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
For the fiscal year ended February 26, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-15817
THE TOPPS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2849283
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Whitehall Street, New York, NY 10004
(Address of principal executive offices) (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 22,
2000 was approximately $387,000,000.
The number of outstanding shares of Common Stock as of May 22, 2000 was
45,373,233.
Documents incorporated by reference Part
----------------------------------- ----
Annual Report to Stockholders for the Year Ended February 26, 2000 I,II,IV
Proxy Statement for the 2000 Annual Meeting of Stockholders III
<PAGE>
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 sports and entertainment picture
products featuring professional athletes and, from time to time, popular
television, movie and other entertainment characters. These collectible picture
products include trading cards, sticker/album collections, tatoos, comic books
and magazines. The Company also markets premium-branded lollipops such as Ring
Pop, Push Pop, and Baby Bottle Pop, Bazooka brand bubble gum and certain novelty
candy products.
The collectible sports card category in which the Company competes has
undergone a contraction over a number of years. In 1998, the industry data on
which the Company relied was discontinued, leaving a void in accurate
information regarding industry size and growth. Despite the lack of industry
data, the Company believes that the sports card industry continued to decline in
1998 due to the impact of the NBA lockout and the liquidation of one of the
Company's main competitors, Pinnacle Brands. In 1999, the Company believes that
the industry stabilized.
Topps has expanded its international presence over the last five years. In
1995, the Company acquired Merlin Publishing International Limited, a U.K.-based
marketer of licensed collectibles, primarily sticker/album collections. While
continuing to market products under the Merlin brand name, Merlin Publishing
International Limited changed its corporate name to Topps Europe Ltd. ("Topps
Europe") in March 1997. During fiscal 1996 and 1997, the Company established
subsidiaries in Canada, Mexico, Brazil and Argentina. However, in fiscal 2001,
the Company expects to convert back to exporting directly to Mexico from the
U.S. The Company has also expanded its distribution of confectionery products in
the Far East, particularly Japan. As of the end of fiscal 2000, the Company had
employees in seven countries and distributed its products in sixty countries.
================================================================================
Trademarks of The Topps Company, Inc. and Subsidiaries appearing in this report:
Baby Bottle Pop, Bazooka, Bazooka Joe, Bowman, Bowman Chrome, Bowman's Best,
Flip Pop, Garbage Pail Kids, Mars Attacks, Merlin, Popzoids, Push Pop, Ring Pop,
Topps, Topps Chrome, Topps Finest, Topps Gallery, Topps Gold Label, Topps
Stadium Club, Treasure Pop, Triple Power Push Pop, and Wacky Packages.
Unless otherwise indicated, all date references refer to calendar years.
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PRODUCTS
Collectible Sports Products
- ---------------------------
The Company is a leading marketer of collectible picture products featuring
players of Major League Baseball, the National Basketball Association, the
National Football League, the National Hockey League and certain professional
soccer leagues. In the U.S. and Canada, picture products are generally sold in
the form of cards, while in the rest of the world picture products are typically
sold in the form of sticker/album collections.
Card products feature photographs of athletes and contain summary
statistics and biographical material. 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 brand names including, but not
limited to, Topps, Topps Stadium Club, Topps Finest, Topps Gallery, Bowman,
Bowman Chrome, Bowman's Best, Topps Gold Label and Topps Chrome. Each brand of
sports cards has its own unique positioning in the marketplace. All cards are
high quality, showcasing various technologies and state-of-the-art reproduction
techniques. Cards may also include value-added features such as foil stamping,
film lamination, autographs and genuine memorabilia. Prices generally range from
a suggested retail price of $0.99 per pack to $5.00 per pack. The Company is
continuously updating the features of its cards and seeking new technologies.
Sports sticker/album collections, which are sold under the Merlin and Topps
brand names, are marketed throughout Europe and parts of Asia. Stickers are sold
in packages and display photos of popular local athletes and sports teams. The
stickers are designed so that they can be placed in an associated album, which
contains more detailed information and statistics regarding the players and
teams.
The Company has sports licenses for Premier League Soccer in the U.K. as
well as soccer licenses in Italy and Denmark.
Entertainment Products
- ----------------------
The Entertainment Products segment consists of trading cards, sticker/album
products and magazines featuring licenses from popular films, television shows
and other entertainment properties.
Since the 1950's, the Company has marketed trading cards featuring some of
the dominant entertainment properties of the time, including The Beatles, Elvis
Presley, Star Wars, Michael Jackson, E.T.: The Extra-Terrestrial, Indiana Jones,
Batman, Teenage Mutant Ninja Turtles, Jurassic Park and The X-Files.
Occasionally, the Company has also created cards featuring its own entertainment
properties such as Wacky Packages, Garbage Pail Kids and Mars Attacks, as well
as cards detailing events of national interest such as Desert Storm.
Since the acquisition of Merlin in 1995, the Company has also sold
collectible entertainment products in the form of sticker/album collections in
Europe and parts of Asia.
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Over the years, entertainment products have experienced peaks and valleys
in terms of consumer interest. This volatility has prompted the Company to be
extremely selective in determining which entertainment licenses to pursue. In
fiscal 2000, the Company marketed only three new entertainment card and three
new sticker/album properties.
During fiscal 2000, through an agreement with Nintendo of America, the
Company obtained the rights to develop and market products including trading
cards, sticker/album products and lollipops, featuring the highly popular
Pokemon characters. The Company began distributing Pokemon cards in the U.S. and
Canada in August 1999 and will expand upon its domestic product line and
introduce product into Europe, Latin America and parts of Asia in fiscal 2001.
The Company also marketed both trading cards and sticker/album products based on
the Star Wars film, Episode I: The Phantom Menace in fiscal 2000.
The Company has contracted with Marvel Entertainment to publish trading
cards and sticker/albums (as well as confectionery products) based on their
comic book characters. The first release, X-Men trading cards, is scheduled for
the summer of 2000 in conjunction with the opening of the X-Men motion picture
in the U.S.
Over the years, the Company has also published magazines based on subjects
of interest in the entertainment field. In fiscal 2000, the Company issued a
variety of Star Wars magazines.
In the past, the Company has also created and marketed a limited selection
of high-quality color comic books for distribution primarily in specialty shops.
Due to a contraction in the market, the Company suspended its comic book
publishing activities in fiscal 1999.
Confectionery
- -------------
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 generally at a suggested
retail price of five cents a piece. Individual pieces of Bazooka brand bubble
gum include a comic featuring Bazooka Joe, a copyrighted cartoon character
created by the Company in 1953.
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, mass
merchandisers and club stores.
The Company also markets premium quality lollipops throughout the United
States, Canada, Europe and parts of Latin America and Asia. Core products
include Ring Pop (a lollipop made of candy molded into the form of an
exaggerated precious gem stone, anchored to a plastic ring), 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 now and save the rest
for later) and Baby Bottle Pop (a miniature baby bottle filled with
fruit-flavored powder and topped with a candy nipple). Additionally, the Company
markets Flip Pop (a pop within a fun plastic container which can be flipped out,
licked, and placed back in the case for consumption later). In fiscal 2001, the
Company plans to increase its advertising support and merchandising efforts
behind Ring Pop, Push Pop and Baby Bottle Pop and will enhance Baby Bottle Pop
by adding real fruit juice to the product.
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In fiscal 2000 the Company introduced Pokemon pops (premium lollipops with
a Bazooka gum center sold with a Pokemon sticker) and Triple Power Push Pop (a
larger Push Pop with three different flavors which can be pushed up
independently or together). In fiscal 2001, the Company plans to introduce
Pokemon Popzoids (a lollipop with a collectible Pokemon character stick) and
Pokemon Treasure Pops (a lollipop with a surprise Pokemon toy hidden inside the
handle).
For a schedule of net sales by key business segment for the past three
fiscal years, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 7 of the Company's Annual Report to
Stockholders for the year ended February 26, 2000 (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, as well as in certain Latin American and Asian markets.
The Company's internal sales staff handles U.S. sports collectibles sales
and sales of confectionery products to national accounts. Confectionery sales
through other channels are handled by broker organizations. Together, the sales
force and brokers service over 80,000 retail outlets through more than 6,000
separate accounts which include wholesale tobacco and confectionery jobbers,
hobby distributors and retailers, wholesale clubs, news-dealers, mass
merchandisers and direct-buying grocery, convenience, drug, variety, discount
and toy store chains and specialty accounts (e.g. Blockbuster Video).
In Canada, sales of trading cards (primarily hockey and entertainment
cards) and confectionery products are handled by a direct sales force and four
regional brokers. Current distribution in Canada is to over 10,000 retail
outlets.
In the U.K., sales of both confectionery products and collectibles are
handled by a dedicated sales force as well as by wholesalers selling to
independent retailers. Together, the sales force and wholesalers reach
approximately 30,000 retail news and confectionery outlets. Elsewhere in Europe,
as well as in Latin America, Japan and the rest of Asia, sales are primarily
through distributors.
Advertising and Promotion
- -------------------------
The Company utilizes a variety of marketing activities, including
television, radio and print advertising campaigns, sweepstakes and promotions
designed to create consumer awareness and increase retail sales of its products.
Worldwide advertising and marketing expenses (which encompass media spending,
trade spending and consumer promotions including player autograph costs)
included in selling, general, and administrative expenses amounted to
$20,813,000 in fiscal 1998, $18,974,000 in fiscal 1999, and $25,219,000 in
fiscal 2000.
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Traditionally, the Company has also relied on the popularity of its sports
and other licensed products and the consumer recognition of its brand names to
help promote its products.
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 trading card products (excluding those to hobby accounts), on confectionery
products, on magazines sold to mass merchandisers and on sales of most sticker
and album products overseas. 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 1998, 1999 and 2000 were 12.4%, 8.3% and 8.5% respectively.
PRODUCTION
In December 1996, the Company discontinued operations at its Duryea,
Pennsylvania manufacturing facility. Concurrent with the Duryea plant closure,
Bazooka gum manufacture was transferred to a single contractor in the U.S.,
Hershey Foods Corporation. At the same time, the cutting, collating and
packaging of card products previously performed at the Duryea facility were
outsourced to several manufacturers in the U.S.
In April 1998, the Company ceased manufacturing operations at its factory
in the Republic of Ireland. The Company produced limited quantities of gum at
this facility.
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 organizations
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 of
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.
High-quality substrates (paperboard, plastic, foil) are 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. Cards that
require specialized printing and the combination of various substrates like
plastic, polystyrene and holographic foils are purchased in full sheet form from
specialty printers. Full sheets are then delivered to contract packers where
they are cut into individual cards, collated and wrapped in a variety of package
configurations.
Sticker/album production is subcontracted and coordinated by a single
supplier in Italy. Adhesive material and packaging is sourced and printed by
various subcontractors in Italy. The Company believes that there are other
suitable sources available to meet its requirements if the current supplier were
unable to meet the Company's needs.
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Confectionery
- -------------
Since the closure of its manufacturing facility in Duryea, Pennsylvania in
December 1996, the Company has purchased all of its U.S. Bazooka bubble gum
requirements from Hershey Foods Corporation. The current agreement, which
expires in December 2002, requires the Company to source all of its U.S. Bazooka
production needs from Hershey, provided it can fulfill the orders on a timely
basis. Given the shortage of alternative manufacturers for Bazooka gum, failure
by Hershey to supply the Company on a timely basis could have a material adverse
effect on product availability and therefore, on sales of Bazooka. Limited
quantities of Bazooka and other bubble gum products for international sales were
manufactured by the Company's factory in the Republic of Ireland through the end
of fiscal 1998. In April 1998, gum production was discontinued in Ireland.
