U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-KSB
[ X ] Annual Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
[ ] Transition Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number: 0-24608
___________________
FOTOBALL USA, INC.
(Name of small business issuer in its charter)
Delaware 33-0614889
________________ ______________
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification number)
3738 Ruffin Road, San Diego, California 92123
________________________________________________
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (619) 467-9900
_______________
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Redeemable Common Stock Purchase Warrant
Preferred Stock Purchase Right
Check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
__ __
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The Issuer's revenues for the fiscal year ended December 31, 1996 were
$25,997,162.
The aggregate market value of the Issuer's Common Stock held by
non-affiliates, computed by reference to the average bid and asked
prices of such stock, as of March 27, 1997, was $9,656,451.
As of March 27, 1997, the Company had 2,676,742 shares of Common Stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
Transitional Small Business Disclosure Format: Yes No X
___ ___
<PAGE>
PART I
Item 1. Description of Business
General
Fotoball USA, Inc., a Delaware corporation (the "Company"), designs,
develops, manufactures and markets high quality 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 a nationwide network of over 2,000 retailers, including Walmart,
J.C. Penney, Kmart, Target, Pro Image and The Sports Authority. 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"); the National Football League
Properties, Inc. and NFL Players Inc. (collectively "NFL"); National Hockey
League Enterprises and NHL Players' Association (collectively "NHL"); Major
League Soccer ("MLS"); and over 90 colleges and universities ("Colleges").
The Company has also signed license agreements with eight NASCAR drivers,
four motor speedways and Goodyear Tire & Rubber Co. ("Goodyear"), the
California Sesquicentennial Foundation and a retail license with WB Sport,
Warner Bros. new sport merchandise brand. 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. 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 non sports-related products.
The Company's 1997 product lines include: (i) baseballs: synthetic
leather, both mini and 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 players' images, statistics
and/or NFL team and league logos, College logos and/or mascots, and brand
licensed full-size footballs; (iii) basketballs: synthetic leather, miniature
basketballs licensed by Colleges, featuring College logos and/or mascots, and
brand licensed full-size basketballs; (iv) hockey pucks: official size and
weight ice hockey pucks featuring unique logo designs displayed in a replica
hockey net and licensed by NHL; (v) Fototires: miniature synthetic rubber
tires, scaled proportionally for size and weight, which replicate the exact
appearance of a NASCAR and INDY tire, featuring drivers' images and/or cars;
(vi) lapel pins: high-quality lapel pins featuring corporate logos and designs
for promotions and special events; (vii) soccer balls: miniature and
regulation-size synthetic leather soccer balls licensed by MLS, featuring
players' images, and/or MLS team and league logos; (viii) brand licensed and
performance ball products: regulation-size synthetic leather or vulcanized
rubber sports balls, featuring imprinted corporate logos, designs and animated
characters, including products for Disney Attractions, Official All Star Cafe,
and WB Sport; and (ix) custom-designed products, including, for example, toy
cars based upon characters featured in a major oil company's national
advertising campaign and plush teddy bears licensed by the California
Sesquicentennial Foundation.
2<PAGE>
The Company's business is segregated into two distinct market segments: the
promotions business, in which the Company sells custom-designed 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 include large corporations such as Chevron, 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
1996, the Company designed, manufactured and distributed two national toy car
promotions for a major oil company which aggregated approximately $14,000,000
in sales. In 1996, 76% of the Company's sales was derived from sales to
promotions customers (with 54% of the Company's sales derived from the toy
car promotions), as compared to 40% in 1995 (with 26% of the Company's sales
derived from contracts for the sale of promotional products to a national
quick serve restaurant ("QSR") chain). 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
2,000 retailers, including selected department stores and mass merchants
(such as Walmart, J.C. Penney, Kmart, Target, Pro Image and The Sports
Authority), theme parks (including Sea World, Disneyland, Disney World,
Hershey Park and Six Flags, airport and hotel concessionaires (including
Paradies, Duty Free Shops, Host Marriott and the Del-Star Group), various
licensed sports specialty and sporting goods chains, various consumer
catalogs and Professional Baseball stadiums (including all 28 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.
Products
The Company offers a variety of custom-imprinted sports and non-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. As of March 1997,
the Company had significantly expanded beyond its historical product lines
of baseball and football to include:
* Basketballs
* Hockey pucks
* Fototires
* Lapel pins
* Soccer balls
* Brand licensed and performance products
3<PAGE>
The above noted products were primarily introduced (or reintroduced, in
the case of soccer balls and hockey pucks) in the latter part of 1996 or in
early 1997 and therefore did not materially contribute to the Company's sales
in 1996. However, the Company anticipates that these new product lines
should contribute significantly to the growth of the Company's promotional
and retail sports-related sales in 1997 and beyond.
The following is a description of each of the Company's 1997 product lines:
Baseball:
The Company uses a synthetic leather, official size and weight baseball on
which it prints the various images. All the 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 Baseball - Baseball featuring a players' image and statistics.
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 .
Major League ExpressionsTM Baseball - Baseball featuring granite color,
black stitching and team logos.
Negro League BaseballTM - 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 CollectionTM - Baseball featuring university or
college logos.
Promotional Baseball - Baseball custom-printed and used for promotions.
Football:
The Company uses a 6.5-inch football with brown synthetic pebble finish
leather on three panels and white synthetic leather on the fourth panel for
its miniature football. The miniature football has a polyurethane inflatable
bladder and custom miniature version of official lacing. Each miniature
football is packaged with a scaled-down kicking tee which is used as a display
stand. The Company uses a full-size football constructed of synthetic leather
for its brand licensed products. The football product line includes the
following:
Teamball Football- Football featuring the 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.
4<PAGE>
NFL Quarterback Club Fotoball Football - Football featuring a full
color image of a player, together with his replica autograph.
University Teamball - Football featuring a full color image of a
university or college logo.
Performance/Full-size Football - Football featuring color images for
specialty retailers such as Walt Disney and WB Sport.
Promotional Football - Full-size and miniature footballs custom-printed
and used for promotions.
Basketball:
The Company uses a 16-inch circumference basketball with high-grade
synthetic leather finish on six panels and white synthetic leather on two
panels for its miniature basketballs. The miniature basketball is crafted
with full regulation construction and has a butyl inflatable bladder.
The Company uses a full-size basketball constructed of vulcanized rubber
for its brand licensed products. The basketball product line includes
the following:
University Teamball - Basketball featuring a full color image of a
university or college logo and nickname.
NBA team logoball - Basketball featuring full color logos of several
National Basketball Association ("NBA") teams, sold to individual
teams for exclusive sale by the respective team within the arena.
Performance/Full-size Basketball - Basketball featuring full color
images for specialty retailers.
Promotional Basketball - Full-size and miniature basketball made
primarily from vulcanized rubber featuring graphic designs of team,
college or corporate logos for promotions.
Soccer Ball:
The Company uses a 16 inch synthetic leather soccer ball for its miniature
soccer balls. The miniature soccer ball is machine-stitched with a
polyurethane or butyl inflatable bladder and consists of 12 five-sided panels.
The Company uses a full-size soccer ball constructed of vulcanized rubber for
its brand licensed products. The soccer product line includes the following:
Fotoball Soccer Ball - 12-panel miniature soccer ball featuring MLS
team logos, player images and player facsimile autographs.
Performance/Full-size Soccer Ball - Soccer ball featuring color images
for specialty retailers.
Promotional Soccer Ball - Full-size and miniature soccer ball,
size 2-5, custom-printed and used for promotions.
5<PAGE>
Hockey Pucks:
The Company re-introduced its trademarked Fotopuck product in February
1996 through a regional hockey puck promotion sponsored by a national QSR
chain. The Company recently signed a $1,700,000 contract with this same
customer for a three-market hockey puck promotion during the first quarter of
1997. See also "Backlog." The promotional hockey puck product is an official
game puck, custom imprinted with a player's image, team logo and/or corporate
logo which is licensed by the NHL. Also beginning in the spring of 1997 the
Company will introduce into the retail market a hockey puck, featuring
Chromium GraphicsTM process designs on a disk displayed in a hockey net.
Fototire:
Fototire is a miniature rubber tire scaled proportionally for size and
weight and replicates the exact appearance of a NASCAR and INDY tire. The
Fototire has the marks of Goodyear authorized through a license agreement
with Goodyear, and contains a disk in the center of the tire, upon which a
driver's image and/or car, along with corporate logos, are depicted using the
Company's imprinted process and/or Chromium GraphicsTM designs. The Company
will begin selling this product into the retail market in the spring of 1997.
Lapel Pins:
Beginning in the fourth quarter of 1996, the Company expanded into the
lapel pin market. The Company produces a variety of lapel pin styles and
quality including cloisonne, die struck, brass etched and steel for corporate
promotions and to brand licensed retail customers such as Planet Hollywood
and Official All Star Cafe.
Toys:
During 1996, the Company designed, manufactured and distributed toy cars
for two national promotions based on a major oil company's car characters
national advertising campaign. Approximately 3,200,000 toy cars were
distributed to over 4,000 service stations nationwide. Although the Company
does not anticipate any significant toy car sales in 1997, the toy car
promotions delivered in 1996 expanded the Company's opportunities and
expertise in the non-sports promotions business. The strategic relationship
that the Company has developed with an Asian toy manufacturer and a U.S.
toy design company favorably positions the Company to expand its promotional
and retail business beyond sports balls. For example, the Company has designed
three plush teddy bears licensed by the California Sesquicentennial
Foundation, featuring the look of a surfer and a gold prospector. The
Company expects that these products will be available for retail distribution
in the latter part of 1997.
6<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, 1995 and 1996:
PERCENTAGE OF SALES
PRODUCT YEARS ENDED DECEMBER 31,
------- ------------------------
1995 1996
--------- --------
Baseball:
Promotion 32% 19%
Retail 43 16
--------- --------
Total 75 35
Football:
Promotion 8 1
Retail 15 6
--------- --------
Total 23 7
Toys:
Promotion -- 54
--------- --------
Total -- 54
Other:
Promotion -- 2
Retail 2 2
--------- --------
Total 2 4
--------- --------
100% 100%
========= ========
Manufacturing, Supply and Distribution
A significant portion of all raw materials used in the production of the
Company's retail products are purchased from unaffiliated manufacturers in
the Far East. Additionally, the majority of the Company's promotions
products are manufactured according to Company and customer specifications
by these same unaffiliated manufacturers. In 1996, the Company purchased
approximately 89% of its raw materials and finished promotions goods from
four companies located in China, with one manufacturer accounting for 57% of
total raw materials and finished promotions goods 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.
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. The Company is increasingly shifting the
imprinting of its products, including screen printing of certain four-color
retail product, 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
7<PAGE>
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 production
and 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 impact on the cost of all of the
Company's products 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.
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 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 December 31, 1999. 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. The following is a brief description
of the Company's material license arrangements with its licensors:
The Company was granted by the Major League Baseball Players Association
("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" trade
names, 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, 1997, with two one-year renewal options. 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 its expiration.
8<PAGE>
The Company was granted by Major League Baseball Properties, Inc.
("MLBP") the non-exclusive right to utilize on regulation-size baseballs,
sweatbands, mini gloves and mini leather baseballs 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 these same products the names, likenesses and signatures of
certain retired baseball players. The term of the license extends through
December 31, 1999. 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 MLBP upon acceptable terms at its expiration.
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 and its members ("Quarterback Club"
license). The terms of the licenses extend through March 31, 1998. 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 NFLP upon
acceptable terms at its expiration.
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.
Other Considerations
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, 1996, 76% of the Company's sales was derived from promotions, of
which one customer accounted for aggregate sales of $14,122,000, or 54% of
sales, and another customer accounted for aggregate sales of $4,400,000, or
17% of sales. 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. In expanding its sports product retail business, devoting
greater resources to its sales staff, and seeking diversification of its
promotions business by expanding its customer base and product offerings, the
Company's goal is to reduce the potential variability of its quarterly
results in future years. The effect, however, of increasing its sales staff
to leverage its sales opportunities may be to increase operating costs in the
short term.
9<PAGE>
Variability of Gross Margins - Historically the Company has realized gross
margins as a percentage of total sales of between 45-50%. This represented an
aggregation of somewhat lower margin promotions sales offset by higher margin
retail sales. Generally, the Company's promotions sales realize lower margins
than its retail sales. In 1996, the Company realized gross margins of 29%
as a result of the previously mentioned low margin toy car promotion sales.
As the Company does not anticipate any material toy car sales during 1997,
the Company expects that its higher margin sports-related promotions and
retail business should contribute to higher margins in 1997, consistent with
years prior to 1996. The Company's gross margins fluctuate, particularly
between quarters, based in part on the concentration of promotions and
retail sales during the reporting period. The type of product sold, the size
of the promotion and extent of competition also create variability in realized
gross margins.
Variability of Operating Results; Seasonality; Dependence Upon Baseball
Related Sales - The Company has experienced, and expects to continue to
experience, significant quarter-to-quarter variability in its sales and net
income. This is due in part to the seasonality of its licensed sports
product business combined with a significant concentration of its business
from baseball. Historically, the Company has derived a significant amount of
sales from baseball-related products, representing 74% and 35% of the Company's
sales during the years ended December 31, 1995 and 1996, respectively. As
such, its sales tend to be concentrated during the second and third quarters
which coincides with the baseball season. As a result of the Major League
Baseball ("MLB") strike commencing in August 1994, and the delay in the start
of the 1995 MLB season, 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 during
the last half of 1995. The Company believes that the recent signing of a
collective bargaining agreement between MLB players and owners should have a
positive impact upon the Company's future baseball business. Baseball
related sales as a percentage of total sales decreased significantly in 1996
due to the $14,000,000 of toy car sales realized in 1996. Despite these toy
car sales, which are not anticipated to be material in the future, 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. The
second factor which significantly contributes to the variability of the
Company's operations is its dependence on promotions business as more
fully explained above.
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 could have a material
adverse effect on the Company's business and prospects. See Item 3, "Legal
Proceedings".
10<PAGE>
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 $13,300,000 and
$1,700,000 as of March 15, 1996 and 1997, respectively. The 1996 backlog
represented principally three significant promotions: a $9,000,000 toy car
promotion, which was subsequently reduced to $7,200,000, a $386,000 contract
to produce Fotopucks for a Detroit Red Wings promotion, and a $3,600,000
contract to produce "Teamstar Fotoball" baseballs for a national QSR chain.
The 1997 backlog represents a three-market Fotopuck promotion for a national
QSR chain. Because of the wider array of product lines offered by the Company
in 1997 beyond baseball-related products, and the difference in the selling
season of these new products such as the Fototire and hockey puck, the
Company's backlog at March 15, 1997 may not necessarily be indicative of
future revenues or earnings.
Competition and Technological Change
The promotions and sports-related retail 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.
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. Beginning in 1997, the Company began competing
directly with Rawlings Sporting Goods Company, Inc. ("Rawlings") in the
team logo baseball business after Rawlings received licensing rights from
MLB Properties, Inc. for this product category. The Company also competes
with Rawlings for certain promotional baseball programs, as noted below.
The technology currently being used by the Company has contributed to
restricting direct competition of its product lines. The future success of
11<PAGE>
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 domestic promotions business is highly competitive. The Company
believes that given the custom-designed nature of its sports-related products,
such as the mini-football, the Fotopuck and the new Fototire, that no
significant competition exists other than Baden Sports, Inc. and Rawlings.
As previously noted, Rawlings has established itself as a more significant
competitor in certain categories of the Company's promotional baseball
business. Additionally, 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 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 which have significantly greater financial and
other resources than does 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.
The Company continually seeks to offer the latest and most advanced imaging
technologies for its products. The Company has established a supplier
relationship with Chromium Graphics, a company that has developed a patented
new imaging medium that uses multi-color metalization that adds dimension and
texture to products. As previously noted, the Company is using this
metalization process to display the images of drivers, cars and/or team logos
on its Fototire and Fotopuck products.
Trademarks, Proprietary Information and Patents
Fotoball, Teamball, Fotopuck and Fototire are registered trademarks of
the Company. The Company believes that Fotoball is the best known brand
name for baseballs and other sports balls with imprinted color images. The
Company also uses brand names, such as Fotosweats, Teamsweats and Major
League ExpressionsTM, which are not registered with the U.S. Patent and
Trademark Office. The Company considers the Fotoball 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
12<PAGE>
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.
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.
Governmental Regulations
In the United States, the Company is subject to the provisions of, among
other laws, the Federal Hazardous Substances Act and the Federal Consumer
Products Safety Act. These laws empower the Consumer Product Safety
Commission (the "CPSC") to protect consumers from hazardous toys and other
articles. The CPSC has the authority to exclude from the market articles
that are found to be unsafe or hazardous, and can require a recall of such
products under certain circumstances. Similar laws exist in some states and
cities in the United States, as well as in Canada and Europe. The Company
has established a strong quality assurance program (including the inspection
of goods at factories and the retention of independent testing laboratories)
to ensure compliance with applicable laws. While the Company believes that
its products comply in all material respects with regulatory standards, there
can be no assurance that the Company's products will not be found to violate
applicable laws, rules and regulations, which could have a material adverse
effect on the business, financial condition and results of operations of the
Company. In addition, there can be no assurance that more restrictive laws,
rules and regulations will not be adopted in the future, or that the Company's
products will not be marketed in the future in countries with more restrictive
laws, rules and regulations, either of which could make compliance more
difficult or expensive, and which could have a material adverse effect on the
business, financial condition and results of operations of the Company.
The Company is engaged in a business that could result in possible claims
for injury or damage resulting from its products. The Company is not
currently, nor has it been in the past, a defendant in any product liability
lawsuit. The Company currently maintains product liability insurance coverage
in amounts which it believes are adequate. 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.
The Company's operations are subject to federal, state and local laws and
regulations relating to the environment, health and safety and other regulatory
matters. Certain of the Company's operations may from time to time involve the
use of substances that are classified as toxic or hazardous within the meaning
of these laws and regulations. The Company's imprinting process involves the
use of inks, ink thinners, and xylene in the cleaning process of the ball. The
Company believes that is has obtained all material permits and that its
operations are in substantial compliance with all material applicable
environmental laws and regulations. Any non-compliance with environmental
laws and regulations is not likely to have a material adverse effect on the
Company, its results of operations or its liquidity.
13<PAGE>
Employees
As of March 1, 1997, the Company employed 71 persons full-time,
including six in executive positions, eight in sales, six in graphic
production, 15 in administrative support positions and 36 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.
Item 2. Description of Property
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 an additional 4,000 square
feet occupied in October 1995, together with certain common area expenses,
during the term of the lease. The Company's facility has reached its space
utilization capacity both for inventory warehousing and office space. The
Company is evaluating its options including the transfer of certain functions
to additional offsite leased space. In March 1997, the Company began leasing
an additional 7,500 square feet of inventory warehousing space from an
unaffiliated party under a five-year lease agreement for a monthly rent of
$4,500. It is the Company's intent to meet its increasing space requirements,
resulting principally from the expansion of its retail business, by weighing
the incremental costs of future additional space and expanding in a manner
that is congruent with the overall profitability of the Company. There can
be no assurance, however, that the Company will be successful in this regard.
Item 3. Legal Proceedings
The Company is a defendant in an action brought in San Diego County,
California Superior Court on March 14, 1997 by Fred S. Ostern, the Company's
Vice President-Marketing. The complaint alleges that the Company has
breached the employment agreement between the Company and Mr. Ostern by
failing to pay Mr. Ostern the entire amount of the annual cash bonus for 1996
in accordance with the provisions of his employment agreement. The claim
seeks unspecified damages in excess of $50,000. A reserve in an amount
deemed adequate by the Company has been recorded for the year ended December
31, 1996. The Company believes that it has meritorious defenses to the claim
which it intends to assert vigorously. In the opinion of management, except
as noted in the following paragraph, the outcome of the foregoing action will
not, in the aggregate, have a material adverse effect on the Company's
financial condition.
Mr. Ostern was instrumental in bringing in approximately $19,000,000 and
$2,000,000 in sales in 1996 and 1995, respectively. Such amounts represented
73% and 26% of total sales in 1996 and 1995, respectively. The Company
anticipates that Mr. Ostern's contribution to the Company's sales will be far
less in 1997 and 1998 than in 1995 and 1996, due to the non reoccurrence of
the toy car promotions and the anticipated expansion of the Company's sales
and marketing department. Despite the anticipated reduced contribution from
Mr. Ostern in 1997 and 1998, the loss of the services of Mr. Ostern could
have a material adverse effect on the Company's business and prospects.
14<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not submit any matter to a vote of security holders during
the fourth quarter of the year ended December 31, 1996.
15<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock ("Common Stock"), and redeemable Common
Stock purchase warrants ("Warrants") were traded over-the-counter on the
Nasdaq SmallCap Market ("Nasdaq") from August 12, 1994, the effective date of
the Company's initial public offering (the "Offering") to October 16, 1997
and on the Nasdaq National Market ("NMS") since October 17, 1996. 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.
SYMBOL HIGH LOW
------ ---- ---
Common Stock: (FUSA)
1995
First Quarter $ 4.38 $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 $ 10.50 $4.38
Third Quarter $ 9.25 $5.75
Fourth Quarter $ 8.00 $4.50
Warrants: (FUSAW)
1995
First Quarter $1.38 $1.38
Second Quarter $1.25 $ .38
Third Quarter $ .94 $ .50
Fourth Quarter $1.25 $ .56
1996
First Quarter $1.50 $1.00
Second Quarter $4.25 $1.13
Third Quarter $3.63 $1.38
Fourth Quarter $3.13 $1.00
On March 21, 1997, there were approximately 73 holders of record of the
Common Stock. Based on information provided by the Company's transfer
agent and registrar, the Company believes that there are approximately 1,446
beneficial owners of the Common Stock.
The Company has never paid dividends on the Common Stock and does not
anticipate paying any dividends in the foreseeable future.
16<PAGE>
Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations for Years Ended December 31, 1995 and 1996:
The following table sets forth certain operating data (in dollars, rounded
and as a percentage of the Company's sales) for the years ended December 31,
1995 and 1996:
1995 1996
---- ----
% %
--- ---
Sales $ 7,754,309 100 $25,997,162 100
Cost of Sales 4,302,644 55 18,468,475 71
Gross Profit 3,451,665 45 7,528,687 29
Operating Expenses 3,610,157 47 5,567,755 21
Operating Income (Loss) (158,492) (2) 1,960,932 8
Interest Expense 27,753 1 38,843 1
Interest Income 219,211 3 148,261 1
Income Before Income Tax 32,966 1 2,070,350 8
Income Tax Expense 31,800 1 795,000 3
Net Income $ 1,166 1 $ 1,275,350 5
Sales:
Sales were $25,997,000 for the year ended December 31, 1996, an increase
of 235% from sales of $7,754,000 for the year ended December 31, 1995. The
increase in sales was primarily due to a $3,575,000, or 64%, increase in
baseball-related sales and approximately $14,122,000 in toy car promotional
sales to a major oil company. Notwithstanding the significance of the toy car
promotional sales contribution, the Company's core sports-related business
increased 53% to $11,875,000 in 1996 as compared to $7,754,000 in 1995. The
Company anticipates that sales of toy cars in 1997 will not be significant
and therefore overall sales in 1997 will be lower than 1996. However, the
Company expects that its higher margin sports-related promotional and
retail businesses should contribute to higher margins in 1997, consistent
with years prior to 1996.
Retail sales were $6,140,000 for the year ended December 31, 1996, an
increase of 33% from retail sales of $4,630,000 for the year ended December
31, 1995. This increase was due to a continued expansion of sales to national
mass merchants and the direct result of the Company's efforts to broaden and
diversify its product lines. The Company believes that its ongoing efforts
to expand its product offerings, such as with hockey, NASCAR, lapel pins and
brand licensed merchandise, as well as mass merchant sales of WB Sport,
Warner Bros. new all-star sports brand, should promote continued retail sales
growth.
Promotions sales in 1996 were $19,850,000 an increase of 539% from
promotions sales of $3,107,000 for the year ended December 31, 1995. The
increase was primarily due to the $14,122,000 toy car promotion and $4,400,000
of sales to a national QSR chain resulting from hockey and baseball promotions.
Excluding the toy car promotion, the Company's promotions business increased
$2,700,000 or 87% in 1996 as compared to 1995 due primarily to the previously
noted QSR baseball promotion, together with increases of $397,000, $231,000
and $58,000, in hockey, football and basketball promotions sales, respectively.
17<PAGE>
Gross Profit:
Gross profit was $7,529,000 for the year ended December 31, 1996, an
increase of 118% from gross profit of $3,452,000 for the year ended December
31, 1995, reflecting the substantially higher sales in 1996. Gross margins
as a percentage of sales for the year ended December 31, 1996 declined to 29%
from 45% for the prior year period. This decline was the result of the
$14,122,000 in low margin toy car sales realized in 1996 combined with
significant anomalous shipping costs incurred in the delivery of the Spring
1996 toy car promotion. As the Company does not anticipate any material toy
car sales during 1997, the Company expects that its higher margin sports-
related promotions and retail business should contribute to higher margins
in 1997, consistent with years prior to 1996. Excluding the impact of the
toy car promotions, the Company's margins as a percentage of sales remained
materially unchanged from 1995 to 1996.
Operating Expenses:
The Company's operating expenses were $5,568,000 for the year ended
December 31, 1996, an increase of 54% from operating expenses of $3,610,000
for the year ended December 31, 1995. Operating expenses as a percentage of
sales decreased to 21% in 1996 from 47% in 1995. Operating expenses increased
in absolute terms as a result of increases in sales-related expenses such as
royalties and marketing expense. General and administrative expenses
increased as a result of expanded facility and personnel costs incurred to
accommodate the significant sales growth.
Royalties expenses were $935,000 for the year ended December 31, 1996,
an increase of 71% from royalties expenses of $546,000 for the year ended
December 31, 1995. Royalties expenses as a percentage of sales decreased
to 4% in 1996 from 7% in 1995. The decrease in royalties expenses during
this period as a percentage of sales is due to the $14,122,000 of promotional
toy car sales which had no royalty obligation.
Royalties expenses increased in absolute terms in 1996 as a result of the
33% increase in retail sales during the year which typically carry royalty
rates of between 8-18%. Additionally, the $4,000,000 of promotional baseball
sales in 1996 to a national QSR customer required a 10% royalty. Excluding
the impact of the toy car promotions, royalties as a percentage of sales
were 8% in 1996. This is somewhat higher than the 7% realized in 1995 due to
retail sales constituting a greater percentage of total aggregate sports
related sales in 1996 as compared to 1995. The Company expects that in
absolute terms, royalties expenses will increase in 1997, reflecting the
anticipated increase in retail sales, and as a percentage of sales, will
remain consistent with prior years (excluding the impact of the toy car
promotions). 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, 1999 with the exception of the
NFL licenses which expire on March 31, 1998. 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.
18<PAGE>
Marketing expenses were $2,265,000 for the year ended December 31, 1996,
an increase of 88% from marketing expenses of $1,206,000 for the year ended
December 31, 1995. Marketing expenses as a percentage of sales decreased to
9% in 1996 from 16% in 1995, reflecting the absorption of the fixed
components of marketing expenses over significantly higher sales volume.
Marketing expenses increased $1,059,000 in absolute terms in 1996 primarily
as a result of (1) higher wages and benefits associated with additional sales
personnel, (2) increased sales bonus compensation, and (3) higher travel and
exhibiting costs. The Company anticipates increases in sales wages and
benefits in 1997, as a direct result of management's efforts to maximize and
leverage the Company's current brand equity and greater product diversity by
adding additional sales professionals. Other significant marketing expenses
such as travel and exhibiting costs should remain relatively consistent with
the prior year.
General and administrative expenses were $2,130,000 for the year ended
December 31, 1996, an increase of 30% from general and administrative
expenses of $1,642,000 for the year ended December 31, 1995. The $488,000
increase between periods was primarily related to increased employee
compensation commensurate with the overall growth of the Company's operations
combined with an increase in insurance costs, higher office facility costs
and higher public company-related expenses. The Company anticipates that
general and administrative expenses for the year ending December 31, 1997
should be consistent with total general and administrative expenses incurred
in 1996.
Other Income (Expense):
Interest expense was $39,000 for the year ended December 31, 1996, an
increase of 39% from interest expense of $28,000 for the year ended December
31, 1995. The increase of $11,000 was the result of purchases of equipment
and machinery under capital leases combined with interest incurred on the
amount outstanding in the fourth quarter on the revolving credit facility.
The Company anticipates that interest expense will increase moderately
reflecting additional capital lease purchases as more fully explained in
"Liquidity and Capital Resources" below.
Interest income was $148,000 for the year ended December 31, 1996 as
compared to $219,000 for the year ended December 31, 1995. This decrease is
due to two factors: as more fully explained below, the Company's average cash
balances available for investment were lower during 1996 as compared to 1995.
Additionally, the interest rate yield realized on its cash during 1996 was
lower than the corresponding prior year period, reflecting both a modest
decline in interest rates in the market and the Company taking a shorter term
investment position in order to meet working capital requirements during the
period.
Income Tax Expense:
Income tax expense of $795,000 was recorded for the year ended December
31, 1996, as compared to income tax expense of $32,000 for the year ended
December 31, 1995. The Company's effective tax rate in 1996 of 38% was lower
than the statutory tax rate of 40%, primarily due to the charitable donation
of certain inventory during the year. At December 31, 1996, the Company had
federal net operating loss carryforwards of approximately $1,033,000 of which,
19<PAGE>
due to the change in the Company's ownership in connection with its initial
public offering, the Company is limited to the use of approximately $350,000
per year to offset future taxable income. As such, future taxable income
will only be partially offset by available loss carryforwards, resulting in
increased payments of federal and state income taxes in future periods. Given
these limitations on the use of loss carryforwards along with the current and
anticipated future operating results, the Company expects to realize minimum
taxable earnings sufficient to fully utilize the allowable loss carryforwards
in 1997 and future periods. Therefore, no valuation allowance has been
established at December 31, 1996.
Liquidity and Capital Resources
The Company's net working capital increased by $1,437,000 from December
31, 1995 to December 31, 1996, to a net working capital surplus of $6,839,000
at December 31, 1996 from a net working capital surplus of $5,402,000 at
December 31, 1995. Cash flow from operations decreased by $2,619,000 from
cash used in operations of $954,000 for the year ended December 31, 1995 to
cash used in operations of $3,573,000 for the year ended December 31, 1996.
This decrease was primarily the result of the $5,600,000 accounts receivable
with a major oil company resulting from a Holiday 1996 toy car promotion,
which was subsequently collected in January 1997. If the payment of this
$5,600,000 receivable had been received during December 1996, cash flow
from operations and cash balances for the year ended December 31, 1996 would
have been $2,027,000 and $6,582,000, respectively.
Cash and equivalents aggregated $982,000 at December 31, 1996, a
decrease of $1,180,000 from cash and equivalents of $2,162,000 at December
31, 1995. This decrease is primarily due to the significant increases in
accounts receivable, as previously noted, and increased inventory levels in
support of higher sales. The Company's expanding product lines, including
mini-baseball gloves, hockey pucks, and the Fototires, substantially all of
which are imprinted at the San Diego facility, will require the Company, in
the future, to maintain these higher inventory levels. The Company also
utilized cash resources for the acquisition of non-current assets, such as
property and equipment additions. Management is continuously evaluating
its systems and facilities to promote efficiencies, lower its operating
costs and remain technologically competitive in support of its expanded
product lines. During 1996, the Company acquired fixed assets for an
aggregate purchase price of approximately $374,000, including production
machinery, office and computer equipment. For the next twelve months, the
Company anticipates that its capital expenditure requirements will
approximate $500,000, to be used to purchase additional production machinery,
office and computer equipment and software. Additionally, as previously
discussed, the Company's facility has reached its space utilization capacity.
The Company anticipates incurring costs, which are included in the $500,000
capital expenditure budget, on facility and leasehold improvements to
accommodate the Company's need for additional space.
Restricted cash of $1,000,000 at December 31, 1995 represented deposits
with Merrill Lynch supporting an irrevocable stand-by letter of credit.
At December 31, 1996, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $1,087,000 in the aggregate
through 1999, of which $348,000 is due at various times in 1997. Given the
Company's operating profits to date and anticipated increases in retail
product sales, management expects these guaranteed royalties to be funded
from operating cash flows.
20<PAGE>
In December 1994, the Company entered into a $1,000,000 line of credit
with Merrill Lynch International Bank Limited at an interest rate which is
at 1.75% above the London Interbank Offering Rate term that the Company
chooses to select. Borrowings under the line of credit were 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 International Bank Limited from $1,000,000 to $3,000,000.
The line of credit, which expired on December 19, 1996, and was subsequently
renewed on March 27, 1997 extending its term until December 10, 2001,
supported an irrevocable stand-by letter of credit of $1,000,000, which
expired on December 15, 1996, that had been issued to a supplier and was
collateralized by treasury bill investments. 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 bear 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. The Company subsequently received from Scripps
Bank an increase in this revolving credit line to $2,000,000 for purposes
of financing the production of the Holiday 1996 toy car promotion.
Additionally, the terms of this revolving line of credit were extended
through April 15, 1998.
Management believes that the Company's existing cash position, credit
facilities, combined with internally generated cash flows, will be adequate
to support the Company's liquidity and capital needs at least through the end
of 1997.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This report contains "forward-looking statements" within the meaning of
the federal securities laws. These forward-looking statements include, among
others, statements concerning the Company's outlook for 1997, overall sales
trends, gross margin trends, cost reduction strategies and their results, the
Company's expectations as to funding its capital expenditures and operations
during 1997, and other statements of expectations, beliefs, future plans and
strategies, anticipated events or trends, and similar expressions concerning
matters that are not historical facts. The forward-looking statements in this
report are subject to risks and uncertainties that could cause actual results
to differ materially from those expressed in or implied by the statements.
1997 Outlook
Looking forward to 1997, the Company expects a transitional year from the
record year realized in 1996. The Company expects a decline in its total
sales in 1997 over 1996 based on the non-reoccurrence of the $14,000,000 in
1996 toy car promotions sales. The Company anticipates that its higher
margin sports-related promotions and retail business should contribute to
21<PAGE>
higher margins in 1997, consistent with years prior to 1996. The Company
does not expect, however, that anticipated retail sales increases and higher
aggregate margins will fully replace the net income realized from the 1996
toy car promotions. Therefore, earnings are expected to be lower in 1997 than
in 1996. However, given the variability of the Company's promotions business,
it is possible that significant promotional programs could be realized during
the summer and fall of 1997, although there is no way to currently predict
such developments. Additionally, the Company's actual results for 1997 and
future years are dependent upon how well the Company's new NASCAR, hockey and
lapel pin product lines will be received both in the retail and promotional
marketplace. The licensing of drivers and product and packaging development
of the Fototire product took longer than anticipated and therefore no material
sales of the Fototire was realized in the first quarter of 1997. However, the
Company expects an acceleration of sales of the Fototire during the second
half of 1997 and in 1998. Similarly, the backlog of baseball promotions sales
is significantly lower in March 1997 as compared to the same period in 1996,
due to the lack of a "national" baseball promotion in 1997. However, the
Company anticipates that certain promotional projects during the summer of
1997, which the Company is currently discussing with certain customers, may
lead to expanded "national" baseball promotions in 1998.
The Company is addressing a number of critical issues including: the need
to continue to strengthen and build its management and marketing team and
structure; a diversification of its customer base so as to reduce sales
concentration among a few customers; a renewed focus and priority in
improving profitability in the near term through reduced overhead costs and
increased gross margins; and the continued creation of effective and
profitable promotional programs and the expansion of its product offerings.
The company believes, notwithstanding the previously mentioned issues, that
certain strong fundamentals exist which support a positive future outlook,
including:
* The Company is continuing the ongoing expansion of the Company's
promotions customer base, through anticipated "national" promotions
in 1998 which are based on the success of certain possible baseball,
hockey and Fototire promotions in 1997;
* Given the popularity of NASCAR and uniqueness of the Company's
Fototire product, the Company believes that the Fototire may become
one of the Company's top income producing product lines;
* The Company's retail sales during the past three years have been
growing at an average annual rate in excess of 40%. Given its
expanding national mass merchant relationships and its increasing
product diversity, the Company believes that this growth rate can
continue;
* The prudent use of the cash received from the Company's 1994 initial
public offering along with record operating results in 1996 has
resulted in a strong financial position, with no debt and sufficient
working capital resources to finance the Company's liquidity
requirements in the near term;
* The Company has significantly expanded its manufacturing supplier
relationships. Of particular significance is the strategic
relationship that the Company developed, arising from the toy car
22<PAGE>
promotions, with an Asian toy manufacturer and a U.S. toy design
company. These relationships favorably positions the Company to
expand its promotions and retail businesses beyond sports balls.
For example, the Company has designed three plush teddy bears
licensed by the California Sesquicentennial Foundation, featuring
the look of a surfer and a gold prospector. The Company expects
that these products will be available for retail distribution in
the latter part of 1997.
The Company anticipates that royalties and marketing expenses will
increase in the aggregate, resulting from anticipated greater retail sales
and additional sales staff, respectively. The Company is actively pursuing
the diversification of its promotions business by expanding its customer base
and product offerings. The Company has identified the hiring of additional
productive sales professionals as a significant factor in successfully
expanding and diversifying its business. The effect, however, of increasing
its sales staff to leverage its sales opportunities may be to increase
operating costs in the short term. General and administrative expenses are
expected to remain approximately consistent with total general and
administrative expenses incurred in 1996.
