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, 1998
[ ] 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.
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(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, 1998
were $19,147,728.
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 22, 1999, was $ 7,673,029.
As of March 22, 1999, the Company had 2,699,242 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 18, 1999 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, Footlocker, J.C.
Penney, Kmart, Target, Toys R Us, Modell's, Sears 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 sells 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"); over 300 colleges and universities ("Colleges");
and certain entertainment properties including Nickelodeon's "Rugrats"
characters. 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 and
cartoon characters.
The Company's business is segregated into two distinct types of
customers: its promotions customers, to whom the Company sells custom-
designed products directly to companies, and its retail customers which
includes both the sale of licensed products directly to mass merchants,
sports teams and concessionaires (its "national retail sales" customer) and
the sale of non-licensed specialty sports products to amusement park and
entertainment related companies for resale and promotional use (its
"entertainment" customer).
The Company's promotions customers, which include large corporations such
as General Mills, Castrol, Mastercard 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.
2<PAGE>
The Company's national retail sales represents a customer base of
over 2,000 retailers, including selected department stores and mass
merchants (including Walmart, Footlocker, J.C. Penney, Kmart, Target,
Toys R Us, Modell's, Sears 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 $14.95 per item.
The following is a description of each of the Company's 1999 product lines:
Baseball:
The Company uses a synthetic leather, official size and weight baseball on
which it prints the various images. The baseball product line includes:
baseball featuring a players' image and statistics; embroidered baseball;
logo team baseball featuring logos of all 30 Major League Baseball teams;
mini-glove and baseball gift sets; specialty baseball including mini-hanging
baseball, and inaugural baseball with snake skin design; soft cast vinyl
polyester filled baseball licensed by Colleges and Professional Baseball and
promotional baseball custom printed and used for promotion.
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 Company uses a full-size
football constructed of synthetic leather for both retail and promotional
sales and a youth size vulcanized rubber football for colleges. The
football product line includes: Teamball TM and NFL Player Fotoballr;
mini-football featuring NFL team logos and full color images of NFL
players; full-size football featuring university or college logos; NFL
Souvenir full-size football featuring team and Super Bowl logos and NFL
marks produced in limited edition; performance/full-size football featuring
color images for specialty retailers such as Walt Disney and WB Sport
and promotional full-size and miniature football custom-printed and used
for promotions.
3<PAGE>
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 Company uses a full-size
basketball constructed of vulcanized rubber for its brand licensed and
college product line and a full-size basketball constructed of synthetic
leather. The basketball product line includes: University Teamballr made
from synthetic leather and both full and youth size vulcanized rubber
basketball featuring a full-color image of a university or college logo and
nickname; National Basketball Association ("NBA") team logo ball
featuring full-color logos of several NBA teams, sold to individual teams
for exclusive sale by the respective team within the arena; basketball hoop
set with backboard featuring college logos combined with a mini-
basketball; performance/full-size basketball featuring full-color images for
specialty retailers; and promotional basketball in all sizes 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 ball. The Company uses a full-size soccer ball
constructed of vulcanized rubber for its brand licensed products. The
soccer product line includes: soccer ball featuring MLS team logos, player
images and player facsimile autographs; performance/full-size soccer ball
featuring color images for specialty retailers; and promotional soccer ball
custom-printed and used for promotions.
Hockey Puck:
The Company uses a hockey puck that is officially licensed with
the NHL. The hockey product line includes: team puck featuring NHL
team logos, player images and player facsimile autographs packaged in a
mini net; chrome puck featuring Chromium GraphicsT process designs on
a disk displayed in a hockey net; and college puck featuring a full color
image of a university or college logo.
Lapel Pin:
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: MLB Lapel Pin including glow in the dark, flexible
and mood lapel pin licensed by MLB, featuring team logos; National
Collegiate Athletic Association ("NCAA") lapel pin for NCAA
championship series and Final FourT tournament licensed by the NCAA;
and promotional pin custom manufactured and used for corporate
promotions.
4<PAGE>
Playground Ball:
The company uses a soft vulcanized rubber ball in various sizes
for its entertainment-related licensed products such as for Nickelodeon's
"Rugrats" characters. The Company uses a full-size playground ball for
its new MLB team logo playground ball featuring all 30 MLB teams.
Softee Ball:
The Company uses polyester-filled soft synthetic leather for its
"softee" sport ball. The softee product line includes a Teamball
basketball featuring college and minor league team logos and promotional
miniature football and baseball custom printed and used for promotions.
Manufacturing, Supply and Distribution
Significant portions of all raw materials used in the production of
the Company's retail products are purchased from unaffiliated
manufacturers in the Far East. An increasingly greater percentage of the
Company's retail products are manufactured overseas, requiring only
inflation and packaging of the products to be completed at the Company's
San Diego, California facility. Additionally, the majority of the
Company's promotions products are manufactured according to Company
and customer specifications by these same unaffiliated manufacturers. In
1998, the Company purchased approximately 87% of its raw materials
and finished retail and promotions goods from six vendors located in
China, with two manufacturers accounting for 77% of total raw materials
and finished 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 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 vendors located in China to capitalize on significantly lower
manufacturing costs. The Company's senior management periodically
visits its suppliers to supervise the manufacturing of its products and to
ensure compliance with the Company's quality control standards and
specifications. The Company is not a party to any written contract with
any supplier and relies on its long-standing relationships to ensure quality,
responsiveness and efficiency. All of the Company's products
manufactured abroad are paid for in United States dollars.
Foreign manufacturing is subject to a number of risks, including
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
5<PAGE>
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 the
NFL, Professional Baseball, and, to a lesser extent, Colleges. The
Company's licensing arrangements expire at various times through March
31, 2000. 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 the NFL
or Professional Baseball 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 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 ClubT
and its members ("Quarterback Club" license). During 1998 the Company
also received from NFLP the right to utilize team and league logos on
limited edition, collectible, full-size, synthetic-leather footballs. The
terms of the licenses extend through March 31, 2000. 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.
The Company was granted by the Major League Baseball Players
Association ("MLBPA") the non-exclusive right to utilize on regulation-
size baseballs, 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, 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 MLBPA
upon acceptable terms at its expiration.
6<PAGE>
The Company was granted by Major League Baseball Properties,
Inc. ("MLBP") the non-exclusive right to utilize on regulation-size
baseballs, mini gloves, mini leather baseballs, playground balls 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.
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. In prior years, the Company's promotions business
contributed the largest percentage of the Company's total sales and
earnings and as such resulted in significant reliance upon generating
promotion sales sufficient to operate profitably. The large increase in the
Company's retail business in 1998 reduced the importance of the
promotions business in determining the Company's profitability. During
the year ended December 31, 1998, 25% of the Company's sales was
derived from promotions, of which one customer accounted for aggregate
sales of $1,383,000 or 7% of total sales. 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
approximately $2,438,000 or 20% of total sales. The Company expects
the total contribution of promotion sales to aggregate sales will continue
to decrease in the future as a result of the continued growth of the
Company's retail sales and expanding opportunities, such as within the
amusement and entertainment industries.
Variability of Gross Margins - Historically, the Company has realized
higher gross margins on its retail sales as compared to promotions sales.
In 1997, the Company realized gross margins of 36%, excluding a $1,175,000
provision for discontinued and excess inventory. In 1998, the Company
realized gross margins of 39%. The increase was primarily due to the greater
concentration of higher margin retail sales in 1998 as compared to 1997. 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 historically experienced significant
quarter-to-quarter variability in its sales and net income. This
7<PAGE>
was due in part to the seasonality of its licensed sports product business
combined with a significant concentration of its business from baseball.
The second factor which in prior years significantly contributed to the
variability of the Company's operations was its dependence on promotions
business as more fully explained above. The Company realized increasing
sales and profitability in each quarter of 1998 primarily due to significant
increases in its retail businesses. The Company anticipates that in future
periods, retail sales will continue to account for a greater percentage of
aggregate sales and therefore less variability of operating results.
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 and Mr. Favish are discussing an extension of
Mr. Favish's employment agreement. The Company maintains "key man" life
insurance on the life of Michael Favish in the amount of $1,000,000.
Backlog
The Company's backlog of orders was $985,000 and $1,570,000
as of March 1, 1998 and 1999, respectively. The 1998 and 1999 backlog
represents various corporate promotions and specialty retail orders. The
Company's backlog of orders, which is deemed to be in general
promotional orders and certain specialty product retail sales, was
historically considered a meaningful measure of the Company's future
prospects because of the Company's past reliance upon promotional sales
to generate operating profits. The contribution of promotion sales to
aggregate sales has decreased considerably since 1997. Additionally,
retail sales, which are processed within one to four weeks after receipt of
an order and are therefore generally not deemed part of the Company's
backlog, now account for the majority of the Company's total sales. As
such, and given its expectation that retail sales in future periods will
continue to represent a greater percentage of the Company's aggregate
sales, the backlog will become even less indicative of future revenues or
earnings.
Competition and Technological Change
Product
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
8<PAGE>
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 and broadened licensed product lines will
result in substantially more competition within these product categories
due to a greater number of well-established companies, including Franklin
Sports Inc., Baden Sports Inc. ("Baden"), Play by Play Inc., 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.
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 that 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, and 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.
9<PAGE>
Software
The Company has prepared a plan to become Year 2000 compliant. Pursuant
to the Company's Year 2000 plan, the Company is currently evaluating its
information technology ("IT") and non-IT computerized systems to assure that
the transition to a Year 2000 compliant system will not disrupt the Company's
operations. The Company has upgraded its accounting and manufacturing
software systems to achieve further productivity and cost improvements.
These new software systems are Year 2000 compliant. The Company has also
recently completed the testing of its computer hardware systems, all of
which are Year 2000 compliant. The Company believes that all systems
necessary to manage the business effectively will be replaced, modified or
upgraded before the Year 2000. 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.
The Company is also evaluating the systems of its key customers
and suppliers to ensure that these companies are Year 2000 compliant.
The cost of this evaluation is expected to be nominal. In the event that its
current suppliers are either unable to certify that they will be Year 2000
compliant by mid 1999 or unable to give the Company reasonable
assurance that Year 2000 issues will have no material adverse impact on
their operations, then the Company will review its alternatives with
respect to other suppliers. There can be no assurance that the Company
will be able to find suppliers that are acceptable to the Company. In the
event that its key customers are unable to certify that they will be Year
2000 compliant by mid 1999, the Company will be assessing the accounts
receivable collection risk of such key customers.
Trademarks, Proprietary Information and Patents
Fotoball is a registered trademark 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 Teamball, Fotopuck 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.
10<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 that 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.
Employees
As of March 1, 1999, the Company employed 86 persons, all on a
full-time basis, including seven in executive positions, seven in sales, six
in graphic production, 22 in administrative support positions and 44 in
11<PAGE>
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 warehouses are located in
approximately 86,000 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. In May 1998 and March 1999, the Company added 19,000 and
18,000 square feet, respectively, of additional warehousing space at its
4000 Ruffin Road facility. The Company now has approximately 60,000
square feet of warehousing space, which expires in July 2001, including a
one-year renewal option at a monthly rent of $26,422. The Company
anticipates that its warehouse space will meet its space requirements for
the foreseeable future. The Company may need to seek additional office
space in the near term as its sales and staffing requirements increase.
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, 1998.
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") are traded over-the-counter on the Nasdaq
National Market. 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)
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
12<PAGE>
1998
First Quarter $ 1.75 $ 1.00
Second Quarter $ 3.25 $ 1.38
Third Quarter $ 3.19 $ 1.63
Fourth Quarter $ 3.38 $ 1.88
Warrants: (FUSAW)
1997
First Quarter $ 1.88 $ 1.00
Second Quarter $ 1.38 $ .38
Third Quarter $ .75 $ .19
Fourth Quarter $ .47 $ .13
1998
First Quarter $ .19 $ .06
Second Quarter $ .31 $ .09
Third Quarter $ .50 $ .13
Fourth Quarter $ .34 $ .16
On March 19, 1999, there were approximately 77 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 1,286 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, 1997 and 1998:
The following table sets forth certain operating data (in dollars
and as a percentage of the Company's sales) for the years ended December
31, 1997 and 1998:
1997 % 1998 %
----------- --- ----------- ---
Sales $12,176,780 100 $19,147,728 100
Cost of Sales 8,957,533 74 11,590,631 61
Gross Profit 3,219,247 26 7,557,097 39
Operating Expenses 6,068,092 50 6,448,168 34
Operating Income (Loss) (2,848,845) (23) 1,108,929 6
Interest Expense 40,486 1 88,183 1
Interest Income 92,399 1 10,128 1
Income (Loss) Before Income Tax (2,796,932) (23) 1,030,874 5
Income Tax Expense - - 433,000 2
Net Income (Loss) $(2,796,932) (23) $ 597,874 3
Sales:
Sales were $19,148,000 for the year ended December 31, 1998,
an increase of 57% from sales of $12,177,000 for the year ended
December 31, 1997. The $6,971,000 increase in sales was due primarily
to an increase in retail sales of $6,389,000, or 81%, as compared to the
prior year period.
13<PAGE>
Retail sales were $14,307,000 for the year ended December 31, 1998,
an increase of 81% from retail sales of $7,917,000 for the year
ended December 31, 1997. This increase was due to several factors:
continued expansion of sales to national mass merchants; significant
increases in basketball-related sales, primarily from its college vulcanized
rubber product line; increasing sales from the Company's expanding
product lines such as the full-size NFL football, polyester filled "softee"
products and playground balls; an increase in baseball-related sales due in
part to the excitement surrounding the breaking of MLB's home run
record; and a significant increase in the Company's amusement and
entertainment business. The Company realized sales increases of
$2,759,000 or 156%, $1,532,000 or 211%, $1,505,000 or 34%, and
$358,000, from its football, basketball, baseball and playground ball
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 expanding
penetration into national retailers. The number of stores within each retail
chain increased in 1998; however, it reflected a small percentage of the
national retail chains overall store count. The Company expects the
number of stores it services to increase significantly in 1999, continued
growth with its amusement and entertainment customers, continued
growth from its vulcanized rubber "recreational" sports ball product lines,
and the leveraging of existing licensed properties, such as Nickelodeon's
"Rugrats" characters, and the addition of new licensed properties.
Promotions sales in 1998 were $4,841,000, an increase of 14%
from promotions sales of $4,260,000 for the year ended December 31,
1997. The increase was due to increases of $1,770,000, or 134%, and
$804,000, or 364%, from baseball and football-related promotions sales,
offset by a decrease of $1,729,000 or 100%, of hockey-related promotions
sales. The Company's promotions business differed in 1998 as compared
to prior years in that multi-regional corporate promotional programs
accounted for a substantially smaller percentage of aggregate promotions
sales. The Company anticipates that in the future its promotions business
will represent a smaller percentage of the Company's total sales, given the
growth rate of the Company's retail business and the likelihood that fewer
multimillion dollar "national" programs will occur in the future.
However, the Company will continue to pursue its objective of expanding
its promotions business and its contribution to operating profits through
several strategies, including: leveraging its relationships with its licensors,
including MLBP, NFL and colleges, to secure promotions with
corporations who sponsor these organizations; capitalizing on the success
of its amusement/entertainment retail business by pursuing promotional
opportunities with these same customers; leveraging current and future
licensing rights by using these properties and characters in value-added
corporate promotions; and using the Company's expanded line of
products to increase promotions with professional and college sports teams.
Gross Profit:
Gross profit was $7,557,000 for the year ended December 31,
1998, an increase of 135% from gross profit of $3,219,000 for the year
ended December 31, 1997, reflecting the substantially higher sales in
1998. Gross margins as a percentage of sales for the year ended
14<PAGE>
December 31, 1998 increased to 39% from 26% for the prior year period.
This increase was due to two factors; the 1997 gross margins reflected
the $1,175,000 provision for discontinued and excess inventory, which if
excluded would have resulted in gross margins of 36%. Notwithstanding
this provision, the increase from 36% to 39% in 1998 reflected the higher
percentage of retail sales and the introduction in 1998 of certain very
successful higher margin products. The Company expects that gross
margins in 1999 should be consistent with the margins realized in 1998.
Operating Expenses:
The Company's operating expenses were $6,448,000 for the year
ended December 31, 1998, an increase of 6% from operating expenses of
$6,068,000 for the year ended December 31, 1997. Operating expenses as
a percentage of sales decreased to 34% in 1998 from 50% in 1997 due to
the fixed component of operating expenses, which in absolute terms where
lower than in 1997, being allocated over significantly higher sales.
