster, improving freshness.
Organization
We recently restructured our Sales Force and created separate selling
organizations to serve two businesses: trading cards and confectionery. For
years it had made good sense to field only one Sales Force because these two
businesses shared similar distribution patterns and often the same buyer.
However, in recent years, there has been a wide divergence in these trends, and
the traditional synergies no longer exist. Separating the two should yield
benefits as each Sales Force focuses completely on a more homogenous group of
customers. Trading cards will be sold by a direct (Company) Sales Force while
the confectionery business will be handled largely by brokers, which are
staffed to provide much broader retail coverage than our previous organization
ever could.
To parallel the changes in the Sales Force, we also restructured our Customer
Service organization, creating separate groups for trading cards and
confectionery. This should result in higher levels of service, and improved
coordination with our field sales personnel.
In Conclusion
To say that we're proud and appreciative of the job done by the entire team of
Topps employees this past year is an understatement. They have been relentless
in their pursuit of excellence. One need not look beyond the trading card
industry to see how things could have gone in such a challenging environment.
Of course, there are no guarantees but, looking ahead, we aim to achieve
increasingly strong annual operating results and will continue working
tenaciously toward that end. As in the past, we'd like to thank our customers,
licensors, stockholders and suppliers for their valued support.
Arthur T. Shorin John J. Langdon
Chairman of the Board and President and
Chief Executive Officer Chief Operating Officer
5
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended
- -----------------------------------------------------------------------------------------------------
March March February
1, 1997 2, 1996 25,1995
- -----------------------------------------------------------------------------------------------------
(In thousands of dollars, except share data)
<S> <C> <C> <C>
Net sales $ 268,975 $ 265,495 $ 265,386
- ---------------------------------------------------- ------------------ --------------- -------------
Income (loss) from operations (14,475) 16,571 26,924
- ---------------------------------------------------- ------------------ --------------- -------------
Net income (loss) (10,943) 8,394 15,747
- ---------------------------------------------------- ------------------ --------------- -------------
Cash provided by operations 12,707 4,149 4,844
- ---------------------------------------------------- ------------------ --------------- -------------
Working capital 18,716 31,278 30,917
- ---------------------------------------------------- ------------------ --------------- -------------
Current ratio 118.7% 138.6% 163.1%
- ---------------------------------------------------- ------------------ --------------- -------------
Net property, plant and equipment 12,900 31,610 31,964
- ---------------------------------------------------- ------------------ --------------- -------------
Stockholders' equity 68,052 81,850 73,869
- ---------------------------------------------------- ------------------ --------------- -------------
Per share data:
- -----------------------------------------------------------------------------------------------------
Net income (loss) (0.23) 0.18 0.33
- ---------------------------------------------------- ------------------ --------------- -------------
Book value $ 1.45 $ 1.74 $ 1.57
- ---------------------------------------------------- ------------------ --------------- -------------
Weighted average shares outstanding 46,928,369 47,047,251 47,039,287
- ---------------------------------------------------- ------------------ --------------- -------------
</TABLE>
Income (loss) from operations for the fiscal year ended March 1, 1997, includes
a plant closure reserve of $30,000,000 and an impairment loss of $1,350,000.
See Note 2.
6
<PAGE>
CORPORATE PROFILE
The Topps Company, Inc. is an international marketer of entertainment products,
principally collectible picture cards, sticker and album collections,
confections and comic books. The Company, founded in 1938, created BAZOOKA
brand bubble gum in 1947 and marketed its first TOPPS baseball cards in 1951.
Trademarks of The Topps Company, Inc. appearing in this report:
BABY WILD ANIMALS, BAZOOKA, BAZOOKA BLASTS, BAZOOKA JOE, BOWMAN, BOWMAN'S BEST,
COLLECT'EMS, MERLIN, PUSH POP, RING POP, TOPPS, TOPPS CHROME, TOPPS FINEST,
TOPPS GALLERY, and TOPPS STADIUM CLUB.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
- -------------------------------------------------------------------------------------
March March February
1,1997 2,1996 25,1995
(52 weeks) (53 weeks) (52 weeks)
- -------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Collectible picture products $ 179,184 $ 169,983 $ 181,541
- --------------------------------------- ---------------- --------------- ------------
Confectionery products 89,791 95,512 83,845
- --------------------------------------- ---------------- --------------- ------------
Total $ 268,975 $ 265,495 $ 265,386
- --------------------------------------- ---------------- --------------- ------------
- --------------------------------------- ---------------- --------------- ------------
</TABLE>
RESULTS OF OPERATIONS
Fiscal 1997 Versus 1996*
In 1997, the Company's net sales increased 1.3% to $268,975,000 from
$265,495,000. This was the result of increased sales of collectible picture
products which were largely offset by a decrease in sales of confectionery
products.
Net sales of collectible picture products, which consist primarily of sports
cards, entertainment cards, comic books and the Merlin line of sticker and
album collections, increased 5.4% from $169,983,000 in 1996 to $179,184,000 in
1997. This increase was due primarily to twelve months of Merlin sales in 1997
versus seven months in 1996. Despite the difficulties experienced by the
sports card market and the Company's decision not to renew its NHL license, net
sales of sports card products were up slightly. Partially offsetting these
increases were decreases in net sales of entertainment cards and comics.
Collectible picture products accounted for 66.6% of consolidated net sales of
the Company in 1997, versus 64.0% in 1996.
The sports card category continued to contract in calendar 1996, albeit at a
lessor rate than in 1995. There are several reasons behind the extended
industry decline: product and brand proliferation which have led to consumer
confusion and oversupply, a competitive rise in other sports-related
merchandise choices, a reduction in retailer support and labor strife which has
left fans feeling disenfranchised. Further category declines may occur near
term. However, the Company believes that these trends have begun to moderate.
Net sales of confectionery products, which include Bazooka brand bubble gum,
Ring Pop and Push Pop lollipops and other products, decreased 6.0% in 1997 to
$89,791,000 from $95,512,000 in 1996. This decrease was the result of lower
sales of Bazooka bubble gum overall, and lollipops outside the U.S. Two
relatively new products, Puppy In My Pocket and Baby Wild Animals contributed
positively to net sales. The Company's confectionery business accounted for
33.4% of total 1997 net sales, compared to 36.0% in 1996.
Gross profit as a percentage of net sales increased to 33.5% in 1997 from 30.9%
in 1996. This increase in gross profit resulted from, among other things,
lower card design costs in the U.S., as well as lower direct costs, in general,
in both the U.S. and Ireland. In addition, gross profit was positively
impacted by the reduction in manufacturing expenses resulting from the
fourth-quarter closure of the Company's plant in Duryea, Pennsylvania.
Royalties and other income were $2,728,000 in 1997 compared with $3,129,000 in
1996. This decrease resulted primarily from the expiration of a long-term
licensing agreement in Argentina and a reduction in
- -------------------------------------------------------------------------------
*Unless otherwise indicated, all date references to 1997, 1996, and 1995 refer
to the fiscal year ended March 1,1997, March 2, 1996 and February 25,1995,
respectively.
8
<PAGE>
certain one-time income items which benefited the Company in 1996.
Selling, general and administrative expenses increased as a percentage of net
sales to 28.2% in 1997 from 25.8% in 1996. This percentage increase in 1997
was primarily the result of one-time charges relating to the relocation of two
Merlin offices in Europe, the reorganization of the U.S. Sales Force and other
increases in compensation expense, as well as costs associated with the
start-up of operations in Mexico.
Results for 1997 included non-recurring charges of $30,000,000 for the closure
of the Duryea, Pennsylvania manufacturing facility and $1,350,000 for the
impairment of long-lived assets at the Cork, Ireland factory in compliance with
Statement No. 121. of the Financial Accounting Standards Board.
The effective tax rate of 33.3% in 1997 reflected provisions for federal, state
and local income tax rates in accordance with statutory income tax rates. The
effective rate was below the 44.5% tax rate in 1996 as a result of the impact
of non-deductible items on the Company's net loss position.
Net income (loss) decreased to $(10,943,000), or $(0.23) per share in 1997 from
$8,394,000, or $0.18 per share in 1996. Excluding the Duryea, Pennsylvania and
Cork, Ireland plant-related charges, net income in 1997 would have been
$9,493,000, or $0.20 per share.
Fiscal 1996 Versus 1995
The Company's net sales in 1996 of $265,495,000 were virtually even with those
in 1995 of $265,386,000. The 1996 sales results were a combination of lower
sales of collectible picture products offset by higher sales of confectionery
products.
