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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 [FEE REQUIRED]
For the fiscal year ended February 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-15817
THE TOPPS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-2849283
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Whitehall Street, New York, NY 10004
(Address of principal executive offices) (Zip Code)
(212) 376-0300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock par value $.01
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
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The aggregate market value of Common Stock held by non-affiliates as of
May 21,1998 was approximately $133,000,000.
The number of outstanding shares of Common Stock as of May 14,1998 was
46,400,010.
Documents incorporated by reference Part
Annual Report to Stockholders for the Year Ended February 28, 1998 I,II,IV
Proxy Statement for the 1998 Annual Meeting of Stockholders III
PART I
ITEM 1. BUSINESS
General Development
The Topps Company, Inc. was incorporated in Delaware on February 24, 1987.
The Company is the successor to Topps Chewing Gum, Inc., which was established
as a partnership in 1938 and was incorporated under the laws of New York in
1947. All references in this Annual Report on Form 10-K to "Topps" or the
"Company" are to The Topps Company, Inc. and its subsidiaries.
Topps is a leading marketer of collectible picture products featuring
primarily professional athletes and, from time to time, popular television,
movie and comic book characters. The Company also distributes Bazooka brand
bubble gum as well as branded lollipops, such as Ring Pop and Push Pop, novelty
candy products, collectible toys, comic books, magazines and sticker and album
collections.
The sports card category in which the Company competes continued to
contract in calendar 1997. This extended industry decline is the result of
several factors, including: product and brand proliferation which have led to
consumer confusion and oversupply; a competitive rise in other sports-related
merchandise choices; a reduction in retailer support and labor strife in the
sports industry.
In 1995, the Company acquired Merlin Publishing International Limited, a
U.K.-based publisher and marketer of licensed collectibles, primarily sticker
and album collections and, to a lesser extent, trading cards and stationery.
While continuing to market products under the Merlin brand name, Merlin
Publishing International Limited changed its corporate name to Topps Europe Ltd.
("Topps Europe") in March 1997. As a result of contraction in the market for
entertainment sticker and album collections, in fiscal 1998, Topps Europe closed
offices in France, Spain and the Netherlands. It continues to have an office in
Italy and to service other markets from its office in the U.K.
Over the last several years, the Company expanded its international
operations establishing new subsidiaries in Canada and Mexico in fiscal 1996 and
Brazil and Argentina in fiscal 1997. The Company currently distributes its
products in over fifty countries, has employees in eight countries and licensees
in two international markets.
________________________________________________________________________________
Trademarks of The Topps Company, Inc. and Subsidiaries appearing in this report:
Baby Bottle Pop, Bazooka, Bazooka Blasts, Bazooka Joe, Bowman, Bowman Chrome,
Bowman's Best, Candy Zone, Collect 'Ems, Garage Pail Kids, Juice Bar, Mars
Attacks, Merlin, Precious Piggies, Precious Puppies, Push Pop, Ring Pop, Roller
Pop, Topps, Topps Baby Wild Animals, Topps Chrome, Topps Finest, Topps Gallery,
Topps Stadium Club, Topps Stars, Triple Blasts and Wacky Packages.
Unless otherwise indicated, all date references refer to calendar years.
2
Products
Sports Picture 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 and various professional
soccer leagues. In the U.S. and Canada, picture products are generally in the
form of cards, while in the rest of the world picture products are typically in
the form of sticker and album collections, which are the popular medium for
licensed collectibles in these countries.
Card products feature photographs of athletes and contain summary
statistics and biographical material. Over the years, sports picture cards have
been marketed in packages with and without bubble gum. The Company markets
sports picture cards in various size packages, as well as complete sets, for
distribution through a variety of trade channels.
The Company distributes sports cards under brand names including, but not
limited to, Topps, Topps Stadium Club, Topps Finest, Topps Gallery, Bowman,
Bowman Chrome, Bowman's Best and Topps Chrome. Each brand of sports cards has
its own unique positioning in the marketplace and is designed to appeal to a
specific group of consumers. All brands of sports cards are of a high quality
and feature laminated paperboard and state-of-the-art reproduction techniques.