To improve its financial performance, the Company must grow its core
sports related promotions and retail business, achieve higher margins and
control its overall cost structure. The most important factors that could
prevent the Company from achieving these goals - and cause actual results
to differ materially from those expressed in the forward-looking statements
- - include, but are not limited to, the following:
* the ability of the Company to maintain the growth momentum of its
retail division by continuing to expand its national mass merchant
relationships, maintain the appeal and desirability of its existing
product lines and continue to develop new product offerings
* increasing competition from other sports product licensed companies,
including companies that have or may receive the same or similar
licensing rights as the Company's and may have substantially greater
financial resources than the Company
* the ability to maintain and renew its significant licensing
arrangements
* the inability to increase its overall gross margins, or its inability
to maintain the higher level of gross margins realized from its sports
related products
* the ability to expand its customer base, particularly in its
promotions business, and decrease its concentration of sales among
a few significant customers
* the employment and retention of high producing sales staff
* the ability to source products from China at competitive prices
without delays, increased tariffs, other restrictions or
unanticipated costs
23<PAGE>
* continued rapid growth in the popularity of licensed sports products
potential impact on operating margins resulting from an expansion of
the Company's cost infrastructure at a rate that exceed its growth in
sales and gross margins.
These and other risks and uncertainties affecting the Company are
discussed in greater detail in this report and in other filings by the Company
with the Securities and Exchange Commission.
Item 7. Financial Statements
Reference is made to the Financial Statements referred to in the
accompanying index setting forth the financial statements of Fotoball USA,
Inc., together with the report, dated February 21, 1997 of Hollander, Gilbert
& Co., the Company's independent auditors.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
24<PAGE>
Part III
Item 9. Directors and Executive Officers of the Registrant
The following table sets forth certain information as of March 31, 1997
concerning the executive officers and directors of the Company:
NAME AGE POSITION
- ------ ---- ---------
Michael Favish 48 President, Chief Executive Officer and Director
William R. Hasvold1,2 65 Director
Joel K. Rubenstein2,3 60 Director
Sabin C. Streeter2 55 Director
Robert N. Weingarten3 44 Director
David G. Forster 37 Vice President, Finance, Treasurer and Chief
Financial Officer
Karen M. Betro 46 Vice President, Administration
Fred S. Ostern 36 Vice President, Marketing
Michael A. Johnson 32 Vice President, Team Business
Carl E. Francis 38 Vice President, Retail Development
- --------
1. Mr. Hasvold resigned from the Board of Directors effective March 31, 1997
2. Member of compensation committee
3. Member of audit 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.
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 until his retirement in April 1997, Mr. Streeter was
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
25<PAGE>
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.
Commencing January 1, 1997, Mr Weingarten joined Chelsea Capital Corporation
as a principal. Chelsea Capital Corporation is a merchant banking firm
located in Beverly Hills, California. 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 Fremont
Corporation, a publicly-held company.
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 associated with 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.
Fred S. Ostern has served as Vice President, Marketing of the Company
since January 1996, at which time the Company entered into an employment
contract with Mr. Ostern through December 1998. 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 April 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. He is a graduate of Cornell University with a B.S.
in Consumer Economics.
26<PAGE>
Item 10. Executive Compensation
The following table shows, for the fiscal years ended December 31, 1994,
1995 and 1996, 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, David G. Forster, the Company's Vice
President of Finance and Chief Financial Officer and Fred S. Ostern, the
Company's Vice President of Marketing (the "Named Executives"). No other
person who served as an executive officer of the Company received salary
and bonus in excess of $100,000 during the fiscal year ended December 31,
1996.
Summary Compensation Table
Annual Long-Term
Compensation Compensation
----------------------------------- ------------
Other
Name and Annual
Principal Position Year Salary($) Bonus($) Compensation($) Options(#)
- ----------------- ---- --------- -------- --------------- ----------
Michael Favish 1996 153,247 74,250 - 10,000
President and 1995 152,756 - - -
Chief Executive 1994 100,742 - - 100,000
Officer
David G. Forster 1996 76,010 55,750 - 10,500
Vice President of 1995 70,112 12,000 - 12,500
Finance and 1994 64,257 10,799 - 35,000
Chief Financial
Officer
Fred S. Ostern 1996 150,000 355,069 - -
Vice President 1995 329,965(1) - - -
of Marketing 1994 296,185(1) - - -
(1) See Item 12 "Executive Compensation - Certain Relationships and Related
Transactions."
Stock Options
The following table contains information concerning the grant of stock
options under the Company's 1994 Stock Option Plan to the Named Executives
during the Company's last fiscal year:
Option Grants in Last Fiscal Year
% of Total
Options Granted
to Employees in
Options Fiscal Year
Name Granted (#) (of 80,250) Exercise ($/Sh) Expiration Date
- ------------------------------------------------------------------------------
Michael Favish 10,000 12.5 $8.00 5/3/06
David G. Forster 10,500 13.1 $8.00 5/3/06
Fred S. Ostern - - N/A N/A
27<PAGE>
Options granted under the 1994 Stock Option Plan become exercisable
in three equal installments on each of the first, second and third anniversary
of the date of grant. The options were granted at an exercise price equal to
not less than the fair market value of the Common Stock on the date of grant.
The Company does not currently grant stock appreciation rights.
Option Holdings
<TABLE>
The following table sets forth information with respect to the Named
Executives concerning the exercise of options during the last fiscal year
and the unexercised options held as of the end of the last fiscal year.
<CAPTION>
Securities Underlying
Value of Unexercised In-the-
Unexercised Options at FY-End
Money Options at FY-End
Shares Value (#) (1)
($) (2)
Acquired on Realized
Name Exercise(#) ($) Excercisable Unexercisable
Excercisable Unexercisable
- --------------------------------------------------------------------------
- ---------------------------
<S> <C> <C> <C> <C>
<C> <C>
Michael Favish - - 103,333 6,667
N/A N/A
David G. Forster 15,000 71,250 27,590 15,410
71,250 N/A
Fred S. Ostern - - - -
- -
</TABLE>
_________________
(1) This represents the total number of shares subject to stock options
held by the Named Executives. These options were granted on various
dates during the years 1994 through 1996.
(2) These amounts represent the difference between the exercise price of
the stock options and the closing price of $4.75 of the Common Stock
on December 31, 1996, for all in-the-money options then held by each
Named Executive. The in-the-money stock option exercise price was
$ .01.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
The Company is party to an employment agreement (the "Favish Agreement")
with Michael Favish, which provides that Mr. Favish will serve as President
and Chief Executive Officer for an initial term of five years commencing on
August 11, 1994. Mr. Favish's annual base salary is $150,000 per year, with
annual cost of living increases and additional increases at the discretion
of the compensation committee. For 1997, Mr. Favish's salary was increased
to $165,000 by the compensation committee. Mr. Favish is also entitled to
a bonus at the discretion of the compensation committee and has been granted
28<PAGE>
options, vesting over a three-year period, to purchase an aggregate of
110,000 shares of Common Stock at per share exercise prices of $5.78 - $8.00.
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 party to an employment agreement with Fred S. Ostern (the
"Ostern Agreement"), which 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 growth annual sales of the Company produced by
Mr. Ostern less (i) sales returns, allowances and certain discounts, (ii) the
cost of sales (not including commissions, 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
invoice 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. On March 14, 1997, Mr. Ostern brought an action
against the Company alleging that the Company breached the Ostern Agreement.
See Item 3 "Legal Proceedings."
Director Compensation
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 are reimbursed for
reasonable expenses incurred in connection with attendance of meetings.
29<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information as of March 31, 1997
with respect to the Common Stock of the Company beneficially owned by (a) all
persons known to the Company to own beneficially more than 5% of any class
of voting security of the Company, (b) all directors and nominees, (c) the
Named Executives (as defined under the caption "Executive Compensation") and
(d) all executive officers and directors of the Company as a group.
Amount and Percent
Nature of Common
Beneficial Stock
Name and Address Ownership (1) Ownership (1)
- ----------------------- --------------- ---------------
Michael Favish
3738 Ruffin Road
San Diego, CA 92123 511,085 (2) 18.4%
Robert N. Weingarten
5439 Lockhurst Drive
Woodland Hills, CA 91367 74,445 (3) 2.8%
David G. Forster
3708 Cameo Lane
San Diego, CA 92111 51,466 (4) 1.9%
Sabin C. Streeter
2 Woods Witch Lane
Chappaqua, NY 10514 31,247 (5) 1.2%
Joel K. Rubenstein
c/o 500 Newport Center Drive,
Suite 900
Newport Beach, CA 92660 5,600 (6) *
William R. Hasvold
22128 Serenade Ridge
Murrieta, CA 92562 5,675 (7) *
Fred S. Ostern
3121 Hamburg Square
La Jolla, CA 92037 0 0
All executive officers and
directors as a group
(consisting of 10 persons) 714,631 26.7%
_____________
* Less than 1%.
(1) This table identifies persons and entities having sole voting and/or
investment power with respect to the shares set forth opposite their
names as of March 31, 1997 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 March 31, 1997 upon the conversion of convertible securities or
the exercise of warrants or options. Percent of Common Stock Ownership
30<PAGE>
is based on 2,676,742 shares of Common Stock outstanding, and assumes
that in each case the person or entity only, or the group only,
exercised his or its rights to purchase all shares of Common Stock
underlying stock options and warrants.
(2) Includes 100,000 and 3,333 shares of Common Stock issuable upon
exercise of currently exercisable options at per share exercise prices
of $5.78 and $8.00, respectively.
(3) Includes 69,445 shares of Common Stock issued upon exercise of an
option. See "Certain Relationships and Related Transactions."
Includes 5,000 shares of Common Stock issuable upon exercise
of currently exercisable options at per share exercise prices
of $5.25 - $7.75.
(4) Includes 32,590 shares of Common Stock issuable upon exercise of
warrants and currently exercisable options at per share exercise
prices of $ .01 - $ 8.00.
(5) Includes 10,000 shares of Common Stock issuable upon exercise of
currently exercisable options at per share exercise prices of
$5.25 - $7.75.
(6) Includes 5,000 shares of Common Stock issuable upon exercise of
currently exercisable options at per share exercise prices of
$5.25 - $7.75.
(7) Includes 5,000 shares of Common Stock issuable upon exercise of
currently exercisable options at per share exercise prices of
$5.25 - $7.75. Mr. Hasvold resigned from the Board of Directors
effective March 31, 1997.
Section 16(a) Beneficial Ownership Reporting Compliance. Section 16(a)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
requires the Company's directors and executive officers and persons who
beneficially own more than ten percent (10%) of the Common Stock
(collectively, the "Reporting Persons") to file with the Securities and
Exchange Commission (the "Commission") initial reports of beneficial
ownership and reports of changes in beneficial ownership of the Common
Stock. Reporting Persons are required to furnish the Company with copies of
all such reports. To the Company's knowledge, based solely on a review of
copies of such reports furnished to the Company and certain representations
of the Reporting Persons, the Company believes that during the 1996 fiscal
year all of the Reporting Persons complied with all applicable Section 16(a)
reporting requirements, except as set forth in the following sentence. Joel
K. Rubenstein filed one late report covering the acquisition of 200 shares
of Common Stock in December 1996.
Item 12. Certain Relationships and Related Transactions
The Company was party to an Exclusive Services Agreement (the "TEGI
Agreement") dated December 23, 1993 with The Eastwoods Group, Inc. ("TEGI")
for the services of Mr. 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
31<PAGE>
such provision of services of Mr. Ostern, pursuant to which Mr. Ostern
participated in the management of premium contracts from negotiation to
completion, TEGI was paid $296,185 in 1994 and $329,965 in 1995. Effective
January 1, 1996, the Company is party to the Ostern Agreement with Mr. Ostern.
See AEmployment Contracts and Termination of Employment and Change-in-Control
Arrangements.
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 of which $30,000 was paid on August 1, 1994 and the remaining amount
was paid in twelve monthly installments of $2,500 each, commencing on
September 1, 1994. The Company entered into a new consulting agreement
with Mr. Weingarten for a twelve month period commencing September 1, 1995
at a rate 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
consulting agreement was renewed for an additional twelve-month period
commencing September 1, 1996 at a rate of $3,333 per month.
Michael Favish, President and Chief Executive Officer of the Company and
Karen Betro, Vice President-Administration have a long-term relationship.
Derrick Favish, a non-officer employee and stockholder of the Company, is
the brother of Michael Favish, the President and Chief Executive Officer of
the Company. Greg Favish, a non-officer employee and stockholder of the
Company, is the son 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.
32<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(A). Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ ----------
1.1(P) Form of Underwriting Agreement (incorporated by
reference to Exhibit 1.1 of the Registration
Statement on Form SB-2 (File No. 33-80508)
(the "Form SB-2")).
3.1(2)(P) Amended and Restated Certificate of Incorporation of
Fotoball USA, Inc., a Delaware corporation
(incorporated herein by reference to Exhibit 3.1(2)
of the Registration Statement on Form SB-2).
3.2(2)(P) Amended and Restated By-laws of Fotoball USA, Inc., a
Delaware corporation (incorporated herein by reference
to Exhibit 3.2(2) of the Form SB-2).
4.1(P) Form of Representative's Unit Purchase Option
(incorporated herein by reference to Exhibit 4.1 of
the Form SB-2).
4.2(P) Form of Warrant Agreement (incorporated herein by
reference to Exhibit 4.2 of the Form SB-2).
4.3(P) Specimen Warrant Certificate (incorporated herein
by reference to Exhibit 4.3 of the Form SB-2).
4.4(P) Specimen Stock Certificate (incorporated herein by
reference to Exhibit 4.4 of the Form SB-2).
4.5(1) Specimen Form of Rights Certificate (incorporated
herein by reference to Exhibit 2.1 of the Registration
Statement on Form 8-A (File No. 0-21239) (the "Form
8-A").
4.5(2) Form of Rights Agreement, dated as of August 19, 1996,
between Fotoball USA, Inc. and Continental Stock
Transfer & Trust Company (incorporated herein by
reference to Exhibit 2.2 of the Form 8-A).
4.5(3) Form of Certificate of Designation, Preferences and
Rights of Series A Preferred Stock (incorporated
herein by reference to Exhibit 2.3 of the Form 8-A).
4.5(4) Summary of Rights Plan (incorporated herein by
reference to Exhibit 2.4 of the Form 8-A).
10.1(3) License Agreement with Major League Baseball
Properties, Inc.
10.1(4) License Agreement with Major League Baseball Players
Association.
33<PAGE>
10.1(5) License Agreement with National Football League
Properties, Inc.
10.1(6)(P) Trademark License Agreement with Goodyear Tire & Rubber
Company (incorporated herein by reference to Exhibit
10.1(6) of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995 (the "1995
Form 10-KSB")).
10.1(8)(P) Agreement with Chevron USA, Inc. dated as of
October 10, 1995 (incorporated herein by reference to
Exhibit 10.1(10) of the 1995 Form 10-KSB).
10.1(9) Agreement with Chevron USA, Inc. dated June 17, 1996.
10.3*(P) 1994 Stock Option Plan of the Company, as amended
(incorporated herein by reference to Exhibit 10.3
of the Form SB-2).
10.3(1)*(P) Form of Stock Option Agreement (incorporated herein by
reference to Exhibit 10.3(1) of the Company's Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1994 (the "1994 Form 10-KSB")).
10.3(2)*(P) Form of Directors' Stock Option Agreement (incorporated
herein by reference to Exhibit 10.3(2) of the 1994 Form
10-KSB).
10.3(3)*(P) Stock Option Agreement dated November 9, 1994 with
David G. Forster (incorporated herein by reference to
Exhibit 10.3(3) of the 1994 Form 10-KSB).
10.3(4)*(P) Form of Stock Option Agreement dated June 1, 1994 with
Sabin C. Streeter (incorporated herein by reference to
Exhibit 10.3(4) of the 1994 Form 10-KSB).
10.4(1)*(P) Form of Employment Agreement with Michael Favish
(incorporated herein by reference to Exhibit 10.4(1)
of the Form SB-2).
10.4(2)* Employment Agreement with Fred S. Ostern dated
January 1, 1996.
10.4(3)*(P) Amended and Restated Consulting Agreement with Robert
Weingarten effective January 1, 1996.
10.4(4)* Amendment to Amended and Restated Consulting Agreement
with Robert Weingarten dated September 1, 1996.
10.4(6)(P) Consulting Agreement with Universal Marketing Services
Ltd. ("UMS"), dated January 1, 1996.
10.4(7)(P) Stock Option Agreement dated May 9, 1995 with UMS.
10.4(8)(P) Consulting Agreement with ADR Management Group Ltd.
dated August 1, 1995.
34<PAGE>
10.5(P) Lease, dated February 4, 1994, by and between the
Company and George and Marcel Jach, with respect to
3738 Ruffin Road, San Diego, California (incorporated
herein by reference to Exhibit 10.5 of the Form SB-2).
10.9(1) Merrill Lynch International Bank Limited line of
credit dated December 20, 1995.
10.9(2) Merrill Lynch International Bank Limited irrevocable
stand-by letter of credit dated December 1, 1995.
10.10 Revolving Credit Agreement dated November 13, 1996
between Fotoball USA, Inc. and Scripps Bank.
21 Subsidiaries of the Company.
27 Financial data schedule.
* Indicates exhibits relating to executive compensation.
(P) Indicates that document was originally filed with the Securities
and Exchange Commission in paper form and that there have been
no changes or amendments to the document which would require
filing of the document electronically with this Form 10-KSB.
(B). Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of the year ended December 31, 1996.
35<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Fotoball USA, Inc.
---------------------
(Registrant)
Dated: April 15, 1997 By: /s/ Michael Favish
--------------------------
Michael Favish
President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: April 15, 1997 By: /s/ Michael Favish
--------------------------
Michael Favish
President and Chief Executive Officer
Dated: April 15, 1997 By: /s/ David G. Forster
--------------------------
David G. Forster
Vice President -- Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer)
Dated: April 15, 1997 By: /s/ Sabin C. Streeter
--------------------------
Sabin C. Streeter
Director
Dated: April 15, 1997 By: /s/ Joel K. Rubenstein
--------------------------
Joel K. Rubenstein
Director
Dated: April 15, 1997 By: /s/ Robert N. Weingarten
--------------------------
Robert N. Weingarten
Director
36 <PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
10.1(3) License agreement with Major League Baseball
Properties, Inc.
10.1(4) License agreement with Major League Baseball
Players Association.
10.1(5) License agreement with National Football League
Properties, Inc.
10.1(9) Agreement with Chevron USA, Inc. dated June 17,
1996.
10.4(2) Employment Agreement with Fred S. Ostern dated
January 1, 1996.
10.4(4) Amendment to Amended and Restated Consulting
Agreement with Robert Weingarten dated September
1, 1996.
10.9(1) Merrill Lynch International Bank Limited line of
credit dated December 20, 1995.
10.9(2) Merrill Lynch International Bank Limited irrevocable
stand-by letter of credit dated December 1, 1995.
10.10 Revolving Credit Agreement dated November 13,
1996 between Fotoball USA, Inc. and Scripps Bank.
21 Subsidiaries of the Company.
27 Financial data schedule.
37<PAGE>
FOTOBALL USA,INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
Report of Independent Auditors F-1
Balance Sheets at December 31, 1995 and 1996 F-2
Statements of Operations
for the years ended December 31, 1995 and 1996 F-3
Statement of Stockholders' Equity
for the years ended December 31, 1995 and 1996 F-4
Statements of Cash Flows
for the years ended December 31, 1995 and 1996 F-5
Notes to Financial Statements F-7
38<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, 1995 and 1996, 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 provide 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, 1995 and 1996, 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 21, 1997
F-1<PAGE>
FOTOBALL USA, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
1995 1996
ASSETS ---- ----
CURRENT ASSETS
Cash and equivalents $ 2,162,268 $ 981,554
Restricted cash (Note 5) 1,000,000 --
Accounts receivable-net 588,280 7,369,617
Inventories (Note 3) 1,288,085 2,081,206
Production-in-process 628,631 --
Prepaid expenses and other 114,075 176,285
Deferred income taxes (Note 11) 525,000 187,000
----------- ------------
TOTAL CURRENT ASSETS 6,306,339 10,795,662
----------- ------------
PROPERTY AND EQUIPMENT, net (Notes 4 and 7) 860,071 1,039,225
----------- ------------
OTHER ASSETS
Deferred income taxes (Note 11) 601,000 264,000
Deposits and other 41,983 55,449
----------- ------------
TOTAL OTHER ASSETS 642,983 319,449
----------- ------------
$ 7,809,393 $ 12,154,336
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank (Note 5) $ -- $ 1,825,000
Current portion of capital leases (Note7) 50,889 58,516
Accounts payable and accrued expenses (Note 6) 853,523 1,954,106
Income taxes payable -- 119,200
------------ ------------
TOTAL CURRENT LIABILITIES 904,412 3,956,822
CAPITAL LEASES, net of current portion (Note 7) 147,443 138,976
------------ ------------
TOTAL LIABILITIES 1,051,855 4,095,798
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 7, 8 and 9)
STOCKHOLDERS' EQUITY (Note 8)
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 in 1995 and 2,676,742
shares in 1996 26,617 26,767
Additional paid-in capital 8,562,194 8,562,194
Accumulated deficit (1,805,773) (530,423)
Less unamortized compensation expense (25,500) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,757,538 8,058,538
------------ ------------
$ 7,809,393 $ 12,154,336
============ ============
The accompanying notes are an integral part of these statements.
F-2 <PAGE>
FOTOBALL USA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
---- ----
SALES $ 7,754,309 $ 25,997,162
COST OF SALES 4,302,644 18,468,475
----------- ------------
GROSS PROFIT 3,451,665 7,528,687
----------- ------------
OPERATING EXPENSES
Royalties 546,110 935,079
Marketing 1,205,634 2,265,006
General and administrative 1,641,775 2,129,680
Depreciation and amortization 216,638 237,990
----------- ------------
TOTAL OPERATING EXPENSES 3,610,157 5,567,755
----------- ------------
OPERATING INCOME (LOSS) (158,492) 1,960,932
----------- ------------
OTHER INCOME (EXPENSE)
Interest expense (27,753) (38,843)
Interest income 219,211 148,261
----------- ------------
TOTAL OTHER INCOME 191,458 109,418
----------- ------------
INCOME BEFORE INCOME TAX 32,966 2,070,350
INCOME TAX EXPENSE (Note 11) 31,800 795,000
----------- ------------
NET INCOME $ 1,166 $ 1,275,350
=========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,661,742 2,728,348
=========== ============
NET INCOME PER COMMON SHARE $ NIL $ .47
=========== ============
The accompanying notes are an integral part of these statements.
F-3<PAGE>
FOTOBALL USA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
<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, 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
Exercise of officer stock
option 15,000 150
150
Amortization of compensation
expense
25,500 25,500
Net income 1,275,350
1,275,350
--------- -------- ----------- ------------
---------- -----------
BALANCE, December 31, 1996 2,676,742 $ 26,767 $ 8,562,194 $ ( 530,423)
$ -0- $ 8,058,538
========= ======== =========== ============
========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,166 $ 1,275,350
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization of
property and equipment 161,138 194,990
Amortization of deferred consulting fee 30,000 17,500
Amortization of stock compensation expense 25,500 25,500
Changes in operating assets and liabilities:
Accounts receivable (323,413) (6,781,338)
Inventories (487,960) (793,121)
Production-in-process (628,631) 628,631
Prepaid expenses and other (5,714) (62,210)
Deferred income taxes 31,000 675,000
Deposits and other (11,460) (30,966)
Accounts payable and accrued expenses 274,071 1,158,594
Income taxes payable -- 119,200
Consulting fee payable (20,000) --
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (954,303) (3,572,870)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (3,121,630) --
Proceeds from sale and maturities of
short-term investments 6,108,472 --
Purchase of property and equipment (301,065) (324,094)
(Increase) decrease in restricted cash (676,471) 1,000,000
----------- -----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 2,009,306 675,906
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of related party loans (211,253) (58,011)
Repayment of capital lease obligations (34,320) (50,889)
Borrowings under revolving line of credit -- 1,825,000
Proceeds from exercise of stock option -- 150
----------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (245,573) 1,716,250
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 809,430 (1,180,714)
CASH AND EQUIVALENTS, Beginning of period
1,352,838 2,162,268
----------- -----------
CASH AND EQUIVALENTS, End of period $ 2,162,268 $ 981,554
=========== ===========
(continued)
The accompanying notes are an integral part of these statements.
F-5<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS (continued)
YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 27,753 $ 25,851
Income taxes paid $ 17,207 $ 15,277
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 126,668 $ 50,048
The accompanying notes are an integral part of these statements.
F-6<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Nature of Operations - The Company designs,
develops and manufactures high quality 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 a nationwide network of over 2,000 retailers including Walmart, J.C.
Penney, Kmart, Target, Pro Image and The Sports Authority. 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"); the National
Football League Properties, Inc. and NFL Players Inc. (collectively "NFL");
National Hockey League Enterprises and NHL Players' Association
(collectively "NHL"); Major League Soccer ("MLS") and over 90 colleges
and universities ("Colleges"). The Company has also signed license
agreements with eight NASCAR drivers, four motor speedways, Goodyear
Tire & Rubber Co., the California Sesquicentennial Foundation and a retail
license with WB Sports, Warner Bros. new sport merchandise brand. 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 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.
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.
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
F-7<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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 for which the Company generally receives an
advance deposit approximating 25% of the order. At December 31, 1996, one
of these Fortune 500 companies accounted for 88% or more of total accounts
receivable, which was subsequently collected in January 1997.
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:
Office equipment and furniture 5 to 7 years
Show exhibit 7 years
Machinery and equipment 7 years
Molds 5 years
Leasehold improvements 7 years
Effects of Recent Accounting Pronouncements - The Financial Accounting
Standards Board (FASB) has issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This statement requires that the Company review for impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. SFAS No. 121 was
effective for the Company's fiscal year beginning January 1, 1996. The
adoption of this statement did not have a material impact on the Company's
financial position or result of operations for the fiscal year ended December
31, 1996. The FASB also issued SFAS No. 123, "Accounting for Stock-
Based Compensation." The Company was required to adopt SFAS No. 123
for the fiscal year beginning January 1, 1996. This statement establishes
accounting and disclosure requirements using a fair value-based method of
accounting for stock-based employee compensation plans. Under SFAS
No.123, the Company may either adopt the new fair value-based accounting
method or continue the intrinsic value-based method and provide pro forma
disclosures of net income and earnings per share as if the fair value
accounting provisions of this statement had been adopted. The Company
adopted only the disclosure requirements of SFAS No. 123; therefore such
adoption had no effect on the Company's financial position or results of
operations for the fiscal year ended December 31, 1996.
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, only a nominal provision for uncollectible
accounts has been provided.
F-8<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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 are periodically reviewed and adjusted as necessary.
Net Income per Common Share - Net income per common share is calculated
by dividing net income by the weighted average number of common shares
outstanding during the period, increased by dilutive common stock
equivalents using the treasury stock method. Fully diluted earnings per share
was substantially the same as primary earnings per share during the years
ended December 31, 1995 and 1996. Common equivalent shares result from
the assumed exercise of outstanding stock options. The dilutive effect of
rights to purchase preferred or common shares under the Company's
Stockholder Rights Plan (Note 8) and from the Company's redeemable
common stock purchase warrants have not been included in weighted average
share amounts as the conditions necessary to cause these rights and warrants
to be exercised were not met.
Reclassifications - Certain 1995 balances have been reclassified to conform
with the 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, likenesses
and other identifying marks and images borne by many of its products
pursuant to license arrangements with Professional Baseball, NFL and, to a
lesser extent, Colleges. The Company's licensing arrangements expire at
various times through December 31, 1999. The following table summarizes,
in descending order of 1996 revenue contribution, the Company's significant
license agreements and their terms:
Licensor Product Term Expiration Date
- --------- ------------- ---------------
MLBP Baseball 3 years December 31, 1999
MLBPA Baseball 1 year (2 year option) December 31, 1999
NFL Team Logo Football 2 years March 31, 1998
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 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.
F-9<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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, 1996, 76% of the Company's sales was
derived from promotions, of which one customer accounted for aggregate
sales of $14,122,000, or 54% of sales, and another customer accounted for
aggregate sales of $4,400,000 or 17% of sales. 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.
Variability of Gross Margins - Historically, the Company has realized
gross margins as a percentage of total sales of between 45-50%. This
represented an aggregation of somewhat lower margin promotions sales
offset by higher margin retail sales. Generally, the Company's
promotions sales realize lower margins than its retail sales. In 1996, the
Company realized gross margins of 29% as a result of the previously
mentioned low margin toy car promotion sales. As the Company does
not anticipate any material toy car sales during 1997, the Company
expects that its higher margin sports-related promotions and retail
business should contribute to higher margins in 1997, consistent with
years prior to 1996. The Company's gross margins fluctuate,
particularly between quarters, based in part on the concentration of
promotions and retail sales during the reporting period. The type of
product sold, the size of the promotion and extent of competition also
create variability in realized gross margins.
Variability of Operating Results; Seasonality; Dependence Upon
Baseball Related Sales - The Company has experienced, and expects to
continue to experience, significant quarter-to-quarter variability in its
sales and net income. This is due in part to the seasonality of its
licensed sports product business combined with a significant
concentration of its business from baseball. Historically, the Company
has derived a significant amount of sales from baseball-related products,
representing 74% and 35% of the Company's sales during the years
ended December 31, 1995 and 1996, respectively. As such, its sales tend
to be concentrated during the second and third quarters which coincides
with the baseball season. As a result of the Major League Baseball
("MLB") strike commencing in August 1994, and the delay in the start
of the 1995 MLB season, 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 during the last half of 1995. The Company believes that the
recent signing of a collective bargaining agreement between MLB
players and owners should have a positive impact upon the Company's
future baseball business. Baseball related sales as a percentage of total
sales decreased significantly in 1996 due to the $14,000,000 of toy car
sales realized in 1996. Despite these toy car sales, which are not
anticipated to be material in the future, 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
F-10<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
introduction of new product lines and non baseball-related promtions.
The second factor which significantly contributes to the variability of the
Company's operations is its dependence on promotions business as more
fully explained above.
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 (the "Ostern
Agreement"), 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. In March, 1997, Mr. Ostern brought an action against the
Company alleging that the Company breached the employment
agreement between the Company and Mr. Ostern. See Footnote 9,
"Employment Agreements".
Dependence on Suppliers - In 1996, the Company purchased
approximately 89% of its raw material, consisting primarily of synthetic
baseballs, footballs and basketballs, from four companies located in
China, with one manufacturer accounting for 57% of total raw material
purchased. China currently holds most favored nation ("MFN") trading
status with the United States. 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 all of the Company's products
because products originating from China could be subjected to
substantially higher rates of duty.
3. INVENTORIES
Inventories consisted of the following at December 31, 1995 and 1996:
1995 1996
----------- -----------
Finished goods $ 290,437 $ 439,332
Raw material 997,648 1,641,874
----------- -----------
$ 1,288,085 $ 2,081,206
=========== ===========
F-11<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
4. PROPERTY AND EQUIPMENT
Property and equipment, inclusive of machinery and equipment under
capital leases (see Note 7), consisted of the following at December 31,
1995 and 1996:
1995 1996
----------- -----------
Office equipment $ 369,130 $ 550,860
Show exhibits 126,146 127,174
Molds 32,456 183,136
Machinery and equipment 504,475 535,566
Leasehold improvements 300,402 310,016
----------- -----------
1,332,609 1,706,752
Less: accumulated depreciation
and amortization (472,538) (667,527)
----------- -----------
$ 860,071 $ 1,039,225
=========== ===========
5. LINES OF CREDIT
In December 1994, the Company entered into a $1,000,000 line of credit
facility (the "facility") with a bank. In December 1995, the facility was
increased to $3,000,000. The facility, which matured on December 19,
1996, carried an interest rate that was 1.75% above the London Interbank
Offering Rate term that the Company chose to select. Any borrowings
under the facility were secured by cash collateral deposited with the bank
equal to the credit outstanding. The facility supported several irrevocable
stand-by letters of credit issued and expired at various times through
December 15, 1996, that had been issued to a supplier. The facility
expired on December 19, 1996 and was subsequently renewed on March
27, 1997 extending its term until December 10, 2001.
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 bear
interest at the bank's prime rate plus .75%. The credit line contains
financial covenants requiring the Company to maintain minimum net worth
levels, minimum working capital and debt to equity ratios. In November
1996, the credit line was increased to $2,000,000 and was extended to
April 15, 1998, with the same terms.
At December 31, 1996, outstanding borrowings under the credit line
totaled $1,825,000. This outstanding balance was repaid in full in
January 1997.
F-12<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 1995 and 1996:
1995 1996
--------- -----------
Accounts payable $ 573,526 $ 1,427,161
Accrued payroll and related 52,554 71,232
Acrued interest -- 12,884
Accrued commissions and bonuses 82,061 208,338
Royalties payable 58,298 72,271
Customer deposits 23,042 22,577
Other 64,042 139,643
--------- -----------
$ 853,523 $ 1,954,106
========= ===========
7. COMMITMENTS AND CONTINGENCIES
Royalties - At December 31, 1996, the Company has commitments for
minimum guaranteed royalties under licensing agreements totaling
$1,087,000 through 1999 as follows:
YEARS ENDING DECEMBER 31, 1997
------------------------------
1997 $ 348,100
1998 363,750
1999 375,150
-----------
$ 1,087,000
===========
Capital Leases - The Company is obligated under various capital leases
that expire at various dates through December 2001. Minimum annual
payments including imputed interest under capital lease agreements are as
follows at December 31, 1996:
YEARS ENDING DECEMBER 31, 1997
------------------------------
1997 $ 79,510
1998 65,443
1999 52,377
2000 33,585
2001 13,296
-----------
Total minimum lease payments 244,211
Less interest component (46,719)
-----------
Present value of net minimum lease payments 197,492
Less current portion of capital leases (58,516)
-----------
Capital leases, net of current portion $ 138,976
===========
F-13<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
Included in property and equipment above at December 31, 1995 and
1996 (see Note 4) is the following property and equipment acquired under
capital leases:
1995 1996
----------- ----------
Machinery and equipment $ 193,546 $ 164,196
Office equipment 59,853 109,901
Less accumulated amortization (37,772) (59,008)
----------- ----------
$ 215,627 $ 215,089
=========== ==========
Amortization of capitalized leases is included in depreciation and
amortization expense.
The Company leases certain machinery equipment and office and
warehouse facilities under operating leases, of which the facilities lease
includes a cost escalation clause, and all expire on various dates through
2001. Total rental expense charged to operations was $198,299 in 1995
and $257,876 in 1996. At December 31, 1996, the minimum future rental
commitments under noncancellable leases payable over the remaining
lives of the leases are:
MINIMUM FUTURE
YEARS ENDING DECEMBER 31, RENTAL COMMITMENTS
------------------------- -------------------
1997 $ 240,440
1998 237,650
1999 241,016
2000 246,296
2001 88,569
--------------
$ 1,053,971
==============
The Company's facility has reached its space utilization capacity both for
inventory warehousing, and office space. The Company is evaluating its
options including the transfer of certain functions to additional offsite
leased space. In March 1997, the Company began leasing an additional
7,500 square feet of inventory warehousing space from an unaffiliated
party under a five-year lease agreement for a monthly rent of $4,500. It
is the Company's intent to meet its increasing space requirements,
resulting principally from the expansion of its retail business, by
weighing the incremental costs of future additional space and expanding
in a manner that is congruent with the overall profitability of the
Company. There can be no assurance, however, that the Company will
be successful in this regard.
8. STOCKHOLDERS' EQUITY
Public Offering - On August 19, 1994, the Company completed the
Offering of 1,265,000 units ("Units") (including exercise of the
F-14<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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 was charged to operations ratably over
the period of the contract.
In connection with the Offering, the Company also sold to the
underwriter, for an aggregate of $55, a warrant to purchase up to 110,000
Units. The warrant is exercisable initially at $9.90 per Unit (165% of the
Offering price per Unit) for a period of four years commencing August
11, 1995. On January 31, 1997 the Company elected to register the
underwriter's warrant by filing a Form S-3 Registration Statement, which
was subsequently declared effective by the Securities and Exchange
Commission on February 7, 1997.
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
245,000 shares of Common Stock were available to 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"). Under the Option Plan, officers, directors and key employees
may be granted options to purchase the Company's common stock at no
less than 100% of the market price on the date the option is granted.
Options generally become exercisable in installments of 33% per year on
each of the first through the third anniversaries of the grant date and have
a maximum term of ten years.
Stockholders approved an amendment to the Option Plan at the 1996
annual meeting of stockholders, increasing the authorized number of
shares for issuance under the Option Plan from 245,000 to 375,000
shares. A total of 80,250 options were granted in 1996 under the Option
Plan.
The Company applies Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock options. Accordingly, no compensation expense
has been recognized for its stock-based compensation plans. Had
compensation cost for the Company's Option Plan and other issued stock
options been determined based upon the fair value at the grant date
F-15<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
consistent with the methodology prescribed under SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income
and earnings per share would have been reduced by approximately
$167,000 and $38,000, or $.06 per share and $.01 per share, for 1996 and
1995, respectively. The fair value of the options granted during 1996 is
estimated as $14.30 on the date of grant using the Black-Scholes option-
pricing model with the following assumptions: dividend yield 0%,
volatility of 54%, risk-free interest rate of 6.6%, assumed forfeiture rate
of 2%, and an expected life of 5 years.