Net sales of collectible picture products decreased 6.4% in 1996 to
$169,983,000 from $181,541,000 in 1995. This decrease in sales was the result
of both lower shipments and a higher rate of returns on sports card products.
Growth in sales of entertainment cards and comic books, as well as the
inclusion of seven months of the Merlin business, helped offset the decrease
in sports card products. Collectible picture products accounted for 64.0% of
total net sales of the Company in 1996, versus 68.4% in 1995.
Net sales of confectionery products increased 13.9% in 1996 to $95,512,000 from
$83,845,000. This growth was the result of stronger lollipop sales outside of
the U.S. and the introduction of new products. The Company's confectionery
business accounted for 36.0% of total 1996 net sales, compared to 31.6%
in 1995.
Gross profit as a percentage of net sales decreased slightly to 30.9% in 1996
from 31.4% in 1995. This is the result of higher costs as a percentage of
sales in our domestic business. In addition, profit performance was
negatively impacted by minimum guarantee shortfalls of $2.8 million under
certain of the Company's licensing agreements. The Company was successful in
reducing the provision for inventory obsolescence through improved sales
forecasting techniques and a reduction in production lead times.
Royalties and other income net of expenses were $3,129,000 in 1996 as compared
with $2,957,000 in 1995. The increase in 1996 was driven by licensing income
which was partially offset by settlement costs resulting from a class action
suit.
Selling, general and administrative expenses increased as a percentage of net
sales to 25.8% in 1996 from 22.3% in 1995. This increase was driven by higher
advertising and distribution spending stemming from the expansion of Push Pop
and Ring Pop in foreign markets, as well as by costs to reorganize and redirect
the domestic Sales Force in order to increase the Company's focus on national
accounts and hobby distributors.
The effective tax rate of 44.5% in 1996 exceeded the 42.5% tax rate in 1995 as
a result of the Merlin acquisition.
Net income decreased to $8,394,000, or $.18 per share in 1996, from
$15,747,000, or $.33 per share in 1995, respectively.
9
<PAGE>
Quarterly Comparisons
Management believes that quarter-to-quarter comparisons of sales and operating
results are affected by a number of fluctuating 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. See Note 15 of Notes to Consolidated Financial
Statements.
Inflation
The Company has been subject to price increases for materials, labor, royalty
rates, utilities and services, which have been partially offset by effective
buying of materials and by adjustment in the contents of finished products and
their prices, as competition has permitted.
Liquidity and Capital Resources
On June 30, 1995, the Company entered into a $65 million credit agreement (the
"Credit Agreement") with a syndicate of banks which consisted of a $50 million
term loan to finance the Merlin acquisition, a $2 million letter of credit
facility and a $13 million revolving credit facility to be used for working
capital and general corporate purposes. Beginning April 1996, interest rates
on half of the outstanding principal of the loan were variable and a function
of short-term indices and the Company's consolidated leverage ratio, while
interest rates on the balance of the outstanding loan were fixed for two years
as a result of interest rate swap agreements and were, therefore, a function of
interest rates at the commencement of the swap transactions and the Company's
consolidated leverage ratio. 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 sell or acquire assets or borrow
additional money (other than through the revolving facility), and prohibits the
payment of dividends. On December 6, 1996, certain covenants of the Credit
Agreement were amended to exclude the charges related to the Duryea,
Pennsylvania plant closure and the impairment of assets at the Cork, Ireland
plant. The Credit Agreement is secured by a pledge of 65% of the stock of
Merlin.
As of March 1, 1997, the Company had $24,199,000 in cash, and $34,950,000 in
debt as a result of the Merlin acquisition. Capital expenditures net of
disposals for fiscal 1997 totaled $1,074,000, the majority of which were
related to the expansion of computer systems throughout the Company and
investments required to support the manufacture of confectionery products in
both the U.S. and Ireland.
Management believes that, in light of the Company's borrowing capacity, cash
on hand as of March 1, 1997 and expected cash flow from operations, the
Company has adequate cash to meet its working capital, capital expenditure and
loan repayment requirements for the foreseeable future.
10
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
The Topps Company, Inc. and Subsidiaries
(In thousands of dollars, except share data)
<TABLE>
<CAPTION>
Year Ended
- ---------------------------------------------------------------------------------------------------------------------
March March February
1, 1997 2, 1996 25,1995
(52 weeks) (53weeks) (52 weeks)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 268,975 $ 265,495 $ 265,386
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Cost of sales 178,854 183,490 182,169
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Gross profit on sales 90,121 82,005 83,217
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Royalties and other income 2,728 3,129 2,957
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
92,849 85,134 86,174
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Selling, general and administrative expenses 75,974 68,563 59,250
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Plant closure reserve 30,000 - -
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Impairment loss 1,350 - -
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Income (loss) from operations (14,475) 16,571 26,924
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Interest income (expense), net (1,942) (1,447) 461
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Income (loss) before provision (benefit)
for income taxes (16,417) 15,124 27,385
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Provision (benefit) for income taxes (5,474) 6,730 11,638
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Net income (loss) $ (10,943) $ 8,394 $ 15,747
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Net income (loss) per share $ (.23) $ .18 $ .33
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
Weighted average shares outstanding 46,928,369 47,047,251 47,039,287
- ----------------------------------------------------------------- ------------------- ---------------- ----------------
</TABLE>
See Notes to Consolidated Financial Statements.
11
<PAGE>
CONSOLIDATED BALANCE SHEETS
The Topps Company Inc. and Subsidiaries
(In thousands of dollars, except share data)
<TABLE>
<CAPTION>
March March
1, 1997 2, 1996
- ------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------
Current assets:
- ------------------------------------------------------------------------ ---------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 24,199 $ 24,154
- ------------------------------------------------------------------------ ---------------- -----------------
Accounts receivable, less allowance for doubtful
accounts of $1,126 (1997) and $888 (1996) 59,776 43,357
- ------------------------------------------------------------------------ ---------------- -----------------
Inventories 19,181 27,887
- ------------------------------------------------------------------------ ---------------- -----------------
Income tax receivable 2,901 3,008
- ------------------------------------------------------------------------ ---------------- -----------------
Deferred tax assets 3,489 2,598
- ------------------------------------------------------------------------ ---------------- -----------------
Prepaid expenses and other current assets 9,012 11,267
- ------------------------------------------------------------------------ ---------------- -----------------
Total current assets 118,558 112,271
- ------------------------------------------------------------------------ ---------------- -----------------
Property, plant and equipment
- ------------------------------------------------------------------------ ---------------- -----------------
Land 200 581
- ------------------------------------------------------------------------ ---------------- -----------------
Buildings and improvements 6,936 22,798
- ------------------------------------------------------------------------ ---------------- -----------------
Machinery and equipment 9,204 29,853
- ------------------------------------------------------------------------ ---------------- -----------------
Total property, plant and equipment 16,340 53,232
- ------------------------------------------------------------------------ ---------------- -----------------
Less, accumulated depreciation 3,440 21,622
- ------------------------------------------------------------------------ ---------------- -----------------
Property, plant and equipment, net 12,900 31,610
- ------------------------------------------------------------------------ ---------------- -----------------
Intangible assets, net of amortization of $35,457 (1997)
and $32,844 (1996) 65,456 70,447
- ------------------------------------------------------------------------ ---------------- -----------------
Other assets 4,264 2,799
- ------------------------------------------------------------------------ ---------------- -----------------
TOTAL ASSETS $ 201,178 $ 217,127
- ------------------------------------------------------------------------ ---------------- -----------------
</TABLE>
12
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March March
1, 1997 2, 1996
- ----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Current liabilities:
- ------------------------------------------------------------------------ ---------------- ----------------
<S> <C> <C>
Accounts payable $ 35,150 $ 28,848
- ------------------------------------------------------------------------ ---------------- -----------------
Accrued expenses and other liabilities 52,701 39,879
- ------------------------------------------------------------------------ ---------------- -----------------
Income taxes payable 4,491 5,466
- ------------------------------------------------------------------------ ---------------- -----------------
Current portion of long-term debt 7,500 6,800
- ------------------------------------------------------------------------ ---------------- -----------------
Total current liabilities 99,842 80,993
- ------------------------------------------------------------------------ ---------------- -----------------
Long-term debt 27,450 37,500
- ------------------------------------------------------------------------ ---------------- -----------------
Deferred income taxes 379 11,192
- ------------------------------------------------------------------------ ---------------- -----------------
Other liabilities 5,455 5,592
- ------------------------------------------------------------------------ ---------------- -----------------
Total liabilities 133,126 135,277
- ------------------------------------------------------------------------ ---------------- -----------------
Commitments (See note 16)
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,
in 1997 and 1996. 475 475
- ------------------------------------------------------------------------ ---------------- -----------------