Certain brands feature borderless cards and also contain foil stamping. Prices
generally range from a suggested retail price of $0.99 per pack to $5.00 per
pack. The Company is continuously updating the technology and features of its
cards.
Sticker and album collections, which are sold under the Merlin and Topps
brand names, are marketed throughout Europe and other selected international
markets. Stickers display photos of popular local athletes and sports teams and
are typically sold in packages of six. Stickers are designed for insertion in
designated places in an associated album, which usually contains more detailed
information and statistics regarding the players and teams. The Company is
expanding its sports licenses beyond the Premier League in the U.K. and has
recently obtained sticker and album rights for soccer in Italy, Norway and
Denmark. The Company also sells sticker products in Canada under the Topps
brand name.
Bazooka Brand Bubble Gum. The Company has been marketing Bazooka brand
bubble gum since 1947. Traditional chunk Bazooka bubble gum is produced in
individually-wrapped rectangular pieces in a variety of flavors and sold at
retail for five and ten cents a piece. In the United States and many foreign
countries, individual pieces of Bazooka brand bubble gum include a comic printed
in the appropriate language usually featuring Bazooka Joe, a copyrighted cartoon
character created by the Company in 1953.
The Company sells multiple piece packs of Bazooka which over the years have
included a six-piece pack of soft sugarless bubble gum, a ten-piece pack,
forty-five and seventy-five count bags of traditional chunk Bazooka, as well as
various box, bucket and canister configurations. These packages are designed for
distribution in supermarkets, convenience stores, drug store chains and mass
merchandisers.
3
During 1997, the Company completed phase one of the relaunch of the Bazooka
bubble gum line. This included the development of all new packaging graphics
with a contemporary logo and a more focused product line. In 1998, phase two
which includes the introduction of a 75 comic series featuring new and updated
characters, consumer promotion programs and targeted TV advertising, will be
completed.
The Company also sells Bazooka Blasts, a bubble gum product manufactured
with super flavor crystals designed to enhance flavor impact and extend its
duration. This product is being sold in four flavors in 1998.
Lollipops. The Company markets several lollipop products throughout the
United States and many foreign countries. Products include Ring Pop (a lollipop
made of candy molded into the form of an exaggerated precious gem stone,
anchored to a plastic ring) and Push Pop (a cylinder-shaped lollipop packaged in
a plastic container with a removable cap, designed to enable consumers to eat a
portion of the pop and save the rest). In 1998, the Company plans to continue
its advertising and promotional support as well as merchandising efforts behind
both Ring Pop and Push Pop. The Company also plans on advertising these
lollipops in the Canadian marketplace in 1998.
In 1998, the Company introduced a new line of confectionery items under the
trademark Candy Zone. One of the products, Baby Bottle Pop, is a baby bottle
with a delicious lollipop top whose bottle is filled with a tangy candy powder.
Another, Flip Pop, is a pop within a fun plastic container, which can be flipped
out, licked and replaced back in the case for consumption later. The Company is
currently developing other Candy Zone items and intends to build upon this
premium-priced line. Introductions of other lollipop products over the last
several years include Roller Pop, Triple Blasts and Tongue Sucker.
Other Collectibles. The Company has introduced four series of collectible
plastic animals under the Collect'Ems brand name. These include Puppy In My
Pocket, Topps Baby Wild Animals, Precious Puppies and Precious Piggies. Each
series consists of 24 different animals which are packaged individually with
candy and a collector card.
Entertainment and Other Picture Products. The Company's activities in this
area began in the 1950's. Since then, the Company has marketed many picture
products featuring the dominant entertainment properties of the time, including
The Beatles, Elvis Presley, Star Wars, Michael Jackson, E.T., Indiana Jones,
Batman, Teenage Mutant Ninja Turtles, Jurassic Park, Goosebumps and The X-Files.
Occasionally, the Company has also created products detailing events of national
interest, such as Desert Storm, or parodying popular brands and properties such
as Wacky Packages and Garbage Pail Kids. Over the years, products of this nature
have experienced peaks and valleys in terms of consumer interest.
In fiscal 1998, the Company reduced the number of products sold and focused
its entertainment card efforts on a few of the most prominent licenses in the
entertainment field. The Company produced cards based on The Lost World:
Jurassic Park, Star Wars, The X-Files and Xena: Warrior Princess.
