-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, URcaZ6NH3cFBeie+0nWz8A7nlraKg+VGpsWaY9h8pZae5XKY+wZSdplM+mnLlw4v xs5W6G+HzKUvIAqGlxrlaA== 0000812076-98-000007.txt : 19980529 0000812076-98-000007.hdr.sgml : 19980529 ACCESSION NUMBER: 0000812076-98-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980228 FILED AS OF DATE: 19980528 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOPPS CO INC CENTRAL INDEX KEY: 0000812076 STANDARD INDUSTRIAL CLASSIFICATION: COMMERCIAL PRINTING [2750] IRS NUMBER: 112849283 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15817 FILM NUMBER: 98633189 BUSINESS ADDRESS: STREET 1: ONE WHITEHALL STREET CITY: NEW YORK STATE: NY ZIP: 10004-2109 BUSINESS PHONE: 2123760300 MAIL ADDRESS: STREET 1: ONE WHITEHALL ST STREET 2: ONE WHITEHALL ST CITY: NEW YORK STATE: NY ZIP: 10004 10-K 1 10-K - -------------------------------------------------------------------------------- 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 ] - -------------------------------------------------------------------------------- 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 EX-10.1 2 EXHIBIT 10.1 VICE PRESIDENTS' INCENTIVE BONUS PLAN FOR FISCAL 1999 A fiscal 1999 Vice Presidents' Incentive Bonus plan is established for distribution after the end of fiscal 1999. Each Vice President will receive a maximum bonus of 60% of base salary for fiscal 1999 if Consolidated Operating Profit (income before interest, taxes, depreciation and amortization before payment of any bonuses) is at least $26,648,000 greater than the level achieved in fiscal 1998, as follows: Each Vice President will receive a bonus of 8% of base salary for fiscal 1999 if Consolidated Operating Profit is at least equal to $17,490,000. Thereafter, 1.17% of base salary will be paid as bonus for each 1% improvement in Consolidated Operating Profit up to a level of $22,262,000. For each 1% improvement in Consolidated Operating Profit beyond $22,262,000, an additional .66% of base salary will be paid, up to a maximum incentive bonus of 6% of base salary. EX-10.21 3 CREDIT AGREEMENT CREDIT AGREEMENT dated as of May 11, 1998 among THE TOPPS COMPANY, INC. The Lenders Party Hereto and THE CHASE MANHATTAN BANK, as Agent TABLE OF CONTENTS Page No. ARTICLE I ................................................................... 1 SECTION 1.01. Defined Terms. .................................. 1 SECTION 1.02. Classification of Loans and Borrowings. ........ 18 SECTION 1.03. Terms Generally. ............................... 18 SECTION 1.04. Accounting Terms; GAAP. ....................... 18 ARTICLE II .................................................................. 18 SECTION 2.01. Commitments. ................................... 18 SECTION 2.02. Loans and Borrowings. .......................... 19 SECTION 2.03. Requests for Borrowings. ....................... 19 SECTION 2.04. [This Section intentionally left blank.] ....... 20 SECTION 2.05. Letters of Credit. ............................. 20 SECTION 2.06. Funding of Borrowings. ......................... 24 SECTION 2.07. Interest Elections. ............................ 25 SECTION 2.08. Termination and Reduction of Commitments ... 26 SECTION 2.09. Repayment of Loans; Evidence of Debt. ......... 26 SECTION 2.10. Amortization of Term Loans. .................... 27 SECTION 2.11. Prepayment of Loans. ........................... 28 SECTION 2.12. Fees. .......................................... 29 SECTION 2.13. Interest. ...................................... 30 SECTION 2.14. Alternate Rate of Interest. .................... 31 SECTION 2.15. Increased Costs. ............................... 31 SECTION 2.16. Break Funding Payments. ........................ 32 SECTION 2.17. Taxes. ......................................... 33 SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs. ........................... 34 SECTION 2.19. Mitigation Obligations; Replacement of Lenders.. 35 ARTICLE III ................................................................. 36 SECTION 3.01. Organization; Powers. .......................... 36 SECTION 3.02. Authorization; Enforceability. ................. 36 SECTION 3.03. Governmental Approvals; No Conflicts. .......... 36 SECTION 3.04. Financial Condition; No Material Adverse Change. 37 SECTION 3.05. Properties. .................................... 37 SECTION 3.06. Litigation and Environmental Matters. .......... 38 SECTION 3.07. Compliance with Laws and Agreements. ........... 38 SECTION 3.08. Investment and Holding Company Status. ......... 38 i SECTION 3.09. Taxes. ......................................... 38 SECTION 3.10. ERISA. ......................................... 39 SECTION 3.11. Disclosure. .................................... 39 SECTION 3.12. Subsidiaries and Affiliates. ................... 39 SECTION 3.13. Insurance. ..................................... 39 SECTION 3.14. Labor Matters. ................................. 40 SECTION 3.15. Solvency. ...................................... 40 SECTION 3.16. No Default. .................................... 40 SECTION 3.17. Place of Business. ............................. 40 SECTION 3.18. Year 2000. ..................................... 40 SECTION 3.19. Federal Reserve Regulations. ................... 41 ARTICLE IV .................................................................. 41 SECTION 4.01. Effective Date. ................................ 41 SECTION 4.02. Each Credit Event. ............................. 43 ARTICLE V ................................................................... 44 SECTION 5.01. Financial Statements and Other Information. .... 44 SECTION 5.02. Notices of Material Events. .................... 46 SECTION 5.03. Information Regarding Collateral. .............. 46 SECTION 5.04. Existence; Conduct of Business. ................ 47 SECTION 5.05. Payment of Obligations. ........................ 48 SECTION 5.06. Maintenance of Properties. ..................... 48 SECTION 5.07. Insurance. ..................................... 48 SECTION 5.08. [This Section intentionally left blank.] ....... 49 SECTION 5.09. Books and Records; Inspection and Audit Rights.. 49 SECTION 5.10. Compliance with Laws. .......................... 49 SECTION 5.11. Notice of Discharge of Hazardous Material or Environmental Complaint. .................... 49 SECTION 5.12. Environmental Compliance. ...................... 49 SECTION 5.13. Use of Proceeds and Letters of Credit. ......... 50 SECTION 5.14. Additional Subsidiaries. ....................... 50 SECTION 5.15. Further Assurances. ............................ 50 SECTION 5.16. Interest Rate Protection. ...................... 50 ARTICLE VI .................................................................. 51 SECTION 6.01. Indebtedness; Certain Equity Securities. ....... 51 SECTION 6.02. Liens. ......................................... 52 SECTION 6.03. Fundamental Changes. ........................... 53 SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions. ................... 53 SECTION 6.05. Asset Sales. ................................... 54 SECTION 6.06. Hedging Agreements. ............................ 55 SECTION 6.07. Restricted Payments; Certain Payments of Indebtedness. ............................... 55 SECTION 6.08. Transactions with Affiliates ................... 56 ii SECTION 6.09. Restrictive Agreements. ........................ 56 SECTION 6.10. Amendment of Material Documents. ............... 57 SECTION 6.11. Limitations on Sales and Leasebacks. ........... 57 SECTION 6.12. Fiscal Year. ................................... 57 SECTION 6.13. Consolidated Leverage Ratio. ................... 57 SECTION 6.14. Consolidated Fixed Charge Ratio. ............... 57 SECTION 6.15. Consolidated Net Worth. ........................ 58 SECTION 6.16. Consolidated Net Loss. ......................... 58 SECTION 6.17. EBITDA. ........................................ 58 SECTION 6.18. Cumulative EBITDA. ............................. 58 SECTION 6.19. Capital Expenditures. .......................... 59 ARTICLE VII ................................................................. 59 SECTION 7.01. Events of Default. ............................. 59 ARTICLE VIII ................................................................ 61 ARTICLE IX .................................................................. 63 SECTION 9.01. Notices. ....................................... 63 SECTION 9.02. Waivers; Amendments. ........................... 64 SECTION 9.03. Expenses; Indemnity; Damage Waiver. ............ 65 SECTION 9.04. Successors and Assigns. ........................ 66 SECTION 9.05. Survival. ...................................... 68 SECTION 9.06. Counterparts; Integration; Effectiveness. ...... 69 SECTION 9.07. Severability. .................................. 69 SECTION 9.08. Right of Setoff. ............................... 69 SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process. ......................... 69 SECTION 9.10. WAIVER OF JURY TRIAL. .......................... 70 SECTION 9.11. Headings. ...................................... 70 SECTION 9.12. Confidentiality. ............................... 70 SECTION 9.13. Interest Rate Limitation. ...................... 71 SCHEDULES Schedule 2.01 -- Commitments Schedule 3.05 -- Real Property Schedule 3.06 -- Disclosed Matters Schedule 3.12 -- Subsidiaries Schedule 3.13 -- Insurance Schedule 5.04 -- Material License Schedule 6.01 -- Existing Indebtedness Schedule 6.02 -- Existing Liens Schedule 6.04 -- Existing Investments Schedule 6.09 -- Existing Restrictions iii EXHIBITS Exhibit A -- Form of Assignment and Acceptance Exhibit B-1 -- Form of Opinion of Borrower's Counsel Exhibit B-2 -- Form of Opinion of Borrower's U.K. Counsel Exhibit C -- Form of Perfection Certificate Exhibit D -- Form of Pledge Agreement Exhibit E -- Form of Trademark Security Agreement Exhibit F -- Form of Compliance Certificate Exhibit G -- Form of Topps SA Guaranty iv CREDIT AGREEMENT dated as of May 11, 1998, among THE TOPPS COMPANY, INC., a Delaware corporation (the "Borrower"), the LENDERS party hereto (the "Lenders"), and THE CHASE MANHATTAN BANK, as Agent (in such capacity, the "Agent"). W I T N E S S E T H: WHEREAS, the Borrower has requested that the Lenders make available to the Borrower a term loan facility in the principal amount of $24,950,000, the proceeds of which are to be used to refinance all amounts outstanding under the Nationsbank Facility (as hereinafter defined) and a revolving credit facility of up to $9,450,000, the proceeds of which are to be used as set forth herein; and WHEREAS, the Lenders are willing to make such loans available to the Borrower upon the terms and conditions set forth herein. NOW THEREFORE, the Borrower, the Lenders and the Agent hereby agree as follows: ARTICLE I Definitions Section 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below: "ABR", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate. "Adjusted LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate. "Administrative Questionnaire" means an Administrative Questionnaire in a form supplied by the Agent. "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Agent" means The Chase Manhattan Bank, in its capacity as administrative and collateral agent for the Lenders hereunder. "Alternate Base Rate" means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base CD Rate in effect on such day plus 1% and (c) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate, the Base CD Rate or the Federal Funds Effective Rate, respectively. "Applicable Percentage" means, with respect to any Revolving Lender, the percentage of the total Revolving Commitments represented by such Lender's Revolving Commitment. If the Revolving Commitments have terminated or expired, the Applicable Percentages shall be determined based upon the Revolving Commitments most recently in effect, giving effect to any assignments. "Applicable Rate" means, for any day (a) with respect to any Eurodollar Loan, 2.75% per annum, or (b) with respect to the commitment fees payable hereunder, 1/2 of 1% per annum. "Assessment Rate" means, for any day, the annual assessment rate in effect on such day that is payable by a member of the Bank Insurance Fund classified as "well-capitalized" and within supervisory subgroup "B" (or a comparable successor risk classification) within the meaning of 12 C.F.R. Part 327 (or any successor provision) to the Federal Deposit Insurance Corporation for insurance by such Corporation of time deposits made in dollars at the offices of such member in the United States; provided that if, as a result of any change in any law, rule or regulation, it is no longer possible to determine the Assessment Rate as aforesaid, then the Assessment Rate shall be such annual rate as shall be determined by the Agent to be representative of the cost of such insurance to the Lenders. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Agent, in the form of Exhibit A or any other form approved by the Agent. "Bank of Scotland Debt" means the Indebtedness owing to Bank of Scotland by Topps Europe Limited and Topps U.K. Limited pursuant to that certain Multi Option Facilities Agreement, dated as of January 7, 1994 (as amended). "Base CD Rate" means the sum of (a) the Three-Month Secondary CD Rate multiplied by the Statutory Reserve Rate plus (b) the Assessment Rate. "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrower" means The Topps Company, Inc., a Delaware corporation. "Borrowing" means (a) Loans of the same Class and Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect. 2 "Borrowing Request" means a request by the Borrower for a Borrowing in accordance with Section 2.03. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed; provided that, when used in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market. "Capital Expenditures" means, for any period, without duplication (a) the additions to property, plant and equipment and other capital expenditures of the Borrower and its consolidated Subsidiaries that are (or would be) set forth in a consolidated statement of cash flows of the Borrower for such period prepared in accordance with GAAP and (b) Capital Lease Obligations incurred by the Borrower and its consolidated Subsidiaries during such period, excluding, however, the amount of any Capital Expenditures paid for with proceeds of casualty insurance as evidenced in writing and submitted to the Agent. "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Capitalized Leases" means leases which constitute Capital Lease Obligations. "Change in Control" means (a) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) of shares representing more than 20% of the aggregate ordinary voting power represented by the issued and outstanding capital stock of the Borrower; or (b) occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower nor (ii) appointed by directors so nominated. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender's or the Issuing Bank's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Class", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Term Loans, and, when used in reference to any Commitment, refers to whether such Commitment is a Revolving Commitment or Term Loan Commitment. 3 "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means any and all "Collateral" and "Trademark Collateral" as defined in any applicable Security Document. "Commitment" means a Revolving Commitment or Term Loan Commitment, or any combination thereof (as the context requires). "Consolidated Fixed Charge Ratio" means, on any date, the ratio of (i) the sum of Normalized EBITDA minus unfinanced Capital Expenditures to (ii) current portion of long term debt (as per GAAP) plus interest expense (as certified by a Financial Officer on a quarterly basis). For purposes of calculating Consolidated Fixed Charge Ratio, Normalized EBITDA, unfinanced Capital Expenditures and interest expense shall be measured for the four fiscal quarter period ending on the date such ratio is being tested. "Consolidated Leverage Ratio" means, on any date, the ratio of (i) the sum of outstanding Consolidated Senior Liabilities plus Capitalized Leases plus Standby Letters of Credit to (ii) Normalized EBITDA for the four quarter period ending on such date. "Consolidated Net Income" means, for any period of computation thereof, the gross revenues from operations of the Borrower and its Subsidiaries (including payments received by the Borrower and its Subsidiaries of (i) interest income, and (ii) dividends and distributions made in the ordinary course of their businesses by Persons in which investment is permitted pursuant to this Agreement and not related to an extraordinary event) less all operating and non-operating expenses (not related to extraordinary events) of the Borrower and its Subsidiaries including taxes on income, all determined on a consolidated basis in accordance with GAAP applied on a consistent basis. "Consolidated Net Worth" means at any time as of which the amount thereof is to be determined, Consolidated Shareholders' Equity minus (without duplication of deductions in respect of items already deducted in arriving at surplus and retained earnings) all reserves (other than contingency reserves not allocated to any particular purpose), including without limitation reserves for depreciation, depletion, amortization, obsolescence, deferred income taxes, insurance and inventory valuation all as determined on a consolidated basis in accordance with GAAP applied on a consistent basis; "Consolidated Senior Liabilities" means, on any date, all Indebtedness for Money Borrowed of the Borrower and its Subsidiaries, all determined on a consolidated basis. "Consolidated Shareholders' Equity" means at any time as of which the amount thereof is to be determined, the sum of the following in respect of the Borrower and its Subsidiaries (determined on a consolidated basis and excluding intercompany items among the Borrower and its Subsidiaries and any upward adjustment after the Effective Date due to revaluation of assets): (i) the amount of issued and outstanding share capital, plus (ii) the amount of additional paid-in capital and retained income (or, in the case of a deficit, minus the amount of such deficit), plus (iii) the amount of any foreign currency 4 translation adjustment (if positive, or, if negative, minus the amount of such translation adjustment) minus (iv) the amount of any treasury stock, all as determined in accordance with GAAP applied on a consistent basis. "Contract Notification Date"means the date which is 30 days prior to (x) the date that any Material License will, by its own terms, expire, or (y) the date the Borrower intends to terminate any Material License. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. "Controlling" and "Controlled" have meanings correlative thereto. "Cumulative EBITDA" means EBITDA for the four quarter period ending on the last day of the fiscal quarter for which Cumulative EBITDA is being tested provided, that (i) for the fiscal quarter ending on August 29, 1998, Cumulative EBITDA shall be measured for the two fiscal quarter period ending on such date and (ii) for the fiscal quarter ending on November 28, 1998, Cumulative EBITDA shall be measured for the three fiscal quarter period ending on such date. "Default" means any event or condition which constitutes an Event of Default or which upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosed Matters" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06. "Documentary Letter of Credit" means a documentary letter of credit in form and substance customarily issued by the Issuing Bank from time to time. "Documentary Letter of Credit Outstandings" means, at any time, the sum of (i) the aggregate undrawn stated amount of all Documentary Letters of Credit then outstanding plus (ii) all amounts theretofore drawn under Documentary Letters of Credit and not then reimbursed. "dollars" or "$" refers to lawful money of the United States of America. "EBITDA" means, for any period, Consolidated Net Income (or net loss) of the Borrower and its subsidiaries for such period plus the sum of (i) depreciation expense, (ii) amortization expense, (iii) net total income tax expense and (iv) interest expense (as certified by a Financial Officer on a quarterly basis) for such period, all determined on a consolidated basis in accordance with GAAP applied on a consistent basis. "Effective Date" means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02). "Eligible Assignee" means (i) a commercial bank having total assets in excess of $250,000,000 and being governed by the Board; (ii) a finance 5 company, insurance company or other financial institution or fund acceptable to the Agent which in the ordinary course of business extends credit of the type evidenced by this Agreement and has total assets in excess of $100,000,000 and being governed by the Board, and if not so governed, acceptable to the Borrower, whose consent shall not be unreasonably withheld; and (iii) any other financial institution satisfactory to both the Borrower and the Agent; provided that no such entity that is organized under the laws of a jurisdiction outside the United States shall be an Eligible Assignee unless such entity shall, if legally able to do so, prior to the immediately following due date of any payment by the Borrower hereunder, deliver to the Borrower such certificates, documents or other evidence, as required by the Code or Treasury Regulations issued pursuant thereto, including (A) Internal Revenue Service Form W-8 or W-9 and (B) Internal Revenue Service Form 1001 or Form 4224 and any other certificate or statement of exemption required by Treasury Regulation Section 1.1441-1, 1.1441-4 or 1.1441-6(c) or any subsequent version thereof or successors thereto, properly completed and duly executed by such entity establishing that such payment is (i) not subject to United States Federal withholding tax under the Code because such payment is effectively connected with the conduct by such entity of a trade or business in the United States or (ii) totally exempt from the United States Federal withholding tax. "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to environmental protection matters. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Borrower, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any of its ERISA 6 Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Eurodollar", when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate. "Event of Default" has the meaning assigned to such term in Article VII. "Excluded Taxes" means, with respect to the Agent, any Lender, the Issuing Bank or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its income, profits, or capital by any Governmental Authority, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.19(b)), any withholding tax that is imposed on amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office) or is attributable to such Foreign Lender's failure to comply with Section 2.17(e), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 2.17(a). "Federal Funds Effective Rate" means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Financial Officer" means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower. "Financing Transactions" means the execution, delivery and performance by the Borrower of the Loan Documents, the borrowing of Loans, the use of the proceeds thereof and the issuance of Letters of Credit hereunder. 7 "Foreign Lender" means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction. "Foreign Subsidiary" means any Subsidiary that is organized under the laws of a jurisdiction other than the United States of America or any State thereof or the District of Columbia. "GAAP" means generally accepted accounting principles in the United States of America. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or 8 other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "Indebtedness for Money Borrowed" means for any Person, without duplication, all Indebtedness in respect of money borrowed, including without limitation, all Capitalized Leases and the deferred purchase price of any property or asset, evidenced by a promissory note, bond, debenture or similar written obligation for the payment of money, other than trade payables incurred in the ordinary course of business. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Intercompany Debt" means loans, advances and any other extensions of credit made by the Borrower to any of its Subsidiaries. "Intercompany Notes" means all promissory notes, instruments or other written indicia of an obligation by any Subsidiary to repay any Intercompany Debt owing to the Borrower. "Interest Election Request" means a request by the Borrower to convert or continue a Revolving Borrowing or Term Borrowing in accordance with Section 2.07. "Interest Payment Date" means (a) with respect to any ABR Loan, the first day of each month and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months' duration, each day prior to the last day of such Interest Period that occurs at intervals of three months' duration after the first day of such Interest Period. "Interest Period" means with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months (or, with the consent of each Lender, nine or twelve months) thereafter, as the Borrower may elect; provided, that (i) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (ii) any Interest Period 9 that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing. "Issuing Bank" means The Chase Manhattan Bank, in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.05(i). The Issuing Bank may, in its discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Bank, in which case the term "Issuing Bank" shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. "LC Disbursement" means a payment made by the Issuing Bank pursuant to a Letter of Credit. "LC Exposure" means, at any time, the aggregate amount of all Documentary Letter of Credit Outstandings and all Standby Letter of Credit Outstandings. The LC Exposure of any Revolving Lender at any time shall be its Applicable Percentage of the total LC Exposure at such time. "Lenders" means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to an Assignment and Acceptance, other than any such Person that ceases to be a party hereto pursuant to an Assignment and Acceptance. "Letter of Credit" means any letter of credit issued pursuant to this Agreement, which Letter of Credit shall be a Documentary Letter of Credit (including the Topps SA Letters of Credit) or a Standby Letter of Credit. "LIBO Rate" means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the "LIBO Rate" with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of $5,000,000 and for a maturity comparable to such Interest Period are offered by the principal London office of the Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the 10 foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan Documents" means this Agreement, the Security Documents and any other instrument or agreement executed and delivered in connection herewith or therewith. "Loans" means the loans made by the Lenders to the Borrower pursuant to this Agreement. "Margin Stock" means "Margin Stock" as that term is defined in Regulation U of the Board. "Material Adverse Effect" means a material adverse effect on (a) the business, assets, operations or condition, financial or otherwise, of the Borrower and the Subsidiaries taken as a whole, (b) the ability of the Borrower to perform any of its obligations under any Loan Document or (c) the validity or enforceability of any Loan Document or the rights of or benefits available to the Lenders under any Loan Document. "Material Indebtedness" means Indebtedness (other than the Loans and Letters of Credit), or obligations in respect of one or more Hedging Agreements, of any one or more of the Borrower and its Subsidiaries, in each case with a principal amount outstanding of at least $750,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary would be required to pay if such Hedging Agreement were terminated at such time. "Material Licenses" shall mean the licenses set forth on Schedule 5.04. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. Nationsbank Facility" means the term loan and revolving credit facility made available to the Borrower pursuant to that certain Credit Agreement, dated as of June 30, 1995, as amended, among the Borrower, Nationsbank, National Association (Carolinas), as agent, Chemical Bank, as documentation agent and the lenders party thereto. "Negative Contribution" shall mean, if negative, the number obtained by subtracting from revenues anticipated to be generated in respect of any Material License the direct costs attributable such Material License in a manner consistent with historical applications. "Net Proceeds" means, with respect to any event (a) the cash proceeds received in respect of such event including any cash received in respect of any non-cash proceeds, but only as and when received, net of (b) the sum of (i) all reasonable fees and out-of-pocket expenses paid by the Borrower and the Subsidiaries to third parties (other than Affiliates) in connection with 11 such event, (ii) in the case of a sale or other disposition of an asset, the amount of all payments required to be made by the Borrower and the Subsidiaries as a result of such event to repay Indebtedness (other than Loans) secured by such asset or otherwise subject to mandatory prepayment as a result of such event, and (iii) the amount of all taxes paid (or reasonably estimated to be payable) by the Borrower and the Subsidiaries, and the amount of any reserves established by the Borrower and the Subsidiaries to fund contingent liabilities reasonably estimated to be payable, in each case during the year that such event occurred or the next succeeding year and that are directly attributable to such event (as determined reasonably and in good faith by the chief financial officer of the Borrower). "Normalized EBITDA" means, for any period, Consolidated Net Income (or net loss) of the Borrower and its Subsidiaries for such period plus the sum of (i) depreciation expense, (ii) amortization expense, (iii) net total income tax expense and (iv) interest expense (as certified by a Financial Officer on a quarterly basis) for such period, all determined on a consolidated basis in accordance with GAAP applied on a consistent basis; provided that for purposes of calculating Normalized EBITDA for fiscal quarters ending May 30, 1997, November 28, 1997 and February 28, 1998, there shall be added to Consolidated Net Income (or net loss) for such quarters the amounts of $2,853,000, $3,044,000 and $10,646,000, respectively, which arise from extraordinary losses or non-cash charges, as the case may be. "Obligations" means the collective reference to (i) the unpaid principal of and interest on the Loans and all other obligations and liabilities of the Borrower to the Agent or any Lender (including, without limitation, interest accruing at the then-applicable rate provided herein after the maturity of the Loans and interest accruing at the then-applicable rate provided herein after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, that may arise under, out of, or in connection with this Agreement, the other Loan Documents, the Letters of Credit (including, without limitation, the Topps SA Letters of Credit) or any other documents made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Agent or the Lenders that are required to be paid by the Borrower or any Subsidiary pursuant to the terms of this Agreement or any other Loan Document) and (ii) all obligations and liabilities of the Borrower to any Lender or any affiliate of a Lender, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter incurred, that may arise under, out of, or in connection with any Hedging Agreement or any other document made, delivered or given in connection therewith. "Other Taxes" means any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document, but Other Taxes shall not include Excluded Taxes. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. 12 "Perfection Certificate" means a certificate in the form of Exhibit C or any other form approved by the Agent. "Permitted Encumbrances" means: (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 5.05; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.05; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII; and (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary; provided that the term "Permitted Encumbrances" shall not include any Lien securing Indebtedness. "Permitted Investments" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof; (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody's; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit 13 accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof which has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; (e) shares of mutual funds which invest in obligations described in paragraphs (a) through (d) above, the shares of which mutual funds are at all times rated "AAA" by S&P; and (f) shares of "money market funds" of financial institutions rated A or better by S&P or A2 or better by Moody's and shares of the Strong Municipal Money Market Fund. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreement" means the Pledge Agreement, dated as of the Effective Date, between the Borrower and the Agent, substantially in the form of Exhibit D. "Prepayment Event" means the issuance by the Borrower or any Subsidiary of any equity securities, or the receipt by the Borrower or any Subsidiary of any capital contribution, other than any such issuance of equity securities to, or receipt of any such capital contribution from, the Borrower or a Subsidiary. "Prime Rate" means the rate of interest per annum publicly announced from time to time by The Chase Manhattan Bank as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. "Register" has the meaning set forth in Section 9.04. "Related Parties" means, with respect to any specified Person, such Person's Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person's Affiliates. "Required Lenders" means, at any time, Lenders having Revolving Exposures, Term Loans and unused Commitments representing at least 66-2/3% of the sum of the total Revolving Exposures, outstanding Term Loans and unused Commitments at such time. 14 "Restricted Payment" means any dividend or other distribution (whether in cash, securities or other property) with respect to any shares of any class of capital stock of the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancelation or termination of any such shares of capital stock of the Borrower or any Subsidiary or any option, warrant or other right to acquire any such shares of capital stock of the Borrower or any Subsidiary. "Revolving Availability Period" means the period from and including the Effective Date to but excluding the earlier of the Revolving Maturity Date and the date of termination of the Revolving Commitments. "Revolving Commitment" means, with respect to each Lender, the commitment, if any, of such Lender to make Revolving Loans and to acquire participations in Letters of Credit hereunder, expressed as an amount representing the maximum aggregate amount of such Lender's Revolving Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The amount of each Lender's Revolving Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Revolving Commitment, as applicable. The aggregate amount of the Lenders' Revolving Commitments is $9,450,000. "Revolving Direct Borrowing Maximum Amount" means $6,000,000. "Revolving Exposure" means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender's Revolving Loans and its LC Exposure at such time. "Revolving Lender" means a Lender with a Revolving Commitment or, if the Revolving Commitments have terminated or expired, a Lender with Revolving Exposure. "Revolving Loan" means a Loan made pursuant to clause (b) of Section 2.01. "Revolving Maturity Date" means July 6, 2000. "S&P" means Standard & Poor's. "Security Documents" means the Pledge Agreement, the Trademark Security Agreement and each other security agreement or other instrument or document executed and delivered pursuant to Section 5.14 or 5.15 to secure any of the Obligations. "Standby Letter of Credit" shall mean a standby letter of credit in form and substance customarily issued by the Issuing Bank from time to time and in form and substance acceptable to the Agent and the Issuing Bank and issued for such purposes for which the Borrower has historically obtained standby letters of credit, or for such other purposes as are reasonably acceptable to the Agent and the Issuing Bank. 15 "Standby Letter of Credit Outstandings" shall mean, at any time, the sum of (i) the aggregate undrawn stated amount of all Standby Letters of Credit then outstanding plus (ii) all amounts theretofore drawn under Standby Letters of Credit and not then reimbursed. "Statutory Reserve Rate" means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is the number one minus the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board to which the Agent is subject (a) with respect to the Base CD Rate, for new negotiable nonpersonal time deposits in dollars of over $100,000 with maturities approximately equal to three months and (b) with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage. "subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise Controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" means any subsidiary of the Borrower. "Taxes" means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Term Loan" means a Loan made pursuant to clause (a) of Section 2.01. "Term Loan Commitment" means, with respect to each Lender, the commitment, if any, of such Lender to make a Term Loan hereunder on the Effective Date, expressed as an amount representing the maximum principal amount of the Term Loan to be made by such Lender hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender's Term Loan Commitment is set forth on Schedule 2.01, or in the Assignment and Acceptance pursuant to which such Lender shall have assumed its Term Loan Commitment, as applicable. The aggregate amount of the Lenders' Term Loan Commitments is $24,950,000. 16 "Term Loan Lender" means a Lender with a Term Loan Commitment or an outstanding Term Loan. "Term Loan Maturity Date" means July 6, 2000. "Three-Month Secondary CD Rate" means, for any day, the secondary market rate for three-month certificates of deposit reported as being in effect on such day (or, if such day is not a Business Day, the next preceding Business Day) by the Board through the public information telephone line of the Federal Reserve Bank of New York (which rate will, under the current practices of the Board, be published in Federal Reserve Statistical Release H.15(519) during the week following such day) or, if such rate is not so reported on such day or such next preceding Business Day, the average of the secondary market quotations for three-month certificates of deposit of major money center banks in New York City received at approximately 10:00 a.m., New York City time, on such day (or, if such day is not a Business Day, on the next preceding Business Day) by the Agent from three negotiable certificate of deposit dealers of recognized standing selected by it. "Topps SA" shall mean Topps Latin America SA, a corporation organized under the laws of Uruguay. "Topps SA Guaranty" means the Guaranty, dated as of the Effective Date, between the Borrower and the Agent, substantially in the form of Exhibit G. "Topps SA Letters of Credit" means Documentary Letters of Credit issued for the account of Topps SA for the benefit of its vendors, reimbursement obligations in respect of which are guaranteed by the Borrower. "Topps SA Letter of Credit Outstandings" means, at any time, the sum of (i) the aggregate undrawn stated amount of all Topps SA Letters of Credit then outstanding plus (ii) all amounts theretofore drawn under Topps SA Letters of Credit and not then reimbursed. "Trademark Security Agreement" means the Trademark Security Agreement, dated as of the Effective Date, between the Borrower and the Agent, substantially in the form of Exhibit E. "Traveler Letter of Credit" shall mean a Standby Letter of Credit issued under this Agreement in favor of The Travelers Company. "Type", when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate. "Ulster Bank Debt" means the Indebtedness owing to Ulster Bank by Topps Ireland Limited, as described in items a. through f. of Section 6.04(g). "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. 17 Section 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a "Revolving Loan") or by Type (e.g., a "Eurodollar Loan") or by Class and Type (e.g., a "Eurodollar Revolving Loan"). Borrowings also may be classified and referred to by Class (e.g., a "Revolving Borrowing") or by Type (e.g., a "Eurodollar Borrowing") or by Class and Type (e.g., a "Eurodollar Revolving Borrowing"). Section 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. Section 1.04. Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided that, if the Borrower notifies the Agent that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. ARTICLE II The Credits Section 2.01. Commitments. Subject to the terms and conditions set forth herein, each Lender agrees (a) to make a Term Loan to the Borrower on the Effective Date in a principal amount not exceeding its Term Loan Commitment, and (b) to make Revolving Loans to the Borrower from time to time during the Revolving Availability Period in an aggregate principal amount that will not result in (i) such Lender's Revolving Exposure exceeding such Lender's Revolving Commitment or (ii) the aggregate amount of all Revolving Loans exceeding the 18 Revolving Direct Borrowing Maximum Amount. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans. Amounts repaid in respect of Term Loans may not be reborrowed. Section 2.02. Loans and Borrowings. (a) Each Loan shall be made as part of a Borrowing consisting of Loans of the same Class and Type made by the Lenders ratably in accordance with their respective Commitments of the applicable Class. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender's failure to make Loans as required. (b)Subject to Section 2.14, each Revolving Borrowing and Term Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. (c) At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $1,000,000. At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $1,000,000; provided that an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the total Revolving Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e). Borrowings of more than one Type and Class may be outstanding at the same time. (d)Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Revolving Maturity Date or the Term Loan Maturity Date, as applicable. Section 2.03. Requests for Borrowings. To request a Revolving Borrowing, the Borrower shall notify the Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing; provided that any such notice of an ABR Revolving Borrowing to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e) may be given not later than 10:00 a.m., New York City time, on the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Agent of a written Borrowing Request in a form approved by the Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information in compliance with Section 2.02: (i) the aggregate amount of such Borrowing; 19 (ii) the date of such Borrowing, which shall be a Business Day; (iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; (iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and (v) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.06. If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Agent shall advise each Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing. Section 2.04. [This Section intentionally left blank.] Section 2.05. Letters of Credit.(a) General. Subject to the terms and conditions set forth herein, the Borrower may request the issuance of Documentary Letters of Credit (including Topps SA Letters of Credit) and Standby Letters of Credit for its own account and for the account of Topps SA (in the case of the Topps SA Letters of Credit), in a form reasonably acceptable to the Agent and the Issuing Bank, at any time and from time to time during the Revolving Availability Period. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any form of letter of credit application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control. The Borrower shall not be obligated under any such letter of credit application or related documents to provide collateral to the Issuing Bank other than (x) that which is required to be provided under this Agreement or (y) a security interest in the goods in respect of which such letter of credit is being issued. (b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions. To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Bank) to the Issuing Bank and the Agent (reasonably in advance of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the name and address of the beneficiary thereof and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the Borrower also shall submit a 20 letter of credit application on the Issuing Bank's standard form in connection with any request for a Letter of Credit. The Borrower shall not be obligated under any such letter of credit application or related documents to provide collateral to the Issuing Bank other than (x) that which is required to be provided under this Agreement or (y) a security interest in the goods in respect of which such letter of credit is being issued. A Letter of Credit shall be issued, amended, renewed or extended only if (and upon issuance, amendment, renewal or extension of each Letter of Credit the Borrower shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the Documentary Letter of Credit Outstandings shall not exceed $4,500,000, (ii) the Standby Letter of Credit Outstandings shall not exceed $700,000, (iii) the Topps SA Letter of Credit Outstandings shall not exceed $2,000,000, and (iv) the total Revolving Exposures shall not exceed the total Revolving Commitments. (c) Expiration Date. Each Letter of Credit other than the Traveler Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the date that is five Business Days prior to the Revolving Maturity Date. The Traveler Letter of Credit shall expire at or prior to the close of business July 24, 2003. (d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Lenders, the Issuing Bank hereby grants to each Revolving Lender, and each Revolving Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Lender's Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing, each Revolving Lender hereby absolutely and unconditionally agrees to pay to the Agent, for the account of the Issuing Bank, such Lender's Applicable Percentage of each LC Disbursement made by the Issuing Bank and not reimbursed by the Borrower on the date due as provided in paragraph (e) of this Section, or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever. (e) Reimbursement. If the Issuing Bank shall make any LC Disbursement in respect of a Letter of Credit, the Borrower shall reimburse such LC Disbursement by paying to the Agent an amount equal to such LC Disbursement not later than 12:00 noon, New York City time, on the date that such LC Disbursement is made, if the Borrower shall have received notice of such LC Disbursement prior to 10:00 a.m., New York City time, on such date, or, if such notice has not been received by the Borrower prior to such time on such date, then not later than 12:00 noon, New York City time, on (i) the Business Day that the Borrower receives such notice, if such notice is received prior to 10:00 a.m., New York City time, on the day of receipt, or (ii) the Business Day immediately following the day that the Borrower receives such notice, if such notice is not received prior to such time on the day of receipt; provided that the Borrower may, subject to the conditions to borrowing set forth herein, 21 request in accordance with Section 2.03 that such payment be financed with an ABR Revolving Borrowing in an equivalent amount and, to the extent so financed, the Borrower's obligation to make such payment shall be discharged and replaced by the resulting ABR Revolving Borrowing. If the Borrower fails to make such payment when due, the Agent shall notify each Revolving Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Lender's Applicable Percentage thereof. Promptly following receipt of such notice, each Revolving Lender shall pay to the Agent its Applicable Percentage of the payment then due from the Borrower, in the same manner as provided in Section 2.06 with respect to Loans made by such Lender (and Section 2.06 shall apply, mutatis mutandis, to the payment obligations of the Revolving Lenders), and the Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Revolving Lenders. Promptly following receipt by the Agent of any payment from the Borrower pursuant to this paragraph, the Agent shall distribute such payment to the Issuing Bank or, to the extent that Revolving Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Lenders and the Issuing Bank as their interests may appear. Any payment made by a Revolving Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of ABR Revolving Loans as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement. (f) Obligations Absolute. The Borrower's obligation to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, or (iv) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower's obligations hereunder. Neither the Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank; provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank's failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of gross negligence or wilful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction), the Issuing Bank shall 22 be deemed to have exercised care in each such determination. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented which appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit. (g) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Agent and the Borrower by telephone (confirmed by telecopy) of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder; provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Revolving Lenders with respect to any such LC Disbursement. (h) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full on the date such LC Disbursement is made, the unpaid amount thereof shall bear interest, for each day from and including the date such LC Disbursement is made to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Revolving Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to paragraph (e) of this Section, then Section 2.13(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Revolving Lender pursuant to paragraph (e) of this Section to reimburse the Issuing Bank shall be for the account of such Lender to the extent of such payment. (i) Replacement of the Issuing Bank. The Issuing Bank may be replaced at any time by written agreement among the Borrower, the Agent, the replaced Issuing Bank and the successor Issuing Bank. The Agent shall notify the Lenders of any such replacement of the Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(b). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term "Issuing Bank" shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit. (j) Cash Collateralization. Subject to the provision of the following sentence, the Borrower shall, on or before the Revolving Maturity Date, deposit in an account with the Agent, in the name of the Agent and for the benefit of the Lenders, an amount in cash equal to 105% of the sum of (i) the aggregate undrawn stated amount of the Traveler Letter of Credit plus (ii) all 23 amounts theretofore drawn under the Traveler Letter of Credit and not then reimbursed plus (iii) any accrued and unpaid interest thereon. If any Event of Default shall occur and be continuing, on the Business Day that the Borrower receives notice from the Agent or the Required Lenders (or, if the maturity of the Loans has been accelerated, Revolving Lenders with LC Exposure representing greater than 66-2/3% of the total LC Exposure) demanding the deposit of cash collateral pursuant to this paragraph, the Borrower shall deposit in such cash collateral account, an amount in cash equal to 105% of the LC Exposure as of such date plus any accrued and unpaid interest thereon; provided that the obligation to deposit such cash collateral shall become effective immediately, and such deposit shall become immediately due and payable, without demand or other notice of any kind, upon the occurrence of any Event of Default with respect to the Borrower described in clause (h) or (i) of Section 7.01. Each such deposit shall be held by the Agent as collateral for the payment and performance of the obligations of the Borrower under this Agreement. The Agent shall have exclusive dominion and control, including the exclusive right of withdrawal, over such account. Other than any interest earned on the investment of such deposits, which investments shall be made at the option and sole discretion of the Agent and at the Borrower's risk and expense, such deposits shall not bear interest. Interest or profits, if any, on such investments shall accumulate in such account. Moneys in such account shall be applied by the Agent to reimburse the Issuing Bank for LC Disbursements for which it has not been reimbursed and, to the extent not so applied, shall be held for the satisfaction of the reimbursement obligations of the Borrower for the LC Exposure at such time or, if the maturity of the Loans has been accelerated (but subject to the consent of Revolving Lenders with LC Exposure representing greater than 66-2/3% of the total LC Exposure), be applied to satisfy other obligations of the Borrower under this Agreement. If the Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of an Event of Default, such amount (to the extent not applied as aforesaid) shall be returned to the Borrower within three Business Days after all Events of Default have been cured or waived. It is expressly agreed that amounts deposited into such account in respect of the Traveler Letter of Credit shall remain on deposit after the termination of this Agreement so long as such letter of credit remains outstanding, and to the extent that such funds have not been applied to the Borrower's obligations, shall be returned to the Borrower following the expiration of such letter of credit or the return thereof, in each case without the same having been drawn. Section 2.06. Funding of Borrowings. (a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Agent most recently designated by it for such purpose by notice to the Lenders. The Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower maintained with the Agent in New York City and designated by the Borrower in the applicable Borrowing Request; provided that ABR Revolving Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.05(e) shall be remitted by the Agent to the Issuing Bank. (b) Unless the Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Agent such Lender's share of such Borrowing, the Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, 24 make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Agent, then the applicable Lender and the Borrower severally agree to pay to the Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Agent, at (i) in the case of such Lender, the greater of the Federal Funds Effective Rate and a rate determined by the Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of the Borrower, the interest rate applicable to the Loans so funded by the Agent. If such Lender pays such amount to the Agent, then such amount shall constitute such Lender's Loan included in such Borrowing. SECTION 2.07 INTEREST ELECTIONS (a) Each Revolving Borrowing and Term Borrowing initially shall be of the Type specified in the applicable Borrowing Request and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. (b) To make an election pursuant to this Section, the Borrower shall notify the Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Agent of a written Interest Election Request in a form approved by the Agent and signed by the Borrower. (c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02 and paragraph (f) of this Section: (i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing); (ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day; (iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and (iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term "Interest Period". 