Additional paid-in capital 16,812 16,812
- ------------------------------------------------------------------------ ---------------- -----------------
Treasury stock, 967,500 shares (1997) and
455,000 (1996), at cost. (8,358) (6,120)
- ------------------------------------------------------------------------ ---------------- -----------------
Retained earnings 58,776 69,719
- ------------------------------------------------------------------------ ---------------- -----------------
Minimum pension liability adjustment - (110)
- ------------------------------------------------------------------------ ---------------- -----------------
Cumulative adjustment due to foreign currency translation 347 1,074
- ------------------------------------------------------------------------ ---------------- -----------------
Total stockholders' equity 68,052 81,850
- ------------------------------------------------------------------------ ---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 201,178 $ 217,127
- ------------------------------------------------------------------------ ---------------- -----------------
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
The Topps Company, Inc. and Subsidiaries
(In thousands of dollars)
<TABLE>
<CAPTION>
Year Ended
- -------------------------------------------------------------------------------------------------------------------
March March February
1, 1997 2, 1996 25 , 1995
(52 weeks) (53 weeks) (52 weeks)
- -------------------------------------------------------------------------------------------------------------------
Cash provided by (used for) operations:
- ----------------------------------------------------------------------- -------------- -------------- -------------
<S> <C> <C> <C>
Net income (loss) $ (10,943) $ 8,394 $ 15,747
- ----------------------------------------------------------------------- -------------- -------------- -------------
Add (subtract) non-cash items included in income:
- ----------------------------------------------------------------------- -------------- -------------- -------------
Plant closure reserve 30,000 - -
- ----------------------------------------------------------------------- -------------- -------------- -------------
Impairment loss 1,350 - -
- ----------------------------------------------------------------------- -------------- -------------- -------------
Depreciation and amortization 5,245 5,562 5,216
- ----------------------------------------------------------------------- -------------- -------------- -------------
Deferred taxes on income (11,705) (912) 1,072
- ----------------------------------------------------------------------- -------------- -------------- -------------
Net effect of changes in:
- ----------------------------------------------------------------------- -------------- -------------- -------------
Receivables (16,419) 1,831 (1,780)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Inventories 8,707 597 (1,407)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Income tax receivable 107 (2,456) (552)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Prepaid expenses and other current assets 2,256 (2,583) (1,413)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Other assets 880 (1,389) (46)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Payables and other current liabilities 3,319 (5,287) (12,920)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Other (90) 392 927
- ----------------------------------------------------------------------- -------------- -------------- -------------
Cash provided by operations 12,707 4,149 4,844
- ----------------------------------------------------------------------- -------------- -------------- -------------
Cash used for investing activities:
- ----------------------------------------------------------------------- -------------- -------------- -------------
Additions to property, plant and equipment, net of disposals (1,074) (2,147) (4,945)
- ---------------------------------------------------------------------- -------------- -------------- --------------
Purchase of Merlin, net of cash acquired - (39,953) -
- ----------------------------------------------------------------------- -------------- -------------- -------------
Cash used for investing activities (1,074) (42,100) (4,945)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Cash provided by (used for) financing activities:
- ----------------------------------------------------------------------- -------------- -------------- -------------
Proceeds from borrowing - 50,000 -
- ----------------------------------------------------------------------- -------------- -------------- -------------
Reduction of debt (9,350) (5,700) -
- ----------------------------------------------------------------------- -------------- -------------- -------------
Dividends paid - - (9,878)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Exercise of employee stock options - 20 27
- ----------------------------------------------------------------------- -------------- -------------- -------------
Purchase of treasury stock (2,238) - -
- ----------------------------------------------------------------------- -------------- -------------- -------------
Cash provided by (used for) financing activities (11,588) 44,320 (9,851)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Net increase (decrease) in cash 45 6,369 (9,952)
- ----------------------------------------------------------------------- -------------- -------------- -------------
Cash at beginning of year 24,154 17,785 27,737
- ----------------------------------------------------------------------- -------------- -------------- -------------
Cash at end of year $ 24,199 $ 24,154 $ 17,785
- ----------------------------------------------------------------------- -------------- -------------- -------------
Interest paid $ 2,605 $ 2,217 $ 130
- ----------------------------------------------------------------------- -------------- -------------- -------------
Income taxes paid $ 7,811 $ 10,587 $ 10,941
- ----------------------------------------------------------------------- -------------- -------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
The Topps Company, Inc. and Subsidiaries
(In thousands of dollars)
<TABLE>
<CAPTION>
Cumulative
Adjustment
Minimum Due to
Additional Pension Foreign
Common Paid-in Treasury Retained Liability Currency
Total Stock Capital Stock Earnings Adjustment Translation
............................. ............. ............ ................ ............. .............. .............. .............
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 26, 1994 $ 66,955 $ 475 $ 16,765 $ (6,120) $ 55,456 $ (529) $ 908
............................. ........... ............ ................ ............. .............. .............. .............
Exercise of employee
stock options 27 - 27 - - - -
- ----------------------------- ------------ ------------ ---------------- ------------- -------------- -------------- -------------
Translation adjustment 489 - - - - - 489
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- -------------
Dividends paid (9,878) - - - (9,878) - -
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
Minimum pension
liability adjustment 529 - - - - 529 -
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- -------------
Net income 15,747 - - - 15,747 - -
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- -------------
Balance at February 25, 1995 73,869 475 16,792 (6,120) 61,325 - 1,397
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- -------------
Exercise of employee
stock options 20 - 20 - - - -
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- -------------
Translation adjustment (323) - - - - - (323)
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
Minimum pension
liability adjustment (110) - - - - (110) -
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
Net income 8,394 - - - 8,394 - -
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
Balance at March 2, 1996 81,850 475 16,812 (6,120) 69,719 (110) 1,074
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
Translation adjustment (727) - - - - - (727)
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
Purchase of treasury stock (2,238) - - (2,238) - - -
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
Minimum pension
liability adjustment 110 - - - - 110 -
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
Net income (10,943) - - - (10,943) - -
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
Balance at March 1, 1997 $ 68,052 $ 475 $ 16,812 $ (8,358) $ 58,776 $ - $ 347
- ----------------------------- ------------- ------------ ---------------- ------------- -------------- -------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its subsidiaries. All intercompany items and
transactions have been eliminated in consolidation.
The Company and its subsidiaries, with the exception of Merlin Publishing
International Limited ("Merlin"), a wholly owned subsidiary incorporated in the
United Kingdom, have fiscal years which end on the Saturday closest to the end
of February. Merlin's fiscal year ends on January 31st. On March 24, 1997,
Merlin changed its name to Topps Europe Ltd.
Foreign Currency Translation: The financial statements of subsidiaries
outside the United States, except those subsidiaries located in highly
inflationary economies, are generally measured using the local currency as the
functional currency. Assets and liabilities of these subsidiaries are
translated at the rates of exchange as of the balance sheet date. The resultant
translation adjustments are included in cumulative adjustment due to foreign
currency translation, a separate component of stockholders' equity. Income and
expense items are translated at the average exchange rate for the month. Gains
and losses from foreign currency transactions of these subsidiaries are
included in net income (loss). For subsidiaries operating in highly
inflationary economies, the financial statements are measured using the U.S.
dollar as the functional currency. Gains and losses from balance sheet
translation adjustments are also included in net income (loss).
Derivative Financial Instruments: Derivative financial instruments are
used for hedging purposes by the Company in the management of its interest rate
and foreign currency exposures. The Company does not hold or issue derivative
financial instruments for trading purposes.
Accounting Changes: The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of". In the third quarter of the
current fiscal year ended March 1, 1997, the Company recorded a pre-tax
charge of $1,350,000 related to its property in Cork, Ireland. See Note 2.
The Company adopted SFAS No. 123 "Accounting for Stock Based Compensation" in
the fourth quarter of the current fiscal year ended March 1, 1997.
See Note 11.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 which will change the methodology by which all companies measure their
earnings (loss) per share. This statement will be effective for periods ending
after December 15,1997 at which time previously reported earnings (loss) per
share will be restated, if necessary, to conform with this Statement. The
Company does not believe that the adoption of this statement will have a
significant impact on its reported earnings (loss) per share.
Cash Equivalents: The Company considers investments in highly liquid debt
instruments with a maturity of three months or less to be cash equivalents.
Inventories: Inventories are stated at lower of cost or market. Cost is
determined on the first-in, first-out basis.