4
The Merlin sticker and album product line has also featured a number of
entertainment-based properties. In fiscal 1998, the Company marketed over ten
different properties throughout Europe, some in multiple languages, formats and
series. Due to the European market contraction, Topps Europe's
entertainment-oriented sticker products will be limited to a few product
offerings in fiscal 1998.
Magazine Publishing. The Company is currently publishing two periodicals as
well as single issues of souvenir and poster magazines based on subjects of
interest in the entertainment field. The quarterly Star Wars Galaxy Magazine
features, among other things, interviews with popular Star Wars artists,
excerpts of new works of Star Wars fiction, original comics adventures and
information regarding the next trilogy of Star Wars films. A quarterly Xena
magazine features articles, interviews, artwork and posters based upon the
popular television series. The Company has on occasion, also produced
commemorative and poster magazines.
Comic Books. The Company creates and markets a limited selection of
high-quality color comic books for distribution primarily in specialty shops.
During fiscal 1997, more than 16 different comic books featuring titles such as
The X-Files and Mars Attacks were published. Due to the market contraction, in
fiscal 1998 the Company published fewer titles and focused attention on its
strongest properties. The Company plans to continue this approach in fiscal
1999.
For a schedule of net sales by major product group for the past three
fiscal years, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 6 of the Company's Annual Report to
Stockholders for the year ended February 28, 1998 (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 Latin American and Asian
markets.
In March 1997, the Company reorganized its U.S. sales force. As a result,
U.S. card sales and national accounts are handled by the Company's own sales
force, while U.S. confectionery sales to all classes of trade (excluding
national accounts) are handled through broker organizations. Together, the sales
force and brokers sell to more than 3,000 wholesale tobacco and confectionery
jobbers, hobby distributors, wholesale clubs, newsdealers, mass merchandisers
and direct-buying grocery, convenience, drug, variety, discount and toy store
chains. Sales to more than 3,000 collectible products dealers and hobby shops
are made by direct mail solicitation. During fiscal 1997, the Company introduced
an innovative retailer alliance program entitled Home Team Advantage. This
program is designed to promote hobby retailer loyalty and in-store
merchandising.
5
The Company develops card products for exclusive distribution in the U.S.
hobby channel of trade. Recent examples include the Topps Gallery products that
feature unique, top-quality sports star photographs and artwork by renowned
artist Peter Max and Topps Stars, a product designed exclusively for the
Company's Home Team Advantage hobby retailers.
In the past, the Company has also operated a direct response membership
club through which it marketed special sets of Topps Stadium Club baseball,
football and basketball cards as well as other products. This business was
terminated in February 1998.
In Canada, sales of collectible products and confectionery are handled by a
small direct sales force and brokers.
In the U.K., sales of both confectionery products and collectibles are
handled by a dedicated sales force as well as wholesalers selling to
independents. Together, the sales force and wholesalers reach approximately
30,000 retail news and confectionery outlets. Elsewhere in Europe, sales are
primarily through candy and snack food distributors as well as through newstrade
agents or distributors. Topps continues to expand its distribution capabilities
and now has a presence in over thirty European markets.
In Latin America, Topps sales of both confectionery and collectible
products are handled by national distributors under the supervision of the local
Topps general manager. In Asia, Topps products are sold via distributors and
direct sales.
Advertising and Promotion. The Company utilizes a variety of promotional
activities, including television, radio and print advertising campaigns,
designed to create consumer awareness and increase retail sales of its products,
particularly Topps and Topps Stadium Club brand sports cards and Ring Pop and
Push Pop lollipops. Worldwide advertising and promotional expenditures as a
percentage of net sales for the fiscal years ended 1996, 1997 and 1998 were
7.8%, 7.0% and 8.6%, respectively.
Traditionally, the Company has relied on the popularity of its sports and
other licensed products and the consumer recognition of its brand names in order
to promote its products. In addition, as described above, the Company has often
become a licensee for characters and personalities with well-publicized and
well-advertised names. The Company also uses print advertising on its own
product wrappers and promotional insert cards to increase consumer awareness of
its products and promotions.
