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, 1997
[ ] 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
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
3738 Ruffin Road, San Diego, California 92123
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(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, 1997
were $12,176,780.
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 23, 1998, was $3,623,836.
As of March 23, 1998, the Company had 2,676,742 shares of Common Stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on May 28, 1998 are incorporated by reference into
Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes ( ) No (X)
1<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 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, Gart Bros., Modell's,
Pro Image and The Sports Authority. Additionally, the Company designs,
develops and manufactures high quality custom sports and non-sports related
products for promotional programs. The Company also provides non-licensed
specialty sports products to corporations for resale or promotional use,
including sales to amusement park and entertainment related companies. 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 300 colleges and universities
("Colleges"). Pursuant to these licenses, the Company has the right to use,
for commercial purposes, the names and logos of sports leagues, teams,
colleges and universities and the likenesses of certain sports figures.
The Company's 1998 product lines include: (i) baseballs: synthetic leather,
both mini and official size and weight baseballs, and soft cast vinyl
polyester filled 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, NFL full size collector series and brand
licensed full-size footballs; (iii) basketballs: synthetic leather, miniature
basketballs, brand licensed full-size basketballs and miniature and full-size
vulcanized rubber basketballs licensed by Colleges, featuring College logos
and/or mascots, (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) lapel pins: high-quality lapel pins licensed by MLBP and the
National Collegiate Athletic Association ("NCAA") featuring college team and
league logos and featuring corporate logos and designs for promotions and
special events; (vi) soccer balls: miniature and regulation-size synthetic
leather soccer balls licensed by MLS, featuring players images, and/or MLS
team and league logos; (vii) 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 Six Flags; and
(xiii) Fototires: miniature synthetic rubber tires, scaled proportionally for
size and weight, which replicate the exact appearance of a NASCAR and INDY
tire, for promotional and special events.
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 its retail business which includes both the sale
of licensed product directly to mass merchants, sports teams and
concessionaires (it's "national retail sales" business) and the sale of
non-licensed specialty sports products to amusement park and entertainment
related companies for resale and promotional use (its "entertainment"
business).
The Company's promotions customers, which include large corporations such
as General Mills, Arco, Burger King and McDonalds, purchase the Company's
products for use in promotional campaigns and in connection with their
sponsorship of professional sports teams. 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.
The Company's national retail sales represents a customer base of over
2,000 retailers, including selected department stores and mass merchants
(such as Walmart, J.C. Penney, Kmart, Gart Bros., Modell's, Pro Image and
The Sports Authority), 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 30 Major League Baseball
stadiums and 110 professional minor league baseball stadiums). The Company's
entertainment business designs, develops and manufactures specialty sports
products for large corporations such as Walt Disney, Planet Hollywood, Warner
Bros. and Six Flags.
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
over 500 custom-imprinted sports products with general wholesale prices
ranging from $1.95 to $12.95 per item.
The following is a description of each of the Company's 1998 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
3<PAGE>
have been developed by the Company along with new processes such as debossing,
embroidered balls and the use of foils, in its Major League Expressions line.
The baseball product line includes the following:
Fotoball Baseball - Baseball featuring a players' image and statistics.
Embroidered Baseball - Baseball featuring team logos embroidered on
baseballs.
Logo Team Baseball - Baseball featuring team logos in a unique designs on
multicolored baseballs. Available 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, Peanuts and holiday/event themes including Father's Day.
Major League Expressions Baseball - Baseball featuring debossed metallic
foil lettering and team logos.
Specialty Baseball - various specialty products including mini-hanging
baseball, and inaugural baseball with snake skin design.
University Diamond Collection - 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 and a youth size vulcanized
rubber football for colleges. The football product line includes the
following:
Teamball Football- Football featuring the logo of an NFL team in full
color on the white panel.
NFL Player Fotoball Football - Football featuring a full color image of
a player, together with his replica autograph.
University Teamball - Mini and full size synthetic leather and youth size
vulcanized rubber football featuring a full color image of a university
or college logo.
NFL Souvenir Ball - Full size souvenir football featuring team and Super
Bowl logos and NFL marks produced in limited edition.
Performance/Full-size Football - Football featuring color images for
specialty retailers such as Walt Disney and WB Sport.
4<PAGE>
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 and college product line. The basketball product line
includes the following:
University Teamball - Mini synthetic leather and both full and youth size
vulcanized rubber 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 1-5,
custom-printed and used for promotions.
Hockey Pucks:
The Company uses a hockey puck that is officially licensed with the NHL.
The hockey product line includes the following:
Team Puck - Hockey puck featuring NHL team logos, player images and
player facsimile autographs packaged in a mini net.
Chrome Puck - Hockey puck featuring Chromium Graphics process designs on
a disk displayed in a hockey net.
5<PAGE>
College Puck - Hockey puck featuring a full color image of a university
or college logo.
Lapel Pins:
The Company produces a variety of lapel pin styles including cloisonne,
die struck, brass etched and steel for the licensed product retail market,
for corporate promotions and to brand licensed retail customers such as
Planet Hollywood and Official All Star Cafe. The lapel pin product line
includes the following:
MLB Lapel Pins - Glow in the dark, flexible and mood lapel pins licensed
by MLB, featuring team logos.
NCAA Lapel Pins - Pins for NCAA championship series and Final Four
tournament licensed by the NCAA.
Promotional Pins - Lapel pins custom manufactured and used for corporate
promotions.
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 Graphics designs. The Company
introduced this product in Spring 1997 and was unsuccessful in establishing a
market for the product. Upon the completion of the 1997 fiscal year, the
Company elected not to renew its retail licenses with any drivers. The
Company also recorded in 1997 a provision for discontinued and excess
inventory for substantially all of the $900,000 of Fototire inventory on hand
at December 31, 1997. The Company will continue to pursue an orderly
disposition of this product through promotional programs or other means.
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 1997, the Company purchased approximately
97% of its raw materials and finished promotions goods from six companies
located in China, with one manufacturer accounting for 52% 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 the printing and manufacturing of all vulcanized rubber
products and the application of various processes such as debossing and foils,
to companies located in China to capitalize on significantly lower
manufacturing costs. The Company's senior management periodically visits its
6<PAGE>
suppliers to supervise the manufacturing of its products and to ensure
compliance with the Company's quality control standards and specifications.
The Company is not a party to any written contract with any supplier and
relies on its long-standing relationships to ensure quality, responsiveness
and efficiency. All of the Company's products manufactured abroad are paid
for in United States dollars.
Foreign manufacturing is subject to a number of risks, including
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,
cotton wrist sweatbands and mini-gloves 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, 1998, with one one-year renewal options
remaining. 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.
7<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, mini leather baseballs, and certain lapel pins sold
in the United States the names, symbols, logos and other similar or related
identification of "MLBP." 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 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 in the process
of extending the terms of the Team license through March 31, 2000 and is in
negotiation with the NFLP regarding the renewal of the Quarterback Club
license. The Company is obligated to pay a royalty based on net sales of
licensed products subject to an annual minimum royalty fee. There can be no
assurance that the Company will be able to renew its license agreements with
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, 1997, 33% of the Company's sales was
derived from promotions, of which one customer accounted for aggregate sales
of $2,438,000 or 20% of total sales, of which $1,700,000 represented a three
team hockey puck promotion. The Company does not anticipate a reoccurrence
of a significant hockey puck promotion in 1998. During the year ended
December 31, 1996, 76% of the Company's sales was derived from sales of the
Company's promotional products, of which one customer accounted for
aggregate sales of $14,122,000 or 54% of total sales. The Company expects
the recent trend of a decreasing contribution of promotion sales to aggregate
sales will continue in the future. This trend is the result of the continued
growth of the Company's retail sales and expanding opportunities, particularly
within the amusement and entertainment industries.
8<PAGE>
Variability of Gross Margins - Historically, the Company has realized
higher gross margins on its retail sales as compared to promotional sales. In
1996, the Company realized gross margins of 29% as a result of $14,000,000
of low margin toy promotion sales. In 1997, the Company realized gross
margins of 26% as a result of a $1,175,000 provision for discontinued and
excess inventory. Excluding this operating charge, gross margins were 36% in
1997, which is consistent with the margins realized on the Company's sports-
related sales in 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 35% and 47% of
the Company's sales during the years ended December 31, 1996 and 1997,
respectively. As such, its sales tend to be concentrated during the second
and third quarters which coincides with the baseball season. 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. Excluding the toy car
sales, baseball-related sales accounted for 76% of the Company's core sports
product sales in 1996. 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 including
new vulcanized rubber sports balls. Baseball-related sales, however, are
expected to remain a significant percentage of total sales for the
foreseeable future. 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. 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.
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
generally not deemed part of the Company's backlog. The Company considers
its backlog as those promotional orders and certain specialty product retail
sales in which an agreement has been signed defining the terms and quantity of
the promotion or special order, and delivery extends beyond the normal
processing time of up to four weeks. Historically, the Company's backlog of
9<PAGE>
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 $1,700,000 and
$985,000 as of March 1, 1997 and 1998, respectively. The 1997 backlog
represented a three-market Fotopuck promotion for a national QSR chain. The
1998 backlog represents various corporate promotions and specialty retail
orders. The Company anticipates that, given its expectation that retail sales
in future periods will represent an increasing percentage of the Company's
aggregate sales, the backlog will become less 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. The Company's
expansion into recreational vulcanized rubber sports balls will result in
substantially more competition within this product line due to a greater number
of well established companies, including Franklin Sports Inc., Baden Sports
Inc. ("Baden"), Best Equipment and Wilson Sporting Goods Co. The
Company also competes directly with Rawlings Sporting Goods Company, Inc.
("Rawlings") in the team logo baseball business and 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
the Company will be dependent, in part, upon its proprietary printing process
and ability to keep pace with advancements in printing and graphic designs.
There can be no assurance that new printing 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 future success of the Company increasingly is
dependent upon the creativity of its artists in product design, and its
ability to reproduce these designs onto sports products using highly
effective overseas suppliers.
10<PAGE>
The domestic promotions business is highly competitive. The
Company competes frequently with the same companies as in its licensed sports
product business, particularly Baden and Rawlings. Additionally, a variety of
companies that 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. 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.
As previously noted, a significant competitive advantage of the Company is its
creative design capabilities, and its ability to reproduce these designs onto
high quality products manufactured in China.
Pursuant to the Company's Year 2000 plan, the Company is currently
evaluating its computerized systems to assure that the transition to the Year
2000 will not disrupt the Company's operations. The Company also intends to
evaluate the systems of its key customers and suppliers. The costs of achieving
Year 2000 compliance are not expected to have a material impact on the
Company's business, operations or its financial condition.
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 Expressions, 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
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.
11<PAGE>
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. The cost
of compliance with environmental laws and regulations are not considered
significant.
12<PAGE>
Employees
As of March 1, 1998, the Company employed 69 persons, all on a full-
time basis, including seven in executive positions, eight in sales, seven in
graphic production, 16 in administrative support positions and 31 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 and warehouse are located in
approximately 50,000 square feet of leased space at 3738 Ruffin Road and
4000 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, together with certain common area expenses, during the
term of the lease. In July 1997, the Company began leasing 23,000 square feet
of additional warehousing space from an unaffiliated party under a one-year
lease agreement for a monthly rent of $9,913. The Company anticipates that
the additional warehousing space will meet its space requirements for the
foreseeable future.
Item 3. Legal Proceedings
The Company is not a party to any material litigation or legal
proceeding, and none of the Company's products has ever been the subject of a
safety or quality recall.
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, 1997.
13<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, 1996 and on the Nasdaq National Market ("NMS") since October
17, 1996. The following table sets forth the range of trade 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)
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
1997
First Quarter $ 6.25 $ 3.88
Second Quarter $ 4.50 $ 2.88
Third Quarter $ 3.38 $ 2.13
Fourth Quarter $ 2.75 $ 1.13
Warrants: (FUSAW)
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
1997
First Quarter $ 1.88 $ 1.00
Second Quarter $ 1.38 $ .38
Third Quarter $ .75 $ .19
Fourth Quarter $ .47 $ .13
On March 23, 1998, 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 1,750
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.
Item 6. Management's Discussion and Analysis or Plan of Operation
Results of Operations for Years Ended December 31, 1996 and 1997:
14<PAGE>
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, 1996 and 1997:
1996 % 1997 %
---------- --- ---------- ---
Sales $25,997,162 100 $12,176,780 100
Cost of Sales 18,468,475 71 8,957,533 74
Gross Profit 7,528,687 29 3,219,247 26
Operating Expenses 5,567,755 21 6,068,092 50
Operating Income (Loss) 1,960,932 8 (2,848,845) (23)
Interest Expense 38,843 1 40,486 1
Interest Income 148,261 1 92,399 1
Income (Loss) Before Income Tax 2,070,350 8 (2,796,932) (23)
Income Tax Expense 795,000 3 - -
Net Income (Loss) $ 1,275,350 5 $(2,796,932) (23)
Sales:
Sales were $12,177,000 for the year ended December 31, 1997, a
decrease of 53% from sales of $25,997,000 for the year ended December 31,
1996. The $13,820,000 decrease in sales was due to the $14,122,000 decrease
in toy car promotional sales offset in part by a $302,000 or 3% increase in the
Company's core sports product sales.
Retail sales were $7,917,000 for the year ended December 31, 1997,
an increase of 29% from retail sales of $6,147,000 for the year ended
December 31, 1996. This increase was due to several factors: continued
expansion of sales to national mass merchants; growth in its Major League
Baseball team and concessionaire sales; increasing sales from the Company's
expanding product lines; and a significant increase in the Company's
amusement and entertainment business. The Company realized sales increases
of $424,000 or 32%, $369,000 or 97%, $417,000 or 210%, and $237,000 or
120%, from its football, basketball, hockey and lapel pin product lines,
respectively. Several factors support continued retail sales growth in the
future, which is expected to result in retail sales accounting for a greater
percentage of its total sales. These factors include: the introduction of the
new vulcanized rubber "recreational" sports ball product lines; the
leveraging of its college licenses and its expanding national mass merchant
relationships to gain increased shelf space, and increase year-round
sell-throughs of its products; and continued rapid growth with its amusement
and entertainment customers, such as Walt Disney, Planet Hollywood and Six
Flags. The Fototire NASCAR product realized insignificant sales during 1997
and the Company did not renew for 1998 its retail licenses with any drivers.
The Company also recorded a $1,175,000 provision for discontinued and excess
inventory, primarily representing all of the Fototire inventory on hand at
December 31, 1997. Although the Company will continue to pursue promotional
opportunities with the Fototire and the liquidation of the retail Fototire
product, there can be no assurance that the Company will be successful in
this regard.
Promotions sales in 1997 were $4,260,000, a decrease of 79% from
promotions sales of $19,850,000 for the year ended December 31, 1996. The
decrease was primarily due to the $14,122,000 decrease in toy car promotional
sales. Sports-related promotions sales were $4,260,000 in 1997, a decrease of
15<PAGE>
26% from 1996 sales of $5,730,000. The decrease in promotion sales in 1997
was the result of fewer significant multi-regional corporate promotional
programs. The Company anticipates that in the future its promotions business
will represent a smaller percentage of the Company's total sales, given the
growth of the Company's retail business, and the likelihood that fewer
multimillion dollar "national" programs will occur in the future. The
Company's objective is to reestablish growth of its promotions business by
leveraging its relationships with its licensors, including MLBP, NFL and
Colleges, to secure promotions with corporations who sponsor these
organizations.
Gross Profit:
Gross profit was $3,219,000 for the year ended December 31, 1997, a
decrease of 57% from gross profit of $7,529,000 for the year ended December
31, 1996, reflecting the substantially higher sales in 1996. Gross margins
as a percentage of sales for the year ended December 31, 1997 declined to 26%
from 29% for the prior year period. This decline was the result of a
$1,175,000 provision for discontinued and excess inventory, primarily
representing Fototire product. Gross margins declined in 1996 as compared to
1995 due to the $14,122,000 in low margin toy car sales. Excluding these toy
car sales in 1996 and the inventory charge in 1997, gross margins on its sports
related sales were 36% in both 1996 and 1997. The Company expects that
gross margins in 1998 should be consistent with the margins realized on its
sports-related sales in prior years.
