POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FOTOBALL USA, INC.
(Name of small business issuer in its charter)
Delaware 3050 33-0614889
(State or (Primary Standard (I.R.S.
jurisdiction of Industrial Classification Employer
incorporation or Code Number) Identification No.)
organization)
3738 Ruffin Road
San Diego, California 92123
(619) 467-9900
(Address and telephone number, of
registrant's principal executive offices
and principal place of business)
______________
MICHAEL FAVISH
President and
Chief Executive Officer
Fotoball USA, Inc.
3738 Ruffin Road
San Diego, California 92123
(619) 467-9900
(Name, address and telephone number
of agent for service)
___________
Copies to:
CHARLES I. WEISSMAN, ESQ.
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue, 20th Floor
New York, New York 10022
(212) 758-9500
Telecopier No.: (212) 758-9526
___________
Approximate date of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
<PAGE>
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states
that this Registration Statement shall become effective in accordance
with Section 8(a) of the Securities Act of 1933 or until the
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed
with the Securities and Exchange Commission. These securities may not
be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to buy nor
shall there be any sale of these securities in any State in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS
Subject to completion, dated June 18, 1996
1,411,673 Shares of Common Stock
FOTOBALL USA, INC.
The securities offered hereby (the "Offering") are being sold by
Fotoball USA, Inc., a Delaware corporation (the "Company"), and
consist of 1,411,673 shares of common stock, par value $.01 per share
("Common Stock"), issuable upon exercise of outstanding Redeemable
Common Stock Purchase Warrants (the "Warrants") of the Company issued
in connection with the Company's 1994 initial public offering (the
"Initial Public Offering"). Each Warrant entitles the holder to
purchase one share of Common Stock for $6.50, subject to adjustment in
certain circumstances, during the four-year period commencing August
11, 1995. The Company may call the Warrants for redemption, at a price
of $.01 per Warrant, at any time after they become exercisable on not
less than 30 days' prior written notice to the warrantholders, if the
last sale price of the Common Stock has been at least $9.75 per share
for the 20 consecutive trading days ending on the third day prior to
the date on which the notice of redemption is given. See "Description
of Securities."
The Common Stock and Warrants are quoted on the Nasdaq SmallCap Market
under the symbols "FUSA" and "FUSAW," respectively. On June 10, 1996,
the closing bid price was $9.38 per share of Common Stock and $3.38
per Warrant.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" LOCATED ON PAGES 6-13 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus also covers 7,917 Warrants and 7,267 shares of
Common Stock which are being offered hereby for the respective
accounts of the Selling Stockholders named herein. The Company will
not receive any proceeds from the sale of these securities. See
"Selling Stockholders."
The date of this Prospectus is June __, 1996
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more
detailed information (including the financial statements and the notes
thereto) appearing elsewhere in this Prospectus. Each prospective
investor is urged to read this Prospectus in its entirety. Unless
otherwise indicated, the information included in this Prospectus
assumes no exercise of the Underwriters' purchase option (the
"Purchase Option") issued in connection with the Initial Public
Offering. See "Shares Eligible for Future Sale."
The Company
Fotoball USA, Inc., a Delaware corporation (the "Company"), designs,
develops, manufactures and markets custom sports
and non-sports related products for promotional programs.
Additionally, the Company designs and manufactures custom sports
products which are sold in the licensed product retail market through
independent manufacturers' representatives and directly to the
customer. The Company currently holds licenses with Major League
Baseball, the Major League Baseball Players Association, the National
Association of Professional Baseball Leagues, Inc. (representing
professional minor league baseball; collectively, "Professional
Baseball") and over sixty (60) colleges and universities ("Colleges").
The Company is in the process of renewing its licenses with the
National Football League Properties, Inc. ("NFL"). Pursuant to these
licenses, the Company has the right to use, for commercial purposes,
the names and logos of sports leagues, teams, colleges and
universities and the likenesses of certain sports figures.
The Company's products include: (i) baseballs: synthetic leather,
official size and weight baseballs licensed by Colleges and
Professional Baseball, featuring players' images, statistics and/or
school, team and league logos; (ii) footballs: synthetic leather,
miniature footballs licensed by the NFL and Colleges, featuring helmet
logos and shields of NFL teams, NFL Quarterback Club(r) players'
images, statistics and/or NFL team and league logos, and College logos
and/or mascots; (iii) basketballs: synthetic leather, miniature
basketballs licensed by Colleges, featuring College logos and/or
mascots; and (iv) custom-designed products including toy cars based
upon characters featured in Chevron's national advertising
campaign.
The Company's business is segregated into two distinct market
segments: the promotional product business, in which the Company sells
custom products directly to customers, and the licensed product retail
market, in which the Company sells directly to mass merchants and
through independent representatives to the retail marketplace.
The Company's promotions customers, which are large corporations such
as Chevron, Shell, Coca-Cola, Burger King and McDonalds, purchase the
Company's products for use in promotional campaigns and in connection
with their sponsorship of professional sports teams. In 1995, 40% of
the Company's sales was derived from sales to promotions customers
(with 26% of the Company's sales derived from contracts for the sale
of promotional products to Burger King Corporation) as compared to 74%
in 1994 (with 34% of the Company's sales derived from contracts for
-2-<PAGE>
the sale of promotional products to Chevron). The Company provides its
promotions customers with a wide range of design, product development
and manufacturing services. These services include assisting customers
in the negotiation of corporate sponsorships with professional sports
teams and their associations, in designing and developing promotions
and in procuring product licenses and authorizations. The Company is
responsible for all phases of production, including creative design,
manufacturing, quality control, packaging and shipping.
At the retail level, the Company's account base has increased to over
1,100 retailers, including selected department stores and mass
merchants (such as Kmart, Wal-Mart, J.C. Penney, Sears, Pro Image and
Sports Authority), theme parks (including Disney World(r),
Disneyland(r), Sea World(r), Hershey Park(r) and Six Flags(r)),
airport and hotel concessionaires (including Paradise, Duty Free
Shops, Host Marriot and the Del-Star Group), various licensed sports
specialty and sporting goods chains, various consumer catalogs and
Professional Baseball stadiums (including 22 Major League Baseball
stadiums and 95 professional minor league baseball stadiums).
Fotoball USA, Inc., a California corporation and the predecessor to
the Company ("Fotoball California"), was incorporated under the laws
of the State of California on December 13, 1988. The Company was
incorporated under the laws of the State of Delaware on April 27,
1994, for the purpose of merging and continuing the business of
Fotoball California. On July 29, 1994, Fotoball California merged with
and into the Company, with the Company being the surviving
corporation. The Company's office is located at 3738 Ruffin Road, San
Diego, California 92123 and its telephone number is (619) 467-9900.
Recent Developments
In November 1995, the Company entered into an agreement with Chevron
to design, manufacture and distribute toy cars based upon Chevron's
"claymation" Car Characters national advertising campaign. The
agreement specified a minimum order aggregating approximately
$9,100,000. Subsequently, in April 1996, the Company agreed with
Chevron to lower the minimum order quantity and, in consideration of
this reduction, Chevron agreed to pay an additional $.12 per toy car,
resulting in aggregate sales of $7,200,000. Chevron may, at its
option, increase the total quantity ordered beyond the revised unit
guarantee prior to completion of manufacturing. Additionally, the
Company and Chevron entered into a letter agreement authorizing the
Company to proceed with the engineering, design and production of a
new toy car model to be used in a possible Christmas 1996 promotion.
Chevron agreed to reimburse the Company for the total model costs if
Chevron does not enter into an agreement to purchase toy cars from the
Company during the Christmas 1996 promotion.
In March 1996, the Company entered into an agreement with Burger King
to produce baseballs for a national promotion being held in four of
Burger King's United States geographic regions. This contract will
generate revenues in excess of $3,600,000, of which $664,000 was
recognized during the first quarter of 1996 and the remaining
$2,879,000 will be recognized during the second quarter of 1996. The
-3-<PAGE>
Company's backlog of orders totals $7,200,000 at May 31, 1996. The
current backlog represents the toy car promotion previously noted. See
"Backlog." The Company also recently announced the introduction of a new
National Association of Stock Car ("NASCAR") product and the reintroduction
of its trademarked Fotopuck product. See "Products."
The Offering
Securities Offered
by the Company 1,411,673 shares of Common Stock issuable
upon exercise of outstanding Warrants.
Each Warrant is exercisable to purchase
one share of Common Stock for $6.50 during
the four-year period commencing August 11,
1995. The Company may redeem the Warrants at
a price of $.01 per Warrant at any time
after they become exercisable upon not less
than 30 days' prior written notice to the
warrantholders, if the last sale price of
the Common Stock has been at least $9.75
per share for the 20 consecutive trading
days ending on the third day prior to the
date on which the notice of redemption is
given. See "Description of Securities."
Common Stock Outstanding
as of May 31, 1996 2,661,742 shares
Common Stock Issuable upon
Exercise of Warrants(1)(2) 1,411,673 shares
Nasdaq Symbols Common Stock: FUSA
Warrants: FUSAW
Boston Stock Exchange Symbols Common Stock: FBL
Warrants: FBLW
(1)Does not include (i) 258,000 shares of Common Stock reserved for
issuance upon exercise of outstanding stock options granted under the
Company's 1994 Stock Option Plan (the "Option Plan"), (ii) 117,000
shares of Common Stock reserved for issuance upon exercise of stock
options which may be granted under the Option Plan and (iii) 110,000
shares reserved for issuance upon exercise of outstanding stock
options granted outside of the Option Plan. See "Management -- Option Plan"
and "Description of Securities".
(2)Does not include 110,000 shares of Common Stock reserved for
issuance upon exercise of the Warrants included in the Purchase Option
granted to Gaines, Berland Inc. (the "Representative") in connection
with its services as the representative of the underwriters in the
Initial Public Offering. See "Description of Securities -- Warrants."
-4-<PAGE>
Estimated Net Proceeds; Use of Proceeds
If all of the holders of outstanding Warrants, including Warrants held
for the respective accounts of the Selling Stockholders named herein,
elect to exercise their Warrants after they become exercisable, the
estimated net proceeds to the Company would be approximately
$8,758,840 (including expenses of the Offering estimated to be
approximately $50,000 and assuming payment to the Representative of a
4% commission in connection with the solicitation of the exercise of
the Warrants). The Company intends to apply the net proceeds received
by the Company from the Offering for working capital and general
corporate purposes. See "Use of Proceeds" and "Shares Eligible for
Future Sale."
Risk Factors
The purchase of the securities offered hereby is speculative and
involves a high degree of risk. See "Risk Factors."
Summary Financial Information
The summary financial information for the Company set forth below
should be read in conjunction with the more detailed financial
statements included elsewhere in this Prospectus, including the notes
thereto.
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
_____________________________ ___________________________
1994 1995 1995 1996
____________ ____________ ____________ ____________
Statement of Operations Data: (Unaudited)
<S> <C> <C> <C> <C>
Sales $ 7,335,671 $ 7,754,309 $ 957,293 $ 2,401,656
Cost of Sales 3,671,926 4,302,644 567,875 1,404,863
Operating Income (Loss) 327,313 <F1> (158,492) (298,174) 7,149
Income (Loss) Before Income Tax (385,926)<F2> 32,966 (237,152) 41,639
Income Tax Expense (Benefit) (233,200) 31,800 (94,400) 16,700
Net Income (Loss) (152,726) 1,166 (142,752) 24,939
Net Income (Loss) per Common Share (.09) NIL (.05) .01
Weighted Average Number of Shares 1,719,989 2,661,742 2,661,742 2,691,676
</TABLE>
-5-<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 March 31, 1996
___________________________ ___________________________
As As
Actual Adjusted<F3> Actual Adjusted<F3>
____________ ____________ ____________ ____________
Balance Sheet Data:
<S> <C> <C> <C> <C>
Working Capital $ 5,413,387 $14,172,227 $ 5,453,218 $14,212,058
Total Assets 7,809,393 16,568,233 9,040,703 17,799,543
Total Liabilities 1,051,855 1,051,855 2,251,850 2,251,850
Stockholders' Equity 6,757,538 15,516,378 6,788,853 15,547,693
<FN>
<F1> Gives effect to the non-recurring recapitalization cost of
$241,293. Absent such cost, operating income would have been $568,606.
<F2> Gives effect to the non-recurring costs of the Company's bridge
financing of $660,522. Absent such fees and the recapitalization cost
set forth above, Income (Loss) Before Income Tax would have been
$515,889.
<F3> Gives effect to the assumed exercise of the Warrants into
1,411,673 shares of Common Stock, on such date and the estimated net
proceeds to the Company therefrom. See "Use of Proceeds" and "Description of
Securities."
</FN>
</TABLE>
RISK FACTORS
The purchase of the shares of Common Stock offered hereby is
speculative and involves a high degree of risk, including the risk
factors described below. Each prospective investor should carefully
consider the following risk factors inherent in and affecting the
business of the Company before making a decision to purchase the
securities being offered hereby.
Dependence Upon Licensing Arrangements
The Company's business is based primarily upon its use of the
insignia, logos, names, colors, likenesses and other identifying marks
and images on many of its products pursuant to license arrangements
with Professional Baseball, the NFL and, to a lesser extent, Colleges.
The Company's licensing arrangements expire at various times through
February 15, 1997. The Company is in the process of renewing its
licenses with the NFL and, although the Company believes that the NFL
-6-<PAGE>
licenses will be renewed in terms consistent with its past licenses,
there can be no assurance that its licenses with the NFL will be
renewed upon acceptable terms. The Company may acquire other licenses
for new product lines; however, there can be no assurance that the
Company will be successful in obtaining new licenses. The non-renewal
or termination of one or more of the Company's material licenses,
particularly with Professional Baseball or the NFL, could have a
material adverse effect on the Company's business. See "Business --
License Agreements" and "-- Competition and Technological Change."
Dependence on Promotions Business
The Company's promotions business depends primarily upon a series of
one-time projects with its customers. Although the Company has had
repeat business from certain promotions customers, there can be no
assurance that the Company will be able to continue its relationships
with its promotions customers or attract new promotions customers to
generate enough revenues to operate profitably. During the year ended
December 31, 1995, 40% of the Company's sales was derived from sales
of the Company's products to 189 customers, of which Burger King
accounted for aggregate sales of $2,015,000 or 26% of sales. During
the year ended December 31, 1994, 74% of the Company's sales were
derived from promotions, of which Chevron accounted for aggregate
sales of $2,495,000 or 34% of total sales, and two other customers
accounted for aggregate sales of $622,000 or 8% of sales and $639,000
or 9% of sales, respectively. Chevron and Burger King will continue
to account for a significant percentage of sales in 1996 due to the
toy car and national baseball promotions previously noted. See
"Recent Developments," "Business -- General" and "-- Business
Strategy."
Dependence Upon Key Personnel
The success of the Company is largely dependent on the personal
efforts of Michael Favish, its President and Chief Executive Officer,
and Fred Ostern, its Vice President of Marketing. Mr. Favish has
entered into a five-year employment agreement with the Company,
commencing on August 11, 1994, which, among other things, precludes
Mr. Favish from competing with the Company for a period of two years
following termination of his employment with the Company. The loss of
the services of Mr. Favish would have a material adverse effect on the
Company's business and prospects. The Company maintains "key man" life
insurance on the life of Michael Favish in the amount of $1,000,000.
Mr. Ostern has entered into a three-year employment agreement with the
Company, commencing on January 1, 1996, which, among other things,
precludes Mr. Ostern from competing with the Company for a period of
one year following termination of his employment with the Company. The
loss of the services of Mr. Ostern would have a material adverse
effect on the Company's business and prospects. See "Management --
Employment Contracts and Termination of Employment and Change-in-
Control Arrangements."
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Seasonality; Concentration of Business; Major League Baseball Strike
During the year ended December 31, 1995, 75% of the Company's sales
was derived from baseball-related products and 72% of the Company's
sales was recorded during the third (46%) and fourth (26%) quarters.
During the year ended December 31, 1994, 85% of the Company's sales
was derived from baseball-related products and 86% of the Company's
sales was recorded during the first (19%) and second (67%) quarters.
Sales during the third and fourth quarters of 1994 were adversely
impacted due to the Major League Baseball ("MLB") strike, as discussed
below.
The Company is susceptible to circumstances affecting professional
sports leagues or teams, such as player strikes and owner lockouts.
On August 12, 1994, the Major League Baseball Players Association (the
"MLBPA") went on strike citing differences with team owners regarding
compensation. On April 2, 1995, the MLBPA ended their strike and
agreed to return to MLB teams without having signed a collective
bargaining agreement ("CBA") with team owners. The beginning of the
1995 MLB season was delayed from April 2, 1995 until April 25, 1995.
As a result of the strike and the uncertainty as to the continuation
in full of the 1995 MLB season, the Company's baseball-related
business was materially adversely impacted during the last half of
1994 and the first half of 1995. However, the Company experienced an
upsurge in its baseball and football-related business during the last
half of 1995. The Company believes that the current lack of a CBA
will not have a material negative impact upon the results of
operations for 1996 given an order backlog as of May 31, 1996 of
$7,200,000 representing the Chevron toy car promotion previously
mentioned. See "Recent Developments." However, the Company believes
that the current lack of a CBA may be adversely affecting the
Company's baseball business. The Company believes that the continuing
decrease in the dependence upon baseball-related sales during the past
several years will continue in the future, with the introduction of
new product lines and non-baseball-related promotions.
Consumer Trends
The Company's business is vulnerable to a number of factors beyond its
control, including changes in consumer tastes and enthusiasm for
spectator sports. Although the Company has benefited from the interest
of consumers in collecting souvenirs, especially souvenirs relating to
professional sports, there can be no assurance that such interest will
continue, especially given the occurrence of player strikes and owner
lockouts in MLB and the National Hockey League in recent years.
Although the Company continuously evaluates its product lines to
tailor them to consumer trends, there can be no assurance that it will
be successful in doing so.
Competition and Technological Change
The promotions and sports-related business is highly competitive,
diverse and constantly changing. The Company experiences substantial
competition in most of its product categories from a number of
companies, some of which have greater financial resources and
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marketing and manufacturing capabilities than the Company. Many of
the Company's products are sold under non-exclusive license
agreements, and licensors may license more than one vendor in a
particular product line. Although the Company has been successful in
obtaining and renewing such licenses, and in being the sole vendor of
certain licensed product lines, there can be no assurance that other
competitors will not obtain competing licenses to sell the same or
similar products in the future. The technology currently being used
by the Company has also contributed to restricting direct competition
of its product lines. The future success of the Company will be
dependent, in large part, upon its proprietary printing process and
ability to keep pace with advancing printing and photographic
technology. There can be no assurance that new printing or
photographic technology will not be developed that renders the
Company's current printing process and products obsolete or inferior
or that other competitors will not develop the technology currently
used by the Company. See "Business -- Competition and Technological
Change" and "-- Trademarks, Proprietary Information and Patents."
Foreign Manufacturing and Suppliers
A significant portion of the raw materials used in the production of
the Company's products are the blank baseballs, footballs and
basketballs. In 1995, the Company purchased approximately 74% of its
raw materials from four companies located in China, with one
manufacturer accounting for 61% of total raw materials purchased. The
Company is increasingly shifting the imprinting of its products,
including certain four-color retail product, to companies located in
China to capitalize on significantly lower manufacturing costs.
Foreign manufacturing is subject to a number of risks, including
transportation delays and interruptions, political and economic
disruptions, the imposition of tariffs, quotas and other import or
export controls, and changes in government policies. China currently
enjoys most favored nation ("MFN") trading status with the United
States, although there can be no assurance that China will continue to
enjoy MFN trading status in the future or that conditions on China's
MFN status will not be imposed. Any conditions imposed by the
President of the United States and any legislation in the United
States revoking or placing further conditions on China's MFN trading
status could have a material adverse effect on the cost of the
Company's baseballs, footballs and basketballs because products
originating from China could be subjected to substantially higher
rates of duty. Although alternative suppliers may be available in
other countries at competitive prices, and the Company continues to
evaluate their ability to compete in terms of cost, quality,
production capacity and other considerations, there can be no
assurance that the Company would be able to find alternative suppliers
in a timely manner or that such suppliers would meet the Company's
cost, quality or production capability standards. The inability of a
supplier to ship orders of the Company's products in a timely manner
could adversely affect the Company's ability to deliver products to
its customers on schedule or could otherwise adversely affect the
Company. See "Business -- Manufacturing, Supply and Distribution."
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Lack of Patent Protection
The Company is able to successfully reproduce an image, with all its
half tones, on its products with detail and accuracy, using the
Company's proprietary printing process. This process was developed by
the Company by combining several pre-existing techniques that are used
in other similar industries. To the Company's knowledge, no other
company currently has the ability to perform the complete process. The
Company does not rely upon any material patents or licensed technology
in the operation of its business. The Company does not believe that it
is possible to be issued a patent on its proprietary process and,
accordingly, there can be no assurance that the Company's techniques,
processes and formulations will not otherwise become known to, or
independently developed by, competitors of the Company. See "Business
- -- Trademarks, Proprietary Information and Patents."
Future Capital Requirements
The Company's future capital requirements will depend on many factors,
including cash flow from operations, continued progress in the
development of its products, the successful implementation of new
product lines, the successful expansion of the Company's current
product lines, competing technological and market developments, and
the Company's ability to market its products successfully. To the
extent that the funds generated by the Initial Public Offering,
together with cash flow from operations, are insufficient to fund the
Company's activities, it will be necessary to raise additional funds,
through equity or debt financings. Any equity financings could result
in dilution to the Company's then existing stockholders, and any
financing, if available at all, may be on terms unfavorable to the
Company. If adequate funds are not available, the Company may be
required to curtail its activities significantly and its business
would be adversely affected. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Dividends
The Company has not paid any dividends on its Common Stock to date and
does not intend to pay dividends in the foreseeable future. It is the
present intention of the Board of Directors to retain all earnings, if
any, for use in the Company's business operations and, accordingly,
the Board does not anticipate declaring any dividends in the
foreseeable future. See "Dividend Policy."
Limitation on Net Operating Loss Carryforwards
As of December 31, 1995, the Company had net operating loss
carryforwards for income tax purposes of $2,757,515. These
carryforwards are subject to limitations on the amount that can be
utilized by the Company in a fiscal year due to change of ownership
-10-<PAGE>
rules as defined by applicable tax statutes. An ownership change
occurred upon completion of the Initial Public Offering which resulted
in the limitation on the use of carryforward losses incurred prior to
the ownership change. Consequently, the Company will not have a
portion of its net operating loss carryforwards available in the
current period to offset taxable income, if any, thereby reducing the
Company's net income.
No Assurance of Public Market
Although the Common Stock and Warrants are quoted on the Nasdaq
SmallCap Market, there can be no assurance that the Company will, in
the future, be able to meet all requirements for continued quotation
thereon. In the absence of an active trading market or if such
securities cannot be traded on the Nasdaq SmallCap Market, the
securities could instead be traded on the Electronic Bulletin Board or
in the "Pink Sheets." In such event, the liquidity and stock price of
such securities in the secondary market may be adversely affected. In
addition, in the event such securities are delisted, broker-dealers
have certain regulatory burdens imposed upon them which may discourage
broker-dealers from effecting transactions in such securities, further
limiting the liquidity of such securities.
Shares Eligible for Future Sale
As of May 31, 1996, the Company has 2,661,742 shares of Common Stock
outstanding. Of such shares, 1,442,923 have been registered under the
Registration Statement of which this Prospectus forms a part and
therefore are freely tradeable under the Securities Act of 1933, as
amended (the "Securities Act"). The 1,218,819 remaining shares are
"Restricted Securities," as that term is defined under Rule 144
promulgated under the Securities Act. See "Shares Eligible For Future
Sale."
Effect of Outstanding Options
As of May 31, 1996, there were outstanding stock options under the Option plan
to purchase an aggregate of 258,000 shares of Common Stock at per share
exercise prices ranging from $5.25 to $8.00 and outstanding stock options
outside of the Option plan to purchase an aggregate of 110,000 shares at per
share exercise prices ranging from $.01 to $5.25. In addition, all of the
Warrants and the Purchase Option are exercisable.
The exercise of such outstanding stock options, the Warrants and the Purchase
Option (and the Warrants included therein) will dilute the percentage
ownership of the Company's stockholders, and any sales in the public market
of Common Stock underlying such stock options, Warrants and the Purchase
Option (and the Warrants included therein) may adversely affect
prevailing market prices for the Common Stock. Moreover, the terms
upon which the Company will be able to obtain additional equity
capital may be adversely affected since the holders of such
outstanding securities can be expected to exercise them at a time when
the Company would, in all likelihood, be able to obtain any needed
capital on terms more favorable to the Company than those provided in
such stock options, Warrants and the Purchase Option. In addition, the
Company has granted certain demand and piggy-back registration rights
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to the Representative with respect to the securities issuable upon
exercise of the Purchase Option. See "Management -- Option Plan,"
"Description of Securities" and "Shares Eligible for Future Sale."