Approximately 65% of the Company's sales are made on a returnable basis.
Industry practices require that the Company provide the right to return on sales
of sports card products excluding those to hobby dealers, on comic book products
sold to mass merchandisers and on sales of most of the sticker and album
products in Europe. Returns significantly in excess of the Company's returns
provisions could have a material adverse effect on the Company. Consolidated
return provisions as a percentage of gross sales for the fiscal years ended
1996, 1997 and 1998 were 16.5%, 14.2% and 12.4%, respectively.
6
Production
In December 1996, the Company discontinued operations at its Duryea,
Pennsylvania manufacturing facility and took a related one-time charge of
$30,000,000. As a result of the Duryea plant closure, Bazooka gum is
manufactured by a single contractor in the U.S. (Hershey Foods Corporation). The
cutting, collating and packaging of card products previously performed at the
Duryea facility have been outsourced to several manufacturers in the U.S.
In April 1998, the Company ceased manufacturing operations at its factory
in the Republic of Ireland. This facility produced gum on a limited basis. The
Company has sufficient inventory for its current needs and is presently seeking
alternate sources of production for the longer term.
Collectible Picture Products. In the U.S., photographs of athletes are
generally taken by photographers under contract with the Company or by
free-lance photographers on special assignment. In addition, certain photography
is provided by the organization representing the leagues and their member teams.
Pictures of entertainment subjects are generally furnished by the licensor or
created by artists retained by the Company. Computerized graphic artwork and
design development for all 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 paperboard is sent directly to outside printers by the
Company's suppliers. Pictures are printed utilizing a variety of techniques and
processes, including waterless printing, which allows for a tighter line screen
resulting in sharper and more intense photo reproduction. Sheets of printed
cards are then often sent to additional suppliers who foil stamp and UV (ultra
violet) coat the sheets before they are delivered to contract packagers where
they are then cut into individual cards, collated and wrapped in a variety of
package configurations.
Certain elements of Merlin brand sticker products are sourced from a single
supplier in Italy. The Company believes that there would be other suitable
sources available to meet its requirements, if the current supplier were to
become unable to meet Merlin's supply needs.
Confectionery. As a result of the Company's decision to close its Duryea,
Pennsylvania plant, the Company now purchases all of its U.S. Bazooka bubble gum
requirements from Hershey Foods Corporation pursuant to an agreement which was
extended in 1998. The agreement expires in December 2002. The agreement requires
the Company to source all of its current 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. Bazooka and other
7
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, production of Bazooka was discontinued in Ireland. The Company has
sufficient inventory for its current needs and is presently seeking alternate
sources of production for the longer term.
Push Pop lollipops are manufactured by a single supplier in factories
located in Taiwan, Thailand and China. The loss of production at one or more of
these facilities due to civil unrest or for any other reason could have a
significant negative impact on sales of Push Pop until an alternative source
could be arranged.
Ring Pop lollipops for domestic sales are manufactured at the Company's
Scranton, Pennsylvania factory. Ring Pop lollipops for sale in international
markets are manufactured by a single supplier in factories located in Thailand
and China.
The Company's other candy products are also manufactured, to the Company's
specifications, by outside suppliers abroad and delivered to the Company as
finished product.
All Products. 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 based on rights under license agreements with individual athletes
or their players' associations, as well as the licensing bodies of the
professional sports leagues. These agreements cover the following sports: Major
League Baseball, NBA Basketball and NFL Football. The Company also has a
contract with the Premier Soccer League in the U.K. and with players and teams
with regard to soccer in Norway 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. The
Company chose not to renew its NHL Hockey license upon its expiration in June
1996. However, the Company has recently negotiated a new trading card license
with the National Hockey League Players' Association which is subject to the
execution of a definitive agreement. This agreement is contingent upon the
Company obtaining a license from National Hockey League Enterprises for the
rights to use the team names and logos.