Operating expenses increased in absolute terms due to variable operating
expenses such as a significant increase in royalties expense, reflective of
the Company's increased retail sales contribution.
Royalties expenses were $1,569,000 for the year ended December
31, 1998, an increase of 99% from royalties expenses of $788,000 for the
year ended December 31, 1997. Royalties expenses as a percentage of
sales increased to 8% in 1998 from 6% in 1997. The increase in royalties
expenses during this period both in absolute terms and as a percentage of
sales in 1998 was due to several factors including a significant increase in
sales of higher royalty bearing retail products, such as the NFL full-size
football and baseballs commemorating the MLB players participating in
1998's home run race; combined with a greater number of promotions in
1998 as compared to 1997 which were royalty bearing. The Company
expects that in absolute terms, royalties expenses will increase in 1999,
reflecting the anticipated increase in retail sales and, as a percentage of
sales, will remain consistent with 1998. 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 that expire on
March 31, 2000. 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 $2,260,000 for the year ended
December 31, 1998, an increase of 5% from marketing expenses of
$2,154,000 for the year ended December 31, 1997. Marketing expenses
as a percentage of sales decreased to 12% in 1998 from 18% in 1997,
reflecting the absorption of the fixed components of marketing expenses
over significantly higher sales volume. Marketing expenses increased by
$106,000 due primarily to increases in variable costs such as independent
sales commissions and performance bonuses offset by lower sales wages
and travel costs. The Company anticipates that marketing expenses
should increase in absolute terms in 1999, reflecting increases in variable
costs resulting from expected higher sales volumes. Marketing expenses
as a percentage of sales in 1999 are expected to be consistent with the
percentage realized in 1998.
15<PAGE>
General and administrative expenses were $2,301,000 for the year
ended December 31, 1998, a decrease of 10% from general and administrative
expenses of $2,550,000 for the year ended December 31, 1997. The $249,000
decrease between periods was due in part to significant decreases in
professional services and legal fees offset in part by higher personnel
and facility costs. The Company incurred higher facility costs to accommodate
significantly higher inventory levels and greater packaging and shipping
facilities required by its expanding retail business. The Company anticipates
that general and administrative expenses for the year ending December 31, 1999
should increase moderately as compared to total general and administrative
expenses incurred in 1998.
Other Income (Expense):
Interest expense was $88,000 for the year ended December 31, 1998, an
increase of 120% from interest expense of $40,000 for the year ended
December 31, 1997. The Company anticipates that interest expense in future
periods will continue to increase reflecting increased borrowing from the
Company's revolving line of credit and additional capital lease purchases as
more fully explained in "Liquidity and Capital Resources" below.
Interest income was $10,000 for the year ended December 31,
1998 as compared to $92,000 for the year ended December 31, 1997.
This decrease is due to the Company's average cash balances available
for investment being substantially lower during 1998 as compared to
1997. The Company anticipates that interest income in 1999 will
continue to be insignificant.
Income Tax Expense:
Income tax expense of $433,000 was recorded for the year ended
December 31, 1998. There was no income tax expense (benefit) for the
year ended December 31, 1997 due to the 1997 operating loss. No benefit
for these 1997 operating loss and deferred expenses were recognized in
1997 or 1998 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 net income realized in 1998, and the expectation
of continuing increases in its retail business, it is probable that future
taxable income will be sufficient to realize the $90,000 net deferred tax
asset balance at December 31, 1998, on future tax returns. However,
historically the Company has experienced significant variability in its
operating results. As a result, significant uncertainty exists as to the
realizability of the $1,181,000 of gross deferred tax assets available as of
December 31, 1998. Due to this uncertainty, the Company has established
a valuation allowance to the extent of the $1,181,000 of gross deferred tax
assets.
Liquidity and Capital Resources
The Company's net working capital increased by $1,021,000 from
December 31, 1997 to December 31, 1998, to a net working capital
surplus of $4,884,000 at December 31, 1998 from a net working capital
16<PAGE>
surplus of $3,863,000 at December 31, 1997. Cash flow from operations decreased
by $3,067,000 from cash provided by operations of $2,128,000 for the year ended
December 31, 1997 to cash used in operations of $939,000 for the year ended
December 31, 1998. This decrease was primarily the result of significant
increases in both account receivable and inventories reflecting the significant
increase in annual sales and, in particular, the 143% increase in sales during
the fourth quarter of 1998 as compared to the prior year period.
Cash and equivalents aggregated $8,000 at December 31, 1998, a
decrease of $757,000 from cash and equivalents of $765,000 at December 31,
1997. This decrease is primarily due to the significant increase in accounts
receivable and inventories as previously noted. The Company's inventory
increased by approximately $962,000 to $3,439,000. 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 1998, the Company acquired fixed
assets for an aggregate purchase price of approximately $244,000, including
production machinery, office and computer equipment. For the next twelve
months, the Company anticipates that its capital expenditure requirements
will approximate $400,000, which will be used to purchase additional product
molds, production machinery, and office and computer equipment.
At December 31, 1998, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $637,000 in the aggregate
through 2000, of which $622,000 is due at various times in 1999. Based upon
the net income realized by the Company in 1998 and the expectation of
continuing increases in its retail business, management expects these
guaranteed royalties to be funded from operating cash flows.
In December 1998, the Company amended and renewed a one-year credit
agreement with Scripps Bank. This revolving line of credit facility (the
"credit line") in the amount of $3,500,000 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. The
credit line expires April 15, 2000. The availability under the credit line
during 1997 and 1998 was $2,000,000 and $1,500,000, respectively. In
February 1998, Scripps Bank 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. There were no borrowings
under the credit line at December 31, 1997. At December 31, 1998,
outstanding borrowings under the credit line totaled $400,000.
The Company has a $3,000,000 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 required to be secured by cash collateral
deposited with Merrill Lynch equal to the credit outstanding. The line of
credit extends until December 10, 2001. There was no borrowing under
the line of credit as of December 31, 1998.
17<PAGE>
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 1999.
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
1999, overall sales, gross margin, and operating expense trends, the
Company's expectations as to funding its capital expenditures and
operations during 1999, 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.
1999 Outlook
Looking forward to 1999, the Company expects continued improvement over
fiscal year 1998 results. During the past several years, the Company's
retail business has consistently grown in excess of 25% per year. In 1998,
the Company's retail sales increased by 81%, driven primarily by growth in
national account sales and entertainment/amusement-related sales. The
Company's ability to exceed its historical retail sales growth rate of 25%
per year will be dependent upon several factors including: continued
expansion and penetration into national mass merchants; continued growth of
its rubber sports ball product line; increasing sales with its amusement park
and entertainment related customers; and the leveraging of existing licensed
properties and the addition of new licensed properties. Retail sales in 1999
are anticipated to represent a similar percentage of total sales as compared
to 1998, and should continue to 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, the Company expects moderate
growth in its promotions business in 1999.
The Company was successful in 1998 in reducing its operating
costs and improving efficiencies. The Company expects only moderate
increases in its fixed costs and expects higher variable costs such as
royalties expense, commissions and other direct selling expenses to
increase in absolute terms as a result of higher sales. The Company
anticipates, however, that net margins, as a percentage of sales, will
improve in 1999 as compared to 1998.
18<PAGE>
The ability of the Company to continue to realize increased sales
and earnings in 1999 and future periods is dependent upon in large
measure its ability to realize continued growth in its retail businesses,
continue to expand its promotions business through customer and product
diversification, 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
* 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 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 highly
competitive industries such as recreational sports balls and
polyester filled "softee" or plush products
* 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
* the ability to effectively meet customer demands regarding timely
delivery and order fulfillment
* the popularity of current or future licensing properties and the
ability of the Company to leverage these properties to produce
sales and earnings.
19<PAGE>
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 5, 1999, of Hollander,
Lumer & Co. LLP, the Company's independent auditors.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 9. Directors and Executive Officers of the Registrant
The following table sets forth certain information as of March 15, 1999
concerning the executive officers and directors of the Company:
NAME AGE POSITION
- ---- --- --------
Salvatore T. DiMascio 1,2 59 Director
Michael Favish 50 President, Chief Executive Officer and
Director
Nicholas A. Giordano 2 56 Director
Joel K. Rubenstein 1 62 Director
David G. Forster 39 Executive Vice President, Finance,
Treasurer and Chief Financial Officer
Carl E. Francis 40 Senior Vice President, Sales and
Marketing
Karen M. Betro 48 Vice President, Operations
Jon D. Schneider 31 Vice President, Marketing, Team Business
Steve B. Katzke 32 Vice President, Specialty Sales and
Marketing
- ---------
1. Member of compensation committee
2. Member of audit committee
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., H.E.R.C. Products Inc., and
Colorado Casino Resort Inc., all of which are publicly-held corporations.
20<PAGE>
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 26 years of product design,
manufacturing and sourcing experience and has established strategic
international sourcing alliances.
Nicholas A. Giordano has served as a director of the Company
since July 1998. In July 1998, Mr. Giordano was appointed interim
President of LaSalle University for a one-year term. From late 1997
through 1998, Mr. Giordano was a consultant for financial service
organizations. Additionally, from 1971 through August 1997, Mr.
Giordano held various positions at The Philadelphia Stock Exchange,
including from 1981 to 1997 as President and Chief Executive Officer.
He also served as Chairman of the Board of the exchange's two
subsidiaries: Stock Clearing Corporation of Philadelphia and Philadelphia
Depository Trust Company. Mr. Giordano's previous business
experience includes serving as Chief Financial Officer at two brokerage
firms (1968-1971) and as a Certified Public Accountant at Price
Waterhouse (1965-1971).
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.
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.
21<PAGE>
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
1999 Annual Meeting of Stockholders.
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 1999 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 1999 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).
22<PAGE>
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(1) License Agreement with Major League Baseball
Properties, Inc., dated May 14, 1997. (incorporated
herein by reference to Exhibit 10.1(1) of the
Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997 (the
"1997 Form 10-KSB")).
10.1(2) Amended License Agreement with Major League
Baseball Properties, Inc., dated December 11, 1998.
10.1(3) License Agreement with Major League Baseball Players
Association dated March 29, 1997. (incorporated
herein by reference to Exhibit 10.1(3) of the 1997
Form 10-KSB).
10.1(4) License Agreement with National Football League
Properties, Inc., dated April 14, 1998.
10.3(5)* Stock Option Agreement dated January 30, 1998 with
Salvatore T. DiMascio (incorporated herein by
reference to Exhibit 10.3(5) of the 1997 Form 10-KSB).
23<PAGE>
10.3(6)* 1998 Stock Option Plan of the Company (incorporated
herein by reference to Exhibit 4.1 of the Form S-8
filed on July 23, 1998).
10.3(7)* Form of Stock Option Agreement (incorporated herein
by reference to Exhibit 4.2 of the Form S-8 filed on
July 23, 1998).
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(3)* Settlement Agreement and Mutual General Release
dated October 1, 1997 with Fred S. Ostern
(incorporated herein by reference to Exhibit 10.4(3)
of the 1997 Form 10-KSB).
10.4(9) Consulting Agreement with ADR Management Group
Ltd. dated August 11, 1997 (incorporated herein by
reference to Exhibit 10.4(9) of the 1997 Form 10-KSB).
10.4(10) Stock Option Agreement dated August 11, 1997 with
ADR Management Group Ltd. (incorporated herein
by reference to Exhibit 10.4(10) of the 1997 Form 10-KSB).
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
(incorporated herein by reference to Exhibit 10.5(1)
of the 1997 Form 10-KSB).
10.5(2) Second and Third Amendment dated June 1, 1998, and
September 29, 1998, respectively, to sublease
between the Company and General Textiles, with
respect to 4000 Ruffin Road, San Diego, California.
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(1) of the Form SB-2).
24<PAGE>
10.10(1) Amended Revolving Credit Agreement dated February
19, 1998 between Fotoball USA, Inc., and Scripps
Bank (incorporated herein by reference to Exhibit
10.10(1) of the 1997 Form 10-KSB).
10.10(2) Amended Revolving Credit Agreement dated December
28, 1998 between Fotoball USA, Inc., and Scripps Bank.
11 Statement re: computation of per share earnings.
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, 1998.
25<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, 1999 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, 1999 By: /s/ Michael Favish
--------------------------------
Michael Favish
President and Chief Executive Officer
Dated: March 30, 1999 By: /s/ David G. Forster
--------------------------------
David G. Forster
Executive Vice President - Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
Dated: March 30, 1999 By: /s/ Salvatore T. DiMascio
--------------------------------
Salvatore T. DiMascio
Director
Dated: March 30, 1999 By: /s/ Nicholas A. Giordano
--------------------------------
Nicholas A. Giordano
Director
Dated: March 30, 1999 By: /s/ Joel K. Rubenstein
--------------------------------
Joel K. Rubenstein
Director
26<PAGE>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1(2) Amended License Agreement with Major League Baseball
Properties, Inc. dated December 11, 1998.
10.1(4) License Agreement with National Football League
Properties, Inc., dated April 14, 1998.
10.5(2) Second and Third Amendment dated June 1, 1998 and
September 29, 1998, respectively to sublease between
the Company and General Textiles, with respect to
4000 Ruffin Road, San Diego, California.
10.10(2) Amended Revolving Credit Agreement dated December 28,
1998 between Fotoball USA, Inc., and Scripps Bank.
11 Statement re: computation of per share earnings.
21 Subsidiaries of the Company.
27 Financial data schedule.
27<PAGE>
FOTOBALL USA, INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998
Report of Independent Auditors F-1
Balance Sheets at December 31, 1997 and 1998 F-2
Statements of Operations for the years ended
December 31, 1997 and 1998 F-3
Statement of Stockholders' Equity for the
years ended December 31, 1997 and 1998 F-4
Statements of Cash Flows for the years
ended December 31, 1997 and 1998 F-5
Notes to Financial Statements F-6
28<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, 1997 and 1998, 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, 1997 and 1998, and
the results of its operations, and its cash flows for the years then
ended in conformity with generally accepted accounting
principles.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
February 5, 1999
F-1<PAGE>
FOTOBALL USA, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1998
1997 1998
ASSETS ----------- -----------
CURRENT ASSETS
Cash and equivalents $ 764,855 $ 8,498
Accounts receivable less allowances of
$147,000 in 1998 and $151,000 in 1997 1,402,607 3,041,633
Inventories 2,476,815 3,438,552
Prepaid expenses and other 148,855 157,608
Deferred income taxes 150,000 90,000
----------- -----------
TOTAL CURRENT ASSETS 4,943,132 6,736,291
----------- -----------
PROPERTY AND EQUIPMENT, net 1,217,892 1,126,551
----------- -----------
OTHER ASSETS
Deferred income taxes 301,000 --
Deposits and other 115,382 31,767
----------- -----------
TOTAL OTHER ASSETS 416,382 31,767
----------- -----------
$ 6,577,406 $ 7,894,609
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank $ -- $ 400,000
Current portion of capital leases 90,182 95,970
Accounts payable and accrued expenses 789,388 1,315,831
Settlement liability 200,000 --
Income taxes payable -- 39,800
----------- -----------
TOTAL CURRENT LIABILITIES 1,079,570 1,851,601
CAPITAL LEASES, net of current portion 229,930 154,503
----------- -----------
TOTAL LIABILITIES 1,309,500 2,006,104
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized-1,000,000 shares; issued and
outstanding-none
Common stock, $.01 par value;
authorized - 15,000,000 shares;
issued and outstanding - 2,699,242
shares in 1998 and 2,676,742 shares
in 1997 26,767 26,992
Additional paid-in capital 8,568,494 8,590,994
Accumulated deficit (3,327,355) (2,729,481)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,267,906 5,888,505
----------- -----------
$ 6,577,406 $ 7,894,609
=========== ===========
The accompanying notes are an integral part of these statements.