25 If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. (d) Promptly following receipt of an Interest Election Request, the Agent shall advise each Lender of the details thereof and of such Lender's portion of each resulting Borrowing. (e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto. SECTION 2.08. Termination and Reduction of Commitments.(a) Unless previously terminated, (i) the Term Loan Commitments shall terminate at 5:00 p.m., New York City time, on the Effective Date and (ii) the Revolving Commitments shall terminate on the Revolving Maturity Date. (b) The Borrower may at any time terminate, or from time to time reduce, the Commitments of any Class; provided that (i) each reduction of the Commitments of any Class shall be in an amount that is an integral multiple of $100,000 and not less than $1,000,000 and (ii) the Borrower shall not terminate or reduce the Revolving Commitments if, after giving effect to any concurrent prepayment of the Revolving Loans in accordance with Section 2.11, the sum of the Revolving Exposures would exceed the total Revolving Commitments. (c) The Borrower shall notify the Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any notice, the Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Revolving Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments of any Class shall be permanent. Each reduction of the Commitments of any Class shall be made ratably among the Lenders in accordance with their respective Commitments of such Class. SECTION 2.09. Repayment of Loans; Evidence of Debt. (a) The Borrower hereby unconditionally promises to pay (i) to the Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan of such 26 Lender on the Revolving Maturity Date and (ii) to the Agent for the account of each Lender the then unpaid principal amount of each Term Loan of such Lender as provided in Section 2.10. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder. (c) The Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Agent hereunder for the account of the Lenders and each Lender's share thereof. (d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein; provided that the failure of any Lender or the Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (e) Any Lender may request that Loans of any Class made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns). SECTION 2.10. Amortization of Term Loans. (a) Subject to adjustment pursuant to paragraph (c) of this Section, the Borrower shall repay Term Borrowings on each date set forth below in the aggregate principal amount set forth opposite such date: 27 Date Amount June 1, 1998 $1,666,666.66 July 1, 1998 $ 833,333.33 August 1, 1998 $ 833,333.33 September 1, 1998 $ 833,333.33 October 1, 1998 $ 833,333.33 November 1, 1998 $ 833,333.33 December 1, 1998 $ 833,333.33 January 1, 1999 $ 833,333.33 February 1, 1999 $ 833,333.33 March 1, 1999 $ 833,333.33 April 1, 1999 $ 833,333.33 May 1, 1999 $ 833,333.33 June 1, 1999 $ 833,333.33 July 1, 1999 $ 833,333.33 August 1, 1999 $1,041,666.68 September 1, 1999 $1,041,666.68 October 1, 1999 $1,041,666.68 November 1, 1999 $1,041,666.68 December 1, 1999 $1,041,666.68 January 1, 2000 $1,041,666.68 February 1, 2000 $1,041,666.68 March 1, 2000 $1,041,666.68 April 1, 2000 $1,041,666.68 May 1, 2000 $1,041,666.68 June 1, 2000 $1,041,666.68 July 6, 2000 $ 991,666.57 (b) To the extent not previously paid, Term Loans shall be due and payable on the Term Loan Maturity Date. (c) Any prepayment of a Term Borrowing shall be applied to reduce the subsequent scheduled repayments of the Term Borrowings to be made pursuant to this Section in reverse chronological order. SECTION 2.11. Prepayment of Loans. (a) The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to the requirements of this Section. (b) Subject to the proviso set forth below, in the event and on each occasion that any Net Proceeds are received by or on behalf of the Borrower or any Subsidiary in respect of any Prepayment Event, the Borrower shall, immediately after such Net Proceeds are received, prepay Term Borrowings in an aggregate amount equal to the amount by which all such Net Proceeds arising during the term of this Agreement exceeds $5,000,000 in the manner specified in Section 2.10(c). 28 (c) Prior to any optional or mandatory prepayment of Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be prepaid and shall specify such selection in the notice of such prepayment pursuant to paragraph (d) of this Section; provided that each prepayment of Borrowings of any Class shall be applied to prepay ABR Borrowings of such Class before any other Borrowings of such Class. (d) The Borrower shall notify the Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Revolving Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Revolving Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, the principal amount of each Borrowing or portion thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably detailed calculation of the amount of such prepayment; provided that, if a notice of optional prepayment is given in connection with a conditional notice of termination of the Revolving Commitments as contemplated by Section 2.08, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.08. Promptly following receipt of any such notice, the Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in the amount of $500,000 and $100,000 increments thereof, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13. SECTION 2.12. Fees. (a) The Borrower agrees to pay to the Agent for the account of each Lender a commitment fee, which shall accrue at the Applicable Rate on the average daily unused amount of each Revolving Commitment of such Lender during the period from and including the Effective Date to but excluding the date on which such Commitment terminates. Accrued commitment fees shall be payable in arrears on the last day of May, August, November and February of each year and on the date on which the Revolving Commitments terminate, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). For purposes of computing commitment fees, a Revolving Commitment of a Lender shall be deemed to be used to the extent of the outstanding Revolving Loans and LC Exposure of such Lender. (b) The Borrower agrees to pay to the Agent for the account of each Revolving Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at a per annum rate equal to one quarter of one percent (0.25%) on the face amount of Documentary Letters of Credit and two and three quarters percent (2.75%) per annum on the face amount of Standby Letters of Credit during the period from and including the Effective Date to but excluding the later of the date on which such Lender's Revolving Commitment terminates and the date on which such Lender ceases to have any LC Exposure. In addition to the fees in the nature of those referred to in the preceding sentence (without duplication), the Borrower agrees to pay the Issuing Bank's standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees accrued through and including the last day of May, August, November and February 29 of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date; provided that all such fees shall be payable on the date on which the Revolving Commitments terminate and any such fees accruing after the date on which the Revolving Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 10 days after demand. All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Borrower agrees to pay to the Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Agent. (d) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Agent (or to the Issuing Bank, in the case of fees payable to it) for distribution, in the case of commitment fees and participation fees, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances. SECTION 2.13. Interest. (a) The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate. (b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate. (c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% plus the rate applicable to ABR Revolving Loans as provided in paragraph (a) of this Section. (d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the Revolving Commitments; provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Revolving Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion. (e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or 30 Adjusted LIBO Rate shall be determined by the Agent, and such determination shall be conclusive absent manifest error. SECTION 2.14. ALternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing: (a) the Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or (b) the Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders (or Lender) of making or maintaining their Loans (or its Loan) included in such Borrowing for such Interest Period; then the Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing. SECTION 2.15. Increased Costs. (a) If any Change in Law shall: (i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or the Issuing Bank; or (ii) impose on any Lender or the Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein; and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered. (b) If any Lender or the Issuing Bank determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or the Issuing Bank's capital or on the capital of such Lender's or the Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the Issuing Bank, to a level below that which such Lender or the Issuing Bank or such 31 Lender's or the Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or the Issuing Bank's policies and the policies of such Lender's or the Issuing Bank's holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender's or the Issuing Bank's holding company for any such reduction suffered. (c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof. (d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender's or the Issuing Bank's right to demand such compensation; provided that the Borrower shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender's or the Issuing Bank's intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof. SECTION 2.16. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the Borrower's election to convert a Borrowing of any Class to or continue a Borrowing of any Class as a Eurodollar Borrowing which results in the Interest Period therefor commencing before and ending after a date on which any principal of the Loans of such Class is to be repaid and the payment of such principal during such interest period, (c) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (d) the failure to borrow, convert, continue or prepay any Revolving Loan or Term Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11(d) and is revoked in accordance therewith), or (e) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19, then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event (and in the case of clause (b) above, the Borrower will make such compensation on the applicable principal repayment date). In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would 32 accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof. SECTION 2.17. Taxes. (a) Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes; provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Agent, Lender or Issuing Bank (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Agent, each Lender and the Issuing Bank, within 10 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Agent, such Lender or the Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or the Issuing Bank, or by the Agent on its own behalf or on behalf of a Lender or the Issuing Bank, shall be conclusive absent manifest error. (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Agent. (e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which the Borrower is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to the Borrower (with a copy to the Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate. 33 SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Setoffs. (a) The Borrower shall make each payment required to be made by it hereunder or under any other Loan Document (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.15, 2.16 or 2.17, or otherwise) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Agent at its offices at 1 Pierrepont Plaza, Brooklyn, New York, except payments to be made directly to the Issuing Bank as expressly provided herein and except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. The Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Loan Document shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties. (c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans, Term Loans or participations in LC Disbursements resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans, Term Loans and participations in LC Disbursements and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans, Term Loans and participations in LC Disbursements of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans, Term Loans and participations in LC Disbursements; provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to 34 the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of set-off and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation. (d) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Agent for the account of the Lenders or the Issuing Bank hereunder that the Borrower will not make such payment, the Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Agent in accordance with banking industry rules on interbank compensation. (e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.05(d) or (e), 2.06(b), 2.18(d) or 9.03(c), then the Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Agent for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid. SECTION 2.19. Mitigation Obligations; Replacement of Lenders. (a) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment. (b) If any Lender requests compensation under Section 2.15, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (i) the Borrower shall have received the prior written consent of the Agent (and, if a Revolving Commitment is being assigned, the Issuing Bank), which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in LC Disbursements, 35 accrued interest thereon, accrued fees and all other amounts payable to it hereunder, from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply. ARTICLE III Representations and Warranties The Borrower represents and warrants to the Lenders that: SECTION 3.01. Organization; Powers. Each of the Borrower and its Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. SECTION 3.02. Authorization; Enforceability. The Financing Transactions to be entered into by the Borrower are within the Borrower's corporate powers and have been duly authorized by all necessary corporate and, if required, stockholder action. This Agreement has been duly executed and delivered by the Borrower and constitutes, and each other Loan Document to which the Borrower is to be a party, when executed and delivered by the Borrower, will constitute, a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. SECTION 3.03. Governmental Approvals; No Conflicts. The Financing Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect and except filings necessary to perfect Liens created under the Loan Documents, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of its Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of its Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of its Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries, except Liens created under the Loan Documents. 36 SECTION 3.04. Financial Condition; No Material Adverse Change. (a) The Borrower has heretofore furnished to the Lenders its consolidated and consolidating balance sheet and statements of income, stockholders equity and cash flows (i) as of and for the fiscal years ended March 2, 1996 and March 1, 1997, (A) in the case of the consolidated financials, reported on by Deloitte & Touche, L.L.P., independent public accountants and (B) in the case of the consolidating financials, certified by the Borrower's chief financial officer, and (ii) as of and for the fiscal quarters ended May 30, 1997, November 28, 1997 and February 28, 1998, (A) in the case of the consolidated financials, reviewed by Deloitte & Touche, L.L.P., independent public accountants and (B) in the case of consolidating financials, certified by the Borrower's chief financial officer. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of the Borrower and its consolidated Subsidiaries as of such dates and for such periods in accordance with GAAP, subject to year-end audit adjustments in the case of the statements referred to in clause (ii) above. (b) Except as disclosed in the financial statements referred to above or the notes thereto and except for the Disclosed Matters, after giving effect to the Financing Transactions, none of the Borrower or its Subsidiaries has, as of the Effective Date, any material Indebtedness or contingent liabilities, unusual long-term commitments or unrealized losses. (c) Since February 28, 1998, there has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and its Subsidiaries, taken as a whole. SECTION 3.05. Properties. (a) Each of the Borrower and its Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, subject to no transfer restrictions or Liens of any kind (other than as set forth on Schedule 6.02), except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. (b) Each of the Borrower and its Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Borrower and its Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. (c) Schedule 3.05 sets forth the address of each real property that is owned or leased by the Borrower or any of its Subsidiaries as of the Effective Date after giving effect to the Financing Transactions. (d) Neither the Borrower nor its Subsidiaries is a party to any contract, agreement, lease or instrument the performance of which, either unconditionally or upon the happening of an event, will result in or require the creation of a Lien on any assets of the Borrower or its Subsidiaries or otherwise result in a violation of this Agreement other than the Liens granted to the Agent as provided for in this Agreement and the other Loan Documents. 37 SECTION 3.06. Litigation and Environmental Matters. (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries (i) as to which there is a reasonable likelihood of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve any of the Loan Documents or the Financing Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of its Subsidiaries (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability. (c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. SECTION 3.07. Compliance with Laws and Agreements. Each of the Borrower and its Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. Neither the Borrower nor any subsidiary is (a) a party to any judgment, order, decree or any agreement or instrument or subject to restrictions which could reasonably be likely to have a Material Adverse Effect or to materially adversely affect the ability of the Borrower to observe the covenants and agreements contained herein or any other Loan, or (b) in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party, which default has, or if not remedied within any applicable grace period could reasonably be likely to have, a Material Adverse Effect or to materially adversely affect the ability of the Borrower to observe the covenants and agreements contained herein or any other Loan Document. SECTION 3.08. Investment and Holding Company Status. Neither the Borrower nor any of its Subsidiaries is (a) an "investment company" or an "affiliated Person" of, or "promoter" or "principal underwriter" for, an "investment company," as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. SECTION 3.09. Taxes. Each of the Borrower and its Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent 38 that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. Each of the Borrower and its Subsidiaries has paid, or has provided adequate reserves for the payment of, all material Federal, state and foreign income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof. SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $3,000,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $3,000,000 the fair market value of the assets of all such underfunded Plans. SECTION 3.11. Disclosure. The Borrower has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which the Borrower or any of its Subsidiaries is subject, and all other matters known to any of them, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower to the Agent or any Lender in connection with the negotiation of this Agreement or any other Loan Document or delivered hereunder or thereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. SECTION 3.12. Subsidiaries and Affiliates. Schedule 3.12 sets forth as of the Effective Date the name of, and the ownership interest of the Borrower in, each Subsidiary and each Affiliate of the Borrower. The outstanding shares or other equity interests of each such Subsidiary and each Affiliate have been duly authorized and validly issued and are fully paid and nonassessable; and the Borrower and each such subsidiary owns beneficially and of record all the shares and other interests it is listed as owning in Schedule 3.12, free and clear of any Lien. Schedule II to the Pledge Agreement sets forth as of the Effective Date a complete description of all Intercompany Notes owned by the Borrower. The Borrower owns beneficially and legally all such Intercompany Notes, free and clear of any Lien. SECTION 3.13. Insurance. Schedule 3.13 sets forth a description of all insurance maintained by or on behalf of the Borrower and its Subsidiaries as of the Effective Date. As of the Effective Date, all premiums in respect of such insurance have been paid. 39 SECTION 3.14. Labor Matters. As of the Effective Date, except for the Disclosed Matters, none of the employees of the Borrower or any Subsidiary is subject to any collective bargaining agreement and there are no strikes, lockouts or slowdowns against the Borrower or any Subsidiary pending or, to the knowledge of the Borrower, threatened that are reasonably likely to have a Material Adverse Effect. The hours worked by and payments made to employees of the Borrower and the Subsidiaries have not been in material violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters except to the extent that any such violation could not reasonably be expected to result in a Material Adverse Effect. All payments due from the Borrower or any Subsidiary, or for which any claim may be made against the Borrower or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of the Borrower or such Subsidiary. The consummation of the Financing Transactions will not give rise to any right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower or any Subsidiary is bound that is reasonably likely to have a Material Adverse Effect. SECTION 3.15. Solvency. Immediately after the consummation of the Financing Transactions to occur on the Effective Date and immediately following the making of each Loan made on the Effective Date and after giving effect to the application of the proceeds of such Loans, (a) the fair value of the assets of the Borrower, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of the Borrower will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) the Borrower will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) the Borrower will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Effective Date. SECTION 3.16. No Default. As of the date hereof, there does not exist any Default or Event of Default hereunder. SECTION 3.17. Place of Business. As of the date hereof, the Borrower has no office, mailing address or other place of business in the United Kingdom. SECTION 3.18. Year 2000. Any reprogramming required to permit the proper functioning, in and following the year 2000, of (i) the Borrower's computer systems and (ii) equipment containing embedded microchips (including systems and equipment supplied by others or with which Borrower's systems interface) and the testing of all such systems and equipment, as so reprogrammed, will be substantially completed by February 28, 1999, except to the extent the failure to do so is not reasonably likely to result in a Material Adverse Effect. The cost to the Borrower of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Borrower (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the 40 Borrower and its Subsidiaries are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit the Borrower to conduct its business without Material Adverse Effect. SECTION 3.19. Federal Reserve Regulations. The Borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. ARTICLE IV Conditions SECTION 4.01. Effective Date. The obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02): (a) The Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement. (b) The Agent shall have received a favorable written opinion (addressed to the Agent and the Lenders and dated the Effective Date) of (i) Willkie Farr & Gallagher, counsel for the Borrower, substantially in the form of Exhibit B-1 and (ii) Simmons & Simmons, special U.K. counsel to the Borrower, substantially in the form of Exhibit B-2, covering such matters relating to the Borrower, the Loan Documents or the Financing Transactions as the Required Lenders shall reasonably request. The Borrower hereby requests such counsel to deliver such opinions. (c) The Agent shall have received such documents and certificates as the Agent or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Financing Transactions and any other legal matters relating to the Borrower, the Loan Documents or the Financing Transactions, all in form and substance satisfactory to the Agent and its counsel. (d) The Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Borrower, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02. (e) The Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder or under any other Loan Document. 41 (f) The Agent shall have received counterparts of the Trademark Security Agreement and the Pledge Agreement signed on behalf of the Borrower, together with the following: (i) stock certificates or bearer share warrants representing 65% of the outstanding shares of capital stock of Topps Europe Limited as of the Effective Date after giving effect to the Financing Transactions and stock powers and instruments of transfer, endorsed in blank, with respect to such stock certificates or bearer share warrants; (ii) all documents and instruments, including Uniform Commercial Code financing statements, required by law or reasonably requested by the Agent to be filed, registered or recorded to create or perfect the Liens intended to be created under the Security Documents; (iii) the duly endorsed original of all instruments evidencing loans and advances made by the Borrower to any Subsidiary to the extent such instruments do not cause the earnings and profits of such Subsidiary to be deemed to be a distribution to the Borrower under 26 U.S.C.S. Sec. 956; and (iv) a completed Perfection Certificate dated the Effective Date and signed by an executive officer or Financial Officer of the Borrower, together with all attachments contemplated thereby, including the results of a search of the Uniform Commercial Code (or equivalent) filings made with respect to the Borrower in the jurisdictions contemplated by the Perfection Certificate and a search of the United States Patent and Trademark Office with respect to the Borrower's intellectual property and copies of the financing statements (or similar documents) disclosed by such searches and evidence reasonably satisfactory to the Agent that the Liens indicated by such financing statements (or similar documents) are permitted by Section 6.02 or have been released. (g) The Agent shall have received evidence satisfactory to it that the insurance required by Section 5.07 is in effect. (h) The Borrower and the Subsidiaries shall have granted the Agent access to and the right to inspect all reports, audits and other internal information of the Borrower and the Subsidiaries relating to environmental matters, and any third party verification of certain matters relating to compliance with environmental laws and regulations requested by the Agent, and the Agent shall be satisfied that the Borrower and the Subsidiaries are in compliance in all material respects with all applicable environmental laws and regulations and be satisfied with the costs of maintaining such compliance. (i) All consents and approvals required to be obtained from any Governmental Authority or other Person as shall be required to consummate the transactions contemplated hereby shall have been obtained, and all applicable 42 waiting periods and appeal periods shall have expired, in each case without the imposition of any burdensome conditions. (j) The Lenders shall have received (i) audited consolidated financial statements of the Borrower for the fiscal years ended March 2, 1996 and March 1, 1997, (ii) if available, satisfactory audited consolidated financial statements of the Borrower for the fiscal year ended February 28, 1998 and (iii) satisfactory reviewed interim consolidated financial statements of the Borrower for each quarterly period ended subsequent to the date of the latest financial statements delivered pursuant to clauses (i) and (ii) of this paragraph as to which such financial statements are available and (iv) unaudited consolidating financial statements for all statements above. (k) The Agent shall be satisfied with the nature and amount of all Indebtedness of the Borrower and its Subsidiaries, including, without limitation, the Bank of Scotland Debt and the Ulster Bank Debt, and the Borrower shall have provided to the Agent copies of all operative documents in connection with the Bank of Scotland Debt and the Ulster Bank Debt. (l) All amounts outstanding under the Nationsbank Facility shall have been fully and finally paid and satisfied in full and all promissory notes, credit agreements, reimbursement agreements and other documents executed in connection therewith, and any Liens granted to secure payment and performance thereof, have been cancelled or terminated, as appropriate. (m) The Agent shall have received such other documents, instruments, certificates and opinions as are customary for transactions of this type or as the Agent may reasonably request, and shall be satisfied with such other conditions as it may reasonably require. The Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans and of the Issuing Bank to issue Letters of Credit hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 3:00 p.m., New York City time, on May 31, 1998 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time). SECTION 4.02. Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing, and of the Issuing Bank to issue, amend, renew or extend any Letter of Credit, is subject to the satisfaction of the following conditions: (a) The representations and warranties of the Borrower set forth in the Loan Documents shall be true and correct on and as of the date of such Borrowing or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable, except to the extent they expressly relate to an earlier date (it being understood that references 43 to a specific date, to "the date hereof" and to "the Effective Date" are not repeated as of the date of such Borrowing). (b) At the time of and immediately after giving effect to such Borrowing or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default shall have occurred and be continuing. Each Revolving Borrowing shall be accompanied by a certificate, dated the date of the Borrowing Request, signed by the President, a Vice President or a Financial Officer of the Borrower as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE V Affirmative Covenants Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that: SECTION 5.01. Financial Statements and Other Information. The Borrower will furnish to the Agent and each Lender:tatements and Other Information. (a) within 90 days after the end of each fiscal year of the Borrower, its audited consolidated and unaudited consolidating balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, (i) in the case of the audited consolidated financial statements, reported on by Deloitte & Touche, L.L.P. or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) and (ii) in the case of the unaudited consolidating financial statements, certified by the Borrower's chief financial officer, to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, its consolidated and consolidating balance sheet and related statements of operations, stockholders' equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, (i) in the case of the consolidated financial statements, reviewed by Deloitte & Touche, L.L.P. or other independent public accountants of recognized national standing and (ii) in the case of the unaudited consolidating financial statements, certified by the Borrower's chief financial officer as presenting fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a 44 consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; (c) concurrently with any delivery of financial statements under clause (a) or (b) above, a certificate of a Financial Officer of the Borrower, substantially in the form of Exhibit F (or such other form reasonably satisfactory to the Agent) (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 6.13 through 6.19 and (iii) stating whether any change in GAAP or in the application thereof has occurred since the date of the Borrower's audited financial statements referred to in Section 3.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) concurrently with any delivery of financial statements under clause (a) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (e) (i) within 7 days after the end of each fiscal month, (a) a schedule setting forth gross sales by business segment for the previous fiscal month and for the portion of the fiscal year ended on the last day of such fiscal month and cash balances by subsidiary as of the last day of such fiscal month, and setting forth in each case in comparative form the figures for the corresponding month of the previous fiscal year and corresponding portion of the previous fiscal year, and; (b) a list of any Intercompany Notes delivered during such fiscal quarter; and (ii) within 45 days after the end of each fiscal quarter a schedule setting forth the results of operations of each business segment as of the end of such fiscal quarter and for the portion of the fiscal year ended on the last day of such fiscal quarter, setting forth in each case in comparative form the figures for the corresponding period or periods of the previous fiscal year, together with an explanation of all material variances from such comparative figures. (f) within six months of the Effective Date, projected balance sheets, projected statements of operations and projected statements of cash flows (which projections shall be on a quarterly basis for fiscal year 1999 and on an annual basis for fiscal year 2000 and fiscal year 2001), which shall set forth, among other things, the Borrower's projected gross sales, projected net sales and projected results of operations of each domestic business segment and each Foreign Subsidiary, for the Borrower and its Subsidiaries in form and content consistent with Borrower's official plan as presented to its Board of Directors; (g) (i) by March 1 of each calendar year preliminary projections on a quarterly basis for the upcoming fiscal year, and (ii) concurrently with the Borrower's presentation of same to its board of directors during each year, final projections on a quarterly basis for the 45 upcoming fiscal year, in each case setting forth the items described in clause (f) above; (h) promptly upon any revision of projections previously delivered to the Agent or the projections referred to in clauses (f) and (g) above, such revised projected balance sheets, projected statements of operations and projected statements of cash flows with an explanation of all material variances to the profit and loss statement from the projections as they existed prior to such revision; (i) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed by the Borrower to its shareholders generally, as the case may be; and (j) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Agent or any Lender may reasonably request. SECTION 5.02. Notices of Material Events. The Borrower will furnish to the Agent and each Lender prompt written notice of the following: (a) the occurrence of any Default; (b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect; (c) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $750,000; and (d) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. SECTION 5.03. Information Regarding Collateral. (a) The Borrower will furnish to the Agent prompt written notice of any change (i) in the Borrower's corporate name or in any trade name used to identify it in the conduct of its business or in the ownership of its properties, (ii) in the location of the Borrower's chief executive office, its principal place of 46 business, any office in which it maintains books or records relating to Collateral owned by it or any office or facility at which Collateral owned by it is located (including the establishment of any such new office or facility), (iii) in the Borrower's identity or corporate structure or (iv) in the Borrower's Federal Taxpayer Identification Number. The Borrower agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. The Borrower also agrees promptly to notify the Agent if any material portion of the Collateral is damaged or destroyed. (b) Each year, at the time of delivery of annual financial statements with respect to the preceding fiscal year pursuant to clause (a) of Section 5.01, the Borrower shall deliver to the Agent a certificate of a Financial Officer of the Borrower (i) setting forth the information required pursuant to Sections 1 and 2 of the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Effective Date or the date of the most recent certificate delivered pursuant to this Section and (ii) certifying that all Uniform Commercial Code financing statements (including fixture filings, as applicable) or other appropriate filings, recordings or registrations, including all refilings, rerecordings and reregistrations, containing a description of the Collateral have been filed of record in each governmental, municipal or other appropriate office in each jurisdiction identified pursuant to clause (i) above to the extent necessary to protect and perfect the security interests under the Security Documents for a period of not less than 18 months after the date of such certificate (except as noted therein with respect to any continuation statements to be filed within such period). SECTION 5.04. Existence; Conduct of Business. The Borrower will, and will cause each of its Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect (a) its legal existence and (b) the rights, licenses, permits, privileges, franchises, patents, copyrights, trademarks and trade names which are material to the conduct of its business taken, in case of the Borrower, individually and in the case of any Subsidiary, as a whole with the other Subsidiaries; provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.03; provided, further, that the Borrower shall be permitted to terminate, or allow to lapse, any Material License in the exercise of its reasonable business judgment to the extent that the Borrower (a) provides written notice on the Contract Notification Date that such Material License will terminate or may be terminated, or allowed to lapse without renewal, (b) if requested by the Agent, advises the Agent of the status of any negotiations which may be transpiring in respect of such Material License and (c) furnishes to the Agent either of the following 30 days following the date that such Material License terminates or is allowed to lapse: (i) projected consolidated statement of operations for the Borrower and its Subsidiaries which reflect that, after giving effect to the termination or lapse of such Material License, the Borrower will be in compliance with the financial covenants set forth in Article VI of the Credit Agreement for the next succeeding four fiscal quarters, such projections to be certified by a Financial Officer, prepared in good faith and in accordance with GAAP to the extent applicable; or 47 (ii) an analysis prepared by the Borrower's chief financial officer which analysis demonstrates to the reasonable satisfaction of the Agent that the terms of such Material License would have given rise to a Negative Contribution with respect to such Material License for the next four fiscal quarters after giving effect to (x) existing contractual terms which would have taken effect during such fiscal quarters or (y) the terms which the licensor under such Material License advised in writing that it required in order to renew such Material License which was expiring by its own terms. SECTION 5.05. Payment and Obligations. The Borrower will, and will cause each of its Subsidiaries to, pay its Indebtedness and other obligations (for which the failure to pay would constitute an Event of Default under Section 7.01(f)), including Tax liabilities, before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP, (c) such contest effectively suspends collection of the contested obligation and the enforcement of any Lien securing such obligation and (d) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.06. Maintenance of Properties. The Borrower will, and will cause each of its Subsidiaries to, keep and maintain or replace all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted. SECTION 5.07. Insurance. (a) The Borrower will, and will cause each of its Subsidiaries to, maintain, with financially sound and reputable insurance companies: (i) fire and extended coverage insurance, on a replacement cost basis, with respect to all personal property and improvements to real property, in such amounts as are customarily maintained by companies in the same or similar business operating in the same or similar locations; (ii) commercial general liability insurance against claims for bodily injury, death or property damage occurring upon, about or in connection with the use of any properties owned, occupied or controlled by it, providing coverage on an occurrence basis with a combined single limit of not less than $10,000,000 and including the broad form CGL endorsement; (iii) business interruption insurance, insuring against loss of gross earnings for a period of not less than 12 months arising from any risks or occurrences required to be covered by insurance pursuant to clause (i) above; and (iv) such other insurance as may be required by law. Deductibles or self-insured retention shall not exceed $500,000 for fire and extended coverage policies, $1,000,000 for commercial general liability policies or 30 days for business interruption policies. 48 (b) Each such policy referred to in this paragraph also shall provide that it shall not be canceled, materially modified or not renewed (i) by reason of nonpayment of premium except upon not less than 10 days' prior written notice thereof by the insurer to the Agent (giving the Agent the right to cure defaults in the payment of premiums) or (ii) for any other reason except upon not less than 30 days' prior written notice thereof by the insurer to the Agent. The Borrower shall deliver to the Agent, prior to the cancellation, modification or nonrenewal of any such policy of insurance, a copy of a renewal or replacement policy (or other evidence of renewal of a policy previously delivered to the Agent) together with evidence satisfactory to the Agent of payment of the premium therefor. SECTION 5.08. [This Section intentionally left blank.] SECTION 5.09. Books and Records; Inspection and Audit Rights. The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit any representatives designated by the Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. SECTION 5.10. Compliance with Laws. The Borrower will, and will cause each of its Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. SECTION 5.11. Notice of Discharge of Hazardous Material or Environmental Complaint. The Borrower will, and will cause each of its Subsidiaries to, promptly provide to the Agent true, accurate and complete copies of any and all notices, complaints, orders, directives, claims, or citations received by the Borrower or any Subsidiary relating to any (a) violation or alleged violation by the Borrower or any Subsidiary of any applicable Environmental Laws; (b) release or threatened release by the Borrower or any Subsidiary, or at any facility or property owned or operated by the Borrower or any Subsidiary, of any Hazardous Material, except where occurring legally; or (c) liability or alleged liability of the Borrower or any Subsidiary for the costs of cleaning up, removing, remediating or responding to a release of Hazardous Materials. SECTION 5.12. Environmental Compliance. If the Borrower or any Subsidiary shall receive letter, notice, complaint, order, directive, claim or citation alleging that the Borrower or any Subsidiary has violated any Environmental Law or is liable for the costs of cleaning up, removing, remediating or responding to a release of Hazardous Materials, the Borrower shall, within the time period permitted by the applicable Environmental Law or the Governmental Authority responsible for enforcing such Environmental Law, remove or remedy, or cause the applicable Subsidiary to remove or remedy, such violation or release or satisfy such liability, except where the failure to do so is not reasonably likely to result in a Material Adverse Effect or unless the applicability of the Environmental Law, the fact of such violation or liability 49 or what is required to remove or remedy such violation is being contested by the Borrower or the applicable Subsidiary by appropriate proceedings diligently conducted and all reserves with respect thereto as may be required under GAAP, if any, have been made. SECTION 5.13. Use of Proceeds and Letters of Credit. The proceeds of the Term Loans will be used only for the repayment of amounts owing under the Nationsbank Facility. The proceeds of the Revolving Loans and Letters of Credit will be used for general working capital needs of the Borrower and to guaranty the payment of workers' compensation insurance in the ordinary course of business. No part of the proceeds of any Loan will be used, whether directly or indirectly, (i) to purchase or carry Margin Stock or to extend credit to others for the purpose of purchasing or carrying Margin Stock or to refund indebtedness originally incurred for such purpose, or (ii) for any purpose that entails a violation of any of the Regulations of the Board, including Regulations G, U and X. SECTION 5.14. Additional Subsidiaries. If any additional Subsidiary is formed or acquired after the Effective Date, the Borrower will notify the Agent and the Lenders thereof and the Borrower will, to the extent such Subsidiary is formed in the United States, cause such Subsidiary to become a guarantor of the Obligations hereunder within three Business Days after such Subsidiary is formed or acquired. SECTION 5.15. Further Assurances. (a) The Borrower will execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, fixture filings, mortgages, deeds of trust and other documents), which may be required under any applicable law, or which the Agent or the Required Lenders may reasonably request, to effectuate the transactions contemplated by the Loan Documents or to grant, preserve, protect or perfect the Liens created or intended to be created by the Security Documents or the validity or priority of any such Lien, all at the expense of the Borrower. The Borrower also agrees to provide to the Agent, from time to time upon request, evidence reasonably satisfactory to the Agent as to the perfection and priority of the Liens created or intended to be created by the Security Documents. (b) If any material trademarks, tradenames or any other intellectual property are acquired by the Borrower after the Effective Date (other than assets constituting Collateral under the Security Documents that become subject to the Lien of the Security Documents upon acquisition thereof), the Borrower will notify the Agent and the Lenders thereof, and, if requested by the Agent or the Required Lenders, the Borrower will cause such assets to be subjected to a Lien securing the Obligations and will take such actions as shall be necessary or reasonably requested by the Agent to grant and perfect such Liens, including actions described in paragraph (a) of this Section, all at the expense of the Borrower. SECTION 5.16. Interest Rate Protection. As promptly as practicable, and in any event within 60 days after the Effective Date, the Borrower will enter into, and thereafter for a period of not less than 2 years will maintain in effect, one or more interest rate protection agreements on such terms and with such parties as shall be reasonably satisfactory to the Agent, the effect of which shall be to fix or limit the interest cost to the Borrower 50 with respect to at least $10,000,000 initially (but which may be reduced from time to time to an amount not less than one half of the then outstanding principal amount of the Term Loan) of the notional value of the Term Loans. ARTICLE VI Negative Covenants Until the Commitments have expired or terminated and the principal of and interest on each Loan and all fees payable hereunder have been paid in full and all Letters of Credit have expired or terminated and all LC Disbursements shall have been reimbursed, the Borrower covenants and agrees with the Lenders that: SECTION 6.01. Indebtedness; Certain Equity Securities.(a) The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except: (i) Indebtedness created under the Loan Documents; (ii) Hedging Agreements allowed pursuant to Section 6.06; (iii) Indebtedness existing on the date hereof and set forth in Schedule 6.01 and extensions, renewals, modifications and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof or increase, above a rate deemed commercially reasonable by the Borrower, the interest rate payable thereon from that existing immediately prior to such extension, renewal or refinancing; (iv) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or another Subsidiary; provided that such Indebtedness shall be subject to Section 6.04; (v) Guarantees by the Borrower of Indebtedness of any Subsidiary and by any Subsidiary of Indebtedness of the Borrower; provided that such Guarantees shall be subject to Section 6.04; (vi) Indebtedness of the Borrower or any Subsidiary incurred solely for the purpose of financing the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof or result in an earlier maturity date or decreased weighted average life thereof; provided that (A) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (B) the aggregate principal amount of Indebtedness permitted by this clause (vi) shall not exceed 95% of the amount allowed for Capital Expenditures pursuant to Section 6.19; 51 (vii) trade payables in the ordinary course of business, endorsements for collection or deposit in the ordinary course of business, surplus and retained earnings, lease obligations (other than pursuant to Capitalized Leases), reserves for deferred income taxes and investment credits, other deferred credits and reserves, and deferred compensation obligations; and (viii) additional Indebtedness not to exceed $100,000 outstanding at any time. (b) The Borrower will not, and will not permit any Subsidiary to, issue any preferred stock or be or become liable in respect of any obligation (contingent or otherwise) to purchase, redeem, retire, acquire or make any other payment in respect of any shares of capital stock of the Borrower or any Subsidiary or any option, warrant or other right to acquire any such shares of capital stock. Nothing in this paragraph shall prohibit the Borrower from granting stock options to officers, directors, employees and consultants of or to the Borrower or from issuing common stock of the Borrower pursuant to such options. SECTION 6.02. Liens. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (i) Liens created under the Loan Documents; (ii) Permitted Encumbrances; (iii) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 6.02; provided that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof; and (iv) Liens on fixed or capital assets acquired, constructed or improved by the Borrower or any Subsidiary; provided that (A) such security interests secure Indebtedness permitted by clause (vi) of Section 6.01(a), (B) such security interests and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, (C) the Indebtedness secured thereby does not exceed 95% of the cost of acquiring, constructing or improving such fixed or capital assets and (D) such security interests shall not apply to any other property or assets of the Borrower or any Subsidiary. (v) Liens on property of the Borrower shipped under or in connection with Documentary Letters of Credit permitted under this Agreement (if such Liens are in favor of the issuer of such Documentary Letters of Credit) and all property of the Borrower in the actual or constructive possession of the Issuing Bank with respect to Documentary Letters of Credit, other than property held in a fiduciary capacity of such Issuing Bank. 52 SECTION 6.03. Fundamental Changes. (a) The Borrower will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Subsidiary may merge into the Borrower in a transaction in which the Borrower is the surviving corporation, (ii) any Subsidiary may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary and (iii) any Subsidiary may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders; provided that any such merger involving a Person that is not a wholly owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Section 6.04. (b) The Borrower will not, and will not permit any of its Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and its Subsidiaries on the date of execution of this Agreement and businesses reasonably related thereto. SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions. The Borrower will not, and will not permit any of its Subsidiaries to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly owned Subsidiary prior to such merger) any capital stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except: (a) Permitted Investments; (b) investments existing on the date hereof and set forth on Schedule 6.04, to the extent such investments would not be permitted under any other clause of this Section; (c) (i) investments by the Borrower in the equity of its Subsidiaries and (ii) investments, loans and advances by Subsidiaries in and to other Subsidiaries; provided that any such shares of capital stock held by the Borrower in Topps Europe Limited shall be pledged pursuant to the Pledge Agreement (subject to the limitations applicable to common stock of a Foreign Subsidiary referred to in therein); provided, further, that the aggregate amount of investments by the Borrower in its Subsidiaries shall not at any time exceed $3,000,000; (d) Intercompany Debt evidenced by Intercompany Notes owing to the Borrower in an aggregate principal amount not to exceed $3,000,000 at any one time; (e) Intercompany Debt not evidenced by Intercompany Notes but which is reflected on the books and records of the Borrower and its Subsidiaries in an aggregate outstanding principal amount not to exceed $15,000,000 at any one time; 53 (f) a guaranty by the Borrower under the Topps SA Guaranty in an amount not in excess of $2,000,000; (g) an unsecured guaranty by the Borrower of each of the following unsecured obligations of Topps Ireland Limited to a financial institution: a. Overdraft facility up to 500,000 Irish pounds; b. Letter of credit facility up to $3,450,000 (U.S.); c. 70,000 Irish pound guarantee to the Department of Agriculture; d. 20,000 Swiss Franc guarantee to Messrs. Gordernd in respect of the importation of goods into Switzerland; e. 2,000,000 Irish pound forward currency hedging facility; and f. 58,000 Sterling pound guarantee in favor of VAG Finance Limited. ; provided that (i) the maximum amount of each unsecured separate credit facility extended by such financial institution may not be increased and (ii) the aggregate amount of all such guaranties shall not exceed $7,200,000; (h) investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business; and (i) loans and advances to officers, directors and employees in the ordinary course of business (including to finance relocation expenses) not to exceed $100,000 at any one time outstanding. (j) an unsecured guaranty by the Borrower of the Bank of Scotland Debt in an amount not to exceed 1,500,000 British pounds. SECTION 6.05. Asset Sales. The Borrower will not, and will not permit any of its Subsidiaries to, sell, transfer, lease or otherwise dispose of any asset, including any capital stock, nor will the Borrower permit any of its Subsidiaries to issue any additional shares of its capital stock or other ownership interest in such Subsidiary, except: (a) sales of inventory, used, surplus or obsolete equipment and Permitted Investments in the ordinary course of business; 54 (b) the granting of licenses in trademarks or other intellectual property owned by the Borrower or any of its Subsidiaries provided that any such licenses granted by the Borrower shall be subject to the terms of the Trademark Security Agreement; (c) sales, transfers and dispositions to the Borrower or a Subsidiary; provided that any such sales, transfers or dispositions shall be made in compliance with Section 6.08; (d) a sale of the Plant and equipment owned by Topps Ireland Limited located in Cork, Ireland; (e) a sale of the equipment from the Borrower's Plant located in Duryea, Pennsylvania; (f) sales, transfers and dispositions of assets (other than capital stock of a Subsidiary) that are not permitted by any other clause of this Section; provided that the aggregate fair market value of all assets sold, transferred or otherwise disposed of in reliance upon this clause (f) shall not exceed $500,000 during any fiscal year of the Borrower; and (g) sales and transfers of assets between and among the Borrower and the Subsidiaries not to exceed $750,000 in the aggregate during the term of the Loans. provided that (i) all sales, transfers, leases and other dispositions permitted hereby shall be made for fair value and (ii) substantially all the consideration for such distributions shall be cash consideration. SECTION 6.06. Hedging Agreements. The Borrower will not, and will not permit any of its Subsidiaries to, enter into any Hedging Agreement, other than (a) Hedging Agreements required by Section 5.16 and (b) Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities in an aggregate notional amount not to exceed $54,000,000. SECTION 6.07. Restricted Payments; Certain Payments of Indebtedness. (a) The Borrower will not, and will not permit any Subsidiary to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, except (i) the Borrower may declare and pay dividends with respect to its capital stock payable solely in additional shares of its common stock, (ii) Subsidiaries may declare and pay dividends ratably with respect to their capital stock, and (iii) the Borrower may make Restricted Payments, not exceeding $250,000 during any fiscal year, pursuant to and in accordance with stock option plans or other benefit plans for management or employees or consultants of the Borrower and its Subsidiaries. (b) The Borrower will not, and will not permit any Subsidiary to, make or agree to pay or make, directly or indirectly, any payment or other 55 distribution (whether in cash securities or other property) of or in respect of principal of or interest on any Indebtedness, or any payment or other distribution (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any Indebtedness, except: (i) payment of Indebtedness created under the Loan Documents; (ii) payment of regularly scheduled interest and principal payments as and when due in respect of any Indebtedness permitted hereunder; (iii) refinancings of Indebtedness to the extent permitted by Section 6.01; and (iv) payment of secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness. SECTION 6.08. Transactions with Affiliates.The Borrower will not, and will not permit any Subsidiary to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Subsidiaries, except (a) transactions in the ordinary course of business that are at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm's-length basis from unrelated third parties, (b) any Restricted Payment permitted by Section 6.07, (c) the transactions described in Section 6.04 and (d) transactions permitted under Section 6.05(g). SECTION 6.09. Restrictive Agreements. The Borrower will not, and will not permit any Subsidiary to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets, or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its capital stock or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary; provided that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by any Loan Document, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.09 (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition other than any extension, renewal, amendment, modification or refinancing of the obligations of Topps Ireland Limited to Ulster Bank which such obligations shall not exceed $7.2 million in the aggregate), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases restricting the assignment thereof. 56 SECTION 6.10. Ammendment of Material Documents. The Borrower will not, and will not permit any Subsidiary to, amend, modify or waive any of its rights under its certificate of incorporation, by-laws or other organizational documents if the same is reasonably likely to have a Material Adverse Effect, would result in an Event of Default under any of the Loan Documents or would otherwise be adverse to the interests or rights of the Lenders or determined by the Lenders in their sole discretion. SECTION 6.11. Limitations on Sales and Leasebacks. The Borrower will not, and will not permit any Subsidiary to, enter into any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Borrower or any Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Borrower or any Subsidiary; provided, however, that nothing in this Section 6.11 shall prevent the Borrower or any Subsidiary from selling the plant and equipment located in Cork, Ireland and leasing back office space located in such plant and related equipment. SECTION 6.12. Fiscal Year. The Borrower will not, and will not permit any Subsidiary to, change its fiscal year. SECTION 6.13. Consolidated Leverage Ratio. The Borrower will not permit Consolidated Leverage Ratio on the dates set forth below to be greater than the amount specified opposite such dates: - -------------------------------------------------------------------------------- Fiscal Quarter Ending Consolidated Leverage Ratio - -------------------------------------------------------------------------------- February 28, 1998 2.16 to 1 - -------------------------------------------------------------------------------- May 30, 1998 3.85 to 1 - -------------------------------------------------------------------------------- August 29, 1998 2.03 to 1 - -------------------------------------------------------------------------------- November 28, 1998 1.20 to 1 - -------------------------------------------------------------------------------- February 27, 1999 and the last day of each 1.60 to 1 quarter thereafter - -------------------------------------------------------------------------------- SECTION 6.14. Consolidated Fixed Charge Ratio. The Borrower will not permit Consolidated Fixed Charge Ratio on the dates set forth below to be less than the amount specified opposite such dates: - -------------------------------------------------------------------------------- Fiscal Quarter Ending Consolidated Fixed Charge Ratio - -------------------------------------------------------------------------------- February 28, 1998 1.16 to 1 - -------------------------------------------------------------------------------- May 30, 1998 0.49 to 1 - -------------------------------------------------------------------------------- August 29, 1998 0.94 to 1 - -------------------------------------------------------------------------------- 57 November 28, 1998 1.46 to 1 - -------------------------------------------------------------------------------- February 27, 1999 0.92 to 1 - -------------------------------------------------------------------------------- May 29, 1999 1.10 to 1 - -------------------------------------------------------------------------------- August 28, 1999 1.10 to 1 - -------------------------------------------------------------------------------- the last day of each quarter thereafter 1.25 to 1 - -------------------------------------------------------------------------------- SECTION 6.15. Consolidated Net Worth. The Borrower and its Subsidiaries will not permit Consolidated Net Worth at any time to be less than $56,800,000. SECTION 6.16. Consolidated Net Loss. The Borrower and its Subsidiaries will not incur a consolidated net loss for any fiscal quarter, except that the Borrower and its Subsidiaries may incur a consolidated net loss in one fiscal quarter per each fiscal year as follows: (a) if such consolidated net loss occurs during the first fiscal quarter of any such year, such loss shall not exceed ($1,600,000) or if such consolidated net loss occurs during any fiscal quarter other than the first fiscal quarter, such loss shall not exceed ($2,000,000); (b) the Borrower and its Subsidiaries will not incur a consolidated net loss for the first six months of such fiscal year, (c) the Borrower and its Subsidiaries shall earn a consolidated net profit of $447,000 for the first nine months of such fiscal year, and (d) the Borrower and its Subsidiaries shall earn a consolidated net profit of $4,078,000 in such fiscal year. SECTION 6.17. EBITDA. The Borrower and its Subsidiaries will not permit EBITDA for each quarter ending on the dates set forth below to be less than the amounts set forth opposite such dates: - -------------------------------------------------------------------------------- Fiscal Quarter Ending EBITDA - -------------------------------------------------------------------------------- February 28, 1998 $4,700,000 - -------------------------------------------------------------------------------- May 30, 1998 ($1,800,000) - -------------------------------------------------------------------------------- SECTION 6.18. Cumulative EBITDA. The Borrower and its Subsidiaries will not permit Cumulative EBITDA on the dates set forth below to be less than the amounts set forth opposite such dates: - -------------------------------------------------------------------------------- Fiscal Quarter Ending Cumulative EBITDA - -------------------------------------------------------------------------------- August 29, 1998 $3,100,000 - -------------------------------------------------------------------------------- November 28, 1998 $5,640,000 - -------------------------------------------------------------------------------- February 27, 1999 and on the last day of $14,400,000 each quarter thereafter - -------------------------------------------------------------------------------- 58 SECTION 6.19. Capital Expenditures. The Borrower will not permit Capital Expenditures for the term of the Loans to exceed $6,000,000. ARTICLE VII Events of Default SECTION 7.01. Capital Expenditures. If any of the following events ("Events of Default") shall occur: (a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in clause (a) of this Article) payable under this Agreement or any other Loan Document, when and as the same shall become due and payable; (c) any representation or warranty made or deemed made by or on behalf of the Borrower or any Subsidiary in or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect when made or deemed made; (d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5.02, 5.04 (with respect to the existence of the Borrower), 5.09, 5.13 or 5.14 or in Article VI; (e) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in any Loan Document (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days; (f) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable; (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity; provided that this clause (g) shall not apply to secured Indebtedness that becomes due as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; 59 (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) the Borrower or any Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount in excess of $750,000 shall be rendered against the Borrower, any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and its Subsidiaries in an aggregate amount exceeding $750,000 in any year; (m) any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by the Borrower not to be, a valid and perfected Lien on any Collateral, with the priority required by the applicable Security Document, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents, (ii) as a result of the Agent's failure to maintain possession of any stock certificates, promissory notes or other instruments delivered to it under the Security Documents or (iii) pursuant to the terms of such Security Document; (n) a Change in Control shall occur; 60 (o) if any Loan Document ceases to be in full force and effect (other than by reason of any action by the Agent), or if without the written consent of the Lenders, this Agreement or any other Loan Document shall be disaffirmed or shall terminate, be terminable or be terminated or become void or unenforceable for any reason whatsoever (other than in accordance with its terms in the absence of default or by reason of any action by the Lenders or the Agent); or (p) if the Borrower shall breach any of the material terms or conditions of any Hedging Agreement with any of the Lenders and such breach shall continue beyond any grace period, if any, relating thereto pursuant to its terms; then, and in every such event (other than an event with respect to the Borrower described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to the Borrower described in clause (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. ARTICLE VIII The Agent Each of the Lenders and the Issuing Bank hereby irrevocably appoints the Agent as its agent and authorizes the Agent to take such actions on its behalf and to exercise such powers as are delegated to the Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. The bank serving as the Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Agent hereunder. The Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) the Agent shall not be subject to any fiduciary or other 61 implied duties, regardless of whether a Default has occurred and is continuing, (b) the Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Loan Documents that the Agent is required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth in the Loan Documents, the Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries that is communicated to or obtained by the bank serving as Agent or any of its Affiliates in any capacity. The Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or wilful misconduct. The Agent shall not be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Agent by the Borrower or a Lender, and the Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to the Agent. The Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Agent. The Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of each Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Agent. Subject to the appointment and acceptance of a successor the Agent as provided in this paragraph, the Agent may resign at any time by notifying the Lenders, the Issuing Bank and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders and the Issuing Bank, appoint a successor 62 Agent which shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrower to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Agent. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or related agreement or any document furnished hereunder or thereunder. ARTICLE IX Miscellaneous SECTION 9.01. Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Borrower, to it at One Whitehall Street, New York, New York, 10004-2109, Attention of Ms. Catherine K. Jessup (Telecopy No. 212-376-0621) with a copy to Willkie Farr & Gallagher, One Citicorp Center, 153 East 53rd Street, New York, New York 10022 (Telecopy No. 212-821-8111 (after May 30, 1998 to 787 Seventh Avenue, New York, New York 10019-6099 (Telecopy No. 212-728-8111), Attention of William Hiller, Esq.; (b) if to the Agent, to The Chase Manhattan Bank, 1 Pierrepont Plaza, 16th Floor, Brooklyn, New York, 11201-2791, Attention of Mr. Christopher Murtha and Regional Manager (Telecopy No. 718-403-6598), with a copy to Zalkin, Rodin & Goodman LLP, 750 Third Avenue, 27th Floor, New York, New York, 10017-2771, Attention of Mark F. Liscio, Esq. (Telecopy No. 212-682-6331); provided that after June 12, 1998, notices shall be delivered to the Agent at 4 Metrotech Center, 22nd Floor, Brooklyn, New York, 11245. (c) if to the Issuing Bank, to it at the address provided in paragraph (b) above; 63 (d) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire. Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. SECTION 9.02. Waivers; Ammendments. (a) No failure or delay by the Agent, the Issuing Bank or any Lender in exercising any right or power hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or issuance of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time. (b) Neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Agent and the Borrower that are parties thereto, in each case with the consent of the Required Lenders; provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or LC Disbursement or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the scheduled Revolving Maturity Date or Term Loan Maturity Date, or reduce the amount of, waive or excuse any payment of the principal amount of any Loan or LC Disbursement, or any interest thereon, or any fees payable hereunder, without the written consent of each Lender affected thereby, (iv) change Section 2.18(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender, (v) change any of the provisions of this Section or the definition of "Required Lenders" or any other provision of any Loan Document specifying the number or percentage of Lenders (or Lenders of any Class) required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the written consent of each Lender (or each Lender of such Class, as the case may be), (vi) release any Subsidiary (to the extent such Subsidiary is a Guarantor hereunder) from its Guarantee hereunder, or limit its liability in respect of such Guarantee, without the written consent of each Lender, (vii) release all or any substantial part of the Collateral from the Liens of the Security Documents, without the written consent of each Lender, (viii) change any provisions of any Loan Document in a manner that by its terms adversely 64 affects the rights in respect of payments due to Lenders holding Loans of any Class differently than those holding Loans of any other Class, without the written consent of Lenders holding a majority in interest of the outstanding Loans and unused Commitments of each affected Class or; provided further that (A) no such agreement shall amend, modify or otherwise affect the rights or duties of the Agent, or the Issuing Bank without the prior written consent of the Agent, or the Issuing Bank, as the case may be, and (B) any waiver, amendment or modification of this Agreement that by its terms affects the rights or duties under this Agreement of the Revolving Lenders (but not the Term Loan Lenders) or the Term Loan Lenders (but not the Revolving Lenders) may be effected by an agreement or agreements in writing entered into by the Borrower and requisite percentage in interest of the affected Class of Lenders. SECTION 9.03. Expenses; Indemnity; Damage Waiver.(a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Agent and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Agent, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of the Loan Documents or any amendments, modifications or waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out-of-pocket expenses incurred by the Agent, the Issuing Bank or any Lender, including the fees, charges and disbursements of any counsel for the Agent, the Issuing Bank or any Lender, in connection with the enforcement or protection of its rights in connection with the Loan Documents, including its rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit. (b) The Borrower shall indemnify the Agent, the Issuing Bank and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of any Loan Document or any other agreement or instrument contemplated hereby, the performance by the parties to the Loan Documents of their respective obligations thereunder or the consummation of the Financing Transactions or any other transactions contemplated hereby, (ii) any Loan or Letter of Credit or the use of the proceeds therefrom (including any refusal by the Issuing Bank to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final 65 and nonappealable judgment to have resulted from the gross negligence or wilful misconduct of such Indemnitee. (c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Agent or the Issuing Bank under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Agent or the Issuing Bank, as the case may be, such Lender's pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount; provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Agent or the Issuing Bank in its capacity as such. For purposes hereof, a Lender's "pro rata share" shall be determined based upon its share of the sum of the total Revolving Exposures, outstanding Term Loans and unused Commitments at the time. (d) To the extent permitted by applicable law, the Borrower shall not assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement or any agreement or instrument contemplated hereby, the Financing Transactions, any Loan or Letter of Credit or the use of the proceeds thereof. (e) All amounts due under this Section shall be payable promptly after written demand therefore. SECTION 9.04. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, express or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit) and, to the extent expressly contemplated hereby, the Related Parties of each of the Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement. (b) Any Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided that (i) except in the case of an assignment to a Lender or an Affiliate of a Lender, the Agent (and, in the case of an assignment of all or a portion of a Revolving Commitment or any Lender's obligations in respect of its LC Exposure, the Issuing Bank) must give their prior written consent to such assignment (which consent shall not be unreasonably withheld), (ii) except in the case of an assignment to a Lender or an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender's Commitment or Loans, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Agent) shall not be less than $5,000,000 66 and, after giving effect thereto, the assigning Lender shall retain Commitments and Loans aggregating at least $5,000,000, in each case unless the Agent and the Borrower otherwise consent, (iii) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender's rights and obligations under this Agreement, except that this clause (iii) shall not be construed to prohibit the assignment of a proportionate part of all the assigning Lender's rights and obligations in respect of one Class of Commitments or Loans, (iv) the parties to each assignment shall execute and deliver to the Agent an Assignment and Acceptance, together with a processing and recordation fee of $3,500, and (v) the assignee, if it shall not be a Lender, shall deliver to the Agent an Administrative Questionnaire. Subject to acceptance and recording thereof pursuant to paragraph (d) of this Section, from and after the effective date specified in each Assignment and Acceptance the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all of the assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.15, 2.16, 2.17 and 9.03). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (e) of this Section. (c) The Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive, and the Borrower, the Agent, the Issuing Bank and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank and any Lender, at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Agent shall accept such Assignment and Acceptance and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph. (e) Any Lender may, without the consent of the Borrower, the Agent or the Issuing Bank, sell participations to one or more banks or other entities (a "Participant") in all or a portion of such Lender's rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided that (i) such Lender's obligations under 67 this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce the Loan Documents and to approve any amendment, modification or waiver of any provision of the Loan Documents; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (f) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.15, 2.16 and 2.17 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section but the aggregate amount payable by the Borrower to the Lender selling the participation and the Participant shall not exceed the amount which would otherwise be payable in the absence of the participation. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.18(c) as though it were a Lender. (f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.17(e) as though it were a Lender. (g) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto. SECTION 9.05 Survival. All covenants, agreements, representations and warranties made by the Borrower in the Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid or any Letter of Credit is outstanding and so long as the Commitments have not expired or terminated. The provisions of Sections 2.15, 2.16, 2.17 and 9.03 and Article VIII shall survive and remain in 68 full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Letters of Credit and the Commitments or the termination of this Agreement or any provision hereof. SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Agent constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Agent and when the Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement. SECTION 9.07. Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by such Lender or Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.09. Governing Law; Jurisduction; Consent to Service of Process. (a) This Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and 69 determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or any other Loan Document shall affect any right that the Agent, the Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against the Borrower or its properties in the courts of any jurisdiction. (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE FINANCING TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. SECTION 9.12. Confidentiality. Each of the Agent, the Issuing Bank and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by 70 applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Agent, the Issuing Bank or any Lender on a nonconfidential basis from a source other than the Borrower provided the Agent, the Issuing Bank or any Lender does not have actual knowledge that such source is in breach of any confidentiality agreement with the Borrower. For the purposes of this Section, "Information" means all information received from the Borrower or its agents relating to the Borrower or its business, other than any such information that is available to the Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by the Borrower; provided the Agent, the Issuing Bank or any Lender does not have actual knowledge that such source is in breach of any confidentiality agreement with the Borrower. The Agent, the Issuing Bank and each Lender each agrees that neither it nor its affiliates will use any Information in connection with the performance by it of services for companies other than the Borrower and its Subsidiaries. SECTION 9.13. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts which are treated as interest on such Loan under applicable law (collectively the "Charges"), shall exceed the maximum lawful rate (the "Maximum Rate") which may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender. 71 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE TOPPS COMPANY, INC. By:_________________________ Name: Title: THE CHASE MANHATTAN BANK, individually and as Agent, By:_________________________ Name: Title: 72 SCHEDULE 2.01 COMMITMENTS Term Loan Commitment The Chase Manhattan Bank $24,950,000 Revolving Commitment The Chase Manhattan Bank $ 9,450,000 SCHEDULE 3.05 REAL PROPERTY Office and warehouse 401 York Avenue Leased Duryea, PA 18642 Manufacturing plant 50 Poplar Street Owned Scranton, PA 18509 Manufacturing plant and office* Innishmore Owned Ballincollig County Cork Republic of Ireland Executive offices 1 Whitehall St. Leased New York, NY 10004 Office and warehouse 18 Vincent Avenue Leased Crownhill, Milton Keynes United Kingdom MK8 OAW Office 5409 Eglinton Avenue West Leased Suite 210 Etobicoke, Ontario Canada M9C 5K6 Office Rua Carmo do Rio Verda Leased 241-Cj. 41 CEP 04729-010 Santo Amaro Sao Paulo SP, Brazil *Topps Ireland has signed a contract to sell this property and lease back a small portion for office space. 1 Office Sinclair 3139 Leased 2nd Floor "A" 1425 - Capital Federal Argentina Office Alborado 136, 9 Piso Leased Col. Parques del Pedregal Mexico D.F., 14010 Mexico Office Via Villoresi 13, Leased 20143 Milano, Italy 2 SCHEDULE 3.06 - DISCLOSED MATTERS 1. 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. The plaintiffs have filed a Motion to Alter, Amend and Vacate Judgment and for Leave to File Amended Complaint. The Company has opposed the motion. 2. The Company has the following collective bargaining agreements: A. Certain employees at the Scranton, Pennsylvania manufacturing facility are covered under a Collective Bargaining Agreement between Borrower and Teamsters Local Union No. 229. B. Topps Ireland Limited has agreements in effect with the following unions: a) Services Industrial Professional Technical Union b) Amalgamated Engineering and Electrical Union c) Technical Engineering and Electrical Union Schedule 3.12 THE TOPPS COMPANY SUBSIDIARIES, AFFILIATES and CONTROLLED CORPORATIONS
JURISDICTION OF % OF NAME STATUS INCORPORATION OWNERSHIP BUSINESS Topps Comics, Inc. inactive Delaware 100% Publishing Bowman Gum, Inc. inactive Delaware 100% - Goudey Gum, Inc. inactive Delaware 100% - Topps International, Inc. inactive New York 100% - Topps Ireland Limited active Ireland 100% Sales-confectionery Topps Distributors, Ltd. inactive Ireland 100% - Sweetco Limited active Ireland 100% Sales-gum Topps Sales Company, Inc. active Barbados 100% Commissioned Broker Topps Canada, Inc. active Canada 100% Wholesaler Topps Europe Limited active U.K. 100% Publishing Merlin Marketing Services, Ltd. inactive U.K. 100% - Merlin Publishing Limited active U.K. 100% Publishing Square Circle Limited inactive U.K. 100% - Merlin Holdings, Inc. inactive Delaware 100% - Merlin Editions, Inc. inactive Delaware 100% - Editions Merlin SARL inactive France 100% Publishing Topps Italia S.R.L. active Italy 100% Publishing Merlin Publishing BV inactive Netherlands 100% Publishing Merlin Publishing SL inactive Spain 100% Publishing Topps International Holding, Inc. active Delaware 100% Holding Company Topps Mexico S.A. de C.V. active Mexico 100% Sales-confectionery Topps Brasil Ltda. active Brazil 100% Sales-confectionery Topps Argentina S.A. active Argentina 100% Sales-confectionery Servmex S.A. de C.V. active Mexico 100% Management company Topps Latin America S.A. active Uruguary 100% Sales-confectionery
SCHEDULE 3.13 INSURANCE TOPPS EUROPE INSURANCE POLICIES TYPE OF INSURANCE UNDERWRITER Combined Property/Liability Commercial Union Assurance Co. includes:- Property Damage Business Interruption Employers Liability Public/Products Liability Money Fidelity Personal Accident Travel ITT London and Edinburgh Computer National Vulcan Motor Fleet Eagle Star Uninsured Loss Recovery Hambro Legal Protection Legal Expenses Hambro Legal Protection Directors and Officers Chubb Insurance Europe Marine Cargo Maritime TOPPS ITALIA INSURANCE POLICIES Property - Fire, Theft Gan Italia Managing Director Legal Responsibility Gan Italia Employees Accident Insurance Gan Italia Car Insurance Vittoria MD Health Insurance Assicassa Retired Pension Insurance Gan Italia IRELAND LIMITED INSURANCE POLICIES TYPE UNDERWRITER Curtain Bond Hibernian Employer's Liability Royal Sun Alliance Private Car Hibernian Forklifts Hibernian Contingent Motor Hibernian Fidelity Guarantee Royal Sun Alliance Engineering (Plant) Hibernian Business Travel Lloyd Property Damage Chubb Business Interruption Chubb Money Chubb Public/Products Liability Chubb SCHEDULE 5.04 MATERIAL LICENSES 1. Agreement dated July 25, 1995 between Borrower and NBA Properties, Inc. as amended from time to time. 2. Agreement dated May 19, 1997 between Borrower and National Football League Properties, Inc. as amended from time to time; Agreement dated June 18, 1997 between Borrower and NFL Players Association as amended from time to time. 3. Individual licenses with Major League Baseball Players pursuant to Borrower's standard form of Baseball Player's Picture License Agreement of various dates. Agreement dated January 1, 1969 between Borrower and Major League Baseball Properties as amended from time to time. 4. Agreement dated August 3, 1994 between Borrower and Premier League Soccer as amended from time to time. SCHEDULE 6.01 EXISTING INDEBTEDNESS 1. Topps Ireland Limited ("TIL") has various credit facilities pursuant to an agreement dated July 9, 1997 with Ulster Bank ("Ulster"). They are as follows: a) Overdraft facility up to 500,000 Irish pounds. b) Letter of credit facility of up to $3,450,000 million (U.S.). c) 70,000 Irish pound guarantee to the Department of Agriculture. d) 20,000 Swiss Franc guarantee to Messrs. Gordernd in respect of the importation of goods into Switzerland. e) 2,000,000 Irish pound forward currency hedging facility. The Company may have up to 20 million Irish pounds in currency contracts open at any time. f) 58,000 Sterling pound guarantee in favor of VAG Finance Limited. The documentation relating to these facilities includes a negative pledge in respect of the assets of TIL. 2. 1,500,000 British pounds available under the Bank of Scotland credit facility. SCHEDULE 6.02 EXISTING LIENS Lien in favor of IBM Corp. as set forth in the attached financing statement. Lien in favor of Paula Ann Cockrell as set forth on the attached Judgment & Lien Report. SCHEDULE 6.04 EXISTING INVESTMENTS 1. Investments in subsidiaries listed on Schedule 3.12 SCHEDULE 6.09 EXISTING RESTRICTIONS 1. Negative pledge of the assets of TIL contained within Ulster Bank Credit Agreement referred to in Schedule 6.01. EXHIBIT A to the Credit Agreement ASSIGNMENT AND ACCEPTANCE Dated: __________, ____ Reference is made to the Credit Agreement, dated as of May 11, 1998 (as amended, amended and restated, supplemented, modified and in effect from time to time, the "Credit Agreement"), among THE TOPPS COMPANY, INC., a Delaware corporation (the "Borrower"), the Lenders party thereto (together with their successors and assigns, the "Lenders"), and THE CHASE MANHATTAN BANK, as agent (in such capacity, the "Agent") for the Lenders. Capitalized terms used herein and not otherwise defined shall have the meanings assigned to such terms in the Credit Agreement. This Assignment and Acceptance between the Assignor (as set forth on Schedule I hereto and made a part hereof) and the Assignee (as set forth on Schedule I hereto and made a part hereof) is dated as of the Assignment Effective Date (as set forth on Schedule I hereto and made a part hereof). The Assignor hereby irrevocably sells and assigns to the Assignee without recourse to the Assignor, and the Assignee hereby irrevocably purchases and assumes from the Assignor without recourse to the Assignor, as of the Assignment Effective Date, an undivided interest (the "Assigned Interest") in and to all the Assignor's rights and obligations under the Credit Agreement respecting those, and only those, credit facilities contained in the Credit Agreement as are set forth on Schedule I hereto (the "Assigned Facilities"), in a principal amount for each Assigned Facility as set forth on Schedule I hereto. The Assignor (i) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or any other of the Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement, any other of the Loan Documents or any other instrument or document furnished pursuant thereto, other than that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; [and] (ii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower, any of its Subsidiaries or any other obligor of any of their respective obligations under the Credit Agreement or the performance or observance by the Borrower or any of its Subsidiaries of any of their respective obligations under the Credit Agreement, any of the other Loan Documents or any other instrument or document furnished pursuant thereto; [and (iii) attaches the Note(s) (representing the Revolving Loan(s) and/or Term Loan(s) held by it, singularly or collectively, the "Notes(s)") held by it evidencing the Assigned Facilities and requests that the Agent exchange such Note(s) for a new Note or Notes payable to the Assignor (if the Assignor has retained any interest in the Assigned Facility) and a new Note or Notes payable to the Assignee in the respective amounts which reflect the assignment being made hereby (and after giving effect to any other assignments which have become effective on the Assignment Effective Date)]. The Assignee (i) represents and warrants that it is legally authorized to enter into this Assignment and Acceptance and that it is an Eligible Assignee; (ii) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.01 thereof, and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (iii) agrees that it will, independently and without reliance upon the Agent, the Assignor, any other Lender or any other Secured Party and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement, any of the other Loan Documents or any other instrument or document furnished pursuant thereto; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement, the other Loan Documents or any other instrument or document furnished pursuant thereto as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will be bound by the provisions of the Credit Agreement and will perform in accordance with its terms all the obligations which by the terms of the Credit Agreement are required to be performed by it as a Lender; and (vi) if the Assignee is organized under the laws of a jurisdiction outside the United States, attaches the forms prescribed by the Internal Revenue Service of the United States certifying as to the Assignee's exemption from United States withholding taxes with respect to all payments to be made to the Assignee under the Credit Agreement or such other documents as are necessary to indicate that all such payments are subject to such tax at a rate reduced by an applicable tax treaty. Following the execution of this Assignment and Acceptance, it will be delivered to the Agent, together with a processing and recordation fee of $3,500 for acceptance by it and recording by the Agent pursuant to Section 9.04(b) of the Credit Agreement, effective as of the Assignment Effective Date (which Assignment Effective Date shall be, unless otherwise agreed to by the Agent, at least five Business Days after the execution of this Assignment and Acceptance). Upon such acceptance and recording, from and after the Assignment Effective Date, the Agent shall make all payments in respect of the Assigned Interest (including payments of principal, interest, fees and other amounts) to the Assignee, whether such amounts have accrued prior to the Assignment Effective Date or accrue subsequent to the Assignment Effective Date. The Assignor and the Assignee shall make all appropriate adjustments in payments for periods prior to the Assignment Effective Date by the Agent or with respect to the making of this assignment directly between themselves. From and after the Assignment Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in (x) this Assignment and Acceptance and (y) Section 9.04 of the Credit Agreement, have the rights and obligations of a Lender thereunder and under the other Loan Documents and shall be bound by the provisions thereof, and (ii) the Assignor shall, to the extent provided in (x) this Assignment and Acceptance and (y) Section 9.04 of the Credit Agreement, relinquish its rights and be released from its obligations under the Credit Agreement; provided, that Assignor hereby represents and warrants that the restrictions set forth in Section 9.04(b) of the Credit Agreement pertaining to the minimum amount of assignments have been satisfied. This Assignment and Acceptance shall be construed in accordance with and governed by the laws of the State of New York, without regard to conflicts of laws principles and by federal law to the extent applicable. IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective duly authorized officers on Schedule I hereto. Schedule I to Assignment and Acceptance Respecting the Credit Agreement, dated as of May 11, 1998, among The Topps Company, Inc., the Lenders party thereto, together with their successors and assigns and The Chase Manhattan Bank, as Agent Legal Name of Assignor: Legal Name of Assignee: Assignment Effective Date: Principal New Term Loan Amount Assigned: $___________ Principal New Term Loan Amount Retained: $___________ Principal Revolving Credit Commitment Amount Assigned $___________ Revolving Credit Commitment Percentage Assigned: __________% Principal Revolving Credit Commitment Amount Retained: $___________ Revolving Credit Commitment Percentage Retained: __________% Face Amount of Pre-Petition Letters of Credit Assigned: $___________ Face Amount of Pre-Petition Letters of Credit Retained: $___________ ACCEPTED: THE CHASE MANHATTAN BANK, as Agent _________________________, as Assignor By__________________________ By_______________________ Name: Name: Title: Title: ___________________________, as Assignee By__________________________ Name: Title: CONSENT OF THE BORROWER to the extent that the assignee is not an Eligible Assignee or as required in Section 9.04(b)(ii) of the Credit Agreement where such assignment is not to a Lender or an Affiliate of a Lender or is not an assignment of the entire remaining amount of the assigning Lender's Commitment or Loan THE TOPPS COMPANY, INC. By____________________________ Name: Title: EXHIBIT B-1 TO CREDIT AGREEMENT FORM OF OPINION OF BORROWER'S COUNSEL May 11, 1998 The Chase Manhattan Bank, as Agent and each of the other Lenders party to the Credit Agreement referenced below One Pierrepont Plaza Brooklyn, New York 11201-2791 Re: $34,400,000 Term Loan, Revolving Credit and Letter of Credit Facilities among The Topps Company, Inc., The Chase Manhattan Bank, as Agent, and the other lenders party hereto__________________________________ Ladies and Gentlemen: We have acted as special counsel to The Topps Company, Inc., a Delaware corporation (the "Company"), in connection with (i) the Term Loan in the amount of $24,950,000 (the "Term Loan"), (ii) the Revolving Credit facility (inclusive of Letters of Credit) in the amount of $9,450,000 (the "Revolving Facility"), each being made available to the Company by you on this date pursuant to the Credit Agreement dated as of May 11, 1998 among you, the Lenders and the Company (the "Credit Agreement") and (iii) the other transactions contemplated under the Credit Agreement. This opinion is being delivered in accordance with the condition set forth in Section 4.01 of the Credit Agreement. All capitalized terms not otherwise defined herein shall have the meanings provided therefor in the Credit Agreement. The terms "Actual Knowledge" and "Primary Lawyer Group" have the meanings provided in the Legal Opinion Accord of the ABA Section of Business law (1991) (the "Accord"), except the term "Primary Lawyer Group" shall also include Jack H. Nusbaum. The above reference to the Accord is made solely with respect to such definitions and not for any other purpose. 2 As such counsel, we have reviewed the following documents: 1. the Credit Agreement; 2. the Trademark Security Agreement; 3. the Pledge Agreement, 4. the Topps Guarantee Agreement; and 5. the Financing Statements (as hereinafter defined). All the foregoing documents are collectively referred to hereinafter as the "Loan Documents." In connection with this opinion, we have made such examinations of law and inquiries of officers of the Company and have examined certificates of public officials, execution copies of the Loan Documents and such corporate documents and records of the Company and certificates of officers of the Company and such other documents as we have deemed necessary or appropriate for the purposes of this opinion. In such examination, we have assumed the genuineness of all signatures (other than those of the Company), the authenticity of all documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as certified, conformed or photostatic copies. As to various questions of fact material to this opinion, we have relied upon the certifications, representations and warranties of officers and representatives of the Company and upon the representations and warranties of the Company set forth in the Loan Documents. (A) Based upon and subject to the foregoing, we are of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to transact business as a foreign corporation 3 and is in good standing in the State of New York (except the Company's biennial report is past due but the Company continues to be authorized to transact business in the State of New York) and the Commonwealth of Pennsylvania. The Company has the corporate power and authority to own its assets and conduct the businesses in which it is now engaged and has the corporate power and authority to enter into each of the Loan Documents and to perform its obligations thereunder. 2. The execution, delivery and performance by the Company of the Loan Documents and the consummation and performance of the transactions contemplated thereby have been approved by all necessary corporate and stockholder action on the part of the Company. Each of the Loan Documents has been duly authorized, executed and delivered by the Company and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms. 3. Neither the execution or delivery of, nor performance by the Company of its obligations under, the Loan Documents does or will conflict with, violate or constitute a breach of the charter or bylaws of the Company. 4. To the Actual Knowledge of the Primary Lawyer Group, there except as disclosed in the Credit Agreement, there is no pending or threatened action, suit, investigation or proceeding, before or by any court, governmental department, commission, board, bureau, instrumentality, agency or arbitral authority, which calls into question the validity or enforceability of any of the Loan Documents or the titles to their respective offices or authority of any officers of the Company or which, if determined adversely to the Company or its Subsidiaries would have a Material Adverse Effect on the financial condition of the Company and its Subsidiaries on a consolidated basis or the ability of the Company to perform its obligations under the Loan Documents. 5. Assuming the proceeds of the Loans are used in compliance with the provisions of the Credit Agreement, the making of the Loans and use of 4 the proceeds thereof contemplated by the Loan Documents and the pledge of and granting of security interests in collateral contemplated by the Loan Documents will not violate any New York or Federal law, including Section 7 of the Securities Exchange Act of 1934, as amended, any regulations issued pursuant thereto, or regulations G, T, U or X of the Board of Governors of the Federal Reserve System. 6. The Company is not (i) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended or (ii) a "holding company" or a "subsidiary company" of a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 7. The provisions of the Pledge Agreement are effective to create in favor of the Agent for the benefit of the Lenders a legal, valid and enforceable security interest in all right, title and interest of the Company in the Collateral referred to therein. So long as the Agent has possession in the State of New York of (i) the certificates evidencing the Pledged Shares and (ii) the Intercompany Notes, has acquired the security interest therein in good faith and without notice of any adverse claim and value has been given by the Lenders to the Company, such security interest will be perfected and will be free of any "adverse claim" (as defined in Section 8-102 of the New York Uniform Commercial Code (the "NYUCC")) with the rights of a "protected purchaser" (as defined in Section 8-303 of the NYUCC and which term includes, pursuant to the definition of the terms "purchase" and "purchaser" in Section 1-201 of the NYUCC, a holder, such as the Agent for the benefit of the Lenders, of a security interest). 