Operating Expenses:
The Company's operating expenses were $6,068,000 for the year
ended December 31, 1997, an increase of 9% from operating expenses of
$5,568,000 for the year ended December 31, 1996. Operating expenses as a
percentage of sales increased to 50% in 1997 from 21% in 1996. Operating
expenses increased in both absolute terms and as a percentage of sales as a
result of approximately $885,000 in non-recurring charges which were incurred
in 1997, including: settlement costs ($210,000) and legal fees ($90,000) of
$300,000, incurred in connection with the settlement of a lawsuit with a former
officer; an impairment loss of $110,000 charged to depreciation expense,
resulting from the write down of tire molds related to the Fototire product;
marketing and royalty costs of $300,000 related to the Fototire product; and
approximately $175,000 of professional service, recruiting and training costs.
Royalties expenses were $788,000 for the year ended December 31,
1997, a decrease of 16% from royalties expenses of $935,000 for the year
ended December 31, 1996. Royalties expenses as a percentage of sales
increased to 6% in 1997 from 4% in 1996. The increase in royalties expenses
during this period as a percentage of sales is due to the $14,122,000 of
promotional toy car sales in 1996 which had no royalty obligation. Excluding
these toy car sales, royalties as a percentage of sales in 1996 were 8%, as
compared to 6% in 1997. This decrease both in absolute terms and as a
percentage of sales in 1997 was due to higher royalty bearing promotions sales
in 1996 combined with significant increases in 1997 in amusement park and
entertainment-related sales, which had no royalty obligation. The Company
expects that in absolute terms, royalties expenses will increase in 1998,
reflecting the anticipated increase in retail sales and, as a percentage of
sales, will remain consistent with 1997, in part due to approximately $100,000
16<PAGE>
of NASCAR-related minimum royalty guarantees paid in 1997 which will be non-
recurring. 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.
Marketing expenses were $2,154,000 for the year ended December 31,
1997, a decrease of 5% from marketing expenses of $2,265,000 for the year
ended December 31, 1996. Marketing expenses as a percentage of sales
increased to 18% in 1997 from 9% in 1996, reflecting the absorption of the
fixed components of marketing expenses over significantly lower sales volume.
Marketing expenses increased due to approximately $200,000 of advertising,
wage and travel costs directly related to the NASCAR Fototire product which
will be non-recurring. Additionally, the Company incurred higher wages,
benefits, and travel costs associated with additional sales personnel in 1997.
The Company recently restructured its sales organization, eliminating less
productive sales positions. The Company anticipates that marketing expenses
should decrease both in absolute terms and as a percentage of sales in 1998, as
a result of these and other cost reduction initiatives.
General and administrative expenses were $2,550,000 for the year
ended December 31, 1997, an increase of 20% from general and administrative
expenses of $2,130,000 for the year ended December 31, 1996. The $420,000
increase between periods was due in part to approximately $175,000 of
professional service costs, including recruiting fees and related costs and
computer installation costs, which should be non-recurring. The Company also
incurred higher facility costs to accommodate significantly higher inventory
levels and higher personnel costs. As previously noted, the Company has taken
definitive steps to reduce its operating costs. The Company anticipates that
general and administrative expenses for the year ending December 31, 1998
should be comparable to total general and administrative expenses incurred in
1996.
Other Income (Expense):
Interest expense was $40,000 for the year ended December 31, 1997,
an insignificant increase from interest expense of $39,000 for the year ended
December 31, 1996. The Company anticipates that interest expense in future
periods will increase moderately reflecting additional capital lease purchases
as more fully explained in "Liquidity and Capital Resources" below.
Interest income was $92,000 for the year ended December 31, 1997 as
compared to $148,000 for the year ended December 31, 1996. This decrease is
due to the Company's average cash balances available for investment being
substantially lower during 1997 as compared to 1996. The Company
anticipates that interest income in 1998 will be substantially lower than in
1997 due to lower average cash balances available for investment.
17<PAGE>
Income Tax Expense:
Income tax expense of $795,000 was recorded for the year ended
December 31, 1996. There was no income tax expense (benefit) for the year
ended December 31, 1997 due to the 1997 operating loss. No benefit for these
operating loss and deferred expenses has been recognized in the financial
statements due to the uncertainty as to the future realizability of these
deferred assets in future periods. No other valuation allowances were deemed
necessary as all deductible temporary differences created prior to 1997 are
expected to be utilized from the generation of future taxable income. Based
upon the restructuring and other steps recently made by the Company to reduce
its operating costs and improve efficiencies, and the expectation of continuing
increases in its retail business, it is probable that future taxable income
will be more than sufficient to realize the $451,000 deferred tax asset on
future tax returns.
Liquidity and Capital Resources
The Company's net working capital decreased by $2,976,000 from
December 31, 1996 to December 31, 1997, to a net working capital surplus of
$3,863,000 at December 31, 1997 from a net working capital surplus of
$6,839,000 at December 31, 1996. Cash flow from operations increased by
$5,670,000 from cash used in operations of $3,542,000 for the year ended
December 31, 1996 to cash provided by operations of $2,128,000 for the year
ended December 31, 1997. This increase was primarily the result of the
collection of the $5,600,000 accounts receivable with a major oil company
resulting from a Holiday 1996 toy car promotion, offset in part by a
$1,165,000 decrease in accounts payable and the $2,797,000 net loss.
Cash and equivalents aggregated $765,000 at December 31, 1997, a
decrease of $217,000 from cash and equivalents of $982,000 at December 31,
1996. This decrease is primarily due to the significant operating losses and
decreases in accounts payable, as previously noted, and increased inventory
levels. As previously noted, a $1,175,000 provision for discontinued and
excess inventory was charged to operations in 1997, primarily due to Fototire
inventory which the Company has been unsuccessful in selling. Excluding the
Fototire inventory, the Company's inventory increased by approximately
$400,000 to $2,477,000. The Company's expanding retail product lines,
including rubber sports balls, 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, including property and
equipment. During 1997, the Company acquired fixed assets for an aggregate
purchase price of approximately $582,000, including production machinery,
office and computer equipment. For the next twelve months, the Company
anticipates that its capital expenditure requirements will approximate
$250,000, which will be used to purchase additional product molds, production
machinery, office and computer equipment.
At December 31, 1997, the Company has commitments for minimum
guaranteed royalties under licensing agreements totaling $869,000 in the
aggregate through 2000, of which $421,000 is due at various times in 1998.
Based upon the restructuring and other steps recently made by the Company to
18<PAGE>
reduce its operating costs and improve efficiencies, and the expectation of
continuing increases in its retail business, management expects these
guaranteed royalties to be funded from operating cash flows.
In December 1994, the Company entered into a $1,000,000 line of
credit facility (the "facility") with Merrill Lynch International Bank Limited
at an interest rate of 1.75% above the London Interbank Offering Rate term that
the Company chooses to select. Any borrowing under the line of credit, which
is used solely to collateralize the issuance of stand-by letters of credit to
manufacturers, are secured by cash collateral deposited with Merrill Lynch
equal to the credit outstanding. In December 1995, the Company increased its
existing line of credit with Merrill Lynch International Bank Limited, from
$1,000,000 to $3,000,000. The line of credit, which expired on December 19,
1996, was subsequently renewed on March 27, 1997 extending its term until
December 10, 2001. There was no borrowing under the line of credit as of
December 31, 1997.
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. In February 1998, Scripps Bank renewed the credit
line in the amount of $1,500,000, expiring on October 15, 1998. The bank
also waived the net worth covenant at December 31, 1997 and reduced the
working capital requirements and modified the borrowing base formula on the
new credit line. At December 31, 1996, outstanding borrowings under the
credit line totaled $1,825,000, which were repaid in full in January 1997.
There were no borrowings under the credit line at December 31, 1997.
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
1998.
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 1998, 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 1998, 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.
19<PAGE>
1998 Outlook
Looking forward to 1998, the Company expects significantly improved
results in 1998 from the record losses realized in 1997. During the past
several years, the Company's retail business has consistently grown in excess
of 25% per year. Several factors should support such growth in the future,
including: continued expansion and penetration into national mass merchants;
the introduction of the rubber sports ball product line, which establishes the
Company as a competitor in the recreational sports ball industry and expands
the Company's niche beyond "souvenir" type products; increasing sales with its
amusement park and entertainment related customers; and the recent
establishment of a national independent representative sales force which should
significantly expand the depth of the Company's account base. Retail sales are
anticipated to surpass promotions sales in 1998, and should contribute to
reducing the variability of the Company's sales and earnings in future periods.
Historically, the Company was reliant upon its promotions business to add
sufficient sales to generate operating profits. The Company anticipates that
by early 1999, its retail sales should be sufficient to absorb the Company's
operating costs. The Company will continue to aggressively pursue the growth
of its promotions business, focusing on leveraging its sports league
relationships to secure promotions from their corporate sponsors. Given the
inherent variability of the promotions business, it is difficult to project the
extent of future promotions. However, based on the Company's current
discussions and prospects to date, it is possible that significant promotional
programs could be realized during the summer or fall of 1998, although there is
no way to currently predicts such developments.
The Company has taken definitive steps recently to reduce its operating
costs and improve efficiencies. Notwithstanding the approximately $2,060,000
of non-recurring costs incurred in 1997 ($1,175,000 provision for discontinued
and excess inventory and $885,000 of other charges as previously noted), the
Company has reduced its operating expenses by approximately $400,000 through,
in part, a reduction of its workforce. The Company anticipates that
royalties expense will increase in absolute terms as a result of higher
royalty bearing sales. Marketing and general and administrative expenses
should be comparable to expenses incurred in 1996, reflecting the operating
cost reductions noted above.
To improve its financial performance and reestablish consistent
profitability, the Company must continue to realize significant growth in its
retail business, continue to diversify its promotions business by expanding its
customer base, maintain or increase its gross 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
20<PAGE>
* 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 effectiveness of the new independent sales representative
organizations to expand the breadth of the Company's customer
base and significantly increase sales
* the ability of the Company to effectively compete in the more highly
competitive recreational sports ball industry
* the ability 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
* 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 exceeds 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 20, 1998, of Hollander, Gilbert
& Co., the Company's independent auditors.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
21<PAGE>
Part III
Item 9. Directors and Executive Officers of the Registrant
The following table sets forth certain information as of March 15,
1998 concerning the executive officers and directors of the Company:
NAME AGE POSITION
- ---- --- --------
Michael Favish 49 President, Chief Executive Officer
and Director
Salvatore T. DiMascio2 58 Director
Joel K. Rubenstein1 61 Director
Sabin C. Streeter1 56 Director
David G. Forster 38 Executive Vice President, Finance,
Treasurer and Chief Financial Officer
Carl E. Francis 39 Senior Vice President, Sales and Marketing
Karen M. Betro 47 Vice President, Operations
Jon D. Schneider 30 Vice President, Marketing, Team Business
Steve B. Katzke 31 Vice President, Specialty Sales and
Marketing
- --------
1. Member of compensation committee
2. Member of audit committee
Michael Favish has served as President and a director of the Company
since his founding of the Company in December 1988 and as President, Chief
Executive Officer and a director of the Company since March 1994. Mr.
Favish has over 25 years of product design, manufacturing and sourcing
experience and has established strategic international sourcing alliances.
Salvatore T. DiMascio has served as a director of the Company since
August 1997. Since 1986, Mr. DiMascio has been President of DiMascio
Venture Management, Inc., a management and investment firm. Additionally,
from 1994 to 1997, Mr. DiMascio was Executive Vice President of Anchor
Gaming, Inc., a public gaming company. From 1978 to 1986, Mr. DiMascio
was Senior Vice President and Chief Financial Officer of Conair Corporation,
a public manufacturer of health and beauty products. Mr. DiMascio's
previous business experience includes Audit Manager with Arthur Young &
Co., a national CPA firm, and as Controller of Revlon Inc. Mr. DiMascio is
currently serving on the Board of Directors of U.S. Communications Inc. and
H.E.R.C. Products Inc., both of which are publicly-held corporations.
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.
22<PAGE>
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 Parker-Hunter, Incorporated, a privately-held securities firm.
David G. Forster has served as Executive Vice President, Finance
since January 1998, as Treasurer and Chief Financial Officer of the Company
since March 1994 and as Vice President, Finance of the Company from
December 1993. From November 1989 through November 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.
Carl E. Francis has served as Senior Vice President, Sales and
Marketing since January 1998, as Vice President, Retail Development of the
Company from January 1996 through December 1997 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.
Karen M. Betro has served as Vice President, Operations 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.
Jon D. Schneider has served as Vice President, Marketing, Team
Business since January 1998, as Managing Director of Project Development
since October 1994, and as Director of Special Projects since April 1993.
From 1990 to 1993, Mr. Schneider was employed in various positions in the
sports industry, including Assistant General Manager of the Newport Beach
Dukes and positions with the Oakland Athletics and Sun City Rays.
Steve B. Katzke has served as Vice President, Specialty Sales and
Marketing since January 1998, and as Manager of Retail Sales since January
1993. From 1989 through 1992, Mr. Katzke was employed as the sales
manager of Robert Katzke and Associates.
Item 10. Executive Compensation
The information required by Item 10 is incorporated herein by
reference to the section labeled "Executive Compensation" in the Company's
definitive Proxy Statement in connection with the Company's 1998 Annual
Meeting of Stockholders.
23<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 11 is incorporated herein by
reference to the section labeled "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive Proxy Statement in
connection with the Company's 1998 Annual Meeting of Stockholders.
Item 12. Certain Relationships and Related Transactions
The information required by Item 12 is incorporated herein by
reference to the section labeled "Election of Directors" and "Executive
Compensation" in the Company's definitive Proxy Statement in connection
with the Company's 1998 Annual Meeting of Stockholders.
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., (incorporated herein by reference to
Exhibit 10.1(3) of the Company's Annual Report on
Form 10-KSB for the fiscal year ended December 31,
1996 (the "1996 Form 10-KSB")).
24<PAGE>
10.1(4) License Agreement with Major League Baseball Players
Association (incorporated herein by reference to Exhibit
10.1(4) of the 1996 Form 10-KSB).
10.1(5) License Agreement with National Football League
Properties, Inc. (incorporated herein by reference to
Exhibit 10.1(5) of the 1996 Form 10-KSB)
10.1(9) Agreement with Chevron USA, Inc. dated June 17, 1996
(incorporated herein by reference to Exhibit 10.1(9) of
the Form SB-2).
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).
10.3(5)* Stock Option Agreement dated January 30, 1998 with
Salvatore T. DiMascio.
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 (incorporated herein by reference to
Exhibit 10.4(2) of the 1996 Form 10-KSB).
10.4(3)* Settlement Agreement and Mutual General Release
dated October 1, 1997 with Fred S. Ostern.
10.4(4)*(P) Amended and Restated Consulting Agreement with
Robert Weingarten effective January 1, 1996.
10.4(5)* Amendment to Amended and Restated Consulting
Agreement with Robert Weingarten dated September 1,
1996 (incorporated herein by reference to Exhibit
10.4(4) of the 1996 Form 10-KSB).
10.4(9) Consulting Agreement with ADR Management Group
Ltd. dated August 11, 1997.
10.4(10) Stock Option Agreement dated August 11, 1997 with
ADR Management Group Ltd.
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).
10.5(1) Sublease, dated June 19, 1997 by and between the
Company and General Textiles, with respect to 4000
Ruffin Road, San Diego, California.
10.9(1) Merrill Lynch International Bank Limited line of credit
dated December 20, 1995 (incorporated herein by
reference to Exhibit 10.9(1) of the Form SB-2).