Property, Plant and Equipment (PP&E): PP&E is stated at cost. Depreciation is
computed on the straight-line method. Estimated useful lives used in computing
depreciation are twenty-five years for buildings, five to twelve years for
machinery and equipment, and over the remaining lease period for leasehold
improvements.
Intangible Assets: Intangible assets include trademarks, the value of sports,
entertainment and proprietary product rights and goodwill (the excess of the
purchase price over the estimated fair value of identifiable net assets
acquired). Amortization is by the straight-line method over estimated lives of
up to forty years. Management evaluates the recoverability of intangible
assets based on undiscounted projections of future earnings attributable to the
individual assets acquired.
16
<PAGE>
Net Sales: Sales are recorded upon shipment of products. Sales made on a
returnable basis are recorded net of provisions for estimated returns. These
estimates are revised, as necessary, to reflect actual experience and market
conditions.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires 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 provision for sales
returns, allowance for doubtful accounts, inventory obsolescence, restructuring
costs and asset valuations. Actual results could differ from these estimates.
Reclassifications: Certain items in the prior years' financial statements have
been reclassified to conform with the current year's presentation.
NOTE 2 - OTHER STATEMENT OF OPERATIONS CHARGES
During the third quarter of fiscal 1997, the Company announced that it would
discontinue operations at its Duryea, Pennsylvania factory following the
expiration of a labor agreement in December 1996. This resulted in the
severance of both union and non-union employees and the outsourcing of all
production activities previously performed at that location.
As a result of the closing, the Company recorded a charge of $30,000,000,
before applicable income tax effects. The charge consisted of approximately
$16,100,000 in non-cash write-offs relating to the disposition of factory and
related equipment and approximately $13,900,000 relating to severance and other
employee related costs, costs to hold and sell the factory and other costs of
the closure. The Company made $2.4 million in related cash payments during
fiscal 1997 with the majority of the remainder expected to be paid in fiscal
1998. The ultimate costs associated with the factory and related equipment
will not be finalized until their disposition is completed, which is expected
to require in excess of a year.
In addition, during the third quarter, the Company recorded an impairment
reserve of $1,350,000 in accordance with SFAS No. 121 with respect to its
factory in Cork, Ireland.
As a result of these charges described above, net income (loss) for the period
was adversely impacted by $20,436,000 ($.43 per share), after applicable income
tax effects. Excluding the effect of the above charges, net income for the
year ended March 1, 1997 would have been $9,493,000 or $.020 per share.
NOTE 3 - ACQUISITION
On July 6, 1995, the Company completed the acquisition of Merlin, a U.K.- based
publisher and marketer of sticker and album collections for $44,897,400 in
cash. The acquisition was accounted for under the purchase method. The
purchase price was allocated to the net tangible and intangible assets acquired
based on estimated fair values as of year end. The difference between purchase
price and the related fair values of net assets acquired represents goodwill
which is being amortized on a straight-line basis over estimated useful lives
of up to forty years.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition of Merlin had been consummated
as of the beginning of the periods presented. The pro forma information does
not purport to be indicative of what would have occurred had the acquisition
been made as of these dates or of the results which may occur in the future.
<TABLE>
<CAPTION>
Year Ended
- --------------------------------------------------------------------------------
March February
2, 1996 25, 1995
(53 Weeks) (52 Weeks)
- ----------------------------------------------------------------------------------
(In thousands of dollars,
except share data)
<S> <C> <C>
Net sales $ 300,558 $ 307,014
- ----------------------------- ------- ---------------- --------------------
Net income 7,819 14,983
- ----------------------------- ------- ---------------- --------------------
Net income per share $ 0.17 $ 0.32
- ----------------------------- ------- ---------------- --------------------
</TABLE>
17
<PAGE>
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
March March
1,1997 2,1996
- --------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Raw materials $ 6,236 $ 8,581
- --------------------------- ---------------------- -------------- --------------
Work in process 1,874 3,221
- --------------------------- ---------------------- -------------- --------------
Finished goods 11,071 16,085
- --------------------------- ---------------------- -------------- --------------
Total $ 19,181 $ 27,887
- --------------------------- ---------------------- -------------- --------------
</TABLE>
NOTE 5 - INTANGIBLE ASSETS
<TABLE>
<CAPTION>
March March
1, 1997 2, 1996
- -------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Value of sports, entertainment
and proprietary products $ 36,635 $ 36,635
- -------------------------------------------------- -------------- -------------
Goodwill 64,197 65,691
- -------------------------------------------------- -------------- -------------
Other intangible assets 81 965
- -------------------------------------------------- -------------- -------------
Less: accumulated amortization (35,457) (32,844)
- -------------------------------------------------- -------------- -------------
Total $ 65,456 $ 70,447
- -------------------------------------------------- -------------- -------------
</TABLE>
NOTE 6 - ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
March March
1, 1997 2, 1996
- --------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Royalties $ 5,238 $ 4,636
- ------------------------------------------------- -------------- -------------
Employee compensation 917 3,477
- ------------------------------------------------- --------------- --------------
Provision for estimated
losses on sales returns 23,239 22,123
- ------------------------------------------------- --------------- --------------
Restructuring reserve 11,582 -
- -------------------------------------------------- -------------- --------------
Other 11,725 9,643
- ------------------------------------------------- -------------- --------------
Total $ 52,701 $ 39,879
- ------------------------------------------------- -------------- --------------
</TABLE>
NOTE 7 - DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
Year Ended
- -----------------------------------------------------------------------------------------
March March February
1, 1997 2, 1996 25, 1995
(52 weeks) (53 weeks) (52 weeks)
- -----------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Depreciation expense $ 2,402 $ 3,146 $ 2,945
- ------------------------------------------------- ------------- ------------ ------------
Amortization of intangible assets 2,649 2,312 2,271
- ------------------------------------------------- ------------- ------------ ------------
Amortization- other 194 104 -
- ------------------------------------------------- ------------- ------------ ------------
Total $ 5,245 $ 5,562 $ 5,216
- ------------------------------------------------- ------------- ------------ ------------
</TABLE>
NOTE 8 - LONG-TERM DEBT
<TABLE>
<CAPTION>
March March
1, 1997 2, 1996
- --------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C>
Term loan $ 34,950 $ 44,300
- --------------------------------------------------- ------------- --------------
Less, current portion (7,500) (6,800)
- --------------------------------------------------- -------------- -------------
Total $ 27,450 $ 37,500
- --------------------------------------------------- -------------- -------------
</TABLE>
The scheduled repayment of debt is as follows:
<TABLE>
<CAPTION>
FYE (In thousands of dollars)
- --------------------------------------------------------------------------------
<C> <C>
1998 $ 7,500
- --------------------------------------------------------------------------------
1999 10,000
- -------------------------------------------------------------------------------
2000 11,250
- --------------------------------------------------------------------------------
2001 6,200
- --------------------------------------------------------------------------------
Total $ 34,950
- --------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
In connection with the acquisition of Merlin (see Note 3), the Company entered
into a bank credit agreement ("Credit Agreement") to obtain funds for the
purchase. The Credit Agreement provided for a $50,000,000 term loan, payable
in quarterly installments, a $2,000,000 letter of credit facility ($1,500,000
of which was outstanding as of March 1, 1997) and availability of a $13,000,000
revolving credit facility (none of which was outstanding as of March 1, 1997)
all maturing on July 6, 2000. The Credit Agreement contains certain convenants
concerning indebtedness, capital expenditures, dividends, treasury shares
acquisition, interest coverage and operating profit. On December 6, 1996,
certain covenants of the Credit Agreement were amended as a result of the
restructuring reserve on the closure of the Duryea, Pennsylvania plant and an
impairment loss related to the plant in Cork, Ireland. The Company was in
compliance with all such convenants as of March 1, 1997 and March 2, 1996.
In April 1996, the Company entered into swap arrangements for two years which
fixed the interest rate on one half of the outstanding debt at an average rate
of 6.1% plus an applicable margin of 1.25%. The interest rate on remaining
debt is adjustable and is based on LIBOR plus an applicable margin of 1.25%.
For fiscal 1997 and 1996, the LIBOR rate averaged 5.57% and 5.82%,
respectively. The Company also pays a commitment fee of .375% on the unused
revolving credit facility.