Certain Anti-takeover Provisions; Authorization of Preferred Stock
Certain provisions of the Company's Amended and Restated Certificate
of Incorporation (the "Certificate") and Amended and Restated By-Laws
(the "By-Laws") may be deemed to have the effect of discouraging a
third party from pursuing a non-negotiated takeover of the Company and
preventing certain changes in control. In particular, the Certificate
authorizes the issuance of preferred stock with such designations,
rights and preferences as may be determined from time to time by the
Board of Directors. Accordingly, the Board of Directors is empowered,
without stockholder approval, to issue preferred stock with dividend,
liquidation, conversion, voting or other rights which could adversely
affect the voting power or other rights of the holders of the Common
Stock. In the event of issuance, the preferred stock could be
utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company. Although
the Company has no present intention to issue any shares of its
preferred stock, there can be no assurance that the Company will not
do so in the future. See "Description of Securities -- Preferred
Stock" and "-- Certain Provisions of the Company's Amended and
Restated Certificate of Incorporation and Amended and Restated By-
Laws."
Potential Adverse Effect of Redemption of Warrants
The Company may call the Warrants for redemption, at a price of $.01
per Warrant, at any time after they become exercisable on not less
than 30 days' prior written notice to the warrantholders, if the last
sale price of the Common Stock has been at least $9.75 per share for
the 20 consecutive trading days ending on the third day prior to the
date on which the notice of redemption is given. The warrantholders
may exercise their Warrants until the close of business on the date
fixed for redemption. Redemption of the Warrants could force the
holders to exercise the Warrants and pay the exercise price at a time
when it may be disadvantageous for the holders to do so, to sell the
Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or to accept the redemption price, which is
likely to be substantially less than the market value of the Warrants
at the time of redemption. See "Description of Securities --
Warrants."
Current Prospectus and State Blue Sky Registration Required
in Connection with Exercise of Warrants
The Company will be able to issue shares of Common Stock upon exercise
of Warrants only if there is then a current prospectus relating to the
Common Stock issuable upon exercise of the Warrants under an effective
registration statement filed with the Securities and Exchange
Commission (the "Commission"), and only if such Common Stock is
qualified for sale or exempt from qualification under applicable state
securities laws of the jurisdictions in which the various holders of
Warrants reside. Although the Company has undertaken to file and keep
-12-<PAGE>
current a prospectus relating thereto until the expiration of the
Warrants, subject to the terms of the Warrant Agreement by and between
the Company and Continental Stock Transfer & Trust Company (the
"Warrant Agreement"), there can be no assurance that it will be able
to do so. The Warrants may be deprived of any value and the market for
the Warrants may be limited if a then current prospectus covering the
Common Stock issuable upon exercise of the Warrants is not effective
or if such Common Stock is not qualified or exempt from qualification
in the jurisdictions in which the holders of the Warrants reside. See
"Description of Securities -- Warrants."
USE OF PROCEEDS
If all of the holders of outstanding Warrants, including Warrants held
for the respective accounts of the Selling Stockholders named herein,
elect to exercise their Warrants after they become exercisable, the
estimated net proceeds to the Company would be approximately
$8,758,840 (including expenses of the Offering estimated to be
approximately $50,000 and assuming payment to the Representative of a
4% commission in connection with the solicitation of the exercise of
the Warrants). The Company intends to apply the net proceeds received
by the Company from the Offering for working capital and general
corporate purposes. See "Shares Eligible for Future Sale."
Pending the use of the proceeds, the net proceeds of the Offering will
be invested in United States government securities, short-term
certificates of deposit, money market funds or other investment-grade
short-term interest-bearing investments.
DIVIDEND POLICY
To date, the Company has not paid any dividends on its Common Stock.
The payment of dividends, if any, in the future is within the
discretion of the Board of Directors and will depend on the Company's
earnings, its capital requirements and financial condition and other
relevant factors. The Company does not expect to declare or pay any
dividends in the foreseeable future.
DILUTION
The following discussion and tables reflect the potential dilution to
holders who exercise their Warrants, assuming Warrants to purchase
1,411,673 shares of Common Stock are exercised at $6.50 per share. The
difference between the exercise price per Warrant and the pro forma
net tangible book value per share of Common Stock after the Offering
constitutes the dilution per share of Common Stock pursuant to the
Offering. Net tangible book value per share of Common Stock on any
given date is determined by dividing the net tangible book value of
the Company (total tangible assets less total liabilities) on such
date by the number of shares of Common Stock outstanding on such date.
At March 31, 1996, the net tangible book value of the Company was
$6,788,853, or $2.55 per share of Common Stock. After giving effect to
the exercise of Warrants to purchase 1,411,673 shares of Common Stock
offered by the Company hereby (less estimated expenses of the Offering
and assuming payment to the Representative of a 4% commission), the
-13-<PAGE>
pro forma net tangible book value of the Company at March 31, 1996
would have been $15,547,693, or $3.82 per share, representing an
immediate increase in net tangible book value of $1.27 per share to
existing stockholders and an immediate dilution of $2.68 per share to
the purchasers of shares of Common Stock upon exercise of Warrants in
the Offering.
The following table illustrates the dilution to new investors on a
per-share basis:
Exercise price per share of Common Stock $6.50
Net tangible book value per share of
Common Stock before exercise of the
Warrants to purchase 1,411,673 shares
of Common Stock $2.55
Increase per share of Common Stock
attributable to new investors 1.27
-----
Pro forma net tangible book value per
share of Common Stock after the
exercise of the Warrants to purchase
1,411,673 shares of Common Stock 3.82
-----
Dilution per share of Common Stock
to new investors $2.68
=====
-14-<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
March 31, 1996 and as adjusted to give effect to the exercise of
Warrants to purchase 1,411,673 shares of Common Stock offered by the
Company hereby at $6.50 per share and the application of the estimated
net proceeds therefrom:
Actual As Adjusted(1)
____________ _____________
Long-Term Debt
(net of current portion of $36,680) $ -- $ --
Stockholders' Equity:
Preferred Stock, $.01 par value:
authorized--1,000,000 shares;
issued and outstanding--none -- --
Common Stock, $.01 par value:
authorized--15,000,000 shares;
issued and outstanding--2,661,742
actual; 4,073,415 as adjusted 26,617 40,734
Additional Paid-In Capital 8,562,194 17,306,917
Accumulated Deficit (1,780,833) (1,780,833)
Less:
Unamortized Compensation Expense (19,125) (19,125)
------------ ------------
Total Stockholders' Equity 6,788,853 15,547,693
------------ ------------
Total Capitalization $ 6,788,853 $15,547,693
============ ============
(1) Does not include (i) 187,750 shares of Common Stock reserved for
issuance upon exercise of outstanding stock options granted under the
Option Plan, (ii) 187,250 shares of Common Stock reserved for issuance
upon exercise of stock options which may be granted under the Option
Plan and (iii) 110,000 shares reserved for issuance upon exercise of
outstanding stock options granted outside of the Option Plan. See
"Management -- Option Plan" and "Description of Securities".
-15-<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's business increased moderately in 1995, with revenues
increasing from $7.3 million in 1994 to approximately $7.8 million in
1995. As a result of the Major League Baseball strike, the Company's
baseball-related business was materially adversely impacted during the
first half of 1995. However, the Company experienced an upsurge in its
baseball and football-related business in the last half of 1995,
contributing to the increase in sales over 1994 levels.
In November 1995, the Company entered into an agreement with Chevron
to design, manufacture and distribute toy cars based upon Chevron's
"claymation" Car Characters national advertising campaign. The
contract will generate revenues of $7,200,000 which will be recognized
in the second quarter of 1996. Additionally, in March 1996 the Company
entered into an agreement with Burger King to produce baseballs for a
national promotion being held in four of Burger King's United States
geographic regions. This contract generated revenues of $664,000 during the
first quarter of 1996 and will generate revenues of $2,879,000 during
the second quarter of 1996. See "Recent Developments" and "Backlog."
Results of Operations
The following table sets forth certain operating data (in dollars and
as a percentage of the Company's sales) for the periods presented:
<TABLE>
<CAPTION>
December 31, December 31, March 31, March 31,
1994 1995 1995 1996
____________ ____________ ____________ ____________
% % % %
___ ___ ___ ___
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 7,335,671 100 $ 7,754,309 100 $ 957,293 100 $ 2,401,656 100
Cost of Sales 3,671,926 50 4,302,644 55 567,875 59 1,404,863 58
Operating Expenses 3,336,432 45 3,610,157 47 687,592 72 989,644 41
Operating Income (Loss) 327,313 4 (158,492) (2) (298,174) (31) 7,149 1
Interest Expense 127,380 2 27,753 1 8,096 1 8,597 1
Interest Income 85,199 1 219,211 3 69,118 7 43,087 2
Non-Recurring Costs 901,815 12 -- -- -- -- -- --
Income (Loss)
Before Income Tax (385,926) (5) 32,966 1 (237,152) (25) 41,639 2
Income Tax Expense
(Benefit) (233,200) (3) 31,800 1 (94,400) (10) 16,700 1
Net Income (Loss) $ (152,726) (2) $ 1,166 1 $ (142,752) (15) $ 24,939 1
</TABLE>
-16-<PAGE>
Three Months Ended March 31, 1995 and 1996:
Sales were $2,401,656 for the three months ended March 31, 1996, an
increase of 151% from sales of $957,293 for the three months ended
March 31, 1995. The increase was due to both promotional and retail
divisions realizing substantial increases over the three months ended
March 31, 1995. For the three months ended March 31, 1996,
promotional sales were $1,310,000, or 55% of sales, as compared to
promotional sales of $306,000, or 32% of sales, for the three months
ended March 31, 1995. This increase was due principally to a $664,000
baseball-related promotion and a $386,000 hockey puck promotion, both
with Burger King. Retail sales were $1,092,000 for the three months
ended March 31, 1996, an increase of 68% from sales of $651,000 for
the three months ended March 31, 1995. This increase was principally
due to two factors: an 110% increase in retail baseball-related sales,
due to greater expectations that an MLB season would occur in 1996, as
compared to the continuing MLB strike during this time in 1995; and
higher sales from the Company's football and basketball product lines
as compared to the comparable prior period. For the three months
ended March 31, 1996, total baseball, football and basketball-related
sales were $1,498,000, $395,000, and $86,236, or 62%, 16%, and 4% of
sales, respectively, as compared to $608,000, $269,000, and $0, or
64%, 28% and 0% of sales, respectively, for the three months ended
March 31, 1995.
Gross profit was $996,793 for the three months ended March 31, 1996,
an increase of 156% from gross profit of $389,418 for the three months
ended March 31, 1995. Gross profit increased on an absolute basis as
a result of the increase in sales. Gross margins as a percentage of
sales increased to 42% for the three months ended March 31, 1996 from
41% for the three months ended March 31, 1995. The gross margins as a
percentage of sales fluctuated an insignificant amount from 1995 to
1996 principally due to the fact that promotional sales, which
typically realize lower margins than retail sales, constituted a
greater percentage of sales (55%) for the three months ended March 31,
1996 as compared to the three months ended March 31, 1995 (32%).
Additionally, retail sales realized somewhat lower than normal margins
for the three months ended March 31, 1996 reflecting low margin sales
to professional minor league teams and a greater percentage of sales
of the Company's mini-glove and basketball products which realize
somewhat lower margins. The Company believes that the historical
trend of promotional sales constituting a greater percentage of the
Company's overall sales will continue and, therefore, the Company
anticipates that margins for the year ending December 31, 1996 will be
lower than those realized during the three months ended March 31,
1996.
Operating expenses were $989,644, or 41% of sales, for the three
months ended March 31, 1996, as compared to operating expenses of
$687,592, or 72% of sales, for the three months ended March 31, 1995.
The increase in operating expenses on an absolute basis was due to
increased royalties and marketing expenses resulting from
significantly higher sales. The increase was also due to general and
administrative expenses that increased in absolute terms due to higher
personnel and facility operating costs incurred to accommodate
significantly higher anticipated sales.
-17-<PAGE>
Royalties expense was $171,086 for the three months ended March 31,
1996, an increase of 81% from royalties expense of $94,573 for the
three months ended March 31, 1995. Royalties expense as a percentage
of sales decreased to 7% of sales for the three months ended March 31,
1996 from 10% of sales for the three months ended March 31, 1995, due
in part to the $386,000 hockey puck promotion which had no royalty
obligation. The decrease was also due to a higher percentage of total
sales consisting of promotional sales for the three months ended March
31, 1996 as compared to the corresponding prior year period. Retail
sales typically require a royalty of 15-18% as compared to 10% for
promotional sales. As previously noted, the Company is dependent upon
its licensing arrangements and their successful renewal. Most of the
Company's significant licenses expire on December 31, 1996 with the
exception of the NFL licenses which expired on March 31, 1996. The
Company has received a preliminary term sheet extending the NFL Team
Logo license through March 31, 1998, and is in the process of
finalizing this into a license agreement. Although historically the
Company's licenses have been renewed by its licensors, and the Company
does not anticipate the non-renewal of any of its significant
licenses, there can be no assurance that the Company will continue to
be able to renew its licenses, that the renewal will be on acceptable
terms and conditions, or that the Company will be able to enter into
comparable new licensing agreements.
Marketing expenses were $305,753 for the three months ended March 31,
1996, an increase of 50% from marketing expenses of $204,141 for the
three months ended March 31, 1995. Marketing expenses as a percentage
of sales decreased to 13% of sales for the three months ended March
31, 1996 from 21% of sales for the three months ended March 31, 1995,
primarily as a result of allocating the non-variable components of
marketing expenses, such as wages, exhibiting and travel costs, over
significantly higher sales volume.
General and administrative expenses were $458,135 for the three months
ended March 31, 1996, an increase of 33% from general and
administrative expenses of $344,855 for the three months ended March
31, 1995. This increase is a result of several factors, including
increased personnel costs and general office expenses incurred in
anticipation of higher sales volumes and higher operating costs
associated with the Company's production facility.
Interest expense was $8,597 for the three months ended March 31, 1996,
an increase of 6% from interest expense of $8,096 for the three months
ended March 31, 1995. The increase reflects the reduction in the
amount of the Company's long-term debt offset by an increase in
interest charges from capitalized leases. Total capitalized equipment
and machinery leases were $184,145 at March 31, 1996, an increase of
$85,229 from $98,916 at March 31, 1995.
Interest income was $43,087 for the three months ended March 31, 1996,
a decrease of $26,031, or 38% from interest income of $69,118 for the
three months ended March 31, 1995. This decrease is due to two
factors: as more fully explained below, the Company's average cash
-18-<PAGE>
balances available for investment were lower during the three months
ended March 31, 1996 as compared to the three months ended March 31,
1995. Additionally, the interest rate yield realized on its cash and
short-term marketable investments during the three months ended March
31, 1996 was significantly lower than the corresponding prior year
period, reflecting the decline in interest rates in the market during
this period.
An income tax expense of $16,700 was recorded for the three months
ended March 31, 1996 as compared to an income tax benefit of $94,400
for the three months ended March 31, 1995. The Company recognized an
income tax expense for the three months ended March 31, 1996 as a
result of the income before income taxes of $41,639 and based on the
Company's estimates that it will realize sufficient pre-tax income in
1996 and future periods to fully utilize prior loss carryforwards.
Net income was $24,939 or $.01 per share for the three months ended
March 31, 1996, as compared to a net loss of $142,752 or ($.05) per
share for the three months ended March 31, 1995.
Years Ended December 31, 1994 and 1995:
Sales were $7,754,309 for the year ended December 31, 1995, an
increase of 6% from sales of $7,335,671 for the year ended December
31, 1994. The increase in sales was due in part to an upsurge in its
baseball-related business during the third quarter of 1995 resulting
from the Company capitalizing on two recent phenomena: the popularity
of Los Angeles Dodgers pitcher Hideo Nomo and the surpassing of Lou
Gehrig's consecutive game record by Baltimore Orioles shortstop Cal
Ripken. The Company's ability to respond to these opportunities
succeeded in generating approximately $780,000 of sales from these two
events. Additionally, the Company recognized $1,527,000 of sales from
two baseball-related promotions during July 1995 and $453,000 of sales
from an October 1995 college football promotion, all with Burger King.
The college football promotion mentioned above was the first promotion
to use the miniature football product. The college football promotion
was highly successful and the Company anticipates increased football-
related promotions in the future.
For the first time, retail sales surpassed promotions sales in 1995
and increased significantly over 1994 levels. Retail sales were
$4,630,000 for the year ended December 31, 1995, an increase of 142%
from retail sales of $1,913,000 for the year ended December 31, 1994.
This increase was due to an expansion of the Company's retail customer
base including significant increases in sales to national mass
merchants; and the maturation and resulting increases in the mini-
football product line -- retail football-related sales were $1,170,000
in 1995, a 106% increase from sales of $567,000 in 1994.
Although the Company anticipates continued strong sales growth in its
retail business, the Company believes that its promotional business
will constitute a greater percentage of its total sales, as it has in
every year prior to 1995, given the significance of the baseball and
toy car promotions previously noted. Management believes that the
growth of its retail business will help to mitigate the variability
inherent in the promotions business, by establishing a sales base
which is more consistent over time.
-19-<PAGE>
Promotions sales in 1995 were $3,107,000 or 40% of sales, and
promotions sales in 1994 were $5,423,000 or 74% of sales. The MLB
strike during the first half of 1995 had the effect of significantly
curtailing the amount of baseball-related promotional contracts that
the Company realized in 1995 as otherwise would have been expected had
there not been a baseball strike. The Company recognized $1,527,000 in
baseball-related promotions in 1995 as compared to $3,800,000 in 1994.
Gross profit was $3,451,665 for the year ended December 31, 1995, a
decrease of 6% from gross profit of $3,663,745 for the year ended
December 31, 1994. The decrease in gross margins was a result of gross
margins as a percentage of sales decreasing from 50% to 45% for the
years ended December 31, 1994 and 1995 respectively. This decrease was
the result of several factors: margins were lower during the first
half of 1995 on retail baseball-related sales due to the introduction
of new products which generate somewhat lower margins, and price
concessions which were made to professional minor and major league
teams in order to increase the Company's market share. Additionally, a
significant percentage of the sales in 1995 were from product that was
imprinted domestically, which result in lower margins than product
imprinted in China. The uncertainty created by the MLB labor dispute
resulted in diminished lead times to manufacture product in China,
thereby requiring the Company to imprint greater quantities of product
in San Diego. Finally, certain promotions in 1995, including the
college football promotion with Burger King, realized margins that
were somewhat lower than what the Company typically realizes from
promotions. As previously noted, the Company believes that the
historical trend of promotional sales constituting a greater
percentage of the Company's overall sales will continue and,
therefore, these lower margins will be more typical of the Company's
business in the future.
Operating expenses were $3,610,157 for the year ended December 31,
1995, an increase of 8% from operating expenses of $3,336,432 for the
year ended December 31, 1994. Operating expenses as a percentage of
sales increased to 47% in 1995 from 45% in 1994. Operating expenses
increased both in absolute terms and as a percentage of sales as a
result of increases in marketing, general and administrative and
depreciation costs offset in part by a reduction in royalty costs.
General and administrative expenses increased as a result of the
Company establishing an organizational infrastructure capable of
servicing the higher sales volumes anticipated in future periods.
Management believes that this organizational infrastructure will be
essential for servicing future promotions, including the toy car
promotion, and maintaining the sales growth being realized in its
retail business.
Royalties expenses were $546,110 for the year ended December 31, 1995,
a decrease of 21% from royalties expenses of $694,306 for the year
ended December 31, 1994. Royalties expenses as a percentage of sales
decreased to 7% in 1995 from 9% in 1994. The decrease in royalties
expenses during this period, both in absolute terms and as a
percentage of sales, is due to a higher percentage of promotions and
certain retail sales in 1995 as compared to 1994 in which no royalty
payment was required or where the customer assumed the royalty
obligation. As previously noted, the Company is dependent upon its
-20-<PAGE>
licensing arrangements and their successful renewal. Most of the
Company's significant licenses expire on December 31, 1996 with the
exception of the NFL licenses which expired on March 31, 1996 and the
Goodyear license which expires on February 15, 1997. Although
historically the Company's licenses have been renewed by its
licensors, and the Company does not anticipate the non-renewal of any
of its significant licenses, there can be no assurance that the
Company will continue to be able to enter into comparable new
licensing agreements.
Marketing expenses were $1,205,634 for the year ended December 31,
1995, an increase of 14% from marketing expenses of $1,058,002 for the
year ended December 31, 1994. Marketing expenses as a percentage of
sales increased to 16% in 1995 from 14% in 1994. The increase in
marketing expenses was attributable to greater travel and exhibiting
costs associated with sales development. Increased costs also resulted
from the Company's efforts to expand its market presence into Europe.
As of December 31, 1995, an insignificant amount of sales had been
realized from sales to Europe. The Company continues to believe that
the international market represents a source of future growth,
particularly in the promotions business. The Company's strategy is to
identify and establish strategic alliances with local companies that
can effectively market and distribute the Company's promotional
products.
General and administrative expenses were $1,641,775 for the year ended
December 31, 1995, an increase of 38% from general and administrative
expenses of $1,193,763 for the year ended December 31, 1994. This
increase is a result of several factors, including increased personnel
costs and general office expenses incurred to service anticipated
higher sales volumes, higher occupancy costs associated with the
Company's expanded production facility, and the recurring costs
associated with a public company, which were only reflected in the
results of operations for the last half of the year ended December 31,
1994.
In February 1993, Robert N. Weingarten, prior to becoming a director
of the Company, was retained as a consultant to the Company to
recapitalize the Company's balance sheet. Pursuant to the Company's
consulting agreement with Mr. Weingarten, the Company agreed to pay
Mr. Weingarten an aggregate amount of $60,000, including $30,000 on or
before August 1, 1994, and an additional $30,000 in 12 equal monthly
installments of $2,500 each, commencing September 1, 1994. The Company
also issued to Mr. Weingarten an option to purchase 69,445 shares
(after giving effect to a merger and reverse stock split effected
prior to the Initial Public Offering) of Common Stock for an aggregate
exercise price of $1,000, which the Company valued at $181,293 (or
approximately $2.62 per share). The Company recorded the aggregate
value of the option and the consulting fee of $241,293 as a non-
recurring recapitalization cost during the year ended December 31,
1994. The option was assigned to and exercised in full by a
corporation wholly-owned by Mr. Weingarten prior to the effective date
of the Initial Public Offering. The Company has entered into a
consulting agreement with Mr. Weingarten for a twelve-month period
commencing September 1, 1995 in the amount of $2,500 per month.
Effective January 1, 1996, the Board of Directors approved a $10,000
-21-<PAGE>
increase in Mr. Weingarten's consulting agreement to be paid over the
remaining term of the agreement. See "Certain Relationships and
Related Transactions."
Operating loss was $158,492 for the year ended December 31, 1995, a
decrease of 148% from operating income of $327,313 for the year ended
December 31, 1994. The operating loss was the result of the decrease
in gross margins and the increase in marketing, general and
administrative and depreciation costs. As previously noted, the
Company's higher operating costs were incurred to support an
organizational infrastructure that will successfully service
significantly higher sales volume expected to be realized in future
periods.
Interest expense was $27,753 for the year ended December 31, 1995, a
decrease of 78% from interest expense of $127,380 for the same period
in 1994. The decrease of $99,627 was primarily the result of the
conversion of the Company's Debentures to equity in August 1994 in
connection with the Initial Public Offering, and the payment of
interest on the promissory notes ("Bridge Notes") issued in connection
with the Company's March 1994 bridge financing ("Bridge Financing")
during the approximate five-month term in 1994 that the Bridge Notes
were outstanding. The decrease in interest expense for the year ended
December 31, 1995 as compared to the same period in 1994 also resulted
from the reduction in the amount of the Company's long-term debt
outstanding to $58,011 at December 31, 1995 from $269,264 at December
31, 1994.
Interest income was $219,211 for the year ended December 31, 1995 as
compared to $85,199 for the year ended December 31, 1994. This
increase is a result of investing the remaining proceeds from the
Initial Public Offering in short-term investments for a full twelve
month period in 1995 versus a four month period in 1994.
In connection with the Bridge Financing, the Company issued, prior to
the effective date of the Initial Public Offering, an aggregate of
146,673 units ("Bridge Units") to the holders of the Bridge Notes.
Each unit (a "Unit") was comprised of one share of Common Stock and
one Warrant, and the Units have since been separated into their
component parts. The Company valued the Bridge Units at $585,000 (or
approximately $4.00 per Bridge Unit) and was amortizing this amount,
along with costs and fees related to the Bridge Financing aggregating
$75,522, over the lesser of 12 months or the period that the Bridge
Notes were outstanding. The Initial Public Offering was declared
effective on August 11, 1994 and the Bridge Notes were repaid on
August 19, 1994. Accordingly, unamortized deferred Bridge Financing
costs of $660,522 were charged to operations in the year ended
December 31, 1994.
An income tax expense of $31,800 was recorded for the year ended
December 31, 1995, as compared to income tax benefit of $233,200 for
the year ended December 31, 1994. The Company recognized an income tax
expense in 1995 as a result of the income before income taxes of
$32,966. As of December 31, 1995, the Company had net operating loss
carryforwards for Federal tax purposes of approximately $2,800,000
expiring in various amounts through 2009. In order to fully utilize
-22-<PAGE>
the deferred tax asset, it is estimated that the Company must generate
a minimum of $630,000 in pre-tax income annually through the year
2009.