Ring Pop lollipops for sale in the U.S. are manufactured at the Company's
Scranton, Pennsylvania factory. Gum-filled pops are manufactured by a supplier
in Brazil. Ring Pop lollipops for sale in international markets as well as all
Push Pops, Baby Bottle Pops, Flip Pops, Popzoid Pops, Treasure Pops and Triple
Power Push Pops 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 material
adverse impact on sales of the Company's lollipops.
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.
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 produced 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, NFL Football and NHL Hockey. The Company also has a
contract with Premier League Soccer in the U.K. and with players and teams with
regard to soccer in Italy and Denmark. The Company's inability to renegotiate
successfully 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.
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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. The
Company also has 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
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 these contracts depend on a
variety of factors. Total royalty expense under the Company's sports and
entertainment licensing contracts for the fiscal years ended 1998, 1999, and
2000 was $33,662,000, $24,373,000, and $43,403,000 respectively. See Note 17 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 and entertainment
contracts.
International Licensing Operations
- ----------------------------------
The Company currently has license agreements with manufacturers in two
foreign countries to manufacture and distribute the Company's products. These
licensees have the right to sell licensed products within their countries.
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.
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SEASONALITY
The Company's U.S. sports card products are sold throughout the year,
spanning the four major sports seasons in which the Company currently
participates, i.e., baseball, football, basketball and hockey. Topps Europe's
sales of sports sticker/album products are driven largely by shipments of
Premier League Soccer, with much of the sales activity occurring in December
through March. Sales of entertainment 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 or particular licensed property. Sales of
confectionery products are impacted by the introduction of new products and the
use of consumer advertising that can occur at any point in the year.
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. This claim was settled and the charge was
dismissed in December 1997.
The Company employed approximately 420 people in fiscal 2000.
All of the production employees at the Company's factory in Scranton,
Pennsylvania are represented by a union. Although the union agreement was due to
expire in 2000, union membership voted recently to approve an extension of the
agreement to February 2003.
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:
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1. Dependence on Licenses. The Company's trading card and sticker/album
businesses are highly dependent upon licensing arrangements with third
parties. These licenses, which have varying expiration dates, are
obtained from the various professional sports leagues, players
associations and, in certain instances, the players themselves as well
as entertainment companies. 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.
2. Contraction in Sports Card Industry. Although the Company believes
that it stabilized in 1999, the sports card industry as a whole
contracted over the past several years. Further prolonged and material
contraction in the sports card industry, whether caused by labor
strife or otherwise, could materially adversely affect the Company's
future plans and results.
3. Declines in Sales of European Sticker/Album products. Sales of Topps
Europe's soccer sticker/album collections declined last year. Further
significant declines in sales of these products could materially
affect the Company's future plans and results.
4. 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.
5. Suppliers. The Company has a single source of supply for certain of
its lollipop products. The loss of this supplier due to civil unrest
or for any other reason could materially affect the Company's future
plans and results.
6. Customers. The Company has several large customers, some of which are
serviced by single distributors. The loss of any of these customers or
distributors could materially affect the Company's future plans and
results.
7. Internet. The Company is making a significant investment in an
Internet strategy. There is no guarantee that the strategy will be
implemented or, if implemented, that it will be successful. Failure to
implement or failure to achieve expected levels of success could
materially affect the Company's future plans and results.
8. International Political and Economic Risk. Due to the Company's
increased international presence, there is an increase in risk
generally associated with operating outside of the U.S. Events such as
civil unrest, currency devaluation and political upheaval could
materially affect the Company's future plans and results.
9. Legal Proceedings. See Item 3: Legal Proceedings for a discussion of
legal matters that could materially affect the Company's future plans
and results.
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FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
The Company operates in three business segments. They are: (i) the
marketing and distribution of collectible sports products; (ii) the marketing
and distribution of entertainment products; and (iii) the marketing and
distribution of confectionery products. Segment and geographic area information
contained in Note 14 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 those executive officers who are also directors appearing in the
Proxy Statement for the annual meeting of stockholders scheduled to be held on
June 29, 2000 ("2000 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.
Position with the Company and business
Name experience during the past five years
---- -------------------------------------
Ronald L. Boyum Vice President Marketing and Sales and General Manager,
Confectionery of the Company since February 2000; Vice
President - Marketing and Sales of the Company since March
1995; Vice President- Marketing of the Company since April
1994. Mr. Boyum is 48 years of age.
Edward P. Camp Vice President 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 53 years of age.
Michael P. Clancy Vice President - International of the Company since December
1998 and Vice President since February 1995. Mr. Clancy has
been Managing Director - Topps Ireland since July 1990 and
was Joint Managing Director - Topps Europe Ltd. from January
1997 to December 1998. Mr. Clancy is 45 years of age.
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 63 years of age.
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Position with the Company and business
Name experience during the past five years
---- -------------------------------------
Ira Friedman Vice President - Publishing and New Product Development of
the Company since September 1991. Mr. Friedman joined the
Company in October 1988. Mr. Friedman is 46 years 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
44 years of age.
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 51 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 43
years of age.
Scott Silverstein Executive Vice President of the Company since February 2000.
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, Chief Executive Officer and
President. Mr. Silverstein is 38 years of age.
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ITEM 2. PROPERTIES
The location and general description of the principal properties owned or
leased by the Company are as follows:
<TABLE>
<S> <C> <C> <C>
Owned or Leased;
Area/Facility If Leased,
Location Type of Facility Square Footage Expiration Year
Duryea, Pennsylvania ................. Office and warehouse 60,000 Leased; 2003
Scranton, Pennsylvania ............... Manufacturing plant 41,000 Owned
Cork, Ireland ........................ Office 8,000 Leased; 2005
New York, New York ................... Executive offices 60,000 Leased; 2010
Milton Keynes, United Kingdom ........ Office and warehouse 10,000 Leased; 2014
</TABLE>
The Company also leases offices in Canada, Brazil, Argentina and Italy. The
Company believes that its active facilities are in good repair and are suitable
for its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In August 1996, the Company was named as a defendant in a class action in
the United States District Court for the Eastern District of New York (the "New
York Court") entitled Sullivan, et.al. v. The Topps Company, Inc., No. CV 96
3779 (E.D.N.Y.) (the "Action"). The Action alleged, among other things, that the
Company violated the federal Racketeer Influenced and Corrupt Organizations
("RICO") Act by its practice of selling sports and entertainment cards with
randomly-inserted "insert" cards, in violation of state and federal
anti-gambling statutes. Each of the Company's principal competitors and
principal licensors was separately sued in various federal courts for employing,
or participating in, the same or similar practices. The Action sought treble
damages and attorneys' fees on behalf of all purchasers of packs of cards
potentially including "insert" cards over a four-year period. The New York Court
granted the Company's motion to dismiss the Action with prejudice in August
1997. The New York Court later denied motions by plaintiffs to alter, amend or
vacate the judgement, and for leave to file an amended complaint. Plaintiffs'
time to appeal all of these rulings has expired, and the judgement for the
Company dismissing the Action is now final and nonappealable.
In September 1998, the Company filed an action in the New York Court
seeking declaratory and injunctive relief against a class of all original
end-use purchasers of trading cards marketed within the four years prior to the
filing of the complaint in packages that may contain randomly-inserted "insert"
cards, entitled The Topps Company, Inc. v. Sullivan et. al., No. CV 98 6023
(EHN) (E.D.N.Y.) (the "Declaratory Judgment Action"). The Declaratory Judgment
Action seeks a declaratory judgment that the defendant class of card purchasers
did not suffer any injury cognizable under RICO by this practice, and an
13
<PAGE>
injunction enjoining the defendant class from filing or pursuing any further
RICO actions against the Company relating to the purchase of trading cards. Two
similar declaratory judgment actions have been filed by several of the Company's
principal licensors in the New York Court against the same class of defendants.
On December 14, 1998, defendants in all of the declaratory judgment actions
moved to dismiss the complaints. The New York Court denied all of these motions
in an order entered on March 17, 2000.
In November 1998, the Company was named as a defendant in a purported class
action commenced in the United States District Court for the Southern District
of California (the "California Court") entitled Rodriquez et al. v. The Topps
Company, Inc., No. CV 2121-B (AJB) (S.D. Cal.) (the "Class Action") The Class
Action alleges that the Company violated RICO, and the California Unfair
Business Practices Act, by its practice of selling sports and entertainment
trading cards with randomly-inserted "insert" cards, allegedly in violation of
state and federal anti-gambling laws. The Class Action seeks treble damages and
attorneys' fees on behalf of all individuals who purchased packs of cards at
least in part to obtain an "insert" card over a four-year period. On January 22,
1999, plaintiffs moved to consolidate the Class Action with similar class
actions pending against several of the Company's principal competitors and
licensors in the California Court. On January 25, 1999, the Company moved to
dismiss the complaint, or, alternatively, to transfer the Class Action to the
Eastern District of New York or stay the Class Action pending the outcome of the
Declaratory Judgment Action pending in the Eastern District of New York. By
orders dated May 14, 1999, the California Court denied the Company's motions to
dismiss or transfer the Class Action but granted the Company's motion to stay
the Class Action pending the outcome of the Declaratory Judgment Action. The
California Court also denied plaintiffs' motion to consolidate the Class Action
with similar purported class actions. On April 18, 2000, the California Court
entered an order requiring plaintiffs in the Class Action as well as in the
other purported class actions to show cause why all such actions should not be
dismissed. A hearing on the issue is scheduled for early June 2000 in the
California Court. An adverse outcome in the Class Action could materially effect
the Company's future plans and results.
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, these actions will not have a material adverse
effect on the Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
14
<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 7 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.
15
<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 2000 Proxy
Statement and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item appears in the 2000 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 2000 Proxy Statement and
is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item appears in the 2000 Proxy Statement and
is hereby incorporated by reference.
16
<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 19.
(3) Listing of Exhibits
See index on pages 20-22.
(b) Reports on Form 8-K
None
17
<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 15, 2000
THE TOPPS COMPANY, INC.
Registrant
___________________________
Arthur T. Shorin
Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed on the 15th day of May 2000 by the following persons on
behalf of the Registrant and in the capacities indicated.
/Arthur T. Shorin/ /Catherine K. Jessup/
Arthur T. Shorin Catherine K. Jessup
Chairman, Chief Executive Vice President-Chief Financial Officer
Officer and President (Principal Financial and
(Principal Executive Officer) Accounting Officer)
/Allan A. Feder/ /David M. Mauer/
Allan A. Feder David M. Mauer
Director Director
/Stephen D. Greenberg/ /Jack H. Nusbaum/
Stephen D. Greenberg Jack H. Nusbaum
Director Director
/Ann Kirschner/ /Richard Tarlow/
Ann Kirschner Richard Tarlow
Director Director
/Wm. Brian Little/ /Stanley Tulchin/
Wm. Brian Little Stanley Tulchin
Director Director
18
<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 28,
1998, February 27, 1999 and February 26, 2000.
Consolidated Balance Sheets-- February 27, 1999 and February 26, 2000.
Consolidated Statements of Cash Flows -- Years Ended February 28,
1998, February 27, 1999 and February 26, 2000.
Consolidated Statements of Stockholders' Equity -- Years Ended
February 28, 1998, February 27, 1999 and February 26, 2000.
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
February 28, 1998, February 27, 1999 and February 26, 2000............. 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.