NOTE 9 - INCOME TAXES
U.S. and foreign operations contributed to income (loss) before provision
(benefit) for income taxes as follows:
<TABLE>
<CAPTION>
Year Ended
- --------------------------------------------------------------------------------------------
March March February
1, 1997 2, 1996 25, 1995
(52 weeks) (53 weeks) (52 weeks)
- --------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
United States $ (21,622) $ 7,689 $ 26,226
- ----------------------------------------------------- ------------ ------------- -----------
Europe 5,492 7,215 1,159
- ----------------------------------------------------- ------------ ------------- -----------
Canada 241 220 -
- ----------------------------------------------------- ------------ ------------- -----------
Latin America (528) - -
- ----------------------------------------------------- ------------ ------------- -----------
Total $ (16,417) $ 15,124 $ 27,385
- ----------------------------------------------------- ------------ ------------- -----------
</TABLE>
Provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
Year Ended
- ---------------------------------------------------------------------------------------------
March March February
1, 1997 2, 1996 25, 1995
(52 weeks) (53 weeks) (52 weeks)
- ---------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Current income taxes:
- ----------------------------------------------------- ------------ ------------- ------------
Federal $ 1,484 $ 2,988 $ 8,043
- ----------------------------------------------------- ------------ ------------- ------------
Foreign 3,501 3,317 92
- ----------------------------------------------------- ------------ ------------- ------------
State and local 299 899 2,550
- ----------------------------------------------------- ------------ ------------- ------------
Total current 5,284 7,204 10,685
- ----------------------------------------------------- ------------ ------------- ------------
Deferred income taxes:
- ----------------------------------------------------- ------------ ------------- ------------
Federal (9,289) (171) 806
- ----------------------------------------------------- ------------ ------------- ------------
State and local (1,469) (303) 147
- ----------------------------------------------------- ------------ ------------- ------------
Total deferred (10,758) (474) 953
- ----------------------------------------------------- ------------ ------------- ------------
Total income tax provision (benefit) $ (5,474) $ 6,730 $ 11,638
- ----------------------------------------------------- ------------ ------------- ------------
</TABLE>
19
<PAGE>
The reasons for the difference between the provision (benefit) for income taxes
and the amount computed by applying the statutory federal income tax rate to
income before provision (benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended
- ----------------------------------------------------------------------------------------------
March March February
1, 1997 2, 1996 25, 1995
(52 weeks) (53 weeks) (52 weeks)
- ----------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Computed expected tax provision (benefit): $ (5,746) $ 5,293 $ 9,584
- ------------------------------------------------------ ------------ ------------ -------------
Increase (decrease) in taxes resulting from:
- ------------------------------------------------------ ------------ ------------ -------------
State and local taxes, net of federal benefit (668) 588 1,753
- ------------------------------------------------------ ------------ ------------ -------------
Operating results of foreign subsidiaries 212 316 (266)
- ------------------------------------------------------ ------------ ------------ -------------
Goodwill and other permanent differences 728 533 567
- ------------------------------------------------------ ------------ ------------ -------------
Total $ (5,474) $ 6,730 $ 11,638
- ------------------------------------------------------ ------------ ------------ -------------
</TABLE>
The components of deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Year Ended
- ----------------------------------------------------------------------------------------------
March March February
1, 1997 2, 1996 25, 1995
(52 weeks) (53 weeks) (52 weeks)
- ----------------------------------------------------------------------------------------------
(In thousands of dollars)
Deferred income tax assets:
- ----------------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Provision for estimated losses on
returns $ 3,489 $ 2,598 $ 3,641
- ----------------------------------------------------- ------------- ------------ -------------
Deferred income tax liabilities:
- ----------------------------------------------------------------------------------------------
Depreciation $ 814 $ 4,668 $ 4,349
- ----------------------------------------------------- ------------- ------------ -------------
Undistributed earnings- foreign subsidiaries 5,143 4,759 2,642
- ----------------------------------------------------- ------------- ------------ -------------
Amortization and other (1,617) 1,765 2,639
- ----------------------------------------------------- ------------- ------------ -------------
Plant closure reserve (3,961) - -
- ----------------------------------------------------- ------------- ------------ -------------
Total deferred income tax liabilities $ 379 $ 11,192 $ 9,630
- ----------------------------------------------------- ------------- ------------ -------------
</TABLE>
20
<PAGE>
NOTE 10 - EMPLOYEE BENEFIT PLANS
Retirement Plans
The Company has a trusteed non-contributory defined benefit retirement plan
covering substantially all domestic non-bargaining unit personnel. Plan
benefits are based on years of service and the employee's average compensation
in the 60 consecutive months which produce the highest average within the last
120 months of employment. The Company funds pension costs in accordance with
the funding requirements of the Employee Retirement Income Security Act of 1974.
Contributions are intended to provide not only for benefits attributed to
service to date but also for those expected to be earned in the future. Plan
assets consist of high-quality, marketable fixed income and equity securities.
The following table sets forth the retirement plan's funded status as
determined by an independent actuary:
<TABLE>
<CAPTION>
March March February
1, 1997 2, 1996 25, 1995
- ---------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 12,288 $ 12,200 $ 9,500
- ------------------------------------------------------ ------------ ------------ ------------
Non-vested 507 500 500
- ------------------------------------------------------ ------------ ------------ ------------
Accumualted benefit obligation $ 12,795 $ 12,700 $ 10,000
- ------------------------------------------------------ ------------ ------------ ------------
Projected benefit obligation $ 16,071 $ 16,350 $ 13,000
- ------------------------------------------------------ ------------ ------------ ------------
Plan assets at market value (15,442) (12,050) (10,400)
- ------------------------------------------------------ ------------ ------------ ------------
Projected benefit obligation in excess
of plan assets 629 4,300 2,600
- ------------------------------------------------------ ------------ ------------ ------------
Unrecognized net loss (2,580) (4,280) (3,053)
- ------------------------------------------------------ ------------ ------------ ------------
Unrecognized transition asset 96 320 365
- ------------------------------------------------------ ------------ ------------ ------------
Minimum liability - 310 -
- ------------------------------------------------------ ------------ ------------ ------------
Accrued (prepaid) pension liability $ (1,855) $ 650 $ (88)
- ------------------------------------------------------ ------------ ------------ ------------
Net pension expense included in the following components:
- ---------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 701 $ 600 $ 580
- ------------------------------------------------------ ------------ ------------ ------------
Interest cost on projected benefit obligation 1,196 1,150 963
- ------------------------------------------------------ ------------ ------------ ------------
Actual return on plan assets (1,011) (1,720) (502)
- ------------------------------------------------------ ------------ ------------ ------------
Net amortization and deferral 77 855 (185)
- ------------------------------------------------------ ------------ ------------ ------------
Voluntary retirement benefit (14) - -
- ------------------------------------------------------ ------------ ------------ ------------
Net pension expense $ 949 $ 885 $ 856
- ------------------------------------------------------ ------------ ------------ ------------
</TABLE>
21
<PAGE>
The Company also has defined benefit agreements, which are non-qualified, with
certain retirees and the Chairman and Chief Executive Officer. The table below
sets forth the funded status as determined by an independent actuary:
<TABLE>
<CAPTION>
March March February
1, 1997 2, 1996 25, 1995
- ---------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Present value of vested benefit obligation $ 2,852 $ 3,250 $ 2,350
- ------------------------------------------------------ ------------ ------------ ------------
Projected benefit obligation in excess of plan assets $ 3,553 $ 3,900 $ 3,300
- ------------------------------------------------------ ------------ ------------ ------------
Unrecognized loss 179 (375) -
- ------------------------------------------------------ ------------ ------------ ------------
Unrecognized transition asset (961) (1,040) (1,120)
- ------------------------------------------------------ ------------ ------------ ------------
Minimum liability 81 765 -
- ------------------------------------------------------ ------------ ------------ ------------
Accrued (prepaid) pension liability $ 2,852 $ 3,250 $ 2,180
- ------------------------------------------------------ ------------ ------------ ------------
Net pension expense $ 355 $ 380 $ 324
- ------------------------------------------------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
March March February
1, 1997 2, 1996 25, 1995
- --------------------------------------------------------------------------------------------
Principal actuarial assumptions used for measurement
of projected benefit obligations were:
- ------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Discount rate 7.8% 7.5% 8.5%
- ------------------------------------------------------ ------------ ------------ ------------
Rate of increase in future compensation level 5.0% 5.0% 5.0%
- ------------------------------------------------------ ------------ ------------ ------------
Long-term rate of return on assets 9.0% 9.0% 8.0%
- ------------------------------------------------------ ------------ ------------ ------------
</TABLE>
The Company is a participant in a multi-employer defined contribution pension
plan covering domestic bargaining unit employees. In addition, the Company
sponsors a defined contribution plan, which qualifies under section 401(a) and
401(k)of the Internal Revenue Code. All non-bargaining unit employees are
eligible to participate; participation in the plan is optional. Pension
expense for all plans was $1,719,000 (1997), $1,780,000 (1996) and
$2,238,000 (1995).