Management of the Company periodically reviews the necessity for a
valuation allowance with respect to both the current and non-current
portion of the deferred income tax asset to determine the probability
of its realization and to estimate what portion will be realized
during the current period and in subsequent future periods, including
any anticipated limitation on the utilization of such loss
carryforwards resulting from the change in the Company's ownership in
connection with the Initial Public Offering. The Company believes that
its backlog of orders of $7,200,000 as of May 31, 1996, together
with continuing increases in its football business and the
introduction of additional product lines, are expected to result in
the Company realizing these minimum taxable earnings sufficient to
fully utilize the allowable loss carryforwards in 1996 and future
periods. Therefore, no valuation allowance has been established at
December 31, 1995.
Liquidity and Capital Resources:
The Company's net working capital increased by $39,831 from December
31, 1995 to March 31, 1996, to a net working capital surplus of
$5,453,218 at March 31, 1996 from a net working capital surplus of
$5,413,387 at December 31, 1995. Cash flow provided by operating
activities increased by $899,535 from cash used by operating
activities of $93,842 for the three months ended March 31, 1995, to
cash provided by operating activities of $805,693 for the three months
ended March 31, 1996. The increase in cash provided by operating
activities was principally due to advances received for the
promotional orders reflected in the Company's backlog at March 31,
1996. This increase was offset in part by investments in inventory to
meet greater demand for domestically-produced merchandise, as well as
the backlog of promotional orders noted above. The Company's
expanding product lines, including mini-basketball and mini-baseball
gloves, substantially all of which are imprinted at the San Diego
facility, will require the Company, in the future, to maintain these
higher inventory levels.
Cash and equivalents aggregated $2,885,279 at March 31, 1996, an
increase of $723,011 from cash and equivalents of $2,162,268 at
December 31, 1995. This increase was principally due to the
approximately $1,360,000 in advances received from future promotions
offset by investments in inventory, as previously noted.
Accounts receivable were $540,867 at March 31, 1996, a decrease of
$47,413 from accounts receivable of $588,280 at December 31, 1995.
This decrease was due to a higher amount of retail sales and a lower
amount of promotional sales during the three months ended December 31,
1995 as compared to the three months ended March 31, 1996. Retail
sales generally carry payment terms of net 30 days whereas the Company
receives significant advance payments on promotional sales, as
previously noted.
-23-<PAGE>
At March 31, 1996, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $212,000 in the
aggregate through 1998, of which $147,000 is due at various times in
1996. Given the Company's backlog of orders and anticipated increases
in retail product sales, management expects these guaranteed royalties
to be funded from operating cash flows.
In December 1994, the Company entered into a $1,000,000 line of credit
with Merrill Lynch International Bank Limited ("Merrill Lynch") at an
interest rate which is at 1.75% above the London Interbank Offering
Rate term that the Company chooses to select. Any borrowings under
the line of credit are secured by cash collateral deposited with
Merrill Lynch equal to the credit outstanding. In December 1995, the
Company increased its existing line of credit with Merrill Lynch, from
$1,000,000 to $3,000,000. The line of credit, which expires on
December 19, 1996, supports an irrevocable stand-by letter of credit
of $1,000,000 which expired on March 15, 1996 that had been issued to
a supplier and was collateralized by cash. Subsequently, on January
2, 1996, an additional stand-by letter of credit of $1,000,000 which
expired on May 15, 1996, was issued to the same supplier. The Company
may provide future letters of credit as a means of guaranteeing
payment, either as required by the above-mentioned supplier or in
procuring goods from other overseas suppliers.
In December 1995, the Company entered into a separate one year credit
agreement with Scripps Bank. This revolving line of credit facility
in the amount of $1,000,000 is collateralized by the assets of the
Company and actual borrowings are limited to available collateral, as
defined in the agreement. Borrowings under the facility bears
interest at the bank's prime rate plus .75%. The revolving credit
contains covenants requiring the Company to maintain a minimum net
worth level and minimum working capital and debt to equity ratios.
There were no borrowings under either line of credit as of March 31,
1996.
The Company's backlog of orders at May 31, 1996 was $7,200,000.
This consists of one promotional project which is scheduled to be
delivered during the second quarter of 1996. See "Recent
Developments." The Company has received and will continue to receive
significant advance deposit payments against the total contracted
revenues of promotional projects. Management believes that the Company's
existing cash position, credit facilities, and the scheduled
prepayments noted above, combined with internally generated cash flow,
will be adequate to support the Company's liquidity and capital needs,
including financing the current backlog, at least through the end of
1996.
The Company anticipates using the remaining portion of the proceeds of
the Initial Public Offering for marketing and sales activities, to
obtain new licenses, including costs associated with placing new
products in production, to purchase raw materials, to fund capital
improvements, and for working capital and general corporate purposes.
-24-<PAGE>
BUSINESS
General:
The Company designs, develops, manufactures and markets customs sports
and non-sports related products for promotional programs.
Additionally, the Company designs and manufactures custom sports
products which are sold in the licensed product retail market through
independent manufacturers' representatives and directly to the
customer. The Company currently holds licenses with Major League
Baseball, the Major League Baseball Players Association, the National
Association of Professional Baseball Leagues, Inc. (representing
professional minor league baseball), and over sixty (60) colleges and
universities. The Company is in the process of renewing its licenses
with the National Football League Properties, Inc. Pursuant to these
licenses, the Company has the right to use, for commercial purposes,
the names and logos of sports leagues and teams and the likenesses of
certain sports figures. The Company believes that the enthusiasm that
accompanies team sports, the heightened popularity and network
coverage of sporting events and consumers' desire to own "authentic"
and "official" souvenirs enhance the demand for the Company's
products.
The Company's products include: (i) baseballs: synthetic leather,
official size and weight baseballs licensed by Colleges and
Professional Baseball, featuring players' images, statistics and/or
school, team and league logos; (ii) footballs: synthetic leather,
miniature footballs licensed by the NFL and Colleges, featuring helmet
logos and shields of NFL teams, NFL Quarterback Club(r) players'
images, statistics and/or NFL team and league logos, and College logos
and/or mascots; (iii) basketballs: synthetic leather, miniature
basketballs licensed by Colleges, featuring College logos and/or
mascots; and (iv) custom-designed products including toy cars based
upon characters featured in Chevron's national advertising campaign.
In 1995, 75% of the Company's sales was represented by baseball-
related products.
The Company's business is segregated into two distinct market
segments: the promotional product business, in which the Company sells
custom products directly to customers, and the licensed product retail
market, in which the Company sells directly through mass merchants and
through independent representatives to the retail marketplace.
The Company's promotions customers, which are large corporations such
as Chevron, Shell, Coca-Cola, Burger King, and McDonalds, purchase the
Company's products for use in promotional campaigns and in connection
with their sponsorship of professional sports teams. In 1995, 40% of
the Company's sales was derived from sales to promotions customers
(with 26% of the Company's sales derived from contracts for the sale
of promotional products to Burger King), as compared to 74% in 1994
(with 34% of the Company's sales derived from a contract for the sale
of promotional products to Chevron). The Company provides its
-25-<PAGE>
promotions customers with a wide range of design, product development
and manufacturing services. These services include assisting customers
in the negotiation of corporate sponsorships with professional sports
teams and their associations, in designing and developing promotions
and in procuring product licenses and authorizations. The Company is
responsible for all phases of production, including creative design,
manufacturing, quality control, packaging and shipping. The Company's
promotions customers generally give the Company short lead times and
require the Company to meet rigorous quality control standards.
At the retail level, the Company's account base has increased to over
1,100 retailers, including selected department stores and mass
merchants (such as Kmart, Wal-Mart, J.C. Penney, Sears, Pro Image and
Sports Authority), theme parks (including DisneyWorld(r),
Disneyland(r), SeaWorld(r), Hershey Park(r) and Six Flags(r)), airport
and hotel concessionaires (including Paradise, Host Marriot and the
Del-Star Group), various licensed sports specialty and sporting goods
chains, various consumer catalogs and Professional Baseball stadiums
(including 22 Major League Baseball stadiums and 95 professional minor
league stadiums). By using selected distribution channels and working
closely with its retail accounts to determine the mix, quantity and
timing of orders, the Company believes that its products achieve high
sell-through and generate attractive profit margins for its retail
accounts.
Fotoball California was incorporated under the laws of the State of
California on December 13, 1988. The Company was incorporated under
the laws of the State of Delaware on April 27, 1994 only for the
purpose of merging and continuing the business of Fotoball California.
On July 29, 1994, Fotoball California merged with and into the
Company, with the Company being the surviving corporation.
Industry Overview:
Professional Baseball and the NFL have each established exclusive
licensing agents for their products. Generally, these agents are
highly selective in granting licenses and are specific as to the scope
of each license granted. Licensed sports-related product sales have
grown significantly since the mid-1980's through aggressive management
of licensing programs and increased marketing by the professional
sports leagues. The United States retains its pre-eminent position in
the licensed sports-related products industry and is an acknowledged
innovator of licensed sports-related products for domestic and export
markets.
Much of the increased demand for licensed sports-related products has
been fostered by extensive television and cable sports programming, as
well as the growth in sporting event attendance. The Company believes
that increased spectator enthusiasm for sports translates into higher
sales for licensed sports-related products, as consumer identification
with teams and players grows. The Company believes that the recent
-26-<PAGE>
expansion of the MLB and the NFL will also contribute to the demand
for licensed sports-related products but that the recent MLB strike
may lessen the demand in the near future for licensed baseball-related
products.
License Agreements:
The Company's business is based primarily upon its use of the
insignia, logos, names, colors, likenesses and other identifying marks
and images borne by many of its products pursuant to license
arrangements with Professional Baseball, the NFL and, to a lesser
extent, Colleges. The Company's licensing arrangements expire at
various times through February 15, 1997. The Company is in the process
of renewing its licenses with the NFL and, although the Company
believes that the NFL licenses will be renewed on terms consistent
with its past licenses, there can be no assurance that its licenses
with the NFL will be renewed upon acceptable terms. The Company may
acquire licenses for new product lines; however, there can be no
assurance that the Company will be successful in obtaining new
licenses. The non-renewal of one or more of the Company's material
licenses, particularly with Professional Baseball or the NFL, could
have a material adverse effect on the Company's business. The
following is a brief description of the Company's material license
arrangements with its licensors:
The Company was granted by the MLBPA the non-exclusive right to
utilize on regulation-size baseballs and cotton wrist sweatbands sold
in the United States, its territories and Canada the "MLBPA" and
"Major League Baseball Players Association" tradenames, the MLBPA logo
and the names, nicknames, likenesses, signatures, pictures, playing
records and/or biographical data of all active baseball players of the
National League and the American League who have entered into a
commercial agreement with the MLBPA. The term of the license extends
through December 31, 1996. The Company is obligated to pay a royalty
based on net sales of licensed products, subject to an annual minimum
royalty fee. There can be no assurance that the Company will be able
to renew its license agreements with the MLBPA upon acceptable terms
at their expiration.
The Company was granted by Major League Baseball Properties, Inc.
("MLBP") the non-exclusive right to utilize on regulation-size
baseballs and sweatbands sold in the United States the names, symbols,
logos and other similar or related identification of "MLBP."
Furthermore, MLBP also granted to the Company the non-exclusive right
to utilize on regulation-size baseballs and wristbands the names,
likenesses and signatures of certain retired baseball players,
including Hank Aaron and Steve Carlton. The term of the license
extends through December 31, 1996. The Company is obligated to pay a
royalty based on net sales of licensed products, subject to an annual
minimum royalty fee. There can be no assurance that the Company will
be able to renew its license agreements with MLBP upon acceptable
terms at their expiration.
-27-<PAGE>
The Company was granted by National Football League Properties, Inc.
("NFLP") the non-exclusive right to utilize on collectible miniature
footballs in the United States the names, symbols, designs and colors
of the following: "National Football League," "NFL," "NFC," "AFC,"
"Super Bowl," "Pro Bowl," the "NFL Shield" design, the Member Clubs of
the NFL (including the helmet designs, uniforms, team names,
nicknames, identifying slogans and logos and other Member Club
indicia) (the "Team License"), and the names, likenesses, portraits,
pictures, photographs, signatures and biographical information of the
NFL Quarterback Club(r) and its members (the "Quarterback Club
License"). The term of the licenses expired on March 31, 1996. The
Company is in the process of extending the terms through March 31,
1997 for the Quarterback Club License and March 31, 1998 for the Team
License. The Company is obligated to pay a royalty based on net sales
of licensed products, subject to an annual minimum royalty fee. There
can be no assurance that the Company will be able to renew its license
agreements with NFLP upon acceptable terms.
In connection with the Company's new Fototire product, the Company was
granted the non-exclusive royalty-free right by Goodyear Tire & Rubber
Co. ("Goodyear") to use the Goodyear trademark (and winged foot
design), Goodyear #1 and Eagle trademarks on miniature tire replicas.
The term of the license is for a period of one year, through February
15, 1997 and is thereafter automatically renewed from year to year
until terminated in accordance with the agreement.
Historically, the Company's licenses have been renewed by its
licensors. Although the Company believes it will be able to renew its
licenses upon their expiration, there can be no assurance that such
renewal can be obtained on terms acceptable to the Company. The
inability of the Company to renew existing licenses and/or acquire
additional licenses could have a material adverse impact on the
Company's sales and earnings.
The Company relies on its licensors for their right to grant and
maintain licenses for various sports properties and for their ability
to preserve the value of licenses by protecting and promoting the
licensed properties. In addition, the Company participates in a
program sponsored by certain of its licensors directed toward
controlling the unauthorized manufacturing, distribution and marketing
of non-licensed products.
Business Strategy:
The Company's long-term strategy will continue to emphasize a
diversification of its products and revenue base by expanding upon its
relationships with its promotional and retail customers and its
reputation of delivering high-quality products with high perceived
value. In this regard, the Company's business strategy includes:
-28-<PAGE>
(i) continuing its expansion of its product lines, including
capitalizing on its recently signed Chevron toy car promotion, by
pursuing other non sports-related promotions. The Company also plans
to continue to expand its retail product lines by obtaining license
agreements with other sports associations and properties and
introducing new products in different sports;
(ii) expanding its core domestic promotions customer base and
diversifying into additional domestic markets in which there is the
demand for promotions;
(iii) continuing its development of its retail business by
aggressively pursuing distribution programs with national mass
merchants;
(iv) expanding its product and revenue base through the possible
acquisition of other sports product, promotional or similar
businesses. The Company is not currently negotiating to acquire any
other company and has no commitments, understandings or arrangements
with respect to any specific transaction; and
(v) continuing its efforts to expand into geographic areas beyond
the United States. The Company believes that the international market,
particularly Asia, Europe and Central America, represents a source of
future growth.
There can be no assurance that the Company will be able to enter into
new license agreements, that the expansion of the Company's business
will be successfully implemented or that acquisitions will be
successfully consummated.
Products:
The Company offers a variety of custom-imprinted sports products
across a broad range of price points. The Company currently markets
approximately 530 custom-imprinted sports products with general
wholesale prices ranging from $3.50 to $7.95 per item. In addition to
the new products discussed above, the Company offers its products in
three basic product lines: baseball, football and basketball products.
The following is a description of each of the Company's significant
product lines:
Baseball:
The Company uses a synthetic leather, official size and weight
baseball on which it prints the various images. All the raw materials
such as the PVC (synthetic leather), thread and core are specified by
the Company according to its quality requirements. Various exclusive
"fancy" synthetic leathers have been developed by the Company for use
in its Major League Expressions line. The baseball product line
includes the following:
Fotoball(r) Baseball - Baseball featuring a players' image and
statistics.
-29-<PAGE>
Club Crest Baseball - Baseball featuring team logo in a unique crest
design along with the team's history. This is done for all 30 Major
League Baseball teams.
Mini-glove and baseball gift set - A mini baseball glove constructed
from genuine leather combined with a baseball featuring Major League
Baseball team logos, Negro League Baseball team logos, Peanuts and
holiday/event themes including Father's Day and "New Baby".
Major League Expressions(TM) Baseball - Baseball featuring granite
color, black stitching and team logos.
Negro League Baseball(TM) - Baseball featuring "old fashioned look"
color and official team logo and historical narrative.
"Outta the Park" Baseball - Baseball featuring colorful geometric and
youth oriented designs of each Major League Baseball team.
University Diamond Collection(TM) - Baseball featuring university or
college logos.
Promotional Baseball - Baseball custom-printed and used for
promotions.
Football:
The Company uses a 6.5 inch miniature football with brown synthetic
pebble finish leather on three panels and white synthetic leather on
the fourth panel. The football has a polyurethane inflatable bladder
and custom miniature version of official lacing. Each football is
packaged with a scaled-down kicking tee which is used as a display
stand. The football product line includes the following:
Teamball(r) Football - Football featuring the helmet logo of an NFL
team in full color on the white panel and the NFL shield printed in
gold on one of the brown panels.
NFL Quarterback Club(r) Fotoball(r) Football - Football featuring a
full color image of a player, together with his replica autograph.
University Teamball(r) - Football featuring a full color image of a
university or college logo.
Promotional Football - Football custom-printed and used for
promotions.
Basketball:
The Company uses a 16-inch circumference miniature basketball with
high-grade synthetic leather finish on six panels and white synthetic
leather on two panels. The basketball is crafted with full regulation
construction and has a butyl inflatable bladder. The basketball
product line includes the following:
University Teamball - Basketball featuring a full color image of a
university or college logo and nickname.
-30-<PAGE>
The following table sets forth the percentage of the Company's total
sales contributed by each of the Company's significant product lines
for the years ended December 31, 1994 and 1995:
PERCENTAGE OF SALES
PRODUCT YEARS ENDED DECEMBER 31,
_______ _______________________
1994 1995
________ ________
Baseball:
Promotion 71 32
Retail 13 43
-------- --------
Total 84 75
Football:
Promotion 2 8
Retail 7 15
-------- --------
Total 9 23
Basketball:
Promotion -- --
Retail -- 1
-------- --------
Total -- 1
Other:(1)
Retail 7 1
-------- --------
Total 7 1
======== ========
(1) Includes sweetbands and soccer products.
In addition to the existing product lines noted above, the Company
expects to offer the following new or updated products in 1996:
Hockey Pucks:
The Company is re-introducing its trademarked Fotopuck(r) product. The
hockey puck is an official game puck, custom imprinted with a player's
image, team logo and/or corporate logo. In February 1996, the Company
signed a $386,000 contract with a major customer to provide Fotopucks
for a Detroit Red Wings promotion. See "Backlog."
NASCAR Product:
By the summer of 1996, the Company expects to introduce its
Fototire(r) product to auto racing fans. The product will have
promotional and retail applications. Fototire is a miniature rubber
tire scaled proportionally for size and weight and replicating the
exact appearance of a NASCAR tire. The Fototire will have the
lettering of Goodyear Tire & Rubber Co., authorized through a license
agreement with Goodyear, and will contain a disk in the center of the
tire, upon which the driver's image and/or car, along with corporate
logos, will be depicted.
-31-<PAGE>
Manufacturing, Supply and Distribution:
A significant portion of the raw materials used in the production of
the Company's products are the blank baseballs, footballs and
basketballs. In 1995, the Company purchased approximately 74% of its
raw materials from four companies located in China, with one
manufacturer, Tayang Sporting Goods Co., Ltd., accounting for 61% of
total raw materials purchased. The imprinting process, which involves
the application of an image onto the blank ball, is performed either
at the Company's San Diego, California facility or in China, depending
upon the complexity of the printing process required. Generally,
products for promotions customers are imprinted in China and products
for retail customers are imprinted at the San Diego facility. The
complex four-color process is performed exclusively at the San Diego
facility and the less sophisticated printing can be performed either
at the San Diego facility or in China. Other products, such as the
sweatbands, are manufactured according to Company specifications by
unaffiliated vendors in the United States. Beginning in the spring of
1996, the Company began having the football bladders manufactured in
China. Additionally, the Company is increasingly shifting the
imprinting of its products, including certain four-color retail
products, to companies located in China to capitalize on significantly
lower manufacturing costs. The Company's senior management
periodically visits its suppliers to supervise the manufacturing of
its products and to ensure compliance with the Company's quality
control standards and specifications. The Company is not a party to
any written contract with any supplier and relies on its long-standing
relationships to ensure quality, responsiveness and efficiency. All of
the Company's products manufactured abroad are paid for in United
States dollars.
Foreign manufacturing is subject to a number of risks, including
transportation delays and interruptions, political and economic
disruptions, the imposition of tariffs, quotas and other import or
export controls, and changes in government policies. China currently
enjoys MFN trading status with the United States. Under the Trade Act
of 1974, the President of the United States is authorized, upon making
specified findings, to waive certain restrictions that would otherwise
render China ineligible for MFN trading status. Although the
President of the United States waived these provisions in 1995 and has
waived these provisions in every year since 1979, there can be no
assurance that China will continue to enjoy MFN trading status in the
future or that conditions on China's MFN status will not be imposed.
Any conditions imposed by the President of the United States and any
legislation in the United States revoking or placing further
conditions on China's MFN trading status could have a material adverse
effect on the cost of the Company's baseballs, footballs and
basketballs because products originating from China could be subjected
to substantially higher rates of duty. Although alternative suppliers
may be available in other countries at competitive prices, and the
Company continues to evaluate their ability to compete in terms of
cost, quality, production capacity and other considerations, there can
-32-<PAGE>
be no assurance that the Company would be able to find alternative
suppliers in a timely manner or that such suppliers would meet the
Company's cost, quality or production capability standards.
Generally, the Company's products are transported to the United States
by ocean freighters. If a customer demands shorter lead times, the
customer will pay for the products to be transported by air delivery.
The inability of a supplier to ship orders of the Company's products
in a timely manner could adversely affect the Company's ability to
deliver products to its customers on schedule or could otherwise
adversely affect the Company.
Backlog:
Generally, substantially all of the Company's retail orders are
processed within one to four weeks after receipt of an order and are
therefore not deemed part of the Company's backlog. The Company
considers its backlog as those promotional orders in which an
agreement has been signed defining the terms and quantity of the
promotion, and delivery extends beyond the normal processing time of
up to four weeks. Historically, the Company's backlog of orders,
which have consisted mainly of baseball-related products, are highest
between January and April of each year and are significantly lower
during the remainder of the year. The Company's backlog of orders was
$7,200,000 and $391,000 as of May 31, 1996 and 1995, respectively.
The current backlog represents the toy car promotion previously noted.
See "Recent Developments." At May 31, 1996, Chevron accounted for all
of the Company's backlog and accounted for none of the Company's
backlog at May 31, 1995.
Seasonality:
Since the Company's products historically have been primarily
baseball-related, its sales have tended to be concentrated during the
baseball season. In 1995, 75% of the Company's sales was represented
by baseball-related products as compared to 85% in 1994. As
previously noted, the agreement to produce a national toy car
promotion for Chevron significantly decreases the dependence upon
baseball-related sales in 1996. However, since all of the above
mentioned backlog of orders will be recognized during the second
quarter of 1996, the Company will continue to experience significant
quarter-to-quarter variability in its revenues and net income.
Competition and Technological Change:
The promotions and sports-related businesses are highly competitive,
diverse and constantly changing. The Company experiences substantial
competition in most of its product categories from a number of
companies, some of which have greater financial resources and
marketing and manufacturing capabilities than the Company.
The Company competes primarily on the basis of customer service,
creativity in product design, quality and uniqueness of products,
prompt delivery and a reputation of reliability. The Company believes
that it successfully competes in each of the above areas and that the
Company has an advantage by offering a full range of services from
design through distribution.
-33-<PAGE>
The licensed sports-related product industry differentiates itself
from other industries in that the licensors control the extent of
competition among licensees and typically do not grant exclusive
licenses. Generally, licensors allow vendors to use licensed products
under non-exclusive license agreements, and such licensors may license
more than one vendor in a particular product line. Although the
Company has been successful in obtaining and renewing such licenses,
and in being the sole vendor of certain licensed product lines, there
can be no assurance that other competitors will not obtain competing
licenses to sell the same or similar products in the future. The
technology currently being used by the Company has also contributed to
restricting direct competition of its product lines. The future
success of the Company will be dependent, in large part, upon its
proprietary printing process and ability to keep pace with advancing
printing and photographic technology. There can be no assurance that
new printing or photographic technology will not be developed that
renders the Company's current printing process and products obsolete
or inferior or that other competitors will not develop the technology
currently used by the Company.
The cost of advancing the technology used in its printing process and
research and development costs associated with designing and creating
new products are not considered significant.
The domestic promotions business also is highly competitive. The
Company believes that given the custom designed nature of its sports-
related products, such as the Teamstar baseballs, mini-football and
the new Fototire, that no significant competition other than Baden
Sports, Inc., currently exists in these promotional product
categories. A variety of companies that can outsource sports ball
products from China do compete against the Company for certain
promotional orders. However, the Company believes that its
creativity, higher quality and reliable service results in a
competitive advantage. With respect to the diversification into non-
sports related promotions, such as the Chevron toy car promotion, the
Company competes with several other companies, the most significant of
which are Alcone Simms O'Brien, a division of the Omnicom Group, Inc.,
Simon Marketing, Inc. and Equity Marketing, Inc. The Company's
competitors include companies, including the ones named above, which
have significantly greater financial and other resources than are
available to the Company. There can be no assurance that the Company
will be able to compete effectively against such companies in the
future.