19
<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 The Topps Company, Inc. Executive Officers' Annual Bonus Plan.*
10.2 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).
10.3 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)).
10.4 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Amendment and Restatement of the 1994 Non-Employee Director Stock
Option Plan. (Incorporated by reference to the Company's 1998 Proxy
Statement filed on May 28, 1998).
20
<PAGE>
Index to Exhibits (Continued)
10.10 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).
10.11 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).
10.12 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).
10.13 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. (Incorporated
by reference to the Company's Annual Report on Form 10-K for the
fiscal year ended March 1, 1997).
10.14 Retail Product License Agreement with the Major League Baseball
Properties, Inc. dated September 28, 1995 (Incorporated by reference
to Exhibit 10.31 to the Company's Quarterly Report on Form 10-Q for
the quarter ended August 30, 1997).
10.15 Credit Agreement, Dated May 11, 1998, among The Topps Company, Inc.
and The Chase Manhattan Bank. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998).
10.16 Amendment Number One to Credit Agreement dated May 11, 1998.
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the fiscal year ended May 30, 1998).
10.17 Second Amendment to Credit Agreement, dated as of November 6, 1998.
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended November 28, 1998).
10.18 Third Amendment to the Credit Agreement dated February 25, 1999.
10.19 Consulting Agreement with Seymour Berger dated December 31, 1997.
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended August 29, 1998).
10.20 Amended and Restated Manufacturing Agreement with Hershey Foods
Corporation, dated March 13, 1998. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended August
29, 1998).
21
<PAGE>
Index to Exhibits (continued)
10.21 Memorandum of Agreement with Major League Baseball Players
Association. (Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended August 29, 1998).
10.22 Retail Product License Agreement between the Company and NBA
Properties, Inc. dated November 19, 1998. (Incorporated by reference
to the Company's Quarterly Report on Form 10-Q for the quarter ended
November 28, 1998).
10.23 License Agreement between the Company and National Football League
Players Incorporated, dated September 27, 1998. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended November 28, 1998).
10.24 Amended and Restated Employment Agreement with Arthur T. Shorin
dated March 1, 1999.(Incorporated by reference to the Company's Annual
Report on Form 10-K for the Fiscal Year ended February 27, 1999).
10.25 Pokemon Merchandise License Agreement - U.S. between the Company and
Nintendo of America, Inc., dated April 16, 1999. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 28, 1999).
10.26 Pokemon Merchanside License Agreement - U.K. between the Company and
Nintendo of America, Inc., dated June 4, 1999. (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended August 28, 1999).
13 Annual Report (Except for those portions specifically incorporated by
reference, the 2000 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.*
*filed herewith
22
<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 February 26, 2000 and February 27, 1999 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended February 26, 2000, and have issued
our report thereon dated March 30, 2000; such consolidated financial statements
and report are included in your 2000 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
March 30, 2000
S-1
<PAGE>
<TABLE>
<CAPTION>
THE TOPPS COMPANY, INC. AND SUBSIDIARIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
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
----------- ------------ ---------- ------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Year Ended February 28, 1998:
Amortization of Sports,
Entertainment and
Proprietary Products ...... $ 26,875 $ 1,898 $ 28,773
Amortization of Other
Intangible Assets ......... 8,582 720 $ 9,302
-------- -------- --------
$ 35,457 $ 2,618 $ 38,075
======== ======== ========
Allowance for Estimated Losses
on Sales Returns ........... $ 23,239 $ 35,468 $(39,449)(a) $ 19,258
======== ======== ========= ========
Allowance for Doubtful Accounts $ 1,126 $ 703 $ (668) $ 1,161
======== ======== ========= ========
Inventory Valuation Adjustment $ 18,452 $ 5,340 $(15,842)(b) $ 7,950
======== ======== ========= ========
============================================================================================================
Year Ended February 28, 1999:
Amortization of Sports,
Entertainment and
Proprietary Products ...... $ 28,773 $ 1,898 $ 30,671
Amortization of Other
Intangible Assets ......... $ 9,302 $ 721 $ 10,023
-------- -------- --------
$ 38,075 $ 2,618 $ 40,693
======== ======== ========
Allowance for Estimated Losses
on Sales Returns ........... $ 19,258 $ 21,518 $(28,147)(a) $ 12,629
======== ======== ========= ========
Allowance for Doubtful Accounts $ 1,161 $ 424 $ (448) $ 1,137
======== ======== ========= ========
Inventory Valuation Adjustment $ 7,950 $ 2,656 $ (5,309)(b) $ 5,297
======== ======== ========= ========
============================================================================================================
Year Ended February 26, 2000:
Amortization of Sports,
Entertainment and
Proprietary Products ...... $ 30,671 $ 1,898 $ 32,568
Amortization of Other
Intangible Assets ......... $ 10,023 $ 721 $ 10,744
-------- -------- --------
$ 40,693 $ 2,618 $ 43,312
======== ======== ========
Allowance for Estimated Losses
on Sales Returns ........... $ 12,629 $ 35,550 $(24,558)(a) $ 23,621
======== ======== ========= ========
Allowance for Doubtful Accounts $ 1,137 $ 470 $ (192) $ 1,415
======== ======== ========= ========
Inventory Valuation Adjustment $ 5,297 $ 8,411 $ (5,840)(b) $ 7,868
======== ======== ========= ========
============================================================================================================
</TABLE>
a) Returns charged against provision, net of recoveries
b) Disposals, net of recoveries
S2
A fiscal 2001 Executive Officers Incentive Bonus Plan has been established, with
the payments to be made after the close of fiscal 2001. Each Executive Officer
will receive a bonus of between zero and 60% of their base salary for fiscal
2000. This payment will be based on the Company achieving pre-established
figures for Consolidated Operating Profit (income before interest, taxes,
depreciation and amortization) for each of the Core Businesses (Sports and
Non-Licensed Confectionery) and Other Businesses (all other). Executive Officers
will not receive a bonus if the Company fails to attain a minimum Core Operating
Profit regardless of the level of Consolidated Operating Income.
TABLE OF CONTENTS
- -----------------
Page
Stockholders' Letter....................................................1
Financial Highlights....................................................6
Management's Discussion and Analysis
of Financial Condition and Results of Operations........................7
Consolidated Financial Statements......................................11
Notes to Consolidated Financial Statements.............................15
Report of Independent Public Accountants...............................30
Market & Dividend Information..........................................31
Selected Consolidated Financial Data...................................32
Directors, Officers, Subsidiaries
and Corporate Information...............................Inside Back Cover
<PAGE>
Dear Stockholders,
We are happy to report outstanding operating results for fiscal year 2000. The
twelve months saw net worth increase $51.9 million from a base of $77.2 million,
and the per share book value of our stock by 64.5%. Net sales reached $374.2
million from $229.4 million the previous year, and earnings were $59.2 million,
or $1.25 per fully diluted share, compared to $15.6 million, or $0.33 per fully
diluted share in fiscal 1999. Other financial highlights included: the
elimination of the Company's long-term debt, a significant boost in our cash
position to $75.9 million at year-end as compared with $41.7 million a year ago,
and the successful repurchase of almost one million shares of its common stock
at an average price of $8.25. All in all, it was indeed a very good year.
Of course, extraordinary results emanated from Pokemon and the Company's ability
to make the most of it. Also worth noting, however, is the solid growth
generated in our core collectible sports and confectionery businesses - the cake
under the icing, so to speak.
COLLECTIBLE SPORTS PRODUCTS
- ----------------------------
Overall, we saw some positive results for our sports card business in fiscal
2000, although product demand weakened during the course of the year and the
category remains challenging. As the months rolled on, Pokemon's overwhelming
presence undoubtedly diverted a certain amount of trade and consumer support
away from sports products. In addition, we recognized a need for more innovation
and promotional spending, both of which will be accelerated in the new year.
On the positive side, the flagship Topps brand retained its mass appeal to
collectors. Among the many awards The Topps Company received last year, Card
Trade Magazine awarded Topps "Best Base Brand" and Topps Baseball "Best Regular
Issue Set" (an award granted to the best set of the year). Also noteworthy is
that Topps Baseball will celebrate its 50th anniversary later this year with
some special products and promotions for collectors of all ages.
Our performance was less successful, however, on super premium brands like Topps
Finest and Gold Label. As a result, the Company is planning significant
investments to boost these brands by including more elements that are currently
popular with collectors, such as autographs and memorabilia.
We made significant progress last year in the development and implementation of
our Internet strategy. We believe that the demographics of the Internet channel
of distribution represent a natural fit with sports fans beyond the current
community of card collectors. As such, we are excited about the possibility of
expanding the card market, which, as you know, has contracted during the last
five years. We plan to announce the specifics of our Internet plans before the
Baseball All-Star break in July, 2000 and, if all goes well, to launch the new
program by year-end.
Internationally, the markets for sports collectibles in the UK and Italy were
considerably weaker than a year ago, and results suffered accordingly. We are
planning a battery of research so that we may identify appropriate steps to
improve performance in the new year.
CONFECTIONERY
- -------------
By every measure, the confectionery business enjoyed a superb year, setting
Company records for sales and profits. Our core (i.e., non-Pokemon)
confectionery business grew 29% worldwide over the previous year, reflecting
stellar performance by all of our major lollipop brands - Ring Pop, Push Pop and
Baby Bottle Pop. According to IRI scan data, these three brands combined to make
Topps one of the fastest growing lollipop businesses in America today.
Our strategy of creating appealing products, increasing product availability by
improving distribution, and using television advertising to build sales is
working and will be continued. We made good progress increasing market
penetration during the year, and our products are now in more outlets, at better
counter position and with more breadth than ever before.
Moreover, we have several product concepts in the pipeline. Some of these will
initially be introduced under our Pokemon license, affording them instant
visibility. Down the road, we will expand those lines by applying a variety of
new themes. We have also freshened many of our current products with new
flavors, better packaging and other innovations - a perpetual enhancement
approach that keeps our line up-to-date and appealing.
<PAGE>
The candy picture is bright as well. Leading the way this past year was the
further rollout of Baby Bottle Pop, which has enjoyed strong consumer acceptance
across a broad spectrum of markets. Push Pop was introduced in Japan, with the
help of a powerful distribution partner, and enjoyed instant success. Flip Pop,
another new brand entry, successfully made its debut in the UK and several other
countries, and Pokemon confectionery items are expected to present a large
opportunity overseas, as the property is especially strong in Europe. Across the
world, the same base strategy applies - quality product, widespread retail
availability and well-placed television advertising.
ENTERTAINMENT PRODUCTS
- -----------------------
There were two big stories in the entertainment segment of our business this
year - Pokemon and Star Wars. Pokemon is the most successful entertainment
program we have ever undertaken, and maximizing this opportunity has been no
small task. Undoubtedly, our efforts have been worthwhile as Pokemon continues
to be extraordinary. The Star Wars movie, "Episode I-The Phantom Menace" set box
office records in many markets. As one of Lucasfilm's trusted licensing partners
- - a relationship that spans some 20 years - Topps did well, both domestically
and overseas. Our Star Wars product line, comprising trading cards, sticker
album collections and magazines, benefited from a carefully orchestrated
distribution strategy, which yielded very satisfying results.
This coming year should also be a good one for Topps entertainment products. In
addition to Pokemon, we will release our first card product under a license for
Marvel's Universe of Superhero characters, featuring the highly anticipated
X-Men movie. We also plan to market a special card series of 'N SYNC, a hot rock
group that is experiencing immense popularity, especially in the United States.