F-2<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998
----------- -----------
SALES $12,176,780 $19,147,728
COST OF SALES 8,957,533 11,590,631
----------- -----------
GROSS PROFIT 3,219,247 7,557,097
----------- -----------
OPERATING EXPENSES
Royalties 787,634 1,568,909
Marketing 2,154,023 2,259,680
General and administrative 2,550,040 2,300,536
Depreciation and amortization 366,395 319,043
Settlement cost 210,000 --
----------- -----------
TOTAL OPERATING EXPENSES 6,068,092 6,448,168
----------- -----------
INCOME (LOSS) BEFORE
OTHER INCOME (EXPENSE) (2,848,845) 1,108,929
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (40,486) (88,183)
Interest income 92,399 10,128
----------- -----------
TOTAL OTHER INCOME (EXPENSE) 51,913 (78,055)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX (2,796,932) 1,030,874
INCOME TAX EXPENSE -- 433,000
----------- -----------
NET INCOME (LOSS) $(2,796,932) $ 597,874
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 2,676,742 2,694,242
=========== ===========
DILUTED 2,676,742 2,774,170
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
BASIC $ (1.04) $ .22
=========== ===========
DILUTED $ (1.04) $ .22
=========== ===========
The accompanying notes are an integral part of these statements.
F-3<PAGE>
FOTOBALL USA, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-in Accumulated
Shares Amount Capital Deficit
Total
---------- --------- ----------- ------------
- ------------
<S> <C> <C> <C> <C>
<C>
BALANCE, December 31, 1996 2,676,742 $ 26,767 $ 8,562,194 $ (530,423)
$ 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)
5,267,906
Stock-based compensation
expense 9,900
9,900
Exercise of stock options 22,500 225 12,600
12,825
Net income 597,874
597,874
---------- --------- ----------- -----------
-----------
BALANCE, December 31, 1998 2,699,242 $ 26,992 $ 8,590,994 $(2,729,481)
$ 5,888,505
========== ========= =========== ===========
===========
The accompanying notes are an integral part of these statements.
F-4<PAGE>
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,796,932) $ 597,874
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 403,977 335,381
Amortization of stock compensation expense 6,300 9,900
Changes in operating assets and liabilities:
Accounts receivable 5,967,010 (1,639,026)
Inventories (1,541,329) (961,737)
Prepaid expenses and other 27,431 (8,753)
Deferred income taxes -- 361,000
Accounts payable and accrued expenses (1,164,718) 526,443
Income taxes payable (119,200) 39,800
Settlement liability 200,000 (200,000)
------------ -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,128,259 (939,118)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (383,717) (215,888)
(Increase) decrease in long-term deposits (59,933) 83,615
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES (443,650) (132,273)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of capital lease obligations (76,308) (97,791)
Borrowings (repayments) under revolving
line of credit (1,825,000) 400,000
Proceeds from exercise of stock options -- 12,825
------------ -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,901,308) 315,034
------------ -----------
NET DECREASE IN CASH AND EQUIVALENTS (216,699) (756,357)
CASH AND EQUIVALENTS, Beginning of period 981,554 764,855
------------ -----------
CASH AND EQUIVALENTS, End of period $ 764,855 $ 8,498
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 40,486 $ 83,149
Income taxes paid $ 121,516 $ --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 198,930 $ 28,152
The accompanying notes are an integral part of these statements.
F-5<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Nature of Operations - 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, Footlocker, J.C. Penney, Kmart, Target,
Toys R Us, Modell's, Sears 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"); over 300 colleges and universities
("Colleges") and certain entertainment-related licenses including
Nickelodeon's "Rugrats" characters.
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.
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, 1997 and 1998, two separate Fortune 500 companies
accounted for 22% and 10% 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-6<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 which are drop shipped
directly to the customer 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, "Earnings per Share", requiring its adoption effective for the
Company's fiscal year ended December 31, 1997. FAS No. 128 simplifies
the computation of EPS by requiring companies with complex capital
structures to report basic EPS instead of primary EPS, and replaces fully
diluted EPS with diluted EPS. Basic EPS is calculated by dividing net
income (loss) by the weighted 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 was 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.
F-7<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Reclassifications - Certain 1997 balances have been reclassified to conform
with the current year's presentation.
Segment Information - As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", (SFAS No. 131)
issued by the FASB. SFAS No. 131 requires that public companies report
certain information about operating segments, products, services and
geographical areas in which they operate and their major customers. The
Company has one operating segment, the sale of custom sports products to
two economically similar customer bases - retail and promotions customers.
These customers have similar characteristics in the nature of products sold,
production processes, and methods of distribution. As such, the Company's
financial statements reflect this one operating segment and no additional
segment information has been provided.
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 the NFL, Professional Baseball, and,
to a lesser extent, Colleges. The Company's licensing arrangements expire at
various times through March 31, 2000. The following table summarizes, in
descending order of 1998 revenue contribution, the Company's significant
license agreements and their terms:
Licensor Product Term Expiration Date
-------- -------- -------------------- -----------------
NFL Team Logo Football 2 years March 31, 2000
MLBPA Baseball 1 year (2 year option) December 31, 1999
MLBP Baseball 3 years December 31, 1999
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 the
NFL or Professional Baseball could have a material adverse effect on the
Company's business.
F-8<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. In
prior years, the Company's promotions business contributed the largest
percentage of the Company's total sales and earnings and as such resulted in
significant reliance upon generating promotion sales sufficient to operate
profitably. The large increase in the Company's retail business in 1998
reduced the importance of the promotions business in determining the
Company's profitability. During the year ended December 31, 1998, 25% of
the Company's sales was derived from promotions, of which one customer
accounted for aggregate sales of $1,383,000 or 7% of total sales. 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
approximately $2,438,000 or 20% 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
1997, the Company realized gross margins of 36%, excluding a $1,175,000
provision for discontinued and excess inventory. In 1998, the Company
realized gross margins of 39%. The increase was primarily due to the
greater concentration of higher margin retail sales in 1998 as compared to
1997. 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 historically experienced significant
quarter-to-quarter variability in its sales and net income. This was due in
part to the seasonality of its licensed sports product business combined with
a significant concentration of its business from baseball. The second factor
which in prior years significantly contributed to the variability of the
Company's operations was its dependence on promotions business as more
fully explained above. The Company realized increasing sales and
profitability in each quarter of 1998 primarily due to significant increases
in its retail businesses.
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
and Mr. Favish are discussing an extension of Mr. Favish's employment
agreement. The Company maintains "key man" life insurance on the life of
Michael Favish in the amount of $1,000,000.
Dependence on Suppliers - In 1998, the Company purchased approximately
87% of its raw materials and finished retail and promotions goods,
F-9<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
consisting primarily of synthetic baseballs, footballs, basketballs, hockey
pucks and playground balls, from six companies located in China, with two
manufacturers accounting for 77% of total raw materials and finished goods
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, 1997 and 1998:
1997 1998
------------ -----------
Finished goods $ 808,407 $ 1,700,148
Raw material 1,668,408 1,738,404
------------ -----------
$ 2,476,815 $ 3,438,552
============ ===========
The Company recognized an allowance for discontinued and excess
inventory of $1,145,720 in 1997 resulting from the write off of the
Company's Fototire product. This adjustment was charged to cost of sales
for the year ended December 31, 1997.
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, 1997
and 1998:
1997 1998
------------ -----------
Office equipment $ 771,301 $ 947,239
Show exhibits 182,953 195,543
Molds 214,185 214,185
Machinery and equipment 741,803 797,315
Leasehold improvements 379,154 379,154
------------ -----------
2,289,396 2,533,436
Less: accumulated depreciation
and amortization (1,071,504) (1,406,885)
------------ -----------
$ 1,217,892 $ 1,126,551
============ ===========
F-10<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company recognized an impairment loss of $110,000 resulting from the
impairment of the tire molds related to its Fototire product which was
charged to depreciation and amortization expense for the year ended
December 31, 1997.
5. LINES OF CREDIT
In December 1998, the Company amended and renewed a one year credit
agreement with Scripps Bank. This revolving line of credit facility (the
"credit line") in the amount of $3,500,000 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 8.75% at December 31, 1998. The credit line
contains financial covenants requiring the Company to maintain minimum
net worth levels, minimum working capital and debt to equity ratios. The
credit line expires April 15, 2000. The availability under the credit line
during 1997 and 1998 was $2,000,000 and $1,500,000, respectively. In
February 1998, Scripps Bank 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. There were no borrowings under the
credit line at December 31, 1997. At December 31, 1998, outstanding
borrowings under the credit line totaled $400,000.
The Company has a $3,000,000 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 required to
be secured by cash collateral deposited with Merrill Lynch equal to the credit
outstanding. The line of credit extends until December 10, 2001. There was
no borrowing under the line of credit as of December 31, 1998.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 1997 and 1998:
1997 1998
------------ -----------
Accounts payable $ 527,093 $ 859,895
Accrued payroll and related 67,355 93,750
Accrued commissions and bonuses 15,000 124,700
Royalties payable 69,901 35,795
Customer deposits 17,176 72,972
Other 92,863 128,719
------------ -----------
$ 789,388 $ 1,315,831
============ ===========
F-11<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. COMMITMENTS AND CONTINGENCIES
Royalties - At December 31, 1998, the Company has commitments for
minimum guaranteed royalties under licensing agreements totaling $637,275
through 2000 as follows:
YEARS ENDING DECEMBER 31,
-------------------------
1999 $ 621,775
2000 15,500
-----------
$ 637,275
===========
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, 1998:
YEARS ENDING DECEMBER 31,
-------------------------
1999 $ 119,012
2000 95,252
2001 59,739
2002 17,422
---------
Total minimum lease payments 291,425
Less interest component (40,952)
---------
Present value of net minimum lease payments 250,473
Less current portion of capital leases (95,970)
---------
Capital leases, net of current portion $ 154,503
=========
Included in property and equipment above at December 31, 1997 and 1998
(see Note 4) is the following property and equipment acquired under capital
leases:
1997 1998
------------ -----------
Machinery and equipment $ 332,252 $ 360,402
Office equipment 145,011 84,801
Less accumulated amortization (122,487) (159,891)
------------ -----------
$ 354,776 $ 285,312
============ ===========
Amortization of capitalized leases is included in depreciation and
amortization expense.
F-12<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 $386,000 in 1997 and
$480,000 in 1998. At December 31, 1998, the minimum future rental commitments
undernoncancellable leases payable over the remaining lives of the leases are:
MINIMUM FUTURE
YEARS ENDING DECEMBER 31, RENTAL COMMITMENTS
------------------------- -------------------
1999 $ 518,155
2000 394,503
2001 74,840
----------
$ 987,498
==========
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. At December 31, 1998,
the entire settlement amount had been paid to Mr. Ostern.
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.
There has been no correspondence between the Company and Chevron since
July 1998. 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.
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
F-13<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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. In addition to the Warrant issued to the underwriter,
the Company, through its unit offering, issued to public investors a total of
1,301,673 Warrants. Each Warrant entitles the holder to purchase one share
of Common Stock for $6.50, during the four-year period commencing one
year from the date of the Company's unit offering on August 11, 1994. The
Company may call the Warrants for redemption, at a price of $.01 per
Warrant, on not less than 30 days' prior written notice to the warrantholders,
if the last price of the Common Stock has been at least $9.75 per share for
the 20 consecutive trading days ending on the third day prior to the date on
which the notice of redemption is given.
Employee Stock Option Plan - In 1998 the Board of Directors of the
Company adopted and the Company's stockholder's subsequently approved
the 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan provides for
awards to employees and non-employee directors of the Company up to an
aggregate of 500,000 shares of Common Stock.
The 1998 Plan authorizes the issuance of incentive stock options ("ISOs"),
and non-qualified stock options ("NQSOs"). Under the 1998 Plan, officers,
directors and key employees may be granted options to purchase the
Company's common stock at no less than 100% of the market price on the
date the option is granted. Options generally become exercisable in
installments of 33% per year on each of the first through the third
anniversaries of the grant date and have a maximum term of ten years. The
1998 Plan also provided for the termination of the Company's 1994 Stock
Option Plan, cancellation of each of the then outstanding options granted
under the 1994 Plan and the re-issuance of an identical number of options
under the 1998 Plan, at the then current market price, to the holders of
options under the 1994 Plan.
A total of 7,500 and 225,050 options were granted in 1997 and 1998,
respectively, under the 1998 Plan, excluding the cancellation and reissuance
of 242,500 options from the 1994 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
F-14<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 $161,000 and
($169,000), or $.06 per share and $(.06) per share, for 1998 and 1997,
respectively. The fair value of the options granted during 1998 is estimated
to range from $.68 to $1.09 on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: dividend yield 0%,
volatility of 53%, risk-free interest rate of 5.25%, assumed forfeiture
rate of 4%, and an expected life of 3 years.
The following table summarizes information concerning all currently
outstanding and exercisable options as of December 31, 1998:
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
- ------------------------------------------------------------------------------
$1-$2 401,550 7.57 $ 1.69 217,750 $ 1.69
$2-$3 76,000 8.20 $ 2.61 30,000 $ 2.54
$3-$6 75,000 6.58 $ 5.25 75,000 $ 5.25
------- -------
552,550 322,750
======= =======
The following table summarizes the Company's Employee Stock Option Plan
activity for the years ended December 31, 1997 and 1998:
NUMBER PRICE WEIGHTED
OF PER AVERAGE
SHARE SHARES PER SHARE
------- -------------- ---------
January 1, 1997 267,500 $5.25 to $8.00 $6.26
Granted 7,500 $5.25 $5.25
Exercised -- -- --
Canceled (8,000) $8.00 $8.00
-------
December 31, 1997 267,000 $5.25 to $8.00 $6.23
Canceled 1994 Plan (242,500) $5.25 to $8.00 $6.23
Reissued 1998 Plan 242,500 $1.69 $1.69
Granted 225,050 $1.69 to $2.69 $1.89
Exercised (7,500) $1.69 $1.69
Canceled (25,000) $1.69 to $8.00 $5.97
-------
December 31, 1998 459,550 $1.69 to $2.69 $1.81
=======
F-15<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Other Stock Options - 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 vested 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 agreed to provide independent financial
relations management services to the Company through July 31, 1998. In
consideration of the services 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 vested in amounts of 1,250 each
month commencing September 1997 until and including August 1998, all of which
shares are 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 and $9,900 was
recognized as compensation expense during 1997 and 1998.
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 during 1997 and 1998 was $165,000 and
has been increased to $190,000 in 1999. In 1998, in conjunction with the
adoption of the 1998 Stock Option Plan, Mr. Favish received 110,000 options
with an exercise price of $1.69 per share which replaced an identical number
of cancelled options issued from the terminated 1994 Stock Option Plan. Mr.
Favish was also granted 10,000 stock options in December 1998, vesting over
a three-year period, at an exercise price of $2.39 per share.
F-16<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Consulting Agreement - The Company was party to a consulting agreement with
Mr. Weingarten, a director of the Company, in which he received $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
The Company has a defined contribution plan pursuant to Section 401(k) of
the Internal Revenue Code that is available to substantially all employees.
In 1998, the Company matched $.50 of each $1.00 of employee contributions up
to two percent of covered payroll. Employees are immediately fully vested in
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, 1997 and December 31, 1998 was $16,856, and $32,345, respectively.
11. INCOME TAXES
The components of income tax expense were as follows for the year ended
December 31, 1998:
FEDERAL STATE TOTAL
---------- --------- ---------
Current $ 49,000 $ 23,000 $ 72,000
Deferred 350,000 11,000 361,000
---------- --------- ---------
$ 399,000 $ 34,000 $ 433,000
========== ========= =========
There was no income tax expense for the year ended December 31, 1997.
The components of net deferred tax assets were as follows at December 31,
1997 and 1998:
1997 1998
Deferred tax assets: ------------ -----------
Net operating loss carryforwards $ 820,000 $ 498,000
Employee benefit plans 24,000 18,000
Uniform capitalization of inventory cost 72,000 84,000
Bad debt reserves 65,000 63,000
Inventory reserves 503,000 435,000
Impairment loss 46,000 46,000
State income taxes 4,000 15,000
Other 36,000 22,000
------------ -----------
Total gross deferred tax assets 1,570,000 1,181,000
Valuation allowance (1,068,000) (1,045,000)
------------ -----------
Net deferred tax assets 502,000 136,000
------------ -----------
Deferred tax liabilities:
Depreciation 51,000 46,000
------------ -----------
Total deferred tax liability 51,000 46,000
------------ -----------
Net deferred tax asset $ 451,000 $ 90,000
============ ===========
F-17<PAGE>
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
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 ability to
realize 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 net
income realized in 1998, and the expectation of continuing increases in its
retail business, it is probable that future taxable income will be sufficient
to realize the $90,000 deferred tax asset on future tax returns.