Within its retail business, the Company competes on the basis of its
quality photographic imaging and processing, its strong relationships
with its licensors, its price points, the brand equity of the Fotoball
name in the marketplace and its use of selected distribution channels
for retail products.
Trademarks, Proprietary Information and Patents:
Fotoball(r), Teamball(r), Fotosweats(r), Teamsweats(r), Fotopuck(r)
and Fototire(r) are registered trademarks of the Company. The Company
believes that Fotoball(r) is the best known brand name for baseballs
and other sports balls with imprinted color images. The Company also
uses brand names, such as Major League Expressions(TM), which are not
-34-<PAGE>
registered with the U.S. Patent and Trademark Office. The Company
considers the Fotoball(r) trademark to be material to its business.
The Company is able to successfully reproduce an image, with all its
half tones, on its products with detail and accuracy, using the
Company's proprietary printing process. This process was developed by
the Company by combining several pre-existing techniques that are used
in other similar industries. To the Company's knowledge, no other
company currently has the ability to perform the complete process. The
Company does not rely upon any material patents or licensed technology
in the operation of its business. The Company does not believe that it
is possible to be issued a patent on its proprietary printing process
and, accordingly, there can be no assurance that the Company's
techniques, processes and formulations will not otherwise become known
to, or independently developed by, competitors of the Company.
Governmental Approvals and Regulations and Environmental Laws:
The Company has no knowledge of any government approvals required,
including any approvals required by federal, state and local
environmental laws and regulations, in the manufacture of its retail
sports products. The Company does not know of any hazardous or harmful
elements contained in its products. In keeping with recent safety
advances, the Company uses only non-toxic, lead-free inks in all of
its production. The toy promotion business, and more specifically the
Chevron toy car promotion, subjects the Company to the provisions of
the Federal Consumer Product Safety Act and the Federal Hazardous
Substances Act (the "Acts"). The Acts empower the Consumer Product
Safety Commission (the "CPSC") to protect the public against
unreasonable risks of injury associated with consumer products,
including toys and other articles. The CPSC has the authority to
exclude from the market articles which are found to be hazardous and
can require a manufacturer to repair or repurchase such toys under
certain circumstances. Any such determination by the CPSC is subject
to court review. Violation of the Acts may also result in civil and
criminal penalties. The Company maintains a quality control program
(including the inspection of goods at factories and the retention of
independent testing laboratories) to ensure compliance with applicable
laws.
Although none of the Company's products has ever been the subject of a
safety or quality recall, the nature of the Company's business exposes
it to the possibility of liability from claims by end-users of
products that have been or may be developed or sold by the Company.
The Company currently maintains product liability insurance in the
amount of $2,000,000 per occurrence, with a $10,000,000 umbrella
liability policy. There can be no assurance that the Company will be
able to maintain such coverage or obtain additional coverage on
acceptable terms, or that such insurance will provide adequate
coverage against all potential claims.
-35-<PAGE>
Employees:
As of May 31, 1996, the Company employed 57 persons full-time,
including six in executive positions, five in advertising and sales,
five in graphic production, 11 in administrative support positions and
30 in factory production and shipping. None of the Company's
employees are covered by a collective bargaining agreement. The
Company's relationship with its employees is satisfactory.
Properties and Facilities:
The Company's headquarters are located in approximately 27,000 square
feet of leased space at 3738 Ruffin Road, San Diego, California 92123.
The headquarters are leased from an unaffiliated party under a seven-
year lease agreement which commenced in April 1994 for a monthly rent
increasing incrementally from $8,800 to $18,710, including the
additional 4,000 square feet occupied in October 1995, together with
certain common area expenses, during the term of the lease. The
Company believes that its facilities are adequate for its current
level of operations and for the foreseeable future.
Legal Proceedings:
The Company is not a party to any material litigation or legal
proceedings, and none of the Company's products has ever been the
subject of a safety or quality recall.
-36-<PAGE>
MANAGEMENT
Directors and Executive Officers of the Company:
The following table sets forth certain information as of May 31, 1996
concerning the executive officers and directors of the Company:
Name Age Position
____ ___ ________
Michael Favish 47 President, Chief Executive Officer
and Director
William R. Hasvold (1) 63 Director
Joel K. Rubenstein (2) 58 Director
Sabin C. Streeter (2) 53 Director
Robert N. Weingarten (1) 44 Director
David G. Forster 36 Vice President, Finance, Treasurer
and Chief Financial Officer
Karen M. Betro 45 Vice President, Administration
Fred S. Ostern 35 Vice President, Marketing
Michael A. Johnson 31 Vice President, Team Business
Carl E. Francis 37 Vice President, Retail Development
- ---------------
1. Member of audit committee
2. Member of compensation committee
Michael Favish has served as President and a director of the Company
since its organization in December 1988 and as President, Chief
Executive Officer and a director of the Company since March 1994.
William R. Hasvold has served as a director of the Company since
August 1994. From August 1990 to present, Mr. Hasvold has served as
President of Cinema Exec Productions, a company which provides
specialized aircraft for the motion picture industry. From September
1992 to present, Mr. Hasvold has been the sole limited partner of
Rancho Vista Development, a construction and development limited
partnership. Mr. Hasvold founded Forbco Management, a food service
business, in February 1972 and has since served as a director of
Forbco Management.
-37-<PAGE>
Joel K. Rubenstein has served as a director of the Company since
August 1994. From April 1990 through April 1992 and from March 1994 to
present, Mr. Rubenstein has been a partner of the Contrarian Group,
Inc., an operating management company. In addition, from April 1993 to
present, Mr. Rubenstein has been a principal of Oracle One Partners,
Inc., a marketing management company. From April 1992 through March
1994, Mr. Rubenstein served as the Senior Project Manager, Business &
Economic Development for Rebuild L.A., the recovery organization
created after the Los Angeles riots. Prior to such time, from January
1985 through April 1990, Mr. Rubenstein served as the Vice President,
Corporate Marketing for Major League Baseball, Office of the
Commissioner.
Sabin C. Streeter has served as a director of the Company since
January 1989. From November 1976 to the present, Mr. Streeter has been
employed as either a senior vice president or a managing director of
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), an
investment banking firm, or its venture capital affiliate, the Sprout
Group. Mr. Streeter is currently serving on the Board of Directors of
Oakwood Homes Corporation and The Middleby Corporation, both of which
are publicly-held corporations, and Parker-Hunter, Incorporated, a
privately-held securities firm.
Robert N. Weingarten has served as a director of the Company since
June 1994. From July 1992 to present, Mr. Weingarten has been the sole
shareholder of Resource One Group, Inc., a financial consulting and
advisory company ("Resource One"). From January 1991 through December
1992, Mr. Weingarten served as a general partner of Commerce Partners,
a consulting firm specializing in financial restructurings and
business reorganizations. Since 1979, Mr. Weingarten has served as a
consultant with numerous public companies in various stages of
development, operation or reorganization. Mr. Weingarten is currently
serving on the Board of Directors of Miller & Benson International,
Ltd. and Fremont Corporation, both of which are publicly-held
companies.
David G. Forster has served as Vice President, Finance of the Company
since December 1993 and has served as Treasurer and Chief Financial
Officer of the Company since March 1994. From November 1989 through
December 1993, Mr. Forster was employed as the Controller of Diamond
Designs, Inc., a retail jewelry chain. From 1986 to 1989 he was a
Senior Auditor at the certified public accounting firms of Touche Ross
and Steres, Alpert & Carne. Mr. Forster is a certified public
accountant.
Karen M. Betro has served as Vice President, Administration of the
Company since January 1996 and has served as Controller of the Company
since its organization in December 1988. During this time, Ms. Betro
was responsible for the administration and operation systems of the
Company. Ms. Betro has served as Controller and Administrative
Manager of several large corporations, including Hill & Knowlton.
-38-<PAGE>
Fred Ostern has served as Vice President of Marketing of the Company
since January 1996. From November 1991 through December 1995, Mr.
Ostern served as a consultant to the Company. Prior to January 1991,
Mr. Ostern was the principal of The Ostern Group, a sports marketing
agency, and also served as Director of Sales for ProServ Inc., a
sports marketing and management company.
Michael A. Johnson has served as Vice President, Team Business of the
Company since April 1994. From November 1991 through March 1994, Mr.
Johnson was employed as the Sales Manager/General Manager of Sports
Products Corp., a sports novelty manufacturer. From April 1990 through
October 1991, Mr. Johnson was employed as the Marketing Manager of
Excel Training, a quality control training company. Prior to such
time, from May 1986 through 1990, Mr. Johnson was a sales account
representative for Technicomp, Inc., a technical training company.
Carl E. Francis has served as Vice President, Retail Development of
the Company since January 1996 and has served as Director of Retail
Development from November 1994 through December 1995. Prior to such
time, he was a Customer Service Analyst for Prudential Mutual Funds
Services, a mutual funds service company, and Charmont, a Japanese
eyewear company. From June 1987 through December 1990, Mr. Francis was
employed as Retail Sales Manager for Major League Baseball Properties
in New York City. Prior to this, from January 1981 through May 1987,
Mr. Francis was a retail buyer for J.C. Penney Company (1982-1987) and
Abraham & Straus (1981-1982), both of which are retail department
store chains.
Directors:
The Company's Board of Directors is divided into three classes, as
nearly equal in number as the then total number of directors
constituting the whole Board of Directors permits. Directors from each
class will be elected at the annual meeting of stockholders held in
the year in which the term for such class expires and will serve
thereafter for three years. Mr. Streeter is serving as a Class 1
director with his term expiring at the 1998 Annual Meeting of
Stockholders, Mr. Rubenstein and Mr. Weingarten are serving as Class 2
directors with their terms expiring at the 1999 Annual Meeting of
Stockholders and Mr. Favish and Mr. Hasvold are serving as Class 3
directors with their terms expiring at the 1997 Annual Meeting of
Stockholders. For further information on the effect of the classified
Board of Directors, see "Description of Securities -- Certain
Provisions of the Company's Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws."
Directors who are not employees of the Company receive cash
compensation of $6,000 per calendar year and options to purchase 2,500
shares of Common Stock on July 1 (beginning in 1995) of each of their
first three years of service on the Board of Directors. All directors
will be reimbursed for reasonable expenses incurred in connection with
attendance of meetings. See "Management -- Option Plan." Officers are
elected by the Board of Directors and serve at the discretion of the
Board.
-39-<PAGE>
The Company has agreed until August 11, 1999, if so requested by the
Representative, to allow the Representative to send a representative
(who need not be the same individual from meeting to meeting) to
observe each meeting of the Company's Board of Directors. During such
period, the Company has also agreed to provide such representative the
same notices and communications sent by the Company to its directors,
but such representative will not be entitled to vote at any such
meeting.
The Company currently has standing audit and compensation committees.
The audit committee's primary responsibilities are to recommend the
appointment of the Company's independent auditors and to review the
scope and results of the audits, the internal accounting controls of
the Company, audit practices and the professional services furnished
by the independent auditors. The compensation committee's primary
responsibility is to review the compensation arrangements relating to
senior officers of the Company and to administer the Option Plan. On May
3, 1996 the stock option committee was dissolved and the duties of the
committee were assigned to the compensation committee.
Executive Compensation:
The following table shows, for the fiscal years ended December 31,
1993, 1994 and 1995, the compensation paid by the Company, as well as
certain other compensation paid or accrued for those years to Michael
Favish, the Company's President and Chief Executive Officer (the
"Named Executive"). No other executive officer of the Company received
salary and bonus in excess of $100,000 during the fiscal year ended
December 31, 1995.
Summary Compensation Table
Annual Long-Term
Compensation Compensation
____________ ____________
Name and
Principal Other Annual
Position Year Salary($) Bonus Compensation Options(#)
________ ____ ______ _____ ____________ _______
Michael Favish 1995 152,756 0 0 0
President and Chief 1994 100,742 0 0 100,000
Executive Officer 1993 84,198 0 0 0
Stock Options
No stock options were granted to the Named Executive during the fiscal
year ended December 31, 1995.
The Company does not currently grant stock appreciation rights.
Option Holdings:
The following table sets forth information with respect to the Named
Executive concerning the exercise of options during the fiscal year
ended December 31, 1995 and the unexercised options held as of
December 31, 1995. The Named Executive did not exercise options
during the fiscal year ended December 31, 1995.
-40-<PAGE>
Fiscal Year-End Option Values
Number of Value of
Unexercised Unexercised
Options In-the-Money Options
at FY-End (#) at FY-End ($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
____ ___________ _____________ ___________ _____________
Michael Favish 33,333 66,667 0 0
___________
(1) The closing bid price of the Common Stock on the Nasdaq SmallCap
Market on December 31, 1995 was $4.375.
Employment Contracts and Termination of Employment
and Change-in-Control Arrangements:
The Company is party to an employment agreement with Mr. Favish (the
"Favish Agreement"), which provides that Mr. Favish will serve as
President and Chief Executive Officer for an initial term of five
years commencing on August 11, 1999. His salary is $150,000 per year,
with annual cost of living increases and additional increases after
one year at the discretion of the compensation committee. Mr. Favish
is also entitled to a bonus at the discretion of the compensation
committee and has been granted options, vesting over a three-year
period, to purchase 100,000 shares of Common Stock at a per share
exercise price of $5.78. The Favish Agreement also provides that Mr.
Favish will not engage in a business which competes with the Company
for the term of the Favish Agreement and for two years thereafter. In
the event that Mr. Favish's employment is terminated as a result of a
Constructive Termination (as defined in the Favish Agreement), the
Favish Agreement provides that the Company will pay Mr. Favish the
base salary and bonus compensation payable to Mr. Favish through the
remainder of the term of the Favish Agreement. In the event that Mr.
Favish's employment is terminated following a Change in Control (as
defined in the Favish Agreement) of the Company, the Favish Agreement
provides that the Company will pay Mr. Favish a termination and non-
competition payment equal to the greater of (i) the base salary and
bonus compensation payable to Mr. Favish through the remainder of the
term of the Favish Agreement or (ii) 2.99 times Mr. Favish's base
salary and bonus compensation for the calendar year prior to such
termination.
The Company is a party to an employment agreement (the "Ostern
Agreement") with Fred Ostern. The Ostern Agreement provides that Mr.
Ostern will serve as Vice President of Marketing for a term of three
years commencing January 1, 1996. Mr. Ostern's annual base salary
will be $150,000 per year, with increases at the discretion of the
Board of Directors. In addition, Mr. Ostern is entitled to annual
bonus compensation based upon Mr. Ostern's contribution to overhead
and profit. Pursuant to the terms of the Ostern Agreement, such
contribution is equal to the gross annual sales of the Company
produced by Mr. Ostern less (i) sales return, allowances and certain
discounts, (ii) the cost of sales (not including commissions,
-41-<PAGE>
marketing expenses and general and administrative expenses) and
royalty expenses, and (iii) certain other costs (as defined in the
Ostern Agreement). If the Ostern Agreement is not renewed by the
Company and Mr. Ostern at the expiration of its term, the Company is
required to pay Mr. Ostern severance and non-competition payment equal
to the annual bonus compensation earned by Mr. Ostern in each fiscal
year of the Company after the expiration of the term based upon Mr.
Ostern's contribution to overhead and profit represented by projects
which are in process or invoiced on the last day of Mr. Ostern's term.
In connection with the foregoing payments, Mr. Ostern has also agreed
to certain limited non-competition provisions for a period of one year
after the expiration of the term of the Ostern Agreement.
Option Plan:
The Option Plan provides for the issuance of options to purchase up to
an aggregate of 375,000 shares of Common Stock (subject to adjustment
in the event of stock splits, stock dividends and similar dilutive
events) to regular, full-time employees and non-employee directors of
the Company or any parent or subsidiary (as defined in the Option
Plan) of the Company. To date, the Company has granted options to
purchase 258,000 shares of Common Stock under the Option Plan. The
maximum number of shares for which options may be granted under the
Option Plan in any calendar year to any one employee is 100,000,
subject to an aggregate maximum for all employees in all years of 200,000.
The Option Plan is administered by the compensation committee of the
Board of Directors, and all directors on the compensation committee
administering the Option Plan are both (i) "disinterested directors"
as defined in Rule 16b-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and (ii) "outside directors" as that
term is used for purposes of Section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"). No director will be compensated
in connection with administering the Option Plan other than through
receipt of the fee otherwise paid to the non-employee directors,
including options available under the Option Plan to non-employee
directors as described below. Subject to the provisions of the Option
Plan, the compensation committee will have the authority to determine
the individuals to whom the stock options are to be granted, the
number of shares to be covered by each option, the exercise price, the
type of option, the option period, the restrictions, if any, on the
exercise of the option, the terms for the payment of the option price
and other terms and conditions.
The Option Plan authorizes the issuance of incentive stock options
("ISOs"), as defined in Section 422 of the Code, and non-qualified
stock options ("NQSOs"), which do not conform to the requirements of
Section 422 of the Code or which the administrator elects to treat as
NQSOs. Pursuant to the Option Plan, employees of the Company may be
granted either ISOs or NQSOs and non-employee directors of the Company
may only be granted NQSOs. The exercise price of each option shall be
-42-<PAGE>
fixed by the administrator of the Option Plan, but may not be less
than the greater of (i) 100% of the fair market value of the Common
Stock at the time of grant or (ii) $5.25, except that the exercise
price of each ISO granted to an employee who owns 10% or more of the
outstanding stock of the Company or a subsidiary or parent of the
Company (a "10% Stockholder") shall not be less than the greater of
(x) 110% of the fair market value on the date of grant or (y) $5.25.
The term of each NQSO shall be fixed by the administrator of the
Option Plan but generally shall not exceed ten years from the date of
grant. The terms of each ISO shall in no event be more than ten years
from the date of grant, or in the case of an ISO granted to a 10%
stockholder, five years from the date of grant. Options may not be
transferred during the lifetime of an optionholder. No stock options
may be granted under the Option Plan after the tenth anniversary of
the adoption of the Option Plan by the Board of Directors of the
Company. Payments by optionholders upon exercise of an option may be
made (as determined by the administrators of the Option Plan) in cash
or such other form of payment as may be permitted under the Option
Plan, including, without limitation, shares of Common Stock.
In addition to the ISOs and NQSOs which may be granted to employees
under the Option Plan at the discretion of the administrator of the
Option Plan, each eligible non-employee director automatically
receives on July 1 during the term of the Plan of each of the first
three years of service as a non-employee director on the Board of
Directors an option to purchase 2,500 shares of Common Stock. The
exercise price of the shares of Common Stock subject to options
granted to each non-employee director shall be equal to the greater of
(i) the fair market value of the shares of Common Stock on the date of
grant or (ii) $5.25. Options granted under the Option Plan to non-
employee directors, with limited exceptions, may only be exercised
within ten years of the date of grant and while the recipient of the
option is a director of the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Weingarten, a director of the Company, is currently retained as a
consultant to the Company. Pursuant to a prior consulting agreement
with Mr. Weingarten, the Company agreed to pay Mr. Weingarten an
aggregate sum of $60,000, including $30,000 on or before August 1,
1994 and an additional $30,000 in 12 equal monthly installments of
$2,500 each, commencing September 1, 1994. The Company has entered
into a new consulting agreement with Mr. Weingarten for a twelve-month
period commencing September 1, 1995 in the amount of $2,500 per month.
Effective January 1, 1996, the Board of Directors approved a $10,000
increase in Mr. Weingarten's consulting agreement, to be paid over the
remaining term of the agreement.
The Company was party to an Exclusive Services Agreement (the "TEGI
Agreement") dated December 23, 1993 with The Eastwoods Group, Inc.
-43-<PAGE>
("TEGI") for the services of Fred Ostern. Mr. Ostern is the sole
officer of TEGI. Pursuant to the TEGI Agreement, TEGI agreed to
provide the Company with the exclusive services of Mr. Ostern until
December 31, 1995. In connection with such provision of services of
Mr. Ostern, pursuant to which Mr. Ostern participated in the
management of promotions contracts from negotiation to completion,
TEGI was paid $296,185 in 1994 and $329,965 in 1995. Pursuant to a
prior employment agreement with Mr. Ostern, Mr. Ostern was paid
$281,495 in 1993, based on the annual sales of the Company for which
he was responsible. Effective January 1, 1996, the Company is party
to the Ostern Agreement with Mr. Ostern. See "Management -- Employment
Contracts and Termination of Employment and Change-in-Control
Arrangements."
Michael Favish, President and Chief Executive Officer and a director
of the Company, and Karen Betro, Vice President-Administration, have
had a long-term personal relationship. Derrick Favish, a non-officer
employee and stockholder of the Company, is the brother of Michael
Favish.
Any future transaction with directors, executive officers or their
affiliates, including, without limitation, any granting or forgiveness
of loans, will be made only if the transaction has been approved by a
majority of the then independent and disinterested members of the
Board of Directors and is on terms no less favorable to the Company
than could have been obtained from unaffiliated parties.
-44-<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of June 1, 1996
with respect to the Common Stock of the Company beneficially owned by
(i) each stockholder known to the Company to own beneficially more
than 5% of the outstanding shares of Common Stock of the Company, (ii)
each director of the Company, (iii) the Named Executive and (iv) all
executive officers and directors of the Company as a group:
Amount and Percent of
Name and Nature of Common Stock
Address of Beneficial Beneficial
Beneficial Owner Ownership(1) Ownership(1)
_______________ _________ _________
Michael Favish
3738 Ruffin Road
San Diego, CA 92123 439,252(2) 16.3%
Robert N. Weingarten
5439 Lockhurst Drive
Woodland Hills, CA 91367 71,945(3) 2.7%
Sabin C. Streeter
2 Woods Witch Lane
Chappaqua, NY 10514 28,747(4) *
William R. Hasvold
22128 Serenade Ridge
Murrieta, CA 92562 2,500(5) *
Joel K. Rubenstein
500 Newport Center Drive, Suite 900
Newport Beach, CA 92660 2,800(3) *
All executive officers and directors
as a group (consisting of 10 persons) 588,454 21.4%
__________________________
* Less than 1%.
(1)This table identifies persons having sole voting and/or investment
power with respect to the shares of Common Stock set forth opposite
their names as of May 31, 1996, according to information furnished to
the Company by each of them. A person is deemed to be the beneficial
owner of securities that can be acquired by such person within 60 days
from the date of this Prospectus upon the conversion of convertible
securities or the exercise of warrants or options. Percent of Common
Stock Beneficial Ownership is based on a total of 2,661,742 shares of
Common Stock outstanding, and assumes in each case that the person
only, or the group only, exercised his or its rights to purchase all
shares of Common Stock underlying convertible securities, options or
warrants.
-45-<PAGE>
(2) Includes 33,333 shares of Common Stock issuable upon exercise of a
currently exercisable option at a per share price of $5.78.
(3) Includes 2,500 shares of Common Stock issuable upon exercise of a
currently exercisable option at a per share exercise price of $5.25.
(4) Includes 7,500 shares of Common Stock issuable upon exercise of
currently exercisable options at a per share exercise price of $5.25.
(5) Does not include 100,694 shares of Common Stock owned by Rancho
Vista Development, a limited partnership of which Mr. Hasvold is the
sole limited partner. Mr. Hasvold does not possess voting or
investment power over such shares and Mr. Hasvold disclaims beneficial
ownership of such shares. Includes 2,500 shares of Common Stock
issuable upon exercise of a currently exercisable option at a per
share exercise price of $5.25.
PER SHARE PRICE OF SECURITIES
The Common Stock and Warrants have been traded over-the-counter on the
Nasdaq SmallCap Market since August 12, 1994, the effective date of
the Initial Public Offering. The following table sets forth the range
of bid prices for the Common Stock and Warrants during the periods
indicated and represents inter-dealer prices, without retail mark-ups,
mark-downs or commissions to the broker-dealer, and may not
necessarily represent actual transactions.
Nasdaq
Symbol High Low
__________ ________ _______
Common Stock (FUSA)
1994
Third Quarter (8/12/94-9/30/94) $5.88 $4.38
Fourth Quarter $4.75 $4.00
1995
First Quarter $4.50 $4.00
Second Quarter $5.25 $2.50
Third Quarter $5.50 $3.13
Fourth Quarter $5.50 $3.13
1996
First Quarter $5.50 $3.88
Second Quarter (4/01/96-6/17/96) $10.50 $7.50
Warrants (FUSAW)
1994
Third Quarter (8/12/94-9/30/94) $2.19 $1.00
Fourth Quarter $1.81 $1.69
-46-<PAGE>
1995
First Quarter $1.38 $1.25
Second Quarter $1.25 $ .38
Third Quarter $ .94 $ .50
Fourth Quarter $1.25 $ .56
1996
First Quarter $1.50 $ .88
Second Quarter (4/01/96-6/17/96) $4.25 $2.38
SELLING STOCKHOLDERS
The following tables set forth certain information with respect to the
Selling Stockholders as of May 31, 1996. The Warrants and shares of
Common Stock set forth therein are being included in the Registration
Statement of which this Prospectus forms a part pursuant to
registration commitments afforded to the Selling Stockholders by
contractual obligations. There are no relationships between the
Company and the Selling Stockholders. The Company will not receive any
proceeds from the sale of any securities by the Selling Stockholders.