OPERATIONS
- -----------
The objective of the operations group is to provide product on a timely basis,
to reduce costs and to improve quality through better supply chain and inventory
management. Notable progress continues to be made in those areas.
We significantly improved our margin during fiscal 2000. The cost of purchased
goods was reduced through specific vendor programs, and transportation costs
were diminished due to better warehouse management as well as higher
confectionery volumes. Continued emphasis on inventory management led to an
increase in inventory turns, tying up less capital and resulting in fresher
products at retail.
Also during this past year, our engineering and quality assurance staff began
implementation of a major capital project - building a second production line
for Ring Pop in our Scranton, Pennsylvania plant. This line, which is expected
to be fully operational by mid fiscal year, will enable us to produce a broader
array of products, and further reduce product costs.
THE FUTURE
- -----------
This past year's success has put Topps in an excellent position. We will
continue to invest in our brand franchises, the heart and soul of the Company,
through advertising, research, quality improvements, and product extensions. Our
efforts to expand distribution will continue unabated. We will introduce
compelling new products, selectively seek out new licenses, and explore new
business opportunities. In short, we are not resting on last year's laurels ...
not for a moment.
In closing, we thank the Topps family of employees everywhere for their
commitment to making good things happen, and congratulate them on a job well
done. On behalf of the entire organization, we also thank our customers,
licensors, stockholders and suppliers for their valued support.
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
<TABLE>
<CAPTION>
Year Ended
- --------------------------------------------------------------------------------
February February February
26, 2000 27, 1999 28, 1998
- --------------------------------------------------------------------------------
(In thousands of dollars, except share data)
<S> <C> <C> <C>
Net sales ......................... $ 374,193 $ 229,414 $ 241,250
Income (loss) from operations ..... 94,852 26,658 (2,020)
Net income (loss) ................. 59,215 15,571 (4,572)
Cash provided (used) by operations 58,879 29,522 (62)
Working capital ................... 71,128 24,919 20,971
Total debt ........................ -- 15,783 30,950
Stockholders' equity .............. 129,175 77,224 61,609
Net income (loss) per share
- basic ................ $ 1.28 $ 0.34 $ (0.10)
- diluted .............. $ 1.25 $ 0.33 $ (0.10)
Weighted average shares outstanding
- basic ................ 46,398,000 46,415,000 46,421,000
- diluted .............. 47,463,000 46,678,000 46,434,000
- --------------------------------------------------------------------------------
Income (loss) from operations includes certain non-recurring items in the years
1998 and 1999 presented above. See Note 2.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following table sets forth, for the periods indicated, net sales by key
business segment:
<TABLE>
<CAPTION>
Year Ended
- -------------------------------------------------------------------------
February February February
26, 2000 27, 1999 28, 1998
- -------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Collectible sports products...... $133,803 $124,855 $141,324
Confectionery .................. 129,724 95,238 84,514
Entertainment products ......... 110,666 9,321 15,412
Total ..................... $374,193 $229,414 $241,250
- -------------------------------------------------------------------------
</TABLE>
FISCAL 2000 VERSUS 1999*
- ------------------------
In fiscal 2000, the Company's net sales increased 63% to $374.2 million. This
was the result of higher sales in each of the three key business segments.
Net sales of collectible sports products, which consist of both sports cards and
sports sticker/album products, increased 7% to $133.8 million. This increase was
the result of several factors including the shipment of basketball card products
which normally would have occurred in the fourth quarter of fiscal 1999, but
were delayed into fiscal 2000 due to the NBA lockout. Higher sales of baseball
card products early in the year, which resulted from the McGwire/Sosa home-run
hitting race the prior year and a full year's participation in the NHL hockey
market also contributed to the increase. Sales of international soccer
sticker/album products were significantly less this year than last. Collectible
sports products accounted for 36% of the Company's consolidated net sales in
2000, compared with 54% in 1999.
Net sales of confectionery products, which include, among other things, Bazooka
brand bubble gum and Ring Pop, Push Pop, Baby Bottle Pop and Pokemon lollipops,
increased 36% in 2000 to $129.7 million. Excluding sales of Pokemon lollipop
products which totaled $6.4 million, confectionery sales grew 29%. This growth
was the result of the continued strength of Baby Bottle Pop around the world,
strong domestic growth of Ring Pop and Push Pop, and the successful introduction
of Push Pop in Japan. Confectionery sales declined year over year in Brazil as a
result of the January 1999 currency devaluation. Confectionery products
accounted for 34% of the Company's net sales in 2000, compared with 42% in 1999.
Net sales of entertainment products, which consist of entertainment cards, comic
books, magazines and the Merlin line of entertainment sticker/album products,
increased to $110.7 million from $9.3 million in 1999. Sales of Pokemon
products, primarily trading cards in the U.S. and Canada, represented $87.4
million, while sales of Star Wars products around the world, accounted for the
majority of the remainder. Entertainment products represented 30% of the
Company's consolidated net sales in 2000, compared with 4% in 1999.
Consolidated gross profit as a percentage of net sales increased to 47.8% in
2000 from 41.3% in 1999. This margin improvement was largely the result of the
favorable mix of high margin entertainment card products. Higher sales overall,
which resulted in greater leverage of fixed costs, and both manufacturing and
vendor cost reductions also contributed to the improvement in gross profit
margins.
- --------------------------------------------------------------------------------
*Unless otherwise indicated, all date references to 2000, 1999 and 1998 refer to
the fiscal years ended February 26, 2000, February 27, 1999 and February 28,
1998, respectively.
<PAGE>
Selling, general & administrative expenses ("SG&A") decreased as a percentage of
net sales to 22.6% in 2000 from 31.5% a year ago as a result of the higher
sales. SG&A dollar spending increased to $84.7 million from $72.3 million due to
greater expenditures for advertising and marketing, higher freight costs and
broker commissions as a result of the increase in sales, and the Company's
investment in its Internet initiative.
Income from operations in 1999 included non-recurring income of $3.5 million
from gains on the sale of the Irish plant as well as on the sales of
manufacturing-related equipment in Ireland and the U.S.
Net interest income in 2000 was $1.7 million versus an expense of $454,000 last
year due to an increase in cash on hand and the reduction and ultimate pay off
of the Company's term loan balance.
The effective tax rate in 2000 of 38.7% reflects provisions for federal, state
and local income taxes in accordance with statutory income tax rates. The
improvement versus the 1999 rate of 40.6% is a function of a lower effective
rate on international earnings.
Net income was $59.2 million, or $1.25 per diluted share in 2000, versus $15.6
million, or $0.33 per diluted share in 1999. Excluding non-recurring items in
1999, net income would have been $13.3 million, or $0.28 per diluted share.
FISCAL 1999 VERSUS 1998
- -----------------------
In 1999, the Company's net sales decreased 4.9% to $229.4 million from $241.3
million. This was the result of lower sales of both collectible sports and
entertainment products which were only partially offset by increased sales of
confectionery products.
Net sales of collectible sports products decreased 11.7% from $141.3 million in
1998 to $124.9 million in 1999. This decrease was the result of the prolonged
NBA lockout and, to a lesser extent, a decline in sales of soccer sticker/album
products. Partially offsetting these declines were increases in sales of U.S.
baseball and football cards and the Company's re-introduction of NHL hockey
cards in the second half of fiscal 1999. Collectible sports products accounted
for 54% of consolidated net sales of the Company in 1999, versus 59% in 1998.
Net sales of confectionery products increased 12.7% in 1999 to $95.2 million
from $84.5 million in 1998. This growth was the result of the roll out of Baby
Bottle Pop and Flip Pop, the expansion of Push Pop in Brazil and stronger sales
of our core lollipop brands--Ring Pop and Push Pop in the U.S. The Company's
confectionery business accounted for 42% of total 1999 net sales, compared with
35% in 1998.
Net sales of entertainment products decreased 39.5% from $15.4 million in 1998
to $9.3 million in 1999. This was primarily the result of the Company's decision
to reduce its emphasis on entertainment sticker/album products and comics. U.S.
sales of entertainment cards increased however, as a result of the introduction
of WCW wrestling cards. Sales of entertainment products accounted for 4% of
consolidated net sales of the Company in 1999, compared with 6% in 1998.
Consolidated gross profit as a percentage of net sales increased to 41.3% in
1999 from 33.0% in 1998. This margin improvement resulted, in part, from lower
royalty payments due to an increase in the percentage of non-royalty bearing
confectionery sales as well as the absence of minimum guarantee shortfalls
experienced in 1998 on U.S. basketball and Brazilian sticker products. Gross
profit margins also benefited from reduced material, product development and
obsolescence costs in the U.S.
Selling, general and administrative expenses decreased to $72.3 million or
31.5% of sales in 1999 from $78.4 million or 32.5% in 1998. This decrease was
largely the result of the headcount and cost reductions put into place at the
end of 1998. A reduction in U.S. marketing expenses previously required by one
of the Company's sport licenses as well as lower advertising agency fees,
combined with reduced marketing costs in Europe (due to the de-emphasis of the
entertainment business), also resulted in lower SG&A.
<PAGE>
Results for 1999 include non-recurring income of $3.5 million from gains on the
sale of the Irish plant as well as on the sales of manufacturing-related
equipment in Ireland and the U.S. 1998 results reflect a non-recurring net
expense of $3.7 million. This consists of severance and other costs related to
both the 1998 headcount reductions and the closure of the Irish plant, offset by
income from the reversal of a plant closure reserve set up in 1997.
Net interest income decreased to an expense of $454,000 in 1999 from an expense
of $1.6 million in 1998 due to a reduction in the Company's outstanding loan
balance and an increase in cash balances.
The effective tax rate of 40.6% in 1999 reflects provisions for federal, state
and local income taxes in accordance with statutory income tax rates. The 1998
effective tax rate of (26.8)% was a function of the Company's inability to
recognize tax benefits on certain foreign losses.
Net income was $15.6 million, or $0.33 per diluted share in 1999, versus a net
loss of $(4.6) million, or $(0.10) per diluted share in 1998. Excluding
non-recurring items in both years, net income from operations in 1999 would have
been $13.3 million, or $0.28 per diluted share, versus a net loss of $(2.3)
million, or $(0.05) per diluted share in the prior year.
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, quarterly results vary. See Note 16 of Notes to Consolidated
Financial Statements.
INFLATION
- ----------
The Company has been subject to price increases for certain materials, labor,
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
- -------------------------------
In July 1995, the Company entered into a $65 million credit agreement with a
syndicate of eight banks in order to finance the acquisition of Topps Europe,
Ltd., formerly known as Merlin Publishing, Ltd., and to provide for working
capital and letter of credit needs. In May 1998, the Company refinanced this
facility with Chase Manhattan Bank. The new credit agreement included a term
loan in the aggregate amount of $25.0 million (which was used to repay the prior
loan) and a $9.5 million facility to cover letter of credit and revolver needs.
The letter of credit and revolver facility was increased to $12.5 million in
February 1999. The term loan was paid in full in October 1999. As of February
26, 2000, the Company had outstanding $4.3 million in letters of credit.
The letter of credit and revolver facility expire on July 6, 2000. This credit
agreement is secured by a pledge of the Company's domestic trademarks and 65% of
the stock of Topps Europe. 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 and prohibits the payment of dividends.
In October 1999, the Board of Directors of the Company authorized the Company to
repurchase up to 5 million shares of its stock. As of February 26, 2000, the
Company had repurchased 940,000 shares at an average price of $8.25.