The following table summarizes information concerning all currently
outstanding and exercisable options as of December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Weighted
Average Weighted Weighted
Range Remaining Average Average
of Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- ------------------------------------------------------------------------------
$ .01 15,000 7.92 $ .01 15,000 $ .01
$5-$6 262,750 8.17 $ 5.45 155,408 $ 5.48
$6-$8 10,000 9.50 $ 7.75 10,000 $ 7.75
8-$10 69,250 9.42 $ 8.00 0 $ 8.00
------- -------
357,000 180,408
======= =======
The following table summarizes the Company's Option Plan activity for the
years ended December 31, 1995 and 1996:
WEIGHTED
AVERAGE
NUMBER OF PRICE PER PRICE PER
SHARES SHARE SHARE
-------- --------------- ---------
January 1, 1995 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
Granted 80,250 $7.75 to $8.00 $7.97
Exercised -- -- --
Canceled (1,000) $8.00 $8.00
-------
December 31, 1996 267,000 $5.25 to $8.00 $6.26
=======
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
F-16<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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 vested ratably on the last day of each quarter
during 1995 and 1996. In August 1996, the officer exercised 15,000 of
the options at $.01 per share. At December 31, 1996, the remaining
15,000 shares of the stock option were all vested.
The foregoing transaction resulted in deferred compensation of $76,500,
which was shown as a reduction to stockholders' equity in the
accompanying financial statements and was amortized to compensation
expense over the vesting period. Compensation expense of $25,500 was
charged to operations during 1995 and 1996. In May 1996, the Company
filed a registration statement on Form S-8 registering the 30,000 shares of
common stock represented by the officer's stock option.
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
services of David Rollinson. Mr. Rollinson was retained to provide
services as an independent sales agent of 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.
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. The maximum number of
options available to be granted under the agreement was 50,000 shares.
During the fiscal years ended 1995 and 1996, no bonus compensation or
stock options were earned by UMS. As of December 31, 1996, the UMS
Agreement and stock option agreement were terminated. The Company has
entered into a new agreement with Mr. Rollinson whereby he will receive
commissions calculated as a percentage of the gross margin contribution
derived from his sales.
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 over the term of the agreement, an average monthly fee of $2,500
plus reasonable out-of-pocket expenses through July 1997. As further
F-17<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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, 1996, 46,875
shares issuable under the stock option were vested.
Stockholder Rights Plan - In August 1996, the Company implemented a
stockholder rights plan to protect stockholders' rights in the event of a
proposed takeover of the Company. Under the stockholder rights plan,
each share of the Company's outstanding Common Stock carries one right
to purchase one one thousandth (1/1000) of Series A preferred stock (a
"Right") at an exercise price of $30, subject to certain anti-dilution
adjustments. Each Right entitles the holder, under certain circumstances,
to purchase Common Stock of the Company or the acquiring company at
a substantially discounted price ten days after a person or group publicly
announces it has acquired or has tendered an offer for 15% or more of the
Company's outstanding Common Stock. The Rights are redeemable by
the Company at $.01 per Right and expire in 2006. The Company has
1,000,000 shares of preferred stock authorized, of which 75,000 shares of
Series A preferred stock have been reserved for issuance upon exercise of
the Rights.
9. TRANSACTIONS WITH RELATED PARTIES
Employment Agreements - The Company is party to an 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 10, 1999. His base salary for 1996 was $150,000 per
year and has been increased to $165,000 in 1997. Mr. Favish was also
granted stock options in August 1994 and May 1996 of 100,000 and
10,000, respectively vesting over a three-year period, at an exercise price
of $5.78 and $8.00 per share, respectively.
The Company was party to an Exclusive Services Agreement ("TEGI
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 TEGI Agreement, TEGI agreed to provide the
Company with the exclusive services of Mr. Ostern until December 31,
1995. In January 1996, the Company entered into the Ostern 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 those sales and less any royalties that are due from those
sales. Mr. Ostern was paid $508,603 in 1996 and TEGI was paid
$329,965 in 1995. In March 1997, Mr. Ostern brought an action against
the Company in San Diego, California Superior Court alleging that the
Company has breached the employment agreement between the Company
and Mr. Ostern by failing to pay Mr. Ostern the entire amount of the annual
cash bonus for 1996 in accordance with the provisions of his employment
agreement. The claim seeks unspecified damages in excess of $50,000.
A reserve in an amount deemed adequate by the Company has been recorded for
the year ended December 31, 1996. The Company believes that it has meritorious
F-18<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
defenses to the claim which it intends to assert vigorously. In the opinion
of management, except as noted in the following paragraph, the outcome
of the foregoing action will not, in the aggregate, have a material adverse
effect on the Company's financial condition.
Mr. Ostern was instrumental in bringing in approximately $19,000,000
and $2,000,000 in sales in 1996 and 1995, respectively. Such amounts
representes 73% and 26% of total sales in 1996 and 1995, respectively.
The Company anticipates that Mr. Ostern's contribution to the Company's
sales will be far less in 1997 and 1998 than in 1995 and 1996, due to the
non reoccurrence of the toy car promotions and the anticipated expansion
of the Company's sales and marketing department. Despite the anticipated
reduced contribution from Mr. Ostern in 1997 and 1998, the loss of the
services of Mr. Ostern could have a material adverse effect on the
Company's business and prospects.
Consulting Agreement - The Company entered into a consulting
agreement with Mr. Weingarten, a director of the Company, 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. In August 1996, the Board of
Directors approved an extension to Mr. Weingarten's consulting
agreement at $40,000 per annum payable through August 31, 1997.
10. 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. In 1996, the Company matched $.50 of
each $1.00 of employee contributions up to three percent of covered
payroll. Employees are immediately fully vested for their contribution
and vest in the Company contribution ratably over a five year period. The
Company's contribution expense for the year ended December 31, 1995
and December 31, 1996 was $14,686, and $27,580, respectively.
11. INCOME TAXES
The components of income tax expense were as follows for the years ended
December 31, 1995 and 1996:
FEDERAL STATE TOTAL
-------- -------- ---------
1995:
Current $ -- $ 800 $ 800
Deferred -- 31,000 31,000
-------- --------- ---------
-- $ 31,800 $ 31,800
======== ========= =========
1996:
Current $ -- $ 120,000 $ 120,000
Deferred 587,000 88,000 675,000
-------- --------- ---------
$587,000 $ 208,000 $ 795,000
======== ========= =========
F-19<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
The components of deferred tax assets were as follows at December 31, 1995
and 1996:
1995 1996
---------- ----------
Deferred tax assets:
Net operating loss carryforwards $1,002,510 $ 351,080
Depreciation 4,785 --
Employee benefit plans 37,913 39,620
Uniform capitalization of inventory cost 59,316 25,248
Bad debt reserves 13,012 23,450
Inventory reserves 40,130 9,922
State income taxes -- 37,060
Other 1,722 11,096
---------- ----------
Total deferred tax assets 1,159,388 497,476
---------- ----------
Deferred tax liabilities:
State income taxes 33,388 --
Depreciation -- 46,476
---------- ----------
Total deferred tax liability 33,388 46,476
---------- ----------
Net deferred tax asset $1,126,000 $ 451,000
========== ==========
The actual tax expense differs from the expected tax expense, computed by
applying the Federal corporate tax rate of 34% to income before income taxes,
as follows:
1995 1996
---------- ----------
Expected statutory tax expense $ 11,208 $ 703,919
Net tax effect of permanent differences -- (68,285)
State income taxes, net of Federal tax effect 20,988 137,280
Adjustment to deferred tax asset -- 20,847
Other (396) 1,239
---------- ----------
Actual tax expense $ 31,800 $ 795,000
========== ==========
At December 31, 1996, the Company had net operating loss carryforwards for
Federal income tax purposes expiring as follows:
YEARS ENDING DECEMEBER 31, AMOUNT
--------------------------- ----------
2006 $ 52,580
2007 593,499
2009 386,508
----------
$1,032,587
==========
F-20<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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
believes that, given the expectation of continuing increases in its retail
business, and an increase in the gross margins realized from its core
sports-related promotional sales, 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-21
Contract No. ML- 2329D
MAJOR LEAGUE BASEBALL PROPERTIES, INC.
LICENSE AGREEMENT
THIS LICENSE AGREEMENT by and between Major League
Baseball Properties, Inc., 350 Park Avenue, New York, NY
10022 (hereinafter referred to as "Licensor"), as agent for
the Major League Baseball Clubs (the "Clubs"), and FOTOBALL
USA INC., 3738 Ruffin Road, San Diego, CA 92123
(hereinafter referred to as "Licensee". This Agreement is
not effective until signed by the parties hereto.
THIS WILL CONFIRM OUR AGREMENT AS FOLLOWS:
1. GRANT OF LICENSE: Licensor grants to Licensee for
the term of this Agreement, subject to the terms and
conditions hereinafter contained, the non-exclusive license
to utilize the names, characters, symbols, designs,
likenesses and visual representations described in Schedule
A attached hereto (herein such names, characters, symbols,
designs, likenesses and visual representations are
collectively called "Logos"), to be used solely in
connection with the manufacture, distribution, promotion,
advertisement and sale of the article or articles specified
in Schedule B attached hereto (herein such article or
articles are called "Licensed Product(s)"). This license
does not constitute and may not be used so as to imply the
endorsement of the Licensed Product(s) or any other product
of Licensee by Licensor, the Office of the Commissioner of
Baseball, the American or National League of Professional
Baseball Clubs (hereinafter referred to as the "Leagues")
or the Clubs. While the Logos licensed herein may be used
as trademarks subject to the terms of this License
Agreement, the Logos are not licensed herein for use as
certification marks or indications of a particular standard
of quality. Any exclusivity granted hereunder shall be
subject to presently outstanding agreements granted by the
Clubs. Further, any exclusivity granted hereunder shall
pertain only to the extent of the items described and, if
given, at the price set forth in Schedule E. Licensor
warrants and represents that as the agent for the Clubs,
pursuant to authority granted by the Clubs, it has the full
authority to license the Logos in connection with the
manufacture, distribution, promotion, advertisement and
sale of the Licensed Product(s).
2. TERRITORY: Licensee shall be entitled to use the
license granted hereunder only in the territory described
in Schedule C attached hereto (herein such territory is
called "Licensed Territory"). Licensee will not make use of
or authorize any use of this license or the Licensed
Product(s) outside the Licensed Territory or distribute or
sell the Licensed Product(s) directly or through others to
retailers outside the Licensed Territory.
3. LICENSE PERIOD: The license granted hereunder
shall be effective and terminate as of the dates specified
in Schedule D attached hereto, unless sooner terminated or
renewed in accordance with the terms and conditions hereof.
4. PAYMENT: A. Advance and Guaranteed Compensation:
Licensee agrees to pay Licensor the sums specified in
Schedule E attached hereto, as advance minimum compensation
(herein called "Advance Compensation") and as guaranteed
minimum compensation (herein called "Guaranteed
Compensation"). The Advance Compensation shall be paid as
set forth in Schedule E, and shall apply against Percentage
Compensation as defined below. The Guaranteed Compensation
shall be paid as provided in Schedule E except to the
extent that paid Advance Compensation and annual cumulative
payments of Percentage Compensation shall theretofore have
offset all or a portion of the total of such Guaranteed
Compensation. Notwithstanding the foregoing, no part of
Percentage Compensation which may be attributable to
premium sales (as defined hereunder) of the Licensed
Product(s) shall serve to offset any part of the Total
Guaranteed Compensation specified in Schedule E. No part of
such Advance Compensation and no part of such Guaranteed
Compensation shall be repayable to Licensee in any event,
except as is expressly provided for herein.
B. Percentage Compensation: Licensee agrees to pay
Licensor a sum equal to the percentage specified in
Schedule E (or Licensor's prevailing rate, if greater) of
all net sales (as defined below) by Licensee or any of its
affiliated, associated or subsidiary entities of the
Licensed Product(s) covered by this Agreement. (Such
percentage of net sales is herein called "Percentage
Compensation.") Percentage Compensation shall be payable
concurrently with the periodic statements required in the
following paragraph, except to the extent offset by
Guaranteed Compensation theretofore remitted. The term "net
sales" shall mean gross sales based on the wholesale price
to the retail trade less quantity discounts and actual
returns, but no deduction shall be made for uncollectible
accounts, commissions, taxes, discounts other than quantity
discounts, such as cash discounts and discounts
attributable to the issuance of a letter of credit, or any
other amount. No costs incurred in the manufacture, sale,
distribution, promotion or advertisement of the Licensed
Product(s) shall be deducted from any Percentage
Compensation payable by Licensee. Said Percentage
Compensation shall also be paid by Licensee to Licensor on
all Licensed Product(s) (including, without limitation, any
irregulars, seconds, etc. distributed pursuant to the
provisions of Paragraph 10 of this Agreement) distributed
by Licensee or any of its affiliated, associated or
subsidiary entities even if not billed or billed at less
than usual net sales price for such Licensed Product(s),
and shall be based upon the usual net sales price for such
Licensed Product(s) sold to the trade by Licensee. Any late
payments of Advance Compensation, Guaranteed Compensation
or Percentage Compensation shall require Licensee to pay
Licensor, in addition to the amounts due, interest at one
percent (1%) per month or the highest prime lending rate of
Chemical Bank during the period such amounts are
delinquent, whichever is greater, on the amounts delinquent
for the period of the delinquency, without prejudice to any
other rights of Licensor in connection therewith.
C. Catalog Contribution: Licensee agrees that Licensor
shall have the right in its sole discretion and in a style
and manner in which it chooses, to print catalogs, sales
sheets or brochures (hereinafter "catalogs") wherein
representative merchandise from licensees of Licensor shall
be displayed.
5. PERIODIC STATEMENTS: Within thirty (30) days after
the first day of the license period, and promptly on the
15th day of every calendar month thereafter, Licensee shall
furnish to Licensor complete and accurate statements,
certified to be accurate by Licensee, or if a corporation,
by an officer of Licensee, showing the sales volume of each
Licensed Product (itemized by Club, for each applicable
Licensed Product), gross sales price, itemized deductions
from gross sales price, and net sales price of the Licensed
Product(s) distributed and/or sold by Licensee during the
preceding calendar month, together with any returns made
during the preceding calendar month. Such statements shall
be furnished to Licensor whether or not any of the Licensed
Product(s) have been sold, or any payment is shown to be
due Licensor, during the calendar months in which such
statements are due. Licensee shall furnish to Licensor
sufficient background information so as to make such
statements intelligible to Licensor, and on an annual
basis, a complete list of Licensee's customers to whom
Licensed Product(s) have been sold. Licensor agrees that it
will not divulge said customer list to any other licensee,
to any other competitor licensing organization, or to any
competitor of Licensee. Receipt or acceptance by Licensor
of any of the statements furnished pursuant to this
Agreement or of any sums paid hereunder shall not preclude
Licensor from questioning the correctness thereof at any
time, and in the event that any inconsistencies or mistakes
are discovered in such statements or payments, they shall
immediately be rectified and the appropriate payments made
by Licensee. Late payment penalties, if any, shall be made
pursuant to Paragraph 4.B. Upon demand of Licensor,
Licensee shall at its own expense, but not more than once
in any twelve (12) month period, furnish to Licensor a
detailed statement certified by an independent certified
public accounting firm approved by Licensor showing the
sales volume of each Licensed Product (itemized by Club,
for each applicable Licensed Product), gross sales price,
itemized deductions from gross sales price and net sales
price of the Licensed Product(s) covered by this Agreement
distributed and/or sold by Licensee to the date of the
Licensor's demand. All amounts payable pursuant to this
Agreement shall be in U.S. dollars only.
6. BOOKS AND RECORDS: Licensee shall keep, maintain
and preserve in its principal place of business for at
least two (2) years following termination or expiration of
this Agreement or any renewal thereof, complete and
accurate records and accounts covering all transactions
relating to this Agreement and pertaining to the various
items required to be shown on the statements to be
submitted by Licensee, including, without limitation,
invoices, correspondence and banking, financial and other
records in Licensee's possession or under its control. Such
records and accounts shall be available for inspection and
audit (and copying at Licensor's expense) at any time or
times during or after the term or terms of this Agreement
during reasonable business hours and upon reasonable notice
by Licensor or its representatives. Licensee agrees not to
cause or permit any interference with Licensor or
representatives of Licensor in the performance of their
duties of inspection and audit.
The exercise by Licensor, in whole or in part or at
any time or times, of the right to audit records and
accounts or of any other right herein granted, the
acceptance by Licensor of any statement or statements or
the receipt and deposit by Licensor of any payment tendered
by or on behalf of Licensee shall be without prejudice to
any rights or remedies of Licensor and shall not estop or
prevent Licensor from thereafter disputing the accuracy of
any such statement or payment.
If pursuant to its right hereunder to audit and
inspect Licensor causes an audit and inspection to be
instituted which thereafter discloses a deficiency of three
percent (3%) or more between the amount found to be due to
Licensor and the amount actually paid or credited to
Licensor, then Licensee shall be responsible for payment of
the entire deficiency, together with interest thereon at
the then current prime rate of Chemical Bank or its
successor from the date such amount became due until the
date of payment, and the costs and expenses of such audit
and inspection. If the audit discloses a deficiency of less
than three percent (3%) between the amount found to be due
to Licensor and the amount actually paid or credited to
Licensor, and if the amount actually paid or credited to
Licensor plus the deficiency exceeds the Guaranteed
Compensation for the period covered by the deficiency, then
Licensee shall pay Licensor the amount of the deficiency
plus interest as calculated above.
7. INDEMNIFICATIONS AND PROTECTIONS: A. Licensor
hereby agrees to indemnify, defend and hold Licensee and
its owners, shareholders, directors, officers, employees,
agents, representatives, successors and assigns harmless
from any claims, suits, damages or costs (including
reasonable attorneys' fees and expenses) arising from (i)
challenges to Licensor's authority as agent for and
pursuant to authority granted by the Clubs to license the
Logos in connection with the manufacture, distribution,
promotion, advertisement and sale of the Licensed
Product(s) or (ii) assertions to any claim of right or
interest in or to the Logos as authorized and used on the
Licensed Products, provided in each case that Licensee
shall give prompt written notice, cooperation and
assistance to Licensor relative to any such claim or suit,
and provided further in each case that Licensor shall have
the option to undertake and conduct the defense of any suit
so brought and to engage in settlement thereof at its sole
discretion.
B. Licensee shall assist Licensor, to the extent
necessary, in the procurement of any protection or to
protect any of Licensor's rights to the Logos, and
Licensor, if it so desires and in its sole discretion, may
commence or prosecute any claims or suits in its own name
or in the name of Licensee or join Licensee as a party
thereto. Licensee shall notify Licensor in writing of any
infringements or imitations by others of the Logos of which
it is aware. Licensor shall have the sole right to
determine whether or not any action shall be taken on
account of such infringements or imitations. Licensee shall
not institute any suit or take any action on account of any
such infringements or imitations without first obtaining
the written consent of Licensor to do so. Licensee agrees
that it is not entitled to share in any proceeds received
by Licensor (by settlement or otherwise) in connection with
any formal or informal action brought by Licensor
hereunder.
C. Licensee hereby agrees to indemnify, defend and
hold Licensor, the Clubs, the Leagues and the Office of the
Commissioner of Baseball and their respective owners,
shareholders, directors, officers, employees, agents,
representatives, successors and assigns harmless from any
claims, suits, damages and costs (including reasonable
attorneys' fees and expenses) arising out of (i) any
unauthorized use of or infringement of any trademark,
service mark, copyright, patent, process, method or device
by Licensee in connection with the Licensed Product(s)
covered by this Agreement, (ii) alleged defects or
deficiencies in said Licensed Product(s) or the use
thereof, or false advertising, fraud, misrepresentation or
other claims related to the Licensed Product(s) not
involving a claim of right to the Logos, (iii) the
unauthorized use of the Logos or any breach by Licensee of
this Agreement, (iv) libel or slander against, or invasion
of the right of privacy, publicity or property of, or
violation or misappropriation of any other right of any
third party, and/ or (v) agreements or alleged agreements
made or entered into by Licensee to effectuate the terms of
this Agreement. Licensor shall give Licensee notice of the
making of any claim or the institution of any action
hereunder and Licensor may at its option participate in any
action. The indemnifications hereunder shall survive the
expiration or termination of this Agreement.
8. INSURANCE: Licensee agrees to obtain, at its own
cost and expense, comprehensive general liability insurance
including product liability insurance from an insurance
company acceptable to Licensor, providing adequate
protection for Licensor, the Clubs, the Leagues, the Office
of the Commissioner of Baseball and Licensee against any
claims or suits arising out of any of the circumstances
described in Paragraph 7C above for which insurer is able
to provide insurance, in an amount no less than
$5,000,000.00 (five million dollars) per incident or
occurrence, or Licensee's standard insurance policy limits,
whichever is greater, and with a reasonable deductible in
relation thereto. Such insurance shall remain in force at
all times during the license period and for a period of
five years thereafter. Within thirty (30) days from the
date hereof, Licensee will submit to Licensor a fully paid
policy or certificate of insurance naming Licensor, the
Leagues and the Office of the Commissioner of Baseball as
additional insured parties and requiring that the insurer
shall not terminate or materially modify such policy or
certificate of insurance without written notice to Licensor
at least thirty (30) days in advance thereof.
9. COPYRIGHT AND TRADEMARK NOTICES AND REGISTRATIONS:
Licensee further agrees that in any instance wherein the
Logos of the Clubs and/or the Leagues are used, the
following general notice shall be included (i.e., on the
product, on a label, on the packaging material or on a
separate slip of paper attached to the product): "The Major
League Club insignias depicted on this product are
trademarks which are the exclusive property of the
respective Major League Clubs and may not be reproduced
without their written consent." Further, all products
containing the Logos shall contain a hangtag and label with
Licensee's name stating "Genuine Merchandise" and
containing the Major League Baseball silhouetted batter
logo and, where appropriate, the Major League Baseball
Cooperstown Collection logo or Major League Baseball
Authentic Diamond Collection logo. All Licensed Product(s)
shall contain a permanently affixed label that displays
Licensee's name. All Licensed Product(s) components which
bear any of the Logos (embroidered emblems, cloth or paper
labels, hangtags, etc.) shall be manufactured in-house by
Licensee or shall be obtained only from one or more
suppliers officially authorized by Licensor to produce
those components. All Licensee advertisements displaying
the Logos, all retailer advertisements featuring Licensed
Product(s) and of which Licensee has knowledge or any
Licensed Product(s), shall contain the words "Genuine
Merchandise" and the silhouetted batter logo. Licensee
shall require those to whom it sells Licensed Product(s)
directly or indirectly to display the words "Genuine
Merchandise" (or such other appropriate notice as directed
by Licensor) and the silhouetted batter logo in all
advertisements. All uses of the Logos shall also include
any designations legally required or useful for enforcement
of copyright, trademark or service mark rights (e.g.,
"(c)," "(R)" or "TM". Licensee shall submit a copy of its
specifications for all of the above notices (including
copies of its artwork, layouts or mold blueprints) to
Licensor for its review. Licensor shall have the right to
revise the above notice requirements and to require such
other notices as shall be reasonably necessary to protect
the interests of Licensor, the Clubs and/or the Leagues in
the respective Logos. Licensee agrees to advise Licensor of
the initial date of the marketing of each Licensed Product,
and upon request, to deliver to Licensor the required
number and type of specimen samples of the Licensed
Product, labels or the like upon which the Logos are used
for use in procuring copyright, trademark and/or service
mark registrations in the name of and at the expense of the
person, firm, corporation or other legal entity owning the
Logos, in compliance with any laws relating to copyright,
trademark and service mark registrations. Except to the
extent set forth in any schedules attached to this
Agreement, Licensor, the Clubs and/or the Leagues shall be
solely responsible for taking such action as it or they
deem appropriate to obtain such copyright, trademark or
service mark registrations for its or their Logos. If it
shall be necessary for Licensee to be the applicant to
effect any such registrations, Licensee shall and hereby
does assign all of its rights in each such application and
any resulting registration to Licensor or any other
appropriate owner thereof, and further agrees to execute
all papers necessary to effectuate and/or confirm such
assignments. Licensee shall perform all acts necessary and
execute all documents necessary to effectuate its
registration as a user of the Logos where such registration
is needed.
Licensee also agrees that, in any case where it
employs the services of photographers or artists in
connection with the production, promotion, marketing or
distribution of the Licensed Product(s), it will require
each such photographer or artist to agree that the
photographic or artistic works he or she produces for
Licensee shall be "works made for hire" for the purposes of
the copyright laws, and that to the extent such
photographic or artistic works may not qualify as "works
made for hire," the copyright in each such work is assigned
to Licensee.
10. APPOVALS: Licensor shall have absolute approval
of the Licensed product(s) and of all packaging,
advertising and promotional material at all stages of the
development thereof. Licensee agrees to furnish in a timely
manner to Licensor, free of cost, for its written approval
as to quality and style, designs of each Licensed Product
and samples of each Licensed Product before its
manufacture, sale, promotion, advertisement or
distribution, whichever first occurs, and samples of all
advertising, point-of-sale displays, catalogs, sales sheets
and other items that display or picture the Logos, and no
such Licensed Product or other such materials shall be
manufactured, sold, promoted, advertised or distributed by
Licensee without such prior written approval. In
particular, no use of any Logo or Logos shall be made on
stationery of Licensee (specifically including, without
limitation, letterhead, envelopes, business cards, shopping
bags, invoices, statements, packing slips, etc.) without
Licensor's express written approval in advance of any such
use. In addition, no irregulars, seconds or other Licensed
Products which do not conform in all material respects to
the approved samples may be distributed or sold without the
express written advance consent of Licensor. All such
sales, if made, shall bear Percentage Compensation as set
forth in Paragraph 4.B. Subject, in each instance, to the
prior written approval of Licensor, Licensee or its agents
may use textual and/or pictorial matter pertaining to the
Logos on such promotional display and advertising material
as may, in its judgment, promote the sale of the Licensed
Product(s). All promotional display and advertising
material must contain and prominently display the official
logo of Licensor. Ten samples of each Licensed Product
shall be supplied free of cost to Licensor, and one to each
Club whose Logos are used on such Licensed Products). From
time to time subsequent to final approval, a reasonable
number of production samples shall periodically be sent to
Licensor free of cost. Such samples shall also be sent upon
any change in design, style or quality, which shall
necessitate subsequent approvals by Licensor. Additional
samples shall be supplied to Licensor upon request at no
more than cost. Licensor shall also have the right to
inspect Licensee's plants, warehouses or storage facilities
at any reasonable time without notice.
In the event that any item or matter submitted to
Licensor under this Agreement for approval or consent shall
not have been approved or consented to, disapproved or
denied, or commented upon within twenty (20) Licensor
business days after receipt thereof by Licensor (both
Licensing Director and Licensed Product Compliance), and
Licensor (both Licensing Director and Licensed Product
Compliance) shall have received notice from Licensee that
comment is overdue by telegram or other written
communication, and Licensor shall not have commented within
five (5) additional Licensor business days of receipt of
such notice, any items or matters so submitted shall be
deemed approved and consented to.
In any instance where any matter is required to be
submitted to Licensor for Licensor's approval, that
approval shall be granted or withheld in Licensor's sole
discretion.
11. DISTRIBUTION: Licensee shall sell the Licensed
Product(s) to jobbers, wholesalers, distributors or
retailers for sale or resale and distribution to retail
stores and merchants for their resale and distribution or
directly to the public. In the event Licensee sells or
distributes a Licensed Product at a special price directly
or indirectly to itself, including, without limitation, any
subsidiary of Licensee, or to any other person, firm or
corporation related in any manner to Licensee or its
officers, directors or major stockholders, Licensee shall
pay compensation with respect to such sales or distribution
based upon the pace generally charged the trade by
Licensee.
12. GOODWILL: Licensee recognizes the great value of
publicity and good will associated with the Logos and, in
such connection, acknowledges that such good will belongs
exclusively to Licensor, the Clubs, the Office of the
Commissioner of Baseball and/or the Leagues and that the
Logos have acquired a secondary meaning in the minds of the
purchasing public.
13. SPECIFIC UNDERTAKINGS OF LICENSEE: During the
license period, each additional license period if any and
thereafter, Licensee agrees that:
A. It will not acquire any rights in the Logos as a
result of its use thereof and all use of the Logos shall
inure to Licensor's benefit;
B. It will not, directly or indirectly, attack the
title of Licensor, the Clubs, the Office of the
Commissioner of Baseball and/or the Leagues in and to the
Logos or any copyright, trademark or service mark
pertaining thereto, nor will it attack the validity of the
license granted hereunder, nor will it use the Logos in any
manner other than as licensed hereunder;
C. It will not at any time apply for any registration
of any copyright, trademark, service mark or other
designation which would affect the ownership of the Logos,
or file any document with any governmental authority or
take any action which would affect the ownership of the
Logos or aid or abet anyone in doing so; D. It will not
harm, misuse or bring into disrepute the Logos;
D. It will not harm, misuse or bring into disrepute
the Logos;
E. It will manufacture, sell, promote, advertise and
distribute the Licensed Product(s) in a legal and ethical
manner and in accordance with the terms and intent of this
Agreement;
F. It will not create any expenses chargeable to
Licensor without the prior written approval of Licensor;
G. It will protect to the best of its ability the
right to manufacture, sell and distribute the Licensed
Product(s) hereunder;
H. It will not use the Licensed Product(s) for
combination sales, as self-liquidating or free giveaways or
for any similar method of merchandising without the prior
written consent of Licensor and will exercise due care that
its customers likewise will refrain from making such use of
the Licensed Product(s);
I. It will not, without the prior written consent of
Licensor, enter into any sublicense or agency agreement for
the manufacture, sale, promotion, advertisement or
distribution of the Licensed Product(s);
J. It will not engage in tying practices, illegal
restraints of trade, or selling practices that exclude any
members of the retail trade for any reason other than poor
credit history, known lack of integrity or disregard for
the rights of Licensor or Major League Baseball. Nothing in
the preceding sentence shall be deemed to require Licensee
to violate any other term of this Agreement;
K. It will not use, or knowingly permit the use of,
the Licensed Product(s) as a premium, except with the prior
written consent of Licensor and the specific negotiation of
a higher royalty payment therefor. For purposes of this
subparagraph and Paragraph 19 below, the term "premium"
shall be defined as including, but not necessarily limited
to, free or self-liquidating items offered to the public in
conjunction with the sale or promotion of a product or
service, including traffic building or continuity visits by
the consumer/customer, or any similar scheme or device, the
prime intent of which is to use the Licensed Product(s) in
such a way as to promote, publicize and/or sell the
products, services or business image of the third party
company or manufacturer. "Premium" use shall also
specifically include distribution of the Licensed
Product(s) for retail sale through distribution channels
(including, without limitation, catalogs) offering earned
discounts or "bonus" points based upon the extent of usage
of the offeror's product or service;
L. It will comply with such guidelines and/or
requirements as Licensor may announce from time to time. It
will comply with all laws, regulations and standards
relating or pertaining to the manufacture, sale,
advertising or use of the Licensed Product(s) and shall
maintain the highest quality and standards, and shall
comply with the requirements of any regulatory agencies
(including, without limitation, the United States Consumer
Safety Commission) which shall have jurisdiction over the
Licensed Product(s);
M. It guarantees that Licensor, Clubs, official Club
and/or Licensor retail stores, Club in-stadium concession-
aires and the Clubs belonging to The National Association
of Professional Baseball Leagues ("NAPBL Clubs") will
obtain the Licensed Product(s) for retail sale at lowest
possible wholesale prices and shall receive prompt
shipments and/or deliveries of the Licensed Product(s),
without regard to the relatively small volume their orders
may represent. Licensor, Clubs and NAPBL Clubs may obtain
the Licensed Product(s) for their use, but not resale, at
the manufacturer's lowest possible price, which shall in no
event be greater than its lowest wholesale price;
N. It will furnish to Licensor, upon request of
Licensor (which shall be made only for reasonable cause and
no more often than once per year), a list of all its
distributors, sales representatives and jobbers for the
Licensed Product(s), as well as a list of all its "trade
names," said list to include the company name, address,
telephone number, territorial representation and key
contact name. Licensor agrees that it will not divulge any
information provided to it under this paragraph to any
other competitor licensing organization;
O. Concurrently with its execution of this Agreement,
it will provide Licensor with the names, addresses,
telephone numbers and names of principal contacts of each
party (hereinafter referred to as "Manufacturer"), both
domestic and foreign, that Licensee desires or intends to
have produce one or more of the Licensed Products in the
event Licensee desires not to be the manufacturer of such
Licensed Product(s). This information shall be set out in
Schedule F of this Agreement and Licensee shall specify the
Licensed Product(s) Manufacturer will produce. In the event
Licensee wishes to substitute a Manufacturer for those
listed in Schedule F or wishes to add to the number of
Manufacturers, Licensee shall first provide Licensor with
the information set out in Schedule F regarding the
proposed new Manufacturers for Licensor's written approval
of such Manufacturers. Licensee's failure to do so may
result in termination of this Agreement and/or confiscation
and seizure of the Licensed Product(s). Licensee shall
ensure that:
(a) Manufacturer produces no merchandise bearing the
Logos other than the Licensed Product(s) described in
Schedule F of this Agreement unless authorized by Licensor;
(b) Manufacturer produces the Licensed Product(s)
only as and when directed by Licensee and in accordance
with the terms herein and in compliance with all laws,
regulations and governmental rules applicable to the
Licensed Product(s) and/or their manufacture;
(c) Manufacturer does not supply the Licensed
Product(s) to any person, firm, corporation or business
entity other than Licensee or to such entities as may be
authorized by Licensee and Licensor jointly; and
(d) Manufacturer does not delegate in any manner
whatsoever its obligations with respect to the Licensed
Product(s).
Prior to the delivery of the Licensed Product(s) from
Manufacturer to Licensee, Licensee shall submit to
Licensor, free of cost, for its written approval as to
quality and style, at least two samples of the Licensed
Product(s) produced by Manufacturer;
P. It will not manufacture or allow the manufacture,
or accumulate inventory, of the Licensed Product(s), at a
rate greater than its average rate during the license
period as the end of the license period approaches;
Q. It will not sell the Licensed Product(s) to
parties whom it knows or reasonably should know will resell
or distribute such Product(s) outside the Licensed
Territory;
R. It will not disclose any confidential, private,
restricted or otherwise nonpublic information concerning
Major League Baseball which, it acknowledges, it may become
privy to during the term of this Agreement;
S. It will not grant to any third person or entity a
security interest in the Licensed Product(s) without
Licensor's prior written approval;
T. It has not had and does not have an investment or
interest in casinos, any other form of legalized gambling
enterprise, or any activity that Licensor or any other
Major League Baseball related entity has made unauthorized
or which is contrary to official policy of Major League
Baseball; and
U. With respect to any Licensed Products manufactured
outside the United States, (i) it will take receipt of
goods at U.S. ports of entry, (ii) it will not allow any
entity in the United States, including but not limited to
distributors wholesalers and retailers, to accept shipment
of the Licensed Products from any non-U.S. manufacturer of
such Products, and (iii) it will distribute such Products
to third parties, including but not limited to
distributors, wholesalers and retailers, from Licensee's
principal place of business only.
14. APPROVAL OF MANUFACTURER, ETC.: Nothing contained
herein may be construed so as to imply endorsement of
Manufacturer by Licensor, the Office of the Commissioner of
Baseball, the Leagues or the Clubs. Licensee shall seek
Licensor's written approval of Manufacturer prior to
Licensee's engagement of Manufacturer. Any approval of
Manufacturer granted by Licensor relates solely to the
manufacturing of the Licensed Product(s) and shall not
constitute a grant of any right, title or interest in or to
the Logos, nor to any copyrights, service marks, trademarks
or other property rights associated therewith. Licensor
hereby reserves the right to terminate in its discretion
the engagement of Manufacturer at any time. Additionally,
Licensor may confiscate goods or samples imported by
Licensee or shipped by Manufacturer that bear any of the
Logos and that have not been approved by Licensor as to
quality.
15. ACKNOWLEDGEMENT OF RIGHTS: Licensee hereby
acknowledges the proprietary nature of all names and logos
of the Major League Baseball Clubs, the Leagues, the Office
of the Commissioner of Baseball or Licensor and
acknowledges that all rights, title and interest to such
names or logos belong to the individual Clubs, the Leagues,
the Office of the Commissioner of Baseball and/or Licensor,
as the case may be. Licensee represents that it has not
made any unauthorized use of names or logos of the Major
League Baseball Clubs, the Leagues, the Office of the
Commissioner of Baseball or Licensor and agrees that it
will make no use of any such names or logos, other than as
provided in this Agreement, without the prior written
consent of Licensor, the Office of the Commissioner of
Baseball or the appropriate individual League or Club. Any
use Licensee has made or will make of such names and logos
has not conferred or will not confer, as the case may be,
any rights or benefits upon it whatsoever, and any rights
created by such use shall inure to the benefit of the
individual Clubs, the Leagues, the Office of the
Commissioner of Baseball and /or Licensor, as the case may
be.
16. TERMINATION: A. Immediate Termination: Licensor
shall have the right to terminate this Agreement
immediately upon the occurrence of any one or more of the
following events (herein called "defaults"):
(i) If Licensee fails to deliver to Licensor or to
maintain in full force and effect the insurance referred to
in Paragraph 8 hereof; or
(ii) If any governmental agency or court of competent
jurisdiction finds that the Licensed Product(s) are
defective in any way, manner or form; or
(iii) If Licensee shall breach any one of the
following undertakings set forth in Paragraph 13 hereof:
13A through F, H through J, Q, R or T; or
(iv) If Licensee shall undergo a change in majority or
controlling ownership.