25<PAGE>
10.9(2) Merrill Lynch International Bank Limited irrevocable
stand-by letter of credit dated December 1, 1995
(incorporated herein by reference to Exhibit 10.9(2) of
the Form SB-2).
10.10 Revolving Credit Agreement dated November 13, 1996
between Fotoball USA, Inc. and Scripps Bank
(incorporated herein by reference to Exhibit 10.10 of the
Form SB-2).
10.10(1) Amended Revolving Credit Agreement dated February
19, 1998 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, 1997.
26<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: March 30, 1998 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: March 30, 1998 By: /s/ Michael Favish
----------------------------
Michael Favish
President and Chief Executive Officer
Dated: March 30, 1998 By: /s/ David G. Forster
----------------------------
David G. Forster
Executive Vice President - Finance
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: March 30, 1998 By: /s/ Sabin C. Streeter
---------------------------
Sabin C. Streeter
Director
Dated: March 30, 1998 By: /s/ Joel K. Rubenstein
----------------------------
Joel K. Rubenstein
Director
Dated: March 30, 1998 By: /s/ Salvatore T. DiMascio
---------------------------
Salvatore T. DiMascio
Director
27<PAGE>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ------------ ----
10.3(5) Stock Option Agreement dated January 30, 1998
with Salvatore T. DiMascio.
10.4(3) Settlement Agreement and Mutual General Release
dated October 1, 1997 with Fred S. Ostern.
10.4(9) Consulting Agreement with ADR Management Group
Ltd. dated August 11, 1997.
10.4(10) Stock Option Agreement dated August 11, 1197 with ADR
Management Group Ltd.
10.5(1) Sublease, dated June 19, 1997 by and between
the Company and General Textiles, with respect
to 4000 Ruffin Road, San Diego, California.
10.10(1) Amended Revolving Credit Agreement dated
February 19, 1998 between Fotoball USA, Inc.
and Scripps Bank.
21 Subsidiaries of the Company.
27 Financial data schedule.
28<PAGE>
FOTOBALL USA, INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
Report of Independent Auditors F-1
Balance Sheets at December 31, 1996 and 1997 F-2
Statements of Operations
for the years ended December 31, 1996 and 1997 F-3
Statement of Stockholders' Equity
for the years ended December 31, 1996 and 1997 F-4
Statements of Cash Flows
for the years ended December 31, 1996 and 1997 F-5
Notes to Financial Statements F-7
29<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, 1996 and 1997, 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, 1996 and 1997, 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 20, 1998
F-1<PAGE>
FOTOBALL USA, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
1996 1997
ASSETS ----------- ------------
CURRENT ASSETS
Cash and equivalents $ 981,554 $ 764,855
Accounts receivable less allowances
of $151,000 in 1997 and $54,000 in 1996 7,369,617 1,402,607
Inventories (Note 3) 2,081,206 2,476,815
Prepaid expenses and other 176,285 148,855
Deferred income taxes (Note 11) 187,000 150,000
----------- ------------
TOTAL CURRENT ASSETS 10,795,662 4,943,132
----------- ------------
PROPERTY AND EQUIPMENT, net (Notes 4 and 7) 1,039,225 1,217,892
OTHER ASSETS ----------- ------------
Deferred income taxes (Note 11) 264,000 301,000
Deposits and other 55,449 115,382
----------- ------------
TOTAL OTHER ASSETS 319,449 416,382
----------- ------------
$12,154,336 $ 6,577,406
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank (Note 5) $ 1,825,000 $ --
Current portion of capital leases (Note 7) 58,516 90,182
Accounts payable and accrued
expenses (Note 6) 1,954,106 789,388
Settlement liability (Notes 7 and 9) -- 200,000
Income taxes payable 119,200 --
----------- ------------
TOTAL CURRENT LIABILITIES 3,956,822 1,079,570
CAPITAL LEASES, net of current portion (Note 7) 138,976 229,930
----------- ------------
TOTAL LIABILITIES 4,095,798 1,309,500
----------- ------------
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 -
2,676,742 shares 26,767 26,767
Additional paid-in capital 8,562,194 8,568,494
Accumulated deficit (530,423) (3,327,355)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 8,058,538 5,267,906
----------- ------------
$12,154,336 $ 6,577,406
=========== ============
The accompanying notes are integral part of these statements.
F-2<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997
----------- ------------
SALES $25,997,162 $ 12,176,780
COST OF SALES 18,468,475 8,957,533
----------- ------------
GROSS PROFIT 7,528,687 3,219,247
----------- ------------
OPERATING EXPENSES
Royalties 935,079 787,634
Marketing 2,265,006 2,154,023
General and administrative 2,129,680 2,550,040
Depreciation and amortization (Note 4) 237,990 366,395
Settlement cost (Notes 7 and 9) -- 210,000
----------- ------------
TOTAL OPERATING EXPENSES 5,567,755 6,068,092
INCOME (LOSS) BEFORE ----------- ------------
OTHER INCOME (EXPENSE) 1,960,932 (2,848,845)
OTHER INCOME (EXPENSE) ----------- ------------
Interest expense (38,843) (40,486)
Interest income 148,261 92,399
----------- ------------
TOTAL OTHER INCOME 109,418 51,913
----------- ------------
INCOME (LOSS) BEFORE INCOME TAX 2,070,350 (2,796,932)
INCOME TAX EXPENSE (Note 11) 795,000 --
----------- ------------
NET INCOME (LOSS) $ 1,275,350 $ (2,796,932)
=========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 2,676,742 2,676,742
=========== ============
DILUTED 2,728,348 2,676,742
=========== ============
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ .48 $ (1.04)
=========== ============
DILUTED $ .47 $ (1.04)
=========== ============
The accompanying notes are integral part of these statements.
F-3<PAGE>
FOTOBALL USA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Common Stock Additional
Unamortized
------------------ Paid-in Accumulated
Compensation
Shares Amount Capital Deficit
Expense Total
--------- -------- ----------- ------------
- ------------ ------------
<S> <C> <C> <C> <C>
<C>
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
Stock-based compensation
expense 6,300
6,300
Net loss (2,796,932)
(2,796,932)
--------- -------- ----------- ------------
- ------------ ------------
BALANCE, December 31, 1997 2,676,742 $ 26,767 $ 8,568,494 $ (3,327,355)
$ 0 $ 5,267,906
========= ======== =========== ============
============ ============
</TABLE>
The accompanying notes are integral part of these statements.
F-4<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 1,275,350 $ (2,796,932)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Provision for discontinued and excess
inventory -- 1,145,720
Depreciation and amortization of
property and equipment 194,990 403,977
Amortization of deferred consulting fee 17,500 --
Amortization of stock compensation expense 25,500 6,300
Changes in operating assets and liabilities:
Accounts receivable (6,781,338) 5,967,010
Inventories (793,121) (1,541,329)
Production-in-process 628,631 --
Prepaid expenses and other (62,210) 27,431
Deferred income taxes 675,000 --
Accounts payable and accrued expenses 1,158,594 (1,164,718)
Income taxes payable 119,200 (119,200)
Settlement liability -- 200,000
----------- ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (3,541,904) 2,128,259
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (324,094) (383,717)
Decrease in restricted cash 1,000,000 --
Increase in long-term deposits (30,966) (59,933)
----------- ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 644,940 (443,650)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of related party loans (58,011) --
Repayment of capital lease obligations (50,889) (76,308)
Borrowings (repayments) under revolving
line of credit 1,825,000 (1,825,000)
Proceeds from exercise of stock option 150 --
----------- ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES
1,716,250 (1,901,308)
----------- ------------
NET DECREASE IN CASH AND EQUIVALENTS (1,180,714) (216,699)
CASH AND EQUIVALENTS, Beginning of period 2,162,268 981,554
----------- ------------
CASH AND EQUIVALENTS, End of period $ 981,554 $ 764,855
=========== ============
continued
F-5<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997
----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 25,851 $ 40,486
Income taxes paid $ 15,277 $ 121,516
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 50,048 $ 198,930
The accompanying notes are integral part of these statements.
F-6<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Nature of Operations - 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, Gart Bros., Modell's, Pro Image and The Sports
Authority. Additionally, the Company designs, develops and manufactures
high quality custom sports and non-sports related products for promotional
programs. The Company also provides non-licensed specialty sports products
to corporations for resale or promotional use, including sales to amusement
park and entertainment related companies. 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 300 colleges and universities
("Colleges").
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
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. As of December 31, 1997,
the Company had a cash balance in one bank of approximately $267,000,
which exceeds the federally insured limit.
Concentrations of credit risk with respect to accounts receivable are
mitigated in part due to the large number of customers to which the
Company's retail products are sold, as well as their dispersion across
geographic areas. Additionally, a significant percentage of the Company's
retail and promotions sales are sold to Fortune 500 companies. At
December 31, 1996 and 1997, two separate Fortune 500 companies accounted
for 88% and 22% of total accounts receivable, respectively, which were
collected in subsequent periods.
Inventories - Inventories have been valued at the lower of cost
(first-in, first-out) or market.
F-7<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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
The Company reviews 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.
Stock-Based Compensation - The Company adopted only the disclosure
requirements of SFAS No. 123 and continues to recognize the intrinsic
value-based method, providing pro forma footnote disclosures of net
income and earnings per share as if the fair value accounting provisions
of this statement had been adopted.
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.
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 (Loss) per Common Share - The FASB issued statement No. 128,
"Earning per Share", required its adoption effective for the Company's
fiscal year ended December 31, 1997 and also required restatement of the
earnings per share (EPS) data for the 1996 fiscal year to conform to the
statement. The effect of the restatement on net income per share-diluted
was $.01 for 1996. FAS No. 128 simplifies the computation of EPS by
requiring companies with complex capital structures to report basic EPS
instead od primary EPS, and replaces fully diluted EPS with diluted EPS.
Basic EPS is calculated by dividing net income (loss) by the weighted
F-8<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
average number of common shares outstanding during the period. Diluted EPS
is calculated by dividing net income by the number of common shares
outstanding increased by exercisable or convertible securities. Diluted
EPS is the same as basic EPS in 1997 as a result of the loss from
continuing operations. 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 1996 balances have been reclassified to
conform with the current year's presentation.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Significant Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported
amounts of revenue and expenses during the period. Significant estimates
have been made by management with respect to the realizability of the
Company's deferred tax assets, the possible outcome of threatened
litigation, and the provision for discontinued and excess inventories.
See Footnotes 2, "Variability of Gross Margins", 3, 7, and 11. Actual
results could differ from these estimates making it reasonably possible
that a change in these estimates could occur in the near term.
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 1997 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, 1997, 33% of the Company's sales was
derived from promotions, of which one customer accounted for aggregate
sales of $2,438,000 or 20% of total sales. During the year ended
December 31, 1996, 76% of the Company's sales was derived from sales of the
Company's promotional products, of which one customer accounted for
aggregate sales of approximately $14,000,000 or 54% of total sales.
Variability of Gross Margins - Historically, the Company has realized
higher gross margins on its retail sales as compared to promotional sales.
In 1996, the Company realized gross margins of 29% as a result of
$14,000,000 of low margin toy promotion sales. In 1997, the Company
realized gross margins of 26% as a result of a $1,175,000 provision for
discontinued and excess inventory. Excluding this operating charge, gross
margins were 36% in 1997, which is consistent with the margins realized
on the Company's sports-related sales in 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
35% and 47% of the Company's sales during the years ended December 31, 1996
and 1997, respectively. As such, its sales tend to be concentrated during
the second and third quarters which coincides with the baseball season.
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. Excluding the toy car sales, baseball related sales accounted for 76%
of the Company's core sports product sales in 1996. 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 including new vulcanized rubber sports
balls. Baseball related sales, however are expected to remain a
significant percentage of total sales for the foreseeable future. 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. Mr. Favish has entered into a five-year
employment agreement with the Company, commencing on August 11, 1994,
F-10<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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.
Dependence on Suppliers - In 1997, the Company purchased approximately
97% of its raw material, consisting primarily of synthetic baseballs,
footballs, basketballs, hockey pucks and Fototires, from six companies
located in China, with one manufacturer accounting for 52% 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, 1996 and 1997:
1996 1997
---------- -----------
Finished goods $ 458,184 $ 970,886
Raw material 1,652,203 2,680,830
Allowance for discontinued
and excess inventory (29,181) (1,174,901)
---------- -----------
$2,081,206 $ 2,476,815
========== ===========
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, 1996 and 1997:
1996 1997
---------- -----------
Office equipment $ 550,860 $ 771,301
Show exhibits 127,174 182,953
Molds 183,136 214,185
Machinery and equipment 535,566 741,803
Leasehold improvements 310,016 379,154
---------- -----------
1,706,752 2,289,396
Less: accumulated depreciation
and amortization (667,527) (1,071,504)
---------- -----------
$1,039,225 $ 1,217,892
========== ===========
F-11<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
The Company has recognized an impairment loss of $110,000 resulting from
the impairment of the tire molds related to the Fototire product. This
impairment loss was charged to depreciation and amortization expense for
the year ended December 31, 1997.
5. LINES OF CREDIT
In December 1994, the Company entered into a $1,000,000 line of credit
facility (the "facility") with Merrill Lynch International Bank Limited
at an interest rate of 1.75% above the London Interbank Offering Rate
term that the Company chooses to select. Any borrowing under the line of
credit, which is used solely to collateralize the issuance of stand-by
letters of credit to manufacturers, are secured by cash collateral
deposited with Merrill Lynch equal to the credit outstanding. In
December 1995, the Company increased its existing line of credit with
Merrill Lynch International Bank Limited, from $1,000,000 to $3,000,000.
The line of credit, which expired on December 19, 1996, was subsequently
renewed on March 27, 1997 extending its term until December 10, 2001.
There was no borrowing under the line of credit as of December 31, 1997.
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. In February 1998,
Scripps Bank renewed the credit line in the amount of $1,500,000,
expiring on October 15, 1998. The bank also waived the net worth
covenant at December 31, 1997 and reduced the working capital
requirements and modified the borrowing base formula on the new credit
line. At December 31, 1996, outstanding borrowings under the credit line
totaled $1,825,000 which was repaid in full in January 1997. There were
no borrowings under the credit line at December 31, 1997.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 1996 and 1997:
1996 1997
---------- -----------
Accounts payable $1,427,161 $ 527,093
Accrued payroll and related 71,232 67,355
Accrued interest 12,884 --
Accrued commissions and bonuses 208,338 15,000
Royalties payable 72,271 69,901
Customer deposits 22,577 17,176
Other 139,643 92,863
---------- -----------
$1,954,106 $ 789,388
========== ===========
F-12<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
7. COMMITMENTS AND CONTINGENCIES
Royalties - At December 31, 1997, the Company has commitments for minimum
guaranteed royalties under licensing agreements totaling $869,475 through
2000 as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1998 $ 420,975
1999 437,925
2000 10,575
----------
$ 869,475
==========
Capital Leases - The Company is obligated under various capital leases
that expire at various dates through September 2002. Minimum annual
payments including imputed interest under capital lease agreements are
as follows at December 31, 1997:
YEARS ENDING DECEMBER 31,
-------------------------
1998 $ 121,995
1999 108,928
2000 85,167
2001 57,215
2002 17,420
----------
Total minimum lease payments 390,725
Less interest component (70,613)
----------
Present value of net minimum
lease payments 320,112
Less current portion of
capital leases (90,182)
----------
Capital leases, net of current
portion $ 229,930
==========
Included in property and equipment above at December 31, 1996 and 1997
(see Note 4) is the following property and equipment acquired under
capital leases:
1996 1997
---------- -----------
Machinery and equipment $ 164,196 $ 332,252
Office equipment 109,901 145,011
Less accumulated amortization (59,008) (122,487)
---------- -----------
$ 215,089 $ 354,776
========== ===========
F-13<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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 one of the facilities leases'
includes a cost escalation clause, and all expire on various dates
through 2001. Total rental expense charged to operations was $258,000 in
1996 and $386,000 in 1997. At December 31, 1997, 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
------------------------ ------------------
1998 $ 310,020
1999 253,888
2000 251,384
2001 88,569
----------
$ 903,861
==========
In July 1997, the Company began leasing 23,000 square feet of additional
warehousing space from an unaffiliated party under a one-year lease
agreement for a monthly rent of $9,913. The Company anticipates that the
additional warehousing space will meet its space requirements for the
foreseeable future.