As of February 26, 2000, the Company had $75.9 million in cash.
During 2000, the Company's net increase in cash and cash equivalents was $34.1
million versus $19.6 million in 1999. Cash flow from operating activities in
2000 was $58.9 million versus $29.5 million last year, primarily as a result of
the higher net income, partially offset by the absence of income tax refunds and
an increase in confectionery inventories. Cash flow from investing activities
reflects $2.8 million in capital expenditures this year as compared with
$579,000 in net capital expenditures and $5.8 million in proceeds from the sales
of a plant and manufacturing equipment last year. Cash flow from financing
activities reflects debt payments of $15.8 million, treasury stock purchases of
$7.8 million and cash from the exercise of employee stock options of $1.7
million this year versus debt payments of $15.2 million last year.
Management believes that the Company has adequate means to meet its liquidity
and capital resource needs over the foreseeable future.
<PAGE>
EURO CONVERSION
- ---------------
On January 1, 1999, the exchange rates of Germany, France, the Netherlands,
Austria, Italy, Spain, Finland, Ireland, Belgium, Portugal and Luxembourg were
fixed among one another and to a new currency, the euro. The euro currency will
be introduced into circulation on January 1, 2002 and later that year the
currencies of these countries will be retired. The Company does not expect
future balance sheets and statements of earnings and cash flows to be materially
impacted by conversion to the euro.
YEAR 2000
- ---------
The Company has completed its Year 2000 readiness initiatives and did not
experience any significant problems as a result of the date change. The Company
does not anticipate any negative impact related to this issue going forward.
Year 2000 compliance costs did not materially affect the financial condition or
results of operations of the Company.
ACCOUNTING CHANGES
- -------------------
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities", which delayed the effective date of SFAS
133 which is now effective for fiscal years beginning after June 15, 2000. SFAS
133 provides guidance for the recognition and measurement of derivatives and
hedging activities. It requires an entity to record, at fair value, all
derivatives as either assets or liabilities in the balance sheet, and it
establishes specific accounting rules for certain types of hedges. Management
has determined that had SFAS No. 133 been adopted in the current year it would
not have had a material effect on the current financial condition, results of
operations or cash flows of the Company.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
The Topps Company, Inc. and Subsidiaries
(In thousands of dollars, except share data)
<TABLE>
<CAPTION>
Year Ended
- ------------------------------------------------------------------------------
February February February
26, 2000 27, 1999 28, 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales ........................... $ 374,193 $ 229,414 $ 241,250
Cost of sales ....................... 195,358 134,623 161,541
Gross profit on sales .......... 178,835 94,791 79,709
Other income ........................ 755 676 390
Selling, general and administrative
expenses ............................ 84,738 72,288 78,437
Non-recurring income (expense) ...... -- 3,479 (3,682)
Income (loss) from operations .. 94,852 26,658 (2,020)
Interest income (expense), net ...... 1,712 (454) (1,585)
Income (loss) before provision
for income taxes ............... 96,564 26,204 (3,605)
Provision for income taxes .......... 37,349 10,633 967
Net income (loss) .............. $ 59,215 $ 15,571 $ (4,572)
- ------------------------------------------------------------------------------
Net income (loss) per share
- basic ......... $ 1.28 $ 0.34 $ (0.10)
- diluted ....... $ 1.25 $ 0.33 $ (0.10)
- ------------------------------------------------------------------------------
Number of shares - basic ............ 46,398,000 46,415,000 46,421,000
- diluted .......... 47,463,000 46,678,000 46,434,000
- ------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
- ---------------------------
The Topps Company, Inc. and Subsidiaries
(In thousands of dollars, except share data)
<TABLE>
<CAPTION>
February February
26, 2000 27, 1999
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 75,853 $ 41,728
Accounts receivable, less allowance for
doubtful accounts of $1,415 (2000) and
$1,137 (1999) ............................................ 49,351 29,118
Inventories .............................................. 20,738 16,221
Income tax receivable .................................... 253 269
Deferred tax assets ...................................... 5,737 1,342
Prepaid expenses and other current assets ................ 5,357 4,860
Total current assets ................................ 157,289 93,538
Property, plant and equipment, net ....................... 9,181 7,429
Intangible assets ........................................ 57,588 60,207
Other assets ............................................. 2,876 2,908
Total assets ............................................. $ 226,934 $ 164,082
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 18,958 $ 15,022
Accrued expenses and other liabilities .............. 60,562 38,051
Income taxes payable ................................ 6,641 4,921
Current portion of long-term debt ................... -- 10,625
Total current liabilities ...................... 86,161 68,619
Long-term debt, less current portion ..................... -- 5,158
Deferred income taxes .................................... 2,630 5,143
Other liabilities ........................................ 8,968 7,938
Total liabilities .............................. 97,759 86,858
Commitments (See Note 17) ................................ -- --
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
47,835,758 in 2000 and 47,515,760 in 1999 ........... 478 475
Additional paid-in capital .......................... 18,498 16,841
Treasury stock, 2,042,500 shares in 2000
and 1,102,500 shares in 1999 ........................ (16,677) (8,881)
Retained earnings ................................... 128,990 69,775
Accumulated other comprehensive loss ................ (2,114) (986)
Total stockholders' equity ..................... 129,175 77,224
Total liabilities and stockholders' equity ............... $ 226,934 $ 164,082
- --------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
The Topps Company, Inc. and Subsidiaries
(In thousands of dollars)
<TABLE>
<CAPTION>
Year Ended
- -----------------------------------------------------------------------------------
February February February
26, 2000 27, 1999 28, 1998
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................... $ 59,215 $ 15,571 $ (4,572)
Add (subtract) non-cash items included in income:
Gain on sale of property, plant and equipment ... -- (3,209) (1,317)
Depreciation and amortization ................... 4,019 4,871 4,374
Deferred taxes on income ........................ (6,907) (271) 7,182
Net effect of changes in:
Receivables ..................................... (20,233) 20,609 10,049
Inventories ..................................... (4,517) 392 2,568
Income tax receivable ........................... 16 6,560 (3,928)
Prepaid expenses and other current assets ....... (497) (1,039) 5,188
Payables and other current liabilities .......... 28,165 (14,637) (19,710)
Other ........................................... (382) 675 104
Cash provided by (used in) operating
activities ............................... 58,879 29,522 (62)
Cash flows from investing activities:
Proceeds from disposition of property,
plant and equipment ............................. -- 5,770 4,315
Net additions to property, plant and
equipment ....................................... (2,835) (579) (1,776)
Cash (used in) provided by investing
activities ............................... (2,835) 5,191 2,539
Cash flows from financing activities:
Proceeds from borrowing ......................... -- -- 6,000
Reduction of debt ............................... (15,783) (15,167) (10,000)
Exercise of employee stock options............... 1,660 29 --
Purchase of treasury stock ...................... (7,796) -- (523)
Cash (used in) financing activities ...... (21,919) (15,138) (4,523)
Net increase (decrease) in cash and
cash equivalents ................................... 34,125 19,575 (2,046)
Cash and cash equivalents at beginning of year ..... 41,728 22,153 24,199
Cash and cash equivalents at end of year ........... $ 75,853 $ 41,728 $ 22,153
- ----------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Interest paid ...................................... $ 842 $ 2,237 $ 3,260
Income taxes paid .................................. $ 39,407 $ 7,423 $ 3,354
- ----------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
- ------------------------------------------------------------------------
The Topps Company, Inc. and Subsidiaries
(In thousands of dollars)
<TABLE>
<CAPTION>
Additional Other
Common Paid-in Treasury Retained Comprehensive
Total Stock Capital Stock Earnings Income (Loss)
----- ----- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 1, 1997 ............ $ 68,052 $ 475 $ 16,812 $ (8,358) $ 58,776 $ 347
- --------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net loss ............................ (4,572) -- -- -- (4,572) --
Translation adjustment .............. (1,348) -- -- -- -- (1,348)
Total comprehensive income (loss) (5,920) -- -- -- (4,572) (1,348)
Purchase of treasury stock .......... (523) -- -- (523) -- --
Balance at February 28, 1998 ........ 61,609 475 16,812 (8,881) 54,204 (1,001)
- --------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income .......................... 15,571 -- -- -- 15,571 --
Translation adjustment .............. 15 -- -- -- -- 15
Total comprehensive income ...... 15,586 -- -- -- 15,571 15
Exercise of employee stock options .. 29 -- 29 -- -- --
Balance at February 27, 1999 ........ 77,224 475 16,841 (8,881) 69,775 (986)
- --------------------------------------------------------------------------------------------------------
Comprehensive income (loss):
Net income .......................... 59,215 -- -- -- 59,215 --
Translation adjustment .............. (304) -- -- -- -- (304)
Minimum pension liability ........... (824) -- -- -- -- (824)
Total comprehensive income (loss) 58,087 -- -- -- 59,215 (1,128)
Purchase of treasury stock .......... (7,796) -- -- (7,796) -- --
Exercise of employee stock options .. 1,660 3 1,657 -- -- --
Balance at February 26, 2000 ........ $ 129,175 $ 478 $ 18,498 $ (16,677) $ 128,990 $ (2,114)
- --------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
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 operate and report financial results on a
fiscal year of 52 or 53 weeks which end on the Saturday closest to the end of
February. Fiscal 1999 and 2000 were comprised of 52 weeks. Financial results for
the fiscal year ended February 28, 1998 reflect a change in Topps Europe's
fiscal year end to coincide with that of the parent Company's and include
thirteen months of Topps Europe's operations.
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 accumulated
other comprehensive income. 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 foreign currency exposures. The Company does not hold or
issue derivative financial instruments for trading purposes.
Accounting Changes:
- -------------------
During 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities" which delayed the effective date of SFAS
133, which is now effective for fiscal years beginning after June 15, 2000. SFAS
133 provides guidance for the recognition and measurement of derivatives and
hedging activities. It requires an entity to record, at fair value, all
derivatives as either assets or liabilities in the balance sheet, and it
establishes specific accounting rules for certain types of hedges. Management
has determined that had SFAS No.133 been adopted in the current year it would
not have had a material effect on the current financial condition, results of
operations or cash flows of the Company.
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 using 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 the remaining
lease period for leasehold improvements. In accordance with SFAS No. 121, the
Company periodically evaluates the carrying value of its PP&E for circumstances
which may indicate impairment.
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 under the
provisions of SFAS No. 121, based on undiscounted projections of future cash
flows attributable to the individual assets.
<PAGE>
Net Sales:
- ----------
Sales are recorded upon shipment of products. Sales made on a returnable basis
are recorded net of a provision for estimated returns. These estimates are
revised, as necessary, to reflect actual experience and market conditions.
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 the 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 - NON-RECURRING ITEMS
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 million before applicable income tax
effects in fiscal 1997.
Due to headcount reductions in the United States and Europe and closure of the
Cork, Ireland manufacturing facility, fiscal 1998 results include a net
non-recurring charge of $3.7 million.
Fiscal 1999's non-recurring income of $3.5 million represents the gains on the
sales of the Company's manufacturing facility in Cork, Ireland and of equipment
in Cork, Ireland and Duryea, Pennsylvania.
Excluding these items in all years, net income (loss) from operations would have
been $13.3 million or $0.28 per diluted share in fiscal 1999 and $(2.3) million
or $(0.05) per diluted share in fiscal 1998.