The Company has an individual license agreement with virtually every major
league baseball player. Each baseball player's license agreement is initially
8
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 the year
2000. The Company conducts a related active licensing program with minor league
baseball players and continuously seeks to supplement its relationship with the
baseball community through 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 1996, 1997 and 1998
were $34,614,000, $37,960,000 and $33,662,000, respectively. See Note 16 of
Notes to Consolidated Financial Statements in the Annual Report, which is
incorporated herein by reference, for a description of minimum guarantee
payments required under the Company's existing sports contracts.
9
International Licensing Operations
The Company, which licenses its technology and trademarks, 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 in countries of their location and, in certain instances,
other countries as well. The Company receives royalties from its licensees based
on sales of licensed products and, in certain instances, the licensee's sale of
non-Company brands. Prior to fiscal 1996, the licensee in Canada, which had the
rights with respect to both collectible picture and confectionery products,
accounted for the largest percentage of the Company's royalty income. In fiscal
1996, the Canadian license was restricted to confectionery products only and in
fiscal 1997, it was terminated completely. As a result, the Company now markets
and distributes all products directly in Canada through Topps Canada Inc., a
wholly-owned subsidiary. In addition, in April 1996, the Company's licensing
agreement with Productos Stani for the sale of Bazooka in Argentina expired, and
Productos Stani became the owner of the Bazooka trademark in Argentina.
Royalties are generally based on sales volume in local currency and are
payable in U.S. dollars. The Company's royalties from international operations
are subject to foreign currency fluctuations. Although the Company has from
time-to-time experienced delays in the receipt of payment for royalties from
various licensees because of foreign exchange control regulations, to date, such
regulations have not materially affected the Company's results.
Competition
The Company competes for sales as well as counter and shelf space with
large corporations in the food, candy, publishing, toy and other industries.
Many of these corporations have substantially greater resources than the
Company. More narrowly, the Company competes with other companies, large and
small, which market gum and candy, and with a number of collectible picture
product companies for the spending money of children and adult collectors. The
Company believes that the industries in which it operates are highly
competitive.
Seasonality
The Company's sports picture products are sold throughout the year in the
U.S., spanning the three major sports seasons in which the Company currently
participates, i.e., baseball, football and basketball. Sales of entertainment
card products tend to be driven by the property on which they are based, often
peaking with the release of a movie or the rise in popularity of a television
program. Sales of confectionery products are relatively stable throughout the
year, although they are impacted by the introduction of new products and the use
of consumer advertising that can occur at any point in the year. Topps Europe's
sales are driven largely by the shipment of products relating to Premier League
Soccer, with much of the sales activity occurring in January and February.
10
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. See "Item 3 - Legal Proceedings." All of the
production employees at the Company's factory in Scranton, Pennsylvania are
represented by a union.
The Company employed approximately 500 people in fiscal 1998. In the fourth
quarter of fiscal 1998, the Company eliminated approximately fifty management
and administrative positions worldwide. Subsequent to the Company's fiscal 1998
year end, the Company's factory in the Republic of Ireland was shut down.
Twenty-six employees were affected by this shutdown.
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:
1. Dependence on Licenses. The Company's trading card and sticker and album
businesses are highly dependent upon licensing arrangements with third parties.
These licenses, which have varying expiration dates, are obtained from the
various professional sports leagues, players associations and, in certain
instances, the players themselves as well as entertainment companies. The
11
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 and Competition. The Company
believes that the sports card industry continued to contract during calendar
1997. That contraction, caused in part by product and brand proliferation and
previous labor strife between players and team owners in the various sports, has
resulted in an increasingly competitive environment in the sports card industry.
In addition, the NBA's collective bargaining agreement between the owners and
the union has been reopened for negotiation, and an NBA work stoppage is
possible, prior to and/or during the next NBA season. Further prolonged and
material contraction in the sports card industry, whether caused by labor strife
or otherwise, could materially affect the Company's future plans and results.
3. Returns. Approximately 65% 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.
4. Leverage. In July 1995, the Company entered into a 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. As of February 28, 1998, the Company had
outstanding $24,950,000 on the term loan, $6,000,000 of revolving credit and
$700,000 in standby letters of credit, and the Company was in default of it's
financial covenants.
In May 1998, the total facility was refinanced with Chase Manhattan Bank.