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:
1997 1998
------------ -----------
Expected statutory tax expense (benefit) $ (951,000) $ 350,000
Net tax effect of permanent differences 9,000 8,000
State income taxes, net of Federal tax effect -- 22,000
Adjustment to deferred tax asset 62,000 (33,000)
Valuation allowance 880,000 37,000
Alternative minimum tax -- 49,000
------------ -----------
Actual tax expense $ -- $ 433,000
============ ===========
At December 31, 1998, the Company had net operating loss carryforwards for
Federal income tax purposes expiring as follows:
YEARS ENDING DECEMBER 31, AMOUNT
------------------------- ------------
2007 $ 254,000
2012 1,211,000
------------
$ 1,465,000
============
F-18
</TABLE>
December ll, l998
Mr. Michael Favish
President
Fotoball USA Inc.
3738 Ruffin Road
San Diego, CA 92123
Re: License Agreement No. ML-2329D
Dear Mr. Favish:
This letter, when fully executed, shall formally amend
License Agreement No. ML-2329D(the "License Agreement") between
Major League Baseball Properties, Inc. ("Licensor") and
Fotoball USA Inc. ("Licensee"), with respect to certain rights
owned or controlled by Licensor, as agent for the Major League
Baseball Clubs.
By our mutual execution hereof:
A. As of January 1, 1997, the text of Schedule A, Logos is
deleted in its entirety and replaced by the following:
The names, characters, symbols, designs, likenesses,
visual representations and such other similar or related
identifications (but such similar or related identifications
must be approved in writing by Licensor in advance of use) of
the following noted organizations in connection with the
marketing, promotion and sale of that described in Schedule B
hereof: (1) Major League Baseball Properties, Inc., (2) the
American League, (3) the National League, (4) the following
Clubs: Arizona Diamondbacks, Tampa Bay Devil Rays, Baltimore
Orioles, Boston Red Sox, California Angels, Chicago White Sox,
Cleveland Indians, Detroit Tigers, Kansas City Royals,
Milwaukee Brewers, Minnesota Twins, New York Yankees, Oakland
Athletics, Seattle Mariners, Texas Rangers, Toronto Blue Jays,
Atlanta Braves, Chicago Cubs, Cincinnati Reds, Colorado
Rockies, Florida Marlins, Houston Astros, Los Angeles Dodgers,
Montreal Expos, New York Mets, Philadelphia Phillies,
Pittsburgh Pirates, St. Louis Cardinals, San Diego Padres, San
Francisco Giants, (5) All-Star Game, Division Series, League
Championship Series, World Series, other names given to such
games or events and other names given to other Major League
Baseball playoff games, and (6) the following ballparks:
Oriole Park at Camden Yards and Jacobs Field.
B. As of January 1, 1997, the text of Schedule B, Licensed
Product(s) No. 7 is deleted in its entirety and replaced by the
following:
7. [INTENTIONALLY LEFT BLANK].
C. As of January 1, 1997, the text of the first unnumbered
paragraph of Schedule B, Licensed Product(s) is deleted in its
entirety and replaced by the following:
No rights to utilize the names, likenesses and/or
signatures of any individuals (including, without limitation,
Major League Baseball players), are granted under this
Agreement. Licensee must present to Licensor written evidence
of having obtained the proper authorization to utilize any such
names, likenesses and/or signatures.
D. As of September 11, 1998, the text of Schedule B, Licensed
Product(s) is amended to add the following:
17. Baseballs made of synthetic leather, depicting
the names and likenesses of Mark McGwire and/or Sammy Sosa each
in uniforms bearing Club Logos, commemorating the breaking of
the single season home run record, and sold separately or in
sets with or without a miniature baseball glove.
E. As of January 1, 1999, the text of Schedule B, Licensed
Product(s) is amended to add
18. Oversized baseballs made of synthetic white
leather, featuring Club Logos and/or the names and likenesses
of current Major League Baseball players.
19. Playground balls made of rubber, featuring Club
Logos and/or the names and likenesses of current Major League
Baseball players.
F. As of January 1, 1997, the text of Schedule C, Licensed
Territory (I) is deleted in its entirety and replaced by the
following:
I. For Licensed Product Nos. 1-11 and 13-15:
The fifty United States of America, the District of
Columbia, Puerto Rico and U.S. territories and possessions,
including U.S. military bases worldwide.
G. As of September 11, 1998, the text of Schedule C, Licensed
Territory (I) is deleted in its entirety and replaced by the
following:
I. For Licensed Product Nos. 1-11, 13-15 and 17:<PAGE>
The fifty United States of America, the District of
Columbia, Puerto Rico and U.S. territories and possessions,
including U.S. military bases worldwide.
H. As of January 1, 1999, the text of Schedule C, Licensed
Territory (I) is deleted in its entirety and replaced by the
following:
I. For Licensed Product Nos. 1-11, 13-15 and 17-19:
The fifty United States of America, the District of
Columbia, Puerto Rico and U.S. territories and possessions,
including U.S. military bases worldwide.
I. As of January 1, 1997, the text of the "For Licensed
Product No. 7" portion of Schedule E, Percentage Compensation
is deleted in its entirety.
J. As of September 11, 1998, the text of Schedule E,
Percentage Compensation, is deleted in its entirety and
replaced by the following:
For Sales of Licensed Product Nos. 1-4, 8-11 and 13-16 in
Calendar Year 1998:
Nine percent (9%) of net sales as defined in Paragraph 4B.
For Sales of Licensed Product Nos. 1-4, 8-11 and 13-16 in
Calendar Year 1999:
Eleven percent (11%) of net sales as defined in Paragraph 4B.
For Licensed Product Nos. 5 and 6:
Twelve percent (12%) of net sales as defined in Paragraph 4B.
For Licensed Product No. 12:
Six percent (6%) of net sales as defined in Paragraph 4B.
For Licensed Product No. 17:
Five percent (5%) of net sales as defined in Paragraph 4B.
K. As of January 1, 1999, the text of Schedule E, Percentage
Compensation, is amended to add the following:
For Licensed Product Nos. 18 and 19:
Eleven percent (11%) of net sales as defined in Paragraph 4B.
In each of the above cases, Percentage Compensation
shall be applied against Guaranteed Compensation payable in the
same calendar year only, without carryover. Percentage
Compensation attributable to premium sales of the Licensed
Products shall not be applied against Total Guaranteed
Compensation.
For purposes of this Agreement, a "sale" shall be
deemed to have occurred at the earlier of when invoiced by
Licensee or when shipped by Licensee
Except as noted above, the License Agreement and all
its terms and conditions shall continue to govern our
relationship. Please show concurrence with the above by signing
both copies and returning them to my attention. Upon final
execution, one copy will be sent to you for your files.
This letter shall have no legal effect unless and until signed
by all parties noted below.
AGREED AND ACCEPTED:
MAJOR LEAGUE BASEBALL PROPERTIES, INC.
BY:/s/ Howard Smith
-----------------------------
TITLE: V.P. Licensing
--------------------------
DATE: 1/13/99
--------------------------
FOTOBALL USA, INC.
BY:/s/ Michael Favish
-----------------------------
TITLE: President & CEO
-------------------------
DATE: 1/11/99
-------------------------
cc: Lisa Morales - MLBP
NFL PROPERTIES, INC. LICENSE AGREEMENT
National Football League Properties, Inc.
280 Park Avenue, New York, New York 10017
Area Code (212) 450-2000 FAX (212) 681-7599
LICENSING AGREEMENT TERM SHEET
Licensee: Fotoball USA, Inc. Date: April 14, 1998
Address: 3738 Ruffin Rd. No.: 300-440190-514
San Diego, CA 92123
The following terms are made part of and are subject to all
definitions, terms and conditions set forth in License No. 2327:
MARKETING PROGRAM: NFL Collectibles
TERM: April 1, 1998 - March 31, 2000
TERRITORY: The United States and Military bases
LICENSED PRODUCTS: TEAM LOGO FOOTBALLS; PLAYERS PICTURED FOOTBALLS;
FULL SIZE LIMITED EDITION TEAM/PLAYER AND
COMMEMORATIVE FOOTBALLS (GENUINE ANTIQUE LEATHER AND
SYNTHETIC DISTRESSED LEATHER.
FISCAL YEAR LICENSED PRODUCT ROYALTY %
- ----------- ----------------- -----------
YEAR I 4/1/98 - 3/31/99 5639 TEAM LOGO FOOTBALLS 10%
9201 PLAYER PICTURED FOOTBALLS 10%
51593 LIMITED EDITION FOOTBALLS 10%
YEAR II 4/1/99 - 3/31/00 5639 TEAM LOGO FOOTBALLS 10%
9201 PLAYER PICTURED FOOTBALLS 10%
51593 LIMITED EDITION FOOTBALLS 10%
FISCAL YEAR MINIMUM GUARANTEE ADVANCE
- ----------- ----------------- -----------
YEAR I 4/1/98 - 3/31/99 $50,000 $30,000
YEAR II 4/1/99 - 3/31/00 $65,000 $35,000
AUTHORIZED BRANDS FOR
LICENSED PRODUCT(S): FOTOBALL USA
LICENSED MARK(S) FOR
LICENSED PRODUCT(S): Marketing Program logo, Club Marks and the following
League Marks: "National Football League", "NFL",
"National Football Conference", "American Football
Conference", "NFC", "AFC".
DISTRIBUTION CHANNELS
FOR LICENSED PRODUCT(S): Department Stores, Direct Retailers, Distribution,
Discount Stores, Fan Shops, Grocery Stores,
Sporting Goods Store, Specialty Stores, Gift/Flower
Shops, Hobby Stores, Military Bases, Stadium Shop/
Stadium Concessionaires.
RENEWAL REQUEST DATE: October 1, 1999
COOPERATIVE FUND:
FISCAL YEAR PROGRAM PAYMENT PAYMENT DUE DATE(S)
- ------------ ------- -------- --------------------
YEAR I NFL Collectibles $2,500 To be determined by NFLP
YEAR II NFL Collectibles $2,500 To be determined by NFLP
PROMOTIONAL PRODUCTS:
FISCAL YEAR LICENCED PRODUCTS
- ----------- -----------------
YEAR I Ten (10) Units of each Product upon request
YEAR II Ten (10) Units of each Product upon request
ADVERTISEMENTS: N/A
SPONSORSHIP: N/A
ADDITIONAL TERMS:
Responsibility for obtaining rights to use player names and player
likenesses is solely that of Licensee.
National Football League Properties, Inc.
280 Park Avenue, New York, New York 10017
Area Code (212) 450-2000 FAX (212) 681-7599
Retail Licensing Agreement
Licensee: FOTOBALL USA, INC. Date: April 14, 1998
Address: 3738 Ruffin Road NO. 300-440190-514
San Diego, CA 92123 Lic. No(s): 2327
National Football League Properties, Inc. ("NFLP") has the exclusive
right to license for commercial purposes the trademarks of the National
Football League ("NFL") and the thirty professional football teams that
comprise the NFL ("Member Clubs"). Licensee, whose name and address
are set forth above, desires to use certain of these trademarks in
accordance with the terms and conditions of this agreement ("License").
In consideration of the mutual premises, covenants and undertakings
contained in this License, the parties to this License agree as
follows:
1. Definitions: As used in this License, the terms listed on the
attached Term Sheet OR Term Sheets and elsewhere in this License have
the following meanings:
a. "Advance Royalty Payment": The amount to be credited to Royalty
payments due for the corresponding Fiscal Year payable to NFLP upon the
execution of this License for Fiscal Year I and on or before April 15
for each successive Fiscal Year.
b. "Advertisements": Advertising space in designated NFLP publications
to be purchased by Licensee in accordance with this License.
c. "Affiliate": Any person or entity in which Licensee or any owner,
majority shareholder, officer or director of Licensee has any direct or
indirect beneficial or ownership interest or is a joint venture
partner.
d. "Authorized Brands": The only brand names Licensee may use in
association with the Licensed Products.
e. "Club Marks": The full team names, nicknames, helmet designs,
uniform designs, logos, slogans, and other identifying symbols and
indicia adopted for commercial purposes by the Member Clubs.
f. "Cooperative Fund": The amount payable to NFLP during each Fiscal
Year for use by NFLP in connection with the designated Cooperative
Program.
g. "Distribution Channels": The channels of trade in the Territory in
which Licensee may distribute for sale or sell each Licensed Product as
defined in Exhibit I attached to this License and/or the attached Term
Sheet.
h. "Fiscal Year": The period beginning on April 1 of any year and
ending on March 31 of the following year except for Fiscal Year 1,
which will begin on the date this License is fully-executed and will
end on March 31 of the following year.
i. "League Marks": "National Football League", "NFL", "National
Football Conference", "American Football Conference", "NFC", "AFC',
"Super Bowl", "Pro Bowl", the NFL Shield design, and other identifying
symbols and indicia adopted for commercial purposes by the NFL.
j. "Licensed Marks": The trademarks for which Licensee is granted
certain limited, non-exclusive rights under this License.
k. "Licensed Products": All products for which Licensee may use the
Licensed Marks in association with the Authorized Brands. This license
will refer to each distinct type of product as a 'Licensed Product'
since more than one product may be licensed (e.g. T-shirts and jackets
would each be a Licensed Product).
l. "Marketing Program": The program established by NFLP in connection
with which Licensee may use the Licensed Marks as authorized under this
License. Licensee shall abide by all rules, guidelines and policies
established by NFLP for such Marketing Program, which are deemed part
of this License.
m. "Minimum Royalty Guarantee": The minimum amount of Royalty payments
payable to NFLP on or before the 15th day following the end of each
Fiscal Year.
n. "Net Sales": Gross sales of all Licensed Products sold or
distributed for sale at the greater Licensee's invoiced selling price
or Licensee's normal domestic wholesale warehouse price or, in the case
of Direct Retailer sales by Licensee only, the retail price less sales
derived from returns received and credited and less reasonable quantity
discounts as actually calculated on the invoices provided that the
total returns in any Fiscal Year in which Licensee desires to deduct
quantity discounts from Net Sales may not exceed ten percent (10%) of
Net Sales for the corresponding Fiscal Year without NFLP's prior
written consent only. Licensee shall not credit any return at a rate
greater than the original invoiced selling price for such Licensed
Products. There shall be no other deductions allowed including,
without limitation, deductions for manufacturing costs, selling costs,
distribution costs, advertising and promotional costs, quantity
discounts, freight, non-collected or uncollectable accounts,
commissions, taxes, cash discounts, close out sales, distress sales,
sales to employees, or any other costs. For purposes of this
Agreement, Net Sales and all other referenced sales occur when Licensee
invoices or ships any Licensed Product, whichever is earlier. If Net
Sales are made to an Affiliate, the dollar amount of gross sales will
be the greater of Licensee's regular price to unaffiliated accounts or
the Affiliate's gross sales price to an unaffiliated account.
o. "NFL Marks": All League Marks and Club Marks, collectively.
p. "Premiums": Any products, including the Licensed Products, bearing
the NFL Marks or other indicia of the NFL or its Member Clubs that
Licensee sells or gives away for the purposes of promoting, publicizing
or increasing the sale of its own products or services other than the
Licensed Products, or that Licensee sells or gives away to any other
party whom Licensee knows or should reasonably know intends to use such
products for the purposes of promoting, publicizing or increasing the
sale of any other party's products or services. Promotions include,
without limitation, combination sales, incentives for sales force, and
trade or consumer promotions.
q. "Promotional Products": The quantity of each Licensed Product that
Licensee shall provide to NFLP at no cost during each Fiscal Year for
use in connection with NFLP's Promotional Programs, as defined in
Paragraph 5 of this License.
r. "Renewal Request Date": The date by which NFLP must receive
notification from Licensee of Licensee's desire to renew the License.
s. "Royalty": The amount of Net Sales Licensee shall pay to NFLP for
all sales of the Licensed Products. NFLP reserves the right to
increase the rate of the Royalty during the Term, provided that it
gives Licensee at least six(6) months written notice before such
increase takes effect.
t. "Sponsorship": The designated events for which Licensee will
participate as a sponsor during each Fiscal Year of the Term subject to
the execution of an NFLP Sponsorship Agreement.
u. "Style": A distinct prototype of a Licensed Product that differs
from any other prototype of that same Licensed Product in any form or
manner with respect to design, material, pattern, size, shape, Licensed
Marks, or any other distinguishing characteristic involving the
specifications for the production of all or any portion of that
Licensed Product (e.g. T-shirts bearing the San Francisco 49ers logo
and T-shirts bearing the San Diego Chargers logo would each be a Style
of Licensed Product).
v. "Term": The time period for which this License shall be effective.
w. "Territory": The geographic area in which Licensee shall have the
right to sell the Licensed Products. Licensee is prohibited from
selling Licensed Products F.O.B. outside the Territory without the
prior written approval of NFLP.
x. "Unit": A single Licensed Product (e.g. one T-shirt and one jacket
would each be a Unit).