NOTE 3 - EARNINGS PER SHARE
Earnings per share is computed in accordance with SFAS No. 128. Basic EPS is
computed using weighted average shares outstanding, while diluted EPS is
computed using weighted average shares outstanding plus shares representing
stock distributable under stock-based plans computed using the treasury stock
method. Both basic and diluted EPS for fiscal 1998 were calculated using
weighted average shares outstanding because fiscal 1998 reflected a loss, and
therefore, the inclusion of stock options or other securities convertible into
common stock was anti-dilutive.
The following table represents the computation of weighted average shares
outstanding - diluted:
<TABLE>
<CAPTION>
Year ended
- ------------------------------------------------------------------------------
February February February
26, 2000 27, 1999 28, 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average shares outstanding:
Basic .............................. 46,398,000 46,415,000 46,421,000
Effect of dilutive stock options ... 1,065,000 263,000 13,000
Diluted ............................ 47,463,000 46,678,000 46,434,000
- ------------------------------------ ---------- ---------- ----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOTE 4 INVENTORIES
February February
26, 2000 27, 1999
-------- --------
(In thousands of dollars)
<S> <C> <C>
Raw materials ...................................... $ 3,171 $ 2,097
Work in process .................................... 529 1,020
Finished products .................................. 17,038 13,104
Total ......................................... $20,738 $16,221
------- -------
</TABLE>
<TABLE>
<CAPTION>
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
February February
26, 2000 27, 1999
-------- --------
(In thousands of dollars)
<S> <C> <C>
Land ............................................. $ 42 $ 42
Buildings and improvements ........................ 2,022 2,030
Machinery and equipment .......................... 13,704 10,973
Total PP&E .................................. 15,768 13,045
Accumulated depreciation and amortization ........ (6,587) (5,616)
Net ......................................... $ 9,181 $ 7,429
</TABLE>
<TABLE>
<CAPTION>
NOTE 6 - INTANGIBLE ASSETS
February February
26, 2000 27, 1999
-------- --------
(In thousands of dollars)
<S> <C> <C>
Value of sports, entertainment and
proprietary products ............................ $ 36,635 $ 36,635
Goodwill ........................................... 64,265 64,265
Accumulated amortization ........................... (43,312) (40,693)
Net ........................................... $ 57,588 $ 60,207
</TABLE>
<TABLE>
<CAPTION>
NOTE 7-ACCRUED EXPENSES AND OTHER LIABILITIES
February February
26, 2000 27, 1999
-------- --------
(In thousands of dollars)
<S> <C> <C>
Provision for estimated losses on sales returns .... $23,621 $12,629
Royalties .......................................... 12,760 3,852
Employee compensation .............................. 6,533 4,613
Payments received in advance ....................... 4,665 5,741
Plant closure, severance and other non-recurring
items .............................................. 898 762
Other .............................................. 12,085 10,454
Total ......................................... $60,562 $38,051
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NOTE 8 - DEPRECIATION AND AMORTIZATION
Year Ended
February February February
26, 2000 27, 1999 28, 1998
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
Depreciation expense ............... $ 1,151 $ 1,464 $ 1,099
Amortization of intangible assets .. 2,618 2,618 2,618
Amortization - other ............... 250 789 657
Total ......................... $ 4,019 $ 4,871 $ 4,374
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
NOTE 9 - LONG-TERM DEBT
Year Ended
February February
26, 2000 27, 1999
-------- --------
(In thousands of dollars)
<S> <C> <C>
Term loan $ - $ 15,783
Less: current portion - (10,625)
Total $ - $ 5,158
----- --- --------
</TABLE>
In May 1998, the Company entered into a credit agreement with Chase Manhattan
Bank. The credit agreement provided for a $25.0 million term loan payable in
monthly installments and a $9.5 million facility to cover letter of credit and
working capital needs. The letter of credit and working capital facility has
since been increased to $12.5 million. The facility expires on July 6, 2000.
Amounts outstanding under the credit agreement are secured by a pledge of the
Company's domestic trademarks and 65% of the stock of Topps Europe. Interest
rates on the term loan and outstanding revolving credit balance are based on
LIBOR plus an applicable margin of 1.75%, or prime. The credit agreement
contains certain 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 and prohibits the payment of
dividends. The term loan was repaid in October 1999.
<PAGE>
NOTE 10 - INCOME TAXES
U.S. and foreign operations contributed to income (loss) before provision for
income taxes as follows:
<TABLE>
<CAPTION>
Year Ended
February February February
26, 2000 27, 1999 28, 1998
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
United States ...................... $ 86,654 $ 21,984 $ 4,083
Europe ............................. 7,240 2,424 (5,368)
Canada ............................. 1,395 1,868 737
Latin America ...................... 1,275 (72) (3,057)
Total income (loss) before provision
for income taxes .............. $ 96,564 $ 26,204 $ (3,605)
------------------------------- -------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
Provision for income taxes consists of:
Year Ended
February February February
26, 2000 27, 1999 28, 1998
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Current income taxes (benefit):
Federal ........................... $ 32,024 $ 6,655 $ (4,657)
Foreign ........................... 3,368 2,250 (679)
State and local ................... 8,362 2,032 (293)
Total current .................. 43,754 10,937 (5,629)
Deferred income taxes (benefit):
Federal ........................... (4,889) (79) 5,890
Foreign ........................... (1,316) -- --
State and local ................... (200) (225) 706
Total deferred ................. (6,405) (304) 6,596
Total provision for income taxes $ 37,349 $ 10,633 $ 967
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
The reasons for the difference between the provision for income taxes and the
amount computed by applying the statutory federal income tax rate to income
(loss) before provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended
February February February
26, 2000 27, 1999 28, 1998
-------- -------- --------
(In thousands of dollars)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Computed expected tax provision
(benefit) .......................... $ 33,797 $ 9,171 $ (1,262)
Increase in taxes resulting from:
State and local taxes, net of
federal tax benefit .............. 5,220 1,175 586
Foreign and U.S. tax effects
attributable to foreign operations (1,525) (578) 1,113
Goodwill ........................ 549 549 549
Other permanent differences ..... (692) 316 (19)
Provision for income taxes ...... $ 37,349 $ 10,633 $ 967
- --------------------------------------------------------------------------------
</TABLE>
Deferred U.S. income taxes have not been provided on undistributed earnings of
foreign subsidiaries as the Company considers such earnings to be permanently
reinvested in the businesses as of February 26, 2000. These undistributed
foreign earnings could become subject to U.S. income tax if remitted, or deemed
remitted, as a dividend. Determination of the deferred U.S. income tax liability
on these unremitted earnings is not practical, since such liability, if any, is
dependent on circumstances existing at the time of the remittance. The
cumulative amount of unremitted earnings from the foreign subsidiaries that is
expected to be permanently reinvested was approximately $9.2 million on February
26, 2000.
The components of deferred income tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
Year Ended
February February February
26, 2000 27, 1999 28, 1998
-------- -------- --------
(In thousands of dollars)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income tax assets:
Provision for estimated losses
on sales returns ............... $ 3,241 $ 110 $ 2,792
Provision for inventory
obsolescence ................... 2,496 1,232 --
Total deferred income tax assets $ 5,737 $ 1,342 $ 2,792
Deferred income tax liabilities:
Amortization ................... $ 3,659 $ 4,233 $ 4,756
Depreciation ................... 242 224 627
Non-recurring items ............ (366) 29 315
Undistributed earnings -
foreign subsidiaries .......... -- -- 1,422
Other ......................... (905) 657 (256)
Total deferred income tax
liabilities ................... $ 2,630 $ 5,143 $ 6,864
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 11 - EMPLOYEE BENEFIT PLANS
The FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," in February 1998. This new standard does not change
the measurement or recognition of costs for pensions or other postretirement
plans. It standardizes disclosures and eliminates those that are no longer
useful. The information provided below for fiscal 2000 and 1999 has been
presented under the requirements of the new standard.
The Company maintains noncontributory qualified and non-qualified defined
benefit pensions as well as a postretirement healthcare plan for all eligible
non-bargaining unit personnel.
The Company is also 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 Sections 401(a) and 401(k) of the Internal Revenue Code (the "401(k)
Plan"). While all non-bargaining unit employees are eligible to participate in
the 401(k) Plan, participation is optional. The Company does not contribute to
the 401(k) Plan.
Pension expense for all plans was $1,334,000 (2000) and $883,000 (1999).
The following tables summarize benefit costs, as well as the benefit
obligations, plan assets and funded status associated with the Company's pension
and postretirement healthcare benefit plans.
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Healthcare Benefits
- --------------------------------------------------------------------------------
February February February February
26, 2000 27, 1999 26, 2000 27, 1999
- --------------------------------------------------------------------------------
(in thousands of dollars)
<S> <C> <C> <C> <C>
Reconciliation of change in benefit obligation
Benefit obligation at beginning
of year ............................ $ 21,712 $ 20,839 $ 6,581 $ 6,239
Service cost ....................... 693 692 228 216
Interest cost ...................... 1,537 1,513 465 443
Benefits paid ...................... (1,063) (1,847) (376) (317)
Actuarial (gains) losses ........... (2,124) 515 (604) --
Benefit obligation at end of year .. $ 20,755 $ 21,712 $ 6,294 $ 6,581
- --------------------------------------------------------------------------------
Reconciliation of change in the fair value of plan assets
Fair value of plan assets
at beginning of year ............... $ 15,011 $ 14,738 $ -- $ --
Actual return on plan assets ....... (845) 2,053 -- --
Employer contributions ............. 67 67 376 317
Benefits paid ...................... (1,063) (1,847) (376) (317)
Fair value of plan assets
at end of year ..................... $ 13,170 $ 15,011 $ -- $ --
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Healthcare Benefits
- --------------------------------------------------------------------------------
February February February February
26, 2000 27, 1999 26, 2000 27, 1999
- --------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Funded status
Funded status ....................... $(7,583) $(6,701) $(6,294) $(6,581)
Unrecognized actuarial(gains)losses . 3,447 3,600 (1,367) (771)
Unrecognized prior service cost ..... (128) (143) -- --
Unrecognized initial transition
obligation .......................... 416 612 3,216 3,437
Net amount recognized in the
consolidated balance sheets ......... $(3,848) $(2,632) $(4,445) $(3,915)
- --------------------------------------------------------------------------------
Components of amounts recognized
in the consolidated balance sheets
Prepaid benefit cost ................ $ 269 $ 908 $ -- $ --
Accrued benefit liability ........... (4,941) (3,557) (4,445) (3,915)
Intangible asset .................... -- 17 -- --
Accumulated other comprehensive
expense ............................. 824 -- -- --
Accumulated other comprehensive
consolidated balance sheets ......... $(3,848) $(2,632) $(4,445) $(3,915)
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Postretirement
Pension Benefits Healthcare Benefits
- --------------------------------------------------------------------------------------------------
February February February February February February
26, 2000 27, 1999 28, 1998 26, 2000 27, 1999 28, 1998
- --------------------------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost
Service cost .......................... $ 693 $ 692 $ 654 $ 228 $ 216 $ 362
Interest cost ......................... 1,537 1,513 1,480 465 443 579
Expected return on plan assets ........ (1,320) (1,430) (1,355) -- -- --
Amortization of initial transition
obligation ............................ 196 196 56 221 221 221
Prior service cost .................... (15) (15) (15) -- -- --
Actuarial (gains) losses .............. 193 132 (10) (8) (11) 18
Net periodic benefit cost ............. $ 1,284 $ 1,088 $ 810 $ 906 $ 869 $ 1,180
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
As of February 26, 2000, both the qualified and non-qualified pension plans have
accumulated benefit obligations in excess of plan assets. As of February 27,
1999, only the non-qualified pension plan had accumulated benefit obligations in
excess of plan assets. Information is as follows:
Pension Benefits
- -------------------------------------------------------------------------
February February
26, 2000 27, 1999
- -------------------------------------------------------------------------
(In thousands of dollars)
Projected benefit obligation $ 20,753 $ 4,462
Accumulated benefit obligation 17,308 3,557
Fair value of plan assets $ 13,170 $ --
- -------------------------------------------------------------------------
The weighted-average actuarial assumptions used for both pension plans
are as follows:
- -------------------------------------------------------------------------
February February
26, 2000 27, 1999
- -------------------------------------------------------------------------
(In thousands of dollars)
Discount rate 7.75% 7.0%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 5.0% 5.0%
- -------------------------------------------------------------------------
Assumptions for healthcare cost increases are as follows: 8.5% in fiscal 1999;
8.0% in fiscal 2000; trending down to a 5.5% increase in fiscal 2005. Increases
in healthcare costs could significantly affect the reported postretirement
benefits cost and benefit obligations. A one percentage point change in assumed
healthcare benefit cost trends would have the following effect:
- -------------------------------------------------------------------------
1-Percentage Point
Increase Decrease
- -------------------------------------------------------------------------
On total service and interest cost component $ 116 $ (98)
On postretirement benefit obligation (APBO) $ 793 $ (705)
- -------------------------------------------------------------------------
<PAGE>
NOTE 12 - STOCK OPTION PLANS
The Company has Stock Options Plans that provide 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 two or three years and expire ten years after the grant date.