B. Termination With Cure Period: Licensor shall have
the right to terminate this Agreement upon the occurrence
of any one or more of the following defaults, and
Licensee's failure to cure such default(s) completely
within ten (10) business days from Licensee's receipt of
notice from Licensor;
(i) If Licensee fails to make any payment due
hereunder on the date due, at which time all monies which
are owed during the current term or renewal referred to in
Schedule E of this Agreement shall become due and payable
to Licensor; or
(ii) If Licensee fails to deliver any of the
statements hereinabove referred to or to give access to the
premises and/or license records pursuant to the provisions
hereof to Licensor's authorized representatives for the
purposes permitted hereunder; or
(iii) If Licensee is unable to pay its debts when
due, or makes any assignment for the benefit of creditors
or an arrangement pursuant to any bankruptcy law, or files
or has filed against it any petition under the bankruptcy
or insolvency laws of any jurisdiction, county or place, or
shall have or suffer a receiver or trustee to be appointed
for its business or properly, or be adjudicated a bankrupt
or an insolvent. In the event the license granted hereunder
is terminated pursuant to this Paragraph 16(B)(iii),
neither Licensee nor its receivers, representatives,
trustees, agents, administrators, successors and/or assigns
shall have any right to sell, exploit or otherwise deal
with or in the Licensed Product(s) without the prior
written consent of Licensor; or
(iv) If Licensee does not commence in good faith to
manufacture, distribute and sell each Licensed Product
throughout the Licensed Territory within any twelve ( 12)
month period, but such default and Licensor's resultant
right of termination shall apply only to the specific
Licensed Product(s) and/or the specific territory(ies)
which or wherein Licensee fails to meet said requirements;
or
(v) If Licensee shall discontinue its business as it is now
conducted; or
(vi) If Licensee shall breach any of the undertakings
set forth in Paragraph 13 hereof, except as otherwise
provided in Paragraph 16(A)(iii) above; or
(vii) If Licensee shall breach any of the terms of this
Agreement; or
(viii) If, in the periodic statements furnished
pursuant to Paragraph 5 hereof, the amounts owed to
Licensor are significantly or consistently understated.
Licensor's right to terminate this Agreement shall be
without prejudice to any other rights which it may have,
whether under the provisions of this Agreement, in law or
in equity or otherwise. In the event any of these defaults
occurs and Licensor desires to exercise its right of
termination under the terms of this Paragraph 16, Licensor
shall give notice of termination in writing to Licensee.
Any and all payments then or later due from Licensee
hereunder (including Advance Compensation) shall then
become promptly due and payable in full to Licensor and
without set off of any kind; i.e., no portion of any prior
payments made to Licensor shall be repayable to Licensee.
Until payment to Licensor of any monies due it, Licensor
shall have a lien on any units of the Licensed Product(s)
not then disposed of by Licensee and on any monies due
Licensee from any jobber, wholesaler, distributor,
sublicensee or other third parties with respect to sales of
the Licensed Product(s). Upon termination or expiration of
the term hereof, all rights, licenses and privileges
granted to Licensee hereunder shall automatically revert to
Licensor and Licensee shall execute any and all documents
evidencing such automatic reversion.
17. FINAL STATEMENT UPON TERMINATION OR EXPIRATION:
Licensee shall deliver to Licensor, as soon as practicable,
following expiration or termination of this Agreement, a
statement indicating the number and description of the
Licensed Product(s) on hand. Following expiration or
termination Licensee may manufacture no more Licensed
Product(s), but may continue to distribute its remaining
inventory for a period not to exceed sixty (60) days,
subject to the terms of Paragraph 13(P) hereof and payment
of applicable royalties relative thereto; provided,
however, that such royalties shall not be applicable
against Advance Compensation or Guaranteed Compensation.
Notwithstanding the foregoing, Licensee shall not
manufacture, sell or distribute any Licensed Product(s)
after the expiration or termination of this Agreement
because of (a) the failure of Licensee to cause the
appropriate statutory notice of copyright, trademark,
service mark or user registration to appear wherever the
Logos are used; (b) the departure of Licensee from the
quality and style approved by Licensor under the terms of
Paragraph 10 hereof; (c) the failure of Licensee to obtain
the approval of Licensor under the terms of Paragraph 10
hereof; or (d) the occurrence of an event of default under
the terms of Paragraph 16 hereof. Licensor shall have the
option to conduct physical inventories before termination
and continuing until the end of the 60 day sell-off period
in order to ascertain or verify such inventories and/or
statement. Immediately upon expiration of the sell-off
period, Licensee shall furnish Licensor a detailed
statement certified by an officer of Licensee showing the
number and description of Licensed Products on hand in its
inventory and shall dispose of such inventory at Licensor's
direction and at Licensee's expense. In the event Licensee
refuses to permit Licensor to conduct such physical
inventory, Licensee shall forfeit its right hereunder to
dispose of such inventory. In addition to such forfeiture,
Licensor shall have recourse to all other remedies
available to it.
18. INJUNCTION: Licensee acknowledges that its
failure to perform any of the terms or conditions of this
Agreement, or its failure upon the expiration or
termination of this Agreement to cease the manufacture of
the Licensed Product(s) and limit their distribution and
sale as provided in Paragraph 17 hereof, shall result in
immediate and irreparable damage to Licensor. Licensee also
acknowledges that there may be no adequate remedy at law
for such failures and that in the event thereof Licensor
shall be entitled to equitable relief in the nature of an
injunction and to all other available relief, at law and/or
in equity.
19. RESERVATION OF RIGHTS: Licensor retains all
rights not expressly and exclusively conveyed herein, and
Licensor may license firms, individuals, partnerships or
corporations to use the Logos, artwork and textual matter
in connection with other products, including other products
identical to the Licensed Product(s) contemplated herein.
Licensor reserves the right to use, or license others to
use and/or manufacture, identical items as premiums.
20. PAYMENTS AND NOTICES: All notices and statements
provided for herein shall be in writing, and all notices
hereunder are to be sent to Major League Baseball
Properties, Inc., 350 Park Avenue, New York, New York
10022, Attention: President. All statements and payments
shall be made to Major League Baseball Properties and sent
to an address designated by Licensor.
21. WAIVER, MODIFICATION, ETC.: No waiver,
modification or cancellation of any term or condition of
this Agreement shall be effective unless executed in
writing by the party charged therewith. No written waiver
shall excuse the performance of any act other than those
specifically referred to therein. No waiver by either party
hereto of any breach of this Agreement shall be deemed to
be a waiver of any preceding or succeeding breach of the
same or any other provision hereof. The exercise of any
right granted to either party hereunder shall not operate
as a waiver. The normal expiration of the term of this
Agreement shall not relieve either party of its respective
obligations accruing prior thereto, nor impair or prejudice
the respective rights of either party against the other,
which rights by their nature survive such expiration.
Licensor makes no warranties or representations to Licensee
except those specifically expressed herein.
22. NO PARTNERSHIP, ETC.: This Agreement does not
constitute and shall not be construed as constituting an
agency, partnership or joint venture relationship between
Licensee and Licensor and/or the Clubs. Licensee shall have
no right to obligate or bind Licensor in any manner
whatsoever, and nothing herein contained shall give or is
intended to give any rights of any kind to any third
persons.
23. NON-ASSIGNABILIY: Licensee acknowledges and
recognizes: (a) that it has been granted the license
described in Paragraph 1 because of its particular
expertise, knowledge, judgement, skill and ability; (b)
that it has substantial and direct responsibilities to
perform this Agreement in accordance with all of the terms
contained herein; (c) that Licensor is relying on
Licensee's unique knowledge, experience and capabilities to
perform this Agreement in a specific manner consistent with
the high standards of integrity and quality associated with
Major League Baseball as a national sport and with Major
League Baseball licensed merchandise; and (d) that the
granting of the license under this Agreement creates a
relationship of confidence and trust between Licensee and
Licensor. This Agreement is personal to Licensee, and
Licensee shall not sublicense or franchise any of its
rights hereunder, and neither this Agreement nor any of the
rights of Licensee hereunder shall be sold, transferred or
assigned by Licensee without Licensor's prior written
approval and no rights hereunder shall devolve by operation
of law or otherwise upon any assignee, receiver,
liquidator, trustee or other party. Subject to the
foregoing, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto, their
successors and assigns.
24. PARAGRAPH HEADINGS: Paragraph headings contained
in this Agreement are for convenience only and shall not be
considered for any purpose in governing, limiting,
modifying, construing or affecting the provisions of this
Agreement and shall not otherwise be given any legal
effect.
25. CONSTRUCTION: This Agreement shall be construed
in accordance with the laws of the State of New York, which
shall be the sole jurisdiction for any disputes.
26. SEVERABILITY: The determination that any provision
of this Agreement is invalid or unenforceable shall not
invalidate this Agreement, and the remainder of this
Agreement shall be valid and enforceable to the fullest
extent permitted by law.
27. TIME OF THE ESSENCE: Time is of the essence of all
parts of this Agreement.
28. ACCEPTANCE BY LICENSOR: This instrument, when
signed by Licensee or a duly authorized officer of Licensee
if Licensee is a corporation, shall be deemed an
application for a license and not a binding agreement
unless and until signed by a duly authorized officer of
Licensor. The receipt and/or deposit by Licensor of any
check or other consideration given by Licensee and/or the
delivery of any material by Licensor to Licensee shall not
be deemed an acceptance by Licensor of this application.
The foregoing shall also apply to any documents relating to
renewals or modifications hereof.
29. INTEGRATION: This Agreement, when fully executed,
shall represent the entire understanding between the
parties hereto with respect to the subject matter hereof
and supersedes all previous representations, understandings
or agreements, oral or written, between the parties with
respect to the subject matter hereof.
30. SURVIVAL OF PROVISIONS: Paragraphs 2, 6, 7C, 8, 12, 13A,
B, C, D, F, H, I, K, Q and R, 15, 17, 18, 19, 21, 22, 24, 25, 26,
30 and 31 shall survive any termination or expiration of this
Agreement.
31. MISCELLEOUS: By signing below, Licensee acknowledges
that this Agreement is for the term specified in Schedule D only
and that neither the existence of this Agreement nor anything
contained herein shall impose on Licensor any obligation to renew
or otherwise extend this Agreement after expiration of the
license period.
<PAGE>
SCHEDULE A
LOGOS
The names, characters, symbols, designs, likenesses, visual
representations and such other similar or related identifications
(but such similar or related identifications must be approved in
writing by Licensor in advance of use) of the following noted
organizations in connection with the marketing, promotion and sale
of that described in Schedule B hereof: (1) Major League Baseball
Properties, Inc., (2) the American League, (3) the National League
and (4) the following Clubs: Arizona Diamondbacks, Tampa Bay Devil
Rays, Baltimore Orioles, Boston Red Sox, California Angels, Chicago
White Sox, Cleveland Indians, Detroit Tigers, Kansas City Royals,
Milwaukee Brewers, Minnesota Twins, New York Yankees, Oakland
Athletics, Seattle Mariners, Texas Rangers, Toronto Blue Jays,
Atlanta Braves, Chicago Cubs, Cincinnati Reds, Colorado Rockies,
Florida Marlins, Houston Astros, Los Angeles Dodgers, Montreal
Expos, New York Mets, Philadelphia Phillies, Pittsburgh Pirates, St.
Louis Cardinals, San Diego Padres and San Francisco Giants and (5)
All-Star Game, Division Series, League Championship Series, World
Series, other names given to such games or events and other names
given to other Major League Baseball playoff games, and (6)
Pittsburgh Pirates/Roberto Clemente, and (7) the following stadia:
Oriole Park at Camden Yards and Jacobs Field.
SCHEDULE B
LICENSED PRODUCT(S)
ALL LICENSED PRODUCTS SHALL CONFORM TO LICENSOR'S
THEN-CURRENT LABELING REQUIREMENTS
1. Baseballs made of synthetic white leather, and featuring current
Major League Baseball players in uniform.
2. Baseballs made of synthetic white leather, and featuring printed Club
Logos.
3. Sweatbands featuring color photographs of current Major League Baseball
players in uniform and Logos pad Printed and sewn on band, available in
pairs or individually, in either 3" or 5" sizes.
4. Baseballs made of synthetic white leather, and featuring embossed Logos
in full color.
5. Baseballs made of synthetic white leather, and featuring the Oriole Park
at Camden Yards Logo
6. Baseballs made of synthetic leather, and featuring the Jacobs Field
Logo.
7. Baseballs made of synthetic leather, and featuring the Pittsburgh
Pirates/Roberto Clemente Logo.
8. Baseballs made of synthetic white leather, and featuring printed or
embossed Logos and packaged with a miniature baseball glove made of natural
leather, neither of which is designed for play.
9. Baseballs made of synthetic white leather packaged with a mini-leather
glove, and featuring a printed image of current Major League Baseball
players in uniform.
10. Mini-gloves made of natural or synthetic leather, and featuring
embossed Logos in the palm.
11. Baseballs made of synthetic dual-tone leather, and featuring printed
Logos.
12. Baseballs made of synthetic leather, and featuring screen printed Minor
League baseball club logos and the Logos of the Major League Baseball Clubs
with which such Minor League baseball clubs are affiliated.
13. Baseballs made of synthetic leather in non-traditional colors, and
featuring printed Logos.
14. Mini-leather baseballs, measuring 6 1/2" or less in circumference, and
featuring printed Logos.
15. Mini-leather baseballs, measuring 6 1/2" or less in circumference. and
featuring printed Logos in mini-leather glove.
16. Sweatbands featuring individual Club Logos on vinyl patches and sewn on
band, available in pairs or individually in 5" sizes only.
Other than as noted in Schedule A No. 6 above, and in connection with
Licensed Product No. 7 only, rights to utilize the players' names,
likenesses and/or signatures are not granted under this Agreement. Licensee
must present to Licensor written evidence of having obtained the proper
authorization to utilize the players, names, likenesses and/or signatures.
<PAGE>
SCHEDULE C
LICENSED TERRITORY
I. For Licensed Product Nos. 1-11 and 13-15
The fifty United States of America, the District of Columbia, Puerto Rico
and U.S. territories and possessions, including U.S. military bases
worldwide.
II. For Licensed Product No. 12
The fifty United States of America, the District of Columbia and
Canada; provided, however, that Licensed Products bearing the Logos
of the Buffalo Bisons may not be distributed within a 75-mile radius
of North AmeriCare Park, Buffalo, New York, Licensed Products
bearing the Logos of the Carolina Mudcats may not be distributed
within a 100-nile radius of Five County Stadium, Zebulon, North
Carolina and Licensed Products bearing the Logos of the Toledo Mud
Hens may not be distributed within a 100-mile radius of Ned Skeldon
Stadium, Toledo, Ohio.
III. For Licensed Product No. 16
Concession outlets located within the ballparks of the Clubs listed in
Schedule A only.
SCHEDULE D
LICENSE PERIOD
January 1, 1997 - December 31, 1999
SCHEDULE E
COMPENSATION
TOTAL GUARANTEED COMPENSATION: $750.000.00
PAYABLE AS:
(i) NON-RETURNABLE ADYANCE COMPENSATION due upon signing:
$75,000.00
(ii) REMAINDER 0F GUARANTEED COMPENSATION due as follows:
July 1, 1997 $ 75,000.00
October 1, 1997 $ 50,000.00
Total 1997 Guarantee $200,000.00
January 1, 1998 $100,000.00
July 1, 1998 $100,000.00
October 1, 1998 $ 50,000.00
Total 1998 Guarantee $250,000.00
January 1, 1999 $100,000.00
July 1, 1999 $100,000.00
October 1, 1999 $100,000.00
Total 1999 Guarantee $300,000.00
PERCENTAGE COMPENSATION:
For Licensed Product Nos. 1-4, 8-11, and 13-16:
Nine percent (9%.) of net sales as defined in Paragraph 4B.
For Licensed Product Nos. 5 and 6:
Twelve percent (12%) of net sales as defined in Paragraph 4B.
For Licensed Product No. 7:
Fifteen (15%) of net sales as defined in Paragraph 4B.
For Licensed Product NO. 12:
Six (6%) of net sales as defined in Paragraph 4B.
In each of the above cases, Percentage Compensation shall be applied
against Guaranteed Compensation payable in the same calendar year only,
without carryover. Percentage Compensation attributable to premium sales of
the Licensed Products shall not be applied against Total Guaranteed
Compensation.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement:
MAJOR LEAGUE PROPERTIES, INC., as agent for the Clubs
By: /s/ Ethan Orlinsky
---------------------------------
Date: April 15, 1997
---------------------------------
LICENSEE: FOTOBALL USA, NC.
By: /s/ Michael Favish
---------------------------------
Date: April 3, 1997
---------------------------------
LICENSE AGREEMENT.
THIS AGREEMENT is made as of the 29th day of March 1996, in New
York, New York, by and between the Major League Baseball Players
Association, an unincorporated association under the laws of the State of
New York, with offices at 12 E. 49th Street, New York, New York 10017
(hereinafter "MLBPA"), and Fotoball USA, Inc., a corporation, with offices
located at 3738 Ruffin Road, San Diego, CA 92123 (hereinafter "Licensee").
WHEREAS, MLBPA is acting on behalf of all of the active baseball
players of the National League and the American League who have entered
into a Commercial Authorization Agreement with the MLBPA (hereinafter
"players"), and who, upon being polled by the MLBPA, have not indicated
they have granted a license for products which would conflict with the
license granted herein; and
WHEREAS, MLBPA in such capacity has the right to negotiate this
Agreement and to grant rights in and to the logo, name and symbol of
MLBPA identified in Schedule A hereto (the "Trademarks"), and the named,
nicknamed, likenessed, signatures, pictured, playing records, and/or
biographical data of each player described in Schedule A hereto as part
of a group (hereinafter "the Rights"); and
WHEREAS, Licensee desires to use the Rights and/or the Trademarks
on or in association with the manufacture, offering for sale, sale,
advertising, promotion, and distribution of certain products identified
in Schedule B (the "Licensed Products") in the countries identified in
Schedule B (the "Licensed Territory"); and
WHEREAS, MLBPA is willing to grant Licensee such right to use the
Rights and /or the Trademarks on the Licensed Products in the Licensed
Territory in accordance with the terms and conditions recited herein.
NOW, THEREFORE, in consideration of the mutual promised, covenants
and conditions herein contained, it is hereby agreed as follows:
1. GRANT.
(a) MLBPA hereby grants to Licensee and Licensee hereby accepts
the non-exclusive, non-transferable, nonassignable license, without the
right to grant sublicenses, to use the Rights and Trademarks solely
within the Licensed Territory on the Licensed Products and/or in
association with the manufacture, offering for sale, sale, advertising,
promotion, shipment and distribution of the Licensed Products to jobbers,
wholesalers and distributors for sale, shipment and distribution to
retail stores and merchants and /or to retail stores and merchants for
sale, shipment and distribution direct to the public. Licensee shall not
knowingly permit the Licensed Products to be sold or distributed outside
of the Licensed Territory.
(b) MLBPA represents and warrants that it has the authority to grant
the rights licensed herein. MLBPA makes no representation that it has the
authority to grant, nor does it grant herein, the right to utilize team
symbols, insignias or logos, or the name, symbol, or logo of any other
licensee of MLBPA, or reproductions of any products produced by or for
any other licensee of MLBPA. Accordingly, it is understood by the parties
hereto that if any of the foregoing are to be utilized in connection with
the exercise of the license granted hereunder, including without
limitation the likenesses of players utilizing team logos, symbols or
insignias, it will be the responsibility of Licensee to obtain all
necessary permissions for the use of such material.
(c) Unless specifically authorized in advance by MLBPA in
writing, Licensee agree to utilize with equal prominence the named and
likenesses of a minimum of one hundred (100) players or, at MLBPA's
direction, a minimum of five (5) players per Major League team, on
Licensed Products during the initial License Period (as defined herein)
and during each additional License Period, if any, as provided herein.
Licensee must provide the MLBPA with thirty (30) days' written notice of
the names of all players Licensee intends to use on the Licensed Products
prior to manufacture of such Licensed Products, and Licensee may not use
the name or likeness of any player on the Licensed Products without the
prior written consent of MLBPA, which shall not be unreasonably withheld.
(d) The license granted by MLBPA to Licensee hereunder does not
include the right to, and Licensee shall not in any manner, use (or
purport to grant others the right to use) the Trademarks or the Rights
for the purpose, in whole or in part, of promoting any service or product
other than the Licensed Products. Nor does this license convey the right
to feature or highlight any individual player apart from the group. In
the event Licensee is interested in highlighting any player or in
securing the personal endorsement or services of any player, Licensee
understands and agrees that such will require the personal approval of
the individual player involved and a separate payment to such player,
through the MLBPA, independent of and in addition to all payments due to
the MLBPA pursuant to this Agreement.
(e) Nothing contained in Section 1 (d) above shall prevent
Licensee from utilizing the named and /or likenesses of the players in a
non-endorsement and/or non-testimonial manner in connection with the
packages, cartons, advertising, point-of-sale and /or promotional
materials for the Licensed Products (the "Promotional and Packaging
Material") or require any separate payment in connection therewith;
provided, however, that unless specifically authorized otherwise in
advance by MLBPA in writing, the names and/or likenesses of a minimum of
eight (8) such players are utilized with equal prominence on the
Promotional and Packaging Material for all Licensed Products during the
initial License Period and during each additional License Period, if any,
as provided herein; and Licensee agrees to rotate the players who are
utilized in connection with such materials so as not to highlight any
particular player or group of players to the exclusion of others.
(f) All rights not expressly granted to Licensee in this Agreement are
specifically reserved to MLBPA.
2. TERM AND OPTIONS.
(a) This Agreement shall be effective and shall continue for the
License Period set forth on Schedule B, unless sooner terminated pursuant
to a provision of this Agreement.
(b) MLBPA hereby grants to Licensee two (2) separately
exercisable options (the "Options") to extend the term of this Agreement
for additional one-year periods ("Second and Third License Periods,"
respectively). In order to exercise each of the two Options, Licensee
must provide MLBPA with written notice of its intention to exercise each
such Option and such written notice must be received by MLBPA no earlier
than one hundred twenty (120) days and no later than ninety (90) days
prior to the expiration of the License Period then in effect. The
attempted exercise of any Option shall be void and of no effect if
Licensee (i) has breached or is then in breach of any of its obligations
under this Agreement, or (ii) fails during any License Period to make Net
Sales sufficient to generate Actual Royalties equal to or greater than
the Guaranteed Minimum Royalties as defined herein, or (iii) fails to
make full and timely royalty payments as provided herein. Licensee's
performance in each License Period shall be pursuant to the same terms
and conditions recited in this Agreement.
3. ROYALTIES.
(a) Licensee agrees to pay MLBPA a royalty at the percentage set
forth on Schedule B based on Net Sales (as defined in Subsection 3(b)
below) of the Licensed Products employing the Rights and/or the
Trademarks by Licensee (the "Actual Royalty"). Such Actual Royalty shall
accrue when the Licensed Products are sold, shipped, distributed, billed
and / or paid for, whichever occurs earlier, to a third party not
affiliated with Licensee. For purposes of this Agreement, "affiliated"
means related in any manner through direct or indirect ownership or
control and includes joint venture arrangements.
(b) "Net Sales" shall mean gross sale to third parties not
affiliated with Licensee at Licensee's regular wholesale price, less
returns actually credited. No other deductions shall be permitted. For
example, there shall be no deductions made for other discounts,
commissions, uncollectable accounts, taxed, fees, assessments,
impositions, payments or expenses of any kind which may be incurred or
paid by Licensee in connection with the royalty payments due to MLBPA
hereunder, or for any costs incurred in the manufacture, offering for
sale, sale, advertising, promotion, shipment, distribution and/or
exploitation of the Licensed Products.
(c) Actual Royalty payments shall be made by Licensee to MLBPA
on all Licensed Products sold, shipped and/or distributed by Licensee,
even if not billed (such as in the case of introductory offers, samples,
promotions and the like and sales, shipments and/or distributions to
individuals and/or companies which are affiliates or subsidiaries of
Licensee), or if billed at less than Licensee's usual price for such
Licensed Products, based upon Licensee's usual Net Sales price for such
Licensed Products sold to third parties not affiliated with Licensee in
the course of Licensee's normal distribution, shipment and sale
activities.
(d) Where the billed price for any Licensed Products is less
than the usual Net Sale price for such Licensed Products sold to third
parties not affiliated with Licensee in the course of Licensee's normal
distribution, shipment and sales activities, the Actual Royalty payment
shall be based upon Licensee's usual Net Sales price.
(e) For each License Period of this Agreement, Licensee agrees to pay
MLBPA a non-refundable guaranteed minimum royalty in the amount(s) and in
the manner set forth on Schedule B (the "Guaranteed Minimum Royalty").
Such Guaranteed Minimum Royalty shall be paid in equal quarterly
installments as set forth on Schedule B, with the first such payment due
immediately upon execution of this Agreement. If, upon termination or
expiration of this Agreement or any License Period thereof, the total
royalties paid and and/or payable by Licensee to MLBPA during each such
License Period is less than the Guaranteed Minimum Royalty, Licensee
shall immediately pay the amount of such difference to MLBPA. Actual
Royalty payments based on Net Sales made during any Term of this
Agreement shall be credited against the Guaranteed Minimum Royalty due
for the License Period in which such Net Sales were made.
4. STATEMENTS AND PAYMENTS.
(a) Licensee shall deliver to MLBPA, at its offices in New York,
New York, or to such other address as MLBPA may direct, on the fifteenth
(15th) day following the end of each calendar quarter during any License
Period of this Agreement, and on the fifteenth (15th) day of the month
following termination or expiration of this Agreement, a complete and
accurate statement of its Net Sales of Licensed Products, differentiated
by country and product category, for the immediately preceding calendar
quarter (or portion thereof) (the "Royalty Period"). Said statement shall
be certified as accurate by an officer of Licensee and shall include
information as to the stock number, item description, quantity shipped,
and gross selling price of the Licensed Products shipped, distributed
and/or sold by Licensee during the Royalty Period, information as to
quantity discounts given and returns actually credited, computation of
Net Sales and royalty due, and any other information MLBPA may from time
to time reasonably request. Such statements shall be furnished to MLBPA
whether or not any Licensed Products have been shipped, distributed
and/or sold, and whether or not Actual Royalties have been earned during
the Royalty Period. Statements shall be in a form acceptable to MLBPA and
consistent with Schedule C hereto.
(b) The amount in United States dollars shown in Licensee's
royalty statements as being due MLBPA shall be paid simultaneously with
the submission of such statements. In the event that the amount credited
for returns during any Royalty Period exceeds Licensee's royalty
obligation to MLBPA for such period, Licensee may use such amount as a
credit against future royalty obligations of Licensee during the Term of
this Agreement. In no event, however, shall the amount credited for
returns during any Royalty Period be used upon termination or expiration
of this Agreement as a credit against past royalty obligations of or
royalty payments made by Licensee. In no circumstances shall MLBPA be
obligated to pay any amount to Licensee upon termination or expiration of
this Agreement on account of credits accrued by Licensee for returns.
(c) Licensee's royalty statements and all amounts payable to MLBPA by
Licensee shall be submitted to:
Major League Baseball Players Association
12 E. 49th Street
New York, NY 10017
or such other address as the MLBPA may direct.
(d) The receipt and /or acceptance by MLBPA of any of the
statements furnished or royalties paid hereunder to MLBPA (or
the cashing of any royalty checks paid hereunder) shall not preclude
MLBPA from questioning the correctness thereof at any time and, in the
event that any inconsistencies or mistakes are discovered in such
statements or payments, they shall immediately be rectified by Licensee
and the appropriate payment shall be made by Licensee.
(e) All payments made hereunder shall be in United States
dollars drawn on a United States bank, unless otherwise specifically
agreed upon by the parties.
(f) Time is of the essence with respect to all payments to be
made hereunder by Licensee. Interest at a rate of the lesser of one and
one-half percent (1-1/2%) per month or the maximum rate allowed by law,
compounded daily, shall accrue on any amount due MLBPA hereunder from and
after the date upon which the payment is due until the date of receipt of
payment.
5. AUDIT.
(a) Licensee agrees to keep accurate books of account and
records at its principal place of business covering all transactions
relating to the license granted herein and pertaining to the items
required to be shown in the Licensee's royalty statements to be submitted
pursuant hereto, including without limitation, invoices, correspondence,
banking, financial and other records. MLBPA and its duly authorized
representatives shall have the right, upon reasonable notice, at all
reasonable hours of the day, to audit Licensee's books of account and
records, and all other documents and material in the possession or under
the control of Licensee, with respect to the subject matter and the terms
of this Agreement and to make copies and extracts thereof. In the event
that any such audit reveals an underpayment by Licensee, Licensee shall
immediately upon demand remit payment to MLBPA in the amount of such
underpayment plus interest calculated at the rate of the lesser of one
and one-half percent (1-1/2%) per month or the maximum rate allowed by
law, compounded daily, calculated from the date such payment(s) were
actually due until the date such payment is actually made. In the event
that any such underpayment is greater than Five Thousand Dollars
($5,000), or two percent (2%) of the royalties due for the period
audited, whichever is less, Licensee shall reimburse MLBPA for the costs
and expenses of such audit.
(b) All books of account and records of Licensee covering all
transactions relating to the license granted herein shall be retained by
Licensee for at least two (2) years after the expiration or termination
of this Agreement for possible inspection by MLBPA.
6. QUALITY. NOTICES. APPROVALS. AND SAMPLES.
(a) The Licensed Products and the Promotional and Packaging
Material shall be of high quality in design, material and workmanship so
as to be suited to the favorable advantage, protection and enhancement of
the Trademarks and the Rights, in no event shall be of lesser quality
than the best quality of similar products and promotional, advertising,
and packaging material presently shipped, distributed, sold and/or used
by Licensee in the Licensed Territory, shall be safe and suitable for
their intended purpose, and shall be manufactured, sold and/or
distributed in full conformance with all applicable laws and regulations.
(b) Licensee may not manufacture, use, offer for sale, sell,
advertise, promote, ship and/or distribute any Licensed Products, or any
Promotional and Packaging Material relating to the Licensed Products,
until it has received written approval of same in the manner provided
herein from MLBPA. Such approval shall not be unreasonably withheld.
Should MLBPA fail to approve in writing any of the submissions furnished
it by Licensee within fourteen (14) business days from the date of
submission thereof, such failure shall be considered to be a disapproval
thereof.
(c) Before commencing or authorizing third parties to commence
the design or development of Licensed Products or Promotional and
Packaging Material which have not been previously approved in writing by
MLBPA, Licensee shall submit at its own cost to MLBPA, for approval, a
written description of the concept of such Licensed Product and /or
Promotional and Packaging Material, including full information on the
nature and function of the proposed item and a general description of how
the Rights and/or the Trademarks and other material will be used thereon.
Licensee shall next submit at its own cost to MLBPA, for approval,
complete layouts and descriptions of the proposed Licensed Products and/
or Promotional and Packaging Material showing exactly how and where the
Rights and the Trademarks and all other artwork and wording will be used.
Thereafter, Licensee shall submit at its own cost to MLBPA, for approval,
pre-production models or prototype samples of the proposed Licensed
Products and/or Promotional and Packaging Material. Finally, Licensee
shall submit at its own cost to MLBPA, for approval, actual proofs or
final pre-production samples of the proposed Licensed Products and/or
Promotional and Packaging Material. Licensee shall not proceed beyond any
of the above stages where approval is required without first securing the
express written approval of MLBPA.
(d) Upon commencement of manufacture, shipment and distribution
of the Licensed Products and/or Promotional and Packaging Material
relating to the Licensed Products after all required approvals have been
given by MLBPA, Licensee shall submit, at its own cost, to MLBPA an
additional twelve (12) sets of the Licensed Products and two (2) sets of
the Promotional and Packaging Material.
(e) MLBPA may periodically during any License Period of this
Agreement require that Licensee submit to MLBPA, at no cost to MLBPA, up
to twelve (12) additional sets of the Licensed Products, and the
Promotional and Packaging Material relating to the Licensed Products, for
subsequent review of the quality of and copyright and trademark usage and
notice on same and for any other purpose that MLBPA deems appropriate.
(f) After the required approval has been secured from MLBPA
pursuant to Section 6(c) above, Licensee shall not depart from the
specifications, quality or appearance thereof in any material respect
without first obtaining the express written approval of MLBPA. Licensee
shall make submissions to MLBPA and obtain approvals in the manner
required above each time new or revised concept, layouts, descriptions,
artwork, models, prototype samples and/or production samples are created,
developed and/or adopted by and/or for Licensee.
(g) Subject to reasonable obligations of confidentiality by
MLBPA, to assure that the provisions of this Agreement are being
observed, Licensee agrees that it will allow MLBPA or its designees to
enter Licensee's premises and / or the premises where the Licensed
Products are being manufactured during regular business hours, and upon
reasonable notice, for the purpose of inspecting the Licensed Products
and the Promotional and Packaging Material relating to the Licensed
Products and the facilities in which the Licensed Products are being
packaged.
(h) In order to ensure that the Licensed Products and the
Promotional and Packaging Materials are manufactured, offered for sale,
sold, advertised, promoted, shipped and/or distributed as set forth
herein, in the event that the quality standards and /or trademark and
copyright usage and notice requirements herein referred to are not met,
or in the event that said quality standards and/or trademark and
copyright usage and notice requirements are not maintained throughout the
period of manufacture, offering for sale, sale, advertising, promotion,
shipment and/or distribution of any Licensed Products hereunder, then, in
addition to any other rights available to MLBPA under this Agreement or
otherwise, upon receipt of written notice from MLBPA, Licensee shall
immediately discontinue any and all manufacture, offering for sale, sale,
advertising, promotion, shipment and distribution of such Licensed
Products and/or Promotional and Packaging Material in connection with
which the said quality standards and/or trademark and copyright usage and
notice requirements have not been met.
7. ARTWORK.
(a) The form and content of all artwork for use in any media
shall be subject to the express written approval of MLBPA prior to its
use by Licensee in connection with the Licensed Products. If Licensee
desires to use artwork previously approved by MLBPA one different
Licensed Product or on different Promotional and Packaging Material,
Licensee shall first submit samples of such proposed use to MLBPA for
approval thereof.
(b) Except as provided in Section 18(c) of this Agreement,
notwithstanding any rights otherwise granted to Licensee by state or
federal trademark or copyright laws or otherwise, Licensee shall not
without express written permission of MLBPA directly or indirectly use,
or authorize others to use, in any manner whatsoever, any of the artwork
or designs or other material involving the Rights and/or Trademarks, or
any reproductions thereof, following the expiration or termination of
this Agreement, notwithstanding their invention or use by Licensee, and
Licensee shall destroy all such artwork and/or designs and/or other
material and furnish to MLBPA satisfactory evidence of their destruction.
8. OWNERSHIP OF RIGHTS.
(a) It is understood and agreed that MLBPA is the sole and
exclusive holder of all right, title and interest in and to the Rights
and/or the Trademarks for the duration of this Agreement.
(b) Nothing contained in this Agreement shall be construed as an
assignment to Licensee of any right, title and/or interest in or to the
Rights and/or the Trademarks, it being understood that all right, title
and interest relating thereto are expressly reserved by MLBPA except for
the rights being licensed hereunder.
(c) No license is being granted hereunder for any purpose or as
to any products, services or material other than the Licensed Products
and only in the Licensed Territory. MLBPA reserves for such use as it may
determine all rights of any kind other than the rights herein licensed to
Licensee.
(d) Licensee shall not use the Rights and/or the Trademarks
other then as permitted herein and, in particular, shall not incorporate
the Rights and/or the Trademarks in Licensee's corporate or business name
in any manner whatsoever. Licensee agrees that in using the Rights and
Trademarks, it will in no way represent that it has any rights, title and
/or interest in and/or to the Rights and/or the Trademarks other than
those expressly granted under the terms of this Agreement. Licensee
further agrees that it will not use and/or authorize the use, either
during or after the term of this Agreement, of any configuration,
trademark, trade name or other designation confusingly similar to the
Rights and /or any of the Trademarks.
(e) Notwithstanding any rights otherwise granted to Licensee by
state or federal trademark or copyright laws or otherwise, Licensee shall
not without express written permission of MLBPA directly or indirectly
use, or authorize others to use, in any manner whatsoever, any artwork or
designs or other material involving the Rights and/or Trademarks, or any
reproductions thereof following the expiration or termination of this
Agreement, notwithstanding their invention or use by Licensee, and
Licensee shall destroy all such artwork and/or designs and/or other
material and furnish to MLBPA satisfactory evidence of their destruction.
9. GOODWILL AND PROMOTIONAL VALUE.
(a) Licensee recognized the value of the goodwill associated
with the Rights and/or the Trademarks and acknowledges that the Rights
and/or the Trademarks, and all rights therein and the goodwill pertaining
thereto, belong exclusively to MLBPA. Licensee further recognizes and
acknowledges that the Rights and/or the Trademarks have acquired
secondary meaning in the mind of the public. Licensee agrees that during
any License Period of this Agreement, or thereafter, it will not dispute
or attack the title or any rights of MLBPA in and to the Rights and/or
the Trademarks or the validity of the license granted herein.
(b) Licensee agrees that its use of the Rights and/or the
Trademarks shall inure to the benefit of MLBPA and that Licensee shall
not, at any time, acquire any rights in the Rights and/or the Trademarks
by virtue of any use it may make of the Rights and/or of the Trademarks.
Licensee hereby assigns to MLBPA any and all trademarks and trademark
rights in the Trademarks and /or Rights created by such use, together
with the goodwill of the business in connection with which such
Trademarks are used.