8. The provisions of the Trademark Security Agreement are effective to create in favor of the Agent for the benefit of the Lenders a legal, valid and enforceable security interest in all right, title and interest of the Grantor party thereto in the Trademark Collateral referred to therein. 5 The filing of the Trademark Security Agreement in the United States Patent and Trademark Office will result in the perfection of the Liens which have been created and granted pursuant to the Trademark Security Agreement. To the Actual Knowledge of the Primary Lawyer Group there are no Liens on the Collateral subject to the Trademark Security Agreement except for liens permitted under the Credit Agreement and the Liens in favor of you expressly created pursuant to the Loan Documents. 9. Neither the execution or delivery of, nor performance by the Company of its obligations under, the Loan Documents (a) to the Actual Knowledge of the Primary Lawyer Group, does or will violate or constitute a breach of any material contract, agreement, indenture, lease, instrument, other document, judgment, writ, determination, order or decree to which the Company is a party or by which the Company or any of its properties is bound or (b) does or will violate any law, rules or regulations applicable to the Company or (c) to the Actual Knowledge of the Primary Lawyer Group, does or will result in the creation or imposition of any lien, pledge, charge or encumbrance of any nature upon or with respect to any of the properties of the Company, except for liens permitted under the Credit Agreement and the Liens in favor of you expressly created pursuant to the Loan Documents. 10. Neither the execution or delivery of, nor performance by the Company of its obligations under, the Loan Documents requires the prior approval, consent, waiver, permission or authorization of, notice to or registration or filing with any court or New York or Federal governmental authority, except for filings expressly contemplated by the Loan Documents (which have been made), the filing of Uniform Commercial Code financing statements (the "Financing Statements") and future filings, if any, required to continue the perfection of security interests perfected by the Financing Statements or to perfect any security interests in proceeds of collateral. 11. The Company is not subject to any charter or bylaw provision which restricts, limits, or prohibits payment of the Term Loan or advances made 6 or reimbursement obligations arising under the Revolving Facility or performance of any of the obligations pursuant to the terms of the Loan Documents. (B) The opinions expressed herein, however, are subject to the following: 1. We are members of the Bar of the State of New York and do not purport to be experts in the laws of jurisdictions other than the State of New York, the General Corporation Law of the State of Delaware and the Federal laws of the United Sates of America and we do not express any opinion as to the laws of any jurisdiction other than the present laws of the State of New York, the General Corporation Law of the State of Delaware and Federal laws of the United States, in each case of the type specifically applicable to transactions of the type contemplated by the Loan Documents and the present judicial interpretations thereof and to the facts as they presently exist. 2. The opinions set forth in Paragraph A, insofar as they relate to the enforceability of the Loan Documents, are subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting or limiting the enforcement of creditors' rights generally and to equitable principles affecting the availability of equitable relief (regardless of whether enforcement is considered in a proceeding in equity or at law), including principles of commercial reasonableness or conscionability and an implied covenant of good faith and fair dealing. Such principles of equity are of general application, and in applying such principles, a court, among other things, might not allow a creditor to accelerate the maturity of a debt for an immaterial default. Such principles applied by a court might include a requirement that a creditor act with reasonableness and good faith. Such requirement might be applied, for example, to any provision of the Loan Documents purporting to authorize conclusive determinations by any Lender or the Agent. Insofar as provisions contained in the Loan Documents provide for 7 indemnification, the enforcement thereof may be limited by public policy considerations. 3. A partner of this firm, Jack R. Nusbaum, is a member of the Board of Directors of the Company. 4. We have made no independent investigations except as specifically set forth herein. 5. We express no opinion as to the effect of the law of any jurisdiction other than the State of New York wherein any Lender or the Agent (or any assignee of any of the rights and/or obligations of any Lender or the Agent under the Loan Documents) may be located or wherein enforcement of the Loan Documents may be sought which limits the rates of interest legally chargeable or collectible. 6. We express no opinion as to (i) whether a federal or state court outside of the State of New York would give effect to the choice of New York law provided for in the Loan Documents, (ii) sections of the Loan Documents insofar as such sections relate to the subject matter jurisdiction of the courts specified therein to adjudicate any controversy related to the Loan Documents, (iii) sections of the Loan Documents insofar as such sections relate to the waiver of trial by jury, (iv) the waiver of defenses and the waiver of objection to venue set forth in the Loan Documents with respect to proceedings in the courts specified therein or (v) the enforceability of any provision of the Loan Documents that purports to define acts that will constitute a commercially reasonable disposition of collateral. 7. We express no opinion as to the effect of any Federal or state fraudulent transfer or preferential transfer law, including Sections 547 or 548 of the Bankruptcy Reform Act, as amended, on the opinions set forth in paragraphs 2 and 5 of the Part A or as to the enforceability of any guarantee agreement provided pursuant to Section 5.14 of the Credit Agreement. 8 8. We have made no examination of and express no opinion as to (i) the ownership of any Collateral described in the Loan Documents or any other matters affecting title or (ii) the priority of any Lien purported to be created by any Loan Documents (except as otherwise expressly noted in paragraph 7 of Part A above). 9. Our opinions contained herein are rendered solely for your information in connection with the transactions contemplated under the Loan Documents and may not be relied upon in any manner by any other person, entity or agency, or by you for any other purpose. Our opinions herein shall not be quoted or otherwise included, summarized or referred to in any publication or document, in whole or in part, for any purposes whatsoever, or furnished to any other person, entity or agency, except as may be required by you by applicable law or regulation or request of regulatory agencies to which you are subjects. We further advise you that we are not assuming any obligation to notify the Agent or the Lenders of any changes in this opinion as a result of any facts that may come to our attention in the future which may cause a change in this opinion, including any action necessary to maintain perfection of the security interest referred to in paragraphs 7 or 8 of Part A above. 10. This opinion is limited to matters expressly set forth herein and no opinion is to be implied or may be inferred beyond the matters expressly stated herein. Very truly yours, 9 EXHIBIT B-2 TO CREDIT AGREEMENT FORM OF OPINION OF BORROWER'S U.K. COUNSEL 11 May 1998 CONFORMED COPY The Chase Manhattan Bank, as Agent and Each of the Lenders party to the Credit Agreement Referenced Below. One Pierrepont Plaza Brooklyn NY 11201-2791 USA Dear Sirs Re: US$34,400,000 Term Loan, Revolving Credit Facility and Letter of Credit amongst The Chase Manhattan Bank, as Agent, the Lenders party thereto and The Topps Company, Inc. 1. We have been instructed to opine on certain specific matters concerning Topps Europe Limited ("Topps Europe") as English legal advisers to The Topps Company, Inc. ("Topps") in connection with a Credit Agreement (the "Credit Agreement") of 11 May 1998 and expressed to be between Topps and The Chase Manhattan Bank (the "Agent") for each of the lenders (the "Lenders") now or hereafter party to the Credit Agreement. We have taken instructions solely from Topps in respect of this matter. We understand that the Agent proposes to take a pledge (the "Pledge") to be governed by New York law over certain shares in Topps Europe. We have not advised Topps, the Lenders, the Agent or any other person on the terms and we express no opinion on the effect (if any) or the enforceability (or otherwise) of the Pledge (whether under English Law or under the laws of any other country) nor on whether the Pledge creates security or is an appropriate form of taking security over shares in a company incorporated in England. 2. For the purposes of this opinion, we have examined: 2.1 the entries shown on the microfiche (obtained by us from Companies House, London, on 11 May 1998) of the memorandum and articles of association and the files of Topps Europe maintained at Companies House ("the Microfiche"); and 2.2 the Share Register (as referred to in paragraph 6.3 below). 3. This opinion is limited to English law as applied by the English courts at the date hereof and is given on the basis that it will be governed by and construed in accordance with English law. We have made no investigation of, and express no opinion as to, any laws other than the law of England. In particular we understand that the Pledge and the Credit Agreement are expressed to be governed by the laws of the State of New York. 4. This opinion is being delivered in accordance with the condition in section 4.01(b) of the Credit Agreement. We would draw your attention to the fact that we have not reviewed the Credit Agreement or any amendments, supplements or exhibits thereof. We have assumed that there is nothing in the Credit Agreement which would be relevant to, or which would otherwise affect the opinions which we express in this letter. 5. We would also draw your attention to the fact that we have not reviewed the Pledge or any amendments, supplements or exhibits thereof. We have assumed that there is nothing in the Pledge which would be relevant to, or which would otherwise affect the opinions which we express in this letter. ASSUMPTIONS 6. For the purposes of this opinion we have assumed the following: 6.1 both Topps and the Agent are duly incorporated and validly existing under the laws of the jurisdiction of their incorporation and the Pledge has been validly authorised, executed and delivered by both Topps and the Lender and the entry into and performance of the Pledge are within the capacity and powers of both Topps and the Lender; 6.2 all factual statements made in the Secretary's Certificate, attached hereto as Schedule 1 (the "Secretary's Certificate"), are true and correct; 6.3 the share register of Topps Europe (the "Share Register") is true and correct; 6.4 the information on the Microfiche is accurate and it should be noted that we have made no investigation into whether all necessary documents have been filed by Topps Europe or whether the register maintained by the Registrar in respect of Topps Europe correctly records all such information and consequently it should be noted that such information could be incomplete or incorrect; 6.5 the searches and enquiries referred to in paragraphs 7.5 and 7.6 below were accurate and complete and disclosed all information which is material for the purposes of this opinion; it should be noted, however, that searches at the Companies Registry are not capable of revealing whether or not a winding up petition or a petition for an administration order has been presented; notice of a winding up order made or resolution passed, or administration order made, 3 or a receiver or administrative receiver appointed may not be filed at the Companies Registry immediately; also, the results of oral telephone enquiries of the Central Index of Winding Up Petitions have been found to be unreliable. OPINION 7. Subject to the foregoing assumptions and subject to the reservations mentioned in paragraph 8 below and to any matters not disclosed to us, we are of the opinion, based upon our examination of the documents referred to above, that: 7.1 Topps Europe is a company duly incorporated and validly existing in England under the Companies Act 1985 under the registered number 2331336; 7.2 based solely upon an examination on the date hereof of Topps Europe's Share Register and the Secretary's Certificate: o the present issued share capital of Topps Europe consists of 178,571 Ordinary Shares of US$0.01 and 178,571 Deferred Shares of Br Pds 1 each, in each case, fully paid or credited as fully paid; o all of such Ordinary Shares and Deferred Shares are registered in the name of Topps; 7.3 under the articles of association of Topps Europe the holders of Deferred Shares are only entitled to participate in the assets of Topps Europe after the holders of every other class of shares in the capital of Topps Europe shall have received on a return of assets on liquidation or otherwise the sum of Br pds 1 million in respect of each share (other than Deferred Shares) held by them; 7.4 under the articles of association of Topps Europe none of the Deferred Shares carry any right to receive notice of or attend and vote at any general meeting of Topps Europe; 7.5 entries shown on the Microfiche (obtained by us from Companies House, London on 11 May 1998) revealed no order or resolution for the winding up of Topps Europe, no interim or final administration order in relation to Topps Europe and no notice of the appointment of a receiver, administrative receiver or administrator of Topps Europe or its assets; 7.6 telephone enquiries of the Central Index of Winding Up Petitions made on 11 May 1998 did not reveal that any petition for the winding up or administration of Topps Europe had been presented; 7.7 subject to the same being duly completed and signed by or on behalf of the person who as transferor is named in the Share Register as the registered holder of a share or shares in the issued share capital of Topps Europe, to it being duly stamped and the provisions of Article 9 of the Articles of Association of Topps Europe in the form referred to 4 in paragraph 2 of the Secretary's Certificate otherwise being complied with, a stock transfer form in the form attached hereto as Schedule 2 is effective, upon registration in the Share Register, to transfer such share or shares to the person named as the transferee on such stock transfer form and entered in the Share Register. RESERVATIONS 8. 8.1 No opinion is expressed in relation to any tax consequences arising out of any transactions contemplated herein. 8.2 We have assumed that there will be no changes in the matters relevant for the purposes of this opinion after the date of this opinion. 8.3 No opinion is expressed as to whether the Pledge is capable of registration with the Registrar of Companies, whether the Pledge should be so registered or as to the consequences of non-registration within the applicable time-limit. We would, however, draw your attention to section 409 of the Companies Act 1985 which provides that a charge created by a company incorporated outside Great Britain which has an established place of business in England and Wales on property situate in England and Wales (which would include shares in Topps Europe) will be void as against a liquidator, administrator or any creditor of the company unless it is presented to the Registrar of Companies, together with the prescribed particulars, within 21 days of its creation. We have not been instructed to register the Pledge. 8.4 No opinion is expressed as to the capacity in which Topps holds the Shares. 8.5 No opinion is expressed as to the priority of any security interest which may be created by the Pledge. 8.6 We would point out that, notwithstanding the choice of law contained in the Pledge (which we understand to be New York law), an English court will give effect to mandatory provisions of the English law in relation to the Pledge and that, in particular, the Pledge may be subject to any laws from time to time in effect relating to bankruptcy, insolvency, administration, liquidation, reorganisation, court schemes, moratorium, the doctrine of frustration and any other laws or other legal procedures affecting generally the enforcement of security or of creditors' rights. DISCLOSURE 9. This opinion is addressed to you solely for your own use and benefit in connection with the Credit Agreement and is neither to be transmitted to any other person, nor relied upon by and 5 other person or for any other purpose, nor quoted or referred to in any public document nor filed with any government agency or other person, without our prior written consent. Yours faithfully, SIMMONS & SIMMONS 6 EXHIBIT C TO CREDIT AGREEMENT PERFECTION CERTIFICATE The undersigned, being the Vice President - Chief Financial Officer of THE TOPPS COMPANY, INC., a Delaware corporation (the "Borrower"), pursuant to the requirements of Sec 4.01(f)(iv) of the Credit Agreement (the "Credit Agreement") of even date herewith by and between the Borrower, THE CHASE MANHATTAN BANK, as Agent (the "Agent") and the lenders party thereto, hereby certifies as follows: A. Set forth on Exhibit A are the results of the search of the Uniform Code filings made with respect to the Borrower in the following jurisdictions: 1. Secretary of State, New York 2. City Register, New York County, New York 3. City Register, New York County, New York 4. County Clerk, New York County, New York 5. Central Filing Office, Pennsylvania 6. County of Luzerne, Pennsylvania B. Set forth on Exhibit B are the results of the search of the United States Patent and Trademark Office with respect to the Borrower's intellectual property. C. This certificate is being given in the corporate and not the personal capacity of the undersigned. Dated: May 11, 1998 THE TOPPS COMPANY, INC. By:_____________________________ Title: Vice President - Chief Financial Officer EXHIBIT D TO THE CREDIT AGREEMENT FORM OF PLEDGE AGREEMENT PLEDGE AGREEMENT dated as of May 11, 1998 between THE TOPPS COMPANY, INC., a Delaware corporation (the "Pledgor") and THE CHASE MANHATTAN BANK, as agent (in such capacity, the "Agent") for the lenders (the "Lenders") from time to time parties to the Credit Agreement dated as of May 11, 1998 (as the same may be amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Pledgor, the Lenders and the Agent. W I T N E S S E T H:WHEREAS, (a) pursuant to the Credit Agreement, the Lenders have severally agreed to make Loans and other extensions of credit (collectively, the "Extensions of Credit") to the Pledgor upon the terms and subject to the conditions set forth therein and (b) one or more Lenders or affiliates of Lenders may from time to time enter into Hedging Agreements (as defined in the Credit Agreement) with the Pledgor; WHEREAS, the proceeds of the Extensions of Credit will be used in part to enable the Pledgor to make valuable transfers to certain of its Subsidiaries (as defined in the Credit Agreement) in connection with the operation of their respective businesses, which transfers are evidenced by Intercompany Notes (as defined in the Credit Agreement); WHEREAS, the Pledgor and such Subsidiaries are engaged in related businesses and the Pledgor and such Subsidiaries will derive substantial direct and indirect benefit from the making of the Extensions of Credit; WHEREAS, it is a condition precedent to the obligation of the Lenders to make their respective Extensions of Credit to the Pledgor under the Credit Agreement that the Pledgor shall have executed and delivered this Pledge Agreement to the Agent for the ratable benefit of the Lenders; and WHEREAS, Pledgor is the legal and beneficial owner of (a) the shares of stock of Topps Europe Limited, a company registered in England under number 2331336 (the "Issuer") described on Schedule I hereto (the "Pledged Shares"), which Pledged Shares constitute the percentage of all the issued and outstanding shares of capital stock of the Issuer identified on such Schedule I, and (b) the indebtedness evidenced by the Intercompany Notes more fully described on Schedule II and the indebtedness described from time to time on amendments to Schedule II hereafter delivered to the Agent in accordance with the terms of the Credit Agreement (collectively, the "Pledged Debt"); NOW, THEREFORE, in consideration of the premises and to induce the Agent and the Lenders to enter into the Credit Agreement, the Pledgor hereby agrees with the Agent, for the ratable benefit of the Lenders, as follows: 1. Defined Terms. (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. (b) References to "Lenders" in this Pledge Agreement shall be deemed to include affiliates of Lenders that may from time to time enter into Hedging Agreements with the Pledgor. (c) The words "hereof," "herein," and "hereunder" and words of similar import when used in this Pledge Agreement shall refer to this Pledge Agreement as a whole and not to any particular provision of this Pledge Agreement, and Section references are to Sections of this Pledge Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 2. Grant of Security. (a) Subject to the provisions of subparagraph (b) hereof, the Pledgor hereby transfers, assigns and pledges to the Agent for the ratable benefit of the Lenders, and hereby grants to the Agent for the ratable benefit of the Lenders, a security interest in, the following, whether now owned or existing or hereafter acquired or existing (collectively, the "Collateral"): (i) the Pledged Shares and the certificates representing the Pledged Shares and any interest of the Pledgor in the entries on the books of any financial intermediary pertaining to the Pledged Shares, and all dividends, cash, warrants, rights, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares; and (ii) the Pledged Debt and the instruments evidencing the Pledged Debt, and all interest, cash, instruments and other property or proceeds from time to time received, receivable or otherwise distributed in respect of or in exchange for any or all of the Pledged Debt; and (iii) to the extent not covered by clauses (i) and (ii) above, respectively, all proceeds or any or all of the foregoing Collateral. For purposes of this Pledge Agreement, the term "proceeds" includes whatever is receivable or received when Collateral or proceeds are sold, exchanged, collected or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, proceeds of any indemnity or guaranty payable to the Pledgor or the Agent from time to time with respect to any of the Collateral. (b) Notwithstanding any other provision of this Pledge Agreement, at no time shall the aggregate Pledged Shares hereunder comprise more than 65% of the outstanding ordinary shares of the Issuer, and the Agent shall release, upon the request of the Pledgor, any shares of Pledged Shares in the event and to the extent such Pledged Shares shall represent in excess of such amount. 3. Security for Obligations. This Pledge Agreement secures the payment of all Obligations of the Pledgor. Without limiting the generality of the foregoing, this Pledge Agreement secures the payment of all amounts that constitute part of the Obligations and would be owed by the Pledgor to the Agent or the Lenders under the Loan Documents but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding involved the Pledgor. 4. Delivery of the Collateral. All certificates or instruments, if any, representing or evidencing the Collateral shall be promptly delivered to and held by or on behalf of the Agent pursuant hereto and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance reasonably satisfactory to the Agent. The Agent shall have the right, at any time after the occurrence and during the continuance of an Event of Default and without notice to the Pledgor, to transfer to or to register in the name of the Agent or any of its nominees any or all of the Pledged Shares. 5. Representations and Warranties. The Pledgor represents and warrants as follows: (a) The Pledged Shares set forth on Schedule I hereto represent on the date hereof the percentage of all the issued and outstanding capital stock of the Issuer thereof as identified on Schedule I. (b) The Pledgor is the legal and beneficial owner of the Collateral, as indicated on Schedule I and Schedule II, pledged or assigned by the Pledgor hereunder free and clear of any Lien, except for the Lien created by this Pledge Agreement or Liens permitted under Section 8 hereof. (c) As of the date of this Pledge Agreement, the Pledged Shares pledged by the Pledgor hereunder have been duly authorized and validly issued and are fully paid and non-assessable. (d) The execution and delivery by the Pledgor of this Pledge Agreement and the pledge of the Collateral hereunder pursuant hereto create a valid and perfected first priority security interest in the Collateral, securing the payment of the Obligations. (e) The Pledgor has full power, authority and legal right to pledge all the Collateral pledged pursuant to this Pledge Agreement and will defend its and the Agent's title or interest thereto or therein (and in the proceeds thereof) against any and all Liens (other than the Lien of this Pledge Agreement), however arising, or any and all persons whomsoever. 6. Further Assurances. The Pledgor agrees that at any time and from time to time, at its own expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary, or that the Agent may reasonably request, in order to perfect and protect any pledge, assignment or security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. 7. Voting Rights; Dividends and Distributions; Etc. (a) So long as no Event of Default shall have occurred and be continuing: (i) The Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not prohibited by the terms of this Pledge Agreement or the other Loan Documents. (ii) The Agent shall execute and deliver (or cause to be executed and delivered) to the Pledgor all such proxies and other instruments as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the voting and other rights that it is entitled to exercise pursuant to paragraph (i) above. (b) Subject to paragraph (c) below, the Pledgor shall be entitled to receive and retain and use, free and clear of the Lien of this Pledge Agreement, any and all dividends, distributions, principal and interest made or paid in respect of the Collateral; provided, however, that any and all dividends and other distributions in equity securities included in the Collateral shall be, and shall be forthwith delivered to the Agent to hold as, Collateral and shall, if received by the Pledgor, be received in trust for the benefit of the Agent, be segregated from the other property or funds of the Pledgor and be forthwith delivered to the Agent as Collateral in the same form as so received (with any necessary endorsement). (c) Upon written notice to the Pledgor by the Agent following the occurrence and during the continuance of an Event of Default, (i) all rights of the Pledgor to exercise or refrain from exercising the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to Section 7(a)(i) shall cease, and all such rights shall thereupon become vested in the Agent, which shall thereupon have the sole right to exercise or refrain from exercising such voting and other consensual rights during the continuance of such Event of Default; (ii) all rights of the Pledgor to receive the dividends, distributions and principal and interest payments that the Pledgor would otherwise be authorized to receive and retain pursuant to Section 7(b) shall cease, and all such rights shall thereupon become vested in the Agent, which shall thereupon have the sole right to receive and hold as Collateral such dividends, distributions and principal and interest payments during the continuance of such Event ofDefault; (iii) all dividends, distributions and principal and interest payments that are received by the Pledgor contrary to the provisions of Section 7(b) shall be received in trust for the benefit of the Agent, shall be segregated from other funds of the Pledgor and shall forthwith be paid over to the Agent as Collateral in the same form as so received (with any necessary indorsements); and (iv) in order to permit the Agent to receive all dividends, distributions and principal and interest payments to which it may be entitled under Section 7(b) above, to exercise the voting and other consensual rights that it may be entitled to exercise pursuant to Section 7(c)(i) above, and to receive all dividends, distributions and principal and interest payments that it may be entitled to under Section 7(c) (ii) above, the Pledgor shall, if necessary,upon written notice from the Agent, from time to time execute and deliver to the Agent, appropriate proxies, dividend payment orders and other instruments as the Agent may reasonably request. 8. Transfers and Other Liens; Additional Collateral; Etc. The Pledgor shall: (a) not, except as permitted by the Credit Agreement, (i) sell or otherwise dispose of, or grant any option or warrant with respect to, any of the Collateral or (ii) create or suffer to exist any consensual Lien upon or with respect to any of the Collateral, except for the Lien under this Pledge Agreement; and b. (i)cause the Issuer of Pledged Shares not to issue any stock or other securities in addition to or in substitution for the Pledged Shares issued by the Issuer, except to the Pledgor, and (ii) subject to the provision of Section 2(b), pledge hereunder, immediately upon its acquisition (directly or indirectly) thereof, any and all additional shares of stock or other securities of the Issuer within 60 Business Days of such acquisition. 9. Agent Appointed Attorney-in-Fact. The Pledgor hereby irrevocably appoints the Agent as the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise to take any action and to execute any instrument, in each case after the occurrence and during the continuance of an Event of Default, that the Agent may deem reasonably necessary or advisable to accomplish the purposes of this Pledge Agreement, including, without limitation, to receive, indorse and collect all instruments made payable to the Pledgor representing any dividend, distribution or principal or interest payment in respect of the Collateral or any part thereof and to give full discharge for the same. 10. The Agent's Duties. The powers conferred on the Agent hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. Except for the safe custody of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Shares, whether or not the Agent or any Lender has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any parties or any other rights pertaining to any Collateral. The Agent shall be deemed to have exercised reasonable care in the custody and preservation of any Collateral in its possession if such Collateral is accorded treatment substantially equal to that which the Agent accords its own property. 11. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party upon default under the Uniform Commercial Code in effect in the State of New York at such time (the "N.Y. Uniform Commercial Code") (whether or not the N.Y. Uniform Commercial Code applies to the affected Collateral) and also may without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange broker's board or at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, at such price or prices and upon such other terms as are commercially reasonable irrespective of the impact of any such sales on the market price of the Collateral. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of the Pledgor, and the Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay and/or appraisal which it now has or may at any time in the future have under any rule or statute now existing or hereafter enacted. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the extent permitted by law, the Pledgor hereby waives any claim against the Agent arising by reason of the fact that the price at which any Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale, even if the Agent accepts the first offer received and does not offer such Collateral to more than one offeree. (b) All cash and cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral may, in the discretion of the Agent, be held by the Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Agent pursuant to Section 9.03 of the Credit Agreement) in whole or in part by the Agent for the ratable benefit of the Lenders against, all or any part of the Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after payment in full of the Obligations shall be paid over to the Pledgor or to any other Person that may be lawfully entitled to receive such surplus. (c) The Agent may exercise any and all rights and remedies of the Pledgor in respect of the Collateral. (d) All payments received by the Pledgor after the occurrence and during the continuance of an Event of Default in respect of the Collateral shall be received in trust for the benefit of the Agent, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Agent in the same form as so received (with any necessary indorsement). If at any time when the Agent shall determine to exercise its right to sell all or any part of the Pledged Shares pursuant to this Section, such Pledged Shares or the part thereof to be sold shall not be effectively registered under the Securities Act of 1933, as amended, and as from time to time in effect, and the rules and regulations thereunder (the "Securities Act"), the Agent is hereby expressly authorized to sell such Pledged Shares or such part thereof by private sale in such manner and under such circumstances as the Agent may deem necessary or advisable in order that such sale may legally be effected without such registration. Without limiting the generality of the foregoing, in any such event the Agent (a) may proceed to make such private sale notwithstanding that a registration statement for the purpose of registering such Pledged Shares or such part thereof shall have been filed under such Securities Act, (b) may approach and negotiate with a restricted number of potential purchasers to effect such sale and (c) may restrict such sale to purchasers as to their number, nature of business and investment intention including without limitation to purchasers each of whom will represent and agree to the satisfaction of the Lender that such purchaser is purchasing for its own account, for investment, and not with a view to the distribution or sale of such Pledged Shares, or part thereof, it being understood that the Agent may cause or require the Pledgor, and the Pledgor hereby agrees upon the written request of the Agent, to cause (i) a legend or legends to be placed on the certificates to be delivered to such purchasers to the effect that the Pledged Shares represented thereby have not been registered under the Securities Act and setting forth or referring to restrictions on the transferability of such securities; and (ii) the issuance of stop transfer instructions to the Issuer's transfer agent, if any, with respect to the Pledged Shares, or, if the Issuer transfers its own securities, a notation in the appropriate records of the Issuer. In the event of any such sale, the Pledgor does hereby consent and agree that the Agent shall incur no responsibility or liability for selling all or any part of the Pledged Shares at a price which the Agent may deem reasonable under the circumstances, notwithstanding the possibility that a substantially higher price might be realized if the sale were public and deferred until after registration as aforesaid. [The provisions of the U.K. Law of Property Act 1925 relating to the power of sale conferred thereby are hereby varied so that section 103 shall not apply, and such provisions are hereby extended as set forth herein.] 1. Amendments, etc. with Respect to the Obligations; Waiver of Rights. The Pledgor shall remain obligated hereunder notwithstanding that, without any reservation of rights against the Pledgor and without notice to or further assent by the Pledgor, any demand for payment of any of the Obligations made by the Agent or the Lender may be rescinded by such party and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security, or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Agent or any Lender, and the Credit Agreement, the other Loan Documents, the Letters of Credit and any other documents executed and delivered in connection therewith and the Hedging Agreements and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, as the Agent (or the Required Lenders, as the case may be, or, in the case of any Hedging Agreement, the Lender party thereto) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Agent or any Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. Neither the Agent nor any Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Pledge Agreement or any property subject thereto. The Agent or any Lender may, but shall be under no obligation to, make demand hereunder against the Pledgor, and any failure by the Agent or a Lender to make any such demand or to collect any payments from the Pledgor or release the Pledgor shall not relieve the Pledgor in respect of which a demand is made or collection is not made or the Pledgor is not so released of its obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Agent or any Lender against the Pledgor. For the purposes hereof, "demand" shall include the commencement and continuance of any legal proceedings. 2. Continuing Security Interest; Assignments Under the Credit Agreement. This Pledge Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until the payment in full in cash of the Obligations, (b) be binding upon each Pledgor, its successors and assigns and (c) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent, the Lenders and their respective successors, transferees and assigns. 3. Reinstatement. This Pledge Agreement shall continue to be effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Pledgor, or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, the Pledgor or any substantial part of its property, or otherwise, all as though such payments had not been made. 4. Notices. All notices, requests and demands pursuant hereto shall be made in accordance with Section 9.01 of the Credit Agreement. 5. Counterparts. This Pledge Agreement may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 6. Severability. Any provision of this Pledge Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7. Integration. This Pledge Agreement represents the agreement of the Pledgor with respect to the subject matter hereof and there are no promises or representations by the Agent or the Lender relative to the subject matter hereof not reflected herein or in the other Loan Documents. 8. Amendments in Writing; No Waiver; Cumulative Remedies. (a) None of the terms or provisions of this Pledge Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Pledgor and the Agent. (b) Neither the Agent nor any Lender shall by any act (except by a written instrument pursuant to Section 19(a)), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to exercise, nor any delay in exercising, on the part of the Agent or any Lender, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Agent or any Lender of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy that the Agent or such Lender would otherwise have on any future occasion. (c) The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 9. Section Headings. The Section headings used in this Pledge Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 10. Successors and Assigns. This Pledge Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the Agent and the Lenders and their successors and assigns, except that the Pledgor may not assign, transfer or delegate any of its rights or obligations under this Pledge Agreement without the prior written consent of the Agent. 11. Governing Law; Jurisdiction; Consent to Service of Process. (a) This Pledge Agreement shall be construed in accordance with and governed by the law of the State of New York. (b) The Pledgor hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Pledge Agreement or any other Loan Document shall affect any right that the Agent or any Lender may otherwise have to bring any action or proceeding relating to this Pledge Agreement or any other Loan Document against the Pledgor or its properties in the courts of any jurisdiction. (c) The Pledgor hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Pledge Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Pledge Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01 of the Credit Agreement. Nothing in this Pledge Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law. 12. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS PLEDGE AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. IN WITNESS WHEREOF, each of the undersigned has caused this Pledge Agreement to be duly executed and delivered by its duly authorized officer as of the day and year first above written. THE TOPPS COMPANY, INC. By:______________________________ Name: Title: THE CHASE MANHATTAN BANK, as Agent and as a Lender, By:______________________________ Name: Title: SCHEDULE II 1. Loan Agreement, dated February 3, 1997 by and between Topps Brasil Ltda. and the Pledgor in the original prinicpal amount of $1,000,000. 1. Loan Agreement, dated September 16, 1997 by and between Topps Brasil Ltda. and the Pledgor in the original principal amount of $650,000. EXHIBIT E TO CREDIT AGREEMENT TRADEMARK SECURITY AGREEMENT TRADEMARK SECURITY AGREEMENT (the "Agreement"), dated as of May 11, 1998, made by THE TOPPS COMPANY, INC., a Delaware corporation (the "Grantor") to THE CHASE MANHATTAN BANK, with an office at 1 Pierrepont Plaza, Brooklyn, New York 11201, as agent (the "Agent") for the benefit of the Lenders (as defined in the Credit Agreement referred to below). WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Agent, the Lenders and the Grantor are entering into a Credit Agreement dated as of the date hereof (as amended, modified or supplemented from time to time, the "Credit Agreement"); and WHEREAS, unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined; and WHEREAS, it is a condition precedent to the making of Loans that the Grantor shall have executed and delivered this Agreement; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor and the Agent agree as follows: I. Grant of Security. The Grantor hereby assigns and pledges to the Agent for its benefit and for the ratable benefit of the Lenders, and hereby grants to the Agent for its benefit and for the ratable benefit of the Lenders, a lien on and first priority security interest in (except to the extent such assignment, pledge or grant would violate the terms of any license agreement with any other person in connection with any of the Trademarks, as defined below, whether the Grantor is a licensee o licensor under any such license agreement), the entire right, title and interest of the Grantor in and to the following, whether now owned or hereafter acquired (the "Trademark Collateral"): (a) All owned domestic trademarks, service marks, trade names and trade dress and all trademark and service mark registrations and applications for trademark or service mark registration in the United States (except for "intent to use" applications for trademark or service mark registrations filed pursuant to Section l(b) of the Lanham Act, unless and until an Amendment to Allege Use or a Statement of Use under Sections l(c) and l(d) of said Act has been filed) and (i) all renewals thereof, (ii all income, royalties, damages and payments now and hereafter due and/or payable with respect thereto (including, without limitation, payments under all licenses entered into in connection therewith, and damages and payments for past or future infringements thereof), (iii) the right to sue or otherwise recover for all past, present and future infringements thereof, and (iv) all rights corresponding thereto throughout the world (but only such rights as now exist or may come to exist under applicable local law), together, in each case, with the goodwill of the business connected with the use of, and symbolized by each such trademark, service mark, trade name and trade dress (all of the foregoing and other rights being, collectively, the "Trademarks"); (b) All license agreements with any other Person in connection with any of the Trademarks when the Grantor is a licensor under any such license agreement (subject, in each case, to the terms of such license agreements), and the right to prepare for sale, sell and advertise for sale, all inventory (as defined in the Uniform Commercial Code in effect in the State of New York (the "NYUCC")), to the extent now or hereafter owned by the Grantor and now or hereafter covered by such licenses (the "Licenses"). SECTION 2. Security for Obligations. The assignment and pledge of and grant of a security interest in the Trademark Collateral by the Grantor pursuant to this Agreement (collectively, the "Security Interests") secures the payment of all Obligations of the Grantor now or hereafter existing (and any other documents in respect of such Obligations), whether for principal, interest, fees, expenses or otherwise (all such Obligations being the "Secured Obligations"). The Security Interests granted by this Agreement are granted in conjunction with the security interests granted to the Agent in other assets of the Grantor, as set forth in the Credit Agreement and the other Loan Documents. SECTION I. Representations and Warranties. The Grantor represents and warrants on the date hereof as follows: (a) The Grantor is the sole, legal and beneficial owner of the entire right, title and interest in and to the federal registrations and applications for registration of the Trademarks listed on Schedule I hereto and the Licenses free and clear of any lien, security interest, option, charge, pledge, registered user agreement, assignment (whether conditional or not), or covenant, or any other encumbrance, except for the Security Interests created or permitted by this Agreement or the Credit Agreement, and except for any such encumbrances which do not have a material adverse impact on the economic value of any of the federal registrations and applications for registration of the Trademarks listed on Schedule I hereto, and except as permitted by Section 5 of this Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the federal registrations and applications for registration of the Trademarks listed on Schedule I hereto or the Licenses purported to be granted by the Grantor hereunder is on file in any recording office, including, without limitation, the United States Patent and Trademark Office, except such as may have been filed in favor of the Agent relating to this Agreement. (b) Set forth on Schedule I is a complete and accurate list of all of the United States federal registrations and applications for federal registration of the Trademarks owned by the Grantor. (c) Each federal trademark and service mark registration and application for registration of the Grantor identified on Schedule I is subsisting and, to the best of the Grantor's knowledge, has not been adjudged invalid, unregistrable or unenforceable, in whole or in part, and is, to the best of the Grantor's knowledge, valid, registrable and enforceable. Each License of the Grantor, to the best of the Grantor's knowledge, is subsisting and has not been adjudged invalid or unenforceable, in who or in part, and is, to the best of the Grantor's knowledge, valid and enforceable. The Grantor has notified the Agent in writing of all prior uses of any federal registrations and applications for registration of the Trademarks listed on Schedule I hereto of which the Grantor is aware, which would lead, in the reasonable judgment of the Grantor, to such Trademarks becoming invalid or unenforceable, including prior unauthorized uses by third parties and uses which were not supported by the goodwill of the business connected with such item. (d) The Grantor has not, except as permitted under the Credit Agreement, granted any license, release, covenant not to sue, or non-assertion assurance to any third person with respect to any part of the federal registrations and applications for registration of the Trademarks listed on Schedule I hereto which would materially interfere with its business as currently carried on under any such registrations or applications for registrations. (e) The Grantor has used reasonable and proper statutory notice in connection with its use of each registered trademark and service mark listed on Schedule I, except inadvertent omissions thereof. (f) Except for (i) the appropriate filings with the United States Patent and Trademark Office, and (ii) the appropriate filings under Article 9 of the Uniform Commercial Code, no consent of any other Person (other than licensors of any License to which the Grantor is a licensee), no authorization, consent, approval or other action by, and no notice to or filing or recording with, any governmental, administrative or judicial authority or regulatory body is required in the United States either (x for the granting by the Grantor of the Security Interests granted hereby or for the execution, delivery or performance of this Agreement by the Grantor, or (y) for the perfection of or the exercise by the Agent of its rights and remedies hereunder, except where the failure to obtain, take, give or make such authorizations, consents, approvals, actions, notices or filings would not, and would not be reasonably likely to, have a material adverse effect on the financial condition, operations, business, properties or assets of the Grantor. (g) The consummation of actions contemplated under or in connection with the Loan Documents to be performed by the Grantor, will not impair the legal right of the Grantor to use any of the federal registrations and applications for registration of the Trademarks listed on Schedule I hereto. (h) The Grantor has no knowledge of the existence of any trademark, service mark, trade name or trade dress, or license agreement held or claimed by any other Person that, if upheld, would preclude the Grantor from distributing, marketing, selling or providing any product (except as set forth on Schedule II hereto) or service currently distributed, marketed, sold or provided by it, as the case may be, under or in connection with any of the federal registrations and applications for registration the Trademarks listed on Schedule I hereto (except, in each case, to the extent that the Grantor has granted an exclusive license to another person), or that would materially interfere with the ability of the Grantor to carry on its business as currently carried on, and, the Grantor has no knowledge of any claim that is likely to be made that if upheld would preclude or materially interfere with its business as currently carried on under any of the federal registrations and applications for registration of the Trademarks listed on Schedule I hereto. (i) No material claim in any court or in the United States Patent and Trademark Office has been made (and, as to any trademark, service mark, trade name, or trade dress with respect to which the Grantor is a licensee, to the best knowledge of the Grantor, no material claim has been made against the third party licensor), and the Grantor has no knowledge of any material claim that has been made or (except as set forth on Schedule II hereto) is likely to be made, that the use by the Grantor of an Trademark Collateral does or may violate the rights of any Person. (j) The Grantor, to the best of its knowledge, has used commercially reasonable standards of quality in manufacturing, distribution and marketing of each product sold and provision of each service provided under or in connection with any Trademark Collateral, and has taken whatever steps necessary to ensure that all licensed users of any Trademark Collateral use such commercially reasonable standards of quality. SECTION 2. Further Assurances. (a) The Grantor agrees that from time to time, at the expense of the Grantor, the Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, as the Agent may reasonably request, in order to (i) continue, perfect and protect any Security Interest granted or purported to be granted hereby, or (ii) enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any part of the Trademar Collateral. Without limiting the generality of the foregoing, the Grantor will execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Agent may reasonably request, in order to perfect and preserve the Security Interests granted or purported to be granted hereby. (b) The Grantor hereby authorizes the Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Trademark Collateral without the signature of the Grantor where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Trademark Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) The Grantor will furnish to the Agent from time to time statements and schedules further identifying and describing the Trademark Collateral and such other reports in connection with the Trademark Collateral as the Agent may reasonably request, all in reasonable detail. (d) The Grantor agrees that, if, before the Secured Obligations have been satisfied in full, it (i) obtains an ownership interest in any new trademark, service mark, trade name and trade dress, or trademark or service mark registration or application for trademark or service mark registration which is not now identified on Schedule I, (ii) enters into any new license agreement, subject, in each case, to the terms of the license agreements, or (iii) becomes entitled to the benefit of any tradema service mark, trade name and trade dress (which is materially important to the business of the Grantor), trademark or service mark