Settlement Cost - The Company was a defendant in an action brought in San
Diego County, California Superior Court on March 14, 1997 by Fred S.
Ostern, the Company's former Vice President-Marketing. The complaint
alleged that the Company 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. On October 1, 1997, the Company entered into a
settlement agreement with Mr. Ostern whereby the Company agreed to pay a
corporation wholly owned by Mr. Ostern the aggregate sum of $350,000,
consisting of three monthly payments of $50,000 beginning October 1, 1997,
and the remaining $200,000 being due and payable in twelve monthly payments
of $16,667 during 1998. In consideration of the settlement amount, the
parties mutually agreed that Mr. Ostern's employment with the Company be
terminated. Mr. Ostern also agreed to certain non-solicitation and
non-competition provisions through December 31, 1998. See also Note 9,
"Transactions with Related Parties".
Threatened Litigation - In October 1997, Chevron U.S.A., Inc. ("Chevron")
filed and subsequently dismissed without prejudice a claim for breach of
contract against the Company arising from the 1996 toy car promotions.
Discussions between the Company and Chevron to resolve the matter are
on-going. The Company vigorously denies any wrongdoing and believes it
has substantial meritorious defenses if the matter is pursued by Chevron.
While the effect if any, on future financial results is not subject to
reasonable estimation because considerable uncertainty exists, any
unfavorable outcome could materially affect the financial position of
the Company.
F-14<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
8. STOCKHOLDERS' EQUITY
Public Offering - In connection with the Company's initial public
offering in 1994, the Company sold to the underwriter, for an aggregate
of $55, a warrant to purchase up to 110,000 Units. Each Unit consisted of
one share of 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 underwriter's 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 - The Company has a stock option plan ("Option
Plan"), which provides for awards to employees and non-employee directors
of the Company up to an aggregate of 245,000 shares of Common Stock.
The Option Plan authorizes the issuance of incentive stock options
("ISOs"), and 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 the greater of 100%
of the market price on the date the option is granted or $5.25 per share.
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 and 7,500 options were granted in 1996 and 1997 respectively,
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
consistent with the methodology prescribed under SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income
(loss) and earnings (loss) per share would have been reduced (increased)
by approximately $169,000 and $167,000, or $(.06) per share and $.06 per
share, for 1997 and 1996, respectively. The fair value of the options
granted during 1997 is estimated as $.71 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 5.34%,
assumed forfeiture rate of 2%, and an expected life of 3 years.
F-15<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
The following table summarizes information concerning all currently
outstanding and exercisable options as of December 31, 1997:
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 6.92 $ .01 15,000 $ .01
$ 1-$5 15,000 2.63 $ 2.69 5,000 $ 2.69
$ 5-$6 266,250 7.17 $ 5.45 247,500 $ 5.46
$ 6-$8 7,500 8.50 $ 7.75 7,500 $ 7.75
$ 8-$10 68,750 8.42 $ 8.00 22,917 $ 8.00
------- -------
372,500 297,917
======= =======
The following table summarizes the Company's Option Plan activity for the
years ended December 31, 1996 and 1997:
WEIGHTED
NUMBER AVERAGE
OF PRICE PER PRICE PER
SHARES SHARE SHARE
------- ------------- ---------
January 1, 1996 187,750 $5.25 to $5.78 $5.67
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
Granted 7,500 $5.25 $5.25
Exercised -- -- --
Canceled (7,000) $8.00 $8.00
-------
December 31, 1997 267,500 $5.25 to $8.00 $6.23
=======
Stock Option Issued to an Officer - In November 1994, the Board of
Directors granted an officer of the Company a stock option to purchase
30,000 shares of Common Stock of the Company at an exercise price of
$.01 per share. The shares of Common Stock to be issued upon exercise of
the stock option are "restricted shares" (as defined in the Securities Act)
and, absent registration of the shares of Common Stock underlying the
stock option, are 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.
F-16<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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 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.
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 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, 1997, 75,000 shares issuable under the stock option were
vested. In August 1997, the Company entered into a new agreement with ADR
Management Group ("ADR") whereby ADR will provide independent financial
relations management services to the Company through July 31, 1998. In
consideration of the services to be rendered by ADR, the Company
granted ADR options to purchase an aggregate of 15,000 shares of common
stock of the Company at $2.6875 per share. The shares vest in amounts of
1,250 each month commencing September 1997 until and including August 1998,
all of which shares shall be exercisable from the date of their vesting
until August 2000. In accordance with FAS 123, the Company valued the
option at $16,200 using the Black-Scholes option-pricing model, of which
$6,300 was recognized as compensation expense during 1997, representing the
5,000 shares of the stock option which were exercisable at
December 31, 1997.
F-17<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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.
In January 1996, the Company entered into an agreement with Mr. Fred
Ostern, to serve as the Company's Vice President of Marketing in which
he received a base salary of $150,000 per year, plus annual cash bonuses
calculated as a percentage of the contribution to overhead and profit
derived from Mr. Ostern's sales. Mr. Ostern was paid $508,603 in 1996.
In March 1997, Mr. Ostern brought an action against the Company in San
Diego, California Superior Court alleging that the Company had 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 matter
was settled in October 1997, whereby Mr. Ostern and the Company mutually
agreed to terminate Mr. Ostern's employment agreement with the Company.
The Company agreed to pay Eastwoods Group, Inc., a corporation wholly
owned by Mr. Ostern, an aggregate sum of $350,000 payable in various
amounts during 1997 and 1998. The Company recognized the settlement
amount as a pre-tax charge to operations in the amount of $210,000 for
the year ended December 31, 1997, reflecting the entire settlement amount
less a reserve amount of $140,000 which was accrued for by the Company in
1996. See also Footnote 7 "Commitments and Contingencies".
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
F-18<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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, upon which the agreement
expired. Mr. Weingarten resigned as a Director of the Company on
January 27, 1998.
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 1997, the Company matched
$.50 of each $1.00 of employee contributions up to one 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, 1996 and December 31, 1997 was $27,580, and $16,856,
respectively.
11. INCOME TAXES
The components of income tax expense were as follows for the year ended
December 31, 1996:
FEDERAL STATE TOTAL
-------- --------- ---------
Current $ -- $ 120,000 $ 120,000
Deferred 587,000 88,000 675,000
-------- --------- ---------
$587,000 $ 208,000 $ 795,000
======== ========= =========
There was no income tax expense for the year ended December 31, 1997.
F-19<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
The components of deferred tax assets were as follows at December 31, 1996
and 1997:
1996 1997
---------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 351,000 $ 820,000
Employee benefit plans 40,000 24,000
Uniform capitalization of
inventory cost 25,000 72,000
Bad debt reserves 23,000 65,000
Inventory reserves 10,000 503,000
Impairment loss -- 46,000
State income taxes 37,000 4,000
Other 11,000 36,000
---------- -----------
Total gross deferred tax assets 497,000 1,570,000
Valuation allowance -- (1,068,000)
---------- -----------
Net deferred tax assets 497,000 502,000
---------- -----------
Deferred tax liabilities:
Depreciation 46,000 51,000
---------- -----------
Total deferred tax liability 46,000 51,000
---------- -----------
Net deferred tax asset $ 451,000 $ 451,000
========== ===========
The valuation allowance is primarily attributable to the net operating
loss and deferred expenses created during the year ended December 31, 1997.
No benefit for these operating loss and deferred expenses has been
recognized in the financial statements due to the uncertainty as to the
future realizability of these deferred assets in future periods. No other
valuation allowances were deemed necessary as all deductible temporary
differences created prior to 1997 are expected to be utilized from the
generation of future taxable income. The Company evaluates a variety of
factors in determining the amount of the deferred income tax assets to be
recognized including the number of years the Company's operating loss and
tax credits can be carried forward, the existence of taxable temporary
differences, the Company's earnings history and its near-term earnings
expectations. Based upon the restructuring and other steps recently
made by the Company, and the expectation of continuing increases in its
retail business, it is probable that future taxable income will be more
than sufficient to realize the $451,000 deferred tax asset on future tax
returns.
F-20<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (continued)
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:
1996 1997
---------- -----------
Expected statutory tax
expense (benefit) $ 704,000 $ (951,000)
Net tax effect of permanent
differences (68,000) 9,000
State income taxes, net of
Federal tax effect 137,000 --
Adjustment to deferred tax
asset 22,000 62,000
Valuation allowance -- 880,000
---------- -----------
Actual tax expense $ 795,000 $ --
========== ===========
At December 31, 1997, the Company had net operating loss carryforwards
for Federal income tax purposes expiring as follows:
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ----------
2006 $ 354,000
2007 593,000
2012 1,292,000
----------
$2,239,000
==========
F-21<PAGE>
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Option Agreement") is made and entered
into as of the 30th day of January, 1998, by and between Fotoball USA, Inc.,
a Delaware corporation (the "Company"), and Salvatore T. DiMascio (the
"Optionee").
The Board of Directors (the "Board") of the Company adopted a resolution
granting the Optionee, subject to the terms contained in that certain
agreement (the "Agreement") dated as of January 30, 1998, by and between the
Company and Optionee, a stock option (the "Option") to purchase 2,500 shares
(the "Shares"), of the Company's common stock, par value $.01 per share (the
"Common Stock"), on the terms and subject to the conditions set forth in the
Agreement. The Option was not granted under the Company's 1994 Stock Option
Plan.
The Option is not intended to satisfy the requirements for an incentive
stock option under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company makes no representations or warranties as
to the income, estate or other tax consequences to the Optionee of the grant
or exercise of the Option or the sale or other disposition of the Shares
acquired pursuant to the exercise thereof.
1. (a) The price at which the Optionee shall have the right to purchase
the Shares under this Option Agreement shall be $1.375, the Fair Market Value
(as defined in Paragraph 4 hereof) of the Shares on the date of such grant,
subject to adjustment as provided in Paragraph 3 below.
(b) The Option is immediately exercisable. In no event shall any
Shares be purchasable under this Agreement after January 30, 2008 (ten (10)
years after the Date of Grant)(the "Expiration Date"). Except as provided in
subparagraph (c) hereof, the Option shall cease to be exercisable three (3)
months after the date the Optionee ceases to be a non-employee director of
the Company or any affiliate of the Company, and all rights of the Optionee
hereunder shall thereupon terminate.
(c) If the Optionee ceases to be a non-employee director of the
Company or any affiliate of the Company and this cessation is due to retirement
(as defined by the Board in its sole discretion), or to mental or physical
disability (as defined in each case by the Board in its sole discretion) or
to death, the Option shall be exercisable as provided in this subparagraph.
The Optionee or, in the event of his mental or physical disability, if
permissible under applicable law, his duly appointed guardian or legal
representative or, in the event of his death, his executor or administrator
shall have the privilege of exercising the unexercised portion of the Option
which the Optionee could have exercised on the day on which he ceased to be a
non-employee director of the Company or any affiliate of the Company; provided,
however, that such exercise must be in accordance with the terms of this
Agreement and within (i) three (3) months after the date on which the
Optionee ceases to be a non-employee director of the Company or any affiliate
of the Company by reason of the Optionee's retirement or mental or physical
disability or (ii) (A) twelve (12) months after the date on which the
Optionee ceases to be a non-employee director of the Company or any affiliate
of the Company by reason of the Optionee's death or (B) three (3) months
after the date on which the Optionee ceases to be a non-employee director of
the Company or any affiliate of the Company by reason of the Optionee's death
if such death occurs during the three (3) month period following the date on
which the Optionee ceases to be a non-employee director of the Company or
any affiliate of the Company by reason of retirement or mental or physical
disability, as the case may be. In no event, however, shall the Optionee,
his duly appointed guardian or legal representative, or his executor or
administrator, as the case may be, exercise the Option after the
Expiration Date. Nothing contained herein shall be construed to confer on
the Optionee any Right to continue as a director of the Company.
2. (a) Subject to Section 422 of the Code, neither the Option nor any
right under the Option shall be assignable, alienable, saleable or
transferable by the Optionee without the written consent of the Company, or
by the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined in the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder.
(b) The Option shall not be pledged, alienated, attached, or
otherwise encumbered or transferred in any manner without the written consent
of the Company, and any purported pledge, alienation, attachment, encumbrance,
or transfer thereof without the written consent of the Company shall be void
and unenforceable against the Company.
3. In the event that the Committee shall determine that the outstanding
shares of Common Stock are affected by any (i) subdivision or consolidation
of shares, (ii) dividend or other distribution (whether in the form of cash,
Shares, other securities, or other property), (iii) recapitalization or other
capital adjustment of the Company or (iv) merger, consolidation or other
reorganization of the Company or other rights to purchase Shares or other
securities of the Company, or other similar corporate transaction or event,
such that an adjustment is determined by the Board or a committee thereof to
be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available hereunder, then the Board or
a committee thereof shall, in such manner as it may deem necessary to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made hereunder, adjust any or all of(x) the number and type of Shares which
may be subject to the Option, (y) the number and type of Shares subject to
the unexercised portion of the Option, and (z) the grant, purchase, or
exercise price with respect to the Option or, if deemed appropriate, make
provision for a cash payment to the Optionee. In computing any adjustment
under this paragraph, any fractional share shall be eliminated; provided,
however, in each case, that (i) each such adjustment shall be made in such
manner as not to constitute a cancellation and reissuance of a Non-Qualified
Stock Option for purposes of Section 162(m) of the Code, or the regulations
promulgated thereunder, to the extent that such reissuance would result in
the grant of such Options in excess of the maximum permitted to be granted to
the Optionee in any fiscal year; and (ii) the number of Shares subject to any
Option denominated in Shares shall always be a whole number.
4. Subject to the term of the Agreement, the Option shall be exercised
when written notice of such exercise, signed by a duly authorized officer of
the entity entitled to exercise the Option, has been delivered or transmitted
by registered or certified mail, to the Secretary of the Company at its
principal office. Said written notice shall specify the number of Shares
purchasable under the Option which such entity then wishes to purchase and
shall be accompanied by such documentation, if any, as may be required by the
Company as provided in Paragraph 6 below and be accompanied by payment of the
aggregate Option price. Such payment of the aggregate Option price shall be,
without limitation, in the form of cash, Shares, outstanding Options or other
consideration, or any combination thereof, having a Fair Market Value on the
exercise date equal to the exercise price of the Option or portion thereof
being exercised. Delivery of said notice and such documentation shall
constitute an irrevocable election to purchase the Shares specified in said
notice and the date on which the Company receives said notice and documentation
shall, subject to the provisions of Paragraphs 5 and 6 hereof, be the date as
of which the Shares so purchased shall be deemed to have been issued. The
person entitled to exercise the Option shall not have the right or status as
a holder of the Shares to which such exercise relates prior to receipt by
the Company of such payment, notice and documentation. For purposes of
this Agreement, "Fair Market Value" shall mean, with respect to Shares or
other securities, (i) the closing price per Share of the Shares on the
principal exchange on which the Shares are then trading, if any, on such
date, or, if the Shares were not traded on such date, then on the next
preceding trading day during which a sale occurred; or (ii) if the Shares
are not traded on an exchange but are quoted on the NASDAQ National Market
("NASDAQ") or a successor quotation system, (1) the last sales price (if
the Shares are then listed on NASDAQ) or (2) themean between the closing
representative bid and asked prices (in all other cases) for the Shares on
such date as reported by NASDAQ or a successor quotation system; or (iii)
if the Shares are not publicly traded on an exchange and not quoted on
NASDAQ or a successor quotation system, the mean between the closing bid
and asked prices for the Shares on such date as determined in good faith
by the Board or a committee thereof; or (iv) if the Shares are not
publicly traded, the fair market value established by the Board or a
committee thereof acting in good faith.