2. Grant of License
Subject to all of the terms and conditions of this License, NFLP
grants Licensee the non-exclusive right to use the Licensed Marks in
connection with the manufacture, distribution, sale, and advertising of
the Licensed Products under the Authorized Brand in the Distribution
Channels in the Territory in accordance with all policies, rules and
regulations of the Marketing Program and NFLP, which are deemed part of
this License. Unless otherwise indicated on the Term Sheet, Licensee
shall have no right to distribute the Licensed Products directly to
consumers as a Direct Retailer or otherwise. Licensee shall have no
right to sell or distribute any Premiums unless Licensee receives a
separate Premium License from NFLP and pays NFLP the applicable Royalty
under such Premium License. Licensee shall not use the Licensed
Products as Premiums or permit the use of the Licensed Products as
Premiums by any party whom Licensee knows or should reasonably know
intends to use the Licensed Products as Premiums.
3. Terms of Payment
a. Licensee shall pay NFLP the Royalty on all sales of the Licensed
Products. Regardless of whether any sales occur during any Fiscal
Year, Licensee shall also pay NFLP the applicable Advance Royalty
Payment and Minimum Royalty Guarantee for each Fiscal Year during the
Term. Advance Royalty Payments and any payments made to satisfy the
Minimum Royalty Guarantee are not refundable. Licensee may credit the
Advance Royalty Payment and Royalty payments made to NFLP during each
Fiscal Year to the Minimum Royalty Guarantee for the corresponding
Fiscal Year only. Licensee may not credit such amounts to the Advance
Royalty Payment, Minimum Royalty Guarantee or any other payment
required under this License for any other Fiscal Year. If the Term
Sheet assigns a per-product Advance Royalty Payment and Minimum Royalty
Guarantee, then Licensee may only credit the Advance Royalty Payment
for such product and Royalty payments from the sales of such product
toward the corresponding Minimum Royalty Guarantee for such product in
the corresponding Fiscal Year. If NFLP terminates this License, for
the Fiscal Year in which termination occurs ("Termination Fiscal Year")
Licensee shall pay NFLP the Royalty on all sales of the Licensed
Products made during the Termination Fiscal Year or a pro rated portion
of the Minimum Royalty Guarantee owed in excess of the Advance Royalty
Payment ("Termination Guarantee"), whichever is greater. For purposes
of this paragraph the pro rated Minimum Royalty Guarantee will be
calculated as follows:
Termination Guarantee x No. of Days Completed in Termination Fiscal Year
- ------------------ ---------------------------------------------------
1 365
b. On or before the 15th day of each month, Licensee shall make all
Royalty payments to NFLP due on sales of the Licensed Products during
the preceding calendar month. Simultaneously with the Royalty payment,
Licensee shall furnish full and accurate statements of the Net Sales of
each Licensed Product sold and distributed during such calendar month
on forms provided by NFLP. The statements will include the quantity
and description of each Licensed Product itemized by Member Club if
applicable, the gross sales price, itemized deductions from the gross
sales price, any returns made during the preceding month, and the
resulting Net Sales on which Licensee calculated the Royalty amount.
Licensee shall furnish such statements for each Licensed Product
regardless of whether it sold any such Licensed Product during the
preceding month. NFLP's receipt or acceptance of any statement or
Royalty payment or the cashing of a Royalty check will not preclude
NFLP from questioning the correctness of such statements or payments at
any time. Upon discovery of any verifiable inconsistency or mistake in
such statements or payments, Licensee shall immediately rectify such
inconsistency or mistake.
c. Licensee shall pay NFLP all other amounts listed on the Term Sheet
attached to this License in accordance with the dates provided in such
Term Sheet.
d. Licensee shall pay NFLP an additional charge of one and one-half
percent (1.5%) per month on any payment due under this License that
remains unpaid fifteen (15) days after such payment becomes due.
4. Quality Control
a. Prior to making any use of any Style of any Licensed Product,
Licensee shall submit to NFLP for its approval at Licensee's sole cost
and expense at the following applicable stages: (i) finished artwork or
final proofs; (ii) pre-production samples or strike-offs for such
proposed Style; and (iii) a sample Unit of the finished version of such
Style together with all packaging, cartons, containers, hangtags and
wrapping materials related to such Unit ("Related Materials"). For
Styles that differ solely with respect to the Licensed Marks, Licensee
may submit a sample Unit of one Style along with artwork of the Styles
bearing the other Licensed Marks for approval purposes unless NFLP
requests a sample Unit of each such Style. NFLP shall use its best
efforts to promptly evaluate all such submissions and provide Licensee,
if applicable, with quality standards and specifications for the
finished Units of each Style. Upon approval of the finished version of
a sample Unit of a Style, NFLP shall execute a Product Approval Form
that will contain any applicable quality standards and specifications.
License shall not manufacture, sell, distribute or advertise any Style
of a Licensed Product unless NFLP has executed a Product Approval Form
for such Style.
b. All Product Approval Forms are effective for one Fiscal Year only
and Licensee must resubmit to NFLP each Style of each Licensed Product
previously approved by NFLP for quality control approval each Fiscal
Year. From time to time, NFLP may request additional sample Units of
any Style of any Licensed Product to confirm continued compliance with
NFLP's quality control guidelines and any applicable quality standards
and specifications. NFLP shall have the right to withdraw its approval
of any Style of any Licensed Product if, in NFLP's sole judgment, such
sample Units cease to conform to such guidelines, standards or
specifications or otherwise deviate in quality from the previously
approved sample Units. Upon notice by NFLP to Licensee that the
Product Approval Form for a Style of a Licensed Product has been
withdrawn, Licensee shall immediately cease to manufacture, distribute,
sell or advertise any further Units of such Style until such time as a
new Product Approval Form has been executed and delivered by NFLP.
c. Licensee shall not make any modification to any Style for which
NFLP has issued a Product Approval Form or depart from any applicable
quality standards and specifications for any Style unless NFLP has
approved such modification for such Style and issues a new Product
Approval Form. Licensee acknowledges that the manufacture, use, sale,
distribution, or advertising of any Style that deviates from the Style
approved by NFLP will constitute a material breach of this License.
Upon such breach, NFLP may terminate this License immediately.
d. No distribution or sale of irregulars or seconds is permitted
except when Licensee receives prior written approval from NFLP.
5. Advertising and Promotional Materials
a. Licensee will not use the Licensed Marks or any reproduction of
them, including without limitation, Photographs or Computer Art, as
defined in Paragraph 10a, in any advertising, promotion, publicity or
display materials (collectively "Promotional Materials") without
receiving NFLP's prior written approval executed on a Promotional
Approval Form supplied to Licensee by NFLP. Licensee may use such
approved Promotional Materials only in conjunction with the Styles of
Licensed Products that NFLP has approved. Licensee shall submit to
NFLP all Promotional Materials at the following applicable stages
appropriate to the medium used: (i) conceptual stage, pre-production
art or rough cuts; (ii) layout, storyboard and script; (iii) finished
materials; and (iv) at any other time as reasonably requested by NFLP.
Licensee shall ensure that it submits all proposed Promotional
Materials and any modifications to previously approved Promotional
Materials to NFLP in a timely fashion that will ensure NFLP has
adequate time to review such materials prior to the date of their
proposed use by Licensee. NFLP shall use best efforts to evaluate all
such Promotional Materials' submissions within ten (10) business days
of their receipt by NFLP. NFLP shall execute a Promotional Approval
Form for all Promotional Materials that it approves. Licensee shall
notify its retailers and/or Third Party Distributors that NFLP must
approve all Promotional Materials involving or using in any form or
manner the Licensed Marks. Licensee shall use best efforts to ensure
that its retailers and/or Third Party Distributors do not publish,
display or otherwise distribute such Promotional Materials without
NFLP's prior written approval.
b. NFLP has the exclusive right, in its sole discretion, to approve or
disapprove any Promotional Materials' submissions. Licensee
acknowledges that NFLP may disapprove Promotional Materials that, in
NFLP's opinion, reflect unfavorably upon NFLP, the NFL or its Member
Clubs including, without limitation, materials involving gambling,
lotteries or other games inconsistent with the image of the NFL, the
Member Clubs, or the Licensed Products.
c. NFLP may withdraw its approval of any Promotional Materials if: (i)
the Promotional Materials have been altered without the prior written
approval of NFLP; (ii) the Style and/or the Licensed Product promoted
in the Promotional Materials ceases to be approved under this License;
or (iii) an event occurs that, in NFLP's opinion, causes NFLP's
relationship with Licensee or any Licensed Product to adversely reflect
upon the professional or business reputation of the NFL, its Member
Clubs or NFLP.
d. Licensee represents that NFLP has the right to conduct promotions
and special events in its sole discretion and to print catalogs, sales
sheets and brochures involving representative merchandise from NFLP's
licensees ("Promotional Programs"). Licensee shall supply within ten
(10) business days of any request by NFLP, at no charge to NFLP, all or
any portion of the quantity of Promotional Products specified on the
Term Sheet required by NFLP for use, in NFLP's sole discretion, in such
Promotional Programs.
e. Licensee shall pay NFLP the designated amounts for the
Advertisements, Sponsorship, and Cooperative Fund, if applicable, on or
before the corresponding dates listed on the Term Sheet attached to
this License. NFLP shall use such payments in a manner determined by
NFLP in its sole discretion.
f. During each Fiscal Year of the Term in which NFLP publishes the NFL
Merchandise Catalogue, Licensee shall purchase a full-page
advertisement in such catalogue at the rate established in NFLP's then-
existing rate card. Licensee shall make such payment within fifteen
(15) days from receiving an invoice from NFLP.
6. Distribution Requirements
Licensee shall distribute for sale and sell each Licensed Product only
in the authorized Distribution Channels. Prior to distribution of any
Licensed Product, Licensee shall submit to NFLP a list of its retail
accounts for the Licensed Products for the purpose of determining which
accounts fall within the Distribution Channels. NFLP shall determine,
in its sole discretion, whether such retail accounts fall within the
Distribution Channels and shall provide Licensee with a list of the
approved retail accounts. Licensee shall manufacture, distribute, sell
and maintain inventory of sufficient quantities of each Style of each
Licensed Product to meet the reasonable market demand in the
Distribution Channels. Licensee shall not sell Licensed Products to
any third party that Licensee knows or should reasonably know intends
to sell the Licensed Products outside of the authorized Distribution
Channels. If Licensee sells or distributes for sale other merchandise
that does not bear the Licensed Marks but is of the same grade and
quality as the Licensed Products, Licensee shall not discriminate in
the granting of commissions and discounts to salespersons, dealers and
distributors for the sale of the Licensed Products. If the Licensed
Marks are Club Marks, Licensee acknowledges that it shall manufacture,
distribute and sell a commercially significant quantity of Units
bearing the trademarks of each Member Club individually in each Style.
Licensee shall have no right to distribute the Licensed Products via
computer on-line services unless expressly indicated on the Term Sheet.
7. Authorized Brands
Licensee shall only use the Authorized Brands, if applicable, in
connection with the manufacture, distribution, sale, and advertising of
each Licensed Product. NFLP shall have the right, in its sole
discretion, to remove or change any of the Authorized Brands, if
applicable, during the Term. Licensee must receive the prior written
approval of NFLP to use any other trademarks on the Licensed Products.
8. NFLP's Purchase of Licensed Products
In addition to the Promotional Products provided at no cost by Licensee,
NFLP, the NFL and its Member Clubs shall have the right to purchase any of
the Licensed Products in any quantity at the minimum wholesale price,
excluding Royalty payments, that Licensee charges to its best customer,
provided that NFLP will not require Licensee to pay a Royalty on such sales.
9. Third Party Relationships
a. Licensee shall not assign, sublicense, transfer or otherwise encumber any
of its rights under this License to any Affiliate or other third party
without NFLP's prior written consent. If Licensee assigns, sublicenses,
transfers or encumbers any portion of this License without such consent,
NFLP shall have the right to terminate this License immediately. Among
other things, NFLP will consider the License assigned and subject to the
requirements of this subparagraph if: (i) the beneficial ownership or
control of (50%) percent (50%) or more of Licensee's capital stock is
transferred or otherwise conveyed; (ii) Licensee becomes part of any
merger or consolidation; or (iii) the sale or transfer of all or
substantially all of Licensee's assets occurs.
b. Licensee shall have no right to use any screen printer in
connection with manufacturing of any Licensed Products,
including, without limitation, "hot Market" and Super Bowl
products, without NFLP's prior written consent. In the event of
such consent, Licensee shall have no right to sell the Licensed
Products to such approved screen printer without the separate
written consent of NFLP. In the event of such separate consent,
Licensee shall calculate Royalty payments for Licensed Products
sold to screen printers based on Net Sales of the Licensed
Products calculated on the sales made by the screen printer to
parties in the Distribution Channels. Licensee acknowledges that
it will remain primarily obligated to NFLP under this license
notwithstanding NFLP's approval of a screen printer and that
Licensee shall take all necessary efforts to ensure that any
approved screen printer complies with all applicable terms and
conditions of this License.
c. Licensee must receive NFLP's prior written consent to use a domestic
or foreign third party distributor of any Licensed Product. If the
Licensed Products consist of headwear or apparel, Licensee may only use
those third party distributors that NFLP has approved for all NFL
apparel and headwear licensees. For purposes of this License, a third
party distributor shall mean any third party who purchases Licensed
Products from Licensee , ships such products to retailers and invoices
retailers directly ("Third Party Distributor") Licensee shall ensure
that any of its sales representatives for the Licensed Products shall
not produce, inventory, warehouse or distribute any of the Licensed
Products. NFLP shall have the right to approve or disapprove any Third
Party Distributor in its sole discretion. Licensee acknowledges that
it will remain primarily obligated to NFLP under this License
notwitholding NFLP's approval of a Third Party Distributor and that
Licensee shall take all necessary efforts to ensure that any approved
Third Party Distributor complies with all applicable terms and
conditions of this License including, without limitation, providing
such Third Party Distributor with instructions relating to the
distribution of the Licensed Products and the authorized Distribution
Channels for the Licensed Products. If an approved Third Party
Distributor engages in conduct that would be a breach of this License
if Licensee engaged in such conduct, Licensee shall fully cooperate
with NFLP to ensure that such conduct ceases promptly.
d. Licensee must receive NFLP's prior written consent to use a
domestic or foreign third party manufacturer of any Licensed Product or
any portion of any Licensed Product, including patches, labels and
emblems made by any party that is not already a licensee of NFLP
("Third Party Manufacturer"). NFLP shall have the right to approve or
disapprove any Third Party Manufacturer in its sole discretion. NFLP's
approval of any Third Party Manufacturer, if granted, will be
contingent on the execution of an agreement between NFLP and the
approved Third Party Manufacturer. Notwithstanding such agreement,
Licensee shall at all times remain primarily obligated to NFLP under
this License and shall take all necessary efforts to ensure that such
Third Party Manufacturer uses the Licensed Marks only to manufacture
the designated Licensed Product and for no other purpose including,
without limitation, promoting or selling the Licensed Product. If such
Third Party Manufacturer has made an unauthorized use of the Licensed
Marks, Licensee shall fully cooperate with NFLP to ensure that such
unauthorized use ceases promptly. Licensee shall be primarily
obligated to ensure that each Licensed Product produced by such Third
Party Manufacturer complies with the requirements of Paragraph 4 of
this License.
e. Licensee shall have no right o use any sublicensee for any Licensed
Product without the prior written approval of NFLP. For purposes
of this License, a sublicensee shall mean any third party that
manufactures any Licensed Product, ships such to retailers and
invoices retailers directly ("Sublicensee"). Licensee acknowledges
that it will remain primarily obligated to NFLP under this License
notwitholding NFLP's approval of a Sublicensee and that Licensee
shall take all necessary efforts to ensure that any approval
Sublicensee and that any approved sublicensee complies with all
terms and conditions of this License. If an approved Sublicensee
engages in conduct that would be a breach of this License if
Licensee engaged in such conduct, Licensee shall fully cooperate
with NFLP to ensure that such conduct ceases promptly.
f. Licensee represents and warrants that it shall manufacture and cause all
Third Party Manufacturers to manufacture the Licensed Products in
accordance with all applicable laws, rules and regulations of the United
States Department of Labor and state Departments of Labor, including,
without limitation, the federal Fair Labor Standards Act. Licensee shall
ensure that it will not distribute or cause the distribution of Licensed
Products that Licensee knows or should reasonably know were manufactured
in violation of any federal or state labor law, rule or regulation.