Beneficial
Ownership
of Warrants/
Shares of
Beneficial Warrants/ Common Stock
Name of Ownership of Shares of After Giving
Selling Warrants/Shares Common Stock Effect to
Stockholder of Common Stock Offered for Sale Proposed Sale
___________ _______________ ________________ _____________
Steven M. Newpol 6,667/ 6,667 6,667/ 6,667 0/ 0
W. Donald DeWitt 1,250/ 600 1,250/ 600 0/ 0
- ----------- --------------- ---------------- -------------
Total 7,917/ 7,267 7,917/ 7,267 0/ 0
=========== =============== ================ =============
The Company has been advised by the Selling Stockholders that there
are no underwriting arrangements with respect to the sale of the above
securities (collectively, the "Selling Stockholder Securities"). The
sale of the Selling Stockholder Securities by the Selling Stockholders
may be effected from time to time in transactions (which may include
block transactions) in the over-the-counter market, in negotiated
transactions, through the writing of options on the Common Stock, or a
combination of such methods of sale, at fixed prices which may be
changed, at market prices prevailing at the time of sale or at
negotiated prices. The Selling Stockholders may effect such
transactions by selling the Selling Stockholder Securities directly to
purchasers or to or through broker-dealers which may act as agents or
-47-<PAGE>
principals. The Representative may act as a broker for such sales.
Such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the
purchasers of the Selling Stockholder Securities for which such
broker-dealers may act as agents or to whom they sell as principal, or
both (which compensation as to a particular broker-dealer might be in
excess of customary commissions). The Selling Stockholders and any
broker-dealers that act in connection with the sale of the Selling
Stockholder Securities might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any discounts and
commissions received by them and any profit realized by them on resale
of such shares may be deemed to be underwriting discounts and
commissions under the Securities Act.
DESCRIPTION OF SECURITIES
General:
The Company is authorized to issue 15,000,000 shares of Common Stock,
par value $.01 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share ("Preferred Stock"). As of May 31, 1996,
2,661,742 shares of Common Stock are outstanding, held of record by
approximately 75 persons, and no shares of Preferred Stock are
outstanding. Based on information provided by the Company's transfer
agent and registrar, the Company believes that there are at least 950
beneficial owners of the Common Stock.
Common Stock:
The holders of Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by stockholders. There is
no cumulative voting with respect to the election of directors, with
the result that the holders of more than 50% of the shares voting for
the election of directors can elect all of the directors then being
elected. The holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled
to share ratably in all assets remaining which are available for
distribution to them after payment of liabilities and after provision
has been made for each class of stock, if any, having preference over
the Common Stock. Holders of shares of Common Stock, as such, have no
conversion, preemptive or other subscription rights, and there are no
redemption provisions applicable to the Common Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock
issuable upon exercise of outstanding Warrants, when issued and paid
for as set forth in this Prospectus, will be, fully paid and
nonassessable.
-48-<PAGE>
Preferred Stock:
The Certificate authorizes the issuance of 1,000,000 shares of
Preferred Stock, with such designations, rights and preferences as may
be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting or other rights which could adversely affect the
voting power or other rights of the holders of the Common Stock. In
addition, the Preferred Stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Although the Company does not intend
to issue any shares of Preferred Stock, there can be no assurance that
the Company will not do so in the future.
Warrants:
Each Warrant entitles the registered holder thereof to purchase one
share of Common Stock for $6.50, subject to adjustment in certain
circumstances, during the four-year period commencing August 11, 1995.
The Company may call the Warrants for redemption, in whole or in part,
at a price of $.01 per Warrant, at any time after they became
exercisable upon five business days' prior written notice to the
Representative and upon not less than 30 days' prior written notice to
the warrantholders, if the last sale price of the Common Stock has
been at least $9.75 for the 20 consecutive trading days ending on the
third day prior to the date on which the notice of redemption is
given. The warrantholders shall have the right to exercise the
Warrants until the close of business on the date fixed for redemption.
The Warrants are issued in registered form pursuant to the terms of
the Warrant Agreement. Reference is made to the Warrant Agreement
(which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part) for a complete description of the
terms and conditions applicable to the Warrants (the description
herein contained being qualified in its entirety by reference to the
Warrant Agreement).
The exercise price, number of shares of Common Stock issuable on
exercise of the Warrants and redemption price are subject to
adjustment in certain circumstances, including in the event of a stock
dividend, recapitalization, reorganization, merger or consolidation of
the Company. However, the Warrants are not subject to adjustment for
issuances of Common Stock at prices below their exercise price.
The Warrants may be exercised upon surrender of the Warrant
certificate (the "Warrant Certificate") on or prior to the expiration
date at the offices of the Warrant Agent, with the exercise form on
the reverse side of the Warrant Certificate completed and executed as
indicated, accompanied by full payment of the exercise price (by
certified check, payable to the Company) for the number of Warrants
being exercised. The warrantholders do not have the rights or
privileges of holders of Common Stock prior to exercise of the
Warrants.
-49-<PAGE>
No Warrants will be exercisable unless at the time of exercise there
is a current prospectus covering shares of Common Stock issuable upon
exercise of such Warrants under an effective registration statement
filed with the Commission and such shares have been qualified for sale
or are exempt from qualification under the securities laws of the
state of residence of the holder of such Warrants.
No fractional shares will be issued upon exercise of the Warrants.
However, if a warrantholder exercises all Warrants then owned of
record by him, the Company will pay to such warrantholder, in lieu of
the issuance of any fractional share which is otherwise issuable, an
amount in cash based on the market value of the Common Stock on the
last trading day prior to the exercise date.
Merger and Reverse Stock Split:
Fotoball California was incorporated under the laws of the State of
California on December 13, 1988. The Company was incorporated under
the laws of the State of Delaware on April 27, 1994 only for the
purpose of merging with and continuing the business of Fotoball
California. Prior to the Merger, the Company had no assets,
liabilities or operations. On July 29, 1994, Fotoball California
merged with and into the Company, with the Company being the surviving
corporation. The Merger was consummated under the laws of the State of
Delaware in order to obtain the benefits of (i) certain provisions of
the Delaware General Corporation Law ("DGCL"), including
indemnification of officers and directors, (ii) the substantial body
of case law that has developed construing the DGCL and (iii) the
public policies with respect to Delaware domiciliary corporations.
Certain Provisions of the Company's Amended and Restated Certificate
of Incorporation and Amended and Restated By-Laws:
The provisions of the Certificate and By-Laws summarized in the
succeeding paragraphs may be deemed to have certain anti-takeover
effects which may make more difficult, time-consuming or costly, or
otherwise discourage, a tender offer, merger proposal, proxy contest
or other attempt to take control of the Company or its Board of
Directors that a stockholder might consider to be in such
stockholder's best interest, including an attempt that might result in
a premium over the then-current market price for the Company's shares.
Removal of Directors and Filling Vacancies on the Board of Directors.
The Certificate and By-Laws provide that, subject to the rights of the
holders of any class or series of Preferred Stock, (i) a director may
be removed by stockholders only for cause with the approval of the
holders of a majority of the total voting power of all outstanding
securities of the Company then entitled to vote generally in the
election of directors, voting together as a single class, and (ii)
vacancies in the Board of Directors resulting from death, resignation,
removal (including removal of a director by the stockholders for
cause) or otherwise and newly created directorships resulting from any
increase in the number of directors shall be filled by a majority of
directors then in office.
-50-<PAGE>
Classified Board of Directors. The Board of Directors is divided into
three classes of directors, as nearly equal in number as the then
total number of directors constituting the whole Board of Directors
permits, serving staggered three-year terms. As a result,
approximately one-third of the Board of Directors will be elected at
each annual meeting of stockholders. The classification of directors,
together with the provision in the Certificate that limits the ability
of stockholders to remove directors, has the effect of making it more
difficult for stockholders to change the composition of the Board of
Directors. As a result, absent the approval of the incumbent Board of
Directors, at least two annual meetings of stockholders may be
required for the stockholders to change a majority of the directors,
whether or not a majority of the Company's stockholders believes that
such a change would be desirable.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The By-Laws establish advance notice procedures with
regard to stockholder proposals and the Certificate establishes
advance notice procedures with regard to stockholder proposals for the
nomination, other than by or at the direction of the Board of
Directors or a committee thereof, of candidates for election as
directors. These procedures require stockholders to provide the
Company with notice of their intent to nominate directors or propose
new business at an annual meeting of stockholders not less than 60
days nor more than 90 days prior to the anniversary date of the
immediately preceding annual meeting. However, if the annual meeting
is not held within 30 days of the anniversary date of the immediately
preceding annual meeting, then stockholders must provide advance
notice to the Company within ten days after notice or prior public
disclosure of the annual meeting is given or made to stockholders. The
Company may reject a stockholder proposal or nomination that is not
made in accordance with such procedures. Although the notice
provisions do not give the Board of Directors any power to approve or
disapprove of stockholder nominations or stockholder proposals, they
may have the effect of precluding a contest for the election of
directors or a stockholder proposal if the procedures established by
the By-Laws are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate
of directors or propose an item of business, without regard to whether
consideration of such nominees or proposal might be harmful or
beneficial to the Company and its stockholders.
Delaware Anti-Takeover Law. The Company is subject to the provisions
of Section 203 of the DGCL. Section 203 of the DGCL provides, with
certain exceptions, that a Delaware corporation may not engage in
certain business combinations with a person or affiliate or associate
of such person who is an "interested stockholder" for a period of
three years from the date such person became an interested stockholder
unless: (i) the transaction resulting in the person's becoming an
interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder; (ii) the interested stockholder acquires 85%
percent or more of the outstanding voting stock of the corporation in
the same transaction which makes such person an interested stockholder
(excluding certain employee stock option plans); or (iii) on or after
the date the person becomes an interested stockholder, the business
-51-<PAGE>
combination is approved by the corporation's board of directors and by
the holders of at least 66 2/3% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned
by the interested stockholder. An "interested stockholder" is defined
as any person that is (x) the owner of 15% or more of the outstanding
voting stock of the corporation or (y) an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three year
period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder. Under
Delaware law, the Company could have opted out of Section 203 of the
DGCL but elected to be subject to its provisions.
Limitation of Liability of Directors and Indemnification of Directors
and Officers. The Certificate contains provisions to limit the
personal liability of its directors for monetary damages for breach of
their fiduciary duties, except for liability that cannot be eliminated
under the DGCL, including (i) for any breach of the duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for any unlawful payment of a dividend or
unlawful stock purchase or redemption, as provided in Section 174 of
the DGCL, or (iv) for any transaction from which a director derived an
improper personal benefit. The Certificate also provides that the
Company shall indemnify its directors and officers to the fullest
extent permitted by Section 145 of the DGCL, including circumstances
in which indemnification is otherwise discretionary. Insofar as
indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers, and controlling persons of the
Company, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
Transfer and Warrant Agent:
The transfer agent and registrar for the Common Stock and Warrant
Agent for the Warrants is Continental Stock Transfer & Trust Company,
2 Broadway, New York, New York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
As of May 31, 1996, the Company has 2,661,742 shares of Common Stock
outstanding. Of such shares, 1,442,923 have been registered under the
Registration Statement of which this Prospectus forms a part and
therefore are freely tradeable without restriction or further
registration under the Securities Act. The 1,218,819 remaining shares
are "Restricted Securities," as that term is defined under Rule 144
promulgated under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned Restricted Securities for at least two years from
the date such Restricted Securities were acquired from the Company, is
-52-<PAGE>
entitled to sell within any three-month period a number of shares that
does not exceed the greater of 1% of the then outstanding shares of
Common Stock (26,617 shares based on the number of shares outstanding
as of May 31, 1996) or the average weekly trading volume in the public
market during the four calendar weeks preceding such sale. Sales under
Rule 144 are also subject to certain requirements as to the manner and
notice of sale and the availability of public information concerning
the Company. Further, under Rule 144(k), if a period of at least three
years has elapsed from the date that Restricted Securities were
acquired from the Company, and the person was not an affiliate for at
least three months prior to the date of sale, such person would be
entitled to sell the shares immediately without regard to volume
limitations and the other conditions described above.
In connection with the Initial Public Offering, the Company sold to
the Representative and its designees for an aggregate of $55 the
Purchase Option to purchase up to 110,000 Units. The Purchase Option
is exercisable initially at $9.90 per Unit (165% of the Initial Public
Offering price per Unit) for a period of four years commencing August
11, 1995. The Units purchasable upon exercise of the Purchase Option
are identical to the Units offered hereby, except that the exercise
price of the Warrants underlying the Purchase Option is 122% of the
exercise price of the Warrants included in this Prospectus. The
Purchase Option grants to the holders thereof certain "piggyback" and
demand rights for periods of seven years and five years from August
11, 1994, respectively, with respect to registration under the
Securities Act of the securities directly and indirectly issuable upon
exercise of the Purchase Option.
The Company has engaged the Representative, on a non-exclusive basis,
as its agent for the solicitation of the exercise of the Warrants. To
the extent not inconsistent with the guidelines of the National
Association of Securities Dealers, Inc. and the rules and regulations
of the Commission, the Company has agreed to pay the Representative
for bona fide services rendered a commission equal to 4% of the
exercise price for each Warrant exercised after August 11, 1995 if the
exercise was solicited by the Representative. No compensation will be
paid to the Representative in connection with the exercise of the
Warrants if the market price of the underlying shares of Common Stock
is lower than the exercise price, the Warrants are held in a
discretionary account, the Warrants are exercised in an unsolicited
transaction or the arrangement to pay the commission is not disclosed
in the prospectus provided to warrantholders in connection with such
exercise. In addition, unless granted an exemption by the Commission
from Rule 10b-6 under the Exchange Act, while it is soliciting
exercise of the Warrants, the Representative will be prohibited from
engaging in any market-making activities or solicited brokerage
activities with regard to the Company's securities unless the
Representative has waived its right to receive a fee for the exercise
of the Warrants.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for
the Company by Shereff, Friedman, Hoffman & Goodman, LLP, New York,
New York.
-53-<PAGE>
EXPERTS
The financial statements of the Company at December 31, 1994 and 1995
appearing in this Prospectus and in the Registration Statement of
which this Prospectus forms a part have been audited by Hollander,
Gilbert & Co., independent auditors, as set forth in their reports
thereon appearing elsewhere herein and in the Registration Statement
of which this Prospectus forms a part, and are included in reliance
upon such reports given upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
Following the sale of the securities offered by this Prospectus, the
Company will be subject to the informational requirements of the
Exchange Act, and in accordance therewith will file reports, proxy
statements and other information with the Commission. Such reports,
proxy statements and other information concerning the Company may be
inspected without charge at the Public Reference Room maintained by
the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. In addition, upon request such reports, proxy statements and
other information will be made available for inspection and copying at
the Commission's public reference facilities at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and at Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material
can be obtained at prescribed rates upon request from the Public
Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
The Company has filed with the Commission a Registration Statement on
Form SB-2 under the Securities Act with respect to the securities
offered by this Prospectus. This Prospectus does not contain all of
the information set forth in the Registration Statement and in the
exhibits thereto, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. For further
information with respect to the Company and the Initial Public
Offering, reference is made to the Registration Statement, including
the exhibits filed therewith, copies of which may be obtained at
prescribed rates from the Commission at the public reference
facilities maintained by the Commission. Descriptions contained in
this Prospectus as to the contents of any contract or other documents
filed as an exhibit to the Registration Statement are not necessarily
complete and each such description is qualified by reference to such
contract or documents.
The Company intends to furnish to its stockholders annual reports
containing financial statements which will be audited and reported on
by its independent public accounting firm and such other periodic
reports as the Company may determine to be appropriate or as may be
required by law.
No dealer, sales representative or other person has been authorized to
give any information or to make any representations in connection with
this Offering other than those contained in this Prospectus and, if
given or made, such information or representations must not be relied
-54-<PAGE>
upon as having been authorized by the Company or the Underwriters.
This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities other than the
registered securities to which it relates or an offer to, or a
solicitation of, any person in any jurisdiction in which such offer or
solicitation is not authorized or would be unlawful. The delivery of
this Prospectus and/or any sale made hereunder shall not, under any
circumstances, create any implication that the information contained
herein is correct as of any time subsequent to the date of this
Prospectus.
TABLE OF CONTENTS
Page
____
Prospectus Summary 2
Risk Factors 6 1,411,673 Shares of
Use of Proceeds 10 Common Stock
Dividend Policy 10
Dilution 10
Capitalization 11
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations 12
Business 17 FOTOBALL USA, INC.
Management 27
Certain Relationships and
Related Transactions 32
Principal Stockholders 33
Per Share Price of Securities 34 PROSPECTUS
Selling Stockholders 35
Description of Securities 36
Shares Eligible for Future Sale 39
Legal Matters 39 June __, 1996
Experts 39
Additional Information 40
Index to Financial Statements F-1
Item 24. Indemnification of Directors and Officers.
The indemnification of officers and directors of the Company is
governed by Section 145 of the DGCL and the Certificate and By-Laws of
the Company. Among other things, the DGCL permits indemnification of a
director, officer, employee or agent in civil, criminal,
administrative or investigative actions, suits or proceedings (other
than an action by or in the right of the corporation) to which such
person is a party or is threatened to be made a party by reason of the
fact of such relationship with the corporation or the fact that such
person is or was serving in a similar capacity with another entity at
the request of the corporation against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him if such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action
or proceeding, if he had no reasonable cause to believe his conduct
was unlawful. No indemnification may be made in any such suit to any
-55-<PAGE>
person adjudged to be liable to the corporation unless and only to the
extent that the Delaware Court of Chancery or the court in which the
action was brought determines that, despite the adjudication of
liability, such person is under all circumstances, fairly and
reasonably entitled to indemnity for such expenses which such court
shall deem proper. Under the DGCL, to the extent that a director,
officer, employee or agent is successful, on the merits or otherwise,
in the defense of any action, suit or proceeding or any claim, issue
or matter therein (whether or not the suit is brought by or in the
right of the corporation), he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him.
In all cases in which indemnification is permitted (unless ordered by
a court), it may be made by the corporation only as authorized in the
specific case upon a determination that the applicable standard of
conduct has been met by the party to be indemnified. The determination
must be made by a majority vote of a quorum consisting of the
directors who were not parties to the action or, if such a quorum is
not obtainable, or even if obtainable, if a quorum of disinterested
directors so directs, by independent legal counsel in a written
opinion, or by the stockholders. The statute authorizes the
corporation to pay expenses incurred by an officer or director in
advance of a final disposition of a proceeding upon receipt of an
undertaking by or on behalf of the person to whom the advance will be
made, to repay the advances if it shall ultimately be determined that
he was not entitled to indemnification. The DGCL provides that
indemnification and advances of expenses permitted thereunder are not
to be exclusive of any rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors, or
otherwise. The DGCL also authorizes the corporation to purchase and
maintain liability insurance on behalf of its directors, officers,
employees and agents regardless of whether the corporation would have
the statutory power to indemnify such persons against the liabilities
insured.
The Certificate provides that no director of the Company shall be
personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director except for
liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation
of law, (iii) for paying a dividend or approving a stock repurchase in
violation of Section 174 of the DGCL or (iv) for any transaction from
which the director derived an improper personal benefit.
The By-Laws provide that directors, officers and others shall be
indemnified to the fullest extent authorized by the DGCL, as in effect
(or, to the extent indemnification is broadened, as it may be
amended), against any and all judgments, fines and amounts paid in
settling or otherwise disposing of threatened, pending or completed
actions, suits or proceedings, whether civil, criminal, administrative
or investigative and expenses incurred by such person in connection
-56-<PAGE>
therewith. The By-Laws further provide that, to the extent permitted
by law, expenses so incurred by any such person in defending a civil
or criminal action or proceeding shall, at his request, be paid by the
Company in advance of the final disposition of such action or
proceeding.
The By-Laws provide that the right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition shall not be exclusive of any other right which any person
may have or acquire under any statute, provision of the Certificate or
By-Laws or otherwise.
The Company maintains directors and officers liability and company
reimbursement insurance which, among other things, (i) provides for
payment on behalf of its officers and directors against loss as
defined in the policy stemming from acts committed by directors and
officers in their capacity such and (ii) provides for payment on
behalf of the Company against such loss but only when the Company
shall be required or permitted to indemnify directors or officers for
such loss pursuant to statutory or common law or pursuant to duly
effective Certificate or By-Law provisions.
Item 25. Other Expenses of Issuance and Distribution.
The expenses in connection with the Offering are:
Accounting fees and expenses* $ 5,000.00
Legal fees and expenses* 30,000.00
Printing costs* 5,000.00
Miscellaneous* 5,000.00
----------
Total $50,000.00
==========
*Estimated.
Item 26. Recent Sales of Unregistered Securities.
Since June 1, 1993, the Company has sold unregistered securities in
the amounts, at the time and for the aggregate amounts of
consideration listed as follows:
Pursuant to the terms of an agreement dated February 26, 1994, the
Company issued to John Svenson 31,250 shares of Common Stock. In
partial consideration therefor, Mr. Svenson terminated his option to
purchase 48,611 shares of Common Stock.
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During March and April, 1994, the Company entered into an agreement
with the holders of the Company's 10% Convertible Subordinated
Debentures ("Debentures"), pursuant to which such holders exchanged
their Debentures, including unpaid and accrued interest thereon, into
an aggregate of 39,581 shares of Common Stock.
On March 24, 1994, the Company completed the Bridge Financing and, in
connection therewith, the Company issued on August 19, 1994 an
aggregate of 146,673 Units to the persons set forth below, some of
whom are Selling Stockholders in the Offering:
Principal
Name Amount of Notes Units
____ _______________ _____
OK Associates Pension Trust $ 25,000 4,167
Edmond O'Donnell 100,000 16,667
Lawrence Kaplan 100,000 16,667
Universal Partners, L.P. 150,000 25,000
Jerry Kaplan 25,000 4,167
Michael LaTorre 25,000 4,167
Andrew M. Kaplan 10,000 1,667
Vincent Liu 50,000 8,333
Jack and Caroline De Santis 25,000 4,167
Thomas E. McChesney 25,000 4,167
Frederick A. Arnstein, Jr. Trust 25,000 4,167
Arthur Odabash 25,000 4,167
Alfred Romano 25,000 4,167
Peter Wolf 25,000 4,167
Stanley A. Kaplan 25,000 4,167
Richard Friedman 25,000 4,167
Jeffrey Markowitz 25,000 4,167
Richard S. Wolfeld 25,000 4,167
Lawrence K. Fleischman 25,000 4,167
Steven M. Newpol 40,000 6,667
W. Donald DeWitt 15,000 2,500
Davstar II Managed Inv. Corp., N.V. 40,000 6,667
Amarika Ltd. 25,000 4,167
--------- -------
Total $ 880,000 146,673
========= =======
G-V Capital Corp. acted as placement agent for the financing and
received $40,000 as compensation for its services in connection with
such financing.
On June 1, 1994, the Company issued an aggregate of 2,426 shares to 13
non-officer employees of the Company in connection with their service
as employees of the Company.
-58-<PAGE>
Pursuant to the terms of a consulting agreement with Mr. Weingarten, a
director of the Company, the Company paid Mr. Weingarten the sum of
$30,000 on or before August 1, 1994 and agreed to pay Mr. Weingarten
an aggregate amount of $60,000, including $30,000 in 12 equal monthly
installments of $2,500 each, commencing September 1, 1994. See
"Certain Relationships and Related Transactions." The Company also
issued to Mr. Weingarten an option to purchase 69,445 shares of Common
Stock for an aggregate purchase price of $1,000, which option was
assigned to and exercised by Resource One.
On June 1, 1994, the Company issued to Mr. Streeter an option
exercisable for 5,000 shares of Common Stock at an exercise price per
share of $5.25 in connection with his service as a director of the
Company since January 1989. See "Certain Relationships and Related
Transactions."
On November 9, 1994, the Company issued an aggregate of 69 shares to a
non-officer employee of the Company in connection with his service as
an employee of the Company.
On November 9, 1994, the Company issued to Mr. Forster an option
exercisable for 30,000 shares of Common Stock at an exercise price per
share of $.01 in connection with his service as an officer of the
Company.
On August 1, 1995, the Company issued to ADR Management Group Ltd., an option
exercisable for 75,000 shares of Common Stock at an exercise price per share
of $5.25 in connection with its retention as a consultant to the Company.
The transactions listed above were made in reliance upon the exemption
from the registration provisions under the Securities Act contained in
Section 4(2) thereof.
Item 27. Exhibits and Financial Statement Schedules.