22
<PAGE>
POSTRETIREMENT HEALTH CARE BENEFIT PLAN
The Company provides certain postretirement health care benefits for employees
who meet minimum age and service requirements. The following tables set forth
the plan's status as determined by an independent actuary:
<TABLE>
<CAPTION>
March March February
1, 1997 2, 1996 25, 1995
- ---------------------------------------------------------------------------------------------
(In thousands of dollars)
Accumulated postretirement benefit obligation:
- ------------------------------------------------------- ----------- ------------ ------------
<S> <C> <C> <C>
Retirees $ 3,780 $ 3,700 $ 3,300
- ------------------------------------------------------- ----------- ------------ ------------
Active employees 3,571 3,500 3,100
- ------------------------------------------------------- ----------- ------------ ------------
Total 7,531 7,200 6,400
- ------------------------------------------------------- ----------- ------------ ------------
Unrecognized net transition obligation (3,879) (4,100) (4,321)
- ------------------------------------------------------- ------------ ----------- ------------
Unrecognized net loss (1,057) (1,292) (971)
- ------------------------------------------------------- ----------- ------------ ------------
Accrued postretirement obligation $ 2,415 $ 1,808 $ 1,108
- ------------------------------------------------------- ----------- ------------ ------------
The components of the net periodic postretirement
benefit cost are as follows:
- ------------------------------------------------------- ----------- ------------ ------------
Service cost $ 122 $ 170 $ 200
- ------------------------------------------------------- ----------- ------------ ------------
Interest cost 539 510 453
- ------------------------------------------------------- ----------- ------------ ------------
Net amortization and deferral 259 220 166
- ------------------------------------------------------- ----------- ------------ ------------
Postretirement benefit expense $ 920 $ 900 $ 819
- ------------------------------------------------------- ----------- ------------ ------------
Actual assumptions used to measure the
postretiremnet benefit cost are as follows:
- ------------------------------------------------------- ----------- ------------ ------------
Discount rate 7.8% 7.5% 8.5%
- ------------------------------------------------------- ----------- ------------ ------------
Health care trend rate:
Year-end 10.5% 10.5% 12.0%
- ------------------------------------------------------- ----------- ------------ ------------
Decreasing to year 2010 6.0% 6.0% 6.0%
- ------------------------------------------------------- ----------- ------------ ------------
Effects of increasing the health care trend
rates by one percentage point in each year
are summarized below: Increase in accumulated
postretirement benefit obligation $ 1,225 $ 1,200 $ 1,050
- ------------------------------------------------------- ----------- ------------ ------------
Increase in the aggregate of service cost and
interest cost $ 119 $ 140 $ 134
- ------------------------------------------------------- ----------- ------------ ------------
</TABLE>
23
<PAGE>
NOTE 11 - STOCK OPTION PLANS
Employee Plan
On June 26, 1997, the Company's stockholders ratified the 1996 Stock Option
Plan (the "Plan"), to replace the expiring 1987 Stock Option Plan. The Plan
provides for the granting of non-qualified stock options, incentive stock
options and stock appreciation rights (SARs) to employees, non-employee
directors and consultants within the meaning of Section 422A of the Internal
Revenue Code. Options granted generally vest over three years and expire ten
years after the grant date. The total number of shares of Common Stock
available for issuance is limited to those remaining under the 1987 Stock
Option Plan on June 26, 1997, plus as increased annually on the last day of the
Company's fiscal year, by an amount equal to 0.70% of the aggregate of the
total number of shares of Common Stock outstanding on the last day of each
fiscal year commencing March 1, 1997, and ending with the fiscal year ending
February 25, 2001.
The following table summarizes information about the Plan:
<TABLE>
<CAPTION>
Available Option
for Grant Outstanding Unexercisable Exercisable Price per Share
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance February 26, 1994 836,318 1,981,212 854,500 1,126,712 $ 3.850 - $ 17.625
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Exercisable during year - - (457,500) 457,500 8.000 - 17.625
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Granted (461,000) 461,000 461,000 - 5.313 - 6.375
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Canceled 63,500 (63,500) (23,000) (40,500) 8.000 - 16.250
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Exercised - (6,650) - (6,650) 4.037
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Annual increase 352,818 - - - -
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Balance February 25, 1995 791,636 2,372,062 835,000 1,537,062 3.850 - 17.625
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Exercisable during year - - (455,666) 455,666 5.313 - 8.000
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Granted (864,000) 864,000 864,000 - 5.000 - 10.250
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Canceled 73,250 (73,250) (32,000) (41,250) 5.3125 - 17.325
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Exercised - (5,062) - (5,062) 3.850
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Annual increase 352,856 - - - -
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Balance March 2, 1996 353,742 3,157,750 1,211,334 1,946,416 4.037 - 17.625
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Exercisable during year - - (464,350) 464,350 5.000 - 10.250
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Granted (146,000) 146,000 146,000 - 3.500 - 4.750
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Canceled 63,500 (63,500) (24,000) (39,500) 5.313 - 17.625
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Annual increase 325,749 - - - -
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
Balance March 1,1997 596,991 3,240,250 868,984 2,371,266 $ 3.500 - $17.625
- ------------------------------ ------------ --------------- --------------- ---------------- --------------------
</TABLE>
Director Plan
On June 22, 1994, the Company's stockholders approved the Company's 1994
Non-employee Director Stock Option Plan (the "Director Plan") to attract and
retain the services of qualified people who are neither employees or officers
of the Company as members of the Board of Directors.
The Director Plan authorized the granting of non-qualified stock options up to
an aggregate of 490,000 shares of Common Stock. Options granted expire in five
years and vest one year from the date of grant.
No options may be granted after June 2003.
24
<PAGE>
The following table summarizes information about the Director Plan:
<TABLE>
<CAPTION>
Available Option
for Grant Outstanding Unexercisable Exercisable Price per Share
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Plan as adopted 490,000 - - -
- -------------------------------- ----------- ------------ -------------- ------------- ------------------
Granted (49,000) 49,000 49,000 - $ 7.125
- -------------------------------- ----------- ------------ -------------- ------------- ------------------
Balance February 25, 1995 441,000 49,000 49,000 - 7.125
- -------------------------------- ----------- ------------ -------------- ------------- ------------------
Granted (42,000) 42,000 42,000 - 6.375
- -------------------------------- ----------- ------------ -------------- ------------- ------------------
Exercisable - - (49,000) 49,000 7.125
- -------------------------------- ----------- ------------ -------------- ------------- ------------------
Canceled 7,000 (7,000) - (7,000) 7.125
- -------------------------------- ----------- ------------ -------------- ------------- ------------------
Balance March 2, 1996 406,000 84,000 42,000 42,000 6.375 - 7.125
- -------------------------------- ----------- ------------ -------------- ------------- ------------------
Granted (42,000) 42,000 42,000 - 5.250
- -------------------------------- ----------- ------------ -------------- ------------- ------------------
Exercisable - - (42,000) 42,000 6.375
- -------------------------------- ----------- ------------ -------------- ------------- -------------------
Canceled 14,000 (14,000) - (14,000) 6.375 - 7.125
- -------------------------------- ----------- ------------ -------------- ------------- -------------------
Balance March 1, 1997 378,000 112,000 42,000 70,000 $ 5.250 - $7.125
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Effective March 3, 1996, the Company adopted the provisions of FAS No. 123,
"Accounting for Stock-Based Compensation". As permitted by this statement, the
Company has chosen to continue to account for stock-based compensation using
the intrinsic value method. Accordingly, no compensation expense has been
recognized in the Company's Consolidated Statements of Operations for its
stock-based compensation plans. The average fair value of options granted
during 1997 and 1996 was $2.05 and $2.55 respectively. The fair value was
estimated using the Black-Scholes option pricing model based on the following
assumptions for fiscal 1997 and fiscal 1996: risk-free interest of 6.7%,
expected lifte of six years, estimated volatility of 52%, with no dividend
yield. Had compensation cost been determined under the provisions of SFAS
No. 123, the pro forma net income an earnings per share would have been as
follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------
(In thousands of dollars except share date)
As reported Pro forma As reported Pro forma
- ------------------------------------------ ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) $ (10,943) $ (11,637) $ 8,394 $ 8,045
- ------------------------------------------ ---------------- -------------- -------------- --------------
Earnings (loss)
Per share $ (0.23) $ (0.25) $ 0.18 $ 0.17
- ------------------------------------------ ---------------- -------------- -------------- --------------
</TABLE>
Stock options are not considered in the computation of earnings per share
because dilution from assumed exercise is not material.