registration, application for trademark or service mark registration, license agreement or license agreement renewal, (x) the provisions of Section 1 of this Agreement shall automatically apply thereto, and (y) any such trademark, mark, registration, application, or license agreement, together with the goodwill of the business connected with the use of the mark or symbolized by it, shall automatically become part of the Trademark Collateral. The Grantor shall, on the fifteenth day of each month, give written notice to the Agent of each new trademark or service mark registration or application for registration which arose or was filed during the preceding month. The Grantor authorizes the Agent to modify this Agreement by amending Schedule I to include any such new trademark or service mark registration, or application for trademark or service mark registration which becomes part of the Trademark Collateral under this Section, or which, in the reasonable business judgment of the Grantor, is a material trademark or service mark registration or application for trademark or service mark registration. (e) The Grantor agrees (i) to prosecute diligently any trademark or service mark application that is part of Schedule I, (ii) to file applications for registration of any trademark or service mark which is or becomes material to its business, (iii) to take all necessary steps in any proceeding before the United States Patent and Trademark Office or in any court, to maintain and protect each material trademark, service mark, trade name, trade dress and trademark or service mark registration, and each License agreement, and (iv) to participate in opposition, cancellation and infringement proceedings in each case, such actions under clauses (i) through (iv) above, to be taken as and to the extent Grantor, in the exercise of its reasonable commercial judgment, deems necessary or desirable. Any expenses incurred in connection with such activities shall be borne by the Grantor. If the Grantor fails to comply with any of the foregoing duties, the Agent shall have the right, but not the obligation, to effect compliance in the name of the Grantor to the extent permitted by law, at the Grantor's expense. (f) Except as may be permitted by Section 5.04 of the Credit Agreement, the Grantor shall not (i) abandon any trademark or service mark registration or application for trademark or service mark registration, or any trademark, service mark or trade name, without the written consent of the Agent, which consent shall not be unreasonably withheld, except where such abandonment would not be reasonably likely to have a material adverse effect on the financial condition, operations, business, properti or assets of the Grantor, or (ii) take any action, or permit any action to be taken by any other Persons to the extent such Persons are subject to its control, or fail to take any action, which would materially and adversely affect the validity, perfection, priority or enforcement of the rights transferred herein to the Agent under this Agreement, and any such action or agreement if it shall be entered into or taken, shall be null and void and of no effect whatsoever. The Grantor agrees to notify the Agent immediately and in writing if the Grantor learns (i) that any material item of the Trademark Collateral may become abandoned, or (ii) of any adverse determination or any development (including, without limitation, the institution of any proceeding in the United States Patent and Trademark Office or any court) regarding any material part of the Trademark Collateral. (g) In the event that any material item of the Trademark Collateral is infringed or misappropriated by a third party, the Grantor shall (i) promptly notify the Agent and (ii) take all reasonable steps and actions to defend against and enjoin the infringement or misappropriation and take such other actions as the Grantor shall reasonably deem appropriate under the circumstances to protect and enforce such Trademark Collateral unless (A) the Grantor shall reasonably determine that such Trademark Collateral is of immaterial economic value to the Grantor or (B) such infringement or misappropriation would not be reasonably likely to have a material adverse effect on the financial condition, operations, business, properties or assets of the Grantor taken as a whole. Any expense incurred in connection with such activities shall be borne by the Grantor. (h) The Grantor shall continue to use reasonable and proper statutory notice in connection with its use of each registered trademark or service mark. (i) The Grantor agrees (i) to maintain the quality of any and all products or services of the Grantor used or provided in connection with the Trademark Collateral, consistent with the quality of said products and services as of the date hereof and (ii) to take all reasonable steps to ensure that all licensees of any Trademark Collateral maintain consistent standards of quality, consistent with the standards in effect on the date hereof, except in each case as may otherwise be determined by the Borrower in the exercise of its prudent business judgment to the extent that the failure to do so would not have an adverse affect on any material Trademark Collateral. SECTION 3. Transfers and Other Liens. The Grantor shall not, except as otherwise permitted under Section 5.04 the Credit Agreement: (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of, or grant any option with respect to, the Trademark Collateral, except that the Grantor may license the Trademark Collateral (i) in the ordinary course of the Grantor's business, provided that the Grantor, in the exercise of its reasonable commercial judgment, determines that such license is necessary or desirable in the conduct of the Grantor's business, or (ii) in connection with a sale or transfer of assets as provided in the Credit Agreement, provided that such license shall be on terms reasonably expected to maximize the gain to the Grantor resulting from the granting of such license, (b) create or suffer to exist any Lien upon or with respect to any of the Trademark Collateral except for the Security Interests created by this Agreement or permitted by the Credit Agreement, or take any other action in connection with any of the Trademark Collateral that would impair the value of the interest or rights thereunder of the Grantor or that would impair the interest or rights of the Agent or the Lenders. SECTION 4. Agent Appointed Attorney-in-Fact. The Grantor hereby irrevocably appoints the Agent the Grantor's attorney-in-fact, with full authority in the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Agent's discretion upon the occurrence and during the continuance of an Event of Default, to take any action and to execute any instrument that the Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Trademark Collateral, (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above, and (c) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any payments relating to the Trademark Collateral or otherwise to enforce the rights of the Agent with respect to any of the Trademark Collateral. SECTION 5. Agent May Perform. (a) If the Grantor fails to perform any agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the expenses of the Agent incurred in connection therewith shall be payable by the Grantor under Section 10(b) of this Agreement. The Agent or its designated representatives shall have the right, at any reasonable time during normal business hours and from time to time, upon reasonable notice, and without undue interruption to the business of the Grantor, to inspect the premises of the Grantor and to examine the books, records and operations of the Grantor (including, without limitation, the Grantor's quality control processes) relating to the Trademark Collateral. SECTION 6. The Agent's Duties.The powers conferred on the Agent hereunder are solely to protect its interest in the Trademark Collateral and shall not impose any duty upon it to exercise any such powers. SECTION 7. Remedies. If any Event of Default shall have occurred and be continuing: (a) The Agent may exercise in respect of the Trademark Collateral, in addition to other rights and remedies provided for herein or otherwise available to the Agent, all the rights and remedies of a Lender in default under the NYUCC (whether or not the NYUCC applies to the affected Trademark Collateral) and also may (i) exercise any and all rights and remedies of the Grantor under or otherwise in respect of the Trademark Collateral, (ii) require the Grantor to, and the Grantor hereby agrees that will at its expense and upon request of the Agent forthwith, assemble all or any part of the documents embodying the Trademark Collateral as directed by the Agent and make such documents available to the Agent at a place to be designated by the Agent which is reasonably convenient to both the Agent and the Grantor, (iii) occupy, for a reasonable period and without obligation to the Grantor in respect of such occupation, any premises owned or leased by the Grantor where documents embodying the Trademark Collateral or any part thereof are assembled in order to effectuate the Agent's rights and remedies hereunder or under law, and (iv) without notice except as specified below, sell the Trademark Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. In the event of any sale, assignment, or other disposition of any of the Trademark Collateral by the Grantor, the goodwill of the business connected with and symbolized by any Trademark Collateral subject to such disposition shall be included, and the Grantor shall supply to the Agent or its designee the Grantor's know-how and expertise relating to the manufacture and sale of products or the provision of services relating to any Trademark Collateral subject to such disposition, and its customer lists and other records relating to such Trademark Collateral and to the distribution of such products and services. The Grantor agrees that, to the extent notice of sale shall be required by law, at least ten days' notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Trademark Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) All payments received by the Grantor under or in connection with any of the Trademark Collateral shall be received in trust for the benefit of the Agent, shall be segregated from other funds of the Grantor and shall be forthwith paid over to the Agent in the same form as so received (with any necessary endorsement). All payments made under or in connection with or otherwise in respect of the Trademark Collateral and all cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon all or any part of the Trademark Collateral may, in the discretion of the Agent, be held by the Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Agent pursuant to Section 10 of this Agreement) in whole or in part by Agent for the ratable benefit of the Lenders against, all or any part of the Secured Obligations, in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after payment in full of all the Secured Obligations shall be paid over to the respective Grantor or to whomsoever may be lawfully entitled to receive such surplus. SECTION 8. Indemnity and Expenses. (a) The Grantor agrees to indemnify the Agent from and against any and all claims, losses and liabilities arising out of, or in connection with or resulting from this Agreement or the transactions contemplated hereby (including, without limitation, enforcement of this Agreement), except to the extent such claims, losses or liabilities result from the Agent's gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. (b) The Grantor will upon demand pay to the Agent the amount of any and all reasonable expenses, including, without limitation, the reasonable fees and costs of its counsel and of any experts and agents, that the Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Trademark Collateral, (iii) the exercise or enforcement of any of the rights of the Agent or the Lenders hereunder or (iv) the failure by the Grantor to perform or observe any of the provisions hereof. SECTION 9. Security Interest Absolute. All rights of the Agent and Security Interests granted hereunder, and the Grantor's Obligations, shall, to the extent permitted by law, be absolute and unconditional irrespective of: (i) any lack of validity or enforceability of the Credit Agreement or any other Loan Document, or any agreement or instrument relating thereto; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to departure from, the Credit Agreement or any other Loan Document (other than this Agreement), including, without limitation, any increase in the Secured Obligations resulting from the extension of additional credit to the Borrowers or otherwise; (iii) any taking and holding of Trademark Collateral or guarantees for all or any of the Secured Obligations; or any amendment, alteration, exchange, substitution, transfer, enforcement, waiver, subordination, termination or release of any Trademark Collateral or such guarantees, or any nonperfection of any Trademark Collateral, or any consent to departure from any such guaranty; (iv) any manner of application of Trademark Collateral, or proceeds thereof, to all or any of the Secured Obligations, or the manner of sale or other disposition of any Trademark Collateral; (v) any consent by any Lender or the Agent to the change, restructuring or termination of the corporate structure or existence of the Grantor and any corresponding restructure of the Secured Obligations, or any other restructure or refinancing of the Secured Obligations or any portion thereof; (vi) any modification, compromise, settlement or release by the Agent or any Lender, by operation of law or otherwise (except any of the foregoing with respect to this Agreement), collection or other liquidation of the Secured Obligations or the liability of the Grantor, or of the Trademark Collateral, in whole or in part, and any refusal of payment by the Agent or any Lender, in whole or in part, from any obligor, the Grantor in connection with any of the Secured Obligations, whether or not with notice to, or further assent by, or any reservation of rights against, the Grantor; or (vii) any other circumstance (including, but not limited to, any statute of limitations) that might otherwise constitute a defense available to, or a discharge of, the Grantor. The granting of a Security Interest in the Trademark Collateral shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment of any of the Secured Obligations is rescinded or must be otherwise returned by the Agent or any Lender upon the insolvency, bankruptcy or reorganization of the Grantor or otherwise, all as though such payment had not been made. SECTION I. Waiver. The Grantor hereby waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Secured Obligations (as that term is defined in this Agreement) and this Agreement and any requirement that the Agent or any Lender protect, secure, perfect or insure any Security Interest or any property subject thereto or exhaust any right or take any action against the Grantor or any other Person or any collateral. SECTION 2. Amendments, Etc. (a) Except as provided in subsection (b) to this Section 13, no amendment or waiver of any provision of this Agreement, and no consent to any departure by the Grantor herefrom, shall be in any event effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure to exercise nor any delay in exercising, on the part of the Agent or any of the Lenders, a right, power or privilege under this Agreement shall operate as a waiver thereof; further, no single or partial exercise of any right, power or privilege under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. (b) Any trademark security agreement supplement hereto shall be in substantially the form of Exhibit A hereto (each a "Trademark Security Agreement Supplement"), and upon the execution and delivery thereof by the Grantor the supplements attached to each Trademark Security Agreement Supplement shall be incorporated into and become a part of and supplement Schedule I hereto, and the Agent may attach such supplements to such Schedule as supplemented pursuant hereto. SECTION 3. Addresses for Notices. All notices and other communications to any party provided for hereunder shall be in writing (including telegraphic, telecopy, telex or cable communication) and mailed, telegraphed, telecopied, telexed, cabled or delivered, addressed to such party, in the case of the Grantor, at its address referred to in Section 9.01(a) of the Credit Agreement, in the case of the Agent, at the address of the Agent referred to in Section 9.01(b) of the Credit Agreement, or as to any party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall be effective (a) when received, if mailed or delivered, or (b) when delivered to the telegraph company, transmitted by telecopier, confirmed by telex answerback or delivered to the cable company, respectively, addressed as aforesaid. SECTION 4. Continuing Security Interest; Release and Reassignment of Collateral. (a) This Agreement shall create a continuing Security Interest in the Trademark Collateral and shall (i) remain in full force and effect until the cash payment in full of the Secured Obligations, (ii) be binding upon the Grantor, its successors and assigns, and (iii) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent, the Lenders and their respective successors, transferees and assigns, including, but not limited to, those provided in the Credit Agreement. Without limiting the generality of the foregoing clause (iii), any Lender may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement (including, without limitation, all or any portion of the Loans owing to it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender herein or otherwise, in each case subject to and as provided for in Section 9.04 of the Credit Agreement. (b) In the case of any Trademark Collateral pledged or assigned, or in which a security interest is granted hereunder by the Grantor, upon any sale, lease, transfer or other disposition of any item of Trademark Collateral in accordance with the terms of the Credit Agreement (other than sales of Inventory in the ordinary course of business), the Agent will, at the Grantor's expense, execute and deliver to the Grantor, any such documents as the Grantor shall reasonably request to evidence the release of such item of Trademark Collateral from the assignment and security interest granted hereby; provided, however, as to clause (ii) above, that (x) at the time of such request and such release no Event of Default (or event or condition which upon notice or lapse of time or both would constitute an Event of Default) shall have occurred and be continuing, (y) the Grantor shall have delivered to the Agent, at least 10 Business Days prior to the date of the proposed release, or such shorter period acceptable to the Agent under this Agreement, a written request for release describing the item of Trademark Collateral and the terms of the sale, lease, transfer or other disposition in reasonable detail, including the price thereof and any expenses in connection therewith, together with a form of release for execution by the Agent and a certification by the Grantor to the effect that the transaction is in compliance with the Credit Agreement and as to such other matters as the Agent may request, and (z) any proceeds of any such sale, lease, transfer or other disposition required to be applied to the prepayment of Loans in accordance with the Credit Agreement shalll be so applied. (c) Upon the cash payment in full of the Secured Obligations, the Security Interests granted hereby shall terminate and all rights to the Trademark Collateral shall revert and be reassigned to the respective Grantor. Upon any such termination, the Agent will, at the Grantor's expense, execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination and reassignment. SECTION 5. Transactions Permitted Under the Credit Agreement. Nothing contained in this Agreement shall in any manner prohibit or restrict the Grantor or any of its Subsidiaries from consummating any transaction, entering into any agreement or otherwise taking any action expressly permitted under the Credit Agreement. SECTION 6. Severability. If any term or provision of this Agreement is or shall become illegal, invalid or unenforceable in any jurisdiction, all other terms and provisions of this Agreement shall remain legal, valid and enforceable in such jurisdiction and such illegal, invalid or unenforceable provision shall be legal, valid and enforceable in any other jurisdiction. SECTION 7. Execution in Counterparts. This Agreement may be executed in any number of counterparts each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same agreement. SECTION 8. GOVERNING LAW; TERMS. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR TRADEMARK COLLATERAL ARE GOVERNED BY THE LAWS OF THE UNITED STATES OR ANY OTHER JURISDICTION OTHER THAN THE STATE OF NEW YORK. UNLESS OTHERWISE DEFINED HEREIN OR IN THE CREDIT AGREEMENT, TERMS USED IN ARTICLE 8 OR 9 OF THE U.C.C. ARE USED HEREIN AS THEREIN DEFINED. SECTION 6. WAIVER OF TRIAL BY JURY. The Grantor HEREBY UNCONDITIONALLY AND IRREVOCABLY WAIVES TO THE EXTENT PERMITTED BY LAW ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. IN WITNESS WHEREOF, the Grantor has caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. GRANTOR: THE TOPPS COMPANY, INC. By:____________________________________________ Title: AGENT: THE CHASE MANHATTAN BANK By:____________________________________________ Title: STATE OF NEW YORK ) )ss.: COUNTY OF NEW YORK ) On the ____ day of ___________, 1997, before me personally came ______________________, to me known, who, being by me duly sworn, did depose and say she resides at _____________________________ and that she is a _____________________________ of The Topps Company, Inc., the corporation described in and which executed the above instrument. _________________________________________ Notary Public [Notarial Seal] SCHEDULE I TRADEMARKS See Attached. EXHIBIT A TO TRADEMARK SECURITY AGREEMENT TRADEMARK SECURITY AGREEMENT SUPPLEMENT TRADEMARK SECURITY AGREEMENT SUPPLEMENT, dated as of ____________ __, 1998 (this "Supplement"), made by THE TOPPS COMPANY, INC., a Delaware corporation (the "Grantor") to The Chase Manhattan Bank, with an office at One Pierrepont Plaza, Brooklyn, New York 11201, as agent (the "Agent") for the benefit of each of the lenders (the "Lenders") signatory to the Credit Agreement dated as of May 11, 1998 (as may have been or may be amended, supplemented or otherwise modified from time to time, the "Credit Agreement") among the Grantor, the Agent and the Lenders. WHEREAS, all terms used herein and not otherwise defined herein shall, unless the context specifically requires otherwise, have the respective meanings ascribed to them in, or pursuant to the provisions of, the Trademark Security Agreement (as hereinafter defined); WHEREAS, pursuant to the terms of the Credit Agreement and the other Loan Documents, the Lenders agreed to make Loans to the Borrower upon the terms and subject to the conditions set forth therein to be evidenced by the Notes issued by the Borrower and to be guarantied by the Guarantors thereunder; WHEREAS, the Trademark Security Agreement dated as of ___________, 1998 (the "Trademark Security Agreement") and recorded on ___________, 1998 in Reel ____, Frame ___-___ in the United States Patent and Trademark Office was delivered by the Grantor in favor of the Agent to secure its obligations under the Credit Agreement and the other Loan Documents; and WHEREAS, the Grantor and the Agent mutually desire to supplement the Trademark Security Agreement to add certain additional Trademarks as collateral for the respective obligations of Grantor under the Credit Agreement. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that Schedule I to the Trademark Security Agreement is hereby supplemented to add the Trademark(s) set forth on Schedule A hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. THE TOPPS COMPANY, INC. By:_____________________________________________ Name: Title: AGENT: THE CHASE MANHATTAN BANK By:_____________________________________________ Name: Title: By:_____________________________________________ Name: Title: EXHIBIT F TO CREDIT AGREEMENT Form of Covenant Compliance Certificate A. Compliance with Section 6.01(a)(vii): Indebtedness 1. additional Indebtedness Required: Line A1 must not be greater than $100,000 B. Compliance with Section 6.04: Investments, Loans, Advances, Guarantees and Acquisitions 1. investments by Borrower in its Subsidiaries (6.04(c)) 2. Intercompany Debt evidenced by notes owing to Borrower by Subsidiaries (6.04(d)) 3. Intercompany Debt not evidenced by notes owing to Borrower by Subsidiaries (6.04(e))
- ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Topps Topps Topps Topps Topps Topps Topps Other Ireland Canada Europe Mexico Brazil Argentina Latin America - ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- - ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Investments - ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- - ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Interco. Debt evidenced by notes - ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- - ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ ----------- Interco. Debt not evidenced by notes - ------------------ ----------- ----------- ------------ ----------- ----------- ----------- ------------ -----------
4. loans and advances to officers, directors and employees (6.04(i)) Required: Line B1 must not be greater than $3,000,000 Line B2 must not be greater than $3,000,000 Line B3 must not be greater than $15,000,000 Line B4 must not be greater than $100,000 C. Compliance with Section 6.05: Asset Sales 1. aggregate fair market value of sales, transfers and dispositions of assets (6.05(f)) 2. aggregate fair market value of sales, transfers and dispositions of assets between the Borrower and any Subsidiary (6.05(g)) Required: Line C1 must not be greater than $500,000 during any fiscal year Line C2 must not be greater than $750,000 during the term of the Loans D. Compliance with Section 6.06: Hedging Agreements 1. Hedging Agreements Required: Line D1 must not be greater than $54,000,000 E. Compliance with Section 6.07: Restricted Payments 1. Restricted Payments pursuant to and in accordance with stock option plans or other benefit plans for management or employees or consultants Required: Line E1 must not be greater than $250,000 during any fiscal year F. Compliance with Section 6.13: Consolidated Leverage Ratio 1. Indebtedness for Money Borrowed of the Borrower 2. Indebtedness for Money Borrower of Subsidiaries 3. Capitalized Leases 4. Standby Letters of Credit 5. F1 + F2 + F3 + F4 6. Normalized EBITDA QE1 QE2 QE3 QE4 Total a. Consolidated Net Income (or net loss) b. depreciation expense c. amortization expense d. net total income tax expense e. interest expense f. $2,853,000 for periods that include the quarter ended 5/30/97 g. $3,044,000 for periods that include the quarter ended 11/28/97 h. $10,646,000 for periods that include the quarter ended 2/28/98 I. a + b + c + d + e + f + g + h 7. Ratio of F5 to F6 Required: Line F7 must not be greater than the amount specified opposite such dates: (Insert chart from Section 6.13) G. Compliance with Section 6.14: Consolidated Fixed Charge Ratio QE1 QE2 QE3 QE4 Total 1. Normalized EBITDA (as calculated above) 2. unfinanced Capital Expenditures 3. G1 - G2 4. current portion of long term debt 5. interest expense 6. G4 + G5 7. Ratio of G3 to G6 Required: Line G7 must not be less than the amount specified opposite such dates: (Insert chart from Section 6.14) H. Compliance with Section 6.15: Consolidated Net Worth 1. Consolidated Shareholders' Equity 2. all reserves 3. H1 - H2 Required: Line H3 must not be less than $56,800,000 I. Compliance with Section 6.16: Consolidated Net Loss 1Q 2Q Total 1+2 3Q Total 1+2+3 4Q Total 1+2+3+4 1. net loss or profit Required: the net loss or profit reflected on Line I1 must not (Insert language from Section 6.16) J. Compliance with Section 6.17: EBITDA 1. Consolidated Net Income (or net loss) 2. depreciation expense 3. amortization expense 4. net total income tax expense 5. interest expense 6. J1 + J2 + J3 + J4 + J5 Required: Line J6 must not be less than $4,700,000 for the fiscal quarter ending 2/28/98 and ($1,800,000) for the fiscal quarter ending 5/30/98 K. Compliance with Section 6.18: Cumulative EBITDA QE1 QE2 QE3 QE4 Total 1. Consolidated Net Income (or net loss) 2. depreciation expense 3. amortization expense 4. net total income tax expense 5. interest expense 6. K1 + K2 + K3 + K4 + K5 Required:Line K6 must not be less than $3,100,000 for the two fiscal quarter period ending 8/29/98, and $5,640,000 for the three fiscal quarter period ending 11/28/98, and $14,400,000 for the four fiscal quarter periods thereafter. L. Compliance with Section 6.19: Capital Expenditures 1Q99 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 1. Capital Expenditures Required: Line L1 must not be more than $6,000,000 for the term of the Loans. EXHIBIT G TO CREDIT AGREEMENT TOPPS SA GUARANTY TOPPS SA GUARANTY, dated as of May 11, 1998 (together with any amendments, restatements, modifications and supplements, the "Guaranty") made by THE TOPPS COMPANY, INC., a Delaware corporation (the "Guarantor"), in favor of THE CHASE MANHATTAN BANK, as agent (the "Agent") for the lenders (the "Lenders") party to the Credit Agreement (as hereinafter defined). Capitalized terms not otherwise defined herein shall have the meanings assigned to such terms in the Credit Agreement. WHEREAS, contemporaneously with the execution and delivery of this Guaranty, the Guarantor, the Agent and the Lenders are entering into a Credit Agreement dated as of the date hereof (as amended, modified or supplemented from time to time, the "Credit Agreement"); WHEREAS, pursuant to the terms of the Credit Agreement, the Issuing Bank has agreed, among other things, to issue and the Lenders have agreed, among other things, to participate in the Topps SA Letters of Credit which letters of credit are issued at the request of the Borrower for the account of Topps Latin America SA (the "Obligor"). WHEREAS, it is a condition precedent to the effectiveness of the Credit Agreement that the Guarantor shall have executed and delivered to the Lenders this Guaranty; NOW, THEREFORE, in consideration of the Lenders' agreement to extend credit to the Guarantor and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Guarantor, the Guarantor agrees with the Lenders as follows: SECTION 1. Guaranty. (a) The Guarantor hereby unconditionally guarantees the punctual payment when due, of all obligations of every kind or character now or hereafter existing, whether matured or unmatured, contingent or liquidated, of the Obligor to each of the Agent and the Lenders under the Topps SA Letters of Credit and any agreements executed in connection therewith (the Topps SA Letters of Credit and all such agreements, as may hereafter be amended, restated, modified or supplemented collectively, the "SA Documents") whether for principal, interest, fees, expenses or otherwise and whether in United States dollars or other currencies, and any and all reasonable expenses (including reasonable counsel fees and expenses) incurred by the Agent and the Lenders in enforcing any of their respective rights under this Guaranty (all such obligations being collectively referred to as the "Obligations"). SECTION 2. Guaranty of Payment. The Guarantor further agrees that its guarantee hereunder constitutes a guarantee of payment and performance when due and not of collection, and waives any right to require that any resort be had by any of the Lenders to (i) the Obligor, (ii) any other guarantor, (iii) any Collateral held for payment of the Obligations or to any balance of any deposit account or credit on the books of the Lenders in favor of the Obligor or any other person or (iv) recourse against any other party. SECTION 3. Guaranty Absolute. The Guarantor guarantees that the Obligations will be performed and paid strictly in accordance with the terms of the SA Documents, regardless of any law, regulation or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of any of the Lenders with respect thereto and is not subject to any setoff, counterclaim or defense. The Obligations of the Guarantor hereunder are independent of the obligations of other persons under any other related document, and a separate action or actions may be brought and prosecuted hereunder whether the action is brought against any such person or whether any such person is joined in any such action or actions. The liability of the Guarantor under this Guaranty shall be absolute and unconditional, and shall not be affected or released in any way, irrespective of: (i) any lack of validity or enforceability of the SA Documents, or to the Obligations; (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any document evidencing or relating to any of the Obligations or the SA Documents, including, but not limited to, an increase or decrease in the Obligations; (iii) any taking and holding of Collateral or any other collateral or additional guaranties for all or any of the Obligations, or any amendment, alteration, exchange, substitution, transfer, enforcement, waiver, subordination, termination, or release of any collateral securing the Obligations, if any (the "Collateral") or any other collateral or such guaranties, or any non-perfection of any collateral or any consent to departure from any such guaranty; (iv) any manner of application of Collateral or any other collateral, or proceeds thereof, to all or any of the Obligations, or the manner of sale of any Collateral or any other collateral; (v) any consent by one or more of the Lenders to the change, restructuring or termination of the corporate structure or existence of the Obligor or any affiliate thereof and any corresponding restructuring of the Obligations, or any other restructuring or refinancing of the Obligations or any portion thereof; (vi) any modification, compromise, settlement or release by one or more of the Lenders, by operation of law or otherwise, collection or other liquidation of the Obligations or the liability of the Obligor and any other guarantor, or of the Collateral or any other collateral, in whole or in part, and any refusal of payment by one or more of the Lenders, in whole or in part, from any Obligor or guarantor in connection with any of the Obligations, whether or not with notice to, or further assent by, or any reservation of rights against, the Guarantor; (vii) the waiver of the performance or observance by the Obligor of any agreement, covenant, term or condition to be performed by it; (viii) the voluntary or involuntary liquidation, dissolution, sale of all or substantially all of the property, marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar application or proceeding affecting the Obligor or any of its assets; (ix) the release of the Obligor from the performance or observance of any agreements, covenants, terms or conditions contained in any agreement or document evidencing or relating to the Obligations or the SA Documents by operation of law; or (x) any other circumstance (including, but not limited to, any statute of limitations) which might otherwise constitute a defense available to, or a discharge of, the Guarantor. Without limiting the generality of the foregoing, the Guarantor hereby consents, and hereby agrees, that the rights of the Lenders hereunder, and the liability of the Guarantor hereunder, shall not be affected by any and all releases of any Collateral or any other collateral. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by the Lender upon the insolvency, bankruptcy or reorganization of the Obligor or otherwise, all as though such payment had not been made. SECTION 4. Waivers. The Guarantor waives presentment to, demand of payment from and protest to the Obligor, or any other guarantor of any of the Obligations, and also waives notice of acceptance of its guarantee and notice of protest for non-payment. The Guarantor hereby further waives promptness, diligence, notice of acceptance and any other notice with respect to any of the Obligations and this Guaranty and any requirement that the Lenders protect, secure, perfect or insure any security interest or lien or any property subject thereto or exhaust any right or take any action against the Obligor, or any other person or any Collateral or any other collateral. SECTION 5. Covenants. The Guarantor hereby waives any right to require the Lenders to proceed against the Obligor, any other guarantor or any person or proceed against any Collateral or any other collateral, or pursue any other remedy in the power of the Agent or the Lenders. SECTION 6. Subrogation. Upon payment by the Guarantor of any sums to the Lenders hereunder, all rights of the Guarantor against the Obligor arising as a result thereof by way of right of subrogation or otherwise, shall in all respects be subordinate and junior in right of payment to the prior final and defeasible payment in full of all the Obligations. If any amount shall be paid to the Guarantor for the account of the Obligor, such amount shall be held in trust for the benefit of the Lenders and shall forthwith be paid to the Lenders to be credited and applied to the Obligations, whether matured or unmatured. SECTION 7. Amendments, Etc. No amendment or waiver of any provision of this Guaranty nor consent to any departure by the Guarantor herefrom shall in any event be effective unless the same shall be in writing and signed by the Lenders and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 8. Notices, Etc. All notices and other communications provided for hereunder shall be in writing and shall be given in the manner set forth in Section 9.01 of the Credit Agreement and with copies specified therein, if to the Guarantor and if to the Lenders, to their respective addresses as specified in the Credit Agreement. SECTION 9. No Waiver, Remedies. No failure on the part of any of the Lenders to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law, the Credit Agreement or any other agreement relating to the Obligations. SECTION 10. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default, the Lenders are hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Agent or the Lenders to or for the credit or the account of the Guarantor against any and all of the Obligations of the Guarantor now or hereafter existing under this Guaranty, irrespective of whether the Lenders shall have made any demand under this Guaranty and although such Obligations may be contingent and unmatured. The rights of the Lenders under this Section 10 are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Lenders may have. SECTION 11. Continuing Guaranty; Transfer of Note; Release of Guaranty. This Guaranty is a continuing guaranty and shall (i) remain in full force and effect until the payment in full of all of the Obligations and all other amounts payable under this Guaranty, (ii) be binding upon the Guarantor, its successors and assigns, and (iii) inure to the benefit of and be enforceable by the Lenders and their respective successors, transferees and assigns. Without limiting the generality of the foregoing clause (iii), each Lender may assign or otherwise transfer any instrument of indebtedness of the Obligor held by it, or any interest therein, or grant any participation in its rights or Obligations under any agreement relating to the Obligations and the SA Documents subject to the provisions of such agreement to any other person, and such other person shall thereupon become vested with all the rights in respect thereof granted to the Lender. SECTION 12. Jurisdiction; Waiver of Jury Trial. (a) THE GUARANTOR HEREBY IRREVOCABLY SUBMITS ITSELF TO THE EXCLUSIVE JURISDICTION OF BOTH THE SUPREME COURT OF THE STATE OF NEW YORK, NEW YORK COUNTY AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPEAL THEREFROM, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY, AND HEREBY WAIVES, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF THE ABOVE-NAMED COURTS FOR ANY REASON WHATSOEVER, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THIS GUARANTY MAY NOT BE ENFORCED IN OR BY SUCH COURTS. NEITHER THE GUARANTOR NOR THE LENDER WILL SEEK TO CONSOLIDATE SUCH PROCEEDING INTO ANY ACTION IN WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. SECTION 13. Applicable Law. THIS GUARANTY SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE. SECTION 14. Expenses of the Agent and the Lenders. The Guarantor agrees to pay all reasonable and necessary out-of-pocket expenses incurred by the Agent and the Lenders in connection with the enforcement or protection of its rights or the rights of the Agent and the Lenders generally in connection with the Guaranty including, but not limited to, the reasonable fees and disbursements of counsel for the Agent and the Lenders. [Signature on Following Page] IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. THE TOPPS COMPANY, INC. By: _______________________ Name: Title: EX-10.22 4 CONSULTING AGREEMENT CONSULTING AGREEMENT CONSULTING AGREEMENT, entered into as of the 31st day of December, 1997, by and between THE TOPPS COMPANY, INC., a Delaware corporation with an address at One Whitehall Street, New York, NY 10004-2109 ("Topps") and SEYMOUR BERGER, an individual with a residence at 36 Whitehall Road, Rockville Centre, NY 11570 ("Berger"). WHEREAS, Berger is a long-time employee, and currently Vice President-Sports and Licensing of Topps; WHEREAS, Berger has decided to retire from Topps effective as of December 31, 1997; WHEREAS, Topps wishes to retain Berger's services as a Consultant to Topps for the three-year period commencing on January 1, 1998, so that it can continue to benefit from his knowledge of Topps and the industries in which it operates, and from his expertise in the field of licensing, on the terms and subject to the conditions set forth below; and WHEREAS, Berger desires to provide consulting services to Topps on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants of the parties set forth below and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: 1. Engagement Term. Topps hereby engages Berger, and Berger hereby accepts such engagement on the terms and conditions hereinafter provided, as a consultant to Topps for the period (the "Term") commencing January 1, 1998 (the "Commencement Date") and ending on December 31, 2000 (the "Termination Date"). 2. Scope and Performance Services. (a) In the performance of services to Topps, Berger shall not be required to provide consulting or advisory services to anyone other than the Chairman of the Board (the "Chairman") of Topps. Berger shall promote the name and goodwill of Topps in a professional manner throughout the baseball community and other sporting communities and shall, upon Topps' reasonable request, attend events such as those identified in paragraph 2(b) of this Agreement, and shall maintain contacts with key people in the baseball and other sporting communities in which Topps currently has business relationships. Berger shall also provide 2 such other licensing, marketing and sports-related consulting and advisory services as are reasonably requested by the Chairman in accordance with the terms of this Agreement. (b) Among the events Berger may be requested to attend on behalf of Topps are: (i) the World Series; (ii) the Baseball All-Star Game; (iii) the Super Bowl; (iv) Baseball Spring Training; (v) Baseball winter meetings; (vi) Baseball farm directors and scouting directors meeting; (vii) such other sports functions as are reasonably identified from time to time by the Chairman. (c) Berger's duties shall not require that he provide consulting services on more than 90 days for each of the first and second twelve-month periods during the term and 45 days for the third twelve-month period during the term. Travel days and partial days count as "days" for the purposes of this 3 paragraph. After the first two years of the term, if Topps has not authorized Berger to attend two-thirds of the events described in paragraph 2(b)(i), (ii) and (iii)above, Berger shall (by giving written notice at any time between January 1, 2000 through January 10, 2000) be entitled to terminate this Agreement and accelerate and receive within 10 days of Berger's written notice, all amounts which would otherwise be due under paragraph 3(a) hereof through December 31,2000, and Topps shall continue to fulfill its obligation to Berger under paragraph 3(c) hereof as if the Agreement had continued through December 31,2000. (d) Topps shall make available to Berger office space and access to secretarial assistance consistent with his needs in its Manhattan, New York headquarters. (e) In the event that Arthur Shorin, at any time during the Term, is no longer Chairman of the Board of Topps, Berger may elect to perform his services hereunder solely by telephone. (f) During such time as Berger continues as a member of the Board of Directors of Topps, he shall be treated in all respects and given the same compensation as other non-employee members of the Board of Directors. 4 3. Consulting Fees. (a) In consideration for the services to be rendered by Berger hereunder, Topps shall pay Berger an annual consulting fee during the Term as follows: First 12-month period of agreement - $115,000 per annum Second 12-month period of Agreement - $100,000 per annum Third 12-month period of Agreement - $75,000 per annum Payment for each year shall be made pro rata on a semi-monthly basis, in accordance with normal payroll practices. Payment shall be made directly to Berger at the address set forth on page 1 hereof, or by hand to Berger, or at such other place as Berger may designate in writing. (b) As soon as practicable after January 1, 1998, Topps shall transfer ownership and title to Berger in the vehicle currently leased by Topps for Berger free and clear of all liens. (c) As a retired employee of Topps, Berger shall immediately enroll in Medicare and Topps shall place Berger in its Blue Cross/65 Special Plan or any replacement or successor plan implemented by Topps during the term of this Agreement for retired persons. During the Term, Topps will reimburse 5 Berger for medical, dental and vision expenses not otherwise reimbursed under such Plan, upon the submission of proper documentation, on the same terms as, and subject to the limitations contained in, and for so long as such benefits are covered under Topps' special medical reimbursement plan for officers, subject to a maximum annual reimbursement of $20,000. In the event Topps no longer provides officers a special medical reimbursement, Topps shall have no further obligations to Berger under the preceding sentence. (d) Berger shall cease to participate in all Topps benefit plans effective December 31, 1997, except to the extent the terms of such plans otherwise provide benefits to similarly situated former employees, or as set forth in paragraph 3(c) above. (e) Notwithstanding anything contained in this Agreement to the contrary, Topps shall be required to perform all of its obligations under this Agreement and to continue to make all of the payments required under this Agreement in the event of Berger's death, disability, injury, sickness, health problem, incapacity or inability to perform. 6 (f) Topps may terminate this Agreement, without any further obligation to Berger, on 10 days written notice only for cause as herein defined. Cause shall be deemed to occur only where Topps reasonably and in good faith determines that termination of this Agreement is appropriate by reason of Berger's conviction of a misdemeanor of moral turpitude or felony. In addition, in the event Topps reasonably and in good faith determines that Berger has been acting in a manner that is detrimental to Topps, Topps shall have the right to terminate the Agreement on 10 days' written notice, provided that it accelerates and pays Berger, within 10 days of Topps written notice, all amounts which would otherwise be due under paragraph 3(a) hereof through December 31, 2000, and provided further that Topps shall continue to fulfill its obligation to Berger under paragraph 3(c) hereof as if the Agreement had continued through December 31, 2000. 4. Expenses. Berger shall be reimbursed for all reasonable and customary actual out-of-pocket expenses incurred by him in performing the services required by this Agreement, including, but not limited to, air fare, meals, entertainment and tips, lodging and ground transportation (unrelated to office commuting) and all other reasonable and customary actual out-of-pocket 7 expenses, provided all expenses in excess of $125.00 have been authorized by the Chairman. Topps shall reimburse Berger for his authorized expenses as heretofore provided within thirty (30) days of its receipt of Berger's expense report, subject to provision of appropriate receipts and other documentation in accordance with Topps practice applicable from time to time to comply with applicable law regarding deduction of business expenses. Payment shall be made directly to Berger at the address set forth on page 1 hereof, or by hand, or at such other place as Berger may designate in writing. 5. Confidentiality; Ownership of Materials. (a) Any and all information about Topps' business, which is either (i) provided to Berger by Topps, or (ii) learned by Berger as a result of or in connection with his prior employment or this Agreement, other than information which is otherwise generally known or becomes generally known to the public, or which is made known to Berger by a third party not under an obligation of confidentiality to Topps or which is required to be disclosed by law or legal process, shall be kept in the strictest confidence by Berger, shall not be divulged and shall not be used by Berger for any purpose whatsoever other than the performance of his duties pursuant to this Agreement. Berger 8 acknowledges that Topps would not have an adequate remedy at law for money damages in the event that the covenants set forth in this paragraph were not performed in accordance with their terms and, therefore, Berger agrees that Topps shall be entitled to specific performance of the terms hereof (without being required to post a bond or other security in connection therewith) in addition to any other remedy to which it may be entitled, at law or in equity. (b) All Topps property, including Berger's work product in connection with his employment with Topps and in connection with his performance of services under this Agreement, shall be the exclusive property of Topps. Upon the termination of this Agreement and upon Topps' written request, all such materials shall be promptly delivered to Topps. 6. Release. (a) In consideration for the payment of $10,000 on January 8, 1998, Berger hereby releases, subject to expiration of the seven day right of revocation referenced in such paragraph 6(b), Topps, its officers, directors, employees, subsidiaries, divisions, agents, and trustees and administrators under all Topps employee benefit plans, from all claims, actions and causes of 9 action he or his agents, executives, heirs, or assigns had, has or could have, whether known or unknown, arising on or prior to his execution of this Agreement out of his employment with Topps and the termination of that employment on December 31, 1997, including, but not limited to, all claims arising under the Older Workers Benefit Protection Act of 1990, the Age Discrimination in Employment Act of 1967, as amended (29 U.S.C. sec. 626), Title VII of the Civil Rights Act of 1964, as amended, the New York Human Rights Law, the Employee Retirement Income Security Act of 1974, as amended, the Worker Adjustment and Retraining Notification Act or any other state, federal, local, equal employment, fair employment statute or under common law, including claims for wrongful discharge. Berger understands and agrees that, by executing this Agreement and release, Berger is giving up all right to further employment with Topps and Berger agrees that he will not apply for, solicit, seek or otherwise attempt to obtain employment with Topps, its affiliates, subsidiaries, parent corporations or successors. Notwithstanding the foregoing, nothing herein shall be considered as a release of: 10 (i) any rights Berger has for eligible reimbursement expenses incurred on or prior to his termination date; (ii) any rights Berger has regarding corrections of errors and/or omissions relating to wages, payroll taxes, and personnel records; (iii) any rights to indemnification Berger may have under applicable laws or Topps' certificate of incorporation, by-laws, Board resolutions or otherwise, by virtue of his employment with Topps, his service as an officer of Topps, his service as a member of the Board of a Directors of Topps, to the extent such indemnification is made available to other former officers and directors. (iv) Berger's right to enforce the provisions of Topps release to Berger or of any other provision of this Agreement. (b) Berger hereby agrees and acknowledges that he has been given at least 21 days in which to consider signing this Agreement and Release. He understands that in the event he executes this Agreement and Release within less than 21 days of the date of its delivery to Berger, he acknowledges that such 11 decision was entirely voluntary and that he had the opportunity to consider this Agreement and Release for the entire 21-day period. He acknowledges that he has had the opportunity to consult with an attorney of his choice concerning this Agreement and Release. He has carefully read and fully understands all the provisions of this Agreement and Release and he is entering into the Agreement and Release voluntarily. He acknowledges that the consideration he is receiving in exchange for executing this Release is greater than that he would be entitled to in the absence of this Release. He understands that if he revokes this Agreement and Release, his termination of employment will nevertheless remain in full force and effect and he will not be entitled to the consulting fees specified in the Agreement. He has not relied upon any representation or statement, written or oral, not set forth in this Agreement and Release. He acknowledges that this Agreement and Release sets forth the entire Agreement between Topps and Berger and that it may not be changed orally. He understands that he has the right to revoke this Agreement and Release within 7 days of his signing it, and that this Agreement and Release shall not become effective or enforceable until this 7-day period has expired. He has carefully read and fully 12 understands all of the provisions of this Agreement and Release. (c) Topps hereby releases Berger (together with his beneficiaries, heirs, legal representatives and assigns) from all claims, actions and causes of action it had, has or could have, whether known or unknown arising on or prior to its execution of this Agreement arising out of activities undertaken in the normal course of his employment by Topps; provided, however, that Topps shall not thereby release Topps' right to enforce the provisions of Berger's release of Topps or of any other provision of this Agreement. 