(c) Licensee acknowledges that MLBPA is entering into this
Agreement not only in consideration of the royalties paid hereunder but
also in recognition of the intrinsic benefit to proper maintenance of the
reputation of MLBPA and the players as a result of the manufacture,
offering for sale, sale, advertising, promotion, shipment and
distribution of the Licensed Products by Licensee in accordance with the
provisions of this Agreement. Licensee therefore acknowledges that its
failure to manufacture, offer for sale, sell, advertise, promote, ship
and distribute the Licensed Products in accordance with the provisions of
this Agreement, including without limitation its obligations to protect
and enhance the value of the Trademarks and the Rights, will result in
immediate and irreparable damage to MLBPA in connection with promotion of
the Rights and/or the Trademarks and/or to its members, and that there
will be no adequate remedy at law for the failure by Licensee to abide by
such provisions of this Agreement. Accordingly, Licensee agrees that in
the event of any breach by Licensee, in addition to all other remedies
available to it hereunder, MLBPA may at its sole option commence an
action in any court having jurisdiction or an arbitration proceeding, and
shall be entitled to injunctive relief against any such breach as well as
such other relief as any arbitrator(s) or court with jurisdiction may
deem just and proper.
10. TRADEMARK AND COPYRIGHT PROTECTION.
(a) The license granted herein is conditioned upon Licensee's
full and complete compliance with the provisions of the trademark and
copyright laws of the United States and any foreign country or countries
in the Licensed Territory.
(b) Licensee agrees to permanently affix to all Licensed
Products and all Promotional and Packaging Material the MLBPA logo and
appropriate legends, markings and/or notices as required by MLBPA, to
give appropriate notice to the consuming public of MLBPA's right, title
and interest therein. Licensee agrees that, unless otherwise specified in
writing by MLBPA, each usage of the Trademarks shall be followed by
either the TM or the Trademark Notice symbol, as appropriate, and the
following legends shall appear at least once on each Licensed Product and
on each piece of Promotional and Packaging Material:
Copyright or MLBPA
Licensee also shall include on the Licensed Products, and on each piece
of Promotional and Packaging Material, the following notice:
Official Licensee-
Major League Baseball Players Association
(c) Licensee agrees that it will not use, distribute or sell any
Licensed Products or distribute any Promotional or Packaging Materials
which do not carry notices meeting the requirements of this Agreement.
(d) Licensee shall use no other markings, legends and/or notices
on or in association with the Licensed Products or on or in association
with the Promotional and Packaging Material other than those specified
above and such other markings, legends and/or notices as may be specified
by MLBPA, without first obtaining MLBPA's express written approval.
(e) MLBPA has the right, but not the obligation, to obtain at
its own cost, appropriate trademark and copyright protection for the
Rights and/or the Trademarks in association with the Licensed Products in
any and all countries of the Licensed Territory, in the name of MLBPA or
in the name of any third party selected by MLBPA.
(f) Licensee shall keep appropriate records (including copies of
pertinent invoices and correspondence), and advise MLBPA, relating to the
dates when each of the Licensed Products is first placed on sale or sold
in each country of the Licensed Territory, and the dates of first use in
each country of each different Trademark and/or of the Rights on the
Licensed Products and Promotional and Packaging Material. If requested to
do so by MLBPA, Licensee also agrees to supply MLBPA with samples,
facsimiles or photographs of the trademark usages in question and other
information which will enable MLBPA to complete and obtain trademark
applications or registrations, or to evaluate or oppose any trademark or
design applications, registrations, or used of third parties.
(g) Licensee agrees that it shall not at any time within the
Licensed Territory or anywhere else in the world apply for any copyright
or trademark protection which would affect MLBPA's ownership of any
rights in the Rights and/ or the Trademarks, nor file any document with
any governmental authority or assert directly or indirectly any right or
take any other action which could affect MLBPA's ownership of the Rights
and/or the Trademarks, or the publicity rights of the players, or
knowingly aid or abet anyone else in doing so.
(h) Licensee agrees to cooperate in all reasonable respects with
MLBPA in protecting and defending the Rights and /or the Trademarks. In
the event Licensee becomes aware of any claim or problem arising with
respect to the protection of the Rights and/or the Trademarks in the
Licensed Territory, Licensee shall promptly advise MLBPA in writing of
the nature and extent of same. MLBPA has no obligation to take any action
whatsoever in the event that any claim or problem arises with respect to
the protection of the Rights and/or the Trademarks.
11. INFRINGEMENTS.
(a) Licensee agrees to cooperate with MLBPA in the enforcement
of MLBPA's right in the Rights and/or the Trademarks. Licensee agrees to
notify MLBPA in writing of any infringements or imitations by third
parties of the Rights, the Trademarks, the Licensed Products and/or the
Promotional and Packaging Material which may come to Licensee's
attention. MLBPA shall have sole right to determine whether or not any
action shall be taken on account of any such infringement or imitation.
MLBPA, if it so desires, may commence or prosecute any claims or suits in
its own name or in the name of Licensee, or join Licensee as a party
thereto; provided, however, that Licensee shall not be required to incur
more than nominal out-of-pocket expense as a consequence of being joined
as a party by MLBPA. Licensee agrees not to contact any third party, not
to make any demands or claims, and not to institute any suit or take any
other action on account of such infringements or imitations without
obtaining the prior express written permission of MLBPA.
(b) With respect to all claims and suits involving the Rights
and/or the Trademarks, including suits in which Licensee is joined as a
party, MLBPA shall have the sole right to employ counsel of its choosing
and to direct the handling of the litigation and any settlement thereof.
MLBPA shall be entitled to receive and retain all amounts awarded to
MLBPA as damages, profits or otherwise in connection with such suits.
12. INDEMNIFICATION
Licensee hereby agrees to defend, indemnify and hold harmless
MLBPA, its members, officers, directors, employees and agents, from and
against any and all claims, demands, causes of action and judgments
("Claims") arising out of or in connection with
(a) Licensee's design, manufacture, distribution, shipment,
advertising, promotion, offering for sale and/or sale of the Licensed
Products and/or the Promotional and Packaging Material, including but not
limited to any allegedly unauthorized use by Licensee of any trademark,
copyright, patent, process, idea, method, device, logo, symbol, insignia,
name, term or material other than those licensed herein, and
(b) Licensee's use of any logos, symbols, insignias, names,
terms or other material claimed to be the property of any Major League
Baseball club(s) or any other entity affiliated directly or indirectly
with any Major League Baseball club(s), and
(c) any alleged defect(s) of the Licensed Products.
With respect to the foregoing indemnity, Licensee agrees to defend and
hold MLBPA and its members harmless at no cost or expense to MLBPA
whatsoever, including, but not limited to, attorneys' fees and court
costs. Under no circumstances shall Licensee have the right to settle or
otherwise compromise any claim without the prior written consent of
MLBPA. MLBPA and its members shall have the right to defend themselves in
any such action or proceeding with attorneys of MLBPA's selection.
13. INSURANCE.
Licensee shall, throughout the License Period(s) of this
Agreement, obtain and maintain at its own cost and expense from a
qualified insurance company acceptable to MLBPA, or self-insurance as
authorized by law, comprehensive general liability insurance, the form of
which must be acceptable to MLBPA, naming MLBPA and its members as an
additional insured. Such policy shall provide protection against any and
all claims, demands and causes of action arising out of any defect or
failure to perform, alleged or otherwise, of the Licensed Products or any
material used in connection therewith or any use thereof. The amount of
coverage shall be a minimum of Two Million Dollars ($2,000,000) combined
single limit. The policy shall provide for twenty (20) days' notice to
MLBPA from the insurer by Registered or Certified Mail, return receipt
requested, in the event of any modification, cancellation or termination.
Licensee agrees to furnish MLBPA a certificate of insurance evidencing
same within thirty (30) days after execution of this Agreement, and in no
event shall Licensee manufacture, offer for sale, sell, advertise,
promote, ship and/or distribute the Licensed Products prior to receipt by
MLBPA of such evidence of insurance.
14. EXPLOITATION BY LICENSEE.
(a) Licensee agrees to commence distribution, shipment and sale
of all of the Licensed Products in sufficient quantities to meet the
reasonably anticipated demand therefor throughout the Licensed Territory
within six (6) months after the Effective Date of this Agreement. In the
event of Licensee's failure to comply with this requirement, in addition
to all other remedies available to it, MLBPA shall have the option to
terminate this Agreement upon mailing notice of such termination to
Licensee.
(b) Licensee agrees that during all License Periods of this
Agreement, Licensee will continue to diligently and continuously
distribute, ship and sell each of the Licensed Products throughout the
Licensed Territory and that it will use its best efforts to make and
maintain adequate arrangements for the distribution, shipment and sale
necessary to meet the demand for all such Licensed Products throughout
the Licensed Territory. Licensee further agrees to exercise all
reasonable efforts to advertise and promote the Licensed Products at its
own expense throughout the term of this Agreement as widely as
practicable within the Licensed Territory, to the best advantage and
enhancement of the Trademarks and the Rights.
(c) Licensee will not discriminate against the Licensed Products
by granting commissions/discounts to salesmen, dealers and/or
distributors in favor of Licensee's other similar products.
15. PREMIUMS, PROMOTIONS AND SECONDS.
(a) Under no circumstances shall Licensee have any right to sell
or otherwise utilize the Licensed Products as premiums or promotional
items. MLBPA shall have and retain the sole and exclusive right to
utilize or license third parties to utilize any of the rights granted
herein in connection with any premium, giveaway, mail order, fund
raising, promotional arrangement or fan club (collectively referred to as
"Promotional Products"), which retained right may be exercised by MLBPA
concurrently with the rights granted to Licensee hereunder.
(b) Licensee agrees not to offer for sale, sell, ship,
advertise, promote, distribute and/or use for any purpose whatsoever,
and/or to permit any third party to offer for sale, sell, ship,
advertise, promote, distribute and/or use for any purpose whatsoever, any
Licensed Products and /or Promotional and Packaging Material relating to
the Licensed Products which are damaged, defective, seconds or otherwise
fail to meet the specifications and/or quality standards and/or trademark
and copyright usage and notice requirements of this Agreement.
16. ASSIGNABILITY AND SUBLICENSING.
The license granted hereunder is and shall be personal to
Licensee and shall not be assigned by any act of Licensee or by operation
of law or otherwise encumbered. Licensee shall not have the Licensed
Products or any portion thereof manufactured for Licensee by a third
party unless Licensee first obtains the express written approval of
MLBPA, and such manufacturer shall have signed an agreement in the form
attached hereto as Schedule D. Licensee shall have no right to grant any
sublicenses without MLBPA's prior express written approval. Any attempt
on the part of Licensee to arrange for manufacture by a third party or to
sublicense (except as provided herein), assign, encumber or alter its
rights under this Agreement by operation of law or otherwise, including
without limitation entry by Licensee into any joint venture arrangement
or any material change in the ownership or key management of Licensee,
without reasonable notice to and written approval by MLBPA shall result
in the automatic termination of this Agreement, and all rights granted
hereunder shall immediately revert to MLBPA.
17. TERMINATION.
(a) MLBPA's Right of Termination.
(i) Immediate Right of Termination. In addition to the
automatic termination provisions and/or termination rights provided
elsewhere in this Agreement, and notwithstanding any attempts by Licensee
to cure defaults, MLBPA shall have the right immediately to terminate
this Agreement by giving written notice to Licensee if Licensee does any
of the following:
a. Manufactures, offers for sale, sells, advertises,
promotes, ships, distributes and/or uses in any way any Licensed Product
and/or Promotional and Packaging Material without having the prior
written approval of MLBPA as provided for in this Agreement;
b. Continued to manufacture, offer for sale, sell,
advertise, promote, ship, distribute and/ or use in any way any Licensed
Product and/or Promotional and Packaging Material after receipt of notice
from MLBPA disapproving same;
c. Fails to carry on the Licensed Products or
Promotional or Packaging Material the notices specified by MLBPA, as
required herein;
d. Becomes subject to any voluntary or involuntary
order of any governmental agency involving the recall of any of the
Licensed Products and/or Promotion and Packaging Material because of
safety, health or other hazards or risks to the public;
e. Directly or indirectly through its controlling
shareholders or any of its officers, directors or employees, takes any
action in connection with the manufacture, offering for sale, sale,
advertising promotion, shipment and/or distribution of the Licensed
Products and/or the Promotional and Packaging Material which damages or
reflects adversely upon MLBPA, the Rights and/or the Trademarks;
f. Breaches any of the provisions of this Agreement
relating to the unauthorized assertion of rights in the Rights and/or the
Trademarks;
g. Two or more times during a twelve-month period
fails to make timely payment of royalties when due or fails to make
timely submission of royalty statements when due;
h. Uses the Trademarks or the Rights for the purpose,
in whole or in part, of promoting any service or product other than the
Licensed Products without the express prior consent of MLBPA in writing;
or
i. Fails to obtain or maintain insurance as required by the
provisions of this Agreement.
(ii) Curable Breaches by Licensee. If Licensee
a. commits a material breach of any other terms of this
Agreement, or
b. files a petition in bankruptcy or is adjudicated a
bankrupt or insolvent, or makes an assignment for the benefit of
creditors, or an arrangement pursuant to any bankruptcy law, or
discontinues its business, or if a receiver is appointed for it or its
business and is not discharged within thirty (30) days, and fails to cure
such default and furnish reasonable proof of its cure to MLBPA within
fifteen (15) days after receiving written notice of breach, MLBPA shall
have the right to terminate this Agreement by giving written notice to
Licensee.
(b) Licensee's Right of Termination. If MLBPA commits a material
breach of any of the terms of this Agreement and fails to cure such
default and furnish reasonable proof of its cure to Licensee within
fifteen (15) days after receiving written notice of breach, Licensee
shall have the right to terminate this Agreement by giving written notice
to MLBPA.
18. POST-TERMINATION AND EXPIRATION RIGHTS AND OBLIGATIONS.
(a) Except as provided in Section 18(c) below, upon termination
of this Agreement, Licensee and its receivers, representatives, trustees,
agents, administrators, successors and/or permitted assigns shall have no
right to manufacture, offer for sale, sell, ship, advertise, promote
and/or distribute Licensed Products or to use in any way the Rights, the
Trademarks, or any Promotional and Packaging Material relating to the
Licensed Products.
(b) Upon expiration of this Agreement or termination by MLBPA,
notwithstanding anything to the contrary herein, all royalties on sales,
shipments and/or distributions theretofore made shall become immediately
due and payable and no Guaranteed Minimum Royalty paid to MLBPA shall be
refunded.
(c) Upon expiration of this Agreement, or upon termination of
this Agreement for any reason except those set forth in Section 16 or
Section 17(a) above, subject to the requirements of this Agreement with
respect to payment and reporting of royalties, for a period of sixty (60)
days, Licensee may dispose of all finished Licensed Products which are on
hand upon the expiration of the License Period then in effect, provided
that the royalties with respect to that period are paid and the
appropriate statements are furnished for that period. During such sixty
(60) day period, MLBPA itself may use or license the use of the Rights
and/or the Trademarks in any manner at any time anywhere in the world as
MLBPA sees fit.
(d) Subject to Section 18(c) above, after the expiration or
termination of this Agreement, Licensee shall refrain from further use of
the Rights and/or the Trademarks or any further reference to them, either
directly or indirectly, in connection with the manufacture, offering for
sale, sale, advertising, promotion, shipment and/or distribution of
Licensee's products. Licensee shall destroy all artwork, films,
transparencies, separations, printing plated, molds and other materials
which reproduce the Licensed Products and/or Promotional and Packaging
Material relating to the Licensed Products, and shall give evidence
satisfactory to MLBPA of their destruction. Licensee shall be responsible
to MLBPA for any damages caused by the unauthorized use by Licensee or by
others of all such materials which are not destroyed pursuant to this
Agreement.
(e) Licensee acknowledges that its failure to cease the
manufacture, offering for sale, sale, advertising, promotion, shipment
and/or distribution of the Licensed Products and/or use in any way of the
Promotional and Packaging Material relating to the Licensed Products at
the termination or expiration of this Agreement will result in immediate
and irreparable damage to MLBPA and/or to the players and to the rights
of other licensees of MLBPA. Licensee acknowledges and admits that there
is no adequate remedy at law for failure to cease such activities and
Licensee agrees that in the event of such failure, in addition to all
other remedies available to it hereunder, MLBPA at its sole option may
commence an action in any court having jurisdiction or an arbitration
proceeding, and shall be entitled to equitable relief by way of
injunctive relief and such other relief as any arbitrator(s) or court
with jurisdiction may deem just and proper.
19. FINAL STATEMENT UPON TERMINATION OR EXPIRATION.
Within thirty (30) days after termination or expiration of this
Agreement, as the case may be, Licensee shall deliver to MLBPA a
statement indicating the number and description of the finished Licensed
Products which it had on hand as of the expiration or termination date.
MLBPA shall have the option upon prior written notice to Licensee of
conducting a physical inventory at the time of expiration or termination
and/or at a later date in order to ascertain or verify such statement. In
the event that Licensee refuses to permit MLBPA to conduct such physical
inventory, Licensee shall forfeit any rights hereunder to dispose of such
inventory. In addition to such forfeiture, MLBPA shall have recourse to
all other remedies available to it.
20. NOTICES.
All notices or other communications required or desired to be
sent to either party shall be in writing and sent by Registered or
Certified Mail, postage prepaid, return receipt requested, or by
facsimile or telegram, charges prepaid. Such notices, including facsimile
or telegram, shall be effective on the date sent provided that any notice
sent by facsimile also shall be sent by regular mail. The addresses for
MLBPA and Licensee shall be as set forth on Schedule B. Either party may
change its address by notice in writing to the other party.
21. RELATIONSHIP OF THE PARTIES.
This Agreement does not create a partnership or joint venture
between the parties and neither party shall have any power to obligate or
bind the other in any manner whatsoever.
22. APPLICABLE LAW.
This Agreement is made within the State of New York and shall be
construed in accordance with the laws of the United States and the State
of New York. Licensee hereby expressly waived any right to the benefits
of remedial legislation, if any, of Licensee's home state.
23. REMEDIES.
(a) Except as otherwise provided herein, any dispute or
disagreement between the parties hereto arising out of or relating to
this Agreement shall be settled by final and binding arbitration, in New
York City, under the Commercial Arbitration Rules then obtaining of the
American Arbitration Association. The parties hereto expressly stipulate
that the arbitrator(s) shall have full subpoena power and full powers to
fashion appropriate remedies, including without limitation the power to
grant equitable and/or injunctive and/or declaratory relief. Judgment
upon the award may be entered in any court having jurisdiction.
(b) Licensee recognizes the unique nature of the Rights and the
Trademarks, and the possibility that breaches of this Agreement by
Licensee may require preliminary or extraordinary relief beyond that
available in arbitration, and the possibility that breaches of this
Agreement may involve third parties or witnesses or issues which are
beyond the practical jurisdiction of arbitrators. Accordingly,
notwithstanding the provisions of paragraph 23(a), MLBPA (but not
Licensee) may, at its sole and exclusive option, elect as an alternative
to arbitration to commence an action or proceeding in any court of
competent jurisdiction to enforce this Agreement or protect the Rights
and the Trademarks. MLBPA may also require the termination of a
previously-commenced arbitration proceeding so as to permit a dispute
between the parties to be resolved in an action or proceeding in a court
of competent jurisdiction, so long as MLBPA has theretofore not waived
its right to do so by taking substantial steps to prosecute or defend the
arbitration proceeding.
24. CAPTIONS.
The captions used in connection with the paragraphs and
subparagraphs of this Agreement are inserted only for purpose of
reference. Such captions shall not be deemed to govern, limit, modify or
in any other manner affect the scope, meaning or intent of the provisions
of this Agreement or any part thereof, nor shall such captions otherwise
be given any legal effect.
25. WAIVER.
(a) No waiver by either party of a breach or a default hereunder
shall be deemed a waiver by such party of a subsequent breach or default
of a like or similar nature.
(b) Resort by either party to any remedies referred to in this
Agreement or arising by reason of a breach of this Agreement by the other
party shall not be construed as a waiver by such party of its right to
resort to any and all other legal and equitable remedies available to it.
26. SURVIVAL OF THE RIGHTS.
Any rights and obligations created by this Agreement and which
by necessary implication continue after its expiration or termination
shall survive such expiration or termination.
27. SEVERABILITY.
In the event that any term or provision of this Agreement shall
for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect
any other term or provision, and this Agreement shall be interpreted and
construed as if such term or provision, to the extent the same shall have
been held to be invalid, illegal or unenforceable, had never been
contained herein.
28. INTEGRATION.
This Agreement represents the entire understanding between the
parties hereto with respect to the subject matter hereof and supersedes
all previous representations, understandings or agreements, oral or
written, between the parties with respect to the subject matter hereof.
This Agreement cannot be modified except by a written instrument signed
by the parties hereto.
By their execution below, the parties hereto have agreed to all of the
terms and conditions of this Agreement.
MAJOR LEAGUE BASEBALL FOTOBALL USA, INC
PLAYERS ASSOCIATION (LICENSEE)
By: /s/Donald Fehr By: /s/Michael Favish
--------------------------- ------------------
Date: March 29, 1997 Date: March 17, 1997
<PAGE>
SCHEDULE A
TRADEMARKS
MLBPA
Major League Baseball Players Association
MLBPA logo
THE RIGHTS
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.
<PAGE>
SCHEDULE B
LICENSED PRODUCTS
Regulation size baseballs made of synthetic leather (PVC) utilizing
the photographic images of active Major League baseball players. Such
baseballs must carry a suggested retail value in excess of $4.00 and may
be packaged singly or in combination with one of the following:
A. Other approved Major League baseball player fotoballs.
B. A generic leather or synthetic leather mini-glove. Such glove will
not bear any other third party logo.
C. A baseball stand or holder for display purposes.
D. Any other baseball related item, subject to approval by MLBPA in
writing prior to production.
Licensed Products may be produced, marketed and sold as limited edition
with the prior written consent of the MLBPA.
LICENSE PERIOD
First License Period: January 1,1997 to December 31,1997;
Second License Period: (If Renewed): January 1, 1998 to December 31,1998;
Third License Period (If Renewed): January 1, 1999 to December 31, 1999.
LICENSED TERRITORY
United States, its territories and possessions, Canada, Japan, Korea and
Mexico.
ADDITIONAL CONDITIONS
The International Addendum attached hereto and incorporated herein shall
apply to all sales of Licensee with respect to the Licensed Products
outside the United States.
Notwithstanding the language in Section 1 (b), the names and/or
likenesses of a minimum of six (6), not eight (8), such players may be
utilized with equal prominence on the Promotional and Packaging Material
for all Licensed Products during the initial License Period and during
each additional License Period.
Although MLBPA is not obligated to do so, it is the current intention of
MLBPA to develop a national advertising and/or promotional program
featuring the Rights and/or the Trademarks and to consult with Licensee
about the development of such program. Licensee agrees that MLBPA shall
have the right, at its discretion and in a manner and sale of its choice,
to print catalogues, brochures, advertisements or other promotional
materials wherein representative merchandise from Licensee and other
licensees of MLBPA shall be displayed. In this regard, Licensee agrees
that in addition to all other payments and without credit against the
Guaranteed Minimum Royalty required herein, Licensee shall share in the
cost of such materials annually by payment within ten (10) days after
receiving an invoice therefor in an amount not to exceed Five Thousand
Dollars ($5,000.00).
ACTUAL ROYALTY
Nine Percent (9%)
GUARANTEED MINIMUM ROYALTY
First License Period: Sixty Thousand Dollars ($60,000.00) to be paid as
follows:
$15,000.00 due upon execution of this Agreement by Licensee;
$15,000.00 due on or before April 15,1997;
$15,000.00 due on or before July 15,1997;
$15,000.00 due on or before October 15, 1997.
Second License Period (If Renewed): Seventy - Five Thousand Dollars
($75,000.00) to be paid as follows:
$18,750.00 due on or before January 15, 1998;
$18,750.00 due on or before April 15, 1998;
$18,750.00 due on or before July 15, 1998;
$18,750.00 due on or before October 15, 1998.
Third License Period: (If Renewed) Seventy - Five Thousand Dollars
($75,000.00) to be paid as follows:
$18,750.00 due on or before January 15, 1999;
$18,750.00 due on or before April 15, 1999;
$18,750.00 due on or before July 15,1999;
$18,750.00 due on or before October 15,1999;
ADDRESSES FOR NOTICES
Major League Baseball Players Association Fotoball USA, Inc.
12 E. 49th Street 3738 Ruffin Road
New York, NY 10017 San Diego, CA 92123
Attention: Judy Heeter Attn: Michael Favish
Acknowledged and Approved:
MAJOR LEAGUE BASEBALL FOTOBALL USA, INC.
PLAYERS ASSOCIATION
By: /s/Donald Fehr By: /s/Michael Favish
------------------------------ -----------------------
Date: March 29, 1997 Date: March 17, 1997
<PAGE>
SCHEDULE D
MANUFACTURER'S AGREEMENT
Licensee: Fotoball USA, Inc.
Licensed Territory: United States, its territories and possessions,
Canada, Japan, Korea and Mexico.
Licensed Products: Regulation size baseballs made of synthetic leather
(PVC) utilizing the photographic images of active Major
League baseball players. Such baseballs must carry a
suggested retail value in excess of $4.00 and may be
packaged singly or in combination with one of the
following:
A. Other approved Major League baseball player fotoballs.
B. A generic leather or synthetic leather mini-glove.
Such glove will not bear any other third party logo.
C. A baseball stand or holder for display purposes.
D. Any other baseball related item, subject to approval
by MLBPA in writing prior to production.
Licensed Products may be produced, marketed and sold as limited edition
with the prior written consent of the MLBPA.
The undersigned understands that the Major League Baseball Players
Association ("MLBPA") has authorized the above-named Licensee to
manufacture the above-named Licensed Products utilizing certain names,
logos, symbols, likenesses, signatures and pictures which are the
property of MLBPA ("the Rights"). In order to induce MLBPA to consent to
the manufacture of the Licensed Products by the undersigned, the
undersigned agrees that it will not manufacture the Licensed Products for
anyone but the Licensee; that it will not sell the Licensed Products to
anyone but the Licensee; that it will not knowingly manufacture the
Licensed Products for distribution in any territory other than the
above-named Licensed Territory; that it will not (unless MLBPA otherwise
consents in advance in writing) manufacture any other merchandise
utilizing any aspect of the Rights; that it will permit such
representatives as MLBPA may from time to time designate to inspect the
activities of the undersigned with relation to its manufacture of the
Licensed Products, and that whenever the Licensee ceases to require the
undersigned to manufacture the licensed Products, the undersigned will
return to the licensee or to MLBPA any molds, plates, engravings, or
other devices used to reproduce any of the Rights, or at the direction of
MLBPA or Licensee will give satisfactory evidence of the destruction
thereof. MLBPA shall be entitled to invoke any remedy permitted by law
for violation of this agreement by the undersigned.
(Name of Manufacturer):
FOTOBALL USA, INC.
By: /s/Michael Favish
-----------------------
Title: President/ Chief Executive Officer<PAGE>
INTERNATIONAL ADDENDUM
1. In calculating "Net Sales" with respect to sales in any portion
of the Licensed Territory outside the United States, there shall be no
deduction made in connection with the transfer of funds or royalties or
with the conversion of any currency into United States dollars.
2. If any tax is imposed on MLBPA by any foreign country with
respect to any amount payable to MLBPA, Licensee shall compute and pay
the amount due to MLBPA pursuant to this Agreement on the basis of the
gross amount involved before the deduction of any taxes. If Licensee is
required to withhold from any payment due to MLBPA an amount representing
taxes imposed on MLBPA pursuant to the laws of any foreign country,
Licensee shall nevertheless have the obligation to make up the amount of
said tax in making its payment to MLBPA hereunder.
3. With respect to any countries in the Licensed Territory outside
the United States, the statements provided to MLBPA pursuant to this
Agreement shall be broken down by countries and all Net Sales shall be
stated in the currency of the country where they were made, followed by
the equivalent amount for such Net Sales in United States currency,
followed by the exchange rate applied. The rate of exchange shall be the
actual rate of exchange prevailing on the last day of the month prior to
the date on which payment is due to MLBPA. The parties agree to cooperate
in facilitating the exportation of royalties by legal means from any
country which imposes currency or other restrictions upon the payment of
royalties; provided, however, that upon the request of MLBPA, Licensee
agrees to deposit the full amount, or any portion, of any and all amounts
due MLBPA, in United States or foreign currency, in an account within
such country for the benefit of MLBPA as instructed by MLBPA. If several
currencies are involved in any reporting category, that category shall be
broken down by each such currency.
4. With respect to those countries which require applications to
register Licensee as a Permitted User or Registered User of a trademark
or trademarks used on or in connection with the rights granted under this
Agreement, or which require the recordation of this Agreement, Licensee
agrees to execute and deliver to MLBPA such applications, agreements, or
other documents as may be necessary and as are furnished by MLBPA for
such purposes. In the event such agreements are entered into between
MLBPA and Licensee, this Agreement rather than such agreements will
govern any disputes between MLBPA and Licensee and in the event that this
Agreement is terminated for any reason, any such Registered User or
Permitted User agreements also shall be deemed to be terminated.
<PAGE>
5. It shall be Licensee's sole responsibility at its expense to
obtain all approvals of any foreign authorities which may be necessary in
connection with Licensee's performance under this Agreement in such
portion(s) of the Licensed Territory. Licensee shall take whatever steps
may be reasonably required to effect the remission of funds from abroad;
to minimize or eliminate the incidence of foreign taxes, fees, or
assessments which may be imposed; to protect its investments in foreign
territories, to enable it to commence or continue doing business in any
foreign territory; and to comply in any and all respects with all
applicable laws and regulations.
MAJOR LEAGUE BASEBALL FOTOBALL USA. INC.
PLAYERS ASSOCIATION -----------------
LICENSEE
By: /s/Donald Fehr By: /s/Michael Favish
National Football League Properties, Inc.
410 Park Avenue, New York, New York 10022
Area Code (212) 838-0660 FAX (212) 758-4239
LICENSING AGREEMENT TERM SHEET
Licensee: Fotoball USA, Inc. Date: August 12, 1996
Address: 3738 Ruffin Rd. No.: 657-149-7961
San Diego, CA 92123
The following terms are made part of and are subject to all definitions,
terms and conditions set forth in License No. R02327:
MARKETING PROGRAM: NFL Collectibles/Play Football
TERM: April 1, 1996 - March 31, 1998
TERRITORY: The United States
LICENSED PRODUCTS: COLLECTIBLE TEAM-IDENTIFIED MINIATURE FOOTBALLS, NFL
QUARTERBACK CLUB MINIATURE FOOTBALL,
COLLECTIBLE PLAYER IDENTIFIED MINIATURE FOOTBALL
FISCAL YEAR LICENSED PRODUCT ROYALTY %
- ----------- ---------------- ----------
YEAR 1 04/01/96-03/31/97 P05639/P102 TEAM LOGO FOOTBALLS 9.00
P08002/J100 QBC MINIATURE FOOTBALLS 8.00
P0920/J100 PLAYER PICTURED FOOTBALLS 9.00
YEAR II 04/01/97-03/31/98 P05639/P102 TEAM LOGO FOOTBALLS 9.00
P08002/J100 QBC MINIATURE FOOTBALLS 8.00
P0920/1J100 PLAYER PICTURED FOOTBALLS 9.00
FISCAL YEAR MINIMUM GUARANTEE ADVANCE
- ----------- ----------------- -------
YEAR 1 04/01/96-03/31/97 $ 20,000 $ 20,000
YEAR II 04/01/97-03/31/98 $ 30,000 $ 20,000
AUTHORIZED BRANDS FOR
LICENSED PRODUCT(S): Fotoball USA, Inc.
LICENSED MARK(S) FOR Marketing Program logo, Club Marks, and the
LICENSED PRODUCT(S): following League Marks: "National Football
League", "NFL", "National Football Conference",
"American Football Conference", "NFC", "AFC"
and the NFL Shield design.
DISTRIBUTION CHANNELS FOR Direct Retailers, Discount Stores, Fan Shops,
LICENSED PRODUCT(S): Specialty Stores, Concessionaires, Gift Shops,
Direct Retailers, Drug Stores, Distributors,
Fan Shops
RENEWAL REQUEST DATE: August 31, 1997
COOPERATIVE FUND:
FISCAL YEAR PROGRAM PAYMENT PAYMENT DUE DATE(S)
- ----------- ------- ------- ------------------
YEAR I To be determined by NFLP $1,000 To be determined by NFLP
YEAR II To be determined by NFLP $1,000 4/1/97
PROMOTIONAL PRODUCTS:
FISCAL YEAR LICENSED PRODUCTS NUMBER OF UNIT$ NUMBER OF UNITS
- ----------- --------------------------------- ---------------
YEAR I TEAM LOGO FOOTBALLS 10
QBC MINIATURE FOOTBALLS 10
PLAYER PICTURED FOOTBALLS 10
YEAR II TEAM LOGO FOOTBALLS 10
QBC MINIATURE FOOTBALLS 10
PLAYER PICTURED FOOTBALLS 10
ADDITIONAL TERMS:
Responsibility for obtaining rights to use player names and player likenesses
is solely that of Fotoball USA, Inc. This License is contingent upon the
complete execution and proof of player licenses with either the NFL Players
Association or with each player's agent.
National Football League Properties, Inc.
410 Park Avenue,
New York, New York 10022
Area Code (212) 838-0660 FAX (212) 758-4239
Retail Licensing Agreement
Licensee: Fotoball USA, Inc. Date: August 12, 1996
Address: 3738 Ruffin Rd. No.: 657-149-7691
San Diego, CA 92123 Lic. No: R02327
National Football League Properties, Inc. ("NFLP") has the exclusive right to
license for commercial purposes the trademarks of the National Football League
("NFL") and the thirty professional football teams that comprise the NFL
("Member Clubs"). Licensee, whose name and address are set forth above,
desires to use certain of these trademarks in accordance with the terms
and conditions of this agreement ("License"). In consideration of the mutual
premises, covenants and undertakings contained in this License, the parties
to this License agree as follows:
1. Definitions As used in this License, the terms listed on the attached Term
Sheet and elsewhere in this License have the following meanings:
a. "Advance Royalty Payment": The amount to be credited to Royalty payments
due for the corresponding Fiscal Year payable to NFLP upon the execution
of this License for Fiscal Year I and on or before April 15 for each
successive Fiscal Year.
b. "Advertisements": Advertising space in designated NFLP publications to be
purchased by Licensee in accordance with this License.
c. "Affiliate": Any person or entity in which Licensee or any owner, majority
shareholder, officer or director of Licensee has any direct or indirect
beneficial or ownership interest or is a joint venture partner.
d. "Authorized Brands": The only brand names Licensee may use in association
with the Licensed Products.
e. "Club Marks": The full team names, nicknames, helmet designs, uniform
designs, logos, slogans, and other identifying symbols and indicia
adopted for commercial purposes by the Member Clubs.
f. "Cooperative Fund": The amount payable to NFLP during each Fiscal Year for
use by NFLP in connection with the designated Cooperative Program.
g. "Distribution Channels": The channels of trade in the Territory in which
Licensee may distribute for sale or sell each Licensed Product as defined
in Exhibit I attached to this License and/or the attached Term Sheet.
h. "Fiscal Year": The period beginning on April 1 of any year and ending on
March 31 of the following year except for Fiscal Year 1, which will begin
on the date this License is fully-executed and will end on March 31 of the
following year.
i. "League Marks": "National Football League", "NFL", "National Football
Conference", "American Football Conference", "NFC", "AFC', "Super Bowl",
"Pro Bowl", the NFL Shield design, and other identifying symbols and
indicia adopted for commercial purposes by the NFL.
j. "Licensed Marks": The trademarks for which Licensee is granted certain
limited, non-exclusive rights under this License.
k. "Licensed Products": All products for which Licensee may use the Licensed
Marks in association with the Authorized Brands. This license will refer
to each distinct type of product as a 'Licensed Product' since more than
one product may be licensed (e.g. T-shirts and jackets would each be a
Licensed Product).
l. "Marketing Program": The program established by NFLP in connection with
which Licensee may use the Licensed Marks as authorized under this License.
Licensee shall abide by all rules, guidelines and policies established by
NFLP for such Marketing Program, which are deemed part of this License.
m. "Minimum Royalty Guarantee": The minimum amount of Royalty payments payable
to NFLP on or before the 15th day following the end of each Fiscal Year.
n. "Net Sales": Gross sales of all Licensed Products sold or distributed for
sale at Licensee's invoiced selling price less sales derived from returns
received and credited only. Licensee shall not credit any return at a
rate greater than the original invoiced selling price for such Licensed
Products. There shall be no other deductions allowed including, without
limitation, deductions for manufacturing costs, selling costs, distribution
costs, advertising and promotional costs, quantity discounts, freight,
non-collected or uncollectable accounts, commissions, taxes, cash discounts,
close out sales, distress sales, sales to employees, or any other costs.
For purposes of this Agreement, Net Sales and all other referenced sales
occur when Licensee invoices or ships any Licensed Product, whichever is
earlier. If Net Sales are made to an Affiliate, the dollar amount of
gross sales will be the greater of Licensee's regular price to unaffiliated
accounts or the Affiliate's gross sales price to an unaffiliated account.
o. "NFL Marks": All League Marks and Club Marks, collectively.
p. "Premiums": Any products, including the Licensed Products, bearing the NFL
Marks or other indicia of the NFL or its Member Clubs that Licensee sells
or gives away for the purposes of promoting, publicizing or increasing
the sale of its own products or services other than the Licensed Products,
or that Licensee sells or gives away to any other party whom Licensee
knows or should reasonably know intends to use such products for the
purposes of promoting, publicizing or increasing the sale of any other
party's products or services. Promotions include, without limitation,
combination sales, incentives for sales force, and trade or consumer
promotions.
q. "Promotional Products": The quantity of each Licensed Product that Licensee
shall provide to NFLP at no cost during each Fiscal Year for use in
connection with NFLP's Promotional Programs, as defined in Paragraph 5 of
this License.
r. "Renewal Request Date": The date by which NFLP must receive notification
from Licensee of Licensee's desire to renew the License.
s. "Royalty": The amount of Net Sales Licensee shall pay to NFLP for all sales
of the Licensed Products. Licensee shall calculate all Royalty payments
according to Net Sales based on Licensee's normal domestic wholesale
warehouse price. NFLP reserves the right to increase the rate of the
Royalty during the Term, provided that it gives Licensee at least six
(6) months written notice before such increase takes effect.
t. "Sponsorship": The designated events for which Licensee will participate
as a sponsor during each Fiscal Year of the Term subject to the execution
of an NFLP Sponsorship Agreement.
u. "Style": A distinct prototype of a Licensed Product that differs from any
other prototype of that same Licensed Product in any form or manner with
respect to design, material, pattern, size, shape, Licensed Marks, or
any other distinguishing characteristic involving the specifications for
the production of all or any portion of that Licensed Product (e.g.