The following table summarizes information about the Plans.
<TABLE>
<CAPTION>
February 26, 2000 February 27, 1999 February 28, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Exercise Exercise Exercise
Stock Options Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year .... 4,036,000 $ 5.75 3,777,500 $ 6.23 3,352,250 $ 7.90
Granted ............................. 1,032,500 $ 5.39 527,500 $ 3.03 1,427,250 $ 2.47
Exercised ........................... (318,448) $ 3.75 (13,250) $ 2.22 -- --
Forfeited ........................... (66,000) $ 5.41 (255,750) $ 7.39 (1,002,000) $ 6.49
Outstanding at end of year ........ 4,684,052 $ 5.81 4,036,000 $ 5.75 3,777,500 $ 6.23
Options exercisable at end of year... 3,468,129 $ 6.11 2,663,865 $ 6.99 1,984,741 $ 8.90
Weighted-average fair value of
options granted during the year .... $2.97 $1.72 $1.33
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Summarized information about stock options outstanding and exercisable at February 26, 2000 is as follows:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Outstanding Average Average Exercisable Average
Exercise Price as of Remaining Exercise as of Exercise
Ranges 2/26/00 Contractual Life Price 2/26/00 Price
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 1.76 - $ 3.53 1,694,135 7.6 $ 2.63 1,412,379 $ 2.53
$ 3.54 - $ 5.29 913,167 7.9 $ 4.55 313,000 $ 4.63
$ 5.30 - $ 7.05 588,000 4.4 $ 6.00 470,000 $ 5.76
$ 7.06 - $ 8.81 823,000 4.7 $ 7.97 612,000 $ 8.17
$ 8.82 - $10.57 126,000 3.4 $ 9.31 121,000 $ 9.29
$10.58 - $12.34 208,250 1.5 $10.92 208,250 $10.92
$12.35 - $14.10 37,500 0.1 $13.33 37,500 $13.33
$14.11 - $15.86 231,000 1.5 $14.95 231,000 $14.95
$15.87 - $17.63 63,000 2.3 $17.63 63,000 $17.63
- --------------------------------------------------------------------------------------------
4,684,052 5.9 $ 5.81 3,468,129 $ 6.11
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
The Company follows the provisions of SFAS 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. Had compensation costs been determined based on the fair value of the
2000, 1999 and 1998 stock option grants consistent with the method of SFAS No.
123, the Company's net income and net income per common share assuming dilution
would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except share data)
As reported Pro forma As reported Pro forma As reported Pro forma
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) ....... $ 59,215 $ 58,471 $15,571 $15,169 $(4,572) $(4,881)
Earnings (loss) per share $ 1.25 $ 1.23 $ 0.33 $ 0.32 $ (0.10) $ (0.11)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
In determining the preceding pro forma amounts under SFAS 123, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions for fiscal 2000: risk free
interest rate of 6.5%; expected life of ten years; estimated volatility of 56%;
no dividend yield.
NOTE 13 - 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 October 1999, the Board of Directors of the Company authorized the Company to
repurchase up to 5 million shares of its stock. As of February 26, 2000, the
Company had repurchased 940,000 shares at an average price of $8.25.
NOTE 14 - SEGMENT AND GEOGRAPHIC INFORMATION
Following is the breakdown of industry segments as required by SFAS No. 131. The
Company has three reportable business segments: Collectible Sports Products,
Entertainment Products and Confectionery.
The Collectible Sports Products segment primarily consists of trading cards
featuring players from Major League Baseball, the National Basketball
Association, the National Football League and the National Hockey League as well
as sticker/album products featuring players from certain European soccer
leagues.
The Confectionery segment consists of a variety of lollipop products including
Ring Pop, Push Pop, Baby Bottle Pop and Flip Pop, the Bazooka bubble gum line
and other novelty confectionery products.
The Entertainment Products segment consists of trading cards, sticker/album
products, comics and magazines featuring licenses from popular films, television
shows and other entertainment properties, including Pokemon.
<PAGE>
The Company's management evaluates the performance of each segment based upon
its contributed margin, which is profit after cost of goods, product
development, advertising and promotional costs and obsolescence, but before
allocation of general and administrative expenses, depreciation and
amortization, other income/expense, non-recurring items, interest and income
taxes.
The Company does not allocate assets among its business segments and therefore
does not include a breakdown of assets or depreciation and amortization by
segment.
<TABLE>
<CAPTION>
Year Ended
- --------------------------------------------------------------------------------
February February February
26, 2000 27, 1999 28, 1998
- --------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Net Sales
Collectible Sports Products ........ $ 133,803 $ 124,855 $ 141,324
Confectionery ...................... 129,724 95,238 84,514
Entertainment Products ............. 110,666 9,321 15,412
Total ............................ $ 374,193 $ 229,414 $ 241,250
- --------------------------------------------------------------------------------
Contributed Margin
Collectible Sports Products ........ $ 47,408 $ 48,414 $ 40,326
Confectionery ...................... 62,886 24,736 16,496
Entertainment Products ............. 40,136 1,594 (1,668)
Total ............................ $ 150,430 $ 74,744 $ 55,154
- --------------------------------------------------------------------------------
Reconciliation of contributed margin
to income (loss) before provision
for income taxes
Total contributed margin ........... $ 150,430 $ 74,744 $ 55,154
General & administrative expenses .. (52,314) (47,370) (49,508)
Depreciation & amortization ........ (4,019) (4,871) (4,374)
Other income ....................... 755 676 390
Non-recurring items ................ -- 3,479 (3,682)
Income (loss) from operations .... 94,852 26,658 (2,020)
Interest income (expense), net ..... 1,712 (454) (1,585)
Income (loss) before provision
for income taxes ................. $ 96,564 $ 26,204 $ (3,605)
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Net sales to unaffiliated customers and income (loss) from operations, as
presented below, are based on the location of the ultimate customer. Income
(loss) from operations is defined as contributed margin less general and
administrative expenses, depreciation and amortization, other income/expense and
non-recurring items. Identifiable assets, as presented below, are those assets
located in each geographic area.
<TABLE>
<CAPTION>
Year Ended
- ---------------------------------------------------------------------------
February February February
26, 2000 27, 1999 28, 1998
- ---------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C>
Net Sales
United States ............... $ 270,792 $ 156,913 $ 157,208
Europe ...................... 64,534 45,537 64,599
Other ....................... 38,867 26,964 19,443
Total Net Sales ......... $ 374,193 $ 229,414 $ 241,250
Income (Loss) from Operations
United States ............... $ 84,289 $ 22,536 $ 5,566
Europe ...................... 5,784 1,623 (6,215)
Other ....................... 4,779 2,499 (1,371)
Total Income (Loss) from
operation .............. $ 94,852 $ 26,658 $ (2,020)
Identifiable Assets
United States ............... $ 170,021 $ 127,186 $ 126,498
Europe ...................... 42,267 29,732 43,972
Other ....................... 14,646 7,164 7,936
Total Identifiable Assets $ 226,934 $ 164,082 $ 178,406
- ---------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of 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 February 26, 2000. As considerable
judgment is inherent in the development of these estimates, they are not
necessarily indicative of the amounts that the Company would realize in the
current market exchange.
The recorded amounts and fair values are as follows:
<TABLE>
<CAPTION>
February 26, 2000 February 27, 1999
- ------------------------------------------------------------------------------
Recorded Fair Recorded Fair
Amount Value Amount Value
- ------------------------------------------------------------------------------
(In thousands of dollars)
<S> <C> <C> <C> <C>
Assets:
Cash and equivalents ............. $ 75,853 $ 75,853 $ 41,728 $ 41,728
Prepaid expenses ................. 5,357 5,357 4,860 4,860
Liabilities:
Current portion of long-term debt -- -- 10,625 10,625
Long-term debt ................... -- -- 5,158 5,158
Foreign currency forward contracts -- 685 -- (313)
Interest rate swap contracts ..... $ -- $ -- $ -- $ (29)
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2000 1999
- ------------------------------------------------------------------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ............ $84,941 $80,391 $110,777 $98,084 $53,327 $57,868 $67,647 $50,572
Gross profit on sales 37,747 37,286 58,555 45,247 21,679 25,305 26,545 21,262
Income from operations 15,578 16,525 36,551 26,198 5,094 8,668 7,197 5,699
Net income ........... 9,267 9,881 21,930 18,137 2,696 4,813 4,134 3,928
Net income per share
- basic ............ $ 0.20 $ 0.21 $ 0.47 $ 0.39 $ 0.06 $ 0.10 $ 0.09 $ 0.08
- diluted .......... $ 0.20 $ 0.21 $ 0.46 $ 0.38 $ 0.06 $ 0.10 $ 0.09 $ 0.08
Net income per share
without non-recurring
- basic ............ $ 0.20 $ 0.21 $ 0.47 $ 0.39 $ 0.05 $ 0.06 $ 0.09 $ 0.09
- diluted .......... $ 0.20 $ 0.21 $ 0.46 $ 0.38 $ 0.05 $ 0.06 $ 0.09 $ 0.09
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTE 17 - COMMITMENTS AND OTHER MATTERS
Future minimum payments under non-cancelable leases which extend into the year
2010 are $1,650,000 (2001), $1,608,000 (2002), $1,474,000 (2003), $1,428,000
(2004), $1,238,600 (2005) and $5,800,000 thereafter.
Future minimum payments required under the Company's existing sports and
entertainment contracts, with various expiration dates extending into the year
2003, are estimated to be $12,313,750 (2001), $3,393,750 (2002) and $250,000
(2003).
Total royalty expense under the Company's sports and entertainment licensing
contracts was $43,403,000 (2000), $24,373,000 (1999) and $33,662,000 (1998).
Advertising and marketing expenses (which encompass media spending, trade
spending and consumer promotions including player autograph costs) included in
selling, general and administrative expenses amounted to $25,219,000 (2000),
$18,974,000 (1999) and $20,813,000 (1998).