Upon a determination by the United States Department of Labor or any
state Department of Labor that the Licensed Products have been
manufactured in violation of any federal or state labor law, rule or
regulation, Licensee shall take all necessary steps to correct such violation
including, without limitation, paying all applicable back wages found due
to workers who manufactured the Licensed Products or any portion of them.
g. Licensee shall not make any payments to any Member Club or to any
shareholder, officer, director, employee, agent or representative of any
Member Club, or to any employee, agent or representative of the NFL or
its affiliates in such person's individual capacity, in connection with
the use of any Licensed Marks under this License or otherwise as a direct
result of sales of any Licensed Product. Licensee shall disclose to NFLP
all existing agreements or agreements being negotiated by Licensee or its
agent between Licensee and any Member Club or any shareholder, officer,
director, employee, agent or representative of any Member Club, or any
employee, agent or representative of the NFL or any of its affiliates in
such person's individual capacity.
h. In the event that NFLP consents to any third party relationship under this
Paragraph 9 or otherwise under this License, Licensee acknowledges that
such approval will be contingent on the execution of an appropriate form
or agreement supplied by NFLP.
10. Computer Artwork and Photographs
a. Subject to the requirements of Paragraph 4, if Licensee wishes to use
computer artwork incorporating graphic depictions of the Licensed Marks
("Computer Art") or photographs owned and/or controlled by NFLP
("Photographs"), Licensee shall request such Computer Art or Photographs
in a Use Application provided to Licensee by NFLP. If NFLP, in its sole
discretion, approves such application, NFLP shall provide Licensee with
Computer Art or Photographs at a rate established by NFLP in its sole
discretion provided that, in the case of Photographs, Licensee must first
sign NFLP's standard Photo Use Agreement. Licensee shall make any payment
for the Computer Art or Photographs within thirty (30) days of receiving
an invoice from NFLP. Licensee shall only use the Computer Art or Photographs
in accordance with the terms and conditions of this License including,
without limitation, Paragraph 11, and, in the case of Photographs, the
Photo Use Agreement. The terms of the executed Photo Use Agreement will
govern in the event of any conflict between the terms of this License and
the terms of the Photo Use Agreement.
b. Licensee shall not make copies of the Computer Art or Photographs
without the express written approval of NFLP and shall not use the Computer
Art or Photographs for any purpose other than the purpose set forth in
Licensee's Use Application. Licensee shall not provide the Computer Art
or Photographs to any other party including a manufacturer, unless NFLP
approves such party in accordance with Paragraph 9 of this License.
Licensee shall take all steps necessary to prevent the unauthorized copying
or use of the Computer Art or Photographs by third parties.
c. Upon the expiration or termination of this License, Licensee shall
immediately deliver to NFLP all Computer Art and Photographs provided
by NFLP and all copies and duplications of such Computer Art or
Photographs and all related materials.
d. Licensee acknowledges that it has no right, title or interest in or
to any of the Photographs, including, without limitation, copyrights
in the Photographs. Licensee represents that it will not assert any
rights in or to the Photographs during the Term or thereafter.
11. Protection of Rights
a. Licensee acknowledges that, as between NFLP and Licensee, NFLP
exclusively owns worldwide in perpetuity: (i) all artwork produced under this
License bearing the NFL Marks ("Artwork") and all copyrights and other
proprietary rights in such Artwork; (ii) all secondary marks and/or
promotional concepts ("Secondary Marks") developed for use and used
in connection with any Licensed Product and all copyrights and other
proprietary rights in such Secondary Marks; (iii) all derivative
works based on any of the NFL Marks, Secondary Marks, Computer Art, or
Artwork ("Derivative Works") and all copyrights and other proprietary
rights in such Derivative Works; and (iv) all Computer Art and all copyrights
and other proprietary rights in such Computer Art as well as duplicates
and copies of it. Licensee's use of the Licensed Marks, Computer Art,
Artwork, Secondary Marks and Derivative Works is for NFLP's benefit
and Licensee will not acquire any rights in any of them by such use.
Licensee acknowledges that NFLP will have the right to terminate
this License if Licensee asserts any rights in or to any of the NFL
Marks, Computer Art, Artwork, Secondary Marks and Derivative Works other
than those granted under this License. Licensee shall not attack the
trademarks, copyrights or other proprietary rights of NFLP, the
NFL, or its Member Clubs during the Term or thereafter.
b. Licensee hereby irrevocably assigns and transfers to NFLP all
right, title and interest, including all copyrights and extensions and
renewals thereof, in and to the Artwork, the Secondary Marks, the
Derivative Works, the Computer Art, and all related proprietary rights
(collectively the "Proprietary Materials"). At the request of NFLP,
Licensee shall execute all documents confirming NFLP's rights in and to
the NFL Marks and Proprietary Materials including an assignment of
copyright in form and substance satisfactory to NFLP. Licensee shall
cause each third party who makes or contributes to the creation of the
Proprietary Materials to agree that all rights, including the
copyrights, in his or her work shall be owned by NFLP and to execute
necessary documents.
c. Licensee shall only display or use the Licensed Marks in the form
and manner that NFLP has specifically approved in writing. At NFLP's
direction,Licensee shall cause to be irremovably and legibly printed or
affixed in a clearly visible location approved by NFLP on every Unit of
each Licensed Product, and all Related Materials, Proprietary
Materials, and Promotional Materials the following:
(i) Trademark Notices as directed and specified by NFLP,
(ii) Copyright Notices as directed and specified by NFLP;
(iii) The Marketing Program symbol as directed by NFLP;
(iv) Hangtags, inserts, the Officially Licensed Product holograms
labels or hangtag, which must be used on all Licensed Products,
and other identifying material required by NFLP;
(v) A permanent label displaying Licensee's name and the Authorized
Brand;
(vi) Licensee's name, trade name and address; and
(vii) All other notices required by NFLP to protect the interests
of NFLP, the NFL, and its Member Clubs.
d. Licensee will not use any Trademark or Copyright Notices on the
Licensed Products, Related Materials, Proprietary Materials, and
Promotional Materials that conflict with, negate or cause confusion
with any notices required under this Paragraph 11. Licensee represents
that, except for the Authorized Brands, if applicable, or as otherwise
authorized in writing by NFLP, it will not associate other licensed
properties, names, symbols, or designs with the Licensed Marks on any
of the Licensed Products, Related Materials, Promotional Materials, and
Proprietary Materials. Licensee will not use the Licensed Marks or NFL
Marks on any business sign, business card, invoice, sales sheet,
brochure, catalog, or other form, or as part of the name of Licensee's
business except as authorized by NFLP in writing prior to such usage.
e. NFLP shall have the right to secure trademark and/or copyright
registrations for the NFL Marks. Upon request by NFLP, in addition to
any other quantity of Licensed Products that Licensee must submit to
NFLP under this License, Licensee shall deliver to NFLP, free of cost,
twelve (12) Units of each Licensed Product with their Related Materials
for such registration purposes provided that Licensee shall not owe any
Royalty for such Units. Licensee shall provide NFLP with the date of
first use of each Licensed Product in interstate and intrastate
commerce. NFLP shall have the right to secure trademark and/or
copyright registrations in NFLP's name for any Proprietary Materials
created by Licensee or its agents for use in connection with any
Licensed Product. By execution of this License, Licensee appoints NFLP
as Licensee's attorney-in-fact coupled with an irrevocable interest to
execute, acknowledge, deliver and record all registrations and all
documents referred to in this Paragraph 11.
f. Licensee shall assist NFLP, at NFLP's expense, in the procurement,
protection, and maintenance of NFLP's rights in and to the NFL Marks
and the Proprietary Materials. NFLP may, in its sole discretion,
commence or prosecute and control the disposition of any claims or
suits relative to the imitation, infringement and/or unauthorized use
of the NFL Marks or the Proprietary Materials either in its own name,
or in the name of Licensee, or join Licensee as a party in the
prosecution of such claims or suits. Licensee shall cooperate fully
with and provide full assistance to NFLP in connection with any such
claims or suits. Licensee shall promptly notify NFLP in writing of any
infringement, imitations, or unauthorized use of the NFL Marks or
Proprietary Materials by others. NFLP shall, in its sole discretion,
determine whether to take action and the type of action, if any, to
take against such infringement. Licensee shall not institute any suit
or take any action on account of such infringements, imitations or
unauthorized uses unless it receives NFLP's prior written consent.
NFLP will receive the full amount of any settlement made or damages
awarded in connection with any action taken against such infringement.
12. Indemnification and Insurance
a. During the Term and thereafter, Licensee shall be solely
responsible for, defend, indemnify and hold harmless NFLP, the NFL,
its Member Clubs, and each of their respective affiliates,
shareholders, officers, directors, agents and employees for, from
and against any claims, demands, causes of action, damages, costs
and expenses, including reasonable attorneys' fees, judgments, and
settlements arising out of or in connection with: (i) Licensee's
breach of any of its representations, warranties, covenants or
obligations contained in this License; (ii) Licensee's use of the
Licensed Marks except as provided in subparagraph (c) below; (iii)
Licensee's noncompliance with any applicable federal, state, or
local laws or regulations; or (iv) the manufacture, distribution,
sale, advertising or use of any Licensed Product. Licensee
acknowledges that NFLP's approval of any Licensed Product pursuant
to Paragraph 4 of this License or Promotional Materials or
promotional concepts pursuant to Paragraph 5 of this License shall
not relieve License of its indemnification obligations under the
Paragraph.
b. Licensee shall obtain and maintain at its own expense from a
licensed and admitted insurance carrier with a rating not less than A
from Best, a product liability insurance policy that will provide
coverage of three million dollars ($3,000,000) for personal injuries
arising out of each occurrence and one million dollars ($1,000,000) for
property damage arising out of each occurrence and an advertising
liability insurance policy that will provide coverage of three million
dollars ($3,000,000) for each occurrence. Licensee shall ensure that
such policies: (i) will list the NFL, its Member Clubs, NFLP, and each
of their respective affiliates, shareholders, officers, directors,
agents, and employees as additional insureds; and (ii) will each
provide that they can not be canceled without at least thirty (30) days
written notice to NFLP. Simultaneously with the execution of this
License, Licensee shall submit to NFLP the fully paid policies or
certificates of insurance. Compliance with this subparagraph (b) will
not relieve Licensee of its other obligations under this Paragraph 12.
The insurance coverage required under this License is not cumulative
and will not extend to any other License or Agreement between Licensee
and NFLP unless otherwise authorized by NFLP in writing.
c. During the Term and thereafter, NFLP shall indemnify and hold
harmless Licensee, its officers, directors, agents and employees for,
from and against any claims, demands, causes of action, damages, and
reasonable attorneys' fees for trademark infringement arising out of
the use of the Licensed Marks as strictly authorized under this
License, provided that NFLP is given immediate notice of and shall have
the option to undertake and conduct the defense of any such claim,
demand or cause of action and further provided that Licensee shall
cooperate in the defense of such claim as reasonably required by NFLP.
13. Financial Information
a. Upon NFLP's request, Licensee shall provide NFLP with a statement
from an independent certified public accountant attesting to Licensee's
solvency. For the purposes of this License, "solvency" shall mean that
Licensee's is able to pay its obligations as they become due in the
regular course of business.
b. On or before the 15th day of each month, Licensee shall provide
NFLP with Licensee's Fiscal Year projections for sales and income for
the Licensed Products. Upon request by NFLP, Licensee shall provide
NFLP with a list ranking its License Products sales by retailer and/or
Third Party Distributors for its top twenty-five (25) retail accounts
or by retail account comprising seventy-five (75%) of its Net Sales,
whichever is greater, and itemizing for each such retailer and/or Third
Party Distributors a description and the number of Units of each
Licensed Product sold.
c. Licensee shall notify NFLP in writing of any adverse material
change in Licensee's financial condition that will likely affect its
performance under this License at the time such material change occurs
or when Licensee's learns of the possibility of such a change,
whichever is sooner, including, but not limited to, any possible
adverse material change in Licensee's ability too make timely payments
or keep accurate records due to any inability to process date/time data
from, into or between the twentieth and twenty-first centuries.
14. Audits and Inspections
a. During the Term and for at least three (3) full Fiscal Years after
the expiration or termination of the License, Licensee shall keep,
maintain and preserve complete and accurate books of account and
records covering all transactions relating to this License, including,
without limitation, invoices, correspondence, inventory accounting,
banking and financial records ("Records"). Licensee shall designate a
symbol or number that will be used exclusively on Records relating to
the Licensed Products and with no other articles that Licensee
manufactures, distributes or sells. Licensee shall ensure that all
invoices for the sale of Licensed Products to its retailers and/or
Third Party Distributors will include the quantity and description of
each Licensed Product itemized by Marketing Program, Style and Member
Club, if applicable.
b. During the Term and for at least three (3) full Fiscal Years after
the expiration or termination of the License, NFLP and its duly
authorized representatives will have the right during reasonable
business hours to inspect and audit all Records and conduct a physical
examination of Licensee's premises including its warehouses and
manufacturing facilities and those of Third Party Distributors and
Third Party Manufacturers. NFLP shall provide Licensee with no less
than five (5) business days written notice prior to such inspection,
audit or examination; provided however, if compelling circumstances
exist, as determined by NFLP in the exercise of its reasonable business
judgment. NFLP may conduct an immediate inspection, audit or
examination with no prior notice to Licensee. Licensee represents that
it will fully cooperate with the inspection, audit or examination and
will not cause or permit any interference with NFLP or its
representatives during any inspection, audit or examination. During an
inspection, audit or examination, NFLP shall have the right to make
copies or extracts of Licensee's Records.
c. Licensee shall pay NFLP for the cost of any audit that discloses a
payment deficiency of more than two percent (2%) between the amount due
to NFLP pursuant to the audit and the amount Licensee actually paid or
reported to NFLP. Licensee shall pay NFLP any deficiency amount
together with interest on the deficiency amount pursuant to the
provisions in Paragraph 3d of this License. Licensee shall pay NFLP
the amount of any additional costs beyond the cost of the audit
incurred by NFLP due to a change in an audit date scheduled by NFLP
made at Licensee's request. Licensee shall pay NFLP such amounts
within ten (10) days of invoicing by NFLP.