(a) Exhibits
1.1 Form of Underwriting Agreement.(1)
3.1(2) Amended and Restated Certificate of Incorporation.(2)
3.2(2) Amended and Restated By-laws.(2)
4.1 Form of Representative's Unit Purchase Option.(2)
4.2 Form of Warrant Agreement.(2)
4.3 Specimen Warrant Certificate.(3)
4.4 Specimen Stock Certificate.(3)
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.(3)
10.1(3) License Agreement with Major League Baseball Properties,
Inc.(2)
10.1(4) License Agreement with Major League Baseball Players
Association.(4)
10.1(5) License Agreement with National Football League
Properties, Inc.(5)
10.1(6) Trademark License Agreement with Goodyear Tire & Rubber
Company.(6)
10.1(10) Agreement with Chevron USA, Inc. dated as of October 10,
1995.(6)
10.2(2) Settlement Agreement and Mutual Release with Leon Krajian
dated June 11, 1993.(4)
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10.3* 1994 Stock Option Plan of the Company, as amended.(7)
10.3(1)* Form of Stock Option Agreement.(5)
10.3(2)* Form of Directors' Stock Option Agreement.(5)
10.3(3)* Stock Option Agreement dated as of November 9, 1994 with
David G. Forster.(5)
10.3(4)* Form of Stock Option Agreement dated June 1, 1994 with
Sabin C. Streeter.(5)
10.4(1)* Form of Employment Agreement with Michael Favish.(3)
10.4(3)* Amended and Restated Consulting Agreement with Robert
Weingarten effective January 1, 1996.(6)
10.4(4)* Consulting Agreement with Robert Weingarten dated as of
June 1, 1994.(2)
10.4(5) Consulting Agreement with Universal Marketing Services
Ltd. ("UMS") dated January 1, 1995.(6)
10.4(6) Consulting Agreement with UMS dated January 1, 1996.(6)
10.4(7) Stock Option Agreement dated May 9, 1995 with UMS.(6)
10.4(8) Consulting Agreement with ADR Management Group Ltd. dated
August 1, 1995.(6)
10.4(9)* Employment Agreement with Fred Ostern effective January 1,
1996.(8)
10.5 Lease, dated February 4, 1994, by and between the Company
and George and Marcel Jach, with respect to 3738 Ruffin
Road, San Diego, California.(4)
10.6 Form of Representative's Financial Consulting Agreement
with the Company.(2)
10.7(1) Securities Purchase Agreement, dated as of March 24, 1994,
by and between the Company, each of the Purchasers listed
on Schedule A thereto.(4)
10.7(2) Form of Bridge Warrant, dated March 24, 1994, issued to
the Purchasers.(4)
10.7(3) Form of Bridge Note, dated March 24, 1994, by the Company
to the Purchasers.(4)
10.8(1) Form of Debentures.(4)
10.8(2) Form of Amendment and Waiver Agreement by and between the
Company and each of the Debenture Holders.(4)
10.8(3) First Amendment to Amendment and Waiver Agreement.(4)
10.8(4) Form of Second Amendment to Amendment and Waiver
Agreement.(4)
10.9(1) Merrill Lynch International Bank Limited line of
credit.(6)
10.9(2) Merrill Lynch International Bank Limited irrevocable
stand-by letter of credit.(6)
10.10 Revolving Credit Agreement dated December 20, 1995 between
the Company and Scripps Bank.(6)
21 Subsidiaries of the Company.(3)
23.1 Consent of Hollander, Gilbert & Co.(8)
23.2 Consent of Shereff, Friedman, Hoffman & Goodman, LLP
(contained in Exhibit 5.1).(3)
_______________________
* Indicates exhibits relating to executive compensation.
(1) Exhibits to the Company's Registration Statement on Form SB-2
filed with the Commission on August 11, 1994 incorporated herein
by reference.
-60-<PAGE>
(2) Exhibits to the Company's Registration Statement on Form SB-2
filed with the Commission on August 1, 1994 incorporated herein
by reference.
(3) Exhibits to the Company's Registration Statement on Form SB-2
filed with the Commission on August 9, 1994 incorporated herein
by reference.
(4) Exhibits to the Company's Registration Statement on Form SB-2
filed with the Commission on June 20, 1994 incorporated herein
by reference.
(5) Exhibits to the Company's Annual Report on 10-KSB for the year
ended December 31, 1994 incorporated herein by reference.
(6) Exhibits to the Company's Annual Report on 10-KSB for the year
ended December 31, 1995 incorporated herein by reference.
(7) Exhibits to the Company's Registration Statement on Form S-8
filed with the Commission on May 24, 1996 incorporated herein by
reference
(8) Filed herewith.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
Item 28. Undertakings.
(a) Indemnification
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised
that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the small business issuer
of expenses incurred or paid by a director, officer or controlling
person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
-61-<PAGE>
(b) The undersigned small business issuer hereby undertakes that it
will:
(1) file, during any period in which it offers or sell
securities, a post-effective amendment to this registration statement
to:
(i) include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information set forth in the registration statement; and
(iii) include any additional or changed material information
on the plan of distribution;
(2) for determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of such securities at that time
to be the initial bona fide offering.
(3) file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of the offering.
(4) for purposes of determining any liability under the
Securities Act, treat the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A and contained in a form of prospectus filed by the
small business issuer pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of
the time the Commission declared it effective;
(5) for the purpose of determining any liability under the
Securities Act, treat each post-effective amendment that contains a
form of prospectus as a new registration statement for the securities
offered in the registration statement, and that offering of such
securities at that time as the initial bona fide offering of those
securities; and
(6) provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and
registered in such names as required by the underwriter to permit
prompt delivery to each purchaser.
-62-<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2 and authorized
this Post-Effective Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, in the City of San Diego,
State of California, on June 17, 1996.
FOTOBALL USA, INC.
/s/ Michael Favish
_________________________
Michael Favish
President, Chief Executive
Officer and Director
In accordance with the requirements of the Securities Act of 1933,
this Post-Effective Amendment No. 2 to the Registration Statement was
signed by the following persons in the capacities and on the dates
stated:
Signature Titles Date
/s/ Michael Favish
______________________ President, June 17, 1996
Michael Favish Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ David G. Forster
______________________ Vice President, Finance, June 17, 1996
David G. Forster Treasurer, and
Chief Financial Officer
(Principal Financial &
Accounting Officer)
/s/ William R. Hasvold
______________________ Director June 17, 1996
William R. Hasvold
/s/ Joel K. Rubenstein
______________________ Director June 17, 1996
Joel K. Rubenstein
/s/ Sabin C. Streeter
______________________ Director June 17, 1996
Sabin C. Streeter
/s/ Robert N. Weingarten
______________________ Director June 17, 1996
Robert N. Weingarten
-63-<PAGE>
Exhibit Index
Exhibit No. Exhibits
10.4(9) Employment Agreement with Fred Ostern effective
January 1, 1996.
23.1 Consent of Hollander, Gilbert & Co.
-64-<PAGE>
FOTOBALL USA, INC.
INDEX TO FINANCIAL STATEMENTS
Page No.
Report of Independent Auditors F-2
Balance Sheets at December 31, 1994 and 1995
and March 31, 1996 (Unaudited) F-3
Statements of Operations for the years ended
December 31, 1994 and 1995 and the three months
ended March 31, 1995 and 1996 (Unaudited) F-5
Statement of Stockholders' Equity for the years ended
December 31, 1994 and 1995 and the three months
ended March 31, 1996 (Unaudited) F-6
Statements of Cash Flows for the years ended
December 31, 1994 and 1995 and the three months
ended March 31, 1995 and 1996 (Unaudited) F-7
Notes to Financial Statements F-10
F-1<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
FOTOBALL USA, INC.
We have audited the accompanying balance sheets of FOTOBALL USA, INC.
as of December 31, 1994 and 1995, and the related statements of
operations, stockholders' equity and cash flows for the years then
ended. 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 misstatements. 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 provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of FOTOBALL
USA, INC. as of December 31, 1994 and 1995, and the results of
operations, stockholders' equity and cash flows for the years then
ended in conformity with generally accepted accounting principles.
HOLLANDER, GILBERT & CO.
Los Angeles, California
February 16, 1996
F-2<PAGE>
FOTOBALL USA, INC.
BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1994 1995 1996
____________ ____________ ____________
(Unaudited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 1,352,838 $ 2,162,268 $ 2,885,279
Restricted cash (Note 7) 323,529 1,000,000 1,000,000
Short-term marketable investments
(Note 3) 2,986,841 -- --
Accounts receivable--net 264,867 588,280 540,867
Inventories (Note 4) 800,125 1,288,085 1,723,942
Production-in-process -- 628,631 659,397
Prepaid expenses and other 108,361 125,535 251,906
Deferred income taxes (Note 14) -- 525,000 508,300
------------ ------------ ------------
TOTAL CURRENT ASSETS 5,836,561 6,317,799 7,569,691
------------ ------------ ------------
PROPERTY AND EQUIPMENT, net
(Notes 5, 6 and 9) 593,477 860,071 846,989
------------ ------------ ------------
OTHER ASSETS
Deferred income taxes (Note 14) 1,157,000 601,000 601,000
Deposits and other 13,023 13,023 13,023
Deferred consulting fee, less
accumulated amortization of
$12,500 and $42,500 at
December 31, 1994 and 1995,
respectively (Note 10) 47,500 17,500 10,000
------------ ------------ ------------
TOTAL OTHER ASSETS 1,217,523 631,523 624,023
------------ ------------ ------------
$ 7,647,561 $ 7,809,393 $ 9,040,703
============ ============ ============
</TABLE>
F-3<PAGE>
FOTOBALL USA, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31, 1994 AND 1995 AND MARCH 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1994 1995 1996
____________ ____________ ____________
(Unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Current portion of long-term debt
(Note 6) $ 215,316 $ 58,011 $ 36,680
Current portion of capital leases
(Note 9) 24,351 50,889 48,768
Consulting fee payable (Note 11) 20,000 -- --
Accounts payable and accrued expenses
(Note 8) 521,197 772,470 672,997
Customer deposits 244 23,042 1,358,029
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 781,108 904,412 2,116,474
LONG-TERM DEBT, net of current portion
(Note 6) 53,948 -- --
CAPITAL LEASES, net of current portion
(Note 9) 81,633 147,443 135,377
------------ ------------ ------------
TOTAL LIABILITIES 916,689 1,051,855 2,251,851
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 7, 9 and 10)
STOCKHOLDERS' EQUITY (Note 10)
Preferred stock, $.01 par value;
authorized-1,000,000 shares;
issued and outstanding-none
Common stock, $.01 par value;
authorized - 15,000,000 shares;
issued and outstanding -
2,661,742 shares 26,617 26,617 26,617
Additional paid-in capital 8,562,194 8,562,194 8,562,194
Accumulated deficit (1,806,939) (1,805,773) (1,780,834)
Less unamortized compensation expense
(Note 12) (51,000) (25,500) (19,125)
------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,730,872 6,757,538 6,788,852
------------ ------------ ------------
$ 7,647,561 $ 7,809,393 $ 9,040,703
============ ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-4<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
Years Ended December 31, March 31,
___________________________ ___________________________
1994 1995 1995 1996
____________ ____________ ____________ ____________
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
SALES $ 7,335,671 $ 7,754,309 $ 957,293 $ 2,401,656
COST OF SALES 3,671,926 4,302,644 567,875 1,404,863
------------ ------------ ------------ ------------
GROSS PROFIT 3,663,745 3,451,665 389,418 996,793
------------ ------------ ------------ ------------
OPERATING EXPENSES
Royalties 694,306 546,110 94,573 171,086
Marketing (Note 11) 1,058,002 1,205,634 204,141 305,753
General and administrative 1,193,763 1,641,775 344,855 458,135
Depreciation and amortization 149,068 216,638 44,023 54,670
Non-recurring recapitalization cost
(Note 11) 241,293 -- -- --
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,336,432 3,610,157 687,592 989,644
OPERATING INCOME (LOSS) 327,313 (158,492) (298,174) 7,149
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (127,380) (27,753) 8,096 8,597
Interest income 85,199 219,211 (69,118) (43,087)
Amortization of bridge financing costs
(Note 10) (660,522) -- -- --
Other-net (10,536) -- -- --
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (713,239) 191,458 (61,022) (34,490)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX (385,926) 32,966 (237,152) 41,639
INCOME TAX EXPENSE (BENEFIT)
(Note 14) (233,200) 31,800 (94,400) 16,700
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (152,726) $ 1,166 $ (142,752) $ 24,939
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 1,719,989 2,661,742 2,661,742 2,691,676
------------ ------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE $ (.09) $ NIL $ (.05) $ .01
============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements
F-5<PAGE>
FOTOBALL USA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional Unamortized
____________ paid-in Accumulated Compensation
Shares Amount capital Deficit Expense Total
____________ ____________ ____________ ____________ ____________ ____________
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 1,107,298 $ 11,073 $ 569,605 $(1,654,213) $ $(1,073,535)
Stock issued pursuant to
bridge financing 146,673 1,467 585,000 586,467
Stock issued pursuant to
recapitalization (Note 11) 69,445 694 181,599 182,293
Proceeds of public offering,
net of expenses 1,265,000 12,650 5,860,055 5,872,705
Issuance of common stock in
exchange for convertible
debentures 39,581 396 1,173,798 1,174,194
Common stock issued in
settlement of debt (Note 10) 31,250 313 109,062 109,375
Issuance of common stock to
employees 2,495 24 6,520 6,544
Issuance of warrant to
underwriter 55 55
Grant of stock option to
officer 76,500 (76,500)
Amortization of compensation
expense 25,500 25,500
Net loss (152,726) (152,726)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1994 2,661,742 26,617 8,562,194 (1,806,939) (51,000) 6,730,872
Amortization of compensation
expense 25,500 25,500
Net income 1,166 1,166
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, December 31, 1995 2,661,742 26,617 8,562,194 (1,805,773) (25,500) 6,757,538
Amortization of compensation
expense 6,375 6,375
Net income 24,939 24,939
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, March 31, 1996 2,661,742 $ 26,617 $ 8,562,194 $(1,780,834) $ (19,125) $ 6,788,852
(Unaudited) ============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-6<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
Years Ended December 31, March 31,
___________________________ ___________________________
1994 1995 1995 1996
____________ ____________ ____________ ____________
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (152,726) $ 1,166 $ (142,752) $ 24,939
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization of
property and equipment 111,068 161,138 44,023 54,670
Amortization of deferred consulting
fee 12,500 30,000 -- --
Amortization of deferred bridge
financing fees 660,522 -- -- --
Amortization of stock compensation
expense 25,500 25,500 6,375 6,375
Non-recurring recapitalization
cost-stock option issued 181,293 -- -- --
Issuances of employee bonus stock 6,544 -- -- --
Changes in operating assets and
liabilities:
(Increase) decrease in:
Accounts receivable (98,380) (323,413) (189,774) 47,413
Inventories (262,828) (487,960) 120,854 (435,857)
Production-in-process -- (628,631) -- (30,766)
Prepaid expenses and other (96,697) (17,174) (31,550) (113,294)
Deferred income taxes (234,000) 31,000 (95,200) 16,700
Increase (decrease) in:
Accounts payable and accrued
expenses (370,812) 274,071 201,682 (122,516)
Customer deposits -- -- -- 1,358,029
Consulting fee payable 20,000 (20,000) (7,500) --
------------ ------------ ------------ ------------
NET CASH USED IN OPERATING
ACTIVITIES (198,016) (954,303) (93,842) 805,693
------------ ------------ ------------ ------------
F-7<PAGE>
FOTOBALL USA, INC.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(CONTINUED)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (4,672,736) (3,121,630) (2,257,187) --
Proceeds from sale and maturities of
short-term investments 1,685,895 6,108,472 1,800,000 --
Purchase of property and equipment (419,710) (301,065) (128,267) (47,165)
Increase in restricted cash (323,529) (676,471) -- --
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (3,730,080) 2,009,306 (585,454) (47,165)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options
and warrants 2,467 -- -- --
Principal reductions of short-term
and long-term borrowing (86,500) -- -- --
Principal reductions of related
party loans (368,106) (211,253) (88,101) (21,331)
Repayment of capital lease obligations (14,072) (34,320) (7,068) (14,186)
Bridge financing costs charged to
operations (75,522) -- -- --
Proceeds from bridge financing 880,000 -- -- --
Repayment of bridge financing (880,000) -- -- --
Net proceeds from sale of common stock
and warrants 5,812,759 -- -- --
------------ ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 5,271,026 (245,573) (95,169) (35,517)
------------ ------------ ------------ ------------
NET INCREASE IN CASH AND EQUIVALENTS 1,342,930 809,430 (774,465) 723,011
CASH AND EQUIVALENTS, Beginning of period 9,908 1,352,838 1,352,838 2,162,268
------------ ------------ ------------ ------------
CASH AND EQUIVALENTS, End of period $ 1,352,838 $ 2,162,268 $ 578,373 $ 2,885,279
============ ============ ============ ============
</TABLE>
(continued)
The accompanying notes to financial statements
are an integral part of these statements.
F-8<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31, 1994 AND 1995
AND THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
__________________________ __________________________
1994 1995 1995 1996
____________ ____________ _____________ ___________
<S> <C> <C> (unaudited)
<C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 127,380 $ 27,753 $ 8,096 $ 8,597
Income taxes paid $ 6,636 $ 17,207 $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Securities issued as fee to
investors in bridge financing $ 585,000 -- -- --
Common stock issued as fee to
consultant pursuant to
recapitalization $ 181,293 -- -- --
Common stock issued in exchange for
conversion of convertible
debentures, including accrued
interest $ 1,174,194 -- -- --
Equipment acquired under capital
leases $ 126,731 $ 126,668 -- --
Common stock issued in conjunction
with settlement agreement $ 109,375 -- -- --
Value of stock option issued to
officer $ 76,500 -- -- --
Common stock issued to employees $ 6,544 -- -- --
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-9<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Formation of the Company and Reorganization - FOTOBALL USA, INC., a
California corporation ("Fotoball California"), was incorporated under
the laws of the State of California on December 13, 1988. FOTOBALL
USA, INC., a Delaware corporation ("Fotoball Delaware") was
incorporated under the laws of the State of Delaware on April 27, 1994
for the purpose of merging with and continuing the business of
Fotoball California. Prior to such merger (the "Merger"), Fotoball
Delaware had no assets, liabilities or operations. On July 29, 1994,
Fotoball California merged with and into Fotoball Delaware, with
Fotoball Delaware being the surviving corporation. In connection with
the Merger, each share of common stock of Fotoball California was
exchanged for .694447 shares of common stock, par value $.01 per
share, of Fotoball Delaware. In connection with the Merger, the
stockholders of Fotoball California, by written consent, increased the
authorized number of shares of common stock to 15,000,000 and
authorized 1,000,000 shares of preferred stock, par value $.01 per
share. The accompanying financial statements have been restated to
reflect this change in capitalization. Fotoball California, before the
Merger, and Fotoball Delaware, after the Merger, are herein referred
to as the "Company."
Description of Business and Nature of Operations - The Company
designs, develops, manufactures and markets sports-related items,
including baseballs, miniature footballs, and miniature basketballs,
upon which color or black/white photographic images of professional
athletes, their signatures and/or sports team logos and logos of
corporations are imprinted. Additionally, in November 1995, the
Company entered into an agreement with Chevron to design and
manufacture toy cars for a national promotion in the Spring of 1996.
The Company currently holds licenses with Major League Baseball
Properties ("MLBP"), the Major League Baseball Players Association
("MLBPA"), the National Association of Professional Baseball Leagues,
Inc. (representing professional minor league baseball; collectively,
"Professional Baseball"); and over sixty (60) colleges and
universities ("Colleges"). The Company is in the process of renewing
its licenses with the National Football League Properties, Inc.
("NFL"). A major component of the Company's operations is the design,
development and manufacture of promotions for major corporations using
imprinted sports-related products and, beginning in 1996, non sports-
related products.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect certain
reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.
F-10<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
Cash and Equivalents - Cash and equivalents include money market funds
and marketable securities that are highly liquid and have original
maturities of three months or less at the date of purchase. Such cash
equivalents are carried at cost, which approximates fair value.
Restricted Cash - Restricted cash represents deposits supporting
irrevocable stand-by letters of credit which provide financial
assurance that the Company will fulfill its financial obligations to
suppliers. If the letters of credit are not drawn upon, these deposits
will be released from restriction when the stand-by letters of credit
expire.
Short-term Marketable Investments - Short-term marketable investments
consist of commercial paper, certificates of deposit, and securities
issued by the United States Government. Investments in certificates of
deposit are acquired from federally insured banks to a maximum of the
FDIC insurance limit of $100,000 per bank. Investments in commercial
paper of industrial firms and financial institutions are rated A1, P1
or better. Short-term marketable investments mature within one year or
less and are stated at cost, which approximates fair value.
Concentration of Credit Risk - The Company invests its excess cash in
various investment grade instruments such as treasury bills,
certificates of deposit, commercial paper, and money market funds. The
Company invests its cash in what it believes to be credit-worthy
financial institutions and has established guidelines relative to
diversification and maturities with the objectives of maintaining
safety and liquidity. These guidelines are periodically reviewed and
modified to take advantage of trends and interest rates. The Company
has not experienced any losses on its cash equivalents or short-term
investments.
Concentrations of credit risk with respect to accounts receivable are
mitigated in part due to the large number of customers to which the
Company's retail products are sold, as well as their dispersion across
geographic areas. Additionally, a significant percentage of the
Company's promotion sales are sold to Fortune 500 companies in which
the Company generally receives an advance deposit approximating 25% of
the order. At December 31, 1995, one customer accounted for 21% or
more of total accounts receivable.
Inventories - Inventories have been valued at the lower of cost
(first-in, first-out) or market.
Production-in-Process - Production-in-process represents costs
incurred related to pre-production functions which are capitalized and
charged to operations when the product is shipped and revenue is
recorded. The Company's cycle from sales through product shipment
generally ranges from three to six months.
Property and Equipment - Property and equipment is stated at cost, and
is depreciated on the straight-line method over their estimated useful
lives as follows:
F-11<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
Office equipment and furniture 5 to 7 years
Show exhibits 7 years
Machinery and equipment 7 years
Leasehold improvements 7 years
Maintenance and repairs are charged to expense as incurred. When
assets are sold or retired, the costs and related accumulated
depreciation are removed from the accounts and any resulting gain or
loss is reflected in operations.
Provision for Uncollectible Accounts - The Company historically has
not experienced any significant bad debt expense. Management of the
Company periodically reviews its accounts receivable and records an
appropriate provision for uncollectible accounts. Based on the
Company's customer base, current sales and historical data, a nominal
provision for uncollectible accounts has been established.
Royalties and Licensing Arrangements - Royalties due licensors are
generally provided for based upon a negotiated percentage of related
net sales, frequently subject to a minimum guaranteed royalty. Prepaid
license costs are charged to operations over the term of the
contractual agreement, also based upon a percentage of related net
sales. The unamortized balance of prepaid costs is reviewed
periodically to ensure that, at a minimum, these amounts are amortized
ratably over the license term.
Revenue Recognition - Sales of goods manufactured domestically are
recognized when such goods are shipped from the Company's
manufacturing facility. Sales of imported goods are recognized at the
time shipments are received at the customer's designated location.
Consignment sales, which are generally not significant, are recorded
net of an estimated allowance for returns, which is periodically
reviewed and adjusted as necessary.
Net Income (Loss) per Common Share - Net income (loss) per common
share is based upon the weighted average number of common shares and
common share equivalents outstanding during the periods as if the
recapitalization took place at the beginning of the years presented.
The Company's outstanding stock options are excluded from the 1994 and
1995 computations as their effect would be antidilutive or
insignificant during these periods.
Reclassifications - Certain 1994 balances have been reclassified to
conform with current year's presentation.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Dependence Upon Licensing Arrangements - The Company's business is
based primarily upon its use of the insignia, logos, names, colors,
F-12<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
likenesses and other identifying marks and images borne by many of its
products pursuant to license arrangements with Professional Baseball,
and, to a lesser extent, the NFL and Colleges. The Company's licensing
arrangements expire at various times through February 15, 1997. The
Company is in the process of extending the term of the NFL Team Logo
license through March 31, 1998. The following table summarizes, in
descending order of 1995 revenue contribution, the Company's
significant license agreements and their terms:
Licensor Product Term Expiration Date
________ _______ ____ _______________
MLBP Baseball 2 years December 31, 1996
MLBPA Baseball 1 year (2 year option) December 31, 1996
NFL Team Logo Football 2 years March 31, 1996
The Company believes that its relationships with these licensors are
satisfactory and anticipates that each of the license agreements will
be renewed on acceptable terms and conditions. The Company is in the
process of renewing its licenses with the NFL. Although historically
the Company's licenses have been renewed by its licensors, there can
be no assurance that the Company will continue to be able to renew its
licenses, that the renewal will be on acceptable terms and conditions,
or that the company will be able to enter into comparable new
licensing agreements. The non-renewal or termination of one or more of
the Company's licenses, particularly with Professional Baseball or the
NFL, could have a material adverse effect on the Company's business.
Seasonality; Dependence Upon Baseball Related Sales; Major League
Baseball Strike - During the year ended December 31, 1995, 75% of the
Company's sales was derived from baseball-related products and 72% of
the Company's sales was recorded during the third (46%) and fourth
(26%) quarters. During the year ended December 31, 1994, 85% of the
Company's sales was derived from baseball-related products and 86% of
the Company's sales was recorded during the first (19%) and second
(67%) quarters. Sales during the third and fourth quarters of 1994
were adversely impacted due to the Major League Baseball ("MLB")
strike, as discussed below.
On August 12, 1994, the MLBPA went on strike citing differences with
team owners regarding compensation. On April 2, 1995, the MLBPA ended
their strike and agreed to return to MLB teams without having signed a
collective bargaining agreement ("CBA") with team owners. The
beginning of the 1995 MLB season was delayed from April 2, 1995 until
April 25, 1995. As a result of the strike and the uncertainty as to
the continuation in full of the 1995 MLB season, the Company's
baseball-related business was materially adversely impacted during the
last half of 1994 and the first half of 1995. However, the Company
experienced an upsurge in its baseball and football-related business
during the last half of 1995. The Company believes that the current
lack of a CBA will not have a material negative impact upon the
F-13<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
results of operations for 1996, given an order backlog as of May 31,
1996 of $7,200,000 from the Chevron toy car promotion previously mentioned.