The Company transacts business in many countries, utilizing many different
currencies. It is thus exposed to the effect of exchange rate fluctuations on
sales and purchase transactions. The Company enters into both foreign currency
forward contracts and options on currency forward contracts to manage these
exposures and to minimize the effects of foreign currency transactions on 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 of 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 February 26, 2000, the Company had outstanding foreign currency forward
contracts with banks in the amounts of $26,485,000 as compared to $20,955,000 as
of February 27, 1999.
These contracts have various maturity dates ranging up to twelve months from
February 26, 2000, with over 90% of the contracts maturing within six months.
The recognition of the net gain, which amounted to $685,000 using spot rates as
of year end, is deferred until the hedged transaction is recorded into
operations. In addition, the Company had options to purchase foreign currencies
outstanding in the amount of $4,607,000 as of February 26, 2000.
Legal proceedings:
- ------------------
In August 1996, the Company was named as a defendant in a class action in the
United States District Court for the Eastern District of New York (the "New York
Court") entitled Sullivan, et. al. v. The Topps Company, Inc., No. CV 96 3779
(E.D.N.Y.) (the "Action"). The Action alleged, among other things, that the
Company violated the federal Racketeer Influenced and Corrupt Organizations
("RICO") Act by its practice of selling sports and entertainment cards with
randomly-inserted "insert" cards, in violation of state and federal
anti-gambling statutes. Each of the Company's principal competitors and
licensors was separately sued in various federal courts for employing, or
participating in, the same or similar practices. The Action sought treble
damages and attorneys' fees on behalf of all purchasers of packs of cards
potentially including "insert" cards over a four-year period. The New York Court
granted the Company's motion to dismiss the Action with prejudice in August
1997. The New York Court later denied motions by plaintiffs to alter, amend or
vacate the judgment, and for leave to file an amended complaint. Plaintiffs'
time to appeal all of these rulings has expired, and the judgment for the
Company dismissing the Action is now final and nonappealable.
In September 1998, the Company filed an action in the New York Court seeking
declaratory and injunctive relief against a class of all original end-use
purchasers of trading cards marketed within the four years prior to the filing
of the complaint in packages that may contain randomly-inserted "insert" cards,
entitled The Topps Company, Inc. v. Sullivan et. al., No. CV 98 6023 (EHN)
(E.D.N.Y.) (the "Declaratory Judgment Action"). The Declaratory Judgment Action
seeks a declaratory judgment that the defendant class of card purchasers did not
suffer any injury cognizable under RICO by this practice, and an injunction
enjoining the defendant class from filing or pursuing any further RICO actions
against the Company relating to the purchase of trading cards. Two similar
declaratory judgment actions have been filed by several of the Company's
principal licensors in the New York Court against the same class of defendants.
On December 14, 1998, defendants in all of the declaratory judgment actions
moved to dismiss the complaints. The New York Court denied all of these motions
in an order entered on March 17, 2000.
<PAGE>
In November 1998, the Company was named as a defendant in a purported class
action commenced in the United States District Court for the Southern District
of California (the "California Court") entitled Rodriquez, et. al. v. The Topps
Company, Inc., No. CV 2121-B (AJB) (S.D. Cal.) (the "Class Action"). The Class
Action alleges that the Company violated RICO, and the California Unfair
Business Practices Act, by its practice of selling sports and entertainment
trading cards with randomly-inserted "insert" cards, allegedly in violation of
state and federal anti-gambling laws. The Class Action seeks treble damages and
attorneys' fees on behalf of all individuals who purchased packs of cards at
least in part to obtain an "insert" card over a four-year period. On January 22,
1999, plaintiffs moved to consolidate the Class Action with similar class
actions pending against several of the Company's principal competitors and
licensors in the California Court. On January 25, 1999, the Company moved to
dismiss the complaint, or, alternatively, to transfer the Class Action to the
Eastern District of New York or stay the Class Action pending the outcome of the
Declaratory Judgement Action pending in the Eastern District of New York. By
orders dated May 14, 1999, the California Court denied the Company's motions to
dismiss or transfer the Class Action but granted the Company's motion to stay
the Class Action pending the outcome of the Declaratory Judgement Action. The
California Court also denied plaintiff's motion to consolidate the Class Action
with similar purported Class Actions. On April 18, 2000, the California Court
entered an order requiring plaintiffs in the Class Action as well as in the
other purported class actions to show cause why all such actions should not be
dismissed. A hearing on the issue is scheduled for early June, 2000 in the
California Court. An adverse outcome in this action could materially affect the
Company's future plans and results.
<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 February 26, 2000 and February 27, 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended February 26, 2000.
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 financial statements present fairly, in all material
respects, the financial position of The Topps Company, Inc. and Subsidiaries as
of February 26, 2000 and February 27, 1999 and the results of their operations
and cash flows for each of the three years in the period ended February 26, 2000
in conformity with generally accepted accounting principles in the United
States.
DELOITTE & TOUCHE LLP
New York, New York
March 30, 2000
<PAGE>
MARKET AND DIVIDEND INFORMATION
- -------------------------------
The Company's Common Stock is traded 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 14, 2000, there were
approximately 4,783 holders of record.
<TABLE>
<CAPTION>
Fiscal year ended Fiscal year ended
February 26, 2000 February 27, 1999
- --------------------------------------------------------------------------------
High Price Low Price High Price Low Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First quarter ............... $ 7.375 $ 4.188 $3.500 $ 2.375
Second quarter .............. 12.063 5.750 3.500 2.125
Third quarter ............... 12.188 6.813 5.500 2.125
Fourth quarter .............. $13.375 $ 6.938 $5.563 $ 4.125
- --------------------------------------------------------------------------------
</TABLE>
The Company's credit agreement 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 9."
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
- ------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
(In thousands of dollars, except share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales ............................ $ 374,193 $ 229,414 $ 241,250 $ 268,975 $ 265,495
Gross profit on sales ................ 178,835 94,791 79,709 90,121 82,005
Selling, general and
administrative expenses .............. 84,738 72,288 78,437 75,974 68,563
Income (loss) from operations ........ 94,852 26,658 (2,020) (14,475) 16,571
Interest income (expense), net ....... 1,712 (454) (1,585) (1,942) (1,447)
Net income (loss) .................... 59,215 15,571 (4,572) (10,943) 8,394
Income (loss) from operations
per share - basic .................... $ 2.04 $ 0.57 $ (0.04) $ (0.31) $ 0.35
- diluted .................. $ 2.00 $ 0.57 $ (0.04) $ (0.31) $ 0.35
Net income (loss) - basic ............ $ 1.28 $ 0.34 $ (0.10) $ (0.23) $ 0.18
- diluted ........... $ 1.25 $ 0.33 $ (0.10) $ (0.23) $ 0.18
Cash dividends ....................... $ -- $ -- $ -- $ -- $ --
Wtd. avg. shares outstanding
- basic ......................... 46,398,000 46,415,000 46,421,000 46,928,000 47,047,000
- diluted ....................... 47,463,000 46,678,000 46,434,000 46,928,000 47,047,000
- ---------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and equivalents ................. $ 75,853 $ 41,728 $ 22,153 $ 24,199 $ 24,154
Working capital ...................... 71,128 24,919 20,971 18,716 31,278
Net property, plant and equipment .... 9,181 7,429 10,148 12,900 31,610
Long-term debt, less current portion . -- 5,158 22,617 27,450 37,500
Total assets ......................... 226,934 164,082 178,406 201,178 217,127
Stockholders' equity ................. $ 129,175 $ 77,224 $ 61,609 $ 68,052 $ 81,850
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Amounts in 1996 include the impact of Topps Europe 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 includes various non-recurring items in fiscal
1999, 1998 and 1997. See Note 2.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
BOARD OF DIRECTORS OFFICERS SUBSIDIARIES CORPORATE INFORMATION
Arthur T. Shorin* Arthur T. Shorin Topps Argentina S.A. Annual Meeting
Chairman, Chief Executive Chairmain, Chief Executive Managing Director Thursday, June 29, 2000. 10:30 A.M.
Officer and President Officer and President Juan P. Georgalos Chase Manhattan Bank
55 Water Street
Allan A. Feder Ronald L. Boyum Topps Brasil, Ltda. New York, New York 10041-0199
Independent Business Vice President - Marketing and Managing Director
Consultant Sales and General Manager Jeroen Servaes Corporate Counsel
Confectionery Willkie Farr & Gallagher
Stephen D. Greenberg Topps Canada, Inc. 787 Seventh Avenue
Chairman Edward P. Camp Managing Director New York, New York 10019
Fusient Media Ventures, Inc. Vice President and President Kevin J. Crux
Hobby Division Independent Auditors
Ann Kirschner Topps Europe Limited Deloitte & Touche
Chief Executive Officer Michael P. Clancy Managing Director Two World Financial Center
and President Vice President - International Christopher Rodman New York, New York 10281
FATHOM and Managing Director
Topps Ireland Limited Topps Ireland Limited Registrar and Transfer Agent
Wm. Brian Little* Managing Director ChaseMellon Shareholder Service, LLC
Private Investor Michael J. Drewniak Michael P. Clancy 85 Challenger Road
Vice President - Manufacturing Ridgefield Park, NJ 07660
David Mauer Topps Italia SRL (800) 851-9677
President and Chief Executive Ira Friedman Managing Director
Officer Vice President - Publishing and Furio Cicogna
Ridell Sports, Inc. New Product Development
Topps UK Limited
Jack H. Nusbaum Leon J. Gutmann Managing Director
Senior Partner and Chairman Assistant Treasurer and Jeremy Charter
Willkie Farr & Gallagher Assistant Secretary
Richard Tarlow Catherine K. Jessup
President Vice President - Chief Financial
Tarlow Advertising (a division Officer
of Revlon, Inc.) and
Chairman William G. O'Connor
Carlson & Partners Advertising Vice President - Administration
Stanley Tulchin* John Perillo
Chairman Vice President - Operations
Stanley Tulchin Associates, Inc.
Scott Silverstein
Executive Vice President
</TABLE>
*Nominated to stand for re-election
to the Company's Board of Directors
at the 2000 Annual Meeting of
Stockholders.
- --------------------------------------------------------------------------------
Additionl copies of this 2000 Annual Report and Form 10-K are available without
charge by making a written request to Investor Relations at the Company's
corporate officers or by calling (212) 376-0300.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0000812076
<NAME> EX-27
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Other
<FISCAL-YEAR-END> Feb-26-2000
<PERIOD-START> Feb-28-1999
<PERIOD-END> Feb-26-2000
<CASH> 75,853
<SECURITIES> 0
<RECEIVABLES> 49,351
<ALLOWANCES> 1,415
<INVENTORY> 20,738
<CURRENT-ASSETS> 157,289
<PP&E> 15,768
<DEPRECIATION> 6,587
<TOTAL-ASSETS> 226,934
<CURRENT-LIABILITIES> 86,161
<BONDS> 0
0
0
<COMMON> 478
<OTHER-SE> 128,697
<TOTAL-LIABILITY-AND-EQUITY> 226,934
<SALES> 374,193
<TOTAL-REVENUES> 377,474
<CGS> 195,358
<TOTAL-COSTS> 280,096
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 471
<INTEREST-EXPENSE> 813
<INCOME-PRETAX> 96,564
<INCOME-TAX> 37,349
<INCOME-CONTINUING> 59,215
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 59,215
<EPS-BASIC> 1.28
<EPS-DILUTED> 1.25
</TABLE>