7. Survivorship. Notwithstanding anything contained in this Agreement to the contrary, in the case of Berger's death, during the Term, Berger's spouse, designated beneficiaries or estate shall be entitled to receive any and all payments remaining to be made to Berger under paragraphs 3(a) and 3(c) hereof, according to the payment schedule set forth therein. 8. Notices. All notices hereunder shall be hand delivered or sent by certified or registered mail or overnight delivery, against receipt, addressed to the parties as follows or to such other address as may be designated in writing: 13 If to Topps: The Topps Company, Inc. One Whitehall Street New York, NY 10004-2109 Attention: Arthur T. Shorin, Chairman If to Berger: Mr. Seymour Berger 36 Whitehall Road Rockville Centre, NY 11570 9. Assignment; Binding Effect. This Agreement may not be assigned or transferred by Berger nor may Berger hire any subcontractors or subconsultants to perform services hereunder, without the prior written consent of Topps. Any attempted violative assignment, subcontract, or transfer, whether voluntary or by operation of law, shall be void and of no force or effect. This Agreement may be assigned by Topps only to any entity controlled by, under the control of, or commonly controlled with, Topps; provided, however, that notwithstanding such assignment, Topps shall remain obligated for all payments and other obligations hereunder. 14 10. Entire Agreement. This Agreement contains the entire understanding and agreement between the parties hereto with respect to the subject matter hereof, supersedes all prior oral and written understandings and agreements relating thereto, and may not be modified, discharged, or terminated orally. 11. Relationship of the Parties. As of the Commencement Date, Berger hereby resigns as an employee of Topps, and shall no longer be deemed an employee of Topps. The services being performed hereunder are being performed as an independent contractor and, as such, Berger shall be responsible for the payment of all taxes and contributions. Nothing herein contained shall be construed to constitute the parties hereto as partners or as joint venturers, or either as agent of the other, and neither party shall have the power or authority to assume or create any obligations or responsibility whatsoever, express or implied, on behalf of or in the name of the other, to the other in any manner, or to make any representation, warranty, or commitment on behalf of the other. 15 12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws. 13. Waivers. Any waiver by either party of a breach of any provision of this agreement shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this agreement. The failure of a party to insist upon strict adherence to any term of this Agreement on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this agreement. Any waiver must be in writing. 14. Separability. If any provision of this Agreement is declared invalid, illegal, or unenforceable, such declaration shall not, in and of itself, nullify the remaining provisions of this Agreement. The balance of this Agreement shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. 16 15. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. 16. Public Announcements. Except as otherwise required by law, Topps shall consult with Berger prior to making any public announcement regarding this Agreement or the substance thereof. 17. No Mitigation. None of Topps' obligations under this Agreement shall be subject to any obligation by Berger to mitigate. 18. No Setoff. Topps shall not have the right to set off or apply against any amounts payable to Berger under this Agreement any amounts claimed to be owing at any time by Berger to Topps. 19. Arbitration. Any controversy, claim or dispute arising out of or relating to this Agreement or the breach, termination, enforceability or validity thereof, including without limitation the determination of the scope or applicability of this agreement to arbitrate, shall be determined by arbitration in New York City before one arbitrator. The arbitration shall be governed by the commercial arbitration rules of the American Arbitration Association. Any award 17 made by such arbitrator shall be final, binding and conclusive on Topps and Berger for all purposes, and judgment upon the award rendered by the arbitrator may be entered in any Court having jurisdiction thereof. Topps and Berger shall pay the cost of their own legal fees and expenses incurred in connection with such arbitration; provided, however, that if Berger prevails at such arbitration, Topps shall reimburse Berger for all reasonable legal fees and expenses incurred by Berger in connection with such arbitration. Berger shall be deemed to have prevailed only to the extent that a final judgment of the arbitrator is rendered in his favor. IN WITNESS WHEREOF, the parties hereto have caused this agreement to be signed as of the date first above written. THE TOPPS COMPANY, INC. By: ------------------- Name: Title: SEYMOUR BERGER - ---------------- 18 EX-10.23 5 HERSHEY AGREEMENT EXECUTION COPY AMENDED AND RESTATED MANUFACTURING AGREEMENT This Amended and Restated Manufacturing Agreement is dated as of this 13th day of March, 1998 by and between Hershey Foods Corporation, a Delaware corporation with an address of 14 E. Chocolate Avenue, Hershey, PA 17033 Hershey (hereinafter "Hershey" ) and The Topps Company, Inc., a Delaware corporation, having offices at One Whitehall Street, New York, NY 10004-2109 (hereinafter "Topps"). RECITALS WHEREAS, Topps and Leaf, Inc. entered into a Manufacturing Agreement as of November 6, 1996 (the "Original Agreement"); WHEREAS, Hershey purchased Leaf, Inc. on December 30, 1996; WHEREAS, Topps and Hershey wish to amend and restate the terms upon which Hershey will manufacture for Topps the gum product(s) described on Schedule A (the "Product") and package the Product in certain packaging and labeling including, inter alia, Topps' name, trademarks and trade dress (the "Packaging")(the Product as packaged in the packaging is referred to herein as the "Packaged Product") for sale in the United States (the "Territory"); and WHEREAS, Hershey and Topps desire to enter into this Agreement for the mutual considerations stated in this Agreement, in order to establish their respective rights, conditions, obligations and responsibilities with regard to the manufacture, supply and sale of the Packaged Products. NOW, THEREFORE, Hershey and Topps, in consideration of the mutual promises and undertakings contained below, agree as follows: 1. MANUFACTURING RELATIONSHIP (a) Subject to the terms and conditions of the Agreement, Topps appoints Hershey as its exclusive manufacturer of the Product and Packaged Product to be sold in the Territory and Hershey accepts such appointment. All Products and Packaged Products shall be manufactured by Hershey at its current Memphis, Tennessee plant (which it hereby represents that it owns), except as otherwise agreed by Topps in writing. Nothing in this Agreement shall restrict Topps from selling the Packaged Product outside the Territory. (b) So long as Hershey is able to provide Topps with the quantity and quality of the Packaged Product ordered hereunder and on the terms provided hereunder, during the term of this Agreement, Topps shall not, directly or indirectly, utilize another manufacturer to manufacture and/or package the Product and Packaged Product to be sold in the Territory. Nothing contained in 1 this Agreement shall restrict Topps from using other manufacturers to (i) manufacture the Product or the Packaged Product for sale outside of the Territory or (ii) to manufacture items other than the Product or Packaged Product for sale anywhere in the world. In the event Topps desires to appoint a manufacturer for the Product or the Packaged Product to be sold or distributed by Topps (and not a licensee) outside of the Territory, Topps shall notify Hershey and Hershey shall have the right to submit a bid for the job within ten (10) days of such notice. Topps shall have the sole and absolute discretion, however, over the selection of any such manufacturer. (c) Topps shall provide to Hershey by the 1st of each month in which this Agreement is in effect a written firm purchase order for the next calendar month (the "Purchase Order"). Topps and Hershey may upon mutual written agreement agree to replace written purchase orders with some form of electronic purchase order system. In the event the parties so agree, all terms and conditions of this Agreement governing written purchase orders other than the requirement that the purchase order be written shall apply equally to any electronic purchase orders. Upon receipt of the Purchase Order, Hershey shall notify Topps of its acceptance or rejection (only as permitted below) of the Purchase Order. In the event Hershey does not accept the Purchase Order, the parties will use their best efforts to mutually agree on a revised Purchase Order. Hershey shall, at all times, have sufficient Product production capacity to fully utilize all of Topps' wrapping machines for the Product (which shall be kept in good working order as further outlined in paragraph 3(a) below), based upon three shifts, five (5) days per week (excluding scheduled plant shutdowns which shall be agreed to by Hershey and Topps and Hershey's normal plant holidays).Hershey may only reject a Purchase Order to the extent Topps requirements for any month exceed such required capacity. In the event of Hershey's rejection of a Purchase Order due to a request in excess of the foregoing production capacity requirement, Topps shall be free to acquire up to that month's excess production requirements from another source. Upon acceptance of the Purchase Order or revised Purchase Order, Hershey shall be obligated to supply the quantity ordered in the time required. Additionally, if Topps requests incremental production which exceeds Hershey's 5 day, 3 shifts per day capacity, Hershey will provide Topps with a cost estimate for the incremental overtime production. Incremental labor cost for direct and indirect labor will be calculated by multiplying the number of hours worked times the wage premium plus partial benefit rate (401K, FICA, pension). Upon receipt of the cost estimate, Topps will notify Hershey, in a timely manner if the overtime is desired and, if it is, Hershey shall perform the overtime. Hershey will invoice Topps for the actual overtime at the end of each month; provided, however, that Topps shall not be required to pay any costs for overtime to the extent that they exceed Hershey's estimate by more than 10%. The terms and conditions of this Agreement shall supersede any and all terms and conditions that may be contained in such Purchase Order other than the specified quantity to be purchased within the specified time frame. (d) Topps will provide rolling twelve (12) month estimates on a quarterly basis of its anticipated requirements for the Product and/or Packaged Product for purposes of Hershey maintaining adequate supplies of ingredients and packaging components. Hershey shall have the right to purchase up to a three months' supply of ingredients and packaging materials for the Product and/or Packaged Products based on these estimates. During March and September of each year 2 hereunder Topps and Hershey will review inventories of ingredients and packaging materials and will agree on the disposition of and reimbursement for obsolete items. Topps shall only be required to reimburse Hershey for any purchases of ingredients or packaging materials made by Hershey in excess of this three month supply if Topps has approved these purchases in writing in advance and Hershey cannot use these ingredients. (e) Hershey will provide daily production reports and monthly reports on waste levels (gum and packaging), line output, etc., to be used by the parties to monitor performance related improvements and production levels. The reports shall be substantially in the form attached hereto as Schedule B. (f) Hershey agrees to conduct appropriate tests, audits and evaluations, as currently performed by Hershey and described on Schedule C, to confirm that ingredients, components, formulas, sequences, weights, count, package defect levels and other quality parameters are being maintained, and shall provide Topps monthly reports regarding the foregoing. Hershey shall perform such additional quality assurance tests, audits or evaluation that Topps may request, and Topps shall pay the incremental cost, if any, of the additional functions. (g) Hershey agrees to maintain adequate records of production, including lot numbers, dates, codes, etc., to identify and isolate production and to reduce losses in the event of a product recall or defect. 2. PRICES AND CONDITIONS OF SALE A. The following will apply during the Original Term of this Agreement (as defined below): (a) For 1997, Hershey shall sell the Packaged Product to Topps at the price listed on Schedule D-1997, F.O.B. Hershey's production facility, exclusive of all sales, use, excise or other taxes, charges or assessments imposed on the purchase and resale of the Packaged Product, subject to only those changes described in paragraph (d) below and subject to the next sentence. Topps acknowledges that as of November 1, 1997, the gum and gum base processing labor costs will be $.076 (or 7.6 cents) per pound for sugar gum (versus $.02) and $.101 (or 10.1 cents) per pound for sugarless gum (versus $.0245) and, therefore, the total net difference for November and December 1997 shall be paid by Topps to Hershey within thirty (30) days after invoice. (b) For the period from January 1, 1998 through December 31, 1998, Hershey shall sell the Packaged Product to Topps at the price listed on Schedule D-1998, F.O.B. Hershey's production facility, exclusive of all sales, use, excise or other taxes, charges or assessments imposed on the purchase and resale of the Packaged Product, subject only those changes described in paragraph (d) below. (c) For the period from January 1, 1999 through December 31, 1999, Hershey shall sell the Packaged Product to Topps at the prices listed on Schedule D-1999, F.O.B. Hershey's production facility, exclusive of all sales, use, excise or other taxes, charges or assessments imposed on the purchase and resale of the Packaged Product, subject only to those changes described in paragraph (d) 3 below. Schedule D-1999 shall be established not later than November 15, 1998 and the differences between Schedule D-1998 and Schedule D-1999 shall reflect only (i) an aggregate maximum increase of 2.5% in the labor cost per case, not to exceed $110,000 in aggregate cost to Topps for the twelve-month period and (ii) updated pricing on ingredients and packaging materials permitted under paragraph (d) below provided, however, that this updated pricing shall reflect changes in all ingredients and packaging materials (i.e. not limited to largest 80%). (d) The prices for the Packaged Product outlined in (a) - (c) above may be changed during the calendar year in which each Schedule D is in effect only to reflect the following: (i) increases or decreases in the cost of any of the largest ingredients and packaging materials (by dollars) which make up 80% of the total cost (by dollars) of ingredients and packaging materials in the aggregate for all Packaged Products expected to be manufactured by Hershey during that calendar year (which items shall be agreed to by the parties at the beginning of each year); and (ii) one-half of any cost decreases associated with performance improvements in factory throughput of the Packaged Product. Price changes in (i) above shall take place as and when Hershey uses the newly priced items in the Packaged Product. The new prices will be effective after use of the current inventory, using a FIFO depletion method. Hershey shall give Topps notice of all pricing changes promptly after Hershey learns of such changes along with copies of the notices or invoices received from its vendor. On March 31, June 30, September 30 and December 31 of each year during the Original Term Hershey will provide Topps with copies of the most recent invoices Hershey has received for packaging and ingredients used to manufacture the Packaged Product. Factory throughput shall be reviewed semi-annually during March and September of each year and any price changes in (ii) above shall take place as soon as possible thereafter. B. The following shall apply during the Extended Term (as defined below): (a) Topps shall pay Hershey as follows: (i) the actual cost of ingredients and packaging to be provided by Hershey; (ii) Hershey's cost of labor and benefits as calculated from the crewing, output and pay rates plus the benefits cost per labor dollar; (iii) the overhead rate per pound of Packaged Product manufactured, which shall be determined in accordance with subparagraph B(c)(vii) below; and (iv) five (5)% of the total of subparagraphs B(a)(i)-(iii) above. 4 (b) The costs referenced in B (a)(i)-(iv) will be established by November 15 of the year preceding the year in which the costs will be effective during the Extended Term (as hereinafter defined) and will be reflected in a new Schedule D-[year]for each year. Hershey and Topps shall together review the new Schedule D, and Hershey shall explain to Topps the basis for all changes from the prior Schedule D. (c) Topps and Hershey agree as follows with regard to pricing for Packaged Products during the Extended Term: (i) labor costs described in B (a) (ii) above will be reviewed and revised in the new Schedule D to take into account actual, reasonable and verifiable crewing changes, output changes, pay changes and benefit cost changes. Output changes, if any, will be based on the last six months' prior to October actual average output of each Packaged Product unless extenuating circumstances affected the six-month average. (ii) minimum acceptable yields for ingredients and packaging for each year during the Extended Term will be mutually agreed to and set forth in Schedule D hereto. Minimum acceptable yields will be based on the six months' prior to October actual average yields, unless extenuating circumstances affected the six-month average. Hershey will bear all costs incurred for packaging and ingredients if yields fall below the yields stated on Schedule D. (iii) on March 31, June 30, September 30 and December 31 of each year during the Extended Term Hershey will provide Topps with copies of the most recent invoices Hershey has received for the packaging and ingredients used to manufacture the Packaged Products. (iv) in the event Hershey at any time receives notice of a cost increase or decrease in any of the largest ingredients and packaging materials (by dollars) which make up 80% of the total cost (by dollars) of ingredients and packaging materials in the aggregate for all Packaged Products expected to be manufactured by Hershey during that calendar year (which items shall be agreed to by the parties at the beginning of each year), Hershey will promptly notify Topps of such increase(s) or decrease(s) along with any notices or invoices received from vendors evidencing such increase(s) or decrease(s). The costs set forth on Schedule D will change to evidence the changed costs when Hershey uses the newly priced items in the Packaged Product. The new prices will be effective after use of the current inventory, using a FIFO depletion method. Hershey shall not discriminate against Topps in the manner in which it uses ingredients and packaging materials in the Packaged Product versus its own products. (v) Hershey will invoice Topps for the Packaged Products produced by Hershey at the time of shipment of such Packaged Products to Topps. Topps will pay Hershey the invoiced amount within 30 days of the invoice date. Interest will accrue on any amount remaining unpaid at the end of such 30 day period at the rate of 1% per month unless Topps has notified Hershey of its good faith dispute of any invoiced item. Hershey and Topps agree to use their best efforts to resolve such disputes. 5 (vi) During the Extended Term only, in the event during any calendar year Topps purchases less than 4 million pounds of Product from Hershey, then Hershey shall have the option of terminating this Agreement upon eighteen (18) months' written notice to Topps delivered within thirty (30) days after the end of such calendar year. If Hershey delivers the notice of termination, Topps shall then have the right (but not the obligation) to commit to Hershey (by written notice delivered by March 15 of that year) that it will purchase at least 4 million pounds of Product during that next calendar year. If Topps does so commit and meets the 4 million pound level, the notice of termination shall be void and this Agreement shall remain in full force and effect. If Topps makes this commitment and fails to meet the 4 million pound threshold, then (x) Topps shall pay Hershey an amount equal to the shortfall in pounds multiplied by the overhead rate per pound of Packaged Product then in effect and (y) Hershey shall have the right to terminate this Agreement by delivery of written notice within thirty (30) days of the end of the calendar year, which termination shall be effective eighteen (18) months after that notice of termination. (vii) For calendar years 2000, 2001 and 2002, the overhead rate per pound of Packaged Product shall be fixed at $0.34 per pound. Promptly after execution of this Amended and Restated Manufacturing Agreement, the parties shall work, in good faith, to establish a methodology, by October 15, 1998, for determining the overhead rate per pound of Packaged Product for all years after 2002 that the Agreement is in effect. That methodology, when mutually agreed upon, will become part of this Agreement as Schedule E. The actual overhead rate for each year after 2002 will be calculated in accordance with this methodology and will be included on the new Schedule D. In the event the total overhead rate per pound of Packaged Product as listed in Schedule D for any such year exceeds the overhead rate per pound of Packaged Product for that listed in Schedule D for the prior year by more than 6%, Topps shall have the right to terminate this Agreement on not less than six (6) nor more than eighteen (18) months' written notice delivered at any time within ninety (90) days after the later of the date the new Schedule D is established or February 15 of the new year. C. The parties agree that the following will be applicable during the Original Term and the Extended Term as defined below: (a) The parties agree that Schedule A is not a static list of Products and Packaged Products and that Product and Packaged Product skus (stock keeping units) may be added or deleted at Topps' discretion. Pricing for any additional Product or Packaged Product skus will be established using the same basic cost and profit structure as was used to determine the agreed upon pricing of other skus provided for herein. Topps and Hershey agree to review the pricing established by the parties for items added to the Schedule of Packaged Products 90 days after production of those new products has begun to determine the accuracy of the established prices. In the event actual costs to Hershey are different than originally anticipated the parties agree to negotiate adjustments in good faith to take into account the higher or lower costs actually incurred by Hershey. (b) The parties acknowledge that new product development is important to the vitality of the Bazooka brand and that product changes are sometimes required or advisable. Without limiting the foregoing, examples of some of these new products or product changes are: 6 A. Flavor extensions. B. Size changes. C. New configurations of existing or new formulations. D. Wrap or box changes in graphics, counts, size, etc. E. Ingredient changes. If Topps requests, Hershey shall assist Topps with the research and development and the implementation of changes or new products. If Topps so requests Hershey's assistance, Topps shall be required to pay the capital costs for the equipment required to produce a new or changed product and Topps will retain ownership thereof. With respect to the cost of production trials for new products, Topps shall pay for all ingredients, packaging components and direct labor, and the parties shall negotiate in advance regarding additional costs and expenses. (c) In the event Hershey makes its continuous gum base and gum making process available to Topps for use in producing the Products, and if Topps elects (in its discretion) to use the same, Topps agrees that it will use the same formula as Hershey chooses to utilize, except that Topps may choose the color and flavor of the Products produced by Hershey through this process. In the event that, before the end of 1998, Hershey makes this process available and Topps elects to utilize Hershey's continuous gum base and gum making process, the gum and gum base processing labor costs outlined in Schedule D will be replaced with $.033 (or 3.3 cents) per pound. For any use of this continuous base or process after the end of 1998 Hershey will provide Topps with the costs of production. Nothing herein shall be deemed to require Hershey to make its continuous system formulas or process available to Topps, or, once having made it available, to continue to make it available. Hershey may at any time decline to make the formulas and process available to Topps. In the event Hershey determines it will no longer make the formulas and process available to Topps, Topps must revert to the batch production process at costs based on those previously applicable to batch production. In the event Topps elects to utilize Hershey's continuous gum and gum base formulas and Hershey subsequently changes its formula and elects to make such revised formulas available to Topps, then Topps must either (x) accept the revised formulas or (y) revert to Topps' prior batch production process at rates based on those previously applicable to batch production. Topps specifically acknowledges that the technology, processing and operation of Hershey's continuous gum and base making process and the formulas are deemed proprietary intellectual property and/or trade secret information by Hershey and will be governed by the terms of this Agreement. (d) Any new technology or other intellectual property or any portion thereof developed solely by Topps concerning these new products or changes is to remain confidential and not to be disclosed or used in the manufacture of any product except the Product and the Packaged Product, and shall be owned by Topps. Any new technology or intellectual property or portion thereof developed solely by Hershey is to remain confidential and shall be owned by Hershey. Any new technology or intellectual property developed jointly by Topps and Hershey will be owned jointly by the two parties, and each party shall have the unrestricted right to utilize, modify, enhance, replicate, and create derivatives of such technology or intellectual property. Prior to full scale production of any new product, any party that believes it has a proprietary interest in any component thereof (other than items that have been previously included in the Product or 7 Packaged Product or other new products developed hereunder) shall notify the other party in writing. The parties shall attempt to amicably resolve any dispute regarding the foregoing. (e) After development of any item for which Topps requested Hershey's assistance as set forth above, Hershey shall have the first option to be the manufacturer for such changed or new product in the Territory so long as the cost to Topps (including capital costs and unit prices) shall be no greater than Topps can obtain elsewhere. Except as set forth in the preceding sentence, nothing contained in this Agreement shall require Topps to utilize Hershey to manufacture new products or variations. If Topps elects to produce the product, for sale in the Territory, elsewhere, Topps will reimburse Hershey for costs Hershey incurred on the development project. (f) All orders will be loaded by Hershey for shipping, in truckload quantities unless otherwise indicated by Topps, to any location within the 48 contiguous states of the United States designated by Topps, by a means of transportation selected by Topps. Hershey will cooperate in all shipping procedures. Topps shall either supply, or at its option pay for, all pallets and slip sheets to be used. All labeling shall include item numbers, count per pallet and date code. Any other labeling or handling shall be negotiated by the parties in advance. (g) Hershey shall not be liable for failure to perform or delay in performance hereunder if such failure or delay is due to fire, storms, floods, labor disputes, strikes, lockouts, war, riots, or civil commotion, embargoes, government or industry regulation, act of God, or any other cause or contingency beyond its reasonable control. In the event of any such occurrence, Topps shall have the right (but not the obligation) to source the Product and the Packaged Product from another entity for the affected period and if the period of force majeure exceeds six (6) months, then Topps may, as its sole remedy, terminate the Agreement immediately. (h) Hershey agrees to carry insurance covering Products and general liability in amounts of not less than $1 million per occurrence and $2 million in the aggregate, and an umbrella policy of not less than $15 million in the aggregate. All policies shall provide for at least thirty (30) days prior written notice of cancellation, non-renewal or material change in the terms and conditions of coverage and name Topps as an additional insured. Hershey will provide Topps with a certificate or certificates of insurance evidencing such coverage and such other evidence as Topps may reasonably request to insure that the insurer is required to cover Topps, as an additional insured, for the deductible portion as well. Hershey will promptly inform Topps of Hershey's receipt of a notice of cancellation, non-renewal, or material change in the terms and conditions of such coverage. In the event Hershey ceases to carry adequate insurance that names Topps as an additional insured, and Hershey fails to cure such breach within forty-five (45) days after written notice by Topps, Topps may terminate this Agreement by giving Hershey written notice of Topps' election to terminate this Agreement. (i) Hershey shall provide evidence of all price changes referred to herein. In the event Topps desires to confirm any pricing under this Agreement whatsoever, an independent and mutually agreeable auditor will be retained by the parties, at the sole expense of Topps and not more frequently than once per calendar year, to do so; provided, however, that the cost components for the overhead 8 rate through the year 2002 shall not be subject to audit. Notwithstanding the foregoing, in the event that an audit reveals that Hershey overcharged Topps by five percent (5%) or more for any calendar year, Hershey shall reimburse Topps for the cost of the audit. Topps and Hershey will work together in good faith to reduce the cost of production of the Product and Packaged Product, including without limitation, the cost of ingredients. In the event Topps locates a supplier of ingredients or packaging components that has lower prices than those being used, Hershey and Topps shall evaluate such materials and supplier. If Hershey determines that the materials or supplier are not acceptable or Hershey has another reasonable basis for not buying such materials and, notwithstanding such advice from Hershey in writing, Topps requires Hershey to use such materials or supplier, Hershey shall not be responsible for any adverse effects which may occur and which are related to Hershey's basis for rejecting such supplier or materials. Title to and responsibility for the Product and Packaged Product passes to Topps when placed on the truck for shipping at Hershey's production facility. (j) The parties acknowledge that Hershey will be purchasing ingredients and components for its own products and the products of others, as well as for the Packaged Product, and Hershey may not discriminate or act with prejudice against Topps in any purchasing, use, pricing or allocation of ingredients or components. Hershey agrees to use its reasonable best efforts in accordance with Hershey's customary practice and consistent with the quality standards necessary to ensure the quality of the Packaged Products, to obtain the best prices available for the ingredients and packaging and to avoid price increases if possible. (k) The parties further acknowledge that the prices on Schedule D are based upon Topps purchasing not less than 4 million pounds of Product per year from Hershey. In the event that Topps purchases less than such amount, the prices shall be adjusted to reflect any increased cost to Hershey. Nothing contained in this Agreement, however, shall require Topps to make any minimum purchases of the Product or the Packaged Product whatsoever. 3. TOPPS' RESPONSIBILITIES (a) Topps has shipped to Hershey at Topps' sole expense all of Topps wrapping machines for gum and other ancillary equipment listed on Schedule F (the "Topps Equipment"). Such machinery shall remain the sole property of Topps and, at Topps request, will be returned to Topps at Topps' cost upon termination or expiration of this Agreement. In the event Topps does not so request the machinery within six (6) months after termination or expiration, Hershey shall be entitled to the machinery or to dispose of it at its sole option. Topps will provide at its expense any replacements for the Topps Equipment reasonably requested by Hershey and agreed to by Topps for use in the production and packaging of the Products. Hershey shall be responsible for the normal and customary day to day maintenance and repair of Topps Equipment at its expense as necessary to keep Topps Equipment in good working order but not to exceed the condition in which Hershey received the machinery provided, however, that Topps shall pay for all rebuilds of Topps Equipment necessary in Hershey's reasonable opinion to maintain the operation or performance of the equipment or any other capital improvements to the Topps Equipment made with Topps' prior written consent. 9 (b) Topps warrants that any machinery, when delivered to Hershey, will be in good working condition and not requiring any substantial repairs. Topps will reimburse Hershey for all of its out-of-pocket expenses for Hershey's actual capital expense and capital costs for installing the machinery provided by Topps. Hershey shall provide in advance of the installation its best estimate of such capital costs and Topps may review the methods of installation and costs, and make reasonable requests of Hershey for a change in the method of installation for the sole purpose of cost control. Further, Hershey shall be entitled to test the machinery for operability and Topps will pay for all materials and Hershey's direct labor costs for such tests. (c) Topps acknowledges that Hershey incurred substantial start up costs when it began production for Topps under the Original Agreement and that those costs continued through October 31, 1997. Hershey agrees to provide Topps with all available documentation and verification of such start up costs. Topps and Hershey agree to review the costs in good faith. Topps agrees to pay fifty percent (50%) of those verified start up costs to Hershey, up to a maximum aggregate payment of $1 million (less the sum of $105,983 which was already advanced to Hershey) in three equal installments, one due upon execution of this Agreement, one due in December of 1998 and one due in December of 1999. Hershey agrees that Topps will have no other liability for start-up costs. Hershey hereby waives any claim that it may have relating to the condition, as it existed at the date of delivery by Topps of the Topps Equipment that has been delivered by Topps prior to the date hereof; provided, however, that the foregoing shall not be interpreted as a waiver by Hershey of any claim regarding equipment which is delivered by Topps after the date hereof. Except as specifically set forth in the preceding sentence this section is not intended to limit Topps' obligations with regard to equipment as set forth in paragraphs 3(a) and (b) above. (d) Topps has provided Hershey with specifications, formula sequences, time requirements and quality standards, which Topps may revise from time-to-time, for the Products and/or the Packaged Products and any ingredient or component thereof which Hershey is to purchase hereunder. Topps may modify the Product to be manufactured hereunder and/or change the Packaging and Hershey shall manufacture such changed Product or Packaging; provided, however, that if any such modification or change would increase the cost of performance to Hershey hereunder, then Hershey shall have the right to adjust the pricing of the Product, as necessary, to offset such incremental cost and the prices shall be reduced to Topps to the extent the costs are thereby reduced. (e) Topps shall, at its sole cost, secure and maintain all necessary licenses, permits, authorizations or other approvals for the use of the ingredient statements, labeling, trademarks, trade names, trade dress or other elements of the Packaging hereunder. (f) Topps agrees to carry insurance covering Products and general liability in amounts of not less than $1 million per occurrence and $2 million in the aggregate, with an umbrella policy of not less than $15 million, and insurance covering trademark infringement, trade name infringement, copyright infringement and advertising liability in amounts not less than $1 million per occurrence and $1 million in the aggregate. All such policies shall provide for at least thirty (30) days prior written notice of cancellation or reduction in coverage and name 10 Hershey as an additional insured. At Hershey's request, Topps will provide Hershey with a certificate or certificates of insurance evidencing such coverage. Topps will promptly inform Hershey of Topps' receipt of a notice of cancellation or reduction in such coverage. In the event Topps ceases to carry adequate insurance that names Hershey as an additional insured, and Topps fails to cure such breach within forty-five (45) days after written notice by Hershey, Hershey may terminate this Agreement by giving Topps written notice of Hershey's election to terminate this Agreement on twelve (12) months' notice; provided, however, that during such twelve (12) month period Hershey shall have the right to buy such insurance and bill Topps therefor. (g) Topps shall indemnify, defend and hold harmless Hershey and its parent, affiliates, subsidiaries, officers, directors, employees and stockholders from and against any and all claims, demands, suits, judgments, costs and expenses, including, without limitation, reasonable attorneys' fees, (1) resulting from or arising out of either: (i) Topps marketing practices and selling practices for the Packaged Products; (ii) errors by Topps in the labeling of the Packaged Product; (iii) any ingredient, packaging, formula, process or other component of the Product or Packaged Product supplied by Topps; or (iv) any breach or violation, or a claim by a third party that, if true, would be a breach or violation, by Topps of any provision of this Agreement or of any representation, warranty, covenant or guarantee of Topps under this Agreement, or (2) caused by any of the written specifications for the Packaged Product given to Hershey by Topps, except to the extent any of the foregoing arise out of Hershey's negligent act or omission. 4. HERSHEY'S RESPONSIBILITIES (a) As an essential condition of this Agreement, Hershey shall, at all times, manufacture and produce the Product and the Packaged Product strictly in accordance with Topps specifications, formula sequences, time requirements and quality standards, which Topps may revise from time-to-time. In the event any revision by Topps would increase the cost of performance to Hershey hereunder, then Hershey shall have the right to adjust the pricing of the Product as necessary. In the event any revisions by Topps reduces the cost of performance to Hershey hereunder, the prices shall be reduced in an amount equal to the cost of reduction. Hershey shall also provide reasonable security measures against theft or sabotage, including the use of metal detectors supplied by Topps for all Products and Packaged Products with such detectors being operated at acceptable sensitivity levels, and shall code each case of Packaged Product with a special date code which indicates the date and shift of manufacture. (b) Hershey shall, at its sole cost, secure and maintain all necessary licenses, permits, authorizations or other approvals necessary for its performance hereunder including, without limitation, all licenses, permits and approvals required by the Federal Food and Drug Administration (the "FDA"). Hershey represents and warrants that at the time the Product is placed on trucks or other carrier for shipping from Hershey's production plant to Topps' designated location, the Product (i) shall be neither "adulterated" nor "misbranded' as those terms are specifically defined in the Federal Food, Drug and Cosmetic Act, (ii) shall comply with all applicable United States laws and regulations relating to the production and manufacture of the Product and the Packaged Product and (iii) that the Products and Packaged Products shall conform to Topps' standards, specifications and instructions; provided, however, that Topps 11 shall be responsible for taste testing the Bazooka flavor solely to test whether it complies with Topps standards for taste. Notwithstanding the foregoing, Hershey makes no representation or warranty of any kind to the extent any Product or Packaged Product fails to comply with (i) - (iii) above to the extent the non-compliance is the result of (x) ingredients or Packaging components supplied by Topps, (y) the specifications, formula, sequences and instructions for the manufacturing process provided by Topps, or (z)any of the written specifications for the Packaged Product given to Hershey by Topps. Hershey covenants that the Products and the Packaged Products will be manufactured following FDA's Current Good Manufacturing Practice in Manufacturing, Packaging or Holding Human Food, as these guidelines and rules may be modified from time to time. However, Hershey makes no representation or warranty as to whether the Product or the Packaged Product complies with any law or regulation of any foreign governmental entity, unless otherwise agreed to by the parties by written amendment to this Agreement. (c) Hershey shall allow authorized representatives of Topps (i) to inspect Hershey's facilities and review its manufacturing processing and conditions for the Product and the Packaged Product at any time during normal business hours, and (ii) to make product and process audits and prepare analytical data for quality control purposes with the assistance of Hershey's personnel. Any such inspection may be made without notice, on regular working days between 7:00 A.M. and 5:00 P.M. or, on two hours' notice, between the hours of 5:00 P.M. and 7:00 A.M. on any day other than weekends, holidays or agreed upon shutdowns, in which case Topps shall provide not less than 24 hours notice. Hershey shall, on a weekly basis, send Topps samples (display box quantities) of the Products and the Packaged Products, and in the case of new Products and if requested by Topps, on a daily basis. Topps shall bear the cost of such samples and shipping. In the event Topps wishes to exercise the right granted pursuant to this Section 4(c), Topps and any of Topps' personnel who are to inspect Hershey s facilities shall execute any and all confidentiality agreements reasonably required to be executed by Hershey which agreements shall supersede the secrecy provisions set forth in this Agreement. If as a result of the exercise of the right granted pursuant to this Section 4(c), Topps shall acquire confidential, proprietary or trade secret information, Topps shall take all steps necessary to keep such information confidential and shall not use such information other than for analyzing Product quality as specifically set forth in Sections 4(c)(i) and 4(c)(ii). In addition, Topps shall indemnify, defend and hold harmless Hershey from and against any and all claims, demands, suits, judgments, costs and expenses arising out of any injury to Topps' personnel which occurs in connection with any inspection performed, unless such injury was the result of negligence or willful misconduct by Hershey. (d) Hershey will procure and maintain, at its expense and in accordance with specifications provided by Topps, all ingredients and Packaging components necessary to manufacture and package the Packaged Product in amounts sufficient to meet Topps' expressed production requirements and from suppliers approved in advance by Topps. (e) Hershey shall indemnify, defend and hold harmless Topps and its affiliates, subsidiaries, officers, directors, employees and stockholders from and against any and all claims, demands, suits, judgments, costs and expenses, including, without limitation, reasonable attorneys' fees, resulting from or arising out of 12 any breach or violation, or a claim by a third party that, if true, would be a breach or violation, by Hershey of any provision of this Agreement or of any representation, warranty, covenant, or guarantee of Hershey under this Agreement unless caused by (x) specifications, formula sequences, quality standards, ingredients, Packaging components or artwork/graphics supplied by Topps; (y) an event which occurred after Hershey's delivery of the Product and/or Packaged Product to Topps as described herein; or (z) any breach by Topps of any representation contained herein or any negligent act or omission of Topps. 5. INTELLECTUAL PROPERTY (a) Topps will market, distribute and sell the Packaged Product under its own trademark and trade name. Topps shall have no right to use any of Hershey's marks, names, other trade identities, copyrighted works or other intellectual property except to the extent that Hershey has incorporated its own intellectual property in or used in the manufacture of the Product or Packaged Product supplied by Hershey to Topps. Topps represents, warrants and guarantees that no intellectual property which it may provide, and no name or mark or aspect of the trade dress used on the Packaging, or in any other way made a part of the Packaging, shall infringe upon or violate any copyright, patent, trade secret, trade name, trademark or any other proprietary rights, or other utility patent rights, of any person not a party to this Agreement, or violate any laws, rules or regulations prohibiting deceptive or other forms of advertising. In the event that Topps receives a claim or notice of suit alleging such infringement, Topps shall promptly notify Hershey. Topps shall then, at its sole expense, (i) settle or defend (with counsel of its own choice) any such claim brought against Hershey and/or Topps, (ii) procure for Topps the right or rights necessary to manufacture, package and sell the Packaged Product or replace or modify the Product, Packaging or Packaged Product, and (iii) to the extent required by a court adjudicating the claim or as agreed in a settlement agreement respecting the claim, remove the affected Product, Packaging and Packaged Product from Hershey s inventory and pay Hershey the purchase price for all affected units of the Product, Packaging and Packaged Product. Topps shall indemnify, defend and hold harmless Hershey from and against any and all claims, demands, suits, judgments, costs and expenses, including, without limitation, reasonable attorneys' fees, resulting from or arising out of any breach or violation of any representation, warranty or guarantee of Topps in this paragraph 5(a). (b) Hershey shall have no right to use any of Topps marks, names, other trade identities, copyrighted works or other intellectual property (including without limitation the Bazooka flavors or Burst technology), except in the Product and the Packaged Product in accordance with the Agreement. Hershey represents, warrants, covenants and guarantees that intellectual property which it may provide, if any, shall not infringe upon or violate any copyright, patent, trade secret, trade name, trademark or any other proprietary rights, or other utility patent rights, of any person not a party to this Agreement, or violate any laws, rules or regulations. In the event Hershey receives a claim or notice of suit alleging such infringement, Hershey shall promptly notify Topps. Hershey shall then, at its sole expense, settle or defend (with counsel of its own choice) any such claim brought against Hershey and/or Topps. Hershey shall indemnify, defend and hold harmless Topps from and against any and all claims, demands, suits, judgments, costs and expenses, including, without limitation, reasonable attorneys' fees, resulting from or arising out of any breach or violation of any 13 representation, warranty or guarantee of Hershey in this paragraph 5(b). 6. TERM AND TERMINATION (a) The Original Term of this Agreement shall be from the date of execution hereof through December 31, 1999. (the "Original Term"). The parties hereby extend the term of this Agreement beyond the Original Term for an additional term beginning on January 1, 2000 and ending December 31, 2002 (the "Extended Term"). For purposes of this Agreement the first year of the Extended Term shall be defined as January 1, 2000 through December 31, 2000. Beginning on December 31, 1998 and on each December 31 thereafter, the Extended Term shall automatically be extended for an additional term of one (1) year so that there are always five (5) years remaining in the term, unless either party delivers notice, at least thirty (30) days prior to any such December 31, of its desire to terminate this Agreement at the end of the then current five (5) year term. (b) Upon written notice, either party shall have the right to terminate this Agreement, on ninety (90) days written notice delivered within thirty (30) days after the end of the cure period if the other party materially breaches or fails to perform any of its material obligations or responsibilities hereunder, which material breach is not cured by the other party within thirty (30) days following its receipt of the written notice of breach from the other party specifying the breach. A material breach includes, but is not limited to: (1) failure to pay material sums as provided for herein, unless such failure is the result of a good faith dispute between the parties; (2) Hershey's failure to comply with paragraphs 4(a) or 4(b) (unless such breach is caused by an act or omission of Topps); and (3) Hershey's failure, for a period of two (2) consecutive months or three (3) months during any twelve (12) month period, to meet Topps' actual production requirements. (c) Notwithstanding anything to the contrary in this Agreement, either party shall have the right to terminate this Agreement immediately, without further notice, if the other party becomes insolvent or makes an assignment for the benefit of creditors, a proceeding or petition for bankruptcy or insolvency is filed by or against the other party under any federal or state law in any court of competent jurisdiction, or receiver of assets is appointed or any levy of a material portion of the other party's assets under the attachment, execution or similar process is made, and the other party does not cure any of the foregoing within sixty (60) days of its occurrence. (d) Hershey may terminate this Agreement, on six (6) month's written notice, if the Product or the Packaged Product is or becomes injurious to health, and the Product cannot be altered, within the six (6) month period, so that it will no longer be injurious; provided, however, that Hershey shall not be required to sell any injurious Product at any time. Notice of such termination must be given within sixty (60) days after it is determined that the Product or the Packaged Product is injurious. (e) Either party may terminate this Agreement, on one (1) years written notice, if the other party is convicted of criminal conduct in a criminal court of law, and such conduct materially and adversely affects the reputation of the other 14 party. Such notice shall be given promptly after such party is so affected. (f) Notwithstanding anything to the contrary in this Agreement, upon termination or expiration of this Agreement, Topps shall cease use of any of Hershey's intellectual property, trade secrets and formula(e), provided Hershey advised Topps in writing of its ownership of such intellectual property, trade secrets or formula prior to inclusion in the Product or Packaged Product, and shall have no further right to use the same except that Topps may sell the existing inventory of Packaged Product. (g) Notwithstanding anything to the contrary in this Agreement, Hershey shall not use any of Topps intellectual property, trade secrets or formula (which includes, without limitation, the Bazooka flavors, Burst technology, master batching and processes relating to the production and manufacture) as provided to Hershey at the commencement of this Agreement, learned by Hershey from Topps or developed by Topps during this Agreement (i) during the term of this Agreement, except in connection with Hershey's obligation to manufacture for Topps under this Agreement or (ii) after the termination of this Agreement. (h) Upon any termination or expiration of this Agreement, Topps shall have the obligation to purchase, and shall receive, all Packaging material and other material containing Topps trademarks ordered or in Hershey's possession, as well as all Product or Packaged Product ingredients ordered or in Hershey's possession, all at Hershey's actual cost therefor (provided the materials are of good quality). 