The new credit agreement provides for a $24,950,000 term loan payable in monthly
installments and a $9,450,000 facility to cover letter of credit and working
capital needs. The facility expires on July 6, 2000. Amounts outstanding under
this 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 2.75%, 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 and the acquisition of
treasury stock. A future default under the new credit facility could materially
adversely affect the Company's future plans and results.
5. Legal Proceedings. In August 1996, the Company was named a defendant in
a class action in the United States District Court for the Eastern District of
12
New York (the "Court") entitled Sullivan, et.al. v. The Topps Company, Inc. No.
CV-96-3779 (EDNY) (the "Action"). The Action alleged, among other things, that
the Company violated the federal Racketeer Influenced and Corrupt Organizations
Act by its practice of selling sports and entertainment cards with
randomly-inserted "insert" cards, in violation of state and federal
anti-gambling statutes. Each of the Company's principal competitors, as well as
several of its principal licensors, was separately sued in its home state 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. On August 21,
1997, the Court entered a judgment granting the Company's motion to dismiss the
complaint with prejudice. The plaintiffs have filed a Motion to Alter, Amend and
Vacate Judgment and for Leave to File Amended Complaint. The Company opposed the
motion and, by Memorandum and Order dated April 28, 1998, the Court denied
plaintiffs' motion in all respects. However, if the decision is appealed, an
adverse outcome could materially affect the Company's future plans and results.
13
Financial Information About Industry Segments, Foreign and Domestic Operations
and Export Sales
The Company operates in one business segment which is the marketing and
distribution of collectible picture and confectionery products, including the
licensing of its technology and trademarks. Geographic area information
contained in Note 13 of the Notes to Consolidated Financial Statements included
in the Annual Report is hereby incorporated by reference.
Executive Officers of the Company
The information required by this item with respect to the directors of the
Company and as to those executive officers who are also directors appearing in
the Proxy Statement for the annual meeting of stockholders scheduled to be held
on June 30, 1998 ("1998 Proxy Statement") is hereby incorporated by reference
thereto. Set forth below is information required by this item covering the other
executive officers of the Company.
Name Position with the Company and business
experience during the past five years
Ronald L. Boyum Vice President - Marketing and Sales of the
Company since March 1995, Vice President-
Marketing of the Company since April 1994
and Vice President-Sales since April 1990.
Mr. Boyum is 46 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 51 years of age.
Michael P. Clancy Vice President of the Company since
February 1995. Mr. Clancy has been
Managing Director - Topps Ireland since July
1990 and Joint Managing Director - Topps
Europe Ltd. since January 1997. Mr. Clancy
is 43 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 61 years of age.
14
Name Position with the Company and business
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 as Director of New
Product Development. Mr. Friedman is 44
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 42 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 49 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 41
years of age.
Scott Silverstein Vice President - Business Affairs and
General Counsel of the Company since
February 1995. Mr. Silverstein held the
position of General Counsel from July 1993
until February 1995. Prior to joining the
Company, Mr. Silverstein was an attorney with
the law firm of Hutton Ingram Yuzek Gainen
Carroll & Bertolotti from April 1990 until July
1993. Prior thereto, he was an attorney with
the law firm of Shea & Gould. Mr. Silverstein
is the son-in-law of Mr. Shorin, the Company's
Chairman of the Board, Chief Executive Officer
and President. Mr. Silverstein is 36 years of
age.
15
ITEM 2. PROPERTIES
The location and general description of the principal properties owned or
leased by the Company are as follows:
Owned or Leased;
Area/Facility If Leased,
Location Type of Facility Square Footage Expiration Year
Duryea, Pennsylvania office and warehouse 60,000 Leased; 2000
Scranton, Pennsylvania manufacturing plant 41,000 Owned
Cork, Ireland manufacturing plant 101,000 Owned*
and office
New York, New York executive offices 60,000 Leased; 2010
Milton Keynes, United warehouse/office 10,000 Leased; 2014
Kingdom
The Company also leases offices in Canada, Brazil, Argentina, Mexico and
Italy. The Company believes that its active facilities are in good repair and
are suitable for its needs for the foreseeable future.
* In April 1998, the Company entered into a contract to sell this property.
The Company intends to lease back a small portion of this facility for office
space.