T-shirts bearing the San Francisco 49ers logo and T-shirts bearing the
San Diego Chargers logo would each be a Style of Licensed Product).
v. "Term": The time period for which this License shall be effective.
w. "Territory": The geographic area in which Licensee shall have the right
to sell the Licensed Products.
x. "Unit": A single Licensed Product (e.g. one T-shirt and one jacket would
each be a Unit).
2. Grant of License
Subject to all of the terms and conditions of this License, NFLP grants
Licensee the non-exclusive right to use the Licensed Marks in connection
with the manufacture, distribution, sale, and advertising of the Licensed
Products under the Authorized Brand in the Distribution Channels in the
Territory in accordance with all policies, rules and regulations of the
Marketing Program and NFLP, which are deemed part of this License.
Licensee shall have no right to sell or distribute any Premiums unless
Licensee receives a separate Premium License from NFLP and pays NFLP the
applicable Royalty under such Premium License. Licensee shall not use the
Licensed Products as Premiums or permit the use of the Licensed Products
as Premiums by any party whom Licensee knows or should reasonably know
intends to use the Licensed Products as Premiums.
3. Terms of Payment
a. Licensee shall pay NFLP the Royalty on all sales of the Licensed
Products. Regardless of whether any sales occur during any Fiscal Year,
Licensee shall also pay NFLP the applicable Advance Royalty Payment and
Minimum Royalty Guarantee for each Fiscal Year during the Term. Advance
Royalty Payments and any payments made to satisfy the Minimum Royalty
Guarantee are not refundable. Licensee may credit the Advance Royalty
Payment and Royalty payments made to NFLP during each Fiscal Year to the
Minimum Royalty Guarantee for the corresponding Fiscal Year only.
Licensee may not credit such amounts to the Advance Royalty Payment,
Minimum Royalty Guarantee or any other payment required under this License
for any other Fiscal Year. If NFLP terminates this License, for the Fiscal
Year in which termination occurs (Termination Fiscal Year) Licensee shall
pay NFLP the Royalty on all sales of the Licensed Products made during the
Termination Fiscal Year or a pro rated portion of the Minimum Royalty
Guarantee owed in excess of the Advance Royalty Payment (Termination
Guarantee'), whichever is greater. For purposes of this paragraph the
pro rated Minimum Royalty Guarantee will be calculated as follows:
Termination Guarantee x No. of Days Completed in Termination Fiscal YEAR
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1 365
b. On or before the 15th day of each month, Licensee shall make all Royalty
payments to NFLP due on sales of the Licensed Products during the
preceding calendar month. Simultaneously with the Royalty payment,
Licensee shall furnish full and accurate statements of the Net Sales of
each Licensed Product sold and distributed during such calendar month on
forms provided by NFLP. The statements will include the quantity and
description of each Licensed Product itemized by Member Club if
applicable, the gross sales price, itemized deductions from the gross
sales price, any returns made during the preceding month, and the
resulting Net Sales on which Licensee calculated the Royalty amount.
Licensee shall furnish such statements for each Licensed Product
regardless of whether it sold any such Licensed Product during the
preceding month. NFLP's receipt or acceptance of any statement or Royalty
payment or the cashing of a Royalty check will not preclude NFLP from
questioning the correctness of such statements or payments at any time.
Upon discovery of any verifiable inconsistency or mistake in such
statements or payments, Licensee shall immediately rectify such
inconsistency or mistake.
c. Licensee shall pay NFLP all other amounts listed on the Term Sheet
attached to this License in accordance with the dates provided in such
Term Sheet.
d. Licensee shall pay NFLP an additional charge of one and one-half percent
(1.5%) per month on any payment due under this License that remains
unpaid fifteen (15) days after such payment becomes due.
4. Quality Control
a. Prior to making any use of any Style of any Licensed Product, Licensee
shall submit to NFLP for its approval at Licensee's sole cost and
expense at the following applicable stages: (i) finished artwork or final
proofs; (ii) pre-production samples or strike-offs for such proposed
Style; and (iii) a sample Unit of the finished version of such Style
together with all packaging, cartons, containers, hangtags and wrapping
materials related to such Unit ("Related Materials"). For Styles that
differ solely with respect to the Licensed Marks, Licensee may submit a
sample Unit of one Style along with artwork of the Styles bearing the
other Licensed Marks for approval purposes unless NFLP requests a sample
Unit of each such Style. NFLP shall use its best efforts to promptly
evaluate all such submissions and provide Licensee, if applicable, with
quality standards and specifications for the finished Units of each Style.
Upon approval of the finished version of a sample Unit of a Style,
NFLP shall execute a Product Approval Form that will contain any
applicable quality standards and specifications. License shall not
manufacture, sell, distribute or advertise any Style of a Licensed
Product unless NFLP has executed a Product Approval Form for such Style.
b. All Product Approval Forms are effective for one Fiscal Year only and
Licensee must resubmit to NFLP each Style of each Licensed Product
previously approved by NFLP for quality control approval within thirty
(30) days after the start of each successive Fiscal Year. From time to
time, NFLP may request additional sample Units of any Style of any
Licensed Product to confirm continued compliance with NFLP's quality
control guidelines and any applicable quality standards and specifications.
NFLP shall have the right to withdraw its approval of any Style of any
Licensed Product if, in NFLP's sole judgment, such sample Units cease to
conform to such guidelines, standards or specifications or otherwise
deviate in quality from the previously approved sample Units. Upon notice
by NFLP to Licensee that the Product Approval Form for a Style of a
Licensed Product has been withdrawn, Licensee shall immediately cease to
manufacture, distribute, sell or advertise any further Units of such
Style until such time as a new Product Approval Form has been executed and
delivered by NFLP.
c. Licensee shall not make any modification to any Style for which NFLP has
issued a Product Approval Form or depart from any applicable quality
standards and specifications for any Style unless NFLP has approved such
modification for such Style and issues a new Product Approval Form.
Licensee acknowledges that the manufacture, use, sale, distribution, or
advertising of any Style that deviates from the Style approved by NFLP
will constitute a material breach of this License. Upon such breach,
NFLP may terminate this License immediately.
d. No distribution or sale of irregulars or seconds is permitted except when
Licensee receives prior written approval from NFLP.
5. Advertising and Promotional Materials
a. Licensee will not use the Licensed Marks or any reproduction of them,
including without limitation, Photographs or Computer Art, as defined
in Paragraph 10a, in any advertising, promotion, publicity or display
materials (collectively "Promotional Materials") without receiving NFLP's
prior written approval executed on a Promotional Approval Form supplied
to Licensee by NFLP. Licensee may use such approved Promotional Materials
only in conjunction with the Styles of Licensed Products that NFLP has
approved. Licensee shall submit to NFLP all Promotional Materials at the
following applicable stages appropriate to the medium used: (i) conceptual
stage, pre-production art or rough cuts; (ii) layout, storyboard and
script; (iii) finished materials; and (iv) at any other time as reasonably
requested by NFLP. NFLP shall use best efforts to evaluate all such
Promotional Materials' submissions within ten (10) business days of their
receipt by NFLP. NFLP shall execute a Promotional Approval Form for all
Promotional Materials that it approves. Licensee shall notify its
retailers and/or Third Party Distributors that NFLP must approve all
Promotional Materials involving or using in any form or manner the
Licensed Marks. Licensee shall use best efforts to ensure that its
retailers and/or Third Party Distributors do not publish, display or
otherwise distribute such Promotional Materials without NFLP's prior
written approval.
b. NFLP has the exclusive right, in its sole discretion, to approve or
disapprove any Promotional Materials' submissions. Licensee acknowledges
that NFLP may disapprove Promotional Materials that, in NFLP's opinion,
reflect unfavorably upon NFLP, the NFL or its Member Clubs including,
without limitation, materials involving gambling, lotteries or other games
inconsistent with the image of the NFL, the Member Clubs, or the Licensed
Products.
c. NFLP may withdraw its approval of any Promotional Materials if: (i) the
Promotional Materials have been altered without the prior written approval
of NFLP; (ii) the Style and/or the Licensed Product promoted in the
Promotional Materials ceases to be approved under this License; or (iii)
an event occurs that, in NFLP's opinion, causes NFLP's relationship with
Licensee or any Licensed Product to adversely reflect upon the professional
or business reputation of the NFL, its Member Clubs or NFLP.
d. Licensee represents that NFLP has the right to conduct promotions and
special events in its sole discretion and to print catalogs, sales sheets
and brochures involving representative merchandise from NFLP's licensees
("Promotional Programs"). Licensee shall supply within ten (10) business
days of any request by NFLP, at no charge to NFLP, all or any portion of
the quantity of Promotional Products specified on the Term Sheet required
by NFLP for use, in NFLP's sole discretion, in such Promotional Programs.
e. Licensee shall pay NFLP the designated amounts for the Advertisements,
Sponsorship, and Cooperative Fund, if applicable, on or before the
corresponding dates listed on the Term Sheet attached to this License.
NFLP shall use such payments in a manner determined by NFLP in its sole
discretion.
f. During each Fiscal Year of the Term in which NFLP publishes the NFL
Merchandise Catalogue, Licensee shall purchase a full-page advertisement
in such catalogue at the rate established in NFLP's then-existing rate
card. Licensee shall make such payment within fifteen (15) days from
receiving an invoice from NFLP.
6. Distribution Requirements
Licensee shall distribute for sale and sell each Licensed Product only in
the authorized Distribution Channels. Prior to distribution of any
Licensed Product, Licensee shall submit to NFLP a list of its retail
accounts for the Licensed Products for the purpose of determining which
accounts fall within the Distribution Channels. NFLP shall determine,
in its sole discretion, whether such retail accounts fall within the
Distribution Channels and shall provide Licensee with a list of the
approved retail accounts. Licensee shall manufacture, distribute, sell
and maintain inventory of sufficient quantities of each Style of each
Licensed Product to meet the reasonable market demand in the Distribution
Channels. Licensee shall not sell Licensed Products to any third party
that Licensee knows or should reasonably know intends to sell the Licensed
Products outside of the authorized Distribution Channels. If Licensee
sells or distributes for sale other merchandise that does not bear the
Licensed Marks but is of the same grade and quality as the Licensed
Products, Licensee shall not discriminate in the granting of commissions
and discounts to salespersons, dealers and distributors for the sale of
the Licensed Products. If the Licensed Marks are Club Marks, Licensee
acknowledges that it shall manufacture, distribute and sell a commercially
significant quantity of Units bearing the trademarks of each Member Club
individually in each Style. Licensee shall have no right to distribute
the Licensed Products via computer on-line services unless expressly
indicated on the Term Sheet.
7. Authorized Brands
Licensee shall only use the Authorized Brands, if applicable, in
connection with the manufacture, distribution, sale, and advertising of
each Licensed Product. NFLP shall have the right, in its sole discretion,
to remove or change any of the Authorized Brands, if applicable, during
the Term. Licensee must receive the prior written approval of NFLP to
use any other trademarks on the Licensed Products.
8. NFLP's Purchase of Licensed Products
In addition to the Promotional Products provided at no cost by Licensee,
NFLP, the NFL and its Member Clubs shall have the right to purchase any of
the Licensed Products in any quantity at the minimum wholesale price,
excluding Royalty payments, that Licensee charges to its best customer,
provided that NFLP will not require Licensee to pay a Royalty on such
sales.
9. Third Party Relationships
a. Licensee shall not assign, sublicense, transfer or otherwise encumber any
of its rights under this License to any Affiliate or other third party
without NFLP's prior written consent. If Licensee assigns, sublicenses,
transfers or encumbers any portion of this License without such consent,
NFLP shall have the right to terminate this License immediately. Among
other things, NFLP will consider the License assigned and subject to the
requirements of this subparagraph if: (i) the beneficial ownership or
control of (50%) percent (50%) or more of Licensee's capital stock is
transferred or otherwise conveyed; (ii) Licensee becomes part of any
merger or consolidation; or (iii) the sale or transfer of all or
substantially all of Licensee's assets occurs.
b. Licensee must receive NFLP's prior written consent to use a domestic or
foreign third party distributor of any Licensed Product ("Third Party
Distributor") or domestic or foreign third party manufacturer of any
Licensed Product or any portion of any Licensed Product, including
patches, labels and emblems made by any party that is not already a
licensee of NFLP ("Third Party Manufacturer"). NFLP shall have the right
to approve or disapprove any Third Party Distributor or Third Party
Manufacturer in its sole discretion. In the case of a Third Party
Manufacturer, NFLP's approval of such Third Party Manufacturer, if
granted, will be contingent on the execution of an agreement between NFLP
and the approved Third Party Manufacturer. Notwithstanding such
agreement, Licensee shall at all times remain primarily obligated to NFLP
under this License and shall take all necessary efforts to ensure
that such Third Party Manufacturer uses the Licensed Marks only to
manufacture the designated Licensed Product and for no other purpose
including, without limitation, promoting or selling the Licensed Product.
If such Third Party Manufacturer has made an unauthorized use of the
Licensed Marks, Licensee shall fully cooperate with NFLP to ensure
that such unauthorized use ceases promptly. Licensee shall be primarily
obligated to ensure that each Licensed Product produced by such Third Party
Manufacturer complies with the requirements of Paragraph 4 of this License.
c. Licensee represents and warrants that it shall manufacture and cause all
Third Party Manufacturers to manufacture the Licensed Products in
accordance with all applicable laws, rules and regulations of the United
States Department of Labor and state Departments of Labor, including,
without limitation, the federal Fair Labor Standards Act. Licensee shall
ensure that it will not distribute or cause the distribution of Licensed
Products that Licensee knows or should reasonably know were manufactured
in violation of any federal or state labor law, rule or regulation. Upon
a determination by the United States Department of Labor or any state
Department of Labor that the Licensed Products have been manufactured
in violation of any federal or state labor law, rule or regulation,
Licensee shall take all necessary steps to correct such violation
including, without limitation, paying all applicable back wages found due
to workers who manufactured the Licensed Products or any portion of them.
d. Licensee shall not make any payments to any Member Club or to any
shareholder, officer, director, employee, agent or representative of any
Member Club, or to any employee, agent or representative of the NFL or
its affiliates in such person's individual capacity, in connection with
the use of any Licensed Marks under this License or otherwise as a direct
result of sales of any Licensed Product. Licensee shall disclose to NFLP
all existing agreements or agreements being negotiated by Licensee or its
agent between Licensee and any Member Club or any shareholder, officer,
director, employee, agent or representative of any Member Club, or any
employee, agent or representative of the NFL or any of its affiliates in
such person's individual capacity.
e. In the event that NFLP consents to any third party relationship under this
Paragraph 9 or otherwise under this License, Licensee acknowledges that
such approval will be contingent on the execution of an appropriate form
or agreement supplied by NFLP.
10. Computer Artwork and Photographs
a. Subject to the requirements of Paragraph 4, if Licensee wishes to use
computer artwork incorporating graphic depictions of the Licensed Marks
("Computer Art") or photographs owned and/or controlled by NFLP
("Photographs"), Licensee shall request such Computer Art or Photographs
in a Use Application provided to Licensee by NFLP. If NFLP, in its sole
discretion, approves such application, NFLP shall provide Licensee with
Computer Art or Photographs at a rate established by NFLP in its sole
discretion provided that, in the case of Photographs, Licensee must first
sign NFLP's standard Photo Use Agreement. Licensee shall make any payment
for the Computer Art or Photographs within thirty (30) days of receiving
an invoice from NFLP. Licensee shall only use the Computer Art or
Photographs in accordance with the terms and conditions of this License
including, without limitation, Paragraph 11, and, in the case of
Photographs, the Photo Use Agreement. The terms of the executed Photo
Use Agreement will govern in the event of any conflict between the terms
of this License and the terms of the Photo Use Agreement.
b. Licensee shall not make copies of the Computer Art or Photographs without
the express written approval of NFLP and shall not use the Computer Art
or Photographs for any purpose other than the purpose set forth in
Licensee's Use Application. Licensee shall not provide the Computer Art
or Photographs to any other party including a manufacturer, unless NFLP
approves such party in accordance with Paragraph 9 of this License.
Licensee shall take all steps necessary to prevent the unauthorized copying
or use of the Computer Art or Photographs by third parties.
c. Upon the expiration or termination of this License, Licensee shall
immediately deliver to NFLP all Computer Art and Photographs provided
by NFLP and all copies and duplications of such Computer Art or
Photographs and all related materials.
d. Licensee acknowledges that it has no right, title or interest in or to
any of the Photographs, including, without limitation, copyrights in the
Photographs. Licensee represents that it will not assert any rights in
or to the Photographs during the Term or thereafter.
11. Protection of Rights
a. Licensee acknowledges that, as between NFLP and Licensee, NFLP exclusively
owns the NFL Marks and all copyrights, trademarks and other proprietary
rights in and to them. Licensee further acknowledges that NFLP shall own
worldwide in perpetuity: (i) all artwork produced under this License
bearing the NFL Marks ("Artwork") and all copyrights and other
proprietary rights in such Artwork; (ii) all secondary marks and/or
promotional concepts ("Secondary Marks") developed for use and used in
connection with any Licensed Product and all copyrights and other
proprietary rights in such Secondary Marks; (iii) all derivative works
based on any of the NFL Marks, Secondary Marks, Computer Art, or Artwork
("Derivative Works") and all copyrights and other proprietary rights in
such Derivative Works; and (iv) all Computer Art and all copyrights and
other proprietary rights in such Computer Art as well as duplicates and
copies of it. Licensee's use of the Licensed Marks, Computer Art,
Artwork, Secondary Marks and Derivative Works is for NFLP's benefit and
Licensee will not acquire any rights in any of them by such use.
Licensee acknowledges that NFLP will have the right to terminate this
License if Licensee asserts any rights in or to any of the NFL Marks,
Computer Art, Artwork, Secondary Marks and Derivative Works other than
those granted under this License. Licensee shall not attack the
trademarks, copyrights or other proprietary rights of NFLP, the NFL, or
its Member Clubs during the Term or thereafter.
b. Any Artwork, Computer Art, Secondary Marks, Derivative Works or other
materials created by Licensee or its agents in connection with this
Agreement shall be performed as a "work made for hire" for NFLP.
Licensee irrevocably assigns and transfers to NFLP all right, title and
interest, including all copyrights and extensions and renewals thereof,
in and to the Artwork, the Secondary Marks, the Derivative Works,
the Computer Art, and all related proprietary rights (collectively the
"Proprietary Materials"). At the request of NFLP, Licensee shall execute
all documents confirming NFLP's rights in and to the NFL Marks and
Proprietary Materials including an assignment of copyright in form and
substance satisfactory to NFLP. Licensee shall cause each third party who
makes or contributes to the creation of the Proprietary Materials to agree
that all rights, including the copyrights, in his or her work shall be
owned by NFLP whether as a "work made for hire" or by assignment, as
appropriate.
c. Licensee shall only display or use the Licensed Marks in the form and
manner that NFLP has specifically approved in writing. Licensee shall
cause to be irremovably and legibly printed or affixed in a clearly
visible location approved by NFLP on every Unit of each Licensed Product,
and all Related Materials, Proprietary Materials, and Promotional Materials
the following:
(i) Trademark Notices as directed and specified by NFLP, including a
legend indicating that the NFL Marks are trademarks of the NFL or
the Member Clubs, and are being used by Licensee under License
from NFLP;
(ii) Copyright Notices as directed and specified by NFLP;
(iii) The Marketing Program symbol;
(iv) Hangtags, inserts, holograms, and other identifying material
required by NFLP;
(v) A permanent label displaying Licensee's name and the Authorized
Brand;
(vi) Licensee's name, trade name and address; and
(vii) All other notices required by NFLP to protect the interests of NFLP,
the NFL, and its Member Clubs.
d. Licensee will not use any Trademark or Copyright Notices on the Licensed
Products, Related Materials, Proprietary Materials, and Promotional
Materials that conflict with, negate or cause confusion with any notices
required under this Paragraph 11. Licensee represents that, except for
the Authorized Brands, if applicable, or as otherwise authorized in
writing by NFLP, it will not associate other licensed properties, names,
symbols, or designs with the Licensed Marks on any of the Licensed
Products, Related Materials, Promotional Materials, and Proprietary
Materials. Licensee will not use the Licensed Marks or NFL Marks on any
business sign, business card, invoice, sales sheet, brochure, catalog, or
other form, or as part of the name of Licensee's business except as
authorized by NFLP in writing prior to such usage.
e. NFLP shall have the right to secure trademark and/or copyright
registrations for the NFL Marks. Upon request by NFLP, in addition to
any other quantity of Licensed Products that Licensee must submit to
NFLP under this License, Licensee shall deliver to NFLP, free of cost,
twelve (12) Units of each Licensed Product with their Related Materials
for such registration purposes provided that Licensee shall not owe any
Royalty for such Units. Licensee shall provide NFLP with the date of
first use of each Licensed Product in interstate and intrastate commerce.
NFLP shall have the right to secure trademark and/or copyright
registrations in NFLP's name for any Proprietary Materials created by
Licensee or its agents for use in connection with any Licensed Product.
By execution of this License, Licensee appoints NFLP as Licensee's
attorney-in-fact coupled with an irrevocable interest to execute,
acknowledge, deliver and record all registrations and all documents
referred to in this Paragraph 11.
f. Licensee shall assist NFLP, at NFLP's expense, in the procurement,
protection, and maintenance of NFLP's rights in and to the NFL Marks and
the Proprietary Materials. NFLP may, in its sole discretion, commence or
prosecute and control the disposition of any claims or suits relative to
the imitation, infringement and/or unauthorized use of the NFL Marks or
the Proprietary Materials either in its own name, or in the name of
Licensee, or join Licensee as a party in the prosecution of such claims
or suits. Licensee shall cooperate fully with and provide full assistance
to NFLP in connection with any such claims or suits. Licensee shall
promptly notify NFLP in writing of any infringement, imitations, or
unauthorized use of the NFL Marks or Proprietary Materials by others.
NFLP shall, in its sole discretion, determine whether to take action and
the type of action, if any, to take against such infringement.
Licensee shall not institute any suit or take any action on account of
such infringements, imitations or unauthorized uses unless it receives
NFLP's prior written consent. NFLP will receive the full amount of any
settlement made or damages awarded in connection with any action taken
against such infringement.
12. Indemnification and Insurance
a. During the Term and thereafter, Licensee shall be solely responsible for,
defend, indemnify and hold harmless NFLP, the NFL, its Member Clubs, and
each of their respective affiliates, shareholders, officers, directors,
agents and employees for, from and against any claims, demands, causes of
action, damages, costs and expenses, including reasonable attorneys' fees,
judgments, and settlements arising out of or in connection with: (i)
Licensee's breach of any of its representations, warranties, covenants or
obligations contained in this License; (ii) Licensee's use of the Licensed
Marks except as provided in subparagraph (c) below; (iii) Licensee's
noncompliance with any applicable federal, state, or local laws or
regulations; or (iv) the manufacture, distribution, sale, advertising or
use of any Licensed Product.
b. Licensee shall obtain and maintain at its own expense from a licensed
and admitted insurance carrier with a rating not less than A from Best,
a product liability insurance policy that will provide coverage of three
million dollars ($3,000,000) for personal injuries arising out of each
occurrence and one million dollars ($1,000,000) for property damage
arising out of each occurrence and an advertising liability insurance
policy that will provide coverage of three million dollars ($3,000,000)
for each occurrence. Licensee shall ensure that such policies: (i) will
list the NFL, its Member Clubs, NFLP, and each of their respective
affiliates, shareholders, officers, directors, agents, and employees as
additional insureds; and will each provide that they can not be canceled
without at least thirty (30) days written notice to NFLP. Simultaneously
with the execution of this License, Licensee shall submit to NFLP the
fully paid policies or certificates of insurance. Compliance with this
subparagraph (b) will not relieve Licensee of its other obligations under
this Paragraph 12. The insurance coverage required under this License
is not cumulative and will not extend to any other License or Agreement
between Licensee and NFLP unless otherwise authorized by NFLP in writing.
c. During the Term and thereafter, NFLP shall indemnify and hold harmless
Licensee, its officers, directors, agents and employees for, from and
against any claims, demands, causes of action, damages, and reasonable
attorneys' fees for trademark infringement arising out of the use of the
Licensed Marks as strictly authorized under this License, provided that
NFLP is given immediate notice of and shall have the option to undertake
and conduct the defense of any such claim, demand or cause of action and
further provided that Licensee shall cooperate in the defense of such
claim as reasonably required by NFLP.
13. Financial Information
a. Upon request by NFLP, Licensee shall furnish NFLP within sixty (60) days
of such request a detailed statement by an independent certified public
accountant showing the number and description of the Licensed Products
sold during the Term including an itemization of each Licensed Product by
number of Units sold, Member Club, if applicable, the gross sales price,
itemized deductions from the gross sales price, any returns made, and
the resulting Net Sales on which Licensee calculated the Royalty amount.
b. Within ninety (90) days after the last day of Licensee's fiscal year,
Licensee shall provide NFLP with all pertinent information pertaining to
Licensee's financial condition involving ownership, credit, financial
and other information about Licensee's business including, without
limitation, fiscal year-end financial statements and operating statements
certified by Licensee's chief financial officer as accurate and complete
and as constituting a fair presentation of Licensee's financial condition.
Licensee shall provide NFLP with full and free access to inspect and copy
all business records pertaining to Licensee's financial condition.
c. On or before the 15th day of each month, Licensee shall provide NFLP with
Licensee's Fiscal Year projections for sales and income for its overall
business, including the Licensed Products. Upon request by NFLP,
Licensee shall provide NFLP with a list ranking its sales by retailer
and/or Third Party Distributors for its top twenty-five (25) retail
accounts or by retail accounts comprising seventy-five percent (75%) of
its Net Sales, whichever is greater, and itemizing for each such retailer
and/or Third Party Distributors a description and the number of Units of
each Licensed Product sold.
d. Licensee shall notify NFLP in writing of any adverse material change in
Licensee's financial condition that will likely affect its performance
under this License at the time such material change occurs.
14. Audits and Inspections
a. During the Term and for at least three (3) full Fiscal Years after the
expiration or termination of the License, Licensee shall keep, maintain
and preserve complete and accurate books of account and records covering
all transactions relating to this License, including, without limitation,
invoices, correspondence, inventory accounting, banking and financial
records ("Records"). Licensee shall designate a symbol or number that
will be used exclusively on Records relating to the Licensed Products
and with no other articles that Licensee manufactures, distributes or
sells. Licensee shall ensure that all invoices for the sale of Licensed
Products to its retailers and/or Third Party Distributors will include
the quantity and description of each Licensed Product itemized by
Marketing Program, Style and Member Club, if applicable.
b. During the Term and for at least three (3) full Fiscal Years after the
expiration or termination of the License, NFLP and its duly authorized
representatives will have the right during reasonable business hours to
inspect and audit all Records and conduct a physical examination of
Licensee's premises including its warehouses and manufacturing facilities
and those of Third Party Distributors and Third Party Manufacturers.'
NFLP shall provide Licensee with no less than five (5) business days
written notice prior to such inspection, audit or examination; provided
however, if compelling circumstances exist, as determined by NFLP in the
exercise of its reasonable business judgment, NFLP may conduct an
immediate inspection, audit or examination with no prior notice to
Licensee. Licensee represents that it will fully cooperate with the
inspection, audit or examination and will not cause or permit any
interference with NFLP or its representatives during any inspection,
audit or examination. During an inspection, audit or examination,
NFLP shall have the right to make copies or extracts of Licensee's
Records.
c. Licensee shall pay NFLP for the cost of any audit that discloses a
payment deficiency of more than two percent (2%) between the amount
due to NFLP pursuant to the audit and the amount Licensee actually
paid or reported to NFLP. Licensee shall pay NFLP any deficiency amount
together with interest on the deficiency amount pursuant to the
provisions in Paragraph 3d of this License. Licensee shall pay such
amounts within ten (10) days of invoicing by NFLP.
15. Termination
Without prejudice to any other rights it may have in law, equity or
otherwise, NFLP shall have the right to immediately terminate this
License upon written notice to Licensee at any time if:
a. Licensee fails to generate Net Sales during any Fiscal Year satisfying
the corresponding Minimum Royalty Guarantee;
b. Licensee fails to deliver to NFLP or to maintain in full force and
effect the insurance coverage referred to in Paragraph 12b of this
License;
c. Licensee fails to make available its premises, Records or other business
information to NFLP or its representatives or fails to provide full and
complete information as required in Paragraphs 13 and 14 of this License;
d. Licensee manufactures, sells, distributes, advertises or uses any Style
of any Licensed Product, or any Promotional Materials, or Proprietary
Materials without the prior written approval of NFLP as required in
this License, or after such written approval has been withdrawn by NFLP
or has expired;
e. Licensee distributes or sells any Licensed Product outside the Territory
or sells any Licensed Product to a third party that Licensee knows or
should reasonably know intends to sell such Licensed Product outside
the Territory;
f. Licensee distributes any Licensed Product outside the corresponding
Distribution Channels, or sells any Licensed Product to any third party
that Licensee knows or should reasonably know intends to sell such
Licensed Product outside the corresponding Distribution Channels;
g. Licensee fails to obtain NFLP's written approval prior to assigning,
sublicensing, transferring, or otherwise encumbering the License or
prior to using a Third Party Manufacturer or Third Party Distributor,
or any approved Third Party Manufacturer or Third Party Distributor
engages in conduct that would entitle NFLP to terminate the License if
Licensee had engaged in such conduct;
h. Licensee fails to satisfy the distribution requirements in Paragraph 6
of this License or otherwise fails to make timely and complete delivery
of orders it has taken for any Licensed Product to seventy percent (70%)
or more of its retail accounts and/or Third Party Distributors that
collectively account for eighty percent (80%) of its Net Sales on one or
more occasion during any Fiscal Year;
i. Licensee makes a material misrepresentation or omission in its license
application form;
j. Licensee fails to make any payment or deliver any statement required
under this License and fails to correct such default within ten (10)
days of written notice of such default;
k. Licensee breaches any other agreement in effect between Licensee and
NFLP;
1. Licensee makes or agrees to make a payment to any Member Club or any
shareholder, officer, director, employee, agent, or representative of
a Member Club, or to any agent, representative or employee of the NFL
or its affiliates in such person's individual capacity, in connection
with the use of any Licensed Marks under this License or otherwise as
a direct result of the sales of any Licensed Product, or Licensee fails
to disclose to NFLP any existing agreement or agreement being negotiated
by Licensee or Licensee's agent between Licensee and a Member Club or
any shareholder, officer, director, employee, agent, or representative
of a Member Club, or any agent, representative or employee of the NFL
or its affiliates in such person's individual capacity;
m. Licensee disparages NFLP, the NFL, any of its Member Clubs, or any of
their respective shareholders, officers, directors and employees as
determined by NFLP in its sole discretion, or otherwise engages in
conduct that NFLP deems detrimental to the NFL or any of its Member
Clubs or any shareholder, officer, director, employee, agent, or
representative of a Member Club;
n. Licensee fails, in any way, to comply with the requirements of
Paragraph 19; or
o. Licensee fails to comply with any other material term or condition of
this License.
16. Goodwill and Reputation
Licensee recognizes the great value of the goodwill associated with the
NFL Marks and acknowledges that such goodwill belongs to the Member
Clubs and the NFL, and that such NFL Marks have secondary meaning in
the minds of the public. The nature of the business of NFLP, the NFL,
and its Member Clubs, requires public respect for and trust in the
reputation and integrity of the NFL and its Member Clubs. NFLP may,
at its sole option, terminate this License or withdraw some or all
Product Approval Forms or Promotional Approval Forms by written notice
to Licensee if any unanticipated factor, development or event causes
NFLP's continued association with any one or more Licensed Product or
Licensee to adversely reflect upon NFLP, the NFL or its Member Clubs as
determined by NFLP in its sole discretion. In the event of such
termination, Licensee shall pay to NFLP the Royalty on all sales of the
Licensed Products made during the Termination Fiscal Year or the
Termination Guarantee as defined in Paragraph 3a, whichever is greater,
and all other amounts due to NFLP. Upon receipt of such payment, NFLP
will reimburse Licensee for its salvage expenses or, in the case of
unsalvageable Licensed Products, Licensee's manufacturing costs if NFLP
does not permit Licensee to distribute the remaining inventory of Licensed
Products.
17. Renewal Request
NFLP must receive a written request from Licensee by no later than the
Renewal Request Date if Licensee desires to renew the License. If
Licensee has complied with all terms and conditions of this License
during the Term and NFLP desires, in its sole discretion, to negotiate
a renewal License, NFLP shall negotiate with Licensee for the terms and
conditions of a renewal License for a period of no more than sixty (60)
days following NFLP's receipt of Licensee's renewal request notice.
This License automatically expires at the end of the Term if NFLP does
not receive Licensee's written request by the Renewal Request Date,
Licensee has failed to comply with all terms and conditions of this
License, NFLP elects not to negotiate a renewal License, or the parties
are unable to reach an agreement within said sixty-day negotiation period.
Licensee acknowledges that NFLP has no express or implied obligation to
renew the License. NFLP will have no liability to Licensee for any
expenses incurred by Licensee in anticipation of any renewal or extension
of this License.
18. Effect of Expiration or Termination of the License
a. Sixty (60) days before the expiration of this License, Licensee will
furnish to NFLP a statement showing the number of Units and description
of such Units for each Style of each Licensed Product, Promotional
Materials, and Proprietary Materials on hand or in process in Licensee's
inventory. If this License is terminated by NFLP, Licensee shall furnish
such statement within ten (10) days after notice of termination is given
by NFLP.
b. After expiration or termination of this License for whatever reason, all
rights granted under this Licensee will revert to NFLP and Licensee shall
refrain from further use of, simulation of or reference to any and all of
the NFL Marks except as provided in this paragraph. Except for termination
of this License by NFLP, Licensee will have ninety (90) days to dispose of
the Licensed Products ("Sell-Off Period") that are on hand or in process
at the time of such expiration, provided all statements and payments then
due to NFLP are first made and such Sell-Off occurs at Licensee's regular
selling price and within the Distribution Channels. During the Sell-Off
Period, Licensee shall submit all payments and statements required under
this License in accordance with the terms and conditions of the License.
c. If Licensee has remaining inventory of the Licensed Products upon the
termination of this License or after the Sell-Off Period, if applicable,
NFLP may, at its option: (i) purchase such inventory at Licensee's cost;
(ii) require Licensee to deliver such inventory to NFLP for destruction
at Licensee's expense; or (iii) require Licensee to destroy such inventory
at Licensee's expense and furnish NFLP with an affidavit signed by an
officer of Licensee attesting to such destruction. NFLP will have the
right at any time before expiration or termination of this License and
during the Sell-Off Period to conduct a physical inventory to, among other
things, verify the quantity and Style of the Licensed Products in
Licensee's inventory. If Licensee refuses to permit such physical
examination of the inventory or fails to provide NFLP with the statement
required in subparagraph a above, Licensee will forfeit its right to any
Sell-Off Period.
d. Upon the termination of this License or immediately after the Sell-Off
Period, Licensee shall deliver to NFLP all Proprietary Materials and all
related materials, including software, created or used by Licensee in
connection with this License and shall, at NFLP's option, destroy or sell
to NFLP at Licensee's cost, any molds, plates and other items used to
reproduce the Licensed Marks.
19. On-Field Product Exposure
Licensee acknowledges that in furtherance of the NFL's policy of control
of game operations, NFLP shall approve any and all visible items worn or
used on-field, including the sidelines, during all pre-season, regular
season and post-season NFL games. Except as otherwise authorized in
writing by NFLP or as otherwise provided in this License, Licensee shall
not during the Term or thereafter agree, contractually or otherwise,
with any Member Club, NFL player, coach, or other Member Club employee,
for any individual to wear, use or promote any commercially identified
product on-field, including the sidelines, during any NFL game.
20. Players and Coaches
Licensee acknowledges that this License does not grant Licensee any
rights with respect to the name, likeness, signature, or other
attributes of any player, coach, or other employee of the NFL. Licensee
shall be responsible for securing whatever rights may be required for
the use of such names, likeness, signatures, or other attributes.
Licensee represents that it will not exercise the rights granted in this
License in any manner that will imply that Licensee has obtained any
such rights without separate written authorization from the appropriate
player, coach, or employee.
21. NFL Films
Licensee understands and acknowledges that this License does not grant
Licensee any rights with respect to film or videotape footage of NFL game
action and that Licensee must obtain such footage directly from NFL Films,
Inc. ("NFL Films") on terms and conditions to be mutually agreed upon by
Licensee and NFL Films. If Licensee desires to use such footage in
connection with this License, NFLP must approve the proposed usage and
subject matter of such footage in writing prior to its usage.
22. Information Transmission
If NFLP obtains the capacity to receive computer transmissions of any or
all information required from Licensee under this License during the Term,
Licensee shall begin to provide such information by such computer
transmission as soon as practicably possible.