25
<PAGE>
NOTE 12 - CAPITAL STOCK
The Company has a Shareholder Rights Plan which entitles stockholders, in
certain circumstances, to purchase one one-hundredth of a share of the
Company's Series A Junior Participating Preferred Stock at an exercise price of
$62 for each share of Common Stock owned. The Shareholder Rights Plan is
intended to protect the interests of the Company's stockholders in the event
the Company is confronted with coercive or unfair takeover tactics.
In connection with a 1994 agreement between the Company and its President and
Chief Operating Officer, the Company issued 100,000 Stock Appreciation Rights,
vesting at the rate of 20,000 per year, commencing on March 30, 1995, at base
prices ranging from $7.00 to $10.25. The Company will make payment for the
difference, if any, between the average market price, as defined, and the
applicable base price on the first business day following the applicable
vesting date. No payments were made during fiscal year ended 1997.
In connection with an advisory agreement entered into between the Company and
Creative Artists Agency, Inc., ("CAA"), which was terminated on November 30,
1995, options to acquire 866,667 shares of Common Stock at an exercise price of
$8.00 per share were issued to CAA. These fully vested options will expire on
April 1, 2003.
During fiscal 1997, the Company purchased 512,000 shares of its common stock
for $2,238,000. There were no such purchases in fiscal 1996.
NOTE 13 - GEOGRAPHIC AREA INFORMATION
Net sales to unaffiliated customers and income from operations, as presented
below, are based on the locations of the ultimate customer. Income from
operations is defined as total net sales less operating expenses and
depreciation and amortization. Identifiable assets, as presented below, are
those assets located in each geographic area.
<TABLE>
<CAPTION>
Year Ended
- ----------------------------------------------------------------------------------------------
March March February
1, 1997 2, 1996 25, 1995
(52 weeks) (53 weeks) (52 weeks)
- ----------------------------------------------------------------------------------------------
(In thousands of dollars)
Net Sales
<S> <C> <C> <C>
United States $ 178,883 $ 188,818 $ 236,829
- --------------------------------------------------- -------------- ------------- -------------
Europe 77,955 62,161 23,337
- --------------------------------------------------- -------------- ------------- -------------
Other 12,137 14,516 5,220
- --------------------------------------------------- -------------- ------------- -------------
$ 268,975 $ 265,495 $ 265,386
- --------------------------------------------------- -------------- ------------- -------------
Income (loss) from operations
- ----------------------------------------------------------------------------------------------
United States $ (19,204) $ 9,070 $ 25,413
- --------------------------------------------------- -------------- ------------- -------------
Europe 5,187 6,606 1,040
- --------------------------------------------------- -------------- ------------- -------------
Other (458) 895 471
- --------------------------------------------------- -------------- ------------- -------------
$ (14,475) $ 16,571 $ 26,924
- --------------------------------------------------- -------------- ------------- -------------
Identifiable assets
- ----------------------------------------------------------------------------------------------
United States $ 140,643 $ 163,145 $ 121,158
- --------------------------------------------------- -------------- ------------- -------------
Europe 55,630 51,616 15,166
- --------------------------------------------------- -------------- ------------- -------------
Other 4,905 2,366 -
- --------------------------------------------------- -------------- ------------- -------------
$ 201,178 $ 217,127 $ 136,324
- --------------------------------------------------- -------------- ------------- -------------
</TABLE>
26
<PAGE>
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments". These estimates have
been determined by the Company using available market information and
appropriate valuation techniques based on information as of March 1, 1997. As
considerable judgment is inherent in the development of these estimates, they
are not necessarily indicative of the amounts that the Company could realize in
the current market exchange.
The recorded amounts and fair values are as follows:
<TABLE>
<CAPTION>
March 1, 1997 March 2, 1996
- ------------------------------------------------------------------------------------------------------------
Recorded Fair Recorded Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------
(In thousands of dollars)
Assets:
- ---------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and equivalents $ 24,199 $ 24,199 $ 24,154 $ 24,154
- ---------------------------------------------------- ------------- ------------- ------------- -------------
Prepaid expenses and other current assets 9,012 8,549 11,267 10,516
- ---------------------------------------------------- ------------- ------------- ------------- -------------
Liabilities:
- ---------------------------------------------------- ------------- ------------- ------------- -------------
Current portion of long-term debt 7,500 7,500 6,800 6,800
- ---------------------------------------------------- ------------- ------------- ------------- -------------
Long-term debt 27,450 27,450 37,500 37,500
- ---------------------------------------------------- ------------- ------------- ------------- -------------
Foreign currency forward contracts - 25,318 - 20,274
- ---------------------------------------------------- ------------- ------------- ------------- -------------
Interest rate swap contracts $ - $ (37) $ - $ -
- ---------------------------------------------------- ------------- ------------- ------------- -------------
</TABLE>
NOTE 15 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 79,261 $ 55,025 $ 62,491 $ 72,198 $ 67,432 $ 60,661 $ 69,458 $ 67,944
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit on sales 26,174 20,328 20,755 22,864 23,599 18,925 19,860 19,621
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations 7,363 2,768 (28,117) 3,511 8,003 2,774 2,672 3,122
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income 3,740 1,227 (18,498) 2,588 4,640 1,005 1,297 1,452
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per share $ 0.08 $ 0.03 $ (0.39) $ 0.06 $ 0.10 $ 0.02 $ 0.03 $ 0.03
- ------------------------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Certain items in the prior year's financial statements have been reclassified
to conform with the current year's presentation.
Amounts in 1997 and 1996 include the impact of Merlin from the date of
acquisition during the second quarter of 1996.
27
<PAGE>
NOTE 16 - COMMITMENTS AND OTHER MATTERS
Future minimum payments under non-cancelable leases which extend into the year
2010 are $1,668,000 (1998), $1,591,000 (1999), $1,485,000 (2000), $1,404,000
(2001), $1,310,000 (2002) and $9,400,000 thereafter.
Future minimum payments required under the Company's sports contracts, with
various expiration dates extending into 2001 are $22,590,000 (1998),
$12,244,000 (1999), $4,067,000 (2000) and $2,400,000 (2001).
Total royalty expense under the Company's sports and entertainment licensing
contracts was $37,960,000 (1997), $34,614,000 (1996) and $35,967,000 (1995).
Advertising expenses included in selling, general and administrative expenses
amounted to $13,573,000 (1997), $13,488,000 (1996) and $10,805,000 (1995).
Two of the Company's European subsidiaries transact business in many countries,
utilizing many different currencies. They are thus exposed to the effect of
exchange rate fluctuations on sales and purchase transactions denominated in
currencies other than their functional currency. These subsidiaries entered
into foreign currency forward contracts to manage these exposures and to
minimize the effects of foreign currency transactions on their cash flow. Such
contracts are entered into primarily to hedge against future commitments. The
Company does not engage in foreign currency speculation. Gains and losses on
these hedging instruments that are designated and effective as hedges in firm
commitments are deferred and recognized in income in the same period as the
hedge transaction. The Company may be exposed to credit losses in the event of
non-performance by counterparties to these instruments. Management believes,
however, that the risk of incurring such losses is remote as the contracts are
entered into with major financial institutions.
At March 1, 1997, the Company had outstanding foreign currency forward sales
and purchase contracts with banks in the amounts of $9,174,000 and $15,389,000,
respectively, as compared to $9,053,000 and $10,990,000 as of March 2, 1996.
These contracts have various maturity dates ranging up to twelve months from
March 1, 1997, with over 70% of the contracts maturing within six months. The
recognition of net gains, which amounted to $756,000 using spot rates as of
year end, is deferred until the period of the hedge transaction.
Legal proceedings:
In August 1996, the Company was named a defendant in a class action in the
United States District Court for the Eastern District of New York entitled
Sullivan, et.al. v. The Topps Company, Inc., No. CV-96-3779 (EDNY) (the
"Action"). The Action alleges, among other things, that the Company has
violated the federal Racketeer Influenced and Corrupt Organizations Act by its
practice of selling sports and entertainment cards with randomly-inserted,
limited edition "insert" cards, allegedly in violation of state and federal
anti-gambling statutes. Each of the Company's principal competitors, as well
as several of its principal licensors, has been separately sued in its home
state for employing, or participating in, the same or similar practices. The
Action seeks treble damages and attorneys fees on behalf of all purchasers of
packs of cards potentially including "insert" cards over a four-year period.