However, the Company believes that the current lack of a CBA may be
adversely affecting the Company's baseball business. The Company believes
that the continuing decrease in the dependence upon baseball-related
sales during the past several years will continue in the future, with the
introduction of new product lines and non baseball-related promotions.
Dependence on Promotions Business - The Company's promotions business
depends primarily upon a series of one-time projects with its
customers. Although the Company has had repeat business from certain
promotions customers, there can be no assurance that the Company will
be able to continue its relationships with its promotions customers or
attract new promotions customers to generate sufficient revenues to
operate profitably. During the year ended December 31, 1995, 40% of
the Company's sales was derived from sales of the Company's
promotional products to 189 customers, of which one customer accounted
for aggregate sales of $2,015,000 or 26% of sales. During the year
ended December 31, 1994, 74% of the Company's sales was derived from
promotions, of which Chevron accounted for aggregate sales of
$2,495,000 or 34% of total sales, and two other customers accounted
for aggregate sales of $622,000 or 8% of sales and $639,000 or 9% of
sales, respectively. Chevron and Burger King will continue to account
for a significant percentage of sales in 1996 due to the toy car and
the national baseball promotions.
Dependence on Suppliers - In 1995, the Company purchased approximately
74% of its raw material from four companies located in China, with one
manufacturer accounting for 61% of total raw material purchased.
Foreign manufacturing is subject to a number of risks, including
transportation delays and interruptions, political and economic
disruptions, the imposition of tariffs, quotas and other import or
export controls, and changes in government policies. China currently
holds most favored nation ("MFN") trading status with the United
States. There can be no assurance, however, that China will continue
to enjoy MFN trading status in the future, and any such revocation or
imposition of further conditions on China's MFN status could have a
material adverse effect on the cost of the Company's raw materials
because products originating from China could be subjected to
substantially higher rates of duty. Although alternative suppliers may
be available in other countries at competitive prices, and the Company
continues to evaluate their ability to compete in terms of cost,
quality, production, capacity and other considerations, there can be
no assurance that the Company would be able to find alternative
suppliers in a timely manner or that such suppliers would meet the
Company's cost, quality or production capability standards.
Segment Information - During 1995, one customer accounted for 26% of
total sales, and 74% of raw material purchases were made from four
vendors. During 1994, one customer accounted for 34% of total sales,
and 85% of raw material purchases were made from two vendors.
F-14<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
3. SHORT-TERM MARKETABLE INVESTMENTS
Short-term marketable investments consisted of the following as of
December 31, 1994:
Bank certificates of deposit $ 1,788,421
U.S. government securities 952,220
Commercial paper 246,200
------------
$ 2,986,841
============
The above investments do not include cash equivalents of $498,135. The
cash equivalents consisted of investment grade (A1, P1) commercial
paper. The Company held no short-term marketable investments as of
December 31, 1995 and March 31, 1996.
4. INVENTORIES
Inventories consisted of the following at December 31, 1994 and 1995
and March 31, 1996 (unaudited):
December 31, December 31, March 31,
1994 1995 1996
____________ ____________ ____________
(Unaudited)
Finished goods $ 224,253 $ 290,437 $ 496,716
Raw material 575,872 997,648 1,227,226
------------ ------------ ------------
$ 800,125 $ 1,288,085 $ 1,723,942
============ ============ ============
5. PROPERTY AND EQUIPMENT
Property and equipment, inclusive of machinery and equipment under
capital leases (see Note 9), consisted of the following at December
31, 1994 and 1995 and March 31, 1996 (unaudited):
December 31, December 31, March 31,
1994 1995 1996
____________ ____________ ____________
(Unaudited)
Office equipment $ 234,896 $ 369,130 $ 381,397
Show exhibits 18,000 126,146 126,146
Machinery and equipment 410,657 536,931 550,958
Leasehold improvements 269,204 300,402 308,313
------------ ------------ ------------
932,757 1,332,609 1,366,814
Less: accumulated
depreciation
and amortization (339,280) (472,538) (519,825)
------------ ------------ ------------
$ 593,477 $ 860,071 $ 846,989
============ ============ ============
F-15<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
6. LONG-TERM DEBT WITH RELATED PARTIES
Long-term debt with related parties consisted of the following at
December 31, 1994 and 1995, and March 31, 1996 (unaudited):
December 31, December 31, March 31,
1994 1995 1996
____________ ____________ ____________
(Unaudited)
Term loan payable to
stockholder resulting
from conversion of an
accounts receivable
factoring line dated
June 11, 1993 and payable
in monthly installments,
including interest of 8%,
based upon 7.50% of the
Company's cash receipts
calculated retroactively
to January 1, 1993. $ 130,990 $ -- $ --
Term loan payable to
stockholder resulting
from conversion of a
factoring line, dated
June 11, 1993, non-
interest bearing, payable
in monthly installments
of $1,250 commencing
July 7, 1993 and continuing
until paid in full. 17,813 4,063 313
Note payable to stockholder
dated September 30, 1991,
payable in monthly
installments of $6,221,
including interest at 9%
commencing October 10,
1992. Balance due
September 10, 1996.
Secured by substantially
all the assets of the
Company but subordinated
to the above described
term loans. 120,461 53,948 36,367
------------ ------------ ------------
Total long-term debt 269,264 58,011 36,680
Less current portion
of long-term debt (215,316) (58,011) (36,680)
------------ ------------ ------------
$ 53,948 $ -- $ --
============ ============ ============
F-16<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
7. LINES OF CREDIT
In December 1994, the Company entered into a $1,000,000 line of credit
facility (the "facility") with a bank. The facility, which matures on
December 19, 1996, carries an interest rate that is 1.75% above the
London Interbank Offering Rate term that the Company chooses to
select. Any borrowings under the facility are secured by cash
collateral deposited with the bank equal to the credit outstanding. In
December 1995, the facility was increased to $3,000,000. The facility
supports an irrevocable stand-by letter of credit of $1,000,000 which
expired on March 15, 1996, that had been issued to a supplier and was
collateralized by cash. Subsequently, on January 2, 1996, an
additional $1,000,000, which expired on May 15, 1996, was issued to
the same supplier. Since the standby letter of credit supported by the
facility expired on May 15, 1996, the collateralized cash has been
classified separately for financial reporting purposes under current
assets as restricted cash.
In December 1995, the Company entered into a separate one year credit
agreement with Scripps Bank. This revolving line of credit facility
(the "credit line") in the amount of $1,000,000 is collateralized by
the assets of the Company and actual borrowings are limited to
available collateral, as defined in the agreement. Borrowings under
the credit line bears interest at the bank's prime rate plus .75%. The
credit line contains covenants requiring the Company to maintain
minimum net worth levels, and minimum working capital and debt to
equity ratios.
There were no borrowings under either line of credit as of December
31, 1995, and March 31, 1996, respectively.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 1994 and 1995 and March 31, 1996 (unaudited):
December 31, December 31, March 31,
1994 1995 1996
____________ ____________ ____________
(Unaudited)
Accounts payable $ 336,313 $ 573,526 $ 466,012
Accrued payroll
and related 25,098 52,554 55,525
Accrued interest 53,778 -- --
Accrued commissions 29,384 82,061 22,500
Royalties payable 67,305 58,298 111,724
Other 9,319 6,031 17,236
------------ ------------ ------------
$ 521,197 $ 772,470 $ 672,997
============ ============ ============
F-17<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
9. COMMITMENTS AND CONTINGENCIES
Royalties - At March 31, 1996, the Company has commitments for minimum
guaranteed royalties under licensing agreements totaling $212,000 through 1998.
Capital Leases - The Company is obligated under various capital leases
that expire at various dates through November 2000. Minimum annual
payments including imputed interest under capital lease agreements are
as follows at December 31, 1995:
YEARS ENDING DECEMBER 31,
1996 $ 73,125
1997 66,213
1998 52,146
1999 39,081
2000 20,289
------------
Total minimum lease payments 250,854
Less interest component (52,522)
------------
Present value of net minimum
lease payments 198,332
Less current portion of
capital leases (50,889)
------------
Capital leases, net of current
portion $ 147,443
============
Included in property and equipment above (see Note 5) is the following
property and equipment acquired under capital leases at December 31,
1994 and 1995 and March 31, 1996 (unaudited):
<TABLE>
<CAPTION>
December 31, March 31,
___________________________ __________
1994 1995 1996
____________ ____________ __________
(Unaudited)
<S> <C> <C> <C>
Machinery and equipment $ 102,452 $ 193,546 $ 193,546
Office equipment 24,279 59,853 59,853
Less accumulated amortization (11,147) (37,772) (64,397)
------------ ------------ ---------
$ 115,584 $ 215,627 $ 189,002
============ ============ =========
</TABLE>
Amortization of capitalized leases is included in depreciation and
amortization expense.
Operating Leases - On January 19, 1994, the Company executed a lease
for new factory and office facilities. The new lease is noncancelable
for a term of seven years beginning April 15, 1994, and commences at a
F-18<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
base rent of $8,000 per month, plus certain common area expenses,
increasing incrementally annually through May 2001. In October 1995,
the Company began occupying the entire building, increasing its total
occupancy space from 22,000 to 27,000 square feet. Minimum annual rental
commitments under noncancelable leases are as follows at December 31, 1995:
YEARS ENDING DECEMBER 31,
1996 $ 219,934
1997 216,904
1998 214,114
1999 217,480
2000 222,760
Thereafter 74,840
------------
$ 1,166,032
============
Rental expense under operating leases totaled $155,345 and $198,299
for the years ended December 31, 1994 and 1995, respectively.
10. STOCKHOLDERS' EQUITY
Public Offering - On August 19, 1994, the Company completed the
Offering of 1,265,000 units "Units") (including exercise of the over-
allotment option) at $6.00 per Unit, providing net proceeds after
offering costs and expenses of approximately $5,900,000. Each Unit
consisted of one share of common stock ("Common Stock") and one
redeemable common stock purchase warrant exercisable at $6.50 per
share during the four year period commencing August 11, 1995. The
Units have since been split into their component parts.
In addition, the Company entered into a consulting agreement to retain
the underwriter as a financial consultant for a two-year period ending
August 10, 1996 at a monthly fee of $2,500, all of which fees
($60,000) was paid in full, in advance, upon the consummation of the
Offering. This amount was recognized as a deferred asset and is being
charged to operations ratably over the period of the contract.
Convertible Debentures - During 1989, the Company completed a
financing ("Debenture Financing"), in which the Company issued 640
units consisting of convertible subordinated debentures ("Debentures")
and common stock of the Company in exchange for an aggregate amount of
$832,000 and $448,000, respectively. Each unit was sold for a per unit
purchase price of $2,000 and consisted of $1,300 aggregate principal
amount of Debentures and approximately 446 shares of Common Stock. The
Debenture Financing was effected pursuant to an exemption from the
registration requirements of the Securities Act of 1933, as amended
("Securities Act").
As originally offered, the Debentures bore interest at a rate of 10%
per annum. Unpaid interest was payable semi-annually on June 30 and
December 31. The principal amount of the Debentures was scheduled to be paid
in four equal installments on or before December 31, 1990, 1991, 1992 and
F-19<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
1993. The Debentures, at the option of its holders (the "Debenture
Holders"), were convertible into shares of Common Stock at
an initial exercise price of $3.25 per share, subject to adjustment
upon the occurrence of certain events. During March and April, 1994,
the Company entered into the Waiver Agreement with the Debenture
Holders, pursuant to which on August 11, 1994, the effective date of
the Offering, the Debenture Holders converted their Debentures,
including all accrued and unpaid interest thereon, into an aggregate
of 39,581 shares of Common Stock.
Interest expense on the Debentures was $50,994 in 1994.
Bridge Units - On March 24, 1994, the Company consummated a bridge
financing ("Bridge Financing") in order, among other things, to pay
certain accounts payable related to the Company's inventory, to pay
certain costs and expenses related to the Offering, to pay certain
costs and expenses related to the Company's relocation to its new
facilities, to repay its outstanding indebtedness to Wells Fargo Bank,
N.A. and for general working capital purposes.
The investors in the Bridge Financing loaned $880,000 to the Company
and were issued promissory notes ("Bridge Notes") representing that
amount. In conjunction with the Bridge Financing, such investors were
also issued an aggregate of 146,673 Units ("Bridge Units"'). The
Bridge Units consisted of the same units offered in its Offering. The
Company valued the Bridge Units at $585,000 (or approximately $4.00
per Bridge Unit) and was amortizing this amount, along with costs and
fees related to the Bridge Financing aggregating $75,522, over the
period that the Bridge Notes were outstanding. The Bridge Notes were
repaid on August 19, 1994. Accordingly, unamortized deferred bridge
financing costs of $660,522 were charged to operations at that time.
Settlement Agreement - On February 26, 1994, the Company and Michael
Favish, the President and Chief Executive Officer of the Company,
entered into a Settlement Agreement and Mutual Release (the "Svenson
Settlement Agreement") with John Svenson and International Resource
Group, Ltd. ("IRG"), a company in which Mr. Svenson is an officer,
regarding certain amounts allegedly owed by the Company to Mr. Svenson
for services rendered during prior years as a marketing consultant,
pursuant to a 1989 consulting agreement. As of December 31, 1993, the
Company had accrued $250,000 as an estimated settlement cost with
respect to this matter. Pursuant to the Svenson Settlement Agreement,
the Company paid Mr. Svenson $10,000, an additional $30,000 within ten
business days after the closing of the Offering and issued to Mr.
Svenson 31,250 shares of Common Stock. In consideration therefore, IRG
terminated its consulting agreement with the Company, and IRG and Mr.
Svenson terminated their option to purchase 48,311 shares of Common Stock.
11. TRANSACTIONS WITH RELATED PARTIES
Employment and Consulting Agreements - The Company is party to an
F-20<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
employment agreement with Michael Favish, which provides that Mr.
Favish will serve as President and Chief Executive Officer for an
initial term of five years ending August 6, 1999. His salary is
$150,000 per year, and he has been granted stock options, vesting over
a three-year period commencing August 11, 1994, to purchase 100,000
shares of Common Stock at a per share exercise price of $5.78.
The Company was party to an Exclusive Services Agreement ("Ostern
Agreement"), dated December 23, 1993, with The Eastwoods Group, Inc.
("TEGI") for the services of Fred Ostern. Mr. Ostern is the sole
officer of TEGI. Pursuant to the Ostern Agreement, TEGI agreed to
provide the Company with the exclusive services of Mr. Ostern until
December 31, 1995. In connection with such provision of services of
Mr. Ostern, pursuant to which Mr. Ostern participates in the
management of premium contracts from negotiation to completion, TEGI
was paid a fee in the amount of $125,000 per year, plus annual sales
commissions on all products sold by the Company, net of returns, as
follows: 2.5% of such annual sales in excess of $1,000,000 but less
than or equal to $5,000,000 and 3.5% of such annual sales in excess of
$5,000,000. TEGI was paid $296,185 and $329,965 in 1994 and 1995,
respectively, which has been classified as marketing expenses. In
January 1996, the Company entered into an employment agreement with
Mr. Ostern, in which he will receive a base salary of $150,000 per
year, plus annual cash bonuses calculated as a percentage of the
contribution to overhead and profit ("COP") derived from Mr. Ostern's
sales. COP is defined as sales that Mr. Ostern is primarily
responsible for less the cost of goods of those sales and less any
royalties that are due from those sales.
In February 1993, Robert N. Weingarten, prior to becoming a director
of the Company, was retained as a consultant to the Company to
recapitalize the Company's balance sheet. Pursuant to the Company's
consulting agreement with Mr. Weingarten, the Company paid Mr.
Weingarten $30,000 on August 1, 1994 and agreed to pay Mr. Weingarten
an additional $30,000 in 12 equal monthly installments of $2,500 each,
commencing September 1, 1994. The Company also issued to Mr.
Weingarten an option to purchase 69,445 shares of Common Stock for an
aggregate exercise price of $1,000, which the Company valued at
$181,293 (or approximately $2.62 per share of Common Stock). The
Company recorded the aggregate value of the option and the consulting
fee of $241,293 as a non-recurring recapitalization cost for the year
ended December 31, 1994. The option was assigned to and exercised in
full by a corporation wholly owned by Mr. Weingarten prior to the
effective date of the Offering. The Company has entered into a
consulting agreement with Mr. Weingarten for a twelve month period
commencing September 1, 1995 in the amount of $2,500 per month.
Effective January 1, 1996, the Board of Directors approved a $10,000
increase in Mr. Weingarten's consulting agreement to be paid over the
remaining term of the agreement.
Notes and Advances Payable to Related Parties - On July 7, 1993, a
stockholder loaned $30,000 to the Company at 10% interest per annum.
Such advance was due on demand and was subsequently repaid on April 6,
1994.
F-21<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
Long-term Financing - In addition to the above described short-term
loans, certain stockholders have provided various forms of long-term
financing to the Company (see Note 6).
Fees and Other Expenses - Fees, commissions and other operating
expenses payable to related parties and charged to operations in the
accompanying financial statements totaled $30,594 and $6,084 during
1994 and 1995, respectively. Interest expense payable to related
parties and charged to operations, including $50,994 attributed to the
Debentures in 1994, amounted to $81,002 and $10,200 during 1994 and
1995, respectively.
As of December 31, 1994 and 1995, accounts payable and accrued
expenses included $58,464 and $16,000, respectively, payable to
related parties. Management is of the opinion that such amounts are
not in excess of those that would have been incurred with non-related
parties. Additionally, certain of these parties became related as a
result of their consent to accept the Company's common stock in
payment of prior amounts due them.
12. STOCK OPTIONS
Employee Stock Option Plan - On June 1, 1994, the Board of Directors
of the Company adopted the Fotoball USA, Inc. 1994 Stock Option Plan
("Option Plan"), which was approved by the stockholders on July 22,
1994, in order to attract and retain employees and non-employee
directors. Pursuant to the Option Plan, options to acquire an
aggregate of 375,000 shares of Common Stock may be granted to
employees and non-employee directors of the Company.
The Option Plan authorizes the issuance of incentive stock options
("ISOs"), as defined in Section 422 of the Internal Revenue Code of
1986, as amended ("Code"), and stock options which do not conform to
the requirements of that Code section, or non-qualified stock options
("NQSOs"). Non-employee directors of the Company may only be granted
NQSOs. The exercise price of each option may not be less than the
greater of (i) 100% of the fair market value of the Common Stock at
the time of grant or (ii) $5.25, except that in the case of a grant of
an ISO to an employee who owns 10% or more of the outstanding capital
stock of the Company or a subsidiary or parent of the Company ("10%
Stockholder"), the exercise price shall not be less than the greater
of (i) 110% of the fair market value on the date of grant or (ii)
$5.25. Options may not be exercised after the tenth anniversary (fifth
anniversary in the case of an ISO granted to a 10% Stockholder) of
their grant.
The following table summarizes stock option activity for the years
ended December 31, 1994 and 1995 and for the period ended
March 31, 1996(unaudited):
F-22<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
WEIGHTED
AVERAGE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
______ _____ _____
January 1, 1994 -- -- --
Granted 125,000 $5.25 to $5.78 $5.67
Exercised -- -- --
Canceled (5,000) $5.25
------------
December 31, 1994 120,000 $5.25 to $5.78 $5.67
Granted 67,750 $5.25 $5.25
Exercised -- -- --
Canceled -- -- --
------------
December 31, 1995 187,750 $5.25 to $5.78 $5.53
Granted -- -- --
Exercised -- -- --
Canceled -- -- --
------------
March 31, 1996(Unaudited) 187,750 $5.25 to $5.78 $5.53
============ =============== =======
Stock Option Issued to an Officer - In November 1994, the Board of
Directors granted an officer of the Company a stock option to purchase
30,000 shares of Common Stock of the Company at an exercise price of
$.01 per share. The shares of Common Stock to be issued upon exercise
of the stock option will be "restricted shares" (as defined in the
Securities Act) and, absent registration of the shares of Common Stock
underlying the stock option, will be required to be held for a minimum
of two years after the exercise date of the option. The stock option
was not issued under the Company's 1994 Stock Option Plan. One-third
(or 10,000 shares) of the stock option vested during the fourth
quarter of the year ended December 31, 1994 and the remaining two-
thirds (or 20,000 shares) of the stock option vest ratably on the last
day of each quarter during 1995 and 1996. At December 31, 1995, 20,000
shares of the stock option were vested.
Deferred compensation of $76,500 was recognized as a result of the
foregoing transaction, of which $25,500 and $25,500 was charged to
operations for 1994 and 1995 respectively. The remaining $25,500 of
deferred compensation at December 31, 1995 is shown as a reduction to
stockholder's equity in the accompanying financial statements and will
be amortized to compensation expense over the remaining vesting
period.
Other Stock Options - On January 1, 1995, the Company entered into a
service agreement with Universal Marketing Services Limited, a non-
affiliated United Kingdom corporation ("UMS Agreement") for the
service of David Rollinson. Mr. Rollinson was retained to provide
services as an independent sales agent to the Company for the United
Kingdom and Europe for a period of one year. In January 1996, the UMS
Agreement was amended extending the term on a month-to-month basis.
F-23<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
Pursuant to the UMS Agreement, the Company agreed to pay UMS a monthly
fee of 2,500 pounds sterling plus bonus compensation computed as a
percentage of operating income realized by UMS ("Operating Income").
Operating Income is defined as sales less cost of sales, and selling,
general and administrative expenses but excluding the bonus
compensation above.
As further consideration, a stock option agreement was entered into
with UMS, whereby the Company granted UMS the option to purchase
common stock of the Company, at the greater of the fair market value
of the common stock on the date of grant or $5.25 per share, based on
UMS generating certain Operating Income levels as follows:
(i) if Operating Income exceeds $300,000 for any calendar year,
5,000 shares of common stock will be earned;
(ii) if Operating Income exceeds $600,000 for any calendar year,
an additional 10,000 shares of common stock will be earned; and
(iii) if Operating Income exceeds $1,000,000, an additional 10,000
shares of common stock will be earned.
The maximum number of options available to be granted under the
agreement represents 50,000 shares. As of December 31, 1995, no bonus
compensation or stock options had been earned by UMS.
On August 1, 1995, the Company entered into an agreement with ADR
Management Group Ltd., ("ADR Agreement") for the purpose of providing
the Company independent financial relations management services.
Pursuant to the ADR Agreement, the Company agreed to pay ADR an
average monthly fee of $2,500 plus reasonable out-of-pocket expenses
through July 1997. As further compensation, the Company granted to ADR
options to purchase an aggregate of 75,000 shares of common stock of
the Company at $5.25 per share. The shares vest in amounts of 9,375 at
the end of each three-month period following August 1, 1995. As of
December 31, 1995 and March 31, 1996, 9,375 and 18,750 shares respectively,
issuable under the stock option were vested.
13. DEFINED CONTRIBUTION PLAN
In January 1995, the Company established a defined contribution plan
pursuant to Section 401(k) of the Internal Revenue Code that is
available to substantially all employees. Under this plan the Company
matches $.50 of each $1.00 of employee contributions up to two percent
of covered payroll. Employees are immediately fully vested for their
contributions and vest in the Company contribution ratably over a five
year period. The Company's contribution expense for the year ended
December 31, 1995 was $14,686.
F-24<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
14. INCOME TAXES
The components of income tax expense (benefit) are as follows for the
years ended December 31, 1994 and 1995:
FEDERAL STATE TOTAL
____________ ____________ ____________
1994:
Current $ -- $ 800 $ 800
Deferred (216,000) (18,000) (234,000)
------------ ------------ ------------
$ (216,000) $ (17,200) $ (233,200)
============ ============ ============
1995:
Current $ -- $ 800 $ 800
Deferred -- 31,000 31,000
------------ ------------ ------------
$ -- $ 31,800 $ 31,800
============ ============ ============
The components of deferred tax assets were as follows at December 31,
1994 and 1995:
1994 1995
____________ ____________
Deferred tax assets:
Net operating loss carryforwards $ 1,086,217 $ 1,002,510
Depreciation 4,078 4,785
Employee benefit plans 21,491 37,913
Uniform capitalization of
inventory costs 34,888 59,316
Liability reserves 43,571 --
Bad debt reserves 9,285 13,012
Inventory reserves -- 40,130
Other 1,391 1,722
------------ ------------
Total deferred tax assets 1,200,921 1,159,388
Deferred tax liabilities:
State income taxes 43,921 33,388
------------ ------------
Total deferred tax liability 43,921 33,388
------------ ------------
Net deferred tax asset $ 1,157,000 $ 1,126,000
============ ============
The actual tax expense (benefit) differs from the expected tax expense
(benefit), computed by applying the Federal corporate tax rate of 34%
to income (loss) before income taxes, as follows:
F-25<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS-(continued)
1994 1995
____________ ____________
Expected statutory tax (benefit)
expense $ (131,155) $ 11,208
State income taxes, net of Federal
tax effect (11,352) 20,988
Adjustment to deferred tax asset (98,306) --
Other 7,613 (396)
------------ ------------
Actual tax (benefit) expense $ (233,200) $ 31,800
============ ============
At December 31, 1995, the Company had net operating loss carryforwards
for federal tax purposes expiring as follows.