5. Anything in this Agreement to the contrary notwithstanding, in no
event may the Option be exercisable if the Company shall, at any time and in
its sole discretion, determine that (i) the listing, registration or
qualification of any Shares otherwise deliverable upon such exercise, upon
any securities exchange or under any state or federal law, or (ii) the
consent or approval of any regulatory body or the satisfaction of withholding
tax or other withholding liabilities is necessary or desirable in connection
with such exercise. In such event, such exercise shall be held in abeyance
and shall not be effective unless and until such withholding, listing,
registration, qualification, consent, or approval shall have been affected or
obtained free of any conditions not acceptable to the Company.
6. The Committee may require as a condition to the right to exercise the
Option hereunder that the Company receive from the person exercising the
Option, representations, warranties and agreements, at the time of any such
exercise, to the effect that the Shares are being purchased for investment
only and without any present intention to sell or otherwise distribute such
Shares and that the Shares will not be disposed of in transactions which, in
the opinion of counsel to the Company, would violate the registration
provisions of the Securities Act of 1933, as then amended, and the rules and
regulations thereunder. The certificate issued to evidence such Shares shall
bear appropriate legends summarizing such restrictions on the disposition
thereof.
7. All certificates for Shares delivered pursuant to the Option or the
exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Board or a committee thereof may deem advisable under the
rules, regulations, and other restrictions of the Securities and Exchange
Commission, any stock exchange upon which such Shares or other securities are
then listed, and any applicable federal or state securities laws, and the
Board or a committee thereof may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
8. This Agreement shall be construed and enforced in accordance with the
laws of the State of Delaware and applicable federal law. Subject to
subparagraph 2(a) hereof, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors or assigns, as the case may be.
IN WITNESS WHEREOF, the parties have witnessed this Agreement to be duly
executed and delivered as of the date first above written.
FOTOBALL USA, INC.
By: /s/ Salvatore T. DiMascio By: /s/ David G. Forster
-------------------------- -----------------------
Salvatore T. DiMascio David G. Forster
Executive Vice President &
Chief Financial Officer
SETTLEMENT AGREEMENT AND MUTUAL GENERAL RELEASE
This Settlement Agreement and Mutual General Release ("Agreement")
is made as of October 1, 1997 ("Effective Date"), between: Fred S. Ostern
("Ostern") and The Eastwoods Group, Inc. ("Eastwoods"), on the one hand,
and Fotoball USA, Inc., a Delaware corporation ("Fotoball") on the other
hand (sometimes referred to individually and collectively as "Party" or
"Parties")
I. RECITALS.
A. This Agreement is made with reference to the following facts:
1. On March 14, 1997, Ostern filed a Complaint for Damages Based
on Breach of Written Contract in San Diego Superior Court, Case No. 708893
("Action"). Ostern alleges in the Action, inter alia, that Fotoball breached
the employment agreement dated January 1, 1996 between Ostern and Fotoball
("Employment Agreement") by failing to review Ostern's base salary for 1997
and for failing to fully pay Ostern's 1996 bonus. A true and correct copy of
the Employment Agreement is attached hereto as Exhibit "A" and is incorporated
herein by this reference.
2. On April 16, 1997, Fotoball answered Ostern's complaint, denied
the allegations in the Action, and raised affirmative defenses to Ostern's
claims.
3. The Parties have reached a settlement of their dispute and desire
to enter into a mutual general release to settle fully and finally any and all
existing and/or potential Claims and Costs as defined herein, except as
expressly reserved.
II. DEFINITIONS.
As used in this Agreement, the following phrases and words have the
following meanings:
A. Associated Entities and Persons.
"Associated Entities and Persons " shall include, to the broadest
extent allowed by law, accountants, administrators, affiliates and partners,
agents, assigns, attorneys, beneficiaries, co-venturers, directors, employees,
former employees, executors, heirs, officers, partners, subcontractors,
predecessor partnerships, predecessors-in-interest, representatives,
shareholders, spouses, subsidiaries, successor partnerships and successors-in
- -interest.
B. Claims.
"Claims" shall include all claims, rights, demands, liabilities, and
causes of action (whether asserted, unasserted, known, unknown, contingent,
accrued, inchoate or otherwise) arising out of the Action, the Exclusive
Services Agreement dated December 23, 1993 with Eastwoods, and/or the
Employment Agreement dated January 1, 1996, including without limitation, the
Claims in the Action and any and all Claims for compensation, however derived,
arising out of or related to work performed by Ostern or Eastwoods while an
employee of or consultant to Fotoball regardless of whether such work,
contacts, negotiations or discussions resulted in or will result in any
type of arrangement, contract or compensation of any type to Fotoball
during or at any time after Ostern's employment or Eastwoods' consulting with
Fotoball, including at any time after the Effective Date of this Agreement.
C. Costs.
"Costs" shall include all costs, losses, damages, expenses, attorneys'
fees, other fees, interest, and all other obligations.
III. EMPLOYMENT TERMINATED EFFECTIVE SEPTEMBER 30, 1997.
Ostern shall remain an employee of Fotoball pursuant to the Employment
Agreement to and including September 30, 1997. Effective September 30, 1997,
Ostern's Employment Agreement with Fotoball shall be terminated.
IV. CONSULTING SERVICES.
Effective October 1, 1997 to and including December 31, 1998, Eastwoods,
by whom Ostern is employed, shall render consulting services to Fotoball
pursuant to the Consulting Agreement, a true and correct copy of which is
attached hereto as Exhibit "B."
V. DISMISSAL OF ACTION WITH PREJUDICE.
Within five (5) days of Fotoball's execution of this Agreement, Ostern
shall dismiss the Action with prejudice as to all parties. Ostern shall
serve Fotoball's counsel with a conformed copy of the dismissal.
VI. CONFIDENTIALITY.
The Parties and their Associated Entities agree not to disclose the
terms and conditions of this Agreement to any third person or entity except
in one or more of the following circumstances:
A. Disclosure With Consent.
The Parties may disclose the terms of this Agreement with the prior,
written consent of the other Party.
B. Disclosure When Required By Law
The Parties may discuss the terms of this Agreement when otherwise
required by law.
VII. NON-DISPARAGEMENT; PUBLIC STATEMENT.
The Parties agree that from and after the date of this Agreement, they
will refrain from making disparaging remarks about the other Party, and will
not disparage the other Party, its agents, employees, officers, directors,
partners or other representatives.
Pursuant to Paragraph VI of this Agreement, the Parties agree that in
the event they are contacted at any time by any third party person or entity
enquiring about this Agreement, the Consulting Agreement, the Employment
Agreement, or any aspect of the relationship between Ostern and Fotoball,
past, present or future, the Parties shall respond with the following
statement, only: "Mr. Ostern and Fotoball have mutually agreed to terminate
Mr. Ostern's employment agreement with Fotoball effective October 1, 1997.
Thereafter, Eastwoods, with whom Mr. Ostern is affiliated, will provide
certain consulting services to Fotoball through December 31, 1998."
VIII. RELEASES, WAIVERS AND INDEMNIFICATIONS.
A. Mutual General Release
Ostern and Eastwoods, for themselves and on behalf of each of their
Associated Entities and Persons, hereby fully and forever release, acquit,
and discharge Fotoball and each of its Associated Entities and Persons, from
any and all Claims and Costs, except as expressly provided in this Agreement.
Fotoball, for itself and on behalf of each of its Associated Entities
and Persons, hereby fully and forever releases, acquits, and discharges
Ostern and Eastwoods and each of their Associated Entities and Persons, from
any and all Claims and Costs except as expressly provided in this Agreement.
B. Waiver of Civil Code Section 1542.
The Parties, for themselves and on behalf of each of their Associated
Entities and Persons, acknowledge that their releases include Claims and Costs
which they do not know or suspect to exist; and hereby waive all rights which
may exist under California Civil Code Section 1542, which provides as follows:
"A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor."
IX. NO ASSIGNMENT.
Each Party represents and warrants that it has not heretofore assigned
or transferred, or purported to assign or transfer, to any person or entity,
any Claims or Costs herein released, and that it is the sole owner of such
Claims and Costs.
X. COVENANT NOT TO SUE.
Ostern and Eastwoods shall not make, assert or maintain any action,
demand or lawsuit against Fotoball or any of its Associated Entities and
Persons for Claims and Costs released by this Agreement; and Fotoball shall
not make, assert or maintain any action, demand or lawsuit against Ostern and
Eastwoods or any of their Associated Entities and Persons for Claims and Costs
released by this Agreement. No Party shall aid, cause or otherwise encourage
others, and their Associated Entities and Persons, to make, assert or
maintain any action, demand or lawsuit against any other Party.
XI. EXIT INTERVIEW.
Upon execution of this Agreement, Ostern shall participate in an exit
interview. At this exit interview, Ostern shall deliver to Fotoball all
Confidential Information (as defined in the Consulting Agreement) , files,
records, books, locks, keys, samples, combinations, and other property in his
possession or under his control which belongs to Fotoball. Ostern also shall
disclose all persons or entities with whom Ostern has communicated with
respect to Fotoball business during the term of Ostern's employment with
Fotoball up to and including the date of the exit interview, including, but
not limited to, a project with Denny's Restaurants. Ostern, on behalf of
Eastwoods, shall receive the first payment of $50,000 under the Consulting
Agreement after executing this Agreement, the Consulting Agreement, and upon
completion of the exit interview.
XII. PARTIES TO EACH BEAR THEIR OWN COSTS.
The Parties shall each bear their own Costs incurred in connection with
the matters referred to in this Agreement, and in negotiating, preparing and
signing this Agreement.
XIII. ATTORNEYS' FEES.
Should any dispute arise pertaining to this Agreement, the prevailing
Party in any litigation shall be entitled, among other things, to recover
reasonable attorneys' fees and costs incurred in connection with such dispute.
XIV. FURTHER ASSURANCES.
The Parties shall perform any further acts and execute and deliver any
documents which may be reasonably necessary to carry out the intent of this
Agreement.
XV. NO ADMISSION.
The Parties agree and acknowledge that this Agreement is the result of a
compromise and shall never be construed as an admission by any Party or any of
their Associated Entities and Persons of any liability or responsibility
whatsoever, and that each Party, and each of their Associated Entities and
Persons, specifically disclaim any liability or responsibility.
XVI. GOVERNING LAW.
This Agreement is made and entered into at San Diego, California, and
shall be interpreted, enforced and governed by and under the laws of
California.
XVII. INTEGRATION.
This Agreement constitutes the final, complete and exclusive agreement
and understanding between and among the Parties, and supersedes all prior or
contemporaneous written or oral agreements. The Parties each acknowledge that
there are no representations, warranties, agreements, arrangements or
understandings other than as expressly contained in this Agreement.
XVIII. INDEPENDENT ADVICE.
The Parties each acknowledge that they have received independent legal
advice with respect to the advisability of making this Agreement, and
specifically with respect to the meaning and effect of waiving California
Civil Code Section 1542.
XIX. TAX CONSEQUENCES.
The Parties acknowledge and understand that there may be certain tax
consequences connected with entering into this Agreement and by executing this
Agreement, each Party confirms that neither any other Party nor any other
Party's counsel have made any representations in that regard. The Parties
further acknowledge that the separate tax obligations of each Party are the
sole responsibility of that Party.
XX. SEVERABILITY.
If a provision of this Agreement is held to be illegal or invalid by a
court of competent jurisdiction, such provision shall: be rewritten by the
Court to be legal and valid as long as the rewritten provision remains
consistent with the intent of the Parties expressed herein; or deemed to be
severed and deleted. Neither such revision nor such severance and deletion
shall affect the validity of the remaining provisions.
XXI. SUCCESSORS AND ASSIGNS.
This Agreement shall apply to, bind and inure to the benefit of the
Parties and each of their Associated Entities and Persons.
XXII. COUNTERPARTS.
This Agreement may be executed in one or more counterparts all of
which together shall constitute one and the same Agreement.
XXIII. INTERPRETATION.
The Parties have each agreed to the use of the particular language of
the provisions of this Agreement, and any question of doubt ful interpretation
shall not be resolved by any rule of interpretation providing for
interpretation against the Parties who cause an uncertainty to exist or
against the drafter.
XXIV. NO ORAL MODIFICATIONS.
This Agreement may be amended or modified in writing only, signed by
the Parties to be charged or bound by such amendment or modification.
XXV. AUTHORITY
Each of the signatories to this Agreement represents and warrants that
he or she has the right power and authority to execute this Agreement on
behalf of his or her respective entity.
THE FOREGOING IS APPROVED AND AGREED
Dated: 10/10/97 /s/ Fred S. Ostern
-------- -----------------------------
Fred S. Ostern
THE EASTWOOD GROUP, INC.
Dated: 10/10/97 /s/ Fred S. Ostern
-------- -----------------------------
By: Fred S. Ostern, President
FOTOBALL USA, INC.
Dated: 10/10/97 /s/ Michael Favish
-------- -----------------------------
By: Michael Favish
APPROVED AS TO FORM AND CONTENT:
SELTZER CAPLAN WILKINS & McMAHON
A Professional Corporation
By: /s/ Julie P. Dubick
-------------------
Julie P. Dubick
Attorneys for Fotoball USA, Inc.
SPARBER. FERGUSON. PONDER & RYAN
By: /s/ Richard J. Annen
--------------------
Richard J. Annen
Attorneys for Fred S. Ostern<PAGE>
CONSULTING AGREEMENT
This Consulting Agreement is made as of October 1, 1997 ("Effective
Date"), between and among: The Eastwoods Group, Inc. ("Eastwoods") and
Fred S. Ostern, on the one hand, and Fotoball USA, Inc., a Delaware
corporation ("Fotoball") on the other hand (sometimes referred to individually
and collectively as "Party" or "Parties").
I. CONSULTING SERVICES.
Effective October 1, 1997 to and including December 31, 1998 ("Term"),
Eastwoods shall render consulting services to Fotoball ("Consulting Services")
pursuant to this Consulting Agreement.
A. Compensation.
So long as Eastwoods and Ostern fully perform the obligations and
covenants of this Consulting Agreement, Fotoball shall make
the following payments to Eastwoods, totalling not more than $350,000:
1. Payments in 1997.
Fotoball shall pay by check to Eastwoods three (3) payments of
$50,000 each on the following dates: October 1, 1997 (or upon completion of
Ostern's exit interview under the Settlement Agreement), November 1, 1997 and
December 1, 1997, for a total payment in 1997 of $150,000.
2. Payments in 1998.
Commencing January 1, 1998, Fotoball shall pay by check to Eastwoods
the sum of $16,666.66 on the first day of each month for twelve (12)
consecutive months, for a total payment in 1998 of $200,000.
The payments shall be made by mail on the first day of the month
addressed to: The Eastwoods Group, 3121 Hamburg Square, La Jolla, California
92037, or such other address as Fotoball may be notified in writing.
If the first day of the month falls on a weekend or holiday, Fotoball may pay
Ostern on the next available business day.
B. Status of Eastwoods.
Eastwoods is, and shall at all times be, acting and performing as
an independent contractor with respect to Fotoball. Fotoball and Eastwoods
shall not be in the relationship of employer-employee, partners or joint
venturers, and neither party shall have the authority to obligate or bind the
other to any contract, obligation or undertaking whatsoever.
II. NON-COMPETITION/NON-SOLICITATION.
A. Non-Competition.
During the Term of this Consulting Agreement, Eastwoods and Ostern
agree that Eastwoods, and any employee, officer or director of Eastwoods,
including Ostern, or any other person or entity affiliated with Ostern, shall
not directly or indirectly seek to market or sell any "core product
categories" marketed by Fotoball at any time on or before December 31, 1998.