23. Notices
The parties to this License shall send all notices and statements
required under this License to the respective addresses of the parties
set forth above unless notification of a change of address is given in
writing. Licensee shall direct all notices to NFLP to the Vice President
of the Retail Licensing Department with a copy to the General Counsel of
NFLP. All notices required under this License must be in writing, must be
sent by registered or certified mail, facsimile, or a private overnight
delivery service generally accepted in the industry that provides evidence
of delivery, and shall be deemed to have been given at the time they are
sent.
24. Relationship of Parties
The parties to this License are not partners, joint venturers, or agents
and nothing in this License shall be construed to place them in any such
relationship. Neither party will have the power to obligate or bind the
other in any manner whatsoever. NFLP, the NFL, and its Member Clubs in
no way endorse, certify or guarantee the quality of the Licensed Products.
25. Governing Law and Disputes
This License and any dispute arising under it shall be governed by and
construed in accordance with the laws of the State of New York without
regard to conflict of law principles. All disputes pertaining to this
License shall be decided by a state or federal court located in the City
of New York and Licensee consents to personal jurisdiction in such courts.
26. Waiver
Neither party to this License can waive or modify any provision of this
License unless such waiver or modification is in a writing signed by both
parties. Licensee acknowledges that NFLP's prior forbearance of any
requirement of this License will not prevent NFLP from subsequently
requiring full and complete compliance with such requirement or from
exercising its rights under this License.
27. Confidentiality
The parties to this License acknowledge that the terms of this License
are confidential and each warrant that neither shall disclose such terms
to any third party other than the disclosing party's accountants, agents
or attorneys or as required by law, without the other party's prior
written consent.
28. Severability
If any paragraph or clause of this License is illegal or invalid or void
for any reason, the remaining paragraphs and clauses of the License will
remain in full force and effect.
29. Release
In consideration of the rights granted under this License, Licensee
releases NFLP, the NFL, its Member Clubs and each of their respective
affiliates, shareholders, officers, directors, agents and employees from
any claims, demands, losses, expenses or damages, whether known or unknown,
arising out of or in connection with or in any manner related to the
manufacture, distribution or sale of products bearing the Licensed Marks.
30. Entire Agreement
This License constitutes the entire agreement and understanding between
the parties to this License with respect to the subject matter of this
License and cancels, terminates, and supersedes any prior or
contemporaneous agreement or understanding, whether oral or written,
on this subject between Licensee and the NFL, its affiliates or Member
Clubs, or NFLP. The headings in this License are for reference purposes
only and have no legal effect.
31. Execution
Licensee will make an offer to enter into this License by having a duly
authorized officer or representative sign below and return the License
with a check payable to NFLP for the Advance Royalty Payment required for
Fiscal Year 1. An acceptance of the offer will occur and a binding
agreement will exist only after an authorized officer or duly authorized
representative of NFLP signs this License and delivers a fully-executed
copy to Licensee. Licensee acknowledges that this License will be deemed
to have been executed in New York City.
Licensee: Fotoball USA, Inc.
-------------------=----------------
By: /s/Michael Favish Date: 9/13/96
------------------------------------ -------------
(Signature of officer, partner or
individual duly authorized to sign)
Title: President and Chief Exective Officer
------------------------------------
NATIONAL FOOTBALL LEAGUE PROPERTIES, INC.
By: /s/Jim Connelly Date: 10/4/96
------------------------------------ -------------
(Signature of officer, partner or
individual duly authorized to sign)
Title: Vice President
------------------------------------
<PAGE>
EXHIBIT I
DISTRIBUTION CHANNELS
The following definitions shall apply to this License:
1. Department Store: A retail store that operates several departments
carrying higher-priced brands of apparel and non-apparel. Examples
include, without limitation, Macy's, Dillards, Nordstrom, Woodward
and Lothrop, JC Penney, Boscov's, Sears, May Co., Federated Group,
Carson Pirie Scoft, Dayton Hudson, Bon Ton, Belks, Strawbridge &
Clothier, Jacobson and Bloomingdales.
2. Direct Retailer: An organization that markets products directly to
consumers without using retail space through the mediums of television
or catalog.
3. Discount Store: A retail store that operates several departments
carrying lower-priced brands of apparel and non-apparel with limited
service. Examples include, without limitation, Wal-Mart, Kmart,
Bradlees, Roses, Hills. Caldor, Venture, Target, Shopko, and Ames.
4. Distributors: Defined as Third Party Distributors in Paragraph 9b of
the License.
5. Drug Store: A retail store that carries as its primary retail items
pharmaceuticals, health and beauty aids, and convenience items.
Examples include, without limitation, OSCO, Walgreen, and Eckert.
6. Fan Shop: A retail store that carries as its primary retail item
licensed products of the NFL, National Basketball Association,
National Hockey League, Major League Baseball, and the National
Collegiate Athletic Association. Examples include, without limitation,
Pro Image, Team Spirit and Stadium Stuff.
7. Footwear Specialty Store: A retail store that carries as its primary
retail item athletic footwear and also carries, in limited quantities,
licensed apparel and headwear. Examples include, without limitation,
Foot Locker, Foot Action, and Athletes Foot.
8. Grocery Store: A retail store that carries as its primary retail items
food and household products. Examples include, without limitation,
A & P, Shop Rite, Vons, Jewel, and Food Town.
9. Sporting Goods Store: A retail store that carries as its primary retail
items licensed apparel, athletic footwear and sporting goods equipment.
Examples include, without limitation, Champ's, Herman's, Koenig's, The
Sports Authority, Sportmart, Gart Brothers, and Modells.
AGREEMENT
THIS AGREEMENT (this "Agreement"), effective as of June 17, 1996,
between CHEVRON U.S.A. INC. ("Chevron") and FOTOBALL USA, INC.
("Fotoball");
WHEREAS, Chevron holds all copyright and other rights in certain car
characters created by Aardman Studios (the "Characters") and associated names
for the Characters created by Chevron; and
WHEREAS, Fotoball has produced for Chevron a toy car Prototype (defined below)
based on the Freddy 4-Wheeler Character; and
WHEREAS, Chevron intends to use the Freddy 4-Wheeler Character as the basis
of an in-station promotion whereby participating Chevron branded retail
outlets will sell toy cars identical in all material respects to the Prototype
(the "Cars") from approximately December 1, 1996 to approximately
January 15, 1997 (the "Promotion");
NOW, THEREFORE, the parties hereto agree as follows:
1. FUNDAMENTAL OBLIGATIONS
During the term of this Agreement and in accordance with the terms and
conditions set forth herein:
(i) Fotoball (either directly or through its subcontractors) shall design,
manufacture and package the Cars, sell and deliver the Cars to Chevron and
its dealers and jobbers and provide information to Chevron dealers and
jobbers in connection with the Promotion; and (ii) Chevron shall purchase
a minimum of 500,000 Cars.
2. DESIGN AND MANUFACTURE OF THE CARS
(a) Fotoball is responsible for all aspects of the design and production of
the Cars. All versions of the Cars shall conform to the specifications
attached hereto as Exhibit A (the "Specifications"). Fotoball has already
designed and produced one prototype Car based on the Freddy 4-Wheeler Sport
Utility Vehicle Character (the "Prototype"). Chevron approved the Prototype
on June 17, 1996. Fotoball has begun the production of the production molds
to be used in connection with the Cars, other than the Prototype and Sample
Car, based on such approval.
(b) Fotoball delivered to Chevron by July 22, 1996 two hundred (200)
hand made Cars to be used as sales samples of the Freddy 4-Wheeler Sport
Utility Vehicle ("F4W") (the "Sample Car"). Fotoball warrants that it used
commercially reasonable efforts to make the Sample Car identical to the
approved Prototype in all material respects and to meet the applicable
Specifications, except that the doors do not open and the eye mechanisms
do not operate. Chevron acknowledges that Fotoball manufactured the Sample
Car by hand and that such Samples will have a limited life and unpredictable
quality. Chevron has inspected the Sample Cars and has confirmed in writing
any deviations from the Prototype or other material problems that Fotoball
will be expected to avoid in producing the production Cars.
(c) Fotoball shall deliver to Chevron production samples (manufactured
using the production molds) of the F4W, without final packaging, on or before
October 7, 1996. Fotoball shall ensure that the production samples are
identical to the approved Prototype in all material respects, meet the
applicable Specifications and avoid any problems with the Sample Cars
identified by Chevron. Chevron shall inspect the production samples and
notify Fotoball in writing within five (5) business days of their delivery
that the production samples are either approved or contain deviations or
problems that need to be fixed. Fotoball shall propose in writing various
options to resolve any such deviations or problems identified by Chevron
within three (3) days. Such options shall include a description of any
impact or changes in the Schedule. Chevron shall consider such options and
instruct Fotoball in writing within three (3) business days as to how it
should proceed. Fotoball shall bear the actual cost of fixing any material
deviations from the Prototypes and Specifications and maintaining the
schedule set forth as Exhibit B (the "Schedule").
(d) Subject to Section 5, Fotoball shall manufacture the Cars and ship
them to the United States in accordance with the Schedule. Fotoball shall
manufacture at least 101.5% of the Initial Order (defined below) to provide
sufficient inventory for replacing defective and damaged inventory. Such
inventory will not be available for reorders or purchases unless agreed to
by Fotoball at the end of the Promotion.
3. DESIGN AND MANUFACTURE AND DELIVERY OF THE PACKAGING
(a) Fotoball shall be responsible for all aspects of the manufacture of the
Cars packaging and inserts (owner's manual and business reply card). Fotoball
has submitted design options to Chevron for the packaging and inserts and
Chevron has approved one of these options. Chevron has made available to
Fotoball the "illustrator of record" ("Illustrator") who shall be art-directed
by Fotoball regarding illustration services for the packaging and inserts.
Responsibility for the legal aspects of the design of the Cars' packaging
shall be shared as follows: Fotoball shall be responsible for compliance with
all applicable laws and regulations specifically relating to the packaging of
toys, and all applicable laws and regulations relating to imported products;
Chevron shall be responsible for compliance with all applicable laws and
regulations relating to the depiction and use of all trademarks, trade names
or trade dress.
(b) Chevron shall provide Fotoball with camera ready artwork and the paper
specifications needed to comply with U.S. Postal Service requirements for the
business reply cards by August 23, 1996.
(c) Chevron shall pay the Illustrator directly as well as reimburse
Fotoball for the actual, reasonable cost (on a time and materials basis) for
creative design, match prints and final film (the cost of which, as had been
agreed, will not exceed $30,000.00). Fotoball shall be responsible for all
printing costs of the packaging and inserts, including packaging and an owner's
manual for each Car ordered and one million 3-1/2" x 6" four color/one color
business reply cards.
(d) Fotoball shall submit match prints of the packaging and inserts on or
before September 2, 1996. Chevron shall inspect such match prints and notify
Fotoball in writing within five (5) business days of its receipt that the
match prints are either approved or contain deviations or problems that need
to be fixed. Fotoball shall propose in writing various options to resolve any
such deviations or problems identified by Chevron within three (3) business
days. Such options shall include a description of any impact or changes to
the Schedule. Chevron shall consider such options and instruct Fotoball in
writing within three (3) business days as to how it should proceed. Fotoball
shall bear the actual cost of fixing any material deviations or problems and
maintaining the Schedule.
(e) Fotoball shall deliver to Chevron press proofs of the packaging, and
inserts on or before September 30, 1996. The press proofs shall comply with
all applicable laws and regulations, conform to any applicable specifications
provided by Chevron and contain all mutually agreeable changes recommended by
Fotoball. Chevron shall provide written approval or disapproval of the
packaging press proofs within five (5) business days of its receipt of such
press proofs. Fotoball shall propose in writing various options to resolve
any such deviations or problems identified by Chevron within three (3)
business days. Such options shall include a description of any impact or
changes to the Schedule. Chevron shall consider such options and instruct
Fotoball in writing within three (3) business days as to how it should
proceed. Fotoball shall bear the actual cost of fixing any material
deviations or problems and maintaining the Schedule. The press proofs may
be retained by Chevron.
(f) Fotoball shall manufacture the packaging and inserts so that it is
identical in all material respects to the approved press proofs. Fotoball
shall not manufacture or produce any material that departs from Chevron
- -approved press proofs in any respect without Chevron's prior written consent.
4. ORDER AND DELIVERY OF CARS
(a) The "Initial Order" shall mean the compilation of all orders for Cars
from Chevron and its dealers and jobbers (including Chevron's order for
inventory to fill reorders) which are received by Fotoball on or before
September 16, 1996.
(b) Chevron will solicit the Initial Order for Cars from each participating
retail outlet and send Fotoball written notification of the Initial Order by
September 16, 1996. Each order shall set forth the number of Cars ordered and
the address to which such Cars are to be shipped.
(c) Fotoball shall ship the Initial Order as set forth in Exhibit B and
shall provide inventory management services for the Cars in the Initial Order
to be delivered to Alaska.
(d) Fotoball shall take all reorders directly from participating retail
outlets. Such reorders shall be filled using the inventory purchased by
Chevron in the Initial Order for such purpose. In addition, Fotoball shall
act as the initial point of contact to answer calls from Chevron dealers and
jobbers regarding the Promotion. During the Promotion, Fotoball shall maintain
a toll-free hotline operated from 6:30 a.m. to 3:30 p.m. Pacific time, Monday
through Friday (with the exception of legal holidays), for such purposes, and
Chevron shall provide Fotoball with a guidebook to assist Fotoball in
answering any such calls. Fotoball shall ship all reorders via the method
requested by the retail outlet within 24 hours of receipt. Fotoball shall
forward to the appropriate person at Chevron any call it cannot answer itself.
The operational period of the hotline may be modified as mutually agreed by
Chevron and Fotoball.
(e) Chevron may order additional Cars in excess of the Initial Order
during the Promotion or at anytime prior to December 31, 1997. Such additional
cars shall be delivered and paid for on the dates determined by mutual
agreement between the parties.
(f) All shipments of the Cars will be delivered by Fotoball directly to the
location specified in each order. Each Car shipped by Fotoball shall be
properly packaged for retail sale in 40 Car containers.
5. DELAYS
Subject to the next succeeding sentence, Fotoball shall adhere to (and
bear all costs required to maintain) the Schedule and the other dates set
forth herein; provided that where Chevron's approval or instruction or
delivery of materials is required herein, Fotoball may not proceed without
Chevron's written approval or instruction or such materials. Fotoball shall
be entitled to (i) a day-for-day extension for any delay caused by Chevron
in failing to provide timely approval or instruction or materials, plus
(ii) the actual increase in costs, if any, which it suffers; provided that
Fotoball seeks such approval or instruction or materials via facsimile from
Chevron prior to and after the allotted time for such approval or instruction
expires. Fotoball shall promptly notify Chevron in the event it has reason
to suspect that any portion of the Schedule may be delayed.
6. EXCLUSIVITY AND RESTRICTIONS
(a) Chevron shall not purchase for the Promotion toy cars similar to the
Prototypes from anyone other than Fotoball. Chevron retains the right to
purchase from others: (i) promotional items (other than plastic toy cars for
the Promotion), such as key chains, pins, inflatable cars, stuffed cars, etc.
during and after the Promotion and (ii) plastic toy cars (whether based on
F4W or other Characters) for use after the Promotion.
(b) No right or license is granted to Fotoball except as expressly stated
herein. Without limiting the generality of the foregoing, Fotoball shall not
use or distribute materials containing the Characters or Chevron's logo unless
agreed to in writing by Chevron.
7. PAYMENTS
(a) The price Chevron will pay for the Cars ordered and delivered shall be
determined by the following formula:
Price =$3.23 per Car, plus
$0.99 per Car (for air shipping from Hong Kong to the U.S.),
plus
$900,000 (to cover fixed costs), plus
additional charges for Alaska and Hawaii pursuant to Section 7(b), plus
additional charges for creative services pursuant to Section 3(c).
With respect to orders made after the Promotion, the foregoing amount is
subject to adjustment for any change in the actual cost of materials and/or
shipping, unless a lower price is agreed to between the parties. All costs,
including the cost of the molds, Sample Cars, Prototypes, packaging and
services is incorporated into the foregoing price formula, except for Chevron
caused delay costs as provided in Section 5 and certain post-Promotion storage
costs as provided in Section 13(c).
(b) Chevron shall pay to Fotoball i) $0. 10 per Car for all Cars in the
Initial Order delivered to Alaska for the additional cost of inventory
management of such Cars and ii) the difference between published UPS air
shipping rates (at the time of actual shipping) and the predetermined ground
shipping allowance for reorders of Cars delivered to Alaska and Hawaii.
(c) Chevron shall pay to Fotoball three hundred thousand dollars ($300,000)
upon execution of this Agreement. Fotoball shall invoice Chevron for creative
services identified in Section 3(c) upon completion of such creative services.
Subject to Fotoball's performance as indicated on Exhibit B, Fotoball shall
invoice Chevron for the remaining balance on December 6, 1996. Fotoball
shall invoice Chevron for the incremental increase in cost due to expedited
shipping of reorders, if expedited shipping is requested and for additional
charges incurred pursuant to Section 7(b) (associated with delivery to Alaska
and Hawaii) on or about February 1, 1997 and March 1, 1997. Fotoball shall
invoice Chevron for the amount of Chevron's delay costs incurred in accordance
with Section 5 hereof and the increased costs caused by Chevron's changes
determined in accordance with Section 2(c) upon submission of receipts and
other acceptable proof of such costs. Chevron shall pay all undisputed amounts
set forth in such invoices within thirty (30) days of the date of receipt.
Chevron shall be responsible for and pay directly to Aardman Studios any fees
or royalties due in connection with the license granted by Aardman Studios to
Chevron regarding the Characters used in the Promotion.
(d) The price of the Cars noted above includes full and complete
compensation for everything provided in connection with Fotoball's performance
hereunder. Such price is not subject to increase due to any: use tax, sales
tax, value added tax or any other applicable taxes; import/export duties or
levies; ground, air or sea freight or domestic or international shipping
charges; handling fees; warehousing or storage charges; insurance fees; costs
for the design, development, manufacture, transport, packaging and delivery
of the Cars (other than as provided in Section 7(b) above); costs for support
of the Promotion; costs associated with the development and production of the
models, tooling, samples or molds (other than as provided in Section 2(c));
charges for the cost of materials; costs for product safety testing, packaging
(other than as provided in Section 3(a)), shipping (including customs,
brokers and clearance fees) or other transportation to Chevron dealers (other
than as provided in Section 7(b) above); fees for insurance outlined herein,
reorder processing and program support (including access to an 800 operator)
or warehousing or shipping of additional Cars through the conclusion of the
Promotion and all warehousing of all Cars purchased until thirty (30) days
following the conclusion of the Promotion.
8. WARRANTY
Fotoball warrants that the Cars and packaging will be new and first class,
free from defects in materials and workmanship, fit for their intended purpose
and will conform to the Specifications (and applicable specifications,
respectively) and that the Cars will be identical in all material respects
with the Prototypes. Fotoball further warrants that the Cars and the Cars'
packaging will comply with all applicable industry and government safety
regulations and standards, including but not limited to the Consumer Product
Safety Act, the Hazardous Substance Act, the Child Protection and Safety Act
and the Toy Manufacturers of America Safety Standards (as contained in
ASTM F963-86). Prior to approval of production samples pursuant to Section
2(c), Fotoball shall furnish Chevron with certificates of approved independent
testing laboratories certifying that the Cars and Car packaging and inserts
comply with such regulations and standards. Fotoball warrants that defects
and deviations from the Prototypes or Specifications found in the production
sample Cars can be corrected within the time allotted in the Schedule, so
that such defects and deviations do not appear in the Cars ordered for the
Promotion. Fotoball warrants that all services shall be performed by
qualified, competent personnel in a courteous, timely and professional
manner.
9. TERM
The term of this Agreement will commence effective as of June 17, 1996
and expire December 31, 1997, unless sooner terminated hereunder or extended
by mutual agreement. Indemnity, warranty and other obligations intended to
survive termination shall survive expiration or termination.
10. TITLE AND RISK OF LOSS
Title to the Cars shall pass from Fotoball to Chevron upon receipt by
Chevron or its jobbers or dealers. Fotoball shall, at its sole expense,
warehouse the Cars, retaining risk of loss and shall take all reasonable
precautions in caring for the Cars during the term of this Agreement. Risk
of loss shall pass to Chevron upon delivery to participating retail outlets.
Fotoball shall own any excess inventory of materials and/or Cars and/or
packaging, subject to Section 6(b). Unless otherwise agreed in writing,
Chevron shall own all other workproduct arising from Fotoball's performance
of this Agreement, including, without limitation, the production molds, all
drawings, sketches, designs, and any and all patents, copyrights, tradesecrets,
trademarks (including trade dress) or other intellectual property rights
arising out of the foregoing. Fotoball shall execute any documents and take
any other action reasonably requested by Chevron to perfect its rights in the
foregoing.
11. INSURANCE
(a) Fotoball agrees to maintain at its expense at all times during the
term of this Agreement: (i) comprehensive general liability insurance (bodily
injury and property damage), including endorsements for contractual and
product liability, of not less than $500,000 combined single limit per
occurrence; (ii) hired and non-owned automobile liability insurance (bodily
injury and property damage) of not less than $500,000 combined single limit
per occurrence; (iii) property insurance, product insurance and cargo insurance
of not less than $1,000,000 combined single limit per occurrence covering the
replacement costs of the production molds and the Cars while in transit and
while in the care, custody and control of Fotoball (such insurance shall name
Chevron as the loss payee with respect to the production molds); (iv) workers
compensation, employer's liability and any other insurance or bonding
prescribed by applicable law; and (v) excess liability insurance of not less
than $1,000,000 per occurrence in excess of clauses (i), (ii) and (iv) (except
workers compensation insurance) above, each of which names Chevron as an
additional insured. The workers' compensation insurance required herein shall
contain a waiver of subrogation against Chevron.
(b) As proof of such insurance, a certificate of insurance naming Chevron
as an insured party and indicating thereon that the insurance may not be
changed, canceled, or allowed to lapse through non-renewal or failure to pay
the premium therefor except upon not less than thirty (30) days written notice
to Chevron, will be submitted to Chevron by Fotoball within thirty (30) days
after the date of this Agreement.
(c) If Fotoball fails to furnish proof of such insurance as required above,
or if at any time during the term of this Agreement Chevron is notified of the
change, cancellation or lapse of such insurance, which change, cancellation or
lapse Fotoball does not rectify within ten (10) days of the insurance status
change, Chevron, in addition to all other remedies available to it hereunder,
may at its option obtain such insurance coverage and bill Fotoball for the
premium cost thereof. Fotoball agrees to remit such premium to Chevron within
ten (10) days of receipt of notice from Chevron of the amount of such premium
cost. Such premium cost is in addition to any other payments due under this
Agreement. Fotoball's indemnity and other obligations shall not be limited by
the foregoing insurance requirements.
12. INDEMNIFICATION
(a) Fotoball shall defend, indemnify and save harmless Chevron and any
company in which Chevron owns at least fifty per cent of the shares entitled
to vote at a general election of directors, and the officers, directors,
employees, agents and vendors of any of them (collectively, "Chevron
indemnitee"), from and against any and all loss, damage, injury and liability
(including costs and reasonable attorney's fees), relating to or arising out
of Fotoball's making, performance or breach of this Agreement. The Chevron
indemnitee's rights to indemnification under the foregoing shall be independent
of any rights to insurance as provided in Section 8 hereof.
(b) Chevron shall defend, indemnify and save harmless Fotoball and any
company in which Fotoball owns at least fifty per cent of the shares entitled
to vote at a general election of directors, and the officers, directors,
employees, agents and vendors of any of them (collectively, "Fotoball
indemnitee"), from and against any and all loss, damage, injury and liability
(including costs and reasonable attorney's fees), relating to or arising out
of a claim or demand alleging that the design, manufacture, or sale of the
Cars or packaging in accordance with this Agreement infringes intellectual
property rights in the Characters or Chevron products.
13. TERMINATION
(a) Either party may terminate this Agreement upon a material breach that
is not cured within twenty (20) calendar days of notice thereof.
(b) Fotoball agrees that upon termination of this Agreement, Fotoball shall
forthwith cease and desist in the manufacture of the Cars.
(c) Fotoball agrees that upon completion of the Promotion, at Chevron's
written election, Fotoball shall either (i) destroy, at its own expense,
(ii) deliver to Chevron at Chevron's expense or (iii) store at Chevron's
expense all plates, molds, preprints, matrices and other devices using the
Cars. In the event Fotoball stores such items at Chevron's expense, Fotoball
shall credit such storage costs towards any future orders of Cars Chevron may
make.
14. RIGHT TO AUDIT
Fotoball shall maintain true and correct records in connection with this
Agreement and all transactions related thereto for at least 24 months after the
delivery of the products or the provision of services hereunder. Chevron may
from time to time, during regular business hours and with 48 hours notice,
make an audit of all records of Fotoball. Upon completion of this audit, any
amount by which the total payment by Chevron to Fotoball exceeds the amount
due Fotoball, as shown by the audit shall be returned to Chevron. Fotoball
will provide reasonable assistance and not interfere with Chevron in making
such audits.
15. GENERAL PROVISIONS
(a) Entire Agreement. This writing represents and expresses the entire
agreement of the parties hereto. It replaces and supersedes all prior
contracts, representations and understandings (written or oral) between the
parties concerning the within subject matter. No amendment of this Agreement
shall be binding on the parties unless in writing and signed by authorized
representatives of both parties.
(b) Waiver. No waiver by either party, whether express or implied, of
any provision of this Agreement or of any breach or default by the other
party shall constitute a continuing waiver of any provision of this Agreement,
and no such waiver by either party shall prevent such party from enforcing any
and all provisions of this Agreement or from acting upon the same with regard
to any subsequent breach or default by the other party.
(c) Headings. Captions and headings to sections are included solely for
convenience and are not intended to affect interpretation of any provision of
this Agreement.
(d) Force Majeure. In the event an act of the government, war conditions,
fire, flood, or other act of God prevents either party from performing in
accordance with the provisions of this Agreement, such nonperformance shall
be excused and shall not be considered a breach or default for so long as the
said conditions prevail. However, at any time after a two (2) month period
of such nonperformance, either party may terminate this Agreement as to duties
to be performed thereafter on thirty (30) days written notice thereof to the
other party.
(e) Notices. All notices or other communications required or permitted to
be given pursuant to this Agreement shall be in writing and shall be considered
as properly given or made if (i) hand delivered, (ii) mailed registered mail,
return receipt requested, postage prepaid, (iii) sent by prepaid express
overnight courier service, or (iv) sent by electronic facsimile transmission:
If to Chevron: Chevron U.S.A. Inc.
575 Market Street; Room 2326
San Francisco, California 94105
Attention: P. A. Fruin
Fax No. : (415) 894-8552
If to Fotoball: Fotoball USA, Inc.
3738 Ruffin Road
San Diego, California 92123
Attention: F. Ostern
Fax No.: (619) 467-9947
or to such other address as any such party may have designated by like notice
forwarded to the other party hereto. All notices shall be deemed given when
mailed; however, notwithstanding the foregoing, all notices of change of
address shall be deemed given when received.
(f) Further Assurances. The parties agree to execute, acknowledge and
deliver all such further instruments, and do all such other acts, as may be
necessary or appropriate in order to carry out the intent and purposes of
this Agreement.
(g) Governing Law. This Agreement and the relationship of the parties will
be governed by, and interpreted in accordance with, the laws of the State of
California, excluding its conflict of laws rules.
(h) Jurisdiction; Venue. All disputes under or relating to this Agreement
shall be brought and decided only by the courts of California. The parties
hereby submit to the personal jurisdiction of the federal and state courts
located in the state of California. Each party agrees that if so served it
will raise no objection to the personal jurisdiction of the court on any matter
connected with this Agreement that is within the court's subject matter
jurisdiction. Each party hereby waives all rights it has or which may
hereafter arise to contest such exclusive jurisdiction or venue.
(i) Invalidity. If any term or provision of this Agreement or the
application to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement, or the application of such
term or provision to persons whose circumstances are other than those as to
which it is held invalid or unenforceable, shall not be affected.
(j) Conflict of Interest. No director, employee or agent of Fotoball shall
give or receive any commission, fee, rebate, gift or entertainment of
significant cost or value in connection with this Agreement, or enter into
any business arrangement with any director, employee or agent of Chevron or
any affiliate other than as a representative of Chevron or its affiliate,
without prior written notice to Chevron. Fotoball will promptly notify
Chevron of any violation of this paragraph, and any consideration received
as a result of such violation of this paragraph shall be paid over or credited
to Chevron. Additionally, if any violation of this paragraph occurring prior
to the date of this Agreement resulted directly or indirectly in Chevron's
consent to enter into this Agreement with Fotoball, Chevron may, at Chevron's
sole option, terminate this Agreement at any time and, notwithstanding any of
the provision of this Agreement, pay no compensation or reimbursement to
Fotoball whatsoever for any work done after the date of termination. Chevron
or its representatives may audit any and all records of Fotoball pertaining to
this Agreement for the sole purpose of determining whether Fotoball has
complied with the terms of this paragraph, all in accordance with Section 11
of this Agreement.
IN WITNESS WHEREOF, the parties hereto intending to be bound hereby
executed this Agreement as of the date first above written.
CHEVRON U.S.A. INC. FOTOBALL USA, INC.
By /s/P. E. Kump By /s/ Michael Favish
---------------------------------- -------------------------
General Manager, Retail Brand Services President
FRED OSTERN 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.
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 on
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:
Ostern Annual Bonus Aggregate Annual Bonus
Contribution ($) (% of the Ostern Contribution) Compensation Range ($)
- ----------------- -------------------------------- -----------------------
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.
3.4 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.
6.2 Disability.
In the event Employee shall be unable to render the services or
perform his duties hereunder by reason of illness, injury 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
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 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 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 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.
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.
<PAGE>
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
By: /s/Fred S. Ostern
--------------------------------
Fred S. Ostern
<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 = 0%
1,000,000 x 0.0% $ 0
Remainder
$ 2,800,000
$1,000,000-$5,000,000 = 9%
2,800,000 x 9.0% $ 252,000
---------
$ 252,000
Fotoball USA, Inc.
3738 Ruffin Road
San Diego, CA 92123
Tel. 619-467-9900
Fax 619-467-9947
September 1, 1996
Robert N. Weingarten
Resource One Group, Inc.
5439 Lockhurst Drive
Woodland Hills, CA 91367
Dear Bob,
As approved by the Board of Directors on August 12, 1996, the terms of the
Amended and Restated Consulting Agreement ("Agreement") between Fotoball USA,
Inc. and yourself and Resource One Group is hereby extended and modified.
The amount of compensation payable to you is increased to $40,000.00 per
annum and the term of Agreement is extended through August 31, 1997.
IN WITNESS WHEREOF the parties hereto have executed this modification to
the Agreement as of the day and year set forth above.
FOTOBALL USA, INC.
By /s/Michael Favish
-----------------------------------
President & Chief Executive Officer
RESOURCES ONE GROUP, INC.
By /s/Robert N. Weingarten
-----------------------------------
President
By /s/Robert N. Weingarten
-----------------------------------
Robert N. Weingarten
Merrill Lynch Merrill Lynch
International Bank Unlimited
Ropemaker Place
25 Ropemaker Street
London EC2Y9LY
Telephone: 071-628-1000
Direct: 071-867
Telex: 8811047 MERLYN G
December 20, 1995
Fotoball USA, Inc.
Mr. David Forster
3738 Ruffin Road
San Diego, CA 92123
Re: U.S. $1,000,000.00 Facility Agreement dated (December 8, 1994)
Dear Mr. Forster:
We are writing to give notice to Fotoball USA, Inc, (the "Client") of the
following:
1. The amount of the Facility will be increased to the amount of US
$3,000,000.00.
2. The Standby Letter of Credit front end fee will be reduced to (1%) per
annum payable semi-annually.
3. A Revised Risk Disclosure Statement is endorsed which should be signed
and returned to the Bank.
This letter is and shall be part of the "Agreement" as defined in the Terms
Sheet forming part of the above Facility Agreement. Kindly acknowledge
receipt of this letter by signing and returning the enclosed copy, together
with the completed Risk Disclosure Statement.
Yours faithfully,
For and on behalf of
Merrill Lynch Intemational Bank Limited
_______________________
We acknowledge receipt of your letter.
Signed, Client: /s/ David Forster Date: December 26,1995
----------------- -----------------
Merrill Lynch International Bank Limited is regulated by The Securities
and Futures Authority Limited
Merrill Lynch
December 1, 1995
Kam Toys and Novelty Manufacturing Limited,
6/F Guardforce Ctr.,
3 Hok Yuen St East
Hunghom, Kowloon,
Hong Kong
Gentlemen,
We, Merrill Lynch International Bank Limited, London, hereby establish our
Irrevocable, Stand-by Letter of Credit No. MLC 3108 in your favour, for the
account of Fotoball USA, Inc up to the maximum amount of USD 1,000,000.00
(United States Dollars One Million maximum).
Funds under this Letter of Credit are available against your sight draft,
drawn on us, marked "Drawn under Merrill Lynch International Bank Limited
Letter of Credit No. MLC 3108" when accompanied by your signed statement
in the form of Annex I attached hereto and made part hereof.
Partial drawings are permitted. All charges other than those of Merrill
Lynch International Bank are for the account of the beneficiary.
Only you may make a drawing under this Letter Of Credit which expires at the
close of business at this office on March 15, 1996.
We hereby agree with you that drawings made under and in compliance with
the terms and conditions of this Letter of Credit will be duty honoured if
presented to us on or before the above stated expiration date.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits, 1993 Revision, International Chamber of Commerce
Publication No. 500, and any subsequent amendments. To the extent not
covered by the aforesaid Uniform Customs and Practice for Documentary
Credits, the laws of England shall apply. All disputes shall be subject
to the exclusive jurisdiction of the High Court of Justice in England.
Yours faithfully
/s/Robert Wheeler
- -----------------
Authorised Signature
CHANGE IN TERMS AGREEMENT
Borrower: Fotoball USA, Inc. Lender: Scripps Bank
3738 Ruffin Road Corporate Banking
San Diego, CA 92123 550 West "C" Street
Suite 100
San Diego, CA 92101
Principal Amount: $2,000,000.00 Date of Agreement: November 13, 1996
DESCRIPTION OF EXISTING INDEBTEDNESS.
AS EVIDENCED BY:
PROMISSORY NOTE DATED DECEMBER 20, 1995 IN THE AMOUNT OF $1,000,000.00.
DESCRIPTION OF COLLATERAL. AS DESCRIBED IN: COMMERICAL SECURITY AGREEMENT
DATED DECEMBER 20, 1995.
DESCRIPTION OF CHANGE IN TERMS.
INCREASE THE NOTE AMOUNT TO $2,000,000.00
CHANGE THE PAYMENT DAY TO THE 15TH DAY OF EACH MONTH BEGINNING DECEMBER
15, 1996
EXTEND THE MATURITY DATE TO APRIL 15, 1998.
PROMISE TO PAY. FOTOBALL U.S.A. INC. ("Borrower") promises to pay to
Scripps Bank ("Lender"), or order, in lawful money of the United States
of America, the principal amount of Two Million & 00/100 Dollars
($2,000,000.00) or so much as may be outstanding, together with Interest
on the unpaid outstanding principal balance of each advance. Interest
shall be calculated from the date of each advance until repayment of each
advance.
PAYMENT. Borrower will pay this loan on demand, or if no demand is made,
in one payment of all outstanding principal plus all accrued unpaid
Interest on April 15,1998. In addition, Borrower will pay regular monthly
payments of accrued unpaid interest beginning December 15, 1996, and all
subsequent interest payments are due on the same day of each month after
that. Interest on this Agreement is computed on a 365/365 simple interest
basis; that is, by applying the ratio of the annual interest rate over
the number of days in a year, multiplied by the outstanding principal
balance, multiplied by the actual number of days the principal balance is
outstanding. Borrower will pay Lender at Lender's address shown above or
at such other place as Lender may designate in writing. Unless otherwise
agreed or required by applicable law, payments will be applied first to
accrued unpaid interest, then to principal, and any remaining amount to
any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to
change from time to time based on changes in an independent index which
is the Wall Street Journal Prime Rate as published in the Money Rates
section. When a range of rate is shown, the higher rate will be used.
(the "Index"). The Index is not necessarily the lowest rate charged by
Lender on its loans. If the Index becomes unavailable during the term of
this loan, Lender may designate a substitute index after notice to
Borrower. Lender will tell Borrower the current Index rate upon
Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur more
often than each time that Prime Rate changes as shown in the Money Rates
section of the Wall Street Journal. The Index currently Is 8.250% per
annum. The interest rate to be applied to the unpaid principal balance of
this Agreement will be at a rate of 0.750 percentage points over the
Index, resulting In an initial rate of 9.000% per annum. NOTICE: Under no
circumstances will the interest rate on this Agreement be more than the
maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees
and other prepaid finance charges are earned fully as of the date of the
loan and will not be subject to refund upon early payment (whether
voluntary or as a result of default), except as otherwise required by
law. In any event, even upon full prepayment of this Agreement, Borrower
understands that Lender is entitled to a minimum Interest charge of
$100.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount
owed earlier than it is due. Early payments will not, unless agreed to by
Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments of accrued unpaid interest. Rather, they will reduce the
principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be
charged 5.000% of the regularly scheduled payment or $5.00, whichever is
greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any
promise Borrower has made to Lender, or Borrower fails to comply with or
to perform when due any other term, obligation, covenant, or condition
contained in this Agreement or any agreement related to this Agreement,
or in any other agreement or loan Borrower has with Lender. (c) Borrower
defaults under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's ability to repay this Note or perform Borrower's
obligations under this Note or any of the Related Documents. (d) Any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect either
now or at the time made or furnished. (e) Borrower becomes insolvent, a
receiver is appointed for any part of Borrower's property, Borrower makes
an assignment for the benefit of creditors, or any proceeding is
commenced either by Borrower or against Borrower under any bankruptcy or
insolvency laws. (f) Any creditor tries to take any of Borrower's
property on or in which Lender has a lien or security interest. This
includes a garnishment of any of Borrower's accounts with Lender. (g) Any
guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Agreement. (h ) A
material adverse change occurs in Borrower's financial condition, or
Lender believes the prospect of payment or performance of the
Indebtedness is impaired. (i) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if
Borrower has not been given a notice of a breach of the same provision of
this Agreement within the preceding twelve (12) months, it may be cured
(and no event of default will have occurred) if Borrower, after receiving
written notice from Lender demanding cure of such default: (a) cures the
default within fifteen (15) days; or (b) if the cure requires more than
fifteen (15) days, immediately initiates steps which Lender deems in
Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid
principal balance on this Agreement and all accrued unpaid interest
immediately due, without notice, and then Borrower will pay that amount.