In March 1997, a similar action against The Upper Deck Company (Schwartz,
et.al. v. Upper Deck, No. 96CV3408-B (AJB) (S.D.Cal.)) was dismissed without
prejudice with leave to replead. The plaintiffs in that action then filed an
amended complaint in March 1997. In April 1997, a similar action against
Pinnacle Brands, Inc. (Price, et.al. v. Pinnacle Brands, No. 3:96-CV-2150-T
(N.D. Tex.)), was dismissed with prejudice. The plaintiffs in the Pinnacle
action have filed a Motion for Reconsideration. The Company's motion to
dismiss in the Sullivan Action is currently pending. The Company believes it
has meritorious defenses and intends to defend the Action vigorously. Given
the early stage of the litigation, however, the Company is unable to assess the
likelihood of a materially adverse outcome or to estimate the amount or range,
if any, of any probable loss.
28
<PAGE>
In November 1996, Teamsters Local 229 (the "Union") filed an unfair labor
practice charge with the National Labor Relations Board (the "NLRB") relating
to the Duryea plant closing. In April 1997, the Company was advised that the
NLRB intends to issue a complaint against the Company based upon the Union's
charge. According to the NLRB, the complaint will allege that the Company
implemented a decision to close the Duryea plant prior to reaching a bargaining
impasse with the Union concerning the decision. The remedy the complaint will
seek to obtain will include gross back pay for affected employees (less such
employees' other earnings) from October 28, 1996 to the date that the parties
renew negotiations and either (i) reach impasse or (ii) work is restored in
Duryea under a new Collective Bargaining Agreement. Gross backpay (without
reduction for other earnings) is approximately $3.75 million per quarter. The
Company believes it has meritorious defenses and intends to defend the Action
vigorously. Given the early stage of the litigation, however, the Company is
unable to assess the likelihood of a materially adverse outcome .
The Company is a defendant in several other civil actions which are routine and
incidental to its business. In management's opinion, after consultation with
legal counsel, settlement of these actions will not have a material adverse
effect on the Company's consolidated financial position or results of
operations.
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
The Topps Company, Inc.
We have audited the accompanying consolidated balance sheets of The Topps
Company, Inc., and Subsidiaries as of March 1, 1997 and March 2, 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 1, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material aspects, the financial position of The Topps Company, Inc. and
Subsidiaries as of March 1, 1997 and March 2, 1996 and the results of their
operations and cash flows for each of the three years in the period ended March
1, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, during the
year ended March 1, 1997, the Company changed its method of accounting for
impairment of long-lived assets as required by Statement of Financial
Accounting Standards No. 121.
30
DELOITTE & TOUCHE LLP
New York, New York
April 1, 1997
<PAGE>
Market and Dividend Information
The Company's Common Stock is quoted on the NASDAQ National Market under the
symbol TOPP. The following table sets forth, for the periods indicated, the
high and low sales price for the Common Stock during the last two fiscal years
as reported on the NASDAQ National Market. As of April 17, 1997, there were
approximately 5,983 holders of record.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
March 1, 1997 March 2, 1996
- --------------------- ------------------------------ -----------------------------
High Price Low Price High Price Low Price
- --------------------- --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
First quarter $ 6.625 $ 4.687 $ 6.875 $ 5.000
- --------------------- --------------- -------------- --------------- -------------
Second quarter 6.500 4.625 6.500 5.625
- --------------------- --------------- -------------- --------------- -------------
Third quarter 5.000 3.125 7.125 4.875
- --------------------- --------------- -------------- --------------- -------------
Fourth quarter 5.000 3.500 6.000 4.250
- --------------------- --------------- -------------- --------------- -------------
</TABLE>
The Company's Credit Agreement currently prohibits the payment of dividends.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations- Liquidity and Capital Resources" and "Notes to Consolidated
Financial Statements - Note 8."
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
(In thousands of dollars, except share data)
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 268,975 $ 265,495 $ 265,386 $ 268,047 $ 263,158
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Gross profit on sales 90,121 82,005 83,217 94,488 80,283
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Selling, general and administrative expenses 75,974 68,563 59,250 51,876 52,180
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Income (loss) from operations (14,475) 16,571 26,924 45,930 32,800
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Interest income (expense), net (1,942) (1,447) 461 157 13
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Net income (loss) (10,943) 8,394 15,747 26,592 19,037
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Per share:
- --------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (0.31) 0.35 0.57 0.98 0.69
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Net income (loss) (0.23) 0.18 0.33 0.57 0.40
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Cash dividends $ - $ - $ 0.21 0.28 0.28
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Weighted average shares outstanding 46,928,369 47,047,251 47,039,287 47,030,902 47,382,428
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
BALANCE SHEET DATA:
Cash and equivalents $ 24,199 $ 24,154 $ 17,785 $ 27,737 $ 13,837
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Working capital 18,716 31,278 30,917 23,624 9,922
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Net property, plant and equipment 12,900 31,610 31,964 29,479 28,155
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Long-term debt, less current portion 27,450 37,500 - - -
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Total assets 201,178 217,127 136,324 41,677 142,051
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
Stockholders' equity $ 68,052 $ 81,850 $ 73,869 $ 66,955 $ 54,366
- ------------------------------------------------- -------------- -------------- ------------- -------------- -------------
</TABLE>
Amounts in 1997 and 1996 include the impact of Merlin from the date of
acquisition on July 6, 1995.
Certain items in the prior years' financial statements have been reclassified
to conform with the current year's presentation.
Income (loss) from operations for the fiscal year ended March 1, 1997, includes
a plant closure reserve of $30,000,000 and an impairment loss of $1,350,000.
See Note 2.
32
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS
- --------------------------------------------------------------------------------
Arthur T. Shorin * Seymour P. Berger
Chairman of the Board of Directors Vice President - Sports and Licensing
Allan A. Feder Stephen D. Greenberg
Independent Business Consultant President, Classic Sports Network, Inc.
President and Chief Executive Officer,
Vitarroz Corporation John J. Langdon
President and Chief Operating Officer
Wm. Brian Little *
Private Investor David Mauer
Chief Executive Officer,
Riddell Sports, Inc.
Jack H. Nusbaum
Senior Partner and Chairman Stanley Tulchin
Willkie Farr & Gallagher Chairman,
Stanley Tulchin Associates, Inc.
* Nominated to stand for re-election to the Company's Board of Directors at
the 1997 Annual Meeting of Stockholders.
- --------------------------------------------------------------------------------
OFFICERS
- --------------------------------------------------------------------------------
Arthur T. Shorin John J. Langdon
Chairman and Chief Executive Officer President and Chief
Operating Officer
Seymour P. Berger Ronald L. Boyum
Vice President - Sports and Licensing Vice President - Marketing
and Sales
Edward P. Camp Michael P. Clancy
Vice President Vice President
President Hobby Division Joint Managing Director -
Topps Europe
Ira Friedman
Vice President Michael J. Drewniak
Publishing and New Product Development Vice President - Manufacturing
Jeffrey M. Goodman Leon J. Gutmann
Vice President - Sales Assistant Treasurer and
Assistant Secretary
Catherine K. Jessup
Vice President - Chief Financial Officer Steven Kosoff
Vice President - Marketing -
William G. O'Connor New Products
Vice President - Administration
John Perillo
Thomas R. Pisano Vice President - Operations
Vice President - International
Scott Silverstein
Peter Warsop Vice President - General Counsel
Joint Managing Director - Topps Europe
- -------------------------------------------------------------------------------
STOCKHOLDER AND OTHER INFORMATION
Annual Meeting Corporate Counsel
Wednesday, June 25, 1997, 10:30 A.M. Willkie Farr & Gallagher
Chase Manhattan Bank One Citicorp Center
1 Chase Manhattan Plaza 153 East 53rd Street
New York, NY 10081 New York, NY 10022
Registrar and Transfer Agent
ChaseMellon Shareholder Services, LLC
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 851-9677
Form 10-K -- A copy of the Company's Annual Report on Form 10-K as filed with
the Securities and Exchange Commission will be available to stockholders of
record upon written request to the Assistant Treasurer.
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES OF THE COMPANY
(100% WHOLLY-OWNED)
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
Topps Ireland Limited Ireland
Topps Europe Limited United Kingdom
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-17094, 33-59625 and 33-26873 of The Topps Company, Inc. on Form S-8 of our
report dated April 1, 1997 appearing in this Annual Report on Form 10-K of The
Topps Company, Inc. for the year ended March 1, 1997.
DELOITTE & TOUCHE LLP
New York, New York
May 15, 1997
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