7. ADDITIONAL TERMS (a) This document, together with the schedules, constitutes the entire understanding of the parties relating to the manufacture, storage and shipping of the Product and/or Packaged Products, and any prior or contemporaneous agreements or understandings relating thereto are merged herein and superseded. This Agreement may not be amended or altered except by agreement in writing, signed and acknowledged by each party. The headings in this Agreement are for reference only, and shall not affect the interpretation of this Agreement. Non-enforcement by either party of the terms of this Agreement shall not be deemed a waiver, nor in any manner affect such party's rights to enforce the terms of this Agreement. Nor shall a waiver by one party of a breach of the other party be considered a waiver of any other pre-existing or succeeding breach. Notwithstanding anything contained in this Agreement to the contrary, the parties expressly agree that this Agreement shall not extinguish or diminish any liability of Topps or Leaf to the other under the Original Agreement with respect to Product and Packaged Product that was manufactured prior to the date hereof and other events which occurred prior to the date hereof, except as expressly set forth in the last sentence of paragraph 3(c) hereof. (b) Any notice required or necessary under this Agreement shall be in writing and shall be delivered either in person, or by telegraph, telex, facsimile transmission, or by certified or express mail, postage prepaid. Whenever notices are necessary under this Agreement, they shall be considered given to the other party when personally delivered, telegraphed, telexed, sent by facsimile transmission or, if by certified mail, four days after the date of the mailing 15 or, if by express mail, on the next business day. Notices provided pursuant to this Agreement shall be addressed as follows: If to Hershey Hershey Chocolate U.S.A., 400 Running Pump Road Lancaster, PA 17603 Attn.: Director, Manufacturing With a copy to: Hershey Foods Corporation 100 Crystal A Drive Hershey, PA 17033 Attn.: Vice President-General Counsel If to Topps: The Topps Company, Inc. 401 York Avenue Duryea, PA 18642 Attn: Vice President-Manufacturing With copies to: The Topps Company, Inc. One Whitehall Street New York, NY 10004-2109 Attn.: Vice President-Operations and Vice President-General Counsel Either party may change its designated addressee on thirty (30) days' written notice. (c) A termination or expiration of this Agreement shall not affect the rights and responsibilities of the parties accruing prior to the date of termination or expiration and, notwithstanding that this Agreement may otherwise terminate or expire, any and all provisions regarding confidential information and indemnification shall remain in full force and effect. (d) In the event that any provision of this Agreement is held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining parts of this Agreement, but this Agreement shall be construed and enforced as if such illegal or invalid provision had never been inserted herein. (e) The rights and obligations of either party hereunder may not be assigned, transferred or encumbered without the prior written consent of the other party. (f) The laws of the State of Delaware shall govern this Agreement's interpretation and construction. 16 (g) (i) The determination of the necessity of a product recall, whether or not such recall is due to defects or potential defects in the Products or Packaged Products subject to possible recall, the procedure for handling the recall, the disposition of recalled Products or Packaged Products and packaging, and all other considerations involved in such a recall, shall be made by Topps after consultation with Hershey. Such decision shall not be arbitrary, capricious, or unreasonable. Topps shall have the obligation to consider, in good faith, a product recall due to defects or potential defects, upon Hershey's request. (ii) All costs and expenses of the recall shall be paid by Hershey if the reason for the recall is due to any event which occurred, or which failed to occur, while the Product or the Packaged Product was in the possession or control of Hershey (including, without limitation, the inclusion of foreign material or the inclusion of the product or the Packaged Product of ingredients or components that are or may be injurious to health), unless (A) the recall was the result of flavor or color ingredients or packaging components from a Topps approved supplier and Hershey has entered into a written agreement with such supplier under which Topps actually has an enforceable claim against such supplier as a third party beneficiary thereof (in which case Topps shall bear the costs and expenses of the recall) or (B) the ingredients or components were those supplied by Topps or (C) the recall was the result of any of the items for which Hershey is not responsible for under paragraph 4(b) (x), (y) or (z) or the proviso regarding Bazooka flavor contained in the second sentence of paragraph 4(b). All costs and expenses of the recall shall also be paid by Hershey if the reason for the recall is due to Hershey's conduct which is in breach of this Agreement, Hershey's failure to manufacture (including, without limitation, labeling) the Product or Packaged Product according to the specifications or Hershey's failure to store the Product or Packaged Product according to FDA or other applicable laws or regulations. All costs and expenses of the recall shall be paid by Topps if the reason for the recall is due to conduct by Topps which is in breach of this Agreement, an event which occurred after the Product or Packaged Product was no longer in the possession or control of Hershey (provided it was not caused by an act or omission on the part of Hershey while the Product or Packaged Product was in Hershey's possession or control), or ingredients, packaging components or artwork which were supplied by Topps. The parties shall share the costs and expenses of any other recall. (h) Hershey covenants that it shall be a condition to the sale by Hershey of a material portion of the assets of its gum plant located at Memphis Tennessee, to a single person, entity or group that at Topps request, this Agreement and the obligations of Hershey hereunder shall be assigned to and assumed by such purchaser. Topps shall have forty-five (45) days after written notice from Hershey to determine whether it will require such assignment. If, and only if, such sale takes place during the Extended Term and Topps does not require the purchaser to assume this Agreement for the remainder of the then existing term, then this Agreement shall, at Topps option and as a condition to such sale by Hershey, be assigned to and assumed by such purchaser with a shortened term of not less than six (6) months nor more than eighteen (18) months, such term to be designated by Topps within sixty (60) days after the closing of the sale. (i) Hershey and Topps will not use or commercially exploit for its own benefit or the benefit of others any Confidential Information, nor will the receiving party disclose any Confidential Information to any person, firm or corporation except (i) employees of the receiving party who have a need to know such 17 Confidential Information and who have been informed of the receiving party's obligations hereunder, and (ii) contractors or consultants under contract to the receiving party who have a need to know such Confidential Information, who have been approved by the disclosing party in advance of any disclosure of Confidential Information, and who have been informed of the receiving party's obligations hereunder, unless the information: 1. was known to the receiving party prior to disclosure by the disclosing party; or 2. was publicly available at the time of the disclosure to the receiving party; or 3. subsequently becomes publicly available through no fault of the receiving party; or 4. is rightfully acquired by the receiving party subsequent to disclosure by the disclosing party from a third party who is not in breach of a confidential relationship to the disclosing party with regard to such information; or 5. is independently developed by the receiving party and the receiving party shall have the obligation of proving independent development. The term Confidential Information shall include, without limitation, either Topps' or Hershey's formula, recipe, formula sequences and processes relating to the production and maintenance of the Product and the Packaged Product, as well as Topps' purchase order, purchasing information, production requirements, production forecasts, etc. In the event that Topps visits a Hershey facility in order to render assistance to Hershey, Topps may be asked to sign a Visitor Agreement (attached hereto as Exhibit A) containing a confidentiality provision which is of a term longer than this agreement; in such case the term and the conditions of such Visitor Agreement where they are inconsistent with this Agreement shall supersede this Agreement except that the reference in the Visitor's Agreement to ideas, as Proprietary Information, shall be deemed deleted. (j) Except as may be required by law or regulation or if requested by Topps employees' Union, Hershey and Topps agree that they will maintain in confidence the provisions, terms and conditions of this Agreement. (k) Nothing in this Agreement shall preclude Hershey from manufacturing any gum or confection product for itself or others so long as Hershey does not violate its obligations as set forth in this Agreement including, without limitation, paragraph 7(i) hereof. (l) Nothing contained herein shall place the parties in the relationship of partners, joint venturers, principal-agent, or employer-employee and neither party shall have any right to obligate or bind the other in any manner whatsoever. 18 (m) The parties agree that in the case of a breach of this Agreement, the non-breaching party shall take reasonable steps to mitigate the damages caused by the breach. Further, in the event that the breach at issue is Hershey's failure to manufacture Packaged Product for Topps as required under this Agreement, Hershey shall not be liable for damages to Topps to the extent that such damages result from Topps failure, after a period of three (3) years after such breach by Hershey, to find another manufacturer acceptable to Topps. Except as expressly set forth in the two previous sentences, this Agreement shall in no way limit the damages that may be awarded by any court or tribunal. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date shown. THE TOPPS COMPANY, INC. HERSHEY FOODS CORPORATION By: ____________________________ By: ____________________________ Title: ___________________________ Title: ___________________________ 19 SCHEDULES Schedule A List of Products and Packaged Products Schedule B Form of Monthly Report to be Furnished by Hershey Schedule C QA Test Procedures and Form of Monthly Reports to be Furnished by Hershey Schedule D - 1997 Prices for 1997 Schedule D - 1998 Prices for 1998 Schedule E [to be completed] Schedule F Schedule of Equipment 20 EX-10.24 6 EMPLOYMENT AGREEMENT THE TOPPS COMPANY, INC. ONE WHITEHALL STREET NEW YORK, NY 10004-2109 May 27, 1998 Mr. Arthur T. Shorin 400 East 56th Street New York, NY 10022 Dear Mr. Shorin: The Topps Company, Inc. (the "Company") hereby agrees with you to the following amendment to your Employment Agreement with the Company, dated as of October 28, 1991, as amended on May 18, 1994, May 19, 1995, May 22, 1996 and May 22, 1997 (the "Agreement") (the amendments to the Agreement hereafter referred to as the "Amendments"). This will confirm your agreement to the limited reduction of your annual base salary for calendar year 1998 by $246,000 in consideration for the Company granting to you options for an additional 246,000 shares of common stock of the Company. This limited reduction will entitle you to an annual base salary during 1998 equal to $576,000. The amendment set forth herein shall apply only to your annual base salary for the 1998 calendar year, shall be limited precisely as written and shall not be deemed to be a modification or waiver of any right or remedy which the parties hereto may now have or may have in the future under or in connection with the Agreement, the Company's Pension Plan, as supplemented by the supplemental pension benefit arrangement between the Company and you as set forth in the letter agreement dated May 19, 1986, as amended on May 18, 1994 (the "Pension Agreement") or the Company's Incentive Bonus Plan for fiscal year 1999 (the "Bonus Plan"), including, without limitation, (I) the right to have termination payments required to be made under Section 7 of the Agreement calculated to include all salary increases required to have been provided under the terms of the Agreement, without regard to the limited waivers of such increases made by the Amendments, or the reduction provided for in this amendment, (ii) the right to have benefits required to be made under the Pension Agreement calculated to include your 1998 salary with the reduction provided for in this amendment, or (iii) the right to have you bonus opportunity and consequential bonus amount under the Bonus Plan calculated to include your 1998 salary without the reduction provided for in this amendment. Except as provided herein, the Agreement shall remain unchanged and in full force and effect. This Amendment may be executed in counterparts, which taken together shall constitute one and the same amendatory instrument. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of New York. Very truly yours, THE TOPPS COMPANY, INC. By:_______________________ __________________________ Arthur T. Shorin EX-13 7 EXHIBIT 13-ANNUAL REPORT Table of Contents Page Stockholders'Letter............................................................2 Financial Highlights...........................................................5 Management's Discussion and Analysis of Financial Condition and Results of Operations..................................6 Consolidated Financial Statements.............................................10 Notes to Consolidated Financial Statements....................................14 Report of Independent Public Accountants......................................29 Market and Dividend Information...............................................30 Selected Consolidated Financial Data..........................................31 Directors, Officers, Subsidiaries and Stockholder Information.................32 Stockholders' Letter ================================================================================ Dear Fellow Stockholders, Despite the fact that for fiscal 1998, Topps recorded a net loss of $4.6 million, or $.10 per share, as I write to you today, there are ample reasons to believe that we can deliver profitable results for the new year and beyond. Let me provide some background and share with you why I believe that to be so. Organizational Changes and Developments - ----------------------------------------- During this last year, it grew increasingly clear that worldwide revenues and profit contribution had become insufficient to offset an expanding overhead structure. Simply put, costs had to go down and priorities needed re-ordering. We took decisive action, commensurate with the circumstances under which we were operating, cutting off activities and expenses that were no longer justified. All in all, this involved a wide variety of steps to get the Company back on secure ground and set the stage near term for a more profitable future -- steps that included: Reducing headcount throughout the entire organization; Cutting expenses in virtually every department in the Company; Limiting investments of time and money to those operations that can deliver appropriate returns; Entering into a new term loan and revolving credit facility with Chase Manhattan Bank to refinance our former arrangements; Closing the sale of our former manufacturing plant in Duryea, Pennsylvania and relocating administrative operations efficiently within the building, as tenant of the new owner; Negotiating an extension to our contract with Hershey Foods Corp. (for Bazooka bubble gum manufacturing) which should serve us well for years to come; Negotiating a card license with the National Hockey League Players' Association (subject to the execution of a definitive agreement), effective this year and on terms that make economic sense; Entering into a contract to sell our Cork, Ireland manufacturing facility; Achieving significantly improved on-time performance relative to shipping our sports card releases; Launching two new candy products, Flip Pop and Baby Bottle Pop, that are showing encouraging early market results; and Throughout the organization worldwide, creating greater focus on building cash, profits and stockholder value. Our Businesses - -------------- Domestically, sports cards still represent important business to us despite a contracted market and constant competitive challenges. We continued to gain market share during calendar year 1997 and again won numerous prestigious industry awards. We produced some of the most sought-after cards and sets in the industry, including the newly introduced Chrome line, and intend to continue doing so. 2 During the year, our levels of product quality, pre-press technology and collation accuracy were much improved. Customer service and distribution benefited from Topps "Home Team Advantage," a program which is designed to help hobby dealers generate greater in-store traffic and operate more profitably. As part of Home Team Advantage, we continue to sponsor the popular "Retailing for Success" seminars, and get high marks from participating hobby store owners for our active support. Incidentally, we also have a program that enables consumers to find the hobby stores nearest them. If you would like such information, you can obtain it simply by dialing 1-888-GO-TOPPS or by visiting our website at www.topps.com. As for new sports business, in addition to traditional picture products featuring professional athletes, we believe that our brands and consumer franchise can support new marketing initiatives, some of which are already in the pipeline. The objective is to attract into our consumer base sports fans who are not currently there, by offering new types of collectible products. Internationally also, there is further potential for us in sports, given new focus and a pared down organization structure. As you may know, Topps UK does an excellent job with sticker album collections featuring professional football (soccer) players of the English Premier League. This past year, for the first time, our subsidiary, Topps Italia, got a chance to show the Italian football leagues what we could do by publishing a sticker album collection featuring their players. The product we developed was outstanding and marketing results were excellent. All things being equal, we should get the green light to continue with our program in Italy this year. Additionally, in the future, we will seek opportunities to market sports products in other parts of the world. I wish we could be as encouraged about the prospects for entertainment-based picture products overseas. However, as last year progressed, consumer interest in this type of sticker collection became a shadow of its former level, causing us to close three offices in Europe and cut back substantially on acquiring new licenses. We know from experience that, with the exception of properties for which there is extraordinary consumer demand (there well may be one or two), the best strategy is not to force anything but rather to wait patiently until the general market returns to life -- and so we will. On the confectionery front, all news is good news. The transition last year to outsourcing Bazooka created unavoidable supply and customer service problems which took a great deal of time, money and effort to correct. However, that transition is now complete and the arrangement with Hershey for product supply has been extended. Our core lollipop brands, Ring Pop and Push Pop, continue to be strong performers, showing growth and retail vitality. We have increased efforts to develop additional confectionery brands, both by committing greater internal resources to this area, and by opening ourselves to ideas from outside developers. So far, these efforts have resulted in two very promising new items - -- Baby Bottle Pop and Flip Pop -- which were recently introduced to the marketplace, plus other potentially strong product entries now in various stages of development. 3 Looking Ahead - ------------- Today, good things are happening in virtually every area of our business. Near term, building cash, profits and stockholder value will be our primary points of concentration. We will be very selective in deciding where to spend our time and money. We will seek ways to be even more customer friendly and continue being aggressive at marketing, distribution and new product development. Looking ahead, however, there needs to be more. Besides Topps considerable strengths -- people power, the makings of a worldwide distribution system, strong brands, licenses, business relationships and operating capabilities -- the Company must work to add some new initiatives to its business mix to achieve its full strategic potential. Medium- and long-term, therefore, we will pursue such initiatives by both acquisition and internal development, staying close to areas we know best -- sports, collectibles and confectionery. In closing, we thank the Topps family of present and former employees everywhere for their dedication and commitment to helping make things right. On behalf of the entire organization, we also thank our customers, licensors, stockholders and suppliers for their valued support. Chairman, Chief Executive Officer and President OFFICERS OF THE TOPPS COMPANY, INC. 4 Financial Highlights
Year Ended - ---------------------------------- ------------------------------------------------------------------------------------ February March March 28, 1998 1, 1997 2, 1996 - ----------------------------------------------------------------------------------------------------------------------- (In thousands of dollars, except share data) Net sales $ 241,250 $ 268,975 $ 265,495 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (2,020) (14,475) 16,571 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) (4,572) (10,943) 8,394 - ----------------------------------------------------------------------------------------------------------------------- Cash provided by (used by) operations (62) 12,707 4,149 - ----------------------------------------------------------------------------------------------------------------------- Working capital 20,971 18,716 31,278 - ----------------------------------------------------------------------------------------------------------------------- Current ratio 125.9% 118.7% 138.6% - ----------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 10,148 12,900 31,610 - ----------------------------------------------------------------------------------------------------------------------- Stockholders' equity 61,609 68,052 81,850 - ----------------------------------------------------------------------------------------------------------------------- Per share data: Net income (loss) (0.10) (0.23) 0.18 - ----------------------------------------------------------------------------------------------------------------------- Book value $ 1.33 $ 1.45 $ 1.74 - -----------------------------------------------------------------------------------------------------------------------
Corporate Profile ================================================================================ The Topps Company, Inc. is an international marketer of entertainment products, principally collectible picture cards, sticker and album collections, confections, magazines and comic books. The Company, founded in 1938, created Bazooka brand bubble gum in 1947 and marketed its first Topps baseball cards in 1951. 5 Management's Discussion and Analysis of Financial Condition and Results of Operations ================================================================================ The following table sets forth, for the periods indicated, net sales by product group:
Year Ended - ----------------------------------------------------------------------------------------------------------------------- February March March 28, 1998 1, 1997 2, 1996 (52 weeks) (52 weeks) (53 weeks) - ----------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Collectible picture products $ 156,769 $ 179,184 $ 169,983 - ----------------------------------------------------------------------------------------------------------------------- Confectionery products 84,481 89,791 95,512 - ----------------------------------------------------------------------------------------------------------------------- Total $ 241,250 $ 268,975 $ 265,495 - -----------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS - --------------------- Financial results for the year ended February 28, 1998 reflect an extra month for Topps Europe as a result of a change in its fiscal year to coincide with that of the rest of the Company. Topps Europe's net sales and net income for the extra month were $4,937,000 and $702,000, respectively. Fiscal 1998 Versus 1997* In 1998, the Company's net sales decreased 10.3% to $241,250,000 from $268,975,000. This was the result of lower sales of both collectible picture products and confectionery products. Net sales of collectible picture products, which consist primarily of sports cards, entertainment cards, comic books and the Merlin line of sticker and album collections, decreased 12.5% from $179,184,000 in 1997 to $156,769,000 in 1998. This decrease resulted from lower sales of sports cards, principally baseball, and to a lesser extent, the Company's decision not to renew its NHL licenses on terms it deemed unfavorable. Revenues versus a year ago were also negatively impacted by weakness in the entertainment card and sticker/album markets in the U.S. and Europe. Collectible picture products accounted for 65.0% of consolidated net sales of the Company in 1998, versus 66.6% in 1997. The sports card category continued to contract in calendar 1997. This extended industry decline has occurred as a result of several factors, including: product and brand proliferation which have led to consumer confusion and oversupply; a competitive rise in other sports-related merchandise choices; a reduction in retailer support; and labor strife between players and team owners in various sports leagues. Topps continued to gain market share in the sports card industry in calendar 1997, reaching a seven-year high across the three sports in which it participated. Net sales of confectionery products, which include Bazooka brand bubble gum, Ring Pop and Push Pop lollipops and other novelty products, decreased 5.9% in 1998 to $84,481,000 from $89,791,000 in 1997. This decrease was the result of lower sales of Bazooka bubble gum in the U.S. and decreased lollipop sales in Europe. Baby Bottle Pop and Flip Pop, which were introduced in the fourth quarter of fiscal 1998, contributed positively to year over year sales. The Company's confectionery business accounted for 35.0% of total 1998 net sales, compared with 33.4% in 1997. - --------------------------------------------- * Unless otherwise indicated, all date references to 1998, 1997 and 1996 refer to the fiscal years ended February 28, 1998, March 1, 1997 and March 2, 1996, respectively. 6 Gross profit as a percentage of net sales decreased to 33.0% in 1998 from 33.5% in 1997. This decrease in gross profit resulted from higher product costs in the U.S. and Ireland. The Company benefited during the year from savings related to the December 1996 closure of the Duryea, Pennsylvania manufacturing facility. The decrease in royalties and other income and expense from $2,728,000 in 1997 to $390,000 in 1998, was in part the result of the termination of the Company's Canadian licensee in March 1997 (due to the Company's decision to conduct business directly in Canada), the recognition of foreign exchange losses in Europe and Latin America and the absence of a one-time benefit from royalties received in 1997 relating to the sale of Mars Attacks products. Selling, general and administrative expenses increased as a percentage of net sales to 32.5% in 1998 from 28.2% in 1997. The increase in 1998 was primarily the result of costs associated with the startup of operations in Latin America, the impact of inflation on other overhead costs and higher promotional spending in the U.S., particularly with respect to sports card autograph programs. 1998 results include $5,929,000 in severance and other non-recurring costs. This charge consists of $3,407,000 related to headcount reductions in the United States and Europe, $1,518,000 related to the closure of the Cork, Ireland manufacturing facility and $1,004,000 of all other costs. 1998 results also include a $2,247,000 benefit from the reversal of the plant closure reserve set up in fiscal 1997. 1997 results included a charge of $30,000,000 relating to the closure of the Duryea, Pennsylvania manufacturing facility and $1,350,000 for the impairment of long-lived assets at the Cork, Ireland factory in compliance with Statement No. 121 of the Financial Accounting Standards Board. The effective tax rate of (26.8)% in 1998 reflected provisions for federal, state and local income taxes in accordance with statutory income tax rates. The lack of a tax benefit was driven primarily by the Company's inability to recognize certain foreign losses for tax purposes. Net loss decreased to $(4,572,000), or $(0.10) per share in 1998 from $(10,943,000), or $(0.23) per share in 1997. Excluding severance and other non-recurring items and the plant-related charges/benefit in both years, net income (loss) would have been $(2,288,000), or $(0.05) per share in 1998 versus $9,493,000, or $0.20 per share in 1997. Fiscal 1997 Versus 1996 In 1997, the Company's net sales increased 1.3% to $268,975,000 from $265,495,000. This was the result of increased sales of collectible picture products which were largely offset by a decrease in sales of confectionery products. Net sales of collectible picture products increased 5.4% from $169,983,000 in 1996 to $179,184,000 in 1997. This increase was due primarily to 12 months of Topps Europe sales in 1997 versus 7 months in 1996. Despite the difficulties experienced by the sports card market and the Company's decision not to renew its NHL license, net sales of sports card products were up slightly. Partially offsetting these increases were decreases in net sales of entertainment cards and comics. Collectible picture products accounted for 66.6% of consolidated net sales of the Company in 1997, versus 64.0% in 1996. Net sales of confectionery products decreased 6.0% in 1997 to $89,791,000 from $95,512,000 in 1996. This decrease was the result of lower sales of Bazooka bubble gum overall, and lollipops outside the U.S. Two relatively new products, Puppy In My Pocket and Topps Baby Wild Animals, contributed positively to net sales. The Company's confectionery business accounted for 33.4% of total 1997 net sales, compared to 36.0% in 1996. Gross profit as a percentage of net sales increased to 33.5% in 1997 from 30.9% in 1996. This increase in gross profit resulted from, among other things, lower card design costs in the U.S., as well as lower direct costs, in general, in both the U.S. and Ireland. In addition, gross profit was positively impacted by the reduction in manufacturing expenses resulting from the fourth-quarter closure of the Company's plant in Duryea, Pennsylvania. Royalties and other income were $2,728,000 in 1997 compared with $3,129,000 in 1996. This decrease resulted primarily from the expiration of a long-term licensing agreement in Argentina and a reduction in certain one-time income 7 items which benefited the Company in 1996. Selling, general and administrative expenses increased as a percentage of net sales to 28.2% in 1997 from 25.8% in 1996. This percentage increase in 1997 was primarily the result of one-time charges relating to the relocation of two Merlin offices in Europe, the reorganization of the U.S. sales force and other increases in compensation expense, as well as costs associated with the start-up of operations in Mexico. Results for 1997 included non-recurring charges of $30,000,000 for the closure of the Duryea, Pennsylvania manufacturing facility and $1,350,000 for the impairment of long-lived assets at the Cork, Ireland factory in compliance with Statement No. 121 of the Financial Accounting Standards Board. The effective tax rate of 33.3% in 1997 reflected provisions for federal, state and local income tax rates in accordance with statutory income tax rates. The effective rate was below the 44.5% tax rate in 1996 as a result of the impact of non-deductible items on the Company's net loss position. Net income (loss) decreased to $(10,943,000), or $(0.23) per share in 1997 from $8,394,000, or $0.18 per share in 1996. Excluding the Duryea, Pennsylvania and Cork, Ireland plant-related charges, net income in 1997 would have been $9,493,000, or $0.20 per share. Quarterly Comparisons Management believes that quarter-to-quarter comparisons of sales and operating results are affected by a number of fluctuating factors, including the timing of product introductions and variations in shipping and factory scheduling requirements. Thus, annual sales and earnings amounts are unlikely to consist of equal quarterly portions. See Note 16 of Notes to Consolidated Financial Statements. Inflation The Company has been subject to price increases for materials, labor, royalty rates, utilities and services, which have been partially offset by effective buying of materials and by adjustment in the contents of finished products and their prices, as competition has permitted. Liquidity and Capital Resources 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. As of February 28, 1998, the Company had outstanding $24,950,000 on the term loan facility, $6,000,000 of revolving credit and $700,000 in standby letters of credit. As of February 28, 1998, the Company was in technical default of this credit agreement. 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 revolver needs. The facility expires 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. 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 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. As of February 28, 1998, the Company had $22,153,000 in cash, and $30,950,000 in debt primarily as a result of the Merlin acquisition. The reduction in accounts receivable, accounts payable and accrued expenses was due to the drop in sales volume. Accrued expenses were also impacted by the payment of liabilities included in the $30,000,000 restructuring reserve. Capital expenditures for fiscal 1998 totaled $1,776,000, the majority of which were related to the expansion of computer systems throughout the Company and investments required to 8 support the manufacture of confectionery products in the U.S. Management believes that, in light of the Company's borrowing capacity, cash on hand as of February 28, 1998 and expected cash flow from operations, the Company has adequate cash to meet its working capital, capital expenditure and loan repayment requirements for the foreseeable future. Year 2000 The Year 2000 issue is the result of computer programs using only two digits to identify a year in the date field. If not corrected, many systems could fail or create erroneous results on January 1, 2000 by reading the date as January 1, 1900. Failure to fix this problem could result in systems failures or miscalculations leading to disruptions in the Company's operations. The Company began work on Year 2000 issues in 1996. Over 92% of the Company's mainframe programs have been reviewed for compliance. Where necessary, programs have been fixed, tested and put into production. The Company is also in the process of addressing the needs of all other systems such as personal computers, customer and vendor systems, telephone systems and other electronic hardware. The Company expects that its essential systems and business functions will be Year 2000 compliant in all material respects in a timely manner. Year 2000 compliance costs have not and are not expected to significantly affect the financial condition or results of operations of the Company. Accounting Changes In the fourth quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share", which established new standards for computing and presenting earnings per share ("EPS"). It replaced the presentation of primary EPS with a presentation of basic EPS and fully diluted EPS. All prior periods' EPS data was restated in accordance with the provisions of this statement. The adoption of this statement did not have a significant impact on the Company's reported earnings (loss) per share. During the past year, other statements have been issued by the Financial Accounting Standards Board which do not currently affect the financial statements and are not expected to have any significant financial effect on future financial statements. 9 Consolidated Statements of Operations =============================================================================== The Topps Company, Inc. and Subsidiaries (In thousands of dollars, except share data)
Year Ended - ----------------------------------------------------------------------------------------------------------------------- February March March 28, 1998 1, 1997 2,1996 (52 Weeks) (52 Weeks) (53 Weeks) - ----------------------------------------------------------------------------------------------------------------------- Net sales $ 241,250 $ 268,975 $ 265,495 - ----------------------------------------------------------------------------------------------------------------------- Cost of sales 161,541 178,854 183,490 - ----------------------------------------------------------------------------------------------------------------------- Gross profit on sales 79,709 90,121 82,005 - ----------------------------------------------------------------------------------------------------------------------- Royalties and other income 390 2,728 3,129 - ----------------------------------------------------------------------------------------------------------------------- 80,099 92,849 85,134 - ----------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 78,437 75,974 68,563 - ----------------------------------------------------------------------------------------------------------------------- Severance and other non-recurring items 5,929 - - - ----------------------------------------------------------------------------------------------------------------------- Plant closure reserve (2,247) 30,000 - - ----------------------------------------------------------------------------------------------------------------------- Impairment loss - 1,350 - - ----------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (2,020) (14,475) 16,571 - ----------------------------------------------------------------------------------------------------------------------- Interest expense, net 1,585 1,942 1,447 - ----------------------------------------------------------------------------------------------------------------------- Income (loss) before provision (benefit) for income taxes (3,605) (16,417) 15,124 - ----------------------------------------------------------------------------------------------------------------------- Provision (benefit) for income taxes 967 (5,474) 6,730 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (4,572) $ (10,943) $ 8,394 - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) per share - basic and diluted $ (0.10) $ (0.23) $ 0.18 - -----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 10 Consolidated Balance Sheets =========================================== The Topps Company, Inc. and Subsidiaries (In thousands of dollars, except share data)
February March 28, 1998 1, 1997 - -------------------------------------------------------------------------------------------------------------- ASSETS - -------------------------------------------------------------------------------------------------------------- Current assets: - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 22,153 $ 24,199 - -------------------------------------------------------------------------------------------------------------- Accounts receivable, less allowance for doubtful accounts of $1,161 (1998) and $1,126 (1997) 49,727 59,776 - -------------------------------------------------------------------------------------------------------------- Inventories 16,613 19,181 - -------------------------------------------------------------------------------------------------------------- Income tax receivable 6,829 2,901 - -------------------------------------------------------------------------------------------------------------- Deferred tax assets 2,792 3,489 - -------------------------------------------------------------------------------------------------------------- Prepaid expenses and other current assets 3,821 9,012 - -------------------------------------------------------------------------------------------------------------- Total current assets 101,935 118,558 - -------------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 10,148 12,900 - -------------------------------------------------------------------------------------------------------------- Intangible assets, net of amortization of $38,075 (1998) and $35,457 (1997) 62,825 65,456 - -------------------------------------------------------------------------------------------------------------- Other assets 3,498 4,264 - -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 178,406 $ 201,178 - -------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------------------------------------- Current liabilities: - -------------------------------------------------------------------------------------------------------------- Accounts payable $ 27,752 $ 35,150 - -------------------------------------------------------------------------------------------------------------- Accrued expenses and other liabilities 43,714 52,701 - -------------------------------------------------------------------------------------------------------------- Income taxes payable 1,165 4,491 - -------------------------------------------------------------------------------------------------------------- Current portion of long-term debt 8,333 7,500 - -------------------------------------------------------------------------------------------------------------- Total current liabilities 80,964 99,842 - -------------------------------------------------------------------------------------------------------------- Long-term debt, less current portion 22,617 27,450 - -------------------------------------------------------------------------------------------------------------- Deferred income taxes 6,864 379 - -------------------------------------------------------------------------------------------------------------- Other liabilities 6,352 5,455 - -------------------------------------------------------------------------------------------------------------- Total liabilities 116,797 133,126 - -------------------------------------------------------------------------------------------------------------- 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 47,502,510 in 1998 and 1997 475 475 - -------------------------------------------------------------------------------------------------------------- Additional paid-in capital 16,812 16,812 - -------------------------------------------------------------------------------------------------------------- Treasury stock, 1,102,500 shares (1998) and 967,500 (1997) (8,881) (8,358) - -------------------------------------------------------------------------------------------------------------- Retained earnings 54,204 58,776 - -------------------------------------------------------------------------------------------------------------- Cumulative adjustment due to foreign currency translation (1,001) 347 - -------------------------------------------------------------------------------------------------------------- Total stockholders' equity 61,609 68,052 - -------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,406 $ 201,178 - --------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 11 Consolidated Statements of Cash Flows ================================================================================ The Topps Company, Inc. and Subsidiaries (In thousands of dollars)
Year Ended - ----------------------------------------------------------------------------------------------------------------------- February March March 28, 1998 1, 1997 2, 1996 (52 Weeks) (52 Weeks) (53 Weeks) - ----------------------------------------------------------------------------------------------------------------------- Cash provided by (used by) operations: - ----------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (4,572) $ (10,943) $ 8,394 - ----------------------------------------------------------------------------------------------------------------------- Add (subtract) non-cash items included in income: - ----------------------------------------------------------------------------------------------------------------------- Plant closure reserve - 30,000 - - ----------------------------------------------------------------------------------------------------------------------- Impairment loss - 1,350 - - ----------------------------------------------------------------------------------------------------------------------- Gain on sale of property, plant and equipment (1,317) - - - ----------------------------------------------------------------------------------------------------------------------- Depreciation and amortization 4,374 5,245 5,562 - ----------------------------------------------------------------------------------------------------------------------- Deferred taxes on income 7,182 (11,705) (912) - ----------------------------------------------------------------------------------------------------------------------- Net effect of changes in: - ----------------------------------------------------------------------------------------------------------------------- Receivables 10,049 (16,419) 1,831 - ----------------------------------------------------------------------------------------------------------------------- Inventories 2,568 8,707 597 - ----------------------------------------------------------------------------------------------------------------------- Income tax receivable (3,928) 107 (2,456) - ----------------------------------------------------------------------------------------------------------------------- Prepaid expenses and other current assets 5,188 2,256 (2,583) - ----------------------------------------------------------------------------------------------------------------------- Other assets 122 880 (1,389) - ----------------------------------------------------------------------------------------------------------------------- Payables and other current liabilities (19,710) 3,319 (5,287) - ----------------------------------------------------------------------------------------------------------------------- Other (18) (90) 392 - ----------------------------------------------------------------------------------------------------------------------- Cash provided by (used by) operations (62) 12,707 4,149 - ----------------------------------------------------------------------------------------------------------------------- Cash provided by (used by) investing activities: - ----------------------------------------------------------------------------------------------------------------------- Proceeds from disposition of property, plant and equipment 4,315 - - - ----------------------------------------------------------------------------------------------------------------------- Additions to property, plant and equipment (1,776) (1,074) (2,147) - ----------------------------------------------------------------------------------------------------------------------- Purchase of Merlin, net of cash acquired - - (39,953) - ----------------------------------------------------------------------------------------------------------------------- Cash provided by (used by) investing activities 2,539 (1,074) (42,100) - ----------------------------------------------------------------------------------------------------------------------- Cash provided by (used by) financing activities: - ----------------------------------------------------------------------------------------------------------------------- Proceeds from borrowing 6,000 - 50,000 - ----------------------------------------------------------------------------------------------------------------------- Reduction of debt (10,000) (9,350) (5,700) - ----------------------------------------------------------------------------------------------------------------------- Exercise of employee stock options - - 20 - ----------------------------------------------------------------------------------------------------------------------- Purchase of treasury stock (523) (2,238) - - ----------------------------------------------------------------------------------------------------------------------- Cash provided by (used by) financing activities (4,523) (11,588) 44,320 - ----------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (2,046) 45 6,369 - ----------------------------------------------------------------------------------------------------------------------- Cash at beginning of year 24,199 24,154 17,785 - ----------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 22,153 $ 24,199 $ 24,154 - ----------------------------------------------------------------------------------------------------------------------- Interest paid $ 3,260 $ 2,605 $ 2,217 - ----------------------------------------------------------------------------------------------------------------------- Income taxes paid $ 3,354 $ 7,811 $ 10,587 - -----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 12 Consolidated Statements of Stockholders' Equity ================================================================================ The Topps Company, Inc. and Subsidiaries (In thousands of dollars)