Upon Borrower's failure to pay all amounts declared due pursuant to this
section, including failure to pay upon final maturity, Lender, at its
option, may also, if permitted under applicable law, do one or both of
the following: (a) increase the variable interest rate on this Agreement
to 5.750 percentage points over the Index, and (b) add any unpaid accrued
interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Agreement (including any increased
rate). Lender may hire or pay someone else to help collect this Agreement
if Borrower does not pay. Borrower also will pay Lender that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower
also will pay any court costs, in addition to all other sums provided by
law. This Agreement has been delivered to Lender and accepted by Lender
in the State of California. It there is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of San Diego
County, the State of California. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory
security interest in, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some other
account), including without limitation all accounts held jointly with
someone else and all accounts Borrower may open in the future, excluding
however all IRA and Keogh accounts, and all trust accounts for which the
grant of a security interest would be prohibited by law. Borrower
authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on this Agreement against any and all such
accounts.
LINE OF CREDIT. This Agreement evidences a revolving line of credit.
Advances under this Agreement may be requested either orally or in
writing by Borrower or by an authorized person. Lender may, but need not,
require that all oral requests be confirmed in writing. All
communications, instructions, or directions by telephone or otherwise to
Lender are to be directed to Lender's office shown above. The following
party or parties are authorized to request advances under the line of
credit until Lender receives from Borrower at Lender's address shown
above written notice of revocation of their authority: DAVID G. FORSTER,
Vice President/CFO. Borrower agrees to be liable for all sums either: (a)
advanced in accordance with the instructions of an authorized person or
(b) credited to any of Borrower's accounts with Lender. The unpaid
principal balance owing on this Agreement at any time may be evidenced by
endorsements on this Agreement or by Lender's internal records, including
daily computer print-outs. Lender will have no obligation to advance
funds under this Agreement if: (a) Borrower or any guarantor is in
default under the terms of this Agreement or any agreement that Borrower
or any guarantor has with Lender, including any agreement made in
connection with the signing of this Agreement; (b) Borrower or any
guarantor ceases doing business or is insolvent; (c) any guarantor seeks,
claims or otherwise attempts to limit, modify or revoke such guarantor's
guarantee of this Agreement or any other loan with Lender; (d) Borrower
has applied funds provided pursuant to this Agreement for purposes other
than those authorized by Lender; or (e) Lender in good faith deems itself
insecure under this Agreement or any other agreement between Lender and
Borrower.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the
terms of the original obligation or obligations, including all agreements
evidenced or securing the obligation(s), remain unchanged and in full
force and effect. Consent by Lender to this Agreement does not waive
Lender's right to strict performance of the obligation(s) as changed, nor
obligate Lender to make any future change in terms. Nothing in this
Agreement will constitute a satisfaction of the obligation(s). It is the
intention of Lender to retain as liable parties all makers and endorsers
of the original obligation(s), including accommodation parties, unless a
party is expressly released by Lender in writing. Any maker or endorser,
including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign
this Agreement below, then all persons signing below acknowledge that
this Agreement is given conditionally, based on the representation to
Lender that the non-signing party consents to the changes and provisions
of this Agreement or otherwise will not be released by it. This waiver
applies not only to any initial extension, modification or release, but
also to all such subsequent actions.
MISCELLANEOUS PROVISIONS. This Agreement iS payable on demand. The
inclusion of specific default provisions or rights of Lender shall not
preclude Lender's right to declare payment of this Agreement on its
demand. Lender may delay or forgo enforcing any of its rights or remedies
under this Agreement without losing them. Borrower and any other person
who signs, guarantees or endorses this Agreement, to the extent allowed
by law, waive any applicable statute of limitations, presentment, demand
for payment, protest and notice of dishonor. Upon any change in the terms
of this Agreement, and unless otherwise expressly stated in writing, no
party who signs this Agreement, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All
such parties agree that Lender may renew or extend (repeatedly and for
any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect Lender's security
interest in the collateral; and take any other action deemed necessary by
Lender without the consent of or notice to anyone. All such parties also
agree that Lender may modify this loan without the consent of or notice
to anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE
PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND
ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT
BORROWER:
FOTOBALL U.S.A. INC.
By: /s/David G. Forster
------------------------------------
DAVID G. FORSTER, Vice President/CFO
<PAGE>
LOAN AGREEMENT
Borrower: FOTOBALL U.S.A. INC. Lender: Scripps Bank
3738 RUFFIN ROAD Corporate Banking
SAN DIEGO, CA 92123 50 West "C" Street, Suite 100
San Diego. CA 92101
THIS LOAN AGREEMENT between FOTOBALL U.S.A. INC. ("Borrower") and Scripps
Bank ("Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or
has applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial
accommodations from Lender to Borrower, are referred to in this Agreement
Individually as the "Loan" and collectively as the "Loans." Borrower
understands and agrees that: (a) in granting, renewing, or extending any
Loan, Lender is relying upon Borrower's representations, warranties, and
agreements, as set forth in this Agreement; (b) the granting, renewing,
or extending of any Loan by Lender at all times shall be subject to
Lender's sole judgment and discretion; and (c) all such Loans shall be
and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of November 13, 1996, and
shall continue thereafter until all Indebtedness of Borrower to Lender
has been performed in full and the parties terminate this Agreement In
writing.
DEFINITIONS. The following words shall have the following meanings when
used in this Agreement. Terms not otherwise defined in this Agreement
shall have the meanings attributed to such terms in the Uniform
Commercial Code. All references to dollar amounts shall mean amounts in
lawful money of the United States of America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entity
obligated upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means FOTOBALL U.S.A. INC.. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates
of Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
Borrowing Base. The words "Borrowing Base" mean BORROWING BASE
CERTIFICATE/COLLATERAL SCHEDULE.
Business Day. The words "Business Day" mean a day on which commercial
banks are open for business in the State of California.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
Amortization.
Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted in
the form of a security interest, mortgage, deed of trust, assignment,
pledge, chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt lien, charge, lien or title retention
contract, lease or consignment intended as a security device, or any
other security or lien interest whatsoever, whether created by law,
contract, or otherwise. The word "Collateral" includes without limitation
all collateral described below in the section titled "COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
Eligible Accounts. The words "Eligible Accounts" mean, at any time, all
of Borrower's Accounts which contain selling terms and conditions
acceptable to Lender. The net amount of any Eligible Account against
which Borrower may borrow shall exclude all returns, discounts, credits,
and offsets of any nature. Unless otherwise agreed to by Lender in
writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer,
an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a resident
of the United States, except to the extent such Accounts are supported
by insurance, bonds or other assurances satisfactory to Lender.
(e) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account Debtor.
(h) Accounts with respect to which Lender, in its sole discretion, deems
the creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief
under any provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee, custodian,
or receiver for the assets of such Account Debtor; or who has made an
assignment for the benefit of creditors or has become insolvent or fails
generally to pay its debts (including its payrolls) as such debts
become due.
(j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 DAYS from the
invoice date.
(l) EXCLUDING CONTRA, FOREIGN OR DIRECT FEDERAL GOVERNMENT/GOVERNMENT
AGENCY ACCOUNTS.
Eligible Inventory. The words "Eligible Inventory" mean, at any time, all
of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated; whether Borrower
may be liable individually or jointly with others; whether Borrower may
be obligated as a guarantor, surety, or otherwise; whether recovery upon
such Indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
Inventory. The word "Inventory" means all of Borrower's raw materials,
work in process, finished goods, merchandise, parts and supplies, of
every kind and description, and goods held for sale or lease or furnished
under contracts of service in which Borrower now has or hereafter
acquires any right, whether held by Borrower or others, and all documents
of title, warehouse receipts, bills of lading, and all other documents of
every type covering all or any part of the foregoing. Inventory includes
inventory temporarily out of Borrower's custody or possession and all
returns on Accounts.
Lender. The word "Lender" means Scripps Bank, its successors and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations
in favor of Lender, as well as any substitute, replacement or refinancing
note or notes therefor.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
Indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a
lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance
acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks
patents, copyrights, organizational expenses, and similar intangible
items, but including leaseholds and leasehold improvements) less total
Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to
time from the date of this Agreement to the Expiration Date, provided the
aggregate amount of such Advances outstanding at any time does not exceed
the Borrowing Base. Within the foregoing limits, Borrower may borrow,
partially or wholly prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered
by Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall have
been executed by each Guarantor, delivered to Lender, and be in full
force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, books, records,
and operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then
due and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and Borrower
shall have delivered to Lender the compliance certificate called for in
the paragraph below titled "Compliance Certificate."
Making Loan Advances. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need
not, require that all oral requests be confirmed in writing. Each Advance
shall be conclusively deemed to have been made at the request of and for
the benefit of Borrower (a) when credited to any deposit account of
Borrower maintained with Lender or (b) when advanced in accordance with
the instructions of an authorized person. Lender, at its option, may set
a cutoff time, after which all requests for Advances will be treated as
having been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount
of the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay
to Lender an amount equal to the difference between the outstanding
principal balance of the Advances and the Borrowing Base. On the
Expiration Date, Borrower shall pay to Lender in full the aggregate
unpaid principal amount of all Advances then outstanding and all accrued
unpaid interest, together with all other applicable fees, costs and
charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits
and credits as shall be appropriate in connection with the credit
facility. Lender shall provide Borrower with periodic statements of
Borrower's account, which statements shall be considered to be correct
and conclusively binding on Borrower unless Borrower notifies Lender to
the contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of
all other Loans, obligations and duties owed by Borrower to Lender,
Borrower (and others, if required) shall grant to Lender Security
Interests in such property and assets as Lender may require (the
"Collateral"), including without limitation Borrower's present and future
Accounts, general intangibles, and Inventory. Lender's Security Interests
in the Collateral shall be continuing liens and shall include the
proceeds and products of the Collateral, including without limitation the
proceeds of any insurance. With respect to the Collateral, Borrower
agrees and represents and warrants to Lender:
Perfection of Security Interests. Borrower agrees to execute such
financing statements and to take whatever other actions are requested by
Lender to perfect and continue Lender's Security Interests in the
Collateral. Upon request of Lender, Borrower will deliver to Lender any
and all of the documents evidencing or constituting the Collateral, and
Borrower will note Lender's interest upon any and all chattel paper if
not delivered to Lender for possession by Lender. Contemporaneous with
the execution of this Agreement, Borrower will execute one or more UCC
financing statements and any similar statements as may be required by
applicable law, and will file such financing statements and all such
similar statements in the appropriate location or locations. Borrower
hereby appoints Lender as its irrevocable attorney-in-fact for the
purpose of executing any documents necessary to perfect or to continue
any Security Interest. Lender may at any time, and without further
authorization from Borrower, file a carbon, photograph, facsimile, or
other reproduction of any financing statement for use as a financing
statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of
Lender's security interest in the Collateral. Borrower promptly will
notify Lender of any change in Borrower's name including any change to
the assumed business names of Borrower. Borrower also promptly will
notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender
in writing prior to any change in address or location of Borrower's
principal governance office or should Borrower merge or consolidate with
any other entity.
Collateral Records. Borrower does now and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Accounts and Account balances and agings. With respect to the Inventory,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Inventory
and records itemizing and describing the kind, type, quality, and
quantity of Inventory, Borrower's Inventory costs and selling prices, and
the daily withdrawals and additions to Inventory.
Collateral Schedules. Concurrently with the execution and delivery of
this Agreement, Borrower shall execute and deliver to Lender schedules of
Accounts and Inventory and Eligible Accounts and Eligible Inventory, in
form and substance satisfactory to the Lender. Thereafter and at such
frequency as Lender shall require, Borrower shall execute and deliver to
Lender such supplemental schedules of Eligible Accounts and Eligible
Inventory and such other matters and information relating to the Accounts
and Inventory as Lender may request.
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance, and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and
to confirm with Account Debtors the accuracy of such Accounts.
Representations and Warranties Concerning Inventory. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; (c) The
value of the Inventory will be determined on a consistent accounting
basis; (d) Except as agreed to the contrary by Lender in writing, all
Eligible Inventory is now and at all times hereafter will be in
Borrower's physical possession and shall not be held by others on
consignment, sale on approval, or sale or return; (e) Except as reflected
in the Inventory schedules delivered to Lender, all Eligible Inventory is
now and at all times hereafter will be of good and merchantable quality,
free from defects; (f) Eligible Inventory is not now and will not at any
time hereafter be stored with a bailee, warehouseman, or similar party
without Lender's prior written consent, and, in such event, Borrower will
concurrently at the time of bailment cause any such bailee, warehouseman,
or similar party to issue and deliver to Lender, in form acceptable to
Lender, warehouse receipts in Lender's name evidencing the storage of
Inventory; and (g) Lender, its assigns, or agents shall have the right at
any time and at Borrower's expense to inspect and examine the Inventory
and to check and test the same as to quality, quantity, value, and
condition.
Notification Basis. Borrower agrees and understands that this Loan shall
be on a notification basis pursuant to which Lender shall directly
collect and receive all proceeds and payments from the Accounts in which
Lender has a security interest. In order to facilitate the foregoing,
Borrower agrees to deliver to Lender, upon demand, any and all of
Borrower's records, ledger sheets, payment cards, and other
documentation, in the form requested by Lender, with regard to the
Accounts. Borrower further agrees that Lender shall have the right to
notify each Account Debtor, pay such proceeds and payments directly to
Lender, and to do any and all other things as Lender may deem to be
necessary and appropriate, within its sole discretion, to carry out the
terms and intent of this Agreement. Lender shall have the further right,
where appropriate and within Lender's sole discretion, to file suit,
either in its own name or in the name of Borrower, to collect any and all
such Accounts. Borrower further agrees that Lender may take such other
actions, either in Borrower's name or Lender's name, as Lender may deem
appropriate within its sole judgment, with regard to collection and
payment of the Accounts, without affecting the liability of Borrower
under this Agreement or on the Indebtedness.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Lender, as of the date of this Agreement, as of the date of each
disbursement of Loan proceeds, as of the date of any renewal, extension
or modification of any Loan, and at all times any indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is duly
qualified as a foreign corporation and is in good standing in all states
in which the failure to so qualify would have a material adverse effect
on its businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of
any other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under
(a) any provision of its articles of incorporation or organization, or
bylaws, or any agreement or other instrument binding upon Borrower or (b)
any law, governmental regulation, court decree, or order applicable to
Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will
constitute, legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title
to all of Borrower's properties free and clear of all Security Interests
and has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled in
Borrower's legal name, and Borrower has not used, or filed a financing
statement under, any other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste" "hazardous substance,"
"disposal," "release," and "threatened release," as used in this
Agreement, shall have the same meanings as set forth in the "CERCLA,"
"SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the
California Health and Safety Code, Section 25100, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant
to any of the foregoing. Except as disclosed to and acknowledged by
Lender in writing, Borrower represents and warrants that: (a) During the
period of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by any person on,
under about or from any of the properties. (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the
properties by any prior owners or occupants of any of the properties, or
(ii) any actual or threatened litigation or claims of any kind by any
person relating to such matters. (c) Neither Borrower nor any tenant,
contractor, agent or other authorized user of any of the properties shall
use, generate, manufacture, store, treat, dispose of, or release any
hazardous waste or substance on, under, about or from any of the
properties; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and
ordinances, including without limitation those laws, regulations and
ordinances described above. Borrower authorizes Lender and its agents to
enter upon the properties to make such inspections and tests as Lender
may deem appropriate to determine compliance of the properties with this
section of the Agreement. Any inspections or tests made by Lender shall
be at Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating
the properties for hazardous waste and hazardous substances. Borrower
hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Borrower becomes liable for
cleanup or other costs under any such laws, and (b) agrees to indemnify
and hold harmless Lender against any and all claims, losses, liabilities,
damages, penalties, and expenses which Lender may directly or indirectly
sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture,
storage, disposal, release or threatened release occurring prior to
Borrower's ownership or Interest in the properties, whether or not the
same was or should have been known to Borrower. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of
any interest in any of the properties, whether by foreclosure or
otherwise.
Litigation and Claims. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower Is pending or threatened, and no other event has
occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other events,
if any, that have been disclosed to and acknowledged by Lender in
writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in good
faith in the ordinary course of business and for which adequate reserves
have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and rights
in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note and
all of the Related Documents are binding upon Borrower as well as upon
Borrower's successors, representatives and assigns, and are legally
enforceable In accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred with
respect to any such plan, (ii) Borrower has not withdrawn from any such
plan or initiated steps to do so, (iii) no steps have been taken to
terminate any such plan, and (iv) there are no unfunded liabilities other
than those previously disclosed to Lender in writing.
Investment Company Act. Borrower is not an "investment company" or a
company "controlled" by an "investment company", within the meaning of
the Investment Company Act of 1940, as amended.
Public Utility Holding Company Act. Borrower is not a "holding company",
or a "subsidiary company" of a "holding company", or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company",
within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
Regulations G, T and U. Borrower is not engaged principally, or as one of
its important activities, in the business of extending credit for the
purpose of purchasing or carrying margin stock (within the meaning of
Regulations G, T and U of the Board of Governors of the Federal Reserve
System).
Location of Borrower's Offices and Records. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 3738 RUFFIN ROAD, SAN DIEGO, CA 92123. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
Information. All Information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
Claims and Defenses. There are no defenses or counterclaims, offsets or
other adverse claims, demands or actions of any kind, personal or
otherwise, that Borrower, Grantor, or any Guarantor could assert with
respect to the Note, Loan, Indebtedness, this Agreement, or the Related
Documents.
Survival of Representations and Warranties. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force
and effect until such time as Borrower's Indebtedness shall be paid in
full, or until this Agreement shall be terminated in the manner provided
above, whichever is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that,
while this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at
all reasonable times.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and other
reports with respect to Borrower's financial condition and business
operations as Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less
than $7,000,000.00.
Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 1.00 to 1.00.
Current Ratio. Maintain a ratio of Current Assets to Current
Liabilities in excess of 1.25 to 1.00. Except as provided above, all
computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with
generally accepted accounting principles, applied on a consistent
basis, and certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with
respect to Borrower's properties and operations, in form, amounts,
coverages and with insurance companies reasonably acceptable to
Lender. Borrower, upon request of Lender, will deliver to Lender
from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will
not be cancelled or diminished without at least ten (10) days' prior
written notice to Lender. Each insurance policy also shall include
an endorsement providing that coverage in favor of Lender will not
be impaired in any way by any act, omission or default of Borrower
or any other person. In connection with all policies covering assets
in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured, (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition,
upon request of Lender (however not more often than annually), Borrower
will have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessment, tax, governmental charges, levies and liens, of every kind
and nature, imposed upon Borrower or its properties, income, or profits,
prior to the date on which penalties would attach, and all lawful claims
that, if unpaid, might become a lien or charge upon any of Borrower's
properties, income, or profits. Provided however, Borrower will not be
required to pay and discharge any such assessment, tax, charge, levy,
lien or claim so long as (a) the legality of the same shall be contested
in good faith by appropriate proceedings, and (b) Borrower shall have
established on its books adequate reserves with respect to such contested
assessment, tax, charge, levy, lien, or claim in accordance with
generally accepted accounting practices. Borrower, upon demand of Lender,
will furnish to Lender evidence of payment of the assessments, taxes,
charges, levies, liens and claims and will authorize the appropriate
governmental official to deliver to Lender at any time a written
statement of any assessments, taxes, charges, levies, liens and claims
against Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in a
timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under this
Agreement or under any of the Related Documents.
Operations. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of
any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in compliance with all
applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans
With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time
to inspect any and all Collateral for the Loan or Loans and Borrower's
other properties and to examine or audit Borrower's books, accounts, and
records and to make copies and memoranda of Borrower's books, accounts,
and records. If Borrower now or at any time hereafter maintains any
records (including without limitation computer generated records and
computer software programs for the generation of such records) in the
possession of a third party, Borrower, upon request of Lender, shall
notify such party to permit Lender free access to such records at all
reasonable times and to provide Lender with copies of any records it may
request, all at Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying that
the representations and warranties set forth in this Agreement are true
and correct as of the date of the certificate and further certifying
that, as of the date of the certificate, no Event of Default exists under
this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local laws,
statutes, regulations and ordinances; not cause or permit to exist, as a
result of an intentional or unintentional action or omission on its part
or on the part of any third party, on property owned and/or occupied by
Borrower, any environmental activity where damage may result to the
environment, unless such environmental activity is pursuant to and in
compliance with the conditions of a permit issued by the appropriate
federal, state or local governmental authorities; shall furnish to Lender
promptly and in any event within thirty (30) days after receipt thereof a
copy of any notice, summons, lien, citation, directive, letter or other
communication from any governmental agency or instrumentality concerning
any intentional or unintentional action or omission on Borrower's part in
connection with any environmental activity whether or not there is damage
to the environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure the
Loans and to perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while
this Agreement is in effect, Borrower shall not, without the prior
written consent of Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's
assets, or (c) sell with recourse any of Borrower's accounts, except to
Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than dividends
payable in its stock), provided, however that notwithstanding the
foregoing, but only so long as no Event of Default has occurred and is
continuing or would result from the payment of dividends, if Borrower is
a "Subchapter S Corporation" (as defined in the Internal Revenue Code of
1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the
shareholders to pay income taxes and make estimated income tax payments
to satisfy their liabilities under federal and state law which arise
solely from their status as Shareholders of a Subchapter S Corporation
because of their ownership of shares of stock of Borrower, or (d)
purchase or retire any of Borrower's outstanding shares or alter or amend
Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan
to Borrower, whether under this Agreement or under any other agreement,
Lender shall have no obligation to make Loan Advances or to disburse Loan
proceeds if: (a) Borrower or any Guarantor is in default under the terms
of this Agreement or any of the Related Documents or any other agreement
that Borrower or any Guarantor has with Lender, (b) Borrower or any
Guarantor becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt, (c) there occurs a material
adverse change in Borrower's financial condition, in the financial
condition of any Guarantor, or in the value of any Collateral securing
any Loan; (d) any Guarantor seeks, claims or otherwise attempts to limit,
modify or revoke such Guarantor's guaranty of the Loan or any other loan
with Lender, or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ADDITIONAL PROVISIONS:.
1. BORROWER AGREES THAT ADVANCES AGAINST THIS LINE OF CREDIT WILL NOT
EXCEED 80% OF ELIGIBLE ACCOUNTS RECEIVABLE AND 35% OF RAW MATERIALS AND
FINISHED GOODS. ELIGIBLE ACCOUNTS RECEIVABLE ARE DEFINED AS THOSE
ACCOUNTS AGED LESS THAN 90 DAYS MINUS ANY CONTRA, FOREIGN OR DIRECT
FEDERAL GOVERNMENT/GOVERNMENT AGENCY ACCOUNTS. BORROWER FURTHER AGREES
THAT ADVANCES AGAINST RAW MATERIALS AND FINISHED GOODS WILL NOT EXCEED
$1,000,000.00. BORROWER ALSO AGREES THAT THE MAXIMUM ADVANCE AGAINST RAW
MATERIALS AND FINISHED GOODS WILL BE DECREASED TO $600,000.00 ONCE THE
COMPANY HAS DELIVERED GOODS ON THEIR CHEVRON CHRISTMAS CONTRACT OR
JANUARY 15, 1997, WHICHEVER OCCURS FIRST. BORROWER ADDITIONALLY AGREES TO
PROVIDE A COLLATERAL SCHEDULE AT THE TIME OF EACH REQUESTED ADVANCE.
2. BORROWER AGREES TO PROVIDE MONTHLY COMPANY PREPARED FINANCIAL
STATEMENTS, ACCOUNTS RECEIVABLE AGINGS, COLLATERAL SCHEDULES AND ACCOUNTS
PAYABLE AGINGS IN A TIMELY MANNER.
3. BORROWER AGREES TO PROVIDE QUARTERLY 10Q AND ANNUAL 10K STATEMENTS IN
A TIMELY MANNER.
4. BORROWER AGREES TO PROVIDE YEAR END CPA AUDITED FINANCIAL STATEMENTS
IN A TIMELY MANNER.
5. BORROWER AGREES TO MAINTAIN THE FOLLOWING FINANCIAL CONVENANTS AT ALL
TIMES:
A. MINIMUM CURRENT RATIO OF 1.25 TO 1.00
B. MAXIMUM DEBT TO WORTH RATIO OF 1.00 TO 1.00
C. MINIMUM NET WORTH OF $7,000,000.00
6. BORROWER AGREES TO ALLOW THE BANK OR ITS AGENT TO CONDUCT ONE ACCOUNTS
RECEIVABLE AUDIT DURING THE TERM OF THIS LINE OF CREDIT AND TO BEAR THE
EXPENSE FOR THIS AUDIT.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory
security interest in, and hereby assigns, conveys, delivers, pledges, and
transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some other
account), including without limitation all accounts held jointly with
someone else and all accounts Borrower may open in the future, excluding
however all IRA and Keogh accounts, and all trust accounts for which the
grant of a security interest would be prohibited by law. Borrower
authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such
accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
Default In Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or
sales agreement, or any other agreement, in favor of any other creditor
or person that may materially affect any of Borrower's property or
Borrower's or any Grantor's ability to repay the Loans or perform their
respective obligations under this Agreement or any of the Related
Documents.
False Statement. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Detective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against
Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by Judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the Indebtedness,
or by any governmental agency. This includes a garnishment, attachment,
or levy on or of any of Borrower's deposit accounts with Lender. However,
this Event of Default shall not apply if there is a good faith dispute by
Borrower or Grantor, as the case may be, as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding, and if Borrower or Grantor gives Lender written
notice of the creditor or forfeiture proceeding and furnishes reserves or
a surety bond for the creditor or forfeiture proceeding satisfactory to
Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness. Lender, at its option,
may, but shall not be required to, permit the Guarantor's estate to
assume unconditionally the obligations arising under the guaranty in a
manner satisfactory to Lender, and, in doing so, cure the Event of
Default.
Change In Ownership. Any change In ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been
given a notice of a similar default within the preceding twelve (12)
months, it may be cured (and no Event of Default will have occurred) if
Borrower or Grantor, as the case may be, after receiving written notice
from Lender demanding cure of such default: (a) cures the default within
fifteen (15) days; or (b) if the cure requires more than fifteen (15)
days, immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur,
except where otherwise provided in this Agreement or the Related
Documents, all commitments and obligations of Lender under this Agreement
or the Related Documents or any other agreement immediately will
terminate (including any obligation to make Loan Advances or
disbursements), and, at Lender's option, all Indebtedness immediately
will become due and payable, all without notice of any kind to Borrower,
except that in the case of an Event of Default of the type described in
the "Insolvency" subsection above, such acceleration shall be automatic
and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all
of Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall
not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Borrower or of
any Grantor shall not affect Lender's right to declare a default and to
exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a
part of this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted
by Lender In the State of California. It there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts
of San Diego County, the State of California. This Agreement shall be
governed by and construed in accordance with the laws of the State of
California.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the
provisions of this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any rights
to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such participation
interests. Borrower also agrees that the purchasers of any such
participation interests will be considered as the absolute owners of such
interests in the Loans and will have all the rights granted under the
participation agreement or agreements governing the sale of such
participation interests. Borrower further waives all rights of offset or
counterclaim that it may have now or later against Lender or against any
purchaser of such a participation interest and unconditionally agrees
that either Lender or such purchaser may enforce Borrower's obligation
under the Loans irrespective of the failure or insolvency of any holder
of any interest in the Loans. Borrower further agrees that the purchaser
of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
Borrower Information. Borrower consents to the release of information on
or about Borrower by Lender in accordance with any court order, law or
regulation and in response to credit inquiries concerning Borrower.
Non-Liability of Lender. The relationship between Borrower and Lender is
a debtor and creditor relationship and not fiduciary in nature, nor is
the relationship to be construed as creating any partnership or joint
venture between Lender and Borrower. Borrower is exercising its own
judgment with respect to Borrower's business. All information supplied to
Lender is for Lender's protection only and no other party is entitled to
rely on such information. There is no duty for Lender to review, inspect,
supervise, or inform Borrower of any matter with respect to Borrower's
business. Lender and Borrower intend that Lender may reasonably rely on
all information supplied by Borrower to Lender, together with all
representations and warranties given by Borrower to Lender, without
investigation or confirmation by Lender and that any investigation or
failure to investigate will not diminish Lender's right to so rely.
Notice of Lender's Breach. Borrower must notify Lender in writing of any
breach of this Agreement or the Related Documents by Lender and any other
claim, cause of action or offset against Lender within thirty (30) days
after the occurrence of such breach or after the accrual of such claim
cause of action or offset. Borrower waives any claim, cause of action or
offset for which notice is not given in accordance with this paragraph.
Lender is entitled to rely on any failure to give such notice.
Borrower Indemnification. Borrower shall indemnify and hold Lender
harmless from and against all claims, costs, expenses, losses, damages,
and liabilities of any kind, including but not limited to attorneys' fees
and expenses, arising out of any matter relating directly or indirectly
to the Indebtedness, whether resulting from internal disputes of the
Borrower, disputes between Borrower and any Guarantor, or whether
involving any third parties, or out of any other matter whatsoever
related to this Agreement or the Related Documents, but excluding any
claim or liability which arises as a direct result of Lender's gross
negligence or willful misconduct. This indemnity shall survive full
repayment and satisfaction of the Indebtedness and termination of this
Agreement.
Counterparts. This Agreement may be executed in multiple counterparts,
each of which, when so executed, shall be deemed an original, but all
such counterparts, taken together, shall constitute one and the same
Agreement.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that
amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including attorneys' fees for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower
also will pay any court costs, in addition to all other sums provided by
law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimilie, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices
under this Agreement by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the
party's address. To the extent permitted by applicable law, if there is
more than one Borrower, notice to any Borrower will constitute notice to
all Borrowers. For notice purposes, Borrower will keep Lender informed at
all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such funding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower"
as used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and
delivery to Lender of the Related Documents, regardless of any
investigation made by Lender or on Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Borrower, or between
Lender and any Grantor, shall constitute a waiver of any of Lender's
rights or of any obligations of Borrower or of any Grantor as to any
future transactions. Whenever the consent of Lender is required under
this Agreement, the granting of such consent by Lender in any instance
shall not constitute continuing consent in subsequent instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS
OF NOVEMBER 13 1996
BORROWER:
FOTOBALL U.S.A. INC.
By: /s/David G. Forster
-----------------------------------
DAVID G. FORSTER, Vice President/CFO
LENDER:
Scripps Bank
By: /s/ John K. Peck
-----------------------------------
Authorized Officer
<PAGE>
CORPORATE RESOLUTION TO BORROW
Borrower: FOTOBALL U.S.A. INC. Lender: Scripps Bank
3738 RUFFIN ROAD Corporate Banking
SAN DIEGO, CA 92123 550 West "C" Street, Suite 100
San Diego, CA 92101
I, the undersigned Secretary or Assistant Secretary of FOTOBALL U.S.A.
INC. (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of
Delaware as a corporation for profit, with its principal office at 3738
RUFFIN ROAD, SAN DIEGO, CA 92123, and is duly authorized to transact
business in the State of California.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and held on November 6, 1996 at which a quorum was present
and voting, or by other duly authorized corporate action in lieu of a
meeting, the following resolutions were adopted:
BE IT RESOLVED, that any one (1) of the following named officers,
employees. or agents of this Corporation, whose actual signatures are
shown below:
NAME POSITION ACTUAL SIGNATURE
DAVID G. FORSTER Vice President/CFO /s/David G. Forster
acting for and on behalf of the Corporation and as its act and deed be,
and he or she hereby is, authorized and empowered:
Borrow Money. To borrow from time to time from Scripps Bank ("Lender"),
on such terms as may be agreed upon between the Corporation and Lender,
such sum or sums of money as in his or her judgment should be borrowed
however, not exceeding at any one time the amount of Two Million & 00/100
Dollars ($2,000.000.00), in addition to such sum or sums of money as may
be currently borrowed by the Corporation from Lender.
Execute Notes. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accommodations and/or revision
agreement or other evidence of obligation of the Corporation, on Lender's
forms, at such rates of interest and on such terms as may be agreed upon,
evidencing the sums of money so borrowed or any indebtedness of the
Corporation to Lender, and also to execute and deliver to Lender one or
more renewals, extensions, modifications, refinancing, consolidations, or
substitutions for one or more of the notes, any portion of the notes, or
any other evidence of credit accommodations.
Grant Security. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of
any loans or credit accommodations so obtained, any promissory notes so
executed (including any amendments to or modifications, renewals and
extensions of such promissory notes), or any other or further
indebtedness of the Corporation to Lender at any time owing, however the
same may be evidenced, any property now or hereafter belonging to the
Corporation or in which the Corporation now or hereafter may have an
Interest including without limitation all real property and all personal
property (tangible or intangible) of the Corporation. Such property may
be mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered
at the time such loans are obtained or such indebtedness is incurred, or
at any other time or times, and may be either in addition to or in lieu
of any property theretofore mortgaged, pledged, transferred, endorsed,
hypothecated, or encumbered.
Execute Security Documents. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be required
by Lender, and which shall evidence the terms and conditions under and
pursuant to which such liens and encumbrances, or any of them, are given;
and also to execute and deliver to Lender any other written instruments,
any chattel paper, or any other collateral, of any kind or nature, which
Lender may deem necessary or proper in connection with or pertaining to
the giving of the liens and encumbrances.
Negotiate Items. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation in which the Corporation may
have an interest, and either to receive cash for the same or to cause
such proceeds to be credited to the account of the Corporation with
Lender, or to cause such other disposition of the proceeds derived
therefrom as they may deem advisable.
Further Acts. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay
any and all fees and costs, and to execute and deliver such other
documents and agreements as he or she may in his or her discretion deem
reasonably necessary or proper in order to carry into effect the
provisions of these Resolutions. The following person or persons
currently are authorized to request advances and authorize payments under
the line of credit until Lender receives written notice of revocation of
their authority: DAVID G. FORSTER, Vice President/CFO.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these Resolutions and performed prior to the passage of these Resolutions
are hereby ratified and approved, that these Resolutions shall remain in
full force and effect and Lender may rely on these Resolutions until
written notice of his or her revocation shall have been delivered to and
received by Lender. Any such notice shall not affect any of the
Corporation's agreements or commitments in effect at the time notice is
given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in
writing at Lender's address shown above (or such other addresses as
Lender may designate from time to time) prior to any (a) change in the
name of the Corporation, (b) change in the assumed business name(s) of
the Corporation, (c) change in the management of the Corporation, (d)
change in the authorized signer(s), (e) conversion of the Corporation to
a new or different type of business entity, or (f) change in any other
aspect of the Corporation that directly or indirectly relates to any
agreements between the Corporation and Lender. No change in the name of
the Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that at a special meeting of the shareholders of the
Corporation, duly called and held (or by consent of the shareholders in
accordance with the laws of the State of Delaware), not less than the
required percentage of shareholders adopted or consented to all the
Resolutions set forth above.
I FURTHER CERTIFY that the officer, employee, or agent named above is
duly elected, appointed, or employed by or for the Corporation, as the
case may be, and occupies the position set opposite the name; that the
foregoing Resolutions now stand of record on the books of the
Corporation; and that the Resolutions are in full force and effect and
have not been modified or revoked in any manner whatsoever. The
Corporation has no corporate seal, and therefore, no seal is affixed to
this certificate.
IN TESTIMONY WHEREOF, I have hereunto set my hand on November 13, 1996
and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
/s/Karen M. Betro
- --------------
Karen M. Betro
Subsidiaries of the registrant - NONE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMA-
TION EXTRACTED FROM THE FINANCIAL STATEMENTS
CONTAINED IN THE FOTOBALL USA, INC. FORM 10-KSB
FOR THE PERIOD ENDED DECEMBER 31, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 981,554
<SECURITIES> 0
<RECEIVABLES> 7,369,617
<ALLOWANCES> 0
<INVENTORY> 2,081,206
<CURRENT-ASSETS> 10,795,662
<PP&E> 1,706,752
<DEPRECIATION> 667,527
<TOTAL-ASSETS> 12,154,336
<CURRENT-LIABILITIES> 3,956,822
<BONDS> 0
0
0
<COMMON> 26,767
<OTHER-SE> 8,031,771
<TOTAL-LIABILITY-AND-EQUITY> 12,154,336
<SALES> 25,997,162
<TOTAL-REVENUES> 25,997,162
<CGS> 18,468,475
<TOTAL-COSTS> 5,567,755
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,843
<INCOME-PRETAX> 2,070,350
<INCOME-TAX> 795,000
<INCOME-CONTINUING> 1,275,350
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,275,350
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