15. Termination
Without prejudice to any other rights it may have in law, equity or
otherwise, NFLP shall have the right to immediately terminate this
License upon written notice to Licensee at any time if:
a. Licensee fails to generate Net Sales during any Fiscal Year
satisfying the corresponding Minimum Royalty Guarantee or fails to
generate Net Sales on any Licensed Product with a separate Minimum
Royalty Guarantee satisfying the corresponding per-product Minimum
Royalty Guarantee;
b. Licensee fails to deliver to NFLP or to maintain in full force and
effect the insurance coverage referred to in Paragraph 12b of this
License;
c. Licensee fails to make available its premises, Records or other
business information to NFLP or its representatives or fails to provide
full and complete information as required in Paragraphs 13 and 14 of
this License;
d. Licensee manufactures, sells, distributes, advertises or uses any
Style of any Licensed Product, or any Promotional Materials, or
Proprietary Materials without the prior written approval of NFLP as
required in this License, or after such written approval has been
withdrawn by NFLP or has expired;
e. Licensee distributes or sells any Licensed Product outside the
Territory or sells any Licensed Product to a third party that Licensee
knows or should reasonably know intends to sell such Licensed Product
outside the Territory;
f. Licensee distributes any Licensed Product outside the corresponding
Distribution Channels, or sells any Licensed Product to any third party
that Licensee knows or should reasonably know intends to sell such
Licensed Product outside the corresponding Distribution Channels;
g. Licensee fails to obtain NFLP's written approval prior to
assigning, transferring, granting a security interest in the Licensed
Product or otherwise encumbering the License or prior to using a Third
Party Manufacturer or Third Party Distributor, Sublicensee, or screen
printer or any approved Third Party Manufacturer or Third Party
Distributor, Sublicensee, or screen printer engages in conduct that
would entitle NFLP to terminate the License if Licensee had engaged in
such conduct;
h. Any sales representative of Licensee produces, inventories,
warehouses or distributes any of the Licensed Products;
i. Licensee fails to satisfy the distribution requirements in
Paragraph 6 of this License or otherwise fails to make timely and
complete delivery of orders it has taken for any Licensed Product to
seventy percent (70%) or more of its retail accounts and/or Third Party
Distributors that collectively account for eighty percent (80%) of its
Net Sales on one or more occasion during any Fiscal Year;
j. Licensee makes a material misrepresentation or omission in its
license application form;
k. Licensee fails to make any payment or deliver any statement
required under this License and fails to correct such default within
ten (10) days of written notice of such default;
l. Licensee breaches any other agreement in effect between Licensee
and NFLP;
m. Licensee makes or agrees to make a payment to any Member Club or
any shareholder, officer, director, employee, agent, or representative
of a Member Club, or to any agent, representative or employee of the
NFL or its affiliates in such person's individual capacity, in
connection with the use of any Licensed Marks under this License or
otherwise as a direct result of the sales of any Licensed Product, or
Licensee fails to disclose to NFLP any existing agreement or agreement
being negotiated by Licensee or Licensee's agent between Licensee and a
Member Club or any shareholder, officer, director, employee, agent, or
representative of a Member Club, or any agent, representative or
employee of the NFL or its affiliates in such person's individual
capacity;
n. Licensee disparages NFLP, the NFL, any of its Member Clubs, or any
of their respective shareholders, officers, directors and employees as
determined by NFLP in its sole discretion, or otherwise engages in
conduct that NFLP deems detrimental to the NFL or any of its Member
Clubs or any shareholder, officer, director, employee, agent, or
representative of a Member Club;
o. Licensee fails to comply with any applicable federal, state or
local law or regulation in connection with this License.
p. Licensee fails, in any way, to comply with the requirements of
Paragraph 19; or
q. Licensee fails to comply with any other material term or condition
of this License.
16. Goodwill and Reputation
Licensee recognizes the great value of the goodwill associated with
the NFL Marks and acknowledges that such goodwill belongs to the Member
Clubs and the NFL, and that such NFL Marks have secondary meaning in
the minds of the public. The nature of the business of NFLP, the NFL,
and its Member Clubs, requires public respect for and trust in the
reputation and integrity of the NFL and its Member Clubs. NFLP may, at
its sole option, terminate this License or withdraw some or all Product
Approval Forms or Promotional Approval Forms by written notice to
Licensee if any unanticipated factor, development or event causes
NFLP's continued association with any one or more Licensed Product or
Licensee to adversely reflect upon NFLP, the NFL or its Member Clubs as
determined by NFLP in its sole discretion. In the event of such
termination, Licensee shall pay to NFLP the Royalty on all sales of the
Licensed Products made during the Termination Fiscal Year or the
Termination Guarantee as defined in Paragraph 3a, whichever is greater,
and all other amounts due to NFLP. Upon receipt of such payment, NFLP
will reimburse Licensee for its salvage expenses or, in the case of
unsalvageable Licensed Products, Licensee's manufacturing costs if NFLP
does not permit Licensee to distribute the remaining inventory of
Licensed Products.
17. Renewal Request
NFLP must receive a written request from Licensee by no later than
the Renewal Request Date if applicable, listed on the Term Sheet or
Term Sheets if Licensee desires to renew the License. If Licensee has
complied with all terms and conditions of this License during the Term
and NFLP desires, in its sole discretion, to negotiate a renewal
License, NFLP shall negotiate with Licensee for the terms and
conditions of a renewal License for a period of no more than sixty (60)
days following NFLP's receipt of Licensee's renewal request notice.
This License automatically expires at the end of the Term if NFLP does
not receive Licensee's written request by the Renewal Request Date,
Licensee has failed to comply with all terms and conditions of this
License, NFLP elects not to negotiate a renewal License, or the parties
are unable to reach an agreement within said sixty-day negotiation
period. Licensee shall not take any orders for Licensed Products that
will be shipped after the expiration of the License or any Sell-Off
Period, if applicable, at any trade show or otherwise unless NFLP has
notified Licensee in writing that NFLP will renew the License.
Licensee acknowledges that NFLP has no express or implied obligation to
renew the License. NFLP will have no liability to Licensee for any
expenses incurred by Licensee in anticipation of any renewal or
extension of this License.
18. Effect of Expiration or Termination of the License
a. Sixty (60) days before the expiration of this License, Licensee
will furnish to NFLP a statement showing the number of Units and
description of such Units for each Style of each Licensed Product,
Promotional Materials, and Proprietary Materials on hand or in process
in Licensee's inventory. If this License is terminated by NFLP,
Licensee shall furnish such statement within ten (10) days after notice
of termination is given by NFLP.
b. After expiration or termination of this License for whatever
reason, all rights granted under this Licensee will revert to NFLP and
Licensee shall refrain from further use of, simulation of or reference
to any and all of the NFL Marks except as provided in this paragraph.
Except for termination of this License by NFLP, Licensee will have
ninety (90) days to dispose of the Licensed Products ("Sell-Off
Period") that are on hand or in process at the time of such expiration,
provided all statements and payments then due to NFLP are first made
and such Sell-Off occurs at Licensee's regular selling price and within
the Distribution Channels. During the Sell-Off Period, Licensee shall
submit all payments and statements required under this License in
accordance with the terms and conditions of the License.
c. If Licensee has remaining inventory of the Licensed Products upon
the termination of this License or after the Sell-Off Period, if
applicable, NFLP may, at its option: (i) purchase such inventory at
Licensee's cost; (ii) require Licensee to deliver such inventory to
NFLP for destruction at Licensee's expense; or (iii) require Licensee
to destroy such inventory at Licensee's expense and furnish NFLP with
an affidavit signed by an officer of Licensee attesting to such
destruction. NFLP will have the right at any time before expiration or
termination of this License and during the Sell-Off Period to conduct a
physical inventory to, among other things, verify the quantity and
Style of the Licensed Products in Licensee's inventory. If Licensee
refuses to permit such physical examination of the inventory or fails
to provide NFLP with the statement required in subparagraph a above,
Licensee will forfeit its right to any Sell-Off Period.
d. Upon the termination of this License or immediately after the Sell-
Off Period, Licensee shall deliver to NFLP all Proprietary Materials
and all related materials, including software, created or used by
Licensee in connection with this License and shall, at NFLP's option,
destroy or sell to NFLP at Licensee's cost, any molds, plates and other
items used to reproduce the Licensed Marks.
19. On-Field Product Exposure
Licensee acknowledges that in furtherance of the NFL's policy of
control of game operations, NFLP shall approve any and all visible
items worn or used on-field, including the sidelines, during all pre-
season, regular season and post-season NFL games. Except as otherwise
authorized in writing by NFLP or as otherwise provided in this License,
Licensee shall not during the Term or thereafter agree, contractually
or otherwise, with any Member Club, NFL player, coach, or other Member
Club employee, for any individual to wear, use or promote any
commercially identified product on-field, including the sidelines,
during any NFL game.
20. Players and Coaches
Licensee acknowledges that this License does not grant Licensee any
rights with respect to the name, likeness, signature, or other
attributes of any player, coach, or other employee of the NFL.
Licensee shall be responsible for securing whatever rights may be
required for the use of such names, likeness, signatures, or other
attributes. Licensee represents that it will not exercise the rights
granted in this License in any manner that will imply that Licensee has
obtained any such rights without separate written authorization from
the appropriate player, coach, or employee.
21. NFL Films
Licensee understands and acknowledges that this License does not
grant Licensee any rights with respect to film or videotape footage of
NFL game action and that Licensee must obtain such footage directly
from NFL Films, Inc. ("NFL Films") on terms and conditions to be
mutually agreed upon by Licensee and NFL Films. If Licensee desires to
use such footage in connection with this License, NFLP must approve the
proposed usage and subject matter of such footage in writing prior to
its usage.
22. Information Transmission
If NFLP obtains the capacity to receive computer transmissions of
any or all information required from Licensee under this License during
the Term, Licensee shall begin to provide such information by such
computer transmission as soon as practicably possible.
23. Notices
The parties to this License shall send all notices and statements
required under this License to the respective addresses of the parties
set forth above unless notification of a change of address is given in
writing. Licensee shall direct all notices to NFLP to the Senior Vice
President of the Consumer Products with a copy to the General Counsel
of NFLP. All notices required under this License must be in writing,
must be sent by registered or certified mail, facsimile, or a private
overnight delivery service generally accepted in the industry that
provides evidence of delivery, and shall be deemed to have been given
at the time they are sent.
24. Relationship of Parties
The parties to this License are not partners, joint venturers, or
agents and nothing in this License shall be construed to place them in
any such relationship. Neither party will have the power to obligate
or bind the other in any manner whatsoever. NFLP, the NFL, and its
Member Clubs in no way endorse, certify or guarantee the quality of the
Licensed Products.
25. Governing Law and Disputes
This License and any dispute arising under it shall be governed by
and construed in accordance with the laws of the State of New York
without regard to conflict of law principles. All disputes pertaining
to this License shall be decided by a state or federal court located in
the City of New York and Licensee consents to personal jurisdiction in
such courts.
26. Waiver
Neither party to this License can waive or modify any provision of
this License unless such waiver or modification is in a writing signed
by both parties. Licensee acknowledges that NFLP's prior forbearance
of any requirement of this License will not prevent NFLP from
subsequently requiring full and complete compliance with such
requirement or from exercising its rights under this License.
27. Confidentiality
The parties to this License acknowledge that the terms of this
License are confidential and each warrant that neither shall disclose
such terms to any third party other than the disclosing party's
accountants, agents or attorneys or as required by law, without the
other party's prior written consent.
28. Severability
If any paragraph or clause of this License is illegal or invalid or
void for any reason, the remaining paragraphs and clauses of the
License will remain in full force and effect.
29. Release
In consideration of the rights granted under this License, Licensee
releases NFLP, the NFL, its Member Clubs and each of their respective
affiliates, shareholders, officers, directors, agents and employees
from any claims, demands, losses, expenses or damages, whether known or
unknown, arising out of or in connection with or in any manner related
to the manufacture, distribution or sale of products bearing the
Licensed Marks. Nothing in this paragraph will relieve NFLP of its
obligation under Paragraph 12c of the License.
30. Public or Private Offering
Licensee shall not refer to this License or NFLP, the NFL or its
Member Clubs or affiliates in any public or private offering, or other
securities or financing document, without NFLP's prior written consent
and then only on such conditions as NFLP deems appropriate in it
discretion.
31. Multiple Term Sheets
In the event that this License has multiple Term Sheets attached to
it, the terms and conditions of this License will apply to each
Individual Term Sheet.
32. Entire Agreement
This License constitutes the entire agreement and understanding
between the parties to this License with respect to the subject matter
of this License and cancels, terminates, and supersedes any prior or
contemporaneous agreement or understanding, whether oral or written, on
this subject between Licensee and the NFL, its affiliates or Member
Clubs, or NFLP. The headings in this License are for reference
purposes only and have no legal effect.
33. Execution
Licensee will make an offer to enter into this License by having a
duly authorized officer or representative sign below and return the
License with a check payable to NFLP for the Advance Royalty Payment
required for Fiscal Year 1. An acceptance of the offer will occur and a
binding agreement will exist only after an authorized officer or duly
authorized representative of NFLP signs this License and delivers a
fully-executed copy to Licensee. Licensee acknowledges that this
License will be deemed to have been executed in New York City.
Licensee: Fotoball USA, Inc.
-------------------=----------------
By: /s/Carl E. Francis Date: 10/26/98
------------------------------------ ---------------
(Signature of officer, partner or
individual duly authorized to sign)
Title: Senior Vice President
----------------------
NATIONAL FOOTBALL LEAGUE PROPERTIES, INC.
By: /s/ Date: 11/16/98
------------------------------------ --------------
(Signature of officer, partner or
individual duly authorized to sign)
Title: Senior Vice President Business Affairs
---------------------------------------<PAGE>
EXHIBIT I
DISTRIBUTION CHANNELS
The following definitions shall apply to this License:
1. Airport/Hotel Shop: A separate retail store located in an airport
or hotel.
2. Amusement/Convenience Venues: Restaurants. convenience stores, gas
stations, car and truck slaps, amusement venues, recreation centers and
any other business venue in which the sale of the Licensed Products
would constitute a subsidiary business excluding Stadium Shops/Stadium
Concessionaires as defined below.
3. Automotive Store: A retail store that carries as its primary
retail items automotive supplies.
4. Book Store: A retail store that carries as its primary items books
and periodicals. Examples include, without limitation, Walden
Books, and Barnes and Nobles.
5. Card/Party Shop: A retail store that carries as its primary retail
items cards or party products. Examples include, without limitation,
Hallmark Stores.
6. Computer/Electronic Stare: A retail store that carries as its
primary retail items computers, software, and computer accessories or
electronic equipment and appliances. Examples include, without
limitation, CompUSA and Computer City.
7. Computer On-line: Licensee, and no other organization. making the
Licensed Product available for sale to consumers on the Internet or
through a computer on-line service provided that the Licensed Products
are physically shipped to consumers by traditional methods and not
distributed electronically on-line or via the Internet.
8. Craft Store: A retail store that carries as its primary retail
items arts and crafts supplies.
9. Department Store: A retail store that operates several departments
carrying higher-priced brands of apparel and non-apparel. Examples
include, without limitation, Macy's, Dillards, Nordstrom, JC Penney,
Boscov's, Sears, May Co., Federated Group, Carson Pirie Scoft, Dayton
Hudson, Bon Ton, Belks, Strawbridge & Clothier, Jacobson and
Bloomingdales.
10. Direct Retailer: An organization that markets products directly to
consumers without using retail space through the mediums of television
or catalog.
11. Discount Store: A retail store that operates several departments
carrying lower-priced brands of apparel and non-apparel with limited
service. Examples include, without limitation, Wal-Mart, Kmart,
Bradlees, Roses, Hills, Caldor, Venture, Target, Shopko, and Ames.
12. Distributors: Defined as Third Party Distributors in Paragraph 9c
of the License.
13. Drug Store: A retail store that carries as its primary retail
items pharmaceuticals, health and beauty aids, and convenience items.
Examples include, without limitation, OSCO, Walgreen, and Eckert.
14. Fan Shop: A retail store that carries as its primary retail item
licensed products of the NFL, National Basketball Association, National
Hockey League, Major League Baseball, and the National Collegiate
Athletic Association. Examples include, without limitation, Pro Image,
Team Spirit and Stadium Stuff.
15. Footwear Specialty Store: A retail store that carries as its
primary retail item athletic footwear and also carries, in limited
quantities, licensed apparel and headwear. Examples include, without
limitation, Foot Locker, FootAction, and Athletes Foot.
16. Fund Raising: An organization, including Licensee, that markets
products through various channels such as schools for the purpose of
raising money for educational or charitable causes. NFLP must approve
each educational or charitable cause.
17. Galley: A retail store that carries as its primary retail item
artwork.
18. Gift/Flower Shop: A retail atom that carries as its primary retail
items gifts, novelties or flowers.
19. Grocery Store: A retail store that carries as its primary retail
items food and household products. Examples include, without
limitation, A & P, Shop Rite, Vons, Jewel, and Food Town.
20. Hardware Store: A retail store that carries as its primary retail
items hardware products. Examples Include, without limitation, True
Value, Ace and Home Depot.
21. Hobby Store: A retail store that carries as its primary retail
Item collectible products.
22. Home Specialty Store: A retail store that carries as its primary
retail items furniture and home products. Examples include, without
limitation, Home Place, Linens 'N Things, and Bed Bath and Beyond.
23. Jewelry Store: A retail stare that carries as its primary retail
item jewelry. Examples include, without limitation, Adler Jewelers.
24. Membership Club/Warehouse Store: A retail store that markets
products to members only. BJ's Wholesale Club.