Cumulative Adjustment Minimum Due to Additional Pension Foreign Common Paid-in Treasury Retained Liability Currency Total Stock Capital Stock Earnings Adjustment Translation - ----------------------------------------------------------------------------------------------------------------------- Balance at February 25, 1995 $ 73,869 $ 475 $ 16,792 $ (6,120) $ 61,325 $ - $ 1,397 - ----------------------------------------------------------------------------------------------------------------------- Exercise of employee stock options 20 - 20 - - - - - ----------------------------------------------------------------------------------------------------------------------- Translation adjustment (323) - - - - - (323) - ----------------------------------------------------------------------------------------------------------------------- Minimum pension liability adjustment (110) - - - - (110) - - ----------------------------------------------------------------------------------------------------------------------- Net income 8,394 - - - 8,394 - - - ----------------------------------------------------------------------------------------------------------------------- Balance at March 2, 1996 81,850 475 16,812 (6,120) 69,719 (110) 1,074 - ----------------------------------------------------------------------------------------------------------------------- Translation adjustment (727) - - - - - (727) - ----------------------------------------------------------------------------------------------------------------------- Purchase of treasury stock (2,238) - - (2,238) - - - - ----------------------------------------------------------------------------------------------------------------------- Minimum pension liability adjustment 110 - - - - 110 - - ----------------------------------------------------------------------------------------------------------------------- Net loss (10,943) - - - (10,943) - - - ----------------------------------------------------------------------------------------------------------------------- Balance at March 1, 1997 68,052 475 16,812 (8,358) 58,776 - 347 - ----------------------------------------------------------------------------------------------------------------------- Translation adjustment (1,348) - - - - - (1,348) - ----------------------------------------------------------------------------------------------------------------------- Purchase of treasury stock (523) - - (523) - - - - ----------------------------------------------------------------------------------------------------------------------- Net loss (4,572) - - - (4,572) - - - ----------------------------------------------------------------------------------------------------------------------- Balance at February 28, 1998 $ 61,609 $ 475 $ 16,812 $ (8,881) $ 54,204 $ - $ (1,001) - -----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 13 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 have fiscal years which end on the Saturday closest to the end of February. Financial results for the fiscal year ended February 28, 1998 reflect a change in Topps Europe's fiscal year end to coincide with 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 cumulative adjustment due to foreign currency translation, a separate component of stockholders' equity. Income and expense items are translated at the average exchange rate for the month. Gains and losses from foreign currency transactions of these subsidiaries are included in net income (loss). For subsidiaries operating in highly inflationary economies, the financial statements are measured using the U.S. dollar as the functional currency. Gains and losses from balance sheet translation adjustments are also included in net income (loss). Derivative Financial Instruments: Derivative financial instruments are used for hedging purposes by the Company in the management of its interest rate and foreign currency exposures. The Company does not hold or issue derivative financial instruments for trading purposes. Accounting Changes: In the fourth quarter of fiscal 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which established new standards for computing and presenting earnings per share (EPS). It replaced the presentation of primary EPS with a presentation of basic EPS and fully diluted EPS. All prior periods' EPS data was restated in accordance with the provisions of this statement. The adoption of this statement did not have a significant impact on the Company's reported earnings (loss) per share. During the past year, other statements have been issued by the Financial Accounting Standards Board which do not currently affect the financial statements and are not expected to have any significant financial effect on future financial statements. 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 with the exception of certain assets. See Note 2. 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. Net Sales: Sales are recorded upon shipment of products. Sales made on a returnable basis are recorded net of provision for estimated returns. These estimates are revised, as necessary, to reflect actual experience and market conditions. 14 Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reporting of assets and liabilities as of the dates of the financial statements and revenues and expenses during the reporting period. These estimates primarily relate to provision for sales returns, allowance for doubtful accounts, inventory obsolescence, restructuring costs and asset valuations. Actual results could differ from these estimates. Reclassifications: Certain items in the prior years' financial statements have been reclassified to conform with the current year's presentation. NOTE 2 - OTHER STATEMENT OF OPERATIONS CHARGES - -------------------------------------------------------------------------------- Fiscal 1998's income (loss) from operations includes a charge of $5,929,000 for severance and other non-recurring items related to a reduction of employees in the United States and Europe, the closure of the manufacturing facility in Cork, Ireland, the closure of the direct marketing business and the additional costs of renegotiating our Credit Agreement. See Note 9. During the third quarter of fiscal 1997, the Company announced that it would discontinue operations at its Duryea, Pennsylvania factory following the expiration of a labor agreement in December 1996. This resulted in the severance of both union and non-union employees and the outsourcing of all production activities previously performed at that location. As a result of the closing, the Company recorded a charge of $30,000,000 before applicable income tax effects. The charge consisted of approximately $16,100,000 in non-cash write-offs relating to the disposition of factory and related equipment and approximately $13,900,000 relating to severance and other employee-related costs, costs to hold and sell the factory and other costs of the closure. In the fourth quarter of fiscal 1998, the Company reversed $2,247,000 of the $30,000,000 reserve to income, as a result of the actual price received for the factory and an excess of reserves. During the third quarter of fiscal 1997, the Company recorded an impairment reserve of $1,350,000 in accordance with SFAS No. 121 with respect to its factory in Cork, Ireland. Excluding these items in both years, net income (loss) from operations for the year ended February 28, 1998 would have been $(2,288,000) or $(0.05) per share, versus $9,493,000 or $0.20 per share for the prior year. NOTE 3 - EARNINGS PER SHARE - -------------------------------------------------------------------------------- In the fourth quarter of fiscal 1998, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share." Basic EPS is computed based upon the weighted average number of shares outstanding. Diluted EPS is computed based upon the same number of shares plus additional shares representing stock distributable under stock based plans computed using the treasury stock method. Because fiscal years ended 1998 and 1997 reflect losses, basic and diluted EPS were calculated using the basic weighted average shares outstanding. For fiscal 1996, there were no dilutive securities outstanding. The following table represents the computation of weighted average shares - diluted:
Year ended - ---------------------- ------------------------------------ February March March 28, 1998 1, 1997 2, 1996 - ----------------------------------------------------------- Weighted average shares outstanding - basic 46,421,301 46,928,369 47,047,251 - ----------------------------------------------------------- Effect of dilutive stock options issued January 1, 1998 12,363 - - - ----------------------------------------------------------- Weighted average shares outstanding - diluted 46,433,664 46,928,369 47,047,251 - -----------------------------------------------------------
All other stock option plans have not been included as they would have had an antidilutive effect. See Note 12. 15
NOTE 4 - INVENTORIES - -------------------------------------------------------------------------------- February March 28, 1998 1, 1997 - -------------------------------------------------------- (In thousands of dollars) Raw materials $ 1,794 $ 6,236 - -------------------------------------------------------- Work in process 1,619 1,874 - -------------------------------------------------------- Finished products 13,200 11,071 - -------------------------------------------------------- Total $ 16,613 $ 19,181 - --------------------------------------------------------
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET - -------------------------------------------------------------------------------- February March 28, 1998 1, 1997 - -------------------------------------------------------- (In thousands of dollars) Land $ 200 $ 200 - -------------------------------------------------------- Buildings and improvements 3,718 6,936 - -------------------------------------------------------- Machinery and equipment 10,633 9,204 - -------------------------------------------------------- Total PP&E 14,551 16,340 - -------------------------------------------------------- Accumulated depreciation (4,403 (3,440) - -------------------------------------------------------- Total PP&E, net $ 10,148 $ 12,900 - --------------------------------------------------------
NOTE 6 - INTANGIBLE ASSETS - -------------------------------------------------------------------------------- February March 28, 1998 1, 1997 - --------------------------------------------------------- (In thousands of dollars) Value of sports, entertainment and proprietary products $ 36,635 $ 36,635 - --------------------------------------------------------- Goodwill 64,265 64,197 - --------------------------------------------------------- Other intangible assets - 81 - --------------------------------------------------------- Less: accumulated amortization (38,075) (35,457) - --------------------------------------------------------- Total $ 62,825 $ 65,456 - ---------------------------------------------------------
NOTE 7 - ACCRUED EXPENSES AND OTHER LIABILITIES - -------------------------------------------------------------------------------- February March 28, 1998 1, 1997 - --------------------------------------------------------- (In thousands of dollars) Royalties $ 12,351 $ 8,488 - --------------------------------------------------------- Employee compensation 346 1,112 - --------------------------------------------------------- Provision for estimated losses on sales returns 19,258 23,239 - --------------------------------------------------------- Plant closure, severance and other non-recurring items 3,260 11,582 - --------------------------------------------------------- Other 8,499 8,280 - --------------------------------------------------------- Total $ 43,714 $ 52,701 - ---------------------------------------------------------
NOTE 8 - DEPRECIATION AND AMORTIZATION - -------------------------------------------------------------------------------- Year Ended - ----------------------------------- ---------------------- February March March 28, 1998 1, 1997 2, 1996 (52 weeks) (52 weeks) (53 weeks) - ---------------------------------------------------------- (In thousands of dollars) Depreciation expense $ 1,099 $ 2,402 $ 3,146 - ---------------------------------------------------------- Amortization of intangible assets 2,618 2,649 2,312 - ---------------------------------------------------------- Amortization - other 657 194 104 - ---------------------------------------------------------- Total $ 4,374 $ 5,245 $ 5,562 - ----------------------------------------------------------
NOTE 9 - LONG-TERM DEBT - -------------------------------------------------------------------------------- February March 28, 1998 1, 1997 - ---------------------------------------------------------- (In thousands of dollars) Term loan $ 24,950 $ 34,950 - ---------------------------------------------------------- Less: current portion (8,333) (7,500) - ---------------------------------------------------------- Revolver outstanding 6,000 - - ---------------------------------------------------------- Total $ 22,617 $ 27,450 - ----------------------------------------------------------
16 The scheduled repayment of the term loan is as follows:
Fiscal Year: (In thousands of dollars) - -------------------------------------------------------------- 1999 $ 8,333 - -------------------------------------------------------------- 2000 11,458 - -------------------------------------------------------------- 2001 5,159 - -------------------------------------------------------------- Total $ 24,950 - --------------------------------------------------------------
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. 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. As of February 28, 1998, the Company was in technical default of this credit agreement. 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 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 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. 17 NOTE 10 - INCOME TAXES - -------------------------------------------------------------------------------- U.S. and foreign operations contributed to income before provision (benefit) for income taxes as follows:
Year Ended - ---------------------------------------------------------------------------------------------------------------------- February March March 28, 1998 1, 1997 2, 1996 (52 weeks) (52 weeks) (53 weeks) - ---------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) United States $ 4,083 $ (21,622) $ 7,689 - ---------------------------------------------------------------------------------------------------------------------- Europe (5,368) 5,492 7,215 - ---------------------------------------------------------------------------------------------------------------------- Canada 737 241 220 - ---------------------------------------------------------------------------------------------------------------------- Latin America (3,057) (528) - - ---------------------------------------------------------------------------------------------------------------------- Total $ (3,605) $ (16,417) $ 15,124 - ----------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes consists of:
Year Ended - ----------------------------------------------------------------------------------------------------------------------- February March March 28, 1998 1, 1997 2, 1996 (52 weeks) (52 weeks) (53 weeks) - ----------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Current income taxes: - ----------------------------------------------------------------------------------------------------------------------- Federal $ (4,657) $ 1,484 $ 2,988 - ----------------------------------------------------------------------------------------------------------------------- Foreign (679) 3,501 3,317 - ----------------------------------------------------------------------------------------------------------------------- State and local (293) 299 899 - ----------------------------------------------------------------------------------------------------------------------- Total current (5,629) 5,284 7,204 - ----------------------------------------------------------------------------------------------------------------------- Deferred income taxes: - ----------------------------------------------------------------------------------------------------------------------- Federal 5,890 (9,289) (171) - ----------------------------------------------------------------------------------------------------------------------- State and local 706 (1,469) (303) - ----------------------------------------------------------------------------------------------------------------------- Total deferred 6,596 (10,758) (474) - ----------------------------------------------------------------------------------------------------------------------- Total income tax expense (benefit) $ 967 $(5,474) $ 6,730 - -----------------------------------------------------------------------------------------------------------------------
18 The reasons for the difference between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate to income before provision (benefit) for income taxes are as follows:
Year Ended - --------------------------------------------------------------------------------------------------------------------- February March March 28, 1998 1, 1997 2, 1996 (52 weeks) (52 weeks) (53 weeks) - --------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Computed expected tax provision (benefit): $ (1,262) $ (5,746) $ 5,293 - --------------------------------------------------------------------------------------------------------------------- Increase (decrease) in taxes resulting from: - --------------------------------------------------------------------------------------------------------------------- State and local taxes, net of federal tax benefit 586 (668) 588 - --------------------------------------------------------------------------------------------------------------------- Foreign and U.S. tax effects attributable to foreign operations 1,113 212 316 - --------------------------------------------------------------------------------------------------------------------- Goodwill and other permanent differences 530 728 533 - --------------------------------------------------------------------------------------------------------------------- $ 967 $ (5,474) $ 6,730 - ---------------------------------------------------------------------------------------------------------------------
The components of deferred income tax assets and liabilities are as follows:
Year Ended - ----------------------------------------------------------------------------------------------------------------------- February March March 28, 1998 1, 1997 2, 1996 (52 weeks) (52 weeks) (53 weeks) - ----------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Deferred income tax assets: - ----------------------------------------------------------------------------------------------------------------------- Provision for estimated losses on sales returns $ 2,792 $ 3,489 $ 2,598 - ----------------------------------------------------------------------------------------------------------------------- Deferred income tax liabilities: Depreciation $ 627 $ 814 $ 4,668 - ----------------------------------------------------------------------------------------------------------------------- Undistributed earnings - foreign subsidiaries 5,303 5,143 4,759 - ----------------------------------------------------------------------------------------------------------------------- Amortization and other 619 (1,617) 1,765 - ----------------------------------------------------------------------------------------------------------------------- Plant closure reserve 315 (3,961) - - --------------------------------------------------------------------------------------------------------------- ------- Total deferred income tax liabilities $ 6,864 $ 379 $ 11,192 - -----------------------------------------------------------------------------------------------------------------------
19 NOTE 11 - EMPLOYEE BENEFIT PLANS - -------------------------------------------------------------------------------- Retirement Plans The Company has a trusteed non-contributory defined benefit retirement plan covering substantially all domestic non-bargaining unit personnel. Plan benefits are based on years of service and the employee's average compensation in the 60 consecutive months which produce the highest average within the last 120 months of employment. The Company funds pension costs in accordance with the funding requirements of the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Plan assets consist of high-quality, marketable fixed income and equity securities. The following table sets forth the retirement plan's funded status as determined by an independent actuary:
February March March 28, 1998 1, 1997 2, 1996 - ---------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Actuarial present value of benefit obligation: Vested $ 13,155 $ 12,288 $ 12,200 - ---------------------------------------------------------------------------------------------------------------------- Non-vested 324 507 500 - ---------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation $ 13,479 $ 12,795 $ 12,700 - ---------------------------------------------------------------------------------------------------------------------- Projected benefit obligation $ 17,200 $ 16,071 $ 16,350 - ---------------------------------------------------------------------------------------------------------------------- Plan assets at market value (14,738) (15,442) (12,050) - ---------------------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess - ---------------------------------------------------------------------------------------------------------------------- of plan assets 2,462 629 4,300 - ---------------------------------------------------------------------------------------------------------------------- Unrecognized net loss (3,914) (2,580) (4,280) - ---------------------------------------------------------------------------------------------------------------------- Unrecognized transition asset 72 96 320 - ---------------------------------------------------------------------------------------------------------------------- Minimum liability - - 310 - ---------------------------------------------------------------------------------------------------------------------- Accrued (prepaid) pension liability $ (1,380) $ (1,855) $ 650 - ---------------------------------------------------------------------------------------------------------------------- Net pension expense included in the following components: - ---------------------------------------------------------------------------------------------------------------------- Service cost - benefits earned during the year $ 636 $ 701 $ 600 - ---------------------------------------------------------------------------------------------------------------------- Interest cost on projected benefit obligation 1,234 1,196 1,150 - ---------------------------------------------------------------------------------------------------------------------- Actual (gain) loss on plan assets (1,295) (1,011) (1,720) - ---------------------------------------------------------------------------------------------------------------------- Net amortization and deferral (51) 77 855 - ---------------------------------------------------------------------------------------------------------------------- Voluntary retirement benefit - (14) - - ---------------------------------------------------------------------------------------------------------------------- Net pension expense $ 524 $ 949 $ 885 - ----------------------------------------------------------------------------------------------------------------------
20 The Company also has defined benefit agreements, which are non-qualified, with certain retirees and the Chairman, Chief Executive Officer and President. The table below sets forth the funded status as determined by an independent actuary:
February March March 28, 1998 1, 1997 2, 1996 - -------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Present value of vested benefit obligation $ 3,063 $ 2,852 $ 3,250 - -------------------------------------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets 3,639 3,553 3,900 - -------------------------------------------------------------------------------------------------------------------- Unrecognized net loss 232 179 (375) - -------------------------------------------------------------------------------------------------------------------- Unrecognized transition obligation (881) (961) (1,040) - -------------------------------------------------------------------------------------------------------------------- Minimum liability - 81 765 - -------------------------------------------------------------------------------------------------------------------- Accrued pension liability 2,990 2,852 3,250 - -------------------------------------------------------------------------------------------------------------------- Net pension expense $ 286 $ 355 $ 380 - --------------------------------------------------------------------------------------------------------------------
February March March 28, 1998 1, 1997 2, 1996 - -------------------------------------------------------------------------------------------------------------------- Principal actuarial assumptions used for measurement of projected benefit obligations were: - -------------------------------------------------------------------------------------------------------------------- Discount rate 7.0% 7.8% 7.5% - -------------------------------------------------------------------------------------------------------------------- Rate of increase in future compensation level 5.0% 5.0% 5.0% - -------------------------------------------------------------------------------------------------------------------- Long-term rate of return on assets 9.0% 9.0% 9.0% - --------------------------------------------------------------------------------------------------------------------
The Company is a participant in a multi-employer defined contribution pension plan covering domestic bargaining unit employees. In addition, the Company sponsors a defined contribution plan, which qualifies under Sections 401(a) and 401(k) of the Internal Revenue Code (the "401(k) Plan"). All non-bargaining unit employees are eligible to participate; participation in the 401(k) Plan is optional. The Company does not contribute to the 401(k) Plan. Pension expense for all plans was $914,000 (1998), $1,922,000 (1997) and $1,889,000 (1996). 21 Post-retirement Health Care Benefit Plan The Company provides certain post-retirement health care benefits for employees who meet minimum age and service requirements. The following tables set forth the plan's status as determined by an independent actuary:
February March March 28, 1998 1, 1997 2, 1996 - --------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Accumulated post-retirement benefit obligation: - --------------------------------------------------------------------------------------------------------------------- Retirees $ 4,223 $ 3,780 $ 3,700 - --------------------------------------------------------------------------------------------------------------------- Active employees 2,016 3,571 3,500 - --------------------------------------------------------------------------------------------------------------------- Total 6,239 7,351 7,200 - --------------------------------------------------------------------------------------------------------------------- Unrecognized net transition obligation (3,658) (3,879) (4,100) - --------------------------------------------------------------------------------------------------------------------- Unrecognized net loss 782 (1,057) (1,292) - --------------------------------------------------------------------------------------------------------------------- Accrued post-retirement obligation $ 3,363 $ 2,415 $ 1,808 - --------------------------------------------------------------------------------------------------------------------- The components of the net periodic post-retirement benefit cost are as follows: - --------------------------------------------------------------------------------------------------------------------- Service cost $ 362 $ 122 $ 170 - --------------------------------------------------------------------------------------------------------------------- Interest cost 579 539 510 - --------------------------------------------------------------------------------------------------------------------- Net amortization and deferral 239 259 220 - --------------------------------------------------------------------------------------------------------------------- Post-retirement benefit expense $ 1,180 $ 920 $ 900 - --------------------------------------------------------------------------------------------------------------------- Actual assumptions used to measure the post- retirement benefit cost are as follows: - --------------------------------------------------------------------------------------------------------------------- Discount rate 7.8% 7.8% 7.5% - --------------------------------------------------------------------------------------------------------------------- Health care trend rate Year end 10.5% 10.5% 10.5% - --------------------------------------------------------------------------------------------------------------------- Decreasing to year 2010 6.0% 6.0% 6.0% - --------------------------------------------------------------------------------------------------------------------- Effects of increasing the health care trend rates by one percentage point in each year are summarized below: - --------------------------------------------------------------------------------------------------------------------- Increase in accumulated post-retirement benefit obligation $ 739 $ 1,225 $ 1,200 - --------------------------------------------------------------------------------------------------------------------- Increase in the aggregate of service cost and interest cost 104 119 140 - ---------------------------------------------------------------------------------------------------------------------
22 NOTE 12 - STOCK OPTION PLANS - -------------------------------------------------------------------------------- Employee Plan On June 26, 1996, the Company's Stockholders ratified the 1996 Stock Option Plan (the "Plan") to replace the expiring 1987 Stock Option Plan. The Plan provides for the granting of non-qualified stock options, incentive stock options and stock appreciation rights (SARs) to employees, non-employee directors and consultants within the meaning of Section 422A of the Internal Revenue Code. Options granted generally vest over two or three years and expire ten years after the grant date. The total number of shares of Common Stock available for issuance is limited to those remaining under the 1987 Stock Option Plan on June 26, 1997, plus as increased annually on the last day of the Company's fiscal year, by an amount equal to 0.70% of the aggregate total number of shares of Common Stock outstanding on the last day of each fiscal year commencing March 1, 1997, and ending with the fiscal year ending February 25, 2001. The following table summarizes information about the Plan:
Available Option for Grant Outstanding Unexercisable Exercisable Price per Share - --------------------------------------------------------------------------------------------------------------------- Balance February 25, 1995 791,636 2,372,062 835,000 1,537,062 $3.850 - $17.625 - --------------------------------------------------------------------------------------------------------------------- Exercisable during year - - (455,666) 455,666 5.313 - 8.000 - --------------------------------------------------------------------------------------------------------------------- Granted (864,000) 864,000 864,000 - 5.000 - 10.250 - --------------------------------------------------------------------------------------------------------------------- Canceled 73,250 (73,250) (32,000) (41,250) 5.313 - 17.625 - --------------------------------------------------------------------------------------------------------------------- Exercised - (5,062) (5,062) 3.850 - --------------------------------------------------------------------------------------------------------------------- Annual increase 352,856 - - - - - --------------------------------------------------------------------------------------------------------------------- Balance March 2, 1996 353,742 3,157,750 1,211,334 1,946,416 4.037 - 17.625 - --------------------------------------------------------------------------------------------------------------------- Exercisable during year - - (464,350) 5.000 - 10.250 - --------------------------------------------------------------------------------------------------------------------- Granted (146,000) 146,000 146,000 - 3.500 - 4.750 - --------------------------------------------------------------------------------------------------------------------- Canceled 63,500 (63,500) (24,000) (39,500) 5.313 - 17.625 - --------------------------------------------------------------------------------------------------------------------- Annual increase 325,749 - - - - - --------------------------------------------------------------------------------------------------------------------- Balance March 1, 1997 596,991 3,240,250 868,984 2,371,266 3.500 - 17.625 - --------------------------------------------------------------------------------------------------------------------- Exercisable during year - - (503,475) 4.750 - 5.000 - --------------------------------------------------------------------------------------------------------------------- Granted (1,386,250) 1,386,250 1,386,250 - 2.219 - 3.438 - --------------------------------------------------------------------------------------------------------------------- Canceled 1,175,500 (1,175,500) (1,175,500) 4.037 - 15.750 - --------------------------------------------------------------------------------------------------------------------- Annual increase 348,000 - - - - --------------------------------------------------------------------------------------------------------------------- Balance February 28, 1998 734,241 3,451,000 1,751,759 1,699,241 $2.219 - $17.625 - ---------------------------------------------------------------------------------------------------------------------
23 Director Plan On June 22, 1994, the Company's stockholders approved the Company's 1994 Non-Employee Director Stock Option Plan (the "Director Plan") to attract and retain the services of qualified people who are neither employees nor officers of the Company as members of the Board of Directors. The Director Plan authorized the grant of non-qualified options up to an aggregate of 490,000 shares of Common Stock. Under this Plan, no options may be granted after June 2003. The following table summarizes information abount the Director Plan:
Available Option Description for Grant Outstanding Unexercisable Exercisable Price per Share - ----------------------------------------------------------------------------------------------------------------- Plan as adopted 490,000 - - - - - ----------------------------------------------------------------------------------------------------------------- Granted (49,000) 49,000 49,000 - $7.125 - ----------------------------------------------------------------------------------------------------------------- Balance February 25, 1995 441,000 49,000 49,000 - 7.125 - ----------------------------------------------------------------------------------------------------------------- Granted (42,000) 42,000 42,000 - 6.375 - ----------------------------------------------------------------------------------------------------------------- Exercisable - - (49,000) 49,000 7.125 - ----------------------------------------------------------------------------------------------------------------- Canceled 7,000 (7,000) - (7,000) 7.125 - ----------------------------------------------------------------------------------------------------------------- Balance March 2, 1996 406,000 84,000 42,000 42,000 6.375 - 7.125 - ----------------------------------------------------------------------------------------------------------------- Granted (42,000) 42,000 42,000 - 5.250 - ----------------------------------------------------------------------------------------------------------------- Exercisable - - (42,000) 42,000 6.375 - ----------------------------------------------------------------------------------------------------------------- Canceled 14,000 (14,000) - (14,000) 6.375 - 7.125 - ----------------------------------------------------------------------------------------------------------------- Balance March 1, 1997 378,000 112,000 42,000 70,000 5.250 - 7.125 - ----------------------------------------------------------------------------------------------------------------- Granted (42,000) 42,000 42,000 - 3.625 - ----------------------------------------------------------------------------------------------------------------- Exercisable - - (42,000) 42,000 5.250 - ----------------------------------------------------------------------------------------------------------------- Balance February 28, 1998 336,000 154,000 42,000 112,000 $3.625 - $7.125 - -----------------------------------------------------------------------------------------------------------------
Effective March 3, 1996, the Company adopted 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. The average fair value of options granted during 1998, 1997 and 1996 was $1.43, $2.05 and $2.55, respectively. The fair value was estimated using the Black-Scholes option pricing model based on the following assumptions for fiscal 1998, 1997 and 1996: risk free interest rate of 6.7%, expected life of six years, estimated volatility of 52%, with no dividend yield. Had compensation costs been determined under the provisions of SFAS No. 123, the pro forma net income and earnings per share would have been as follows:
1998 1997 1996 - ------------------------------------------------------------------------------- - ----------------------------------------------- (In thousands of dollars, except share data) As reported Pro forma As reported Pro forma As reported Pro forma - --------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (4,572) $ (5,297) $ (10,943) $ (11,637) $ 8,394 $ 8,045 - --------------------------------------------------------------------------------------------------------------------------------- Earnings (loss) per share $ (0.10) $ (0.11) $ (0.23) $ (0.25) $ 0.18 $ 0.17 - ---------------------------------------------------------------------------------------------------------------------------------
24 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 connection with an advisory agreement entered into between the Company and Creative Artists Agency, Inc. ("CAA"), which was terminated on November 30, 1995, options to acquire 866,667 shares of Common Stock at an exercise price of $8.00 per share were issued to CAA. These fully vested options will expire on April 1, 2003. During fiscal 1998 and 1997 the Company purchased 135,000 shares of its Common Stock for $523,000 and 512,000 shares for $2,238,000, respectively. NOTE 14 - GEOGRAPHIC AREA INFORMATION - -------------------------------------------------------------------------------- Net sales to unaffiliated customers and income from operations, as presented below, are based on the locations of the ultimate customer. Income from operations is defined as total net sales less operating expenses, depreciation and amortization. Identifiable assets, as presented below, are those assets located in each geographic area.
Year Ended - -------------------------------------------------------------------- -------------------------------------------------- February March March 28, 1998 1, 1997 2, 1996 (52 weeks) (52 weeks) (53 weeks) - ----------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Net sales United States $ 157,208 $ 178,883 $ 188,818 - ----------------------------------------------------------------------------------------------------------------------- Europe 64,599 77,955 62,161 - ----------------------------------------------------------------------------------------------------------------------- Other 19,443 12,137 14,516 - ----------------------------------------------------------------------------------------------------------------------- $ 241,250 $ 268,975 $ 265,495 - ----------------------------------------------------------------------------------------------------------------------- Income from operations United States $ 5,566 $ (19,204) $ 9,070 - ----------------------------------------------------------------------------------------------------------------------- Europe (6,215) 5,187 6,606 - ----------------------------------------------------------------------------------------------------------------------- Other (1,371) (458) 895 - ----------------------------------------------------------------------------------------------------------------------- $ (2,020) $ (14,475) $ 16,571 - ----------------------------------------------------------------------------------------------------------------------- Identifiable assets United States $ 126,498 $ 140,643 $ 163,145 - ----------------------------------------------------------------------------------------------------------------------- Europe 43,972 55,630 51,616 - ----------------------------------------------------------------------------------------------------------------------- Other 7,936 4,905 2,366 - ----------------------------------------------------------------------------------------------------------------------- $ 178,406 $ 201,178 $ 217,127 - -----------------------------------------------------------------------------------------------------------------------
25 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 28, 1998. As considerable judgment is inherent in the development of these estimates, they are not necessarily indicative of the amounts that the Company could realize in the current market exchange. The recorded amounts and fair values are as follows:
February 28, 1998 March 1, 1997 - -------------------------------------------------------------------------------------- ----------------------------- Recorded Fair Recorded Fair Amount Value Amount Value - -------------------------------------------------------------------------------------------------------------------- (In thousands of dollars) Assets: - -------------------------------------------------------------------------------------------------------------------- Cash and equivalents $ 22,153 $ 22,153 $ 24,199 $ 24,199 - -------------------------------------------------------------------------------------------------------------------- Prepaid expenses 3,821 3,821 9,012 8,549 - -------------------------------------------------------------------------------------------------------------------- Liabilities: - -------------------------------------------------------------------------------------------------------------------- Current portion of long-term debt 8,333 8,333 7,500 7,500 - -------------------------------------------------------------------------------------------------------------------- Long-term debt 22,617 22,617 27,450 27,450 - -------------------------------------------------------------------------------------------------------------------- Foreign currency forward contracts - 1,959 - 755 - -------------------------------------------------------------------------------------------------------------------- Interest rate swap contracts $ - $ (16) $ - $ (37) - --------------------------------------------------------------------------------------------------------------------
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) - --------------------------------------------------------------------------------
1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- 1st 2nd 3rd 4th 1st 2nd 3rd 4th - -------------------------------------------------------------------------------------------------------------------------------- (In thousands of dollars, except share data) Net sales $ 60,177 $ 55,118 $ 54,173 $ 71,782 $ 79,261 $ 55,025 $ 62,491 $ 72,198 - -------------------------------------------------------------------------------------------------------------------------------- Gross profit on sales 22,463 17,625 11,649 27,972 26,174 20,328 20,755 22,864 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from operations 2,011 (2,934) (10,005) 8,908 7,363 2,768 (28,117) 3,511 - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) 822 (1,763) (8,538) 4,907 3,740 1,227 (18,498) 2,588 - -------------------------------------------------------------------------------------------------------------------------------- Net income (loss) per share - basic and diluted $ 0.02 $ (0.04) $ (0.18) $ 0.11 $ 0.08 $ 0.03 $ (0.39) $ 0.06 - --------------------------------------------------------------------------------------------------------------------------------
26 NOTE 17 - COMMITMENTS AND OTHER MATTERS - -------------------------------------------------------------------------------- Future minimum payments under non-cancelable leases which extend into the calendar year 2010 are $1,614,000 (1999), $1,649,000 (2000) $1,558,000 (2001), $1,399,000 (2002) and $8,330,000 thereafter. Future minimum payments required under the Company's existing sports contracts, with various expiration dates extending into calendar year 2001 are estimated to be $16,090,000 (1999), $9,983,000 (2000) and $7,600,000 (2001). Total royalty expense under the Company's sports and entertainment licensing contracts was $33,662,000 (1998), $37,960,000 (1997) and $34,614,000 (1996). Advertising expenses included in selling, general and administrative expenses amounted to $13,240,000 (1998), $13,573,000 (1997) and $13,488,000 (1996). Two of the Company's subsidiaries, Topps Ireland and Topps Europe, transact business in many countries, utilizing many different currencies. They are thus exposed to the effect of exchange rate fluctuations on sales and purchase transactions denominated in currencies other than their functional currency. These subsidiaries enter 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 their cash flow. Such contracts are entered into primarily to hedge against future commitments. The Company does not engage in foreign currency speculation. Gains and losses on these hedging instruments that are designated and effective as hedges 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, the risk of incurring such losses is remote as the contracts are entered into with major financial institutions. At February 28, 1998, the Company had outstanding foreign currency forward sales and purchase contracts with banks in the amounts of $8,238,000 and $13,161,000, respectively, as compared to $9,174,000 and $15,389,000, as of March 1, 1997. These contracts have various maturity dates ranging up to twelve months from February 28, 1998, with over 74% of the contracts maturing within six months. The recognition of net losses, which amounted to $92,000 using spot rates as of year end, is deferred until the period of the hedge transaction. In addition, the Company also had options to purchase foreign currencies outstanding in the amount of $3,178,000 as of February 28, 1998. Legal proceedings: In August 1996, the Company was named a defendant in a class action in the United States 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 attorney's 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 has opposed the motion and, by Memorandum 27 and Order Dated April 28, 1998, the Court denied plaintiffs' motion in all respects. 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 will not have a material adverse effect on the Company's financial condition or results of operations. 28 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 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. 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 28, 1998 and March 1, 1997 and the results of their operations and cash flows for each of the three years in the period ended February 28, 1998 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, during the year ended March 1, 1997, the Company changed its method of accounting for impairment of long-lived assets as required by Statement of Financial Accounting Standards No. 121. DELOITTE & TOUCHE LLP New York, New York April 3, 1998 May 11,1998, as per Note 9. 29 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 9, 1998, there were approximately 5,559 holders of record.
Fiscal year ended Fiscal year ended February 28, 1998 March 1, 1997 - -------------------------------------------------------------------------------------------------------------------- High Price Low Price High Price Low Price - -------------------------------------------------------------------------------------------------------------------- First quarter $ 4.313 $ 3.438 $ 6.625 $ 4.6875 - -------------------------------------------------------------------------------------------------------------------- Second quarter 4.188 3.250 6.500 4.625 - -------------------------------------------------------------------------------------------------------------------- Third quarter 3.563 2.375 5.000 3.125 - -------------------------------------------------------------------------------------------------------------------- Fourth quarter $ 3.000 $ 1.500 $ 5.000 $ 3.500 - --------------------------------------------------------------------------------------------------------------------
The Company's Credit Agreement currently prohibits the payment of dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and "Notes to Consolidated Financial Statements - Note 9." 30 Selected Consolidated Financial Data ================================================================================
1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------- (In thousands of dollars, except share data) OPERATING DATA: Net sales $ 241,250 $ 268,975 $ 265,495 $ 265,386 $ 268,047 - -------------------------------------------------------------------------------------------------------------------- Gross profit on sales 79,709 90,121 82,005 83,217 94,488 - -------------------------------------------------------------------------------------------------------------------- Selling, general and administrative expenses 78,437 75,974 68,563 59,250 51,876 - -------------------------------------------------------------------------------------------------------------------- Income (loss) from operations (2,020) (14,475) 16,571 26,924 45,930 - -------------------------------------------------------------------------------------------------------------------- Interest income (expense), net (1,585) (1,942) (1,447) 461 157 - -------------------------------------------------------------------------------------------------------------------- Net income (loss) (4,572) (10,943) 8,394 15,747 26,592 - -------------------------------------------------------------------------------------------------------------------- Per share: Income (loss) from operations (0.04) (0.31) 0.35 0.57 0.98 - -------------------------------------------------------------------------------------------------------------------- Net income (loss) (0.10) (0.23) 0.18 0.33 0.57 - -------------------------------------------------------------------------------------------------------------------- Cash dividends $ - $ - $ - $ 0.21 $ 0.28 - -------------------------------------------------------------------------------------------------------------------- Weighted average shares outstanding 46,421,301 46,928,369 47,047,251 47,039,287 47,030,902 - -------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Cash and equivalents $ 22,153 $ 24,199 $ 24,154 $ 17,785 $ 27,737 - -------------------------------------------------------------------------------------------------------------------- Working capital 20,971 18,716 31,278 30,917 23,624 - -------------------------------------------------------------------------------------------------------------------- Net property, plant and equipment 10,148 12,900 31,610 31,964 29,479 - -------------------------------------------------------------------------------------------------------------------- Long-term debt, less current portion 22,617 27,450 37,500 - - - -------------------------------------------------------------------------------------------------------------------- Total assets 178,406 201,178 217,127 136,324 141,677 - -------------------------------------------------------------------------------------------------------------------- Stockholders' equity $ 61,609 $ 68,052 $ 81,850 $ 73,869 $ 66,955 - --------------------------------------------------------------------------------------------------------------------
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. 31 BOARD OF DIRECTORS ================================================================================ Arthur T. Shorin Seymour P. Berger Chairman, Chief Executive Business Consultant Officer and President Allan A. Feder * Stephen D. Greenberg Independent Business President Consultant, President and Classic Sports Network, Inc. Chief Executive Officer, Vitarroz Corporation Wm. Brian Little David Mauer * Private Investor Chief Executive Officer Riddell Sports, Inc. Jack H. Nusbaum * Stanley Tulchin Senior Partner and Chairman Chairman Wilkie Farr & Gallagher Stanley Tulchin Associates, Inc. *Nominated to stand for re-election to the Company's Board of Directors at the 1998 Annual Meeting of Stockholders. OFFICERS ================================================================================ Arthur T. Shorin Michael P. Clancy Chairman, Chief Executive Vice President, Managing Officer and President Director - Topps Ireland, Co-Managing Director - Topps Europe Ronald L. Boyum Michael J. Drewniak Vice President - Marketing Vice President - and Sales Manufacturing Edward P. Camp Ira Freidman William G. O'Connor Vice President, President - Vice President - Publishing Vice President - Hobby Division and New Product Development Administration Leon J. Gutmann Catherine K. Jessup Assistant Treasurer and Vice President - Chief Assistant Secretary Financial Officer John Perillo Scott Silverstein Vice President - Operations Vice President - Business Affairs, General Counsel SUBSIDIARIES =============================================================================== Topps Argentina S.A. Topps Canada, Inc. Topps Ireland, Limited Managing Director - Managing Director - Managing Director - Juan P. Georgalos Kevin J. Crux Michael P. Clancy Topps Brasil, Ltda. Topps Europe, Limited Topps Italia SRL Managing Director - Jeroen Co-Managing Directors - Managing Director - Servaes Christopher Rodman Furio Cicogna Michael P. Clancy Topps Mexico S.A. DE C.V. Managing Director - Enrique Sherwell STOCKHOLDER AND OTHER INFORMATION ================================================================================ Annual Meeting Corporate Counsel Tuesday, June 30, 1998, 10:30 A.M. Willkie Farr & Gallagher Chase Manhattan Bank 787 Seventh Avenue 1 Chase Manhattan Plaza New York, New York 10019 New York, New York 10081 Registrar and Transfer Agent Chemical Mellon Shareholder Service, LLC 85 Challenger Road Ridgefield Park, NJ 07660 (800)851-9677 Form 10-K -- A copy of the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission will be available to stockholders of record upon written request to the Assistant Treasurer. - -------------------------------------------------------------------------------- 32 EX-21 8 EXHIBIT 21 EXHIBIT 21 SIGNIFICANT SUBSIDIARIES OF THE COMPANY (100% WHOLLY-OWNED) NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION Topps Ireland Limited Ireland Topps Europe Limited United Kingdom EX-23 9 EXHIBIT 23 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statement No. 33-17094, 33-59625 and 33-26873 of The Topps Company, Inc. on Form S-8 of our report dated April 3, 1998 and May 11, 1998 appearing in this Annual Report on Form 10-K of The Topps Company Inc. for the year ended February 28, 1998. DELOITTE & TOUCHE LLP New York, New York April 3 & May 11, 1998 EX-27 10 FDS --
5 (Replace this text with the legend) 0000812076 EX-27 1,000 other FEB-28-1998 MAR-02-1997 FEB-28-1998 22,153 0 49,727 1,161 16,613 101,935 14,551 4,403 178,406 80,964 30,950 0 0 475 61,134 178,406 241,250 242,667 161,541 243,660 0 671 2,612 (3,605) 967 (4,572) 0 0 0 (4,572) (.10) (.10)
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