"Core product categories" are sports balls, hockey pucks, miniature tires and
lapel pins.
B. Core Product Referral.
From October ll, 1997 to and including December 31, 1998, in the
event Eastwoods, any employee, officer or director of Eastwoods, including
Ostern, or any other person or entity affiliated with Ostern, is solicited,
contacted or otherwise approached by a person or entity desiring to conduct
core product promotions of sports balls, hockey pucks, miniature tires or
lapel pins marketed by Fotoball at any time on or before December 31, 1998,
Eastwoods or Ostern shall, within 72 hours of such contact refer any and all
such persons or entities directly to Fotoball by letter directed to
Michael Favish.
C. Non-Solicitation.
During the Term of this Consulting Agreement, Eastwoods and
Ostern agree that Eastwoods, and any employee, officer or director of
Eastwoods, including Ostern, and any other person or entity affiliated with
Ostern, shall not, on its 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 Fotoball during the Term of this Consulting Agreement.
D. Injunctive Relief.
Ostern, Eastwoods and Fotoball 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 and modify such
provision or provisions of these covenants and to enforce the remainder of
these covenants as so amended. Ostern and Eastwoods agree that any breach of
the covenants contained herein would irreparably injure Fotoball.
Accordingly, Ostern and Eastwoods agree that Fotoball, in addition to
pursuing any other remedies it may have in law or in equity, may obtain an
injunction against Ostern and/or Eastwoods from any court having jurisdiction
over the matter, restraining any further violation of this section.
III. CONFIDENTIAL INFORMATION.
A. Eastwoods and Ostern agree that they will not at any time, either
during the Term of this Consulting Agreement 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 Fotoball except if required to do so by a court of competent
jurisdiction, by any governmental agency having supervisory authority over
the business of Fotoball, or by any administrative body or legislative body
(including a committee thereof) with jurisdiction to order Fotoball to
divulge, disclose or make accessible such information. For purposes of this
Consulting Agreement, "Confidential Information" shall mean nonpublic
information concerning Fotoball'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 nonpublic, proprietary and confidential information of Fotoball;
provided, however, that Confidential Information shall not include any
information which (i) is known generally to the public other than as a result
of unauthorized disclosure by Eastwoods, (ii) become available to Eastwoods
on a nonconfidential basis from a source other than Fotoball, or (iii) was
available to Eastwoods on a nonconfidential basis prior to its disclosure to
Eastwoods by Fotoball. It is specifically understood and agreed by Eastwoods
and Ostern that any Confidential Information received by Ostern during his
employment with Fotoball is deemed Confidential Information for purposes of
this Consulting Agreement.
B. Upon the termination of the Consulting Services or whenever
requested by Fotoball, Eastwoods and Ostern shall immediately deliver to
Fotoball all Confidential Information, if any, in their possession or under
their control which belongs to Fotoball and was gained after the exit
interview under Section XI of the Settlement Agreeinent between the Parties.
IV. GOVERNING LAW.
This Consulting Agreement is made and entered into at San Diego,
California, and shall be interpreted, enforced and governed by and
under the laws of California.
V. INTEGRATION.
This Consulting Agreement constitutes the final, complete and
exclusive agreement and understanding between and among the Parties,
and supersedes all prior or contemporaneous written or oral agreements.
The Parties each acknowledge that there are no representations, warranties,
agreements, arrangements or understandings other than as expressly contained
in this Consulting Agreement.
VI. INDEPENDENT ADVICE.
The Parties each acknowledge that they have received independent legal
advice with respect to the advisability of entering into this Consulting
Agreement.
VII. SEVERABILITY.
If a provision of this Consulting Agreement is held to be illegal or
invalid by a court of competent jurisdiction, such provision shall: be
rewritten by the Court to be legal and valid as long as the rewritten
provision remains consistent with the intent of the Parties expressed herein;
or deemed to be severed and deleted. Neither such revision nor such
severance and deletion shall affect the validity of the remaining provisions.
VIII. ATTORNEYS' FEES.
Should any dispute arise pertaining to this Consulting Agreement, the
prevailing Party in any litigation shall be entitled, among other things, to
recover reasonable attorneys' fees and costs incurred in connection with such
dispute.
IX. SUCCESSORS AND ASSIGNS.
This Consulting Agreement shall apply to, bind and inure to the benefit
of the Parties and each of their Associated Entities and Persons.
X. INTERPRETATION.
The Parties have each agreed to the use of the particular language of
the provisions of this Consulting Agreement, and any question of doubtful
interpretation shall not be resolved by any rule of interpretation providing
for interpretation against the Parties who cause an uncertainty to exist or
against the drafter.
XI. NO ORAL MODIFICATIONS.
This Consulting Agreement may be amended or modified in writing only,
signed by the Parties to be charged or bound by such amendment or
modification.
XII. AUTHORITY.
Each of the signatories to this Consulting Agreement represents and
warrants that he or she has the right power and authority to execute this
Consulting Agreement on behalf of his or her respective entity.
THE FOREGOING IS APPROVED AND AGREED:
Dated: 10/10/97 /s/ Fred S. Ostern
-------- -----------------------------
Fred S. Ostern
THE EASTWOOD GROUP, INC.
Dated: 10/10/97 /s/ Fred S. Ostern
-------- -----------------------------
By: Fred S. Ostern, President
FOTOBALL USA, INC.
Dated: 10/10/97 /s/ Michael Favish
-------- -----------------------------
By: Michael Favish
APPROVED AS TO FORM AND CONTENT:
SELTZER CAPLAN WILKINS & McMAHON
A Professional Corporation
By: /s/ Julie P. Dubick
-------------------
Julie P. Dubick
Attorneys for Fotoball USA, Inc.
SPARBER. FERGUSON. PONDER & RYAN
By: /s/ Richard J. Annen
--------------------
Richard J. Annen
Attorneys for Fred S. Ostern
AGREEMENT
This Agreement (this "Agreement") is effective as of August 11, 1997 by
and between Fotoball USA, Inc., a Delaware corporation (the "Company"), and
ADR Management Group Ltd., a New Jersey corporation ("ADR").
WITNESSETH:
WHEREAS, the Company desires to enter into this Agreement in order to
continue to retain ADR as its independent financial relations management
agent;
WHEREAS, ADR desires to enter into this Agreement upon the terms and
subject to the conditions set forth in this Agreement; and
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein and for the other good and valuable consideration, the
adequacy and receipt of which are hereby acknowledged, the parties agree as
follows:
1. Consulting Services.
(a) The Company hereby retains ADR on a non-exclusive basis, and ADR
agrees to provide services as an independent financial relations management
agent to the Company, upon the terms and subject to the conditions set forth
in this Agreement.
(b) ADR shall, during the Term (as herein defined), make its officers
and directors, including but not limited to John A. Germinario, ADR's Chief
Executive Officer ("Germinario"), available to devote such business time and
attention as is necessary, and perform such duties and functions as it may be
called upon to perform, including the duties and functions set forth on
Exhibit A annexed hereto.
2. Compensation.
In consideration of the services to be rendered by ADR pursuant to
this Agreement, the Company shall grant to ADR options to purchase an
aggregate of 15,000 shares of common stock, par value $.01 per share, of the
Company at $2.6875 per share, of which 1,250 shares shall vest on the 11th day
of each month commencing September 11, 1997 until and including August 11,
1998, and all of which shares shall be exercisable from the date of their
vesting until August 11, 2000. The terms and conditions of all options
granted hereunder shall be subject to the terms and conditions contained in
that certain stock option agreement between the Company and ADR dated the
date hereof(the "Option Agreement").
3. Expenses.
During the Term, the Company shall reimburse ADR for all reasonable
out-of-pocket expenses incurred by it (including disbursements) in the
performance of its duties for the Company, including telephone, facsimile,
audio/visual, meeting costs, photography, mailing, design and printing,
clipping service and research expenses, in all cases upon submission to the
Company of written evidence of ADR's incurrence of such expenses; provided,
however, that the Company shall not be responsible for any such expenses or
disbursements in excess of $1,000 individually unless ADR has obtained the
prior written consent of the Company prior to incurring any such expenses or
disbursements.
4. Term.
Except as otherwise specifically provided in Section 5 below, the
term of this Agreement shall commence effective as of August 1, 1997, and
shall continue until July 31, 1998 (the "Term").
5. Termination.
(a) ADR may terminate this Agreement at any time and for any reason
by delivering to the Company written notice of its desire to terminate this
Agreement thirty (30) days prior to such termination. Upon such termination
by ADR, all options not yet vested pursuant to Section 2 shall be canceled.
(b) Notwithstanding the provisions of clause (a), nothing herein
shall prevent the Company from terminating this Agreement for Good Reason
(as defined below). From and after the date of such termination, all options
not yet vested pursuant to Section 2 shall be canceled. For purposes of this
Agreement, "Good Reason" shall mean (i) ADR's willful misconduct or fraud in
the performance of its duties hereunder, (ii) ADR's breach of this Agreement
or the Confidentiality Letter (as hereinafter defined) in a material manner,
or (iii) the entering of a plea of guilty or nolo contendere by ADR to or the
conviction of ADR for a felony or any other criminal act involving dishonesty,
theft or unethical business conduct.
(c) Notwithstanding the provisions of clause (a), nothing herein
shall prevent the Company from terminating this Agreement if Germinario shall
(i) die, (ii) retire from full-time employment with ADR or (iii) 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 reasons shall be referred to herein as a "Disability")
for a period of either (x) ninety (90) consecutive days or (y) one hundred
eighty (180) days in any consecutive three hundred sixty-five (365) day
period.
6. Relationship to the Company.
Except as expressly provided herein or approved in writing, ADR shall
have no power or authority, express or implied, to incur any debt, obligation
or liability or to enter into any contract or commitment on behalf of the
Company. ADR shall have no authority or power to alter, amend, terminate or
otherwise change any contract, or other document issued by the Company. In
addition, nothing contained herein shall be construed in any manner that
would deem ADR or any of its employees to be an employee of the Company.
7. Confidential Information.
ADR and the Company hereby acknowledge that the confidentiality
letter dated August 23, 1995 by and between ADR and the Company (the
"Confidentiality Letter") remains in full force and effect. ADR covenants and
agrees that it will, and will cause its officers, directors and agents to,
comply with the terms and provisions of the Confidentiality Letter through
strict control of the distribution and use of the Information (as defined in
the Confidentiality Letter).
8. Non-Competition and Non-Solicitation.
(a) Each of ADR and Germinario agree that, in consideration of the
options granted pursuant to the Option Agreement, during the Non-Competition
Period (as defined below), without the prior written consent of the Company,
they shall not: (i) 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, except for Germinario's relationship with ADR,
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) on behalf of any competing entity, directly or
indirectly, have any dealings or contact with any suppliers or customers of
the Company; provided, however, that nothing contained herein shall prohibit
ADR from continuing relationships it had with suppliers or customers of the
Company prior to the effective date of this Agreement so long as such
relationships do not otherwise violate the provisions of this Agreement.
(b) During the Non-Competition Period, each of ADR and Germinario
agrees that, without the prior written consent of the Company (and other than
on behalf of the Company), they 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.
(c) ADR, Germinario and the Company agree that the covenants of
noncompetition 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 the court determines are
not reasonable and to enforce the remainder of these covenants as so amended.
ADR and Germinario agree that any breach of the covenants contained in this
Section 8 would irreparably injure the Company. Accordingly, ADR and
Germinario agree that the Company, in addition to pursuing any other remedies
it may have in law or in equity, may obtain an injunction against ADR and
Gerninario from any court having jurisdiction over the matter, restraining
any further violation of this Section 8.
(d) The provisions of this Section 8 shall extend for the Term and
survive the termination of this Agreement for six months from the date of
such termination (herein referred to as the "Non-Competition Period").
9. Indemnification.
The Company agrees to indemnify and hold harmless ADR, and all
directors, officers, employees and representatives of ADR (collectively, the
"Indemnified Parties"), against any and all damage, loss, claim, expense,
deficiency or cost incurred as the result of any claim, suit or proceeding
made or brought against any of the Indemnified Parties, or in which any of
the Indemnified Parties are asked to participate, based on (i) any materials
or information that any of the Indemnified Parties prepared or disseminated
on behalf of the Company and based on information approved by the Company
before its dissemination, production and/or publication and (ii) the nature
and use of the Company's products and services.
10. 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, CA 92123
Telecopy: (619) 467-9947
Attention: Michael Favish
If to ADR, to: ADR Management Group Ltd.
49 Devonshire Lane
Mendham, New Jersey 07945
Telecopy: (973)543-9370
Attention: John A. Germinario
11. Entire Agreement.
This Agreement, the Option Agreement and the Confidentiality Letter
contain the entire agreement between the parties hereto with respect to the
matters contemplated herein and supersede all prior agreements or
understandings among the parties related to such matters.
12. 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,
ADR and its successors and assigns, and Germinario. "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 common stock of the Company.
13. No Assignment.
Except as contemplated by Section 12 above, this Agreement shall not
be assignable or otherwise transferable by the parties hereto.
14. Amendment or Modification: Waiver.
No provision of this Agreement may be amended or waived unless such
amendment or waiver is authorized by the Company and is agreed to in writing,
signed by a duly authorized officer of each of the Company and ADR. Except as
otherwise specifically provided in this Agreement, no waiver by the parties
hereto of any breach by any 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.
15. Governing 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. Any
controversy or claim arising out of or relating to this Agreement or the
breach of this Agreement that cannot be resolved by ADR, on the one hand, and
the Company, on the other, including any dispute as to termination for Good
Reason shall be submitted to arbitration in the City of San Diego in
accordance with California law and the procedures of the American Arbitration
Association. The determination of the arbitrator(s) shall be conclusive and
binding on the Company and ADR, and judgment may be entered on the
arbitrator(s) award in any court having jurisdiction.
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 lease one
counterpart.
18. Severabilitv.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms and
provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first set forth above.
FOTOBALL USA
By: /s/ Michael Favish
-----------------------
Michael Favish
President and Chief Executive Officer
ADR MANAGEMENT GROUP LTD.
By: /s/ John A. Germinario
-----------------------
John A. Germinario
Chief Executive Officer
For the purpose of binding himself to Section 8 hereof.
/s/ John A. Germinario
-----------------------
John A. Germinario
STANDARD SUBLEASE
American Industrial Real Estate Association
1. Parties. This Subleaae dated for reference purposes only. June 1, 1997
is made by and between General Textiles (herein called "Sublessor") and
Fotoball USA, Inc. (herein called "Sublessee".
2. Premises. Sublessor hereby subleases to Subleases and Subleasee hereby
subleases from Sublessor for the term at the rental and upon all the
conditions set forth herein, that real properly situated in the County of
San Diego State of California, commonly known as 4000 Ruffin Road and
described as southwest protion, consisting of approximately 22,530 square
feet.
Said real property including tne lands and all improvements thereon, is
hereafter called the "Premises".
3. Term.
3.1 Term. The term of this Sublease shall be for 12 months commencing on
July 14, 1997 and ending on July 13, 1998 unless sooner terminated pursuant
to any provision hereof.
3.2 Delay in Commencement. Notwithstanding said commencement date, if for
any reason Sublessor cannot deliver possession of the Premises to Sublessee
on said date. Sublessor shall not be subject to any liability therefore, nor
shall such failure affect the validity of this Lease or the obligations of
Subleasee hereunder or extend the term hereof, but in such case Sublessee
shall not be obligated to pay rent until possession of the Premises is
tendered to Sublessee; provided, however, that if Sublessor shall not have
delivered possession of the Premises within sixty (60) days from said
commencement date, Sublessee may, at Sublessee's option, by notice in writing
to Sublessor within ten (10) days thereafter, cancel the Sublease. In which
event the parties shall be discharged from all obligations thereunder. If
Sublessee occupies the Premises prior to said commencement date, such
occupancy shall be subject to all provisions hereof, such occupancy shall
not advance the termination date and Sublessee shall pay rent for such period
at the initial monthly rates set forth below.