ITEM 3. LEGAL PROCEEDINGS
In August 1996, the Company was named a defendant in a class action in the
United States District Court for the Eastern District of New York (the "Court")
entitled Sullivan, et.al. v. The Topps Company, Inc. No. CV-96-3779 (EDNY) (the
"Action"). The Action alleged, among other things, that the Company violated the
federal Racketeer Influenced and Corrupt Organizations Act by its practice of
selling sports and entertainment cards with randomly-inserted "insert" cards, in
violation of state and federal anti-gambling statutes. Each of the Company's
principal competitors, as well as several of its principal licensors, was
separately sued in its home state 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. On August 21, 1997 the Court entered a judgment
granting the Company's motion to dismiss the complaint with prejudice.
Thereafter, the plaintiffs filed a Motion to Alter, Amend and Vacate Judgment
and for Leave to File Amended Complaint. The Company opposed the motion and, by
Memorandum and Order dated April 28, 1998, the Court denied plaintiffs' motion
in all respects.
16
In November 1996, Teamsters Local 229 (the "Union") filed an unfair labor
practice charge with the National Labor Relations Board (the "NLRB") relating to
the Duryea plant closing. In April 1997, the NLRB issued a complaint against the
Company based upon the Union's charge, alleging that the Company refused to
bargain over its decision to close the Duryea plant. On November 25, 1997 the
parties entered into a Settlement Agreement and Release, settling this matter.
Under the Settlement Agreement and Release, all individuals who worked for the
Company in 1996 and were affected by the closure of Duryea were paid $450 for
each full year of service to the Company, provided such individuals executed a
release. Individuals who did not work during 1996, but who retained certain
recall rights, received a lump sum payment of $1,500, provided they executed a
release. Based on the Settlement Agreement and Release, on December 10,1997, the
NLRB signed an order approving withdrawal of the unfair labor practice charge
and dismissing the complaint. As of February 28, 1998, all amounts due under the
Settlement Agreement have been paid.
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 are not likely to have a material adverse effect on
the Company's consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
17
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Reference is made to the data appearing on page 30 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 31 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 6 through 9 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 10 through 28 and to the
Report of Independent Public Accountants appearing on page 29 of the Annual
Report which are hereby incorporated by reference.
ITEM 9. CHANGES IN ACCOUNTANTS AND DISAGREEMENTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
18
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 1998 Proxy
Statement and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item appears in the 1998 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 1998 Proxy Statement and
is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item appears in the 1998 Proxy Statement and
is hereby incorporated by reference.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1&2) Financial Statements and Financial Statement Schedules
See index on page 22.
(3) Listing of Exhibits
See index on pages 23-25.
(b) Reports on Form 8-K
None
20
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 28, 1998 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 day of May, 1998 by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/ Arthur T. Shorin /s/ Catherine K. Jessup
Arthur T. Shorin Catherine K. Jessup
Chairman of the Board, Vice President-Chief Financial Officer
Chief Executive Officer and President (Principal Financial and
(Principal Executive Officer) Accounting Officer)
/s/ Seymour P. Berger /s/ David M. Mauer
Seymour P. Berger David M. Mauer
Director Director
/s/ Allan A. Feder /s/ Jack H. Nusbaum
Allan A. Feder Jack H. Nusbaum
Director Director
/s/ Stephen D. Greenberg /s/ Stanley Tulchin
Stephen D. Greenberg Stanley Tulchin
Director Director
/s/ Wm. Brian Little
Wm. Brian Little
Director
21
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 March 2, 1996,
March 1, 1997 and February 28, 1998.
Consolidated Balance Sheets -- March 1, 1997 and February 28, 1998.
Consolidated Statements of Cash Flows -- Years Ended March 2, 1996,
March 1, 1997 and February 28, 1998.
Consolidated Statements of Stockholders' Equity -- Years Ended March 2,
1996, March 1, 1997 and February 28, 1998.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants.
(a)(2) Index to Independent Public Accountants'
Report and Financial Statement Schedules Page No.