YEAR EXPIRES AMOUNT
____________ ____________
2004 $ 83,052
2005 761,427
2006 949,143
2007 593,499
2009 370,394
------------
$ 2,757,515
============
Management of the Company periodically reviews the necessity for a
valuation allowance with respect to both the current and non-current
portion of the deferred income tax asset to determine the probability
of its realization and to estimate what portion will be realized
during the current period and in subsequent future periods, including
any anticipated limitation on utilization of loss carryforwards
resulting from the change in the Company's ownership in connection
with the Offering. The Company has a backlog of orders totaling
$7,200,000 at May 31, 1996, resulting from one promotion to be
delivered in the second quarter of 1996. The Company believes that,
given this backlog, and the expectation of continuing increases in its
promotions and retail business, it is more likely than not that the
entire benefit of existing deductible temporary differences will be
realized. Therefore, no valuation allowance has been established.
###
F-26
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is effective as of
January 1, 1996 by and between Fotoball USA, Inc., a Delaware corporation
(the "Company"), and Fred S. Ostern ("Employee").
W I T N E S S E T H :
WHEREAS, Employee is currently serving as the Vice President of
Marketing of the Company pursuant to an Exclusive Services Agreement between
Company and the Eastwoods Group, Inc., a California Corporation, which
provides, among other things, that the Eastwoods Group shall lend the
exclusive services of Employee to Company during the term of the Exclusive
Services Agreement;
WHEREAS, the Company desires to contract directly with Employee as
Vice President of Marketing of the Company, and Employee desires to contract
directly for such employment, upon the terms set forth in the Agreement;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the adequacy
and receipt of which are hereby acknowledged, the parties agree as follows:
1. EMPLOYMENT.
(a) The Company hereby employs (the "Employment") Employee as
the Vice President of Marketing of the Company. Employee's responsibilities
shall be as follows: (i) to utilize the Company's products and expertise,
and the Company's and the Employee's relationships with the sports community
and the corporate community and the Company's production sources, to develop
sports-related and non-sports related products (including toys and other
collectibles) and promotions that enhance corporate America's ability to
reach its customer base, (ii) to expand the Company's premium marketing
activities into additional geographical and other areas, including overseas
and (iii) to contribute to the development and execution of the overall
marketing strategy of the Company. Employee shall report to the President
and Chief Executive Officer of the Company. Employee hereby accepts the
Employment and agrees to render such services, perform such duties and
exercise such supervision, guidance and powers, and such additional
services, duties or powers as may be agreed on by Employee and President and
Chief Executive Officer of the Company, to, for and with respect to the
Company, for the period and upon the terms set forth in this Agreement.
(b) Employee shall devote substantially all of his business
time and attention to the business and affairs of the Company consistent
with his position with the Company, except for vacations permitted pursuant
to Section 3.5 and Disability (as defined in Section 6.2). This Agreement
shall not be construed as preventing Employee from engaging in charitable
and community affairs, or giving attention to his passive investments,
provided that such activities do not interfere with the regular performance
of his duties and responsibilities under this Agreement.
-1-<PAGE>
2. TERM. Except as otherwise specifically provided in Section 6
below, the term of this Agreement (the "Term") shall commence effective as of
January 1, 1996 and shall continue until December 31, 1998, subject to the
terms and conditions of this Agreement.
3. COMPENSATION
3.1 Base Salary. Employee shall be paid a base salary (the
"Base Salary") at an annual rate of one hundred fifty thousand dollars
($150,000), payable on a semi-monthly basis, on the first and fifteenth of
each month. The Base Salary shall be reviewed by the Board of Directors
of the Company (the "Board") on or before January 1 of each year during the
Term, with such reviews to commence prior to such date, and shall be subject
to increase in the discretion of the Board, taking into account merit,
corporate and individual performance and general business conditions. Such
increase, if any, in Employee's Base Salary shall be effective on January 1
of each year during the Term commencing in 1997.
3.2 Annual Cash Bonus.
(a) In addition to the Base Salary, Employee shall be
entitled to annual bonus compensation ("Annual Bonus Compensation") based on
Employee's contribution to overhead and profit (the "Ostern Contribution") of
the Company. The Ostern Contribution shall be equal to (i) the gross annual
sales of the Company (including sales generated by any subsidiary or
affiliate of the Company which may be acquired or formed on or after January
1, 1996 in which the Company has the then-current right to vote more than
50% of the capital stock) produced by Employee or in which Employee is
instrumental in obtaining the contract and/or purchase order under which
such sales are generated (collectively, such annual sales shall be referred
to herein as "Ostern Gross Annual Sales"), (ii) less (A) sales returns,
allowances and discounts attributable to Ostern Gross Annual Sales (other
than allowances and discounts due to bad debts); (B) the cost of sales (not
including commissions, marketing expenses and general and administrative
expenses) and royalties expenses incurred by the Company for Ostern Gross
Annual Sales; (C) any costs incurred by the Company as a direct result of
ongoing customer requests that directly result in a change of estimate
(as opposed to production errors) for Ostern Gross Annual Sales; and (D)
costs directly resulting from the negligence or mismanagement of Employee or
those subordinates under his direct supervision or control (costs directly
resulting from the negligence or mismanagement of the Company (other
than Employee or his referenced subordinates) will not be deducted from the
Ostern Gross Annual Sales. Attached as Exhibit A is an example of the
calculation of the Annual Bonus Compensation. Sales, cost of sales, royalties,
expenses and receivables, as referred to in this Agreement, shall be
calculated in the same manner as such categories are prepared in connection
with the Company's federal securities law filings of its quarterly and annual
financial statements.
(b) The Annual Bonus Compensation shall be based on the
following formula:
-2-<PAGE>
Ostern Contribution ($) Annual Bonus (% of Aggregate Annual Bonus
the Ostern Compensation Range ($)
Contribution)
- ---------------------- ------------------- -----------------------
0 - 1,000,000 None None
1,000,001 - 5,000,000 9 0 - 360,000
5,000,001 - 10,000,000 10 360,000 - 860,000
10,000,001 - 15,000,000 11 860,000 - 1,410,000
15,000,001 - 20,000,000 12 1,410,000 - 2,010,000
20,000,001 - 25,000,000 13 2,010,000 - 2,660,000
25,000,001 and above 14 2,660,000 and above
Except as set forth in Section 6.3 hereof, the Annual Bonus Compensation for
any fiscal year of the Company shall be calculated quarterly on the accrual
basis of accounting and shall be payable in a lump sum to Employee within
thirty (30) days after the end of each fiscal quarter; provided, however,
that, if any portion of the Annual Bonus Compensation payable to Employee
for any fiscal quarter is represented by a receivable in excess of
$1,000,000 that is not collected within thirty (30) days after the end of
such fiscal quarter, the Company shall have the right to delay payment of
the Annual Bonus Compensation which is attributable to the uncollected
receivable for such fiscal quarter until seven (7) days after such
receivable is collected by the Company but in no event shall the Company
delay payment for more than 120 days after the invoice relating to such
receivable is issued. If the receivable is paid in one or more payments, the
Company shall pay to Employee, within seven (7) days of receipt of such
payment, a pro-rata portion of the Annual Bonus Compensation which is
attributable to the payment received.
(c) Employee shall document each job proposal to be
included in the Ostern Contribution by a bid sheet in the form of Exhibit B
that briefly describes the job, denotes the estimated cost of the job by
cost category and the price to be charged to the customer and shows such
other information necessary, in the determination of senior management of
the Company (other than Employee), for senior management to review each job
proposal. Prior to the delivery by Employee of a formal price quotation
for the job to the customer, Employee shall received the written approval of
a representative of senior management (other than Employee).
3.3 Chevron Cash Bonus. In addition to the Base Salary and
Annual Bonus Compensation, Employee shall be entitled to a one-time cash bonus
(the "Cash Bonus") with respect to the Chevron model car program which is
currently scheduled for shipment during the second quarter of 1996 (the
"Program") in an amount equal to .331565% of the gross invoice amount of the
shipment; provided, however, that the Cash Bonus shall not exceed thirty
thousand dollars ($30,000) in the aggregate. Notwithstanding any
provisions contained in Section 3.2(b), the Cash Bonus shall be payable in
a lump sum to Employee within thirty (30) days after the shipping and
invoicing of the Program.
-3-<PAGE>
3.4 Employee Benefits. In addition to the Base Salary and
the Bonus Compensation, Employee shall be entitled (i) to continue to
receive the fringe benefits now provided by the Company (which the Company
intends to memorialize in an employee manual, as such manual may be amended
from time to time) in addition to any additional benefits hereafter provided
to its executive officers, including, but not limited to, life,
hospitalization, surgical, major medical and disability insurance (other
than under the Company's supplementary disability plan) and sick leave, (ii)
to be a full participant in all of the Company's other benefit plans, pension
plans, retirement plans and profit-sharing plans which may be in effect
from time to time or may hereafter be adopted by the Company, (iii) to
receive, for the purchase and maintenance of a disability policy by Employee,
an amount equal to $5,000 per year, payable quarterly, and (iv) to costs and
expenses for the maintenance, including insurance, and operation of
Employee's automobile in an amount equal to $500.00 per month. Employee
hereby waives his right to participate in the Company's supplementary
disability plan.
3.5 Vacation. During the Term, Employee shall be entitled
to such vacation with pay during each calendar year of his Employment
hereunder consistent with his position as an executive officer of the
Company, but in no event less than three (3) weeks in any such calendar
year (pro-rated as necessary for partial calendar years during the Term).
Such vacation may be taken, in Employee's discretion, at such time or times
as are not inconsistent with the reasonable business needs of the Company.
Employee shall not be entitled to any additional compensation in the event
that Employee, for whatever reason, fails to take such vacation during any
year of his Employment hereunder. Employee shall also be entitled to all
paid holidays given by the Company to its executive officers.
4. INDEMNIFICATION. Employee shall be entitled at all times to
the benefit of the maximum indemnification and advancement of expenses
available from time to time under the laws of the State of Delaware.
5. EXPENSES. During the Term, the Company shall reimburse
Employee, on a monthly basis, upon presentation of appropriate vouchers or
receipts in accordance with the Company's expense reimbursement policies for
executive officers, for all reasonable out-of-pocket expenses incurred or
expended by Employee in connection with the performance of his duties under
this Agreement. Such reimbursement shall occur with 5 days after Employee
presents such monthly documentation.
6. CONSEQUENCES OF TERMINATION OF EMPLOYMENT.
6.1 Death. In the event of the death of Employee during
the Term, Employee's Employment hereunder shall be terminated as of the date
of his death and Employee's designated beneficiary, or, in the absence of
such designation, the estate or other legal representative of Employee
(collectively, the "Estate") shall be paid, Employee's unpaid Base Salary
(calculated through the end of the month in which the death occurs) and
Annual Bonus Compensation (based upon the Projects represented in the
Ostern Contribution which are in process or invoiced on the date of death)
paid as set forth in Section 3.2(b). The Estate shall be entitled to all
other death benefits in accordance with the terms of the Company's benefit
programs and plans.
-4-<PAGE>
6.2 Disability. In the event Employee shall be unable to
render the services or perform his duties hereunder by reason of illness,
in jury or incapacity (whether physical, mental, emotional or psychological)
(any of the foregoing shall be referred to herein as a "Disability") for
a period of either (i) ninety (90) consecutive days or (ii) one hundred
eighty (180) days in any consecutive three hundred sixty-five (365) day
period, the Company shall have the right to terminate this Agreement by
giving Employee ten (10) days prior written notice. If Employee's
Employment hereunder is so terminated, Employee shall be paid, in addition
to payments under any disability insurance policy in effect, Employee's
unpaid Base Salary (calculated through the end of the month in which
the termination occurs) and Annual Bonus Compensation (based upon the
Projects represented in the Ostern Contribution which are in process or
invoiced on the date of termination) paid as set forth in Section 3.2(b).
6.3 Termination of Employment of Employee by the Company for
Cause.
(a) Subject to Section 6.3(b), nothing herein shall
prevent the Company from terminating Employee's Employment for Cause (as
defined below). From and after the date of such termination, except as set
forth in this Section 6.3 Employee shall no longer be entitled to receive
Base Salary or Annual Bonus Compensation and the Company shall no longer be
required to pay premiums on any life insurance or disability policy for
Employee. Subject to the Company's right to set off against annual bonus
compensation, to the extent actual damages or losses can be established or
are incurred by the Company to the date of set-off, Employee shall be paid
Base Salary to the date of termination and Annual Bonus Compensation (based
upon the Projects represented in the Ostern Contribution which are in
process or invoiced on the date of termination) paid as set forth in Section
3.2(b). Any rights and benefits which Employee may have in respect of any
other compensation or any employee benefit plans or programs
of the Company, whether pursuant to Section 3.4 or otherwise, shall be
determined in accordance with the terms of such other compensation
arrangements or plans or programs. The term "Cause," as used herein, shall
mean that: (i) Employee shall embezzle funds or misappropriate other
property of the Company or any subsidiary; or (ii) Employee shall willfully
disobey a lawful directive of the Board, whether through commission or
omission; or (iii) Employee shall breach the Agreement in a material manner
or engage in fraudulent conduct as regards the Company.
(b) The Company shall provide Employee with written
notice stating that it intends to terminate Employee's Employment for Cause
under this Section 6.3 and specifying the particular act or acts on the
basis of which the Board intends to so terminate Employee's Employment.
Employee shall then be given the opportunity, within fifteen (15) days of
his receipt of such notice, to have a meeting with the Board to discuss such
act or acts (other than with respect to an action described in Section
6.3(a)(i) above as to which the Board may immediately terminate Employee's
Employment for Cause). Other than with respect to an action described in
Section 6.3(a)(i) above, Employee shall be given seven (7) days after his
meeting with the Board to take reasonable steps to cease or correct the
performance (or nonperformance) giving rise to such written notice. In the
-5-<PAGE>
event Board determines that Employee has failed within such seven-day period
to take reasonable steps to cease or correct such performance (or
nonperformance), Employee shall be given the opportunity, within ten (10)
days of his receipt of written notice to such effect, to have a meeting with
the Board to discuss such determination. Following that meeting, if the
Board believes that Employee has failed to take reasonable steps to cease or
correct his performance (or nonperformance) as above described, the Board may
thereupon terminate the Employment of Employee for Cause.
6.4 Termination of Employment at End of Term. If this
Agreement is not renewed by the Company and Employee at the expiration of the
Term, as consideration for the agreements and covenants of Employee set forth
in Section 8 hereof, the Company shall pay Employee a severance and
non-competition payment equal to the Annual Bonus Compensation earned by
Employee in each fiscal year of the Company after the expiration of the
Term, based on the projects represented in the Ostern Contribution which are
in process or invoiced on the last day of the Term. Such severance and
non-competition payment shall be calculated quarterly on the accrual basis
of accounting and shall be payable in a lump sum to Employee within thirty
(30) days after the end of each fiscal quarter of the Company; provided,
however, that, if any portion of the Annual Bonus Compensation payable to
Employee for any fiscal quarter is represented by a receivable in excess of
$1,000,000 that is not collected within thirty (30) days after the end of
such fiscal quarter, the Company shall have the right to delay payment of
the Annual Bonus Compensation which is attributable to the uncollected
receivable for such fiscal quarter until seven (7) days after such
receivable is collected by the Company but in no event shall the Company delay
payment for more than 120 days after the invoice relating to such receivable
is issued. If the receivable is paid in one or more payments, the Company
shall pay to Employee, within seven (7) days of receipt of such payment, a
pro-rata portion of the Annual Bonus Compensation which is attributable to
the payment received.
7. CONFIDENTIAL INFORMATION.
7.1 Employee covenants and agrees that he will not at any
time, either during the Term or thereafter, use, disclose or make accessible
to any other person, firm, partnership, corporation or any other entity any
Confidential Information (as defined below) pertaining to the business of the
Company except (i) while employed by the Company, in the business of and for
the benefit of the Company or (ii) when required to do so by a court of
competent jurisdiction, by any governmental agency having supervisory
authority over the business of the Company, or by any administrative body
or legislative body (including a committee thereof) with jurisdiction to
order the Company to divulge, disclose or make accessible such information.
For purposes of this Agreement, "Confidential Information" shall mean
non-public information concerning the Company's financial data, statistical
data, strategic business plans, product development (or other proprietary
product data), customer and supplier lists, customer and supplier
information, information relating to practices, processes, methods, trade
secrets, marketing plans and other non-public, proprietary and confidential
information of the Company; provided, however, that Confidential Information
shall not include any information which (x) is known generally to the public
-6-<PAGE>
other than as a result of unauthorized disclosure by Employee, (y) becomes
available to Employee on a non-confidential basis from a source other than
the Company or (z) was available to Employee on a non-confidential basis
prior to its disclosure to Employee by the Company. It is specifically
understood and agreed by Employee that any Confidential Information received
by Employee during his Employment by the Company is deemed Confidential
Information for purposes of this Agreement. In the event Employee's
Employment is terminated hereunder for any reason, he immediately shall
return to the Company all Confidential Information in his possession.
7.2 Employee and the Company agree that this covenant
regarding Confidential Information is a reasonable covenant under the
circumstances, and further agree that if, in the opinion of any court of
competent jurisdiction, such covenant is not reasonable in any respect, such
court shall have the right, power and authority to excise or modify such
provision or provisions of this covenant as to the court shall appear not
reasonable and to enforce the remainder of the covenant as so amended.
Employee agrees that any breach of the covenant contained in this Section 7
would irreparably injure the Company. Accordingly, Employee agrees that the
Company, in addition to pursuing any other remedies it may have in law or
in equity, may obtain an injunction against Employee from any court having
jurisdiction over the matter, restraining any further violation of this
Section 7.
8. NON-COMPETITION; NON-SOLICITATION.
8.1 Employee agrees that during the Non-Competition Period
(as defined in Section 8.4 below), without the prior written consent of the
Company: (i) he shall not be a principal, manager, agent, consultant, officer,
director or employee of, or, directly or indirectly, own more than one (1%)
percent of any class or series of equity securities in, any partnership,
corporation or other entity, which, now or at such time, has material
operations which are engaged in any business activity competitive (directly or
indirectly) with the business of the Company; and (ii) he shall not, directly or
indirectly, have any business dealings or contact with any entities that
were suppliers or customers of the Company during the Term or sell any
products sold by the Company during the Term; provided, however, that
Employee may act as an independent sales representative in soliciting
premium promotions with respect to product categories sold by the Company
during the Non-Competition Period so long as Employee first offers the
Company the opportunity to produce and/or sell the premium promotions on
commercially reasonable terms and conditions, with gross margins to be not
less than gross margins received by the Company from projects included in
the Ostern Contribution during the last year of the Term unless
market conditions dictate that reasonable adjustments are appropriate at the
time such promotions are presented to the Company. The Company shall, in
its sole and absolute discretion, accept or reject any premium promotion
offered by Employee to the Company pursuant to this Section 8.1 within a
reasonable period of time. Employee may, as an independent sales
representative, contact, negotiate and deal with those persons or other
entities which have been customers of the Company and which could be deemed
to be competitors of the Company for purposes of Section 8.1(i), and those
persons and entities referenced in Section 8.1(ii), in order
-7-<PAGE>
to facilitate negotiation and preparation of contracts to produce and/or sell
premium promotions to be first offered to the Company. Such contact and
negotiations shall not violate this Non-Competition/Non-Solicitation
provision.
If the Company does not accept the proposed offer within a reasonable time,
Employee may offer the premium promotion to any person or entity whatsoever,
without violating this Non-Competition/Non-Solicitation provision, but only on
the same terms and conditions as first offered to the Company. If the Company
accepts any premium promotion offered to the Company by Employee pursuant to
this Section 8.1, Employee shall be entitled to a cash commission of ten
percent (10%) of the gross revenues derived from such premium promotion.
Any such commissions relating to a commission-applicable premium promotion
pursuant to this Section 8.1 shall be payable in a lump sum to Employee
within thirty (30) days after the payment for such premium promotion is
received by the Company.
8.2 During the Non-Competition Period, Employee agrees
that, without the prior written consent of the Company (and other than on
behalf of the Company), Employee shall not, on his own behalf or on behalf
of any person or entity, directly or indirectly hire or solicit the
employment of any employee who has been employed by the Company at any time
during the six (6) months immediately preceding such date of hiring or
solicitation.
8.3 Employee and the Company agree that the covenants of
non-competition and non-solicitation are reasonable covenants under the
circumstances, and further agree that if, in the opinion of any court of
competent jurisdiction such covenants are not reasonable in any respect, such
court shall have the right, power and authority to excise or modify such
provision or provisions of these covenants as to the court shall appear not
reasonable and to enforce the remainder of these covenants as so amended.
Employee agrees that any breach of the covenants contained in this Section 8
would irreparably injure the Company. Accordingly, Employee agrees that the
Company, in addition to pursuing any other remedies it may have in law or in
equity, may obtain an injunction against Employee from any court having
jurisdiction over the matter, restraining any further violation of this
Section 8.
8.4 The provisions of this Section 8 shall extend for the
Term and survive the termination of this Agreement for one year from the date
of such termination (herein referred to as the "Non-Competition Period").
9. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been given if delivered
personally or sent by facsimile transmission, overnight courier, or certified,
registered or express mail, postage prepaid. Any such notice shall be deemed
-8-<PAGE>
given when so delivered personally or sent by facsimile transmission (provided
that a confirmation copy is sent by overnight courier), one day after deposit
with an overnight courier, or if mailed, five (5) days after the date of
deposit in the United States mails, as follows:
If to the Company, to: Fotoball USA, Inc.
3738 Ruffin Road
San Diego, California 92123
Fax No.: (619) 467-9947
Attention: President and Chief Executive Officer
If to Employee, to: Fred S. Ostern
14094 Rue D'Antibes
Del Mar, California 92014
With a copy to: Richard E. Sparber, Esq.
Sparber, Ferguson, Naumann, Ponder & Ryan
Imperial Bank Tower
701 "B" Street, Tenth floor
San Diego, California 92101
Fax No.: (619) 239-5601
10. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto with respect to the matters contemplated
herein and supersedes all prior agreements or understandings among the
parties related to such matters.
11. BINDING EFFECT. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the Company and
its successors and assigns and upon Employee. "Successors and assigns" shall
mean, in the case of the Company, any successor pursuant to a merger,
consolidation, or sale, or other transfer of all or substantially all of the
assets or capital stock of the Company.
12. NO ASSIGNMENT. Except as contemplated by Section 11 above,
this Agreement shall not be assignable or otherwise transferable by either
party.
13. AMENDMENT OR MODIFICATION; WAIVER. No provision of this
Agreement may be amended or waived unless such amendment or waiver [is
authorized by the Board and] is agreed to in writing, signed by Employee and
by a duly authorized officer of the Company (other than Employee). Except
as otherwise specifically provided in this Agreement, no waiver by either
party hereto of any breach by the other party hereto of any condition or
provision of this Agreement to be performed by such other party shall be
deemed a waiver of a similar or dissimilar provision or condition at the
same or at any prior or subsequent time.
14. FEES AND EXPENSES. If either party institutes any action or
proceedings to enforce any rights the party has under this Agreement, or for
damages by reason of any alleged breach of any provision of this Agreement, or
for a declaration of each party's rights or obligations hereunder or to set
aside any provision hereof, or for any other judicial remedy, the prevailing
party shall be entitled to reimbursement from the other party for its costs
and expenses incurred thereby, including but not limited to, reasonable
attorneys' fees and disbursements.
-9-<PAGE>
15. GOVERNIN LAW. The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed by the
internal laws of the State of California, without regard to its conflicts of
law rules.
16. TITLES. Titles to the Sections in this Agreement are
intended solely for convenience and no provision of this Agreement is to be
construed by reference to the title of any Section.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, which together shall constitute one agreement. It shall not be
necessary for each party to sign each counterpart so long as each party has
signed at least one counterpart.
18. SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms and
provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first set forth above.
FOTOBALL USA, INC.
By: /s/ Michael Favish
_______________________
Michael Favish
President and Chief Executive Officer
/s/ Fred S. Ostern
_________________________
Fred S. Ostern
-10-<PAGE>
EXHIBIT A
Pro Forma Calculation of Fred Ostern's Annual Cash Bonus
Assuming 1996 Fred Ostern Sales $10,000,000
Estimated Direct Costs and Royalties 6,200,000
------------
Contribution to overhead and profit
("COP") $ 3,800,000
============
Calculation of Annual Cash Bonus
TOTAL
Total COP $ 3,800,000
$0-$1,000,000
1,000,000 x 0.0% $ 0 < $ 1,000,000>
--------------
Remainder
$ 2,800,000
$1,000,000-$5,000,000
2,800,000 x 9.0% $ 252,000
--------------
$ 252,000
==============
-11-
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
We hereby consent to the use in the Prospectus constituting part of this
Post-Effective Amendment No. 2 to the Registration Statement on Form SB-2 of
our report dated February 16, 1996, relating to the financial statements of
Fotoball USA, Inc. which appear in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ HOLLANDER, GILBERT & CO.
-----------------------------
HOLLANDER, GILBERT & CO.
Los Angeles, California
June 13, 1996