4. Rent. Sublessee shall pay to Sublessor as rent for the Premises equal
monthly payments of $9,913.20 in advance on the 1st of each month of the term
hereof. Sublessee shall pay Sublessor upon the execution hereof $9,913.20
as rent for the first month.
Rent for any period during the term hereof which is for less then one month
shall be a prorata portion or the monthly installment. Rent shall be payable
in lawful money of the United States to Sublessor at the address stated
herein or to such other persons or at such other places as Subleesor
may designate in writing.
5. Security Deposit. Sublessee shall deposit with Sublessor upon execution
hereof $9,913.20 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision or
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any
portion of said deposit, Sublessee shall within ten (10) days after written
demand therefore deposit cash with Sublessor in an amount sufficient to
restore said deposit to the full amount hereinabove stated and Sublessee's
failure to do so shall be a material breach of this Sublease. Sublessor
shall not be required to keep said deposit separate from its general accounts.
If Sublessee performs all of Sublessee's obligations hereunder, said deposit,
or so much thereof as has not theretofore been applied by Sublessor, shall be
returned, without payment of interest or other increment for its use to
Sublessee (or at Sublessor's option to the last assignee. If any of
Sublessee's interest hereunder) at the expiration of the term hereof, and
after Sublessee has vacated the Premises NO trust relationship is created
herein between Sublessor and Sublessee with respect to said Security Deposit.
6. Use.
6.1 Use the Premises shall be used and occupied only for general storage
and distribution of sports-themed consumer products and for no other
purpose.
6.2 Compliance with Law.
(a) Sublessor warrants to Sublessee that the Premises in its existing
state, but without regard to the use for which Sublessee will use the
Premises does not violate any applicable building code regulation or ordinance
at the time that this Sublease is executed. In the event that it is
determined that this warranty has been violated, then it shall be the
obligation of the Sublessor after written notice from Sublessee, to promptly
at Sublessor's sole cost and expense rectify any such violation in the event
that Sublessee does not give to Sublessor written notice or the violation
of this warranty within 1 year from the commencement of the term of this
Sublease. It shall be conclusively deemed that such violation did not exist
and the correction or the same shall be the obligation or the Sublessee.
(b) Except as provided in paragraph 6.2(a), Sublessee shall, at
Sublessee's expense, comply promptly with all applicable statutes, ordinances,
rules, regulations, orders, restrictions of record, and requirements in effect
during the term or any part of the term hereof regulating the use by Sublessee
of the Premises. Sublessee shall not use or permit the use of the Premises
in any manner that will tend to create waste or a nuisance or if there shall
be more than one tenant at the building containing the Premises, which shall
tend to disturb such other tenants.
6.3 Condition of premises. Except as provided in paragraph 6.2(a)
Sublessee hereby accepts the Premises in their condition existing as of the
date of the execution hereof, subject to all applicable zoning, municipal,
county and state laws ordinances, and regulations governing and regulating
the use of the Premises and accepts this Sublease subject thereto and to all
matters disclosed thereby and by any exhibits attached hereto Sublessee
acknowleges that neither Sublessor nor Sublessor's agents have made any
representation or warranty as to the suitability of the Premises for the
conduct of Sublessee's business.
7. Master Lease.
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter referred to as the "Master Lease", a copy of which is attached
hereto marked Exhibit 1, dated June 14, 1993 wherein Ruffin Associates, now
Ruffin San Diego Corporation c/o American Realty Advisors is the lessor,
hereinafter referred to as the "Master Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate to
the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and
conditions of the Master Lease except for thoses provisions of the Master
Lease which are directly contradicted by this Sublease in which event
the terms of this Sublease document shall control over the Master Lease.
Therefore, for the purposes of this Sublease, wherever in the Master
Lease the word "Lessor" is used it shall be deemed to mean the Sublessor
herein and wherever in the Master Lease the word "Lessee" is used it shall
be deemed to mean Sublessee herein.
7.4 During the term of this Sublease and for all periods subsquent for
obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with
the benefit of Sublessor and Master Lease, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs
therefrom none.
7.5 The obilgations that Sublessee has assumed under paragraph 7.4
hereof are hereinafter referred to as the "Sublessee's Assumed Obligations".
The obligations tnat Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Laase during tha entire term
of this Sublease, subject, however, to any earlier termination of the Master
Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless
of and from all liability, judgments, costs, damages, cliams or demands
arising out of Sublessor's failure to comply with or perform Sublessor's
Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any party to the
Master Lease.
8. Assignment of Sublease and Default.
8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's
interest in this Sublease and all rentals and income arising therefrom,
subject however to terms of Paragraph 8.2 hereof.
8.2 Master Lessor, by executing this document agrees that until a default
shall occur in the performance of Sublessor's Obligations under the Master
Lease, that Sublessor may receive, collect and enjoy the rents accruing under
this Sublease. However, if Sublessor shall default in the performance of its
obligations to Master Lessor then Master Lessor may, at its option, receive
and collect, directly from Sublessee all rent owing and to be owed under this
Sublease Master Lessor shall not, by reason of this assignment or the Sublease
nor by reason of the collection of the rents from the Sublessee, be deemed
liable to Sublessee for any failure of the Sublessor to perform and comply
with Sublessor's Remaining Obligations.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee upon
receipt of any written notice from the Master Lessor stating that a default
exists in the performance of Sublessor's obligations under the Master Lease,
to pay to Master Lessor the rents due and to become due under the Sublease.
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master Lessor and that Sublessess shall pay such
rents to Master Lessor without any obligation or right to inquire as to
whether such default exists and notwithstanding any notice from or claim from
Sublesor to the contrary and Sublessor shall have no right or claim against
Sublessse for any such rents so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without the
consent of Master Lessor.
9. Consent of Master Lessor.
9.1 In the event that the Master Lease requires that Sublessor obtain the
consent of Master Lessor to any subletting by Sublessor then this Sublease
shall not be effective unless, within 10 days of the date hereof. Master
Lessor signs this Sublease thereby giving its consent to this Subletting.
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then this Sublease nor the Master
Lessor's consent, shall not be effective unless within 10 days of the date
hereof said guarantors sign this Sublease thereby giving guarantors consent to
this Sublease and the terms thereof.
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations or
alter the primaly liability of Sublesssor to pay the rent and perform and
comply with all of the obligations of Sublessor to be performed under the
Master Lease.
(b) The acceptance of rent by Master Lessor from Sublessee or any
one else liable under the Master Lease shall not be deemed a waiver by
Master Lessor of any provisions of the Master Lease
(c) The consent to this Sublease shall not constitute a consent to any
subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the Master Lease,
Master Lessor may proceed directly against Sublessor, any guarantors or any
one else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity
liable thereon to Master Lessor.
(e) Master Lessor may consent to subsequent subletting and assignments
of the Master Lease or this Sublease or any amendments or modifications
thereto without notifing Sublessor nor any one else liable under the Master
Lease and without obtaining their consent and such action shall not relieve
such persons from liability.
(f) In the event that Sublessor shall default in its obligations under
the Master Lease, then Master Lessor at its option and without being
obligated to do so may require Sublessee to attorn to Master Lessor in which
event Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to termination of this
Sublease but Master Lessor shall not be liable for any prepaid rents nor any
security deposit paid by Sublessee nor shall Master Lessor be liable for any
other defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at
the end of this document shall constitute their consent to the terms of
this Sublease.
9.5 Master Lessor acknowledges that to the best of Master Lessor's
knowledge no default presently exists under the Master Lease of obligations
to be performad by Sublessor and that the Master Lease is in full force and
effect.
9.6 In tne event that Sublessor defaults under its obligations to be
performed under the Master Lease by Sublessor. Master Lessor agrees to
deliver to Sublessee a copy of any such notice of default. Sublessee shall
have the right to cure any default of Sublessor described in any notice of
default within ten days after service of such notice of default on Sublesse.
If such default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor.
10. Brokers Fee.
10.1 Upon execution hereof by all parties, Sublessor shall pay to CB_
Commercial a licensed real estate broker. (herein called "Broker") a fee as
set forth in a separate agreement between Sublessor and Broker or in tne event
there is no separate agreement between Sublessor and Broker, the sum of
$ per agreement for brokerage services rendered by Broker to Sublessor in
this transaction.
10.2 Sublessor agrees that if Sublessee exercises any option or right of
first refusal granted by Sublessor herein or any option or right substantially
similar thereto, either to extend the term of this Sublease to renew this
Sublease, to purchase the Premises, or to lease or purchase adjacent property
which Sublessor may own or in which Sublessor has an interest or if Broker is
the procuring cause of any lease, sublease, or sale pertaining to the Premises
or any adjacent property which Sublessor may own or in which Sublessor has an
interest then as to any of said transactions Sublessor shall pay to Broker a
fee in cash in accordance with the schedule of Broker in effect at the time
of the execution of this Sublease. Notwithstanding the foregoing Sublessor's
obligatilon under this Paragraph 10.2 is limited to a transactton in which
Sublessor is acting as a sublessor, lessor or seller.
10.3 Master Lessor agrees by its consent to this Sublease, that if
Sublessee shall exercise any option or right of first refusal granted
to Sublessee by Master Lessor in connection with this Sublease or any option
or right substantially similar thereto either to extend the Master Lease, to
renew the Master Lease to purchase the Premises or any part thereof, or to
lease or purchase adjacent properly which Master Lessor may own or in which
Master Lessor has an interest or if Broker is the procuring cause of any
other lease or sale entered into between Sublessee and Master Lessor
pertaining to the Premises any part thereof, or any adjacent property
which Matter Lessor owns or in which it has an interest, then as to any of
said transactions Master Lessor shall pay to Broker a fee in cash in
accordance wih the schedule of Broker in effect at the time of its consent
to this Sublease.
10.4 Any fees due from Sublessor or Master Lessor hereunder shall be due
and payable upon the exercise of any option to extend or renew as to any
extension or renewal upon the execution of any new lease as to a new lease
transaction or the exercise of a right of first refusal to lease: or at the
close of escrow as the exercise of any option to purchase or other sale
transaction.
10.5 Any transferee of Sublessor's interest in this Sublease or of
Master Lessor's interest in the Master Lease by accepting an assignment
thereof shall be deemed to have the respective obligations of Sublessor
or Master Lessor under this Paragraph 10. Brokfer shall be deemed to be a
third-party beneficiary of this paragraph 10.
11. Attorney's fees. If any party or the broker named herein brings an action
to enforce the terms hereof or to declare rights hereunder the prevailing
party in any such action on trial and appeal shall be entitled to his
reasonable attorney's fees to be paid by losing party as fixed by the Court.
The provision of this paragraph shall inure to the benefit of the Broker named
herein who seeks to enforce a right hereunder.
12. Additional Provisions [If there are no additional provisions draw a line
from this point to the next printed word after the space left here. If
there are additional provisions place the same here.]
1. Subleasee shall have the right to renew the lease for an additional twelve
(12) month period. The lease rate for the option term shall increase by $.01
on the thirteenth month. All other terms and conditions shall remain the same.
Sublease must give Sublessor ninety (90) days' written notice in order to
exercise this option. The new monthly rent rate will be $10,138.50.
2. All Tenant Improvements are subject to Sublessor and Landlord approval.
All Tenant Improvements shall be done at Sublessee's expense.
3. Premises have one dock high door and one man door accessed by stairs.
4. Tenant Improvements: Tenant may construct the following tenant improvements
at Tenant's sole cost and expense:
a. Construct a demising wall between the Premises in the adjacent
warehouse space;
b. Separate utilities for the Premises and the adjacent warehouse space;
c. Construct a r-stroom with the Premises; and
d. Install racking within the Premises.
5. Parking: Tenant shall be granted the use of 18 unreserved parking spaces.
Sublessor reserves the right to park trailers in areas designated and
approved by Master Lessor in its sole discretion.
If this Sublease has been filled in it has been prepared for submission to
your attorney for his approval. No representation or recommendation is made
by the real estate broker or its agents or employees as to the legal
sufficiency, legal effect, or tax consequences of this Sublease or the
transaction relating thereto.
Executed at San Diego General Textiles
on June 27, 1997 By: /s/ Jim Baker
address 4000 Ruffin Road ---------------------
San Diego, CA 92123 Jim Baker
"Sublessor" (Corporate Seal)
Executed at San Diego Fotoball USA, Inc.
on June 27, 1997 By: /s/ David G. Forster
address 3738 Ruffin Road ---------------------
San Diego, CA 92123 David G. Forster
"Sublessee" (Corporate Seal)
Executed at Glendale Ruffin San Diego Corporation
on June 27, 1997 By: /s/
address 700 North Brand Boulevard ---------------
Ste. 300 Glendale, CA 92103
February 26, 1998
Mr. Michael Favish, President
Mr. David Forster, EVP/CFO
Fotoball U.S.A., Inc.
3738 Ruffin Road
San Diego, CA 92123
RE: Loan #11620 and Financial Covenant
Gentlemen:
Scripps Bank hereby waives the Fotoball U.S.A., Inc. minimum net worth
covenant of $6,700,000 for December 31, 1997 in regards to the $2,000,000
line of credit.
Sincerely,
/s/ Rick Roe
- ---------------------------
Rick Poe
First Vice President
Corporate Lending Department<PAGE>
CHANGE IN TERMS AGREEMENT
Borrower: FOTOBALL USA, INC. LENDER: SCRIPPS BANK
3738 Ruffin Road Corporate Lending
San Diego, CA 92123 San Diego, CA 92123
Principal Amount: $1,500,000.00 Date of Agreement: February 19, 1998
DESCRIPTION OF EXISTING INDEBTEDNESS.
AS EVIDENCED BY:
PROMISSORY NOTE DATED DECEMBER 20, 1995 IN THE AMOUNT OF $1,000,000.00.
PROMISSORY NOTE DATED NOVEMBER 13, 1996 IN THE AMOUNT OF $2,000,000.00.
DESCRIPTION OF COLLATERAL.
AS DESCRIBED IN:
COMMERICAL SECURITY AGREEMENT DATED DECEMBER 20, 1995.
DESCRIPTION OF CHANGE IN TERMS.
NEW LOAN AGREEMENT DATED FEBRUARY 19, 1998 SUPERCEDES ALL PRIOR LOAN
AGREEMENTS.
LINE OF CREDIT IS DECREASED TO $1,500,000.00
INTEREST RATE HAS CHANGED TO WALL STREET JOURNAL PRIME PLUS 1.0%.
EXTEND THE MATURITY DATE TO OCTOBER 15, 1998.
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.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE
PROVISIONS OF THIS AGREEMENT. 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/Chief Finanical Officer<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: FOTOBALL U.S.A., INC. Lender: Scripps Bank
3738 RUFFIN ROAD Corporate Lending
SAN DIEGO, CA 92123 9005 Complex Drive
San Diego, CA 92123
LOAN TYPE. This is a Variable Rate (1.000% over Wall Streel Journal Prime Rate
as published in the Money Rates section. When a range of rate is shown, the
higher rate will be used., making an initial rate of 9.500%), Revolving Line
or Credit Loan to a Corporation for S1,500,000.00 due on October 15, 1998.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
[ ] Personal, family, or Household Purposes or Personal Investment.
[X] Business (Including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: EXTEND LINE OF CREDIT
AND REDUCE AMOUNT TO $1,500,000.00. INTEREST RATE HAS CHANGED TO WALL STREET
JOURNAL PRIME PLUS 1%.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $1,500.000.00 as follows:
Undisbursed Funds: $1,500,000.00
-------------
Note Principal: $1,500,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid In Cash: $2000.00
$2,000.00 DOCUMENT FEE
$ 20.00
Other Charges Paid in Cash:
$20.00 UCC SEARCH --------
Total Charges Paid In Cash: $2020.00
LOAN ADVANCE AGREEMENT CONDITION. UNDISBURSED FUNDS TO BE DISBURSED PER
REQUEST AGREEMENT.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT
AND THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL
CONDITION AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO
LENDER. THIS AUTHORIZATION IS DATED FEBRUARY 19, 1998.