Report of Independent Public Accountants......................... S-1
Schedule VIII -- Valuation and Qualifying Accounts - Years
Ended March 2, 1996, March 1, 1997 and February 28, 1998......... S-2
Schedules other than those listed above are omitted because they are
either not required or not applicable or the required information is
shown in the Consolidated Financial Statements or Notes thereto.
22
(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. 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 - Memorandum of Agreement with Major League Baseball Players
Association dated April 10, 1995 (Incorporated by reference
to Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 25, 1995).
10.7 - 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).
10.8 - Employment Agreement with Arthur T. Shorin (Incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-3 (No. 33-43567)).
10.9 - Amendment to Employment Agreement with Arthur T. Shorin
dated May 18, 1994 (Incorporated by reference to Exhibit
10.12 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 25, 1995).
23
Index to Exhibits (continued)
10.10 - 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).
10.11 - Retail License Agreement with NBA Properties, Inc. dated
July 25, 1995 (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended November
25, 1995).
10.12 - 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).
10.13 - Amended and Restated 1994 Non-Employee Director Stock Option
Plan (Incorporated by reference to the Company's 1998 Proxy
Statement filed on May 28,1998).
10.14 - 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).
10.15 - 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).
10.16 - 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).
10.17 - Amendment to Employment Agreement with Arthur T. Shorin
dated May 22, 1996. (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 2, 1996).
10.18 - Amendment to Employment Agreement with Arthur T. Shorin
dated May 21, 1997 (Incorporated by reference to the
Company's Annual Report on Form 10-K for the fiscal year
ended March 1,1997).
10.19 - 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).
24
Index to Exhibits (continued)
10.20 - 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.)
10.21 - Credit Agreement, dated May 11, 1998, between The Topps
Company, Inc and The Chase Manhattan Bank.*
10.22 - Consulting Agreement between The Topps Company, Inc and
Seymour Berger dated December 31, 1997.*
10.23 - Amended and Restated Manufacturing Agreement between The
Topps Company, Inc and Hershey Foods Corporation, a Delaware
corporation, dated March 13, 1998.*
10.24 - Ammendment to Employment Agreement with Arthur T. Shorin
dated May 27, 1998.*
13 - Annual Report (Except for those portions specifically
incorporated by reference, the 1998 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.
25
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 28, 1998 and March 1, 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended February 28, 1998, and have issued
our report thereon dated April 3, 1998 and May 11, 1998; such consolidated
financial statements and report are included in your 1998 Annual Report to
Stockholders and are incorporated herein by reference. Our audits also included
the consolidated financial statement schedule of The Topps Company, Inc. and
Subsidiaries listed in Item 14. This consolidated financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Deloitte & Touche LLP
New York, New York
April 3, 1998
May 11, 1998
S-1
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
---------------- --------------- --------------- ---------------- ---------------
Year Ended March 2, 1996:
Amortization of Sports,
Entertainment and
Proprietary Products $23,333 $1,610 $24,943
Amortization of Other
Intangible Assets 7,199 702 $7,901
---------------- --------------- ---------------
$30,532 $2,312 $32,844
================ =============== ===============
Allowance for Estimated Losses
on Sales Returns $12,920 $53,256 $(44,053) (a) $22,123
================ =============== ================ ===============
Inventory Valuation
Adjustment $29,425 $7,082 $(13,092) (b) $23,415
================ =============== ================ ===============
====================================================================================================================================
Year Ended March 1, 1997:
Amortization of Sports,
Entertainment and
Proprietary Products $24,943 $1,932 $26,875
Amortization of Other
Intangible Assets 7,901 717 $(36) $8,582
---------------- --------------- ---------------- ---------------
$32,844 $2,649 $(36) $35,457
================ =============== ================ ===============
Allowance for Estimated Losses
on Sales Returns $22,123 $46,096 $(44,980) (a) $23,239
================ =============== ================ ===============
Inventory Valuation
Adjustment $23,415 $6,418 $(11,381) (b) $18,452
================ =============== ================ ===============
====================================================================================================================================
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
================ =============== ================ ===============
Inventory Valuation
Adjustment $18,452 $5,340 $(15,842) (b) $7,950
================ =============== ================ ===============
====================================================================================================================================
(a) Returns charged against provision, net of recoveries.
(b) Disposals, net of recoveries
S-2