BORROWER:
FOTOBALL U.S.A., INC.
By: /s/ DAVID G. FORSTER
--------------------------------------------------------
DAVID G. FORSTER, Vice President/Chief Finanical Officer<PAGE>
LOAN AGREEMENT
Borrower: FOTOBALL U.S.A. INC. Lender: Scripps Bank
3738 RUFFIN ROAD Corporate Lending
SAN DIEGO, CA 92123 9005 Complex Drive
San Diego, CA 92123
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 February 19, 1998, 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 Borrower is or may become
liable to the Account Debtor for goods sold or services
rendered by the Account Debtor to Borrower.
(e) Accounts which are subject to dispute, counterclaim, or
setoff.
(f) Accounts with respect to which the goods have not been
shipped or delivered, or the services have not been rendered,
to the Account Debtor.
(g) Accounts with respect to which Lender, in its sole
discretion, deems the creditworthiness or financial condition
of the Account Debtor to be unsatisfactory.
(h) 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.
(i) Accounts with respect to which the Account Debtor is the
United States government or any department or agency of the
United States.
(j) Accounts which have not been paid in full within 90 DAYS
from the invoice date.
(k) MINUS ALL CONTRA, FOREIGN AND DIRECT FEDERAL GOVERNMENT AGENCY ACCOUNTS.
ALSO LESS ALL ACCOUNTS RECEIVABLE OF ANY ACCOUNT WHEN 20% OR MORE
OF THE ENTIRE BALANCE OWNING IS AGED 90 DAYS OR MORE.
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.
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. 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.
Collateral Schedules. Concurrently with the execution and delivery
of this Agreement, and Elibible Accounts, 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 such other matters and information
relating to the Accounts 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.
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.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and, as soon
as available, but in no event later than forty (40) days after the end of the
month, Borrower's balance sheet and profit and loss statement for the
period ended, prepared and certified as correct to the best knowledge and
belief by Borrower's chief financial officer or other officer or person
accetable to Lender. All financial reports required to be provided under
this Agreement shall be prepared in accordance with generally accepted
accounting prnciples, apllied on a consistent basis, and certified
by Borrower as being true and correct.
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 $5,000,000.00.
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. TOTAL ADVANCES ARE RESTRICTED TO 80% OF ELIGIBLE ACCOUNTS RECEIVABLE,
DEFINED AS THOSE ACCOUNTS RECEIVABLE LESS THAN 90 DAYS AGED MINUS ALL CONTRA,
FOREIGN, BANKRUPT AND DIRECT FERERAL GOVERNMENT AGENCY ACCOUNTS, AND LESS ALL
ACCOUNTS RECEIVABLE OF ANY ACCOUNT WHEN 20% OR MORE OF THE ENTRIE BALANCE
OWING IS AGED 90 DAYS OR MORE.
2. A COLLATERAL SCHEDULE IS REQUIRED FOR EACH ADVANCE.
3. BORROWER TO PROVIDE MONTHLY COMPANY PREPARED FINANCIAL STATEMENTS
WITHIN 40 DAYS OF EACH MONTH END.
4. BORROWER TO PROVIDE MONTH ACCOUNTS RECEIVABLE AGING REPORT AND ACCOUNTS
PAYABLE AGING REPORT WITHIN 25 DAYS OF EACH MONTH.
5. BORROWER TO PROVIDE BANK ITS 10-Q STATEMENT EVERY QUARTER, AND ITS
10-K STATEMENT, CONCURRENTLY WITH FILING.
6. BORROWER TO PROVIDE FISCAL YEAR CPA AUDITED FINANCIAL STATEMENTS
WITHIN 120 DAYS OF FISCAL YEAR END.
7. BORROWER AGREES TO MAINTAIN THE FOLLOWING FINANICAL COVENANTS AT
ALL TIMES:
A. CURRENT RATIO TO REMAIN ABOVE 1.25 TO 1.0.
B. DEBT TO TANGIBLE NET WORTH TO REMAIN BELOW 1.0 TO 1.0.
C. NET WORTH TO REMAIN ABOVE $5,000,000.00
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. If 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 FEBRUARY 19, 1998.
BORROWER: FOTOBALL U.S.A. INC.
By: DAVID G. FORSTER, Vice President
LENDER:
Scripps Bank
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, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 764,855
<SECURITIES> 0
<RECEIVABLES> 1,553,607
<ALLOWANCES> 151,000
<INVENTORY> 2,476,815
<CURRENT-ASSETS> 4,943,132
<PP&E> 2,289,396
<DEPRECIATION> 1,071,504
<TOTAL-ASSETS> 6,577,406
<CURRENT-LIABILITIES> 1,079,570
<BONDS> 0
0
0
<COMMON> 26,767
<OTHER-SE> 5,241,139
<TOTAL-LIABILITY-AND-EQUITY> 6,577,406
<SALES> 12,176,780
<TOTAL-REVENUES> 12,176,780
<CGS> 8,957,533
<TOTAL-COSTS> 6,068,092
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,486
<INCOME-PRETAX> (2,848,845)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,796,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,796,932)
<EPS-PRIMARY> (1.04)
<EPS-DILUTED> (1.04)
</TABLE>
<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-QSB
FOR THE PERIOD ENDED JUNE 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS. THIS FDS HAS BEEN REFILED
REFLECTING THE RESTATEMENT OF EARNINGS PER SHARE
DATA IN ACCORDANCE WITH SFAS 128.
RESTATED
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,184,726
<SECURITIES> 0
<RECEIVABLES> 5,350,785
<ALLOWANCES> 0
<INVENTORY> 1,834,288
<CURRENT-ASSETS> 11,010,331
<PP&E> 1,460,742
<DEPRECIATION> 564,619
<TOTAL-ASSETS> 12,494,877
<CURRENT-LIABILITIES> 4,342,904
<BONDS> 0
0
0
<COMMON> 26,617
<OTHER-SE> 8,002,443
<TOTAL-LIABILITY-AND-EQUITY> 12,494,877
<SALES> 15,153,860
<TOTAL-REVENUES> 15,153,860
<CGS> 10,380,311
<TOTAL-COSTS> 2,746,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,577
<INCOME-PRETAX> 2,102,870
<INCOME-TAX> 844,100
<INCOME-CONTINUING> 1,258,771
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,258,771
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
</TABLE>
<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. THIS FDS HAS BEEN REFILED
REFLECTING THE RESTATEMENT OF EARNINGS PER SHARE
DATA IN ACCORDANCE WITH SFAS 128.
RESTATED
<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> .48
<EPS-DILUTED> .47
</TABLE>
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Option Agreement") is made and entered
into as of the 11th day of August, 1997, by and between Fotoball USA, Inc.,
a Delaware corporation (the "Company"), and ADR Management Group Ltd., a New
Jersey corporation (the "Optionee").
The Board of Directors (the "Board") of the Company adopted a resolution
granting the Optionee, subject to the terms contained in that certain
agreement (the "Agreement") dated as of August 11, 1997, by and between the
Company and Optionee, a stock option (the "Option") to purchase 15,000 shares
(the "Shares"), of the Company's common stock, par value $.01 per share
(the "Common Stock"), on the terms and subject to the conditions set forth in
the Agreement. The Option was not granted under the Company's 1994 Stock
Option Plan.
The Option is not intended to satisfy the requirements for an incentive
stock option under Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company makes no representations or warranties as
to the income, estate or other tax consequences to the Optionee of the grant
or exercise of the Option or the sale or other disposition of the Shares
acquired pursuant to the exercise thereof.
1. (a) The price at which the Optionee shall have the right to purchase
the Shares under this Option Agreement shall be $2.6875, of the Fair Market
Value (as defined in Paragraph 4 hereof) of the Shares on the date of such
grant, subject to adjustment as provided in Paragraph 3 below.
(b) Unless the Option is previously terminated or accelerated pursuant
to this Option Agreement, 1,250 shares of the Option shall vest on the 11th
day of each month commencing September 11, 1997 until and including
August 11, 1998. in no event shall any Shares be purchasable under this
Agreement after August 11, 2000 (the "Expiration Date"). The Option shall
cease to be exercisable thirty (30) days after the date of termination of the
Agreement for reasons other than termination for Good Reason (as defined in
the Agreement), or termination due to the death, Disability (as defined in
the Agreement) or retirement of John A. Germinario ("Germinario").
Immediately upon the termination of the Agreement for Good Reason, all rights
of ADR hereunder shall thereupon terminate.
(c) If (i) Germinario ceases to be an employee of ADR or any
affiliate of ADR and this cessation is due to retirement (as defined by the
Board or a committee thereof in its sole discretion), (ii) Germinario becomes
unable to render services or perform his duties to ADR by reason of Disability
or (iii) Germinario dies, ADR shall have the right to exercise the unexercised
portion of the Option which ADR could have exercised on the day on which
Germinario ceased to be an employee of ADR due to retirement, Disability or
death; provided, however, that such exercise must be in accordance with the
terms of this Agreement and within (i) three (3) months after the date on
which Germinario's employment is terminated by reason of Germinario's
retirement or Disability or (ii)(A) twelve (12) months after the date on
which Germinario's employment is terminated by reason of Germinario's death
or (B) three (3) months after the date on which Germinario's employment is
terminated by reason of Germinario's death if such death occurs during the
three (3) month period following the termination of Germinario's employment
by reason of retirement or Disability, as the case may be. In no event,
however, shall ADR exercise the Option after the Expiration Date.
2. (a) Subject to Section 422 of the Code, neither the Option nor any
right under the Option shall be assignable, alienable, saleable or
transferable by the Optionee without the written consent of the Company, or
by the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined in the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder.
(b) The Option shall not be pledged, alienated, attached, or otherwise
encumbered or transferred in any manner without the written consent of the
Company, and any purported pledge, alienation, attachment, encumbrance, or
transfer thereof without the written consent of the Company shall be void and
unenforceable against the Company.
3. In the event that the Board or a committee thereof shall determine
that the outstanding shares of Common Stock are affected by any (i) subdivision
or consolidation of shares, (ii) dividend or other distribution (whether in
the form of cash, Shares, other securities, or other property),
(iii) recapitalization or other capital adjustment of the Company or
(iv) merger, consolidation or other reorganization of the Company or other
rights to purchase Shares or other securities of the Company, or other
similar corporate transaction or event, such that an adjustment is determined
by the Board or a committee thereof to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to be
made available hereunder, then the Board or a committee thereof shall, in
such manner as it may deem necessary to prevent dilution or enlargement of the
benefits or potential benefits intended to be made hereunder, adjust any or
all of (x) the number and type of Shares which may be subject to the Option,
(y) the number and type of Shares subject to the unexercised portion of the
Option, and (z) the grant, purchase, or exercise price with respect to the
Option or, if deemed appropriate, make provision for a cash payment to the
Optionee. In computing any adjustment under this paragraph, any fractional
share shall be eliminated; provided, however, in each case, that (i) each
such adjustment shall be made in such manner as not to constitute a
cancellation and reissuance of a Non-Qualified Stock Option for purposes of
Section 162(m) of the Code, or the regulations promulgated thereunder, to the
extent that such reissuance would result in the grant of such Options in
excess of the maximum permitted to be granted to the Optionee in any fiscal
year; and (ii) the number of Shares subject to any Option denominated in
Shares shall always be a whole number.
4. Subject to the term of the Agreement, the Option shall be exercised
when written notice of such exercise, signed by a duly authorized officer of
the entity entitled to exercise the Option, has been delivered or transmitted
by registered or certified mail, to the Secretary of the Company at its
principal office. Said written notice shall specify the number of Shares
purchasable under the Option which such entity then wishes to purchase
and shall be accompanied by such documentation, if any, as may be required by
the Company as provided in Paragraph 6 below and be accompanied by payment of
the aggregate Option price. Such payment of the aggregate Option price shall
be, without limitation, in the form of cash, Shares, outstanding Options or
other consideration, or any combination thereof, having a Fair Market Value
on the exercise date equal to the exercise price of the Option or portion
thereof being exercised. Delivery of said notice and such documentation shall
constitute an irrevocable election to purchase the Shares specified in said
notice and the date on which the Company receives said notice and
documentation shall, subject to the provisions of Paragraphs 5 and 6 hereof,
be the date as of which the Shares so purchased shall be deemed to have been
issued. The person entitled to exercise the Option shall not have the right
or status as a holder of the Shares to which such exercise relates prior to
receipt by the Company of such payment, notice and documentation. For
purposes of this Agreement, "Fair Market Value" shall mean, with respect to
Shares or other securities, (i) the closing price per Share of the Shares on
the principal exchange on which the Shares are then trading, if any, on such
date, or, if the Shares were not traded on such date, then on the next
preceding tmding day during which a sale occurred; or (ii) if the Shares are
not traded on an exchange but are quoted on the Nasdaq National Market
("Nasdaq") or a successor quotation system, (1) the last sales price (if the
Shares are then listed on Nasdaq) or (2) the mean between the closing
representative bid and asked prices (in all other cases) for the Shares on
such date as reported by Nasdaq or a successor quotation system; or (iii) if
the Shares are not publicly traded on an exchange and not quoted on Nasdaq or
a successor quotation system, the mean between the closing bid and asked
prices for the Shares on such date as determined in good faith by the Board
or a committee thereof; or (iv) if the Shares are not publicly traded, the
fair market value established by the Board or a committee thereof acting in
good faith.
5. Anything in this Agreement to the contrary notwithstanding, in no
event may the Option be exercisable if the Company shall, at any time and in
its sole discretion, determine that (i) the listing, registration or
qualification of any Shares otherwise deliverable upon such exercise, upon
any securities exchange or under any state or federal law, or (ii) the
consent or approval of any regulatory body or the satisfaction of withholding
tax or other withholding liabilities is necessary or desirable in connection
with such exercise. In such event, such exercise shall be held in abeyance
and shall not be effective unless and until such withholding, listing,
registration, qualification, consent, or approval shall have been affected or
obtained free of any conditions not acceptable to the Company.
6. The Board or a committee thereof may require as a condition to the
right to exercise the Option hereunderthat the Company receive from the
person exercising the Option, representations, warranties and agreements, at
the time of any such exercise, to the effect that the Shares are being
purchased for investment only and without any present intention to sell or
otherwise distribute such Shares and that the Shares will not be disposed of
in transactions which, in the opinion of counsel to the Company, would
violate the registration provisions of the Securities Act of 1933, as then
amended, and the rules and regulations thereunder. The certificate issued to
evidence such Shares shall bear appropriate legends summarizing such
restrictions on the disposition thereof.
7. All certificates for Shares delivered pursuant to the Option or the
exercise thereof shall be subject to such stop transfer orders and other
restrictions as the Board or a committee thereof may deem advisable under the
rules, regulations, and other restrictions of the Securities and Exchange
Commission, any stock exchange upon which such Shares or other securities are
then listed, and any applicable federal or state securities laws, and the
Board or a committee thereof may cause a legend or legends to be put on any
such certificates to make appropriate reference to such restrictions.
8. This Agreement shall be construed and enforced in accordance with the
laws of the State of Delaware and applicable federal law. Subject to
subparagraph 2(a) hereof, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors or assigns, as the case may be.
IN WITNESS WHEREOF, the parties have witnessed this Agreement to be duly
executed and delivered as of the date first above written.
FOTOBALL USA, INC.
By: /s/ Michael Favish
-------------------------------------
Michael Favish
President and Chief Executive Officer
ADR MANAGEMENT GROUP LTD.
By: /s/ John A. Germinario
-------------------------------------
John A. Germinario,
Chief Executive Officer