25. Military Base: The domestic military bases of the United States.
26. Office Supply: A retail store that carries as its primary retail
items office supply. . Examples include, without limitation, Office
Max and Staples.
27. Sporting Goods Store: A retail store that carries as its primary
retail items licensed apparel, athletic footwear and sporting goods
equipment. Examples include, without limitation, Champ's, Herman's,
Koenig's, The Sports Authority, Sportmart, Gart Brothers, and Modells.
28. Stadium Shop/Stadium Concessionaires: A retail or vendor that
carries as its primary retail item Licensed Products of the NFL and is
located at the training facilities or stadium of a Member Club.
29. Toy/Children's Store: A retail store that carries as its primary
retail items toys and/or children's apparel. Examples include, without
limitation, Toys'R Us, Kids'R Us, and Babies'R Us.
SECOND AMENDMENT TO LEASE
SUBLESSOR: GENERAL TEXTILES, a California corporation
SUBLESSEE: FOTOBALL, USA, Inc.
WITNESSETH
SUBLESSOR AND SUBLESSEE have entered into that certain Sublease
dated June 19, 1997 and First Amendment to Lease dated March 31, 1998
(collectively the "Sublease"), with respect to the real property located
in the County of San Diego, the State of California, which is more
particularly described as 4000 Ruffin Road, San Diego, California
consisting of twenty-two thousand five hundred and thirty (22,530)
square feet of retail space("Premises") located in the southwest portion
of the building.
The parties wish to Amend the Sublease on this 12th day of May,
1998, as follows:
1. Premises: Sublessor and Sublessee agree to expand the Premises by
approximately an additional 18,818 square feet ("the Additional
Premises") located in the southwest portion of the building immediately
west of the Premises as shown on Exhibit "A".
2. Terms: Subject to Paragraph 4 below, the term for the Additional
Premises shall be month-to-month commencing on May 13, 1998 and shall be
leased on all terms and conditions of the Sublease including monthly
rent of $0.44 per square foot ($8,279.92). The Additional Premises is
subject to an existing
expansion option. Therefore, the Sublessee agrees to vacate the
Additional Premises within fourteen (14) days of receiving verbal or
written notice ("Notice Period'") from the Sublessor. Written notice
may be given either by facsimile, overnight delivery service or mail.
On the vacation date, the Additional Premises shall be broom clean and
in the same condition as it was prior to the Sublessee's occupancy
including closing the opening in the drywall demising wall. Any tenant
improvement, alarm and/or utility work to restore the Additional
Premises to its condition existing prior to Sublessee's occupancy shall
be completed prior to the end of the Notice Period by the Sublessor and
reimbursed by the Sublessee to the Sublessor as additional rent under
the Sublease within fifteen (15)days of Sublessor's request for
reimbursement.
3. A. Tenant Improvements: Sublessee will construct the following
tenant improvements at Sublessee's sole cost and expense:
1. Construct a secured passageway between the Premises and the
Additional Premises. Construction of this opening is approved with
this document.
2. Secure the Additional Premises from the adjacent tenant's
Premises, if required.
B. Any additional tenant improvement work shall be approved by the
Sublessor and Master Lessor prior to the commencement of the tenant
improvements.
C. The Sublessee agrees to reimburse the Sublessor for any
associated work required on the Building, alarm system and/or
utilities due to the adding of the Additional Premises. Such
reimbursement shall be made by the Sublessee to the Sublessor as
additional rent under the Sublease within fifteen (l5) days of
Sublessor's request for reimbursement.
4. Term Extension Rights: Sublessee has exercised an option to extend
the term of the Sublease so that the term of the Sublease with respect
to the 22,530 square feet of the Premises initially subleased expires on
July 13, 2000. Sublessee also has one further extension option to extend
the term for an additional one year period. As indicated in Paragraph 2
above, the Additional Premises is subject to an existing expansion
option of another tenant (the "Existing Expansion Option"). In the event
the Existing Expansion Option is not exercised, Sublessor shall provide
notice thereof to Sublessee and the term of the sublease of the
Additional Premises shall be modified to be coterminous with the term of
the sublease of the original Premises of 22,530 square feet and, in such
event, the extension option of the Sublessee shall also apply to the
Additional Premises. During the time period that Sublessee subleases the
Additional Premises on a month to month basis, Sublessee shall not have
any right to extend the term of the sublease of the Additional Premises
for any extension periods as provided in the Sublease.
Except as modified hereinabove, all other terms and conditions of
said Sublease shall remain in full force and effect.
ACCEPTED AND AGREED TO: ACCEPTED AND AGREED TO:
FOTOBALL, USA, Inc. RUFFIN SAN DIEGO CORPORATION
"SUBLESSEE" "MASTER LESSOR"
By: /s/ Michael Favish By: /s/ Gerald Goldman
--------------------- ---------------------
Michael Favish, Gerald Goldman,
President, CFO Asset Manager
Dated: June 1, 1998 Dated: May 18, 1998
ACCEPTED AND AGREED TO:
GENERAL TEXTILES a
California corporation
"SUBLESSOR"
By: /s/ James Baker
------------------
James Baker
CFO
Dated: May 26, 1998<PAGE>
General Textiles, Inc.
4000 Ruffin Road
San Diego, CA 92123
(619) 637-4126
(619) 637-4188 (fax)
September 29, 1998
Via Facsimile & U.S. Mail
Mr. Michael Favish
Fotoball USA, Inc.
3738 Ruffin Road
San Diego, CA 92123
Re: Sublease dated June 19, 1997 between General Textiles.
Inc.("Sublessor") and Fotoball USA, Inc. ("Sublessee") as amended on
March 31, 1998, May 12, 1998 and June 4, 1998 (collectively, as amended,
the "Sublease") relative to the original premises consisting of 22,608
square feet (the `'Original Premises") and additional premises
consisting of 18,818 square feet (the "Additional premises") at 4000
Ruffin Road, San Diego, California (the Original Premises and the
Additional Premises shall be collectively referred to as the
("Premises")
Dear Mr. Favish:
This letter sets forth our agreement to amend the Sublease as follows:
1. As referenced in Paragraph 4 of the Second Amendment to the sublease
dated May 12, 1998, the "Existing Expansion Option" (as defined therein)
was not exercised by the other subtenant with respect to the Additional
Premises. Accordingly, as required by Paragraph 4, the term of the
Additional Premises shall no longer be on a month-to-month basis, and
the term of both the Original Premises and the Additional Premises shall
now be coterminous and expire on July 13, 2000. In addition, Sublessee
shall have one(l) option (the "Option") to extend the term of the
Sublease for one(l) year to commence on July 14, 2000 and expire on July
13, 2001. Sublessee must give Sublessor one hundred eighty (180) days
prior written notice in order to exercise the option to extend the term
as; provided above. In the event such notice is not given by the date
required herein, Sublessee shall have no further right to extend the
term.
2. Sublessor currently subleases to another subtenant an additional
18,624 square feet (the "Expansion Premises") that is adjacent to the
Additional Premises. The sublease of the other subtenant for the
Expansion Premises currently expires on February 28, 1999. Commencing
on March 1, 1999, Subleasee hereby agrees to sublease from Sublessor,
and Sublessor hereby agrees to sublease to Sublessee, the Expansion
Space for the term, at the rental, and upon all the terms and conditions
of the Sublease, as amended in this letter. Effective March 1,1999 the
Premises shall include the Original Premises. Additional Premises and
Expansion Premises, consisting of a total of 60,050 square feet. The
term for the Expansion Premises shall be coterminous with the term of
the Original Premises and the Additional Premises and shall expire on
July 13, 2000. In the event Sublessee elects to exercise the Option to
extend the term for one year, such Option must be exercised for all of
the Premises (i.e., the Option will be deemed to be for the Original
Premises, Additional Premises and Expansion Premises). Sublessee shall
not be permitted to exercise the Option for less than all of the
Premises (as collectively defined herein).
3. Sublessee acknowledges that it is subleasing the Expansion Premises
from Sublessor in its "as is" condition. All improvements to be made to
the Expansion Premises (or any other portion of the Premises) by
Sublessee are subject to the written approval of Sublessor and Master
Lessor prior to the commencement of any work by Sublessee. Any
improvements to the Expansion Premises (or any other portion of the
Premises) shall be performed at Sublessee's sole cost and expense, in
good workmanlike manner and in accordance with all applicable laws and
regulations. Sublessee agrees to reimburse Sublessor, as additional
rent within fifteen (15) days of request, for any associated work
required on the Building, alarm system and/or utilities due to the
addition of the Expansion Premises. Upon the expiration of the term of
this Sublease, Sublessee shall vacate the Premises in broom clean
condition and in the same condition it was prior to Sublessee's
occupancy, ordinary wear and tear excepted.
4. Commencing on March 1, 1999 and for each month thereafter during the
term of this Sublease (including the Option term), Sublessee: agrees to
reimburse Sublessor, as additional rent within fifteen (15) days of
request, for any amounts that Sublessor is required to pay to Master
Lessor under the Master Lease for Common Area Operating Expenses, Real
Property Taxes and Insurance that are attributable to the Original
Premises, Additional Premises and Expansion Premises during the term of
this Sublease.
5. Sublessee currently pays monthly installments of base rent for the
Original Premises and Additional Premises equal to forty-four cents
($.44) per square: foot per month far a total of $18,227.44 per month.
Subject to any adjustment to the base rent as provided below, commencing
March 1, 1999, Sublessee shall pay base rent for the Expansion Premises
at the rate of forty-four cents ($.44) per square foot per month, which
equals $8, l94,56 per month. Subject to any adjustment required below,
the total base rent payable by Sublessee commencing on March 1,1999 for
the entire Premises shall be $26,422.00. Sublessee acknowledges that the
base rent that Sublessor is required to pay to Master Lessor is subject
to annual increases of three percent (3%) per year, with the next
increase to occur on April 1, 1999, Sublessee agrees to increase the
base rent that it pays to Sublessor during the term hereof to cover the
cost of any such increase imposed by the Master Lease.
Please sign an original of this letter and return it to me indicating
your agreement with the foregoing terms and conditions. Thanks for your
assistance.
Sincerely,
Sublessor
General Textiles, Inc.
The foregoing terms and conditions are accepted and agreed to:
Sublessee
Fotoball USA, Inc.
By: /s/ Michael Favish
-------------------
Its: President/CFO
-------------------
Dated: 9/29/98
-------------------
The foregoing amendment to the Sublease is consented to:
Master Lessor
Ruffin San Diego Corporation
CHANGE IN TERMS OF AGREEMENT
Principal Amount: $3,500,000.00
Maturity: 04-15-2000
LOAN NO.: 11620
Collateral: 191
Officer: 125
Borrower: Fotoball USA, Inc. Lender: Scripps Bank
3738 Ruffin Road Corporate Lending
San Diego, CA 92123 9005 Complex Drive
San Diego, CA 92123
DESCRIPTION OF EXISTING INDEBTEDNESS.
AS EVIDENCED BY:
PROMISSORY NOTE DATED DECEMBER 20, 1995 IN THE AMOUNT OF $1,000,000.00.
CHANGE IN TERMS AGREEMENT DATED NOVEMBER 13, 1996 IN THE AMOUNT OF
$2,000,000.00
CHANGE IN TERMS AGREEMENT DATED FEBRUARY 19, 1998 IN THE AMOUNT OF
$1,500,000.00
CHANGE IN TERMS AGREEMENT DATED AUGUST 20, 1998 INTHE AMOUNT OF
$2,000,000.00
DESCRIPTION OF COLLATERAL.
AS DESCRIBED IN:
COMMERICAL SECURITY AGREEMENT DATED DECEMBER 20, 1995.
DESCRIPTION OF CHANGE IN TERMS.
LOAN AGREEMENT DATED DECEMBER 28, 1998 SUPERCEDES ALL PRIOR LOAN AGREEMENTS.
LINE OF CREDIT IS INCREASED TO $3,500,000.00
EXTEND MATURITY DATE TO APRIL 15, 2000.
THE VARIANCE ON THIS NOTE IS CHANGED TO PRIME +.75% OVER THE INDEX
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/CFO<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: Fotoball USA, 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 date (0.750% over Wall Street Journal
Prime Rate as published In the Money Rates section. When a range of rate
Is shown, the higher rate will be used., making an initial rate of
8.500%), Revolving Line of Credit Loan to a Corporation for
$3,000,000.00 due on April 15, 2000.
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: INCREASE LINE OF
CREDIT AND EXTEND MATURIITY DATE.
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 $3,500,000.00
as follows:
Undisbursed Funds: $2,800,000.00
Amount paid on Borrower's account: $ 700,000.00
$700,000.00 Payment on
Loan # 11620 (RENEW) --------------
Note Principal: $3,500,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed
the following charges:
Prepaid Finance Charges Paid In Cash: $ 2,000.00
$2,000.00 DOCUMENT FEE -------------
Total Charger Paid In Cash: $ 2,000.00
LOAN ADVANCE AGREEMENT CONDITION. UNDISBURSED FUNDS TO BE DISBURSED PER
LOAN ADVANCE 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 DECEMBER 28, 1998.
BORROWER: FOTOBALL U.S.A. INC.
By: /s/ DAVID G. FORSTER
------------------------------------
DAVID G. FORSTER, Vice President/CFO<PAGE>
LOAN AGREEMENT
Borrower: FOTOBALL U.S.A. INC. Lender: Scripps Bank
3738 RUFFIN ROAD Corporate 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 December 28, 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, as determined by Lender
from time to time, the lesser of (a) $3,500,000.00; or (b) the sum of
(i) 80.000% of the aggregate amount of Eligible Accounts, plus (ii)
25.000% of the aggregate amount of Eligible Inventory.
Business Day. The words "Business Day" mean a day on which
commercial banks are open for business in the State of California.
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
Amortization.
Collateral. The word "Collateral" means and includes without
limitation all property and assets granted as collateral security
for a Loan, whether real or personal property, whether granted
directly or indirectly, whether granted now or in the future, and
whether granted in the form of a security interest, mortgage, deed
of trust, assignment, pledge, chattel mortgage, chattel trust,
factor's lien, equipment trust, conditional sale, trust receipt
lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or
lien interest whatsoever, whether created by law, contract, or
otherwise. The word "Collateral" includes without limitation all
collateral described below in the section titled "COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
Eligible Accounts. The words "Eligible Accounts" mean, at any time,
all of Borrower's Accounts which contain selling terms and
conditions acceptable to Lender. The net amount of any Eligible
Account against which Borrower may borrow shall exclude all
returns, discounts, credits, and offsets of any nature. Unless
otherwise agreed to by Lender in writing, Eligible Accounts do not
include:
(a) Accounts with respect to which the Account Debtor is an
officer, an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a
subsidiary of, or affiliated with or related to Borrower or
its shareholders, officers, or directors.
(c) Accounts with respect to which goods are placed on
consignment, guaranteed sale, or other terms by reason of
which the payment by the Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a resident
of the United States, except to the extent such Accounts w
supported by Insurance, bonds or other assurances satisfactory to
Lender.
(e) Accounts with respect to which Borrower is or may become
liable to the Account Debtor for goods sold or services
rendered by the Account Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or
setoff.
(g) Accounts with respect to which the goods have not been
shipped or delivered, or the services have not been rendered,
to the Account Debtor.
(h) Accounts with respect to which Lender, in its sole
discretion, deems the creditworthiness or financial condition
of the Account Debtor to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition In bankruptcy or an application for relief under
my 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 falls
generally to pay its debts (Including its payrolls) as such debts become
due.
(j) Accounts with respect to which the Account Debtor Is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 DAYS from the
invoice date.
(l) MINUS ALL CONTRA, FOREIGN, BANKRUPT, DIRECT FEDERAL GOVERNMENT
AGENCY ACCOUNTS.
Eligible Inventory. The words "Eligible Inventory" mean, at any time,
all of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free end clear of all security
interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be obsolete,
unsalable, damaged, defective, or unfit for further processing.
ERISA. The word "ERISA" means the Employee Retirement Income
Security Act of 1974, as amended.
Event of Default. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in
the section titled "EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of
termination of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation
each and all of the persons or entities granting a Security
Interest in any Collateral for the Indebtedness, including without
limitation all Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without
limitation each and all of the guarantors, sureties, and
accommodation parties in connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts
and liabilities of Borrower to Lender, or any one or more of them,
as well as all claims by Lender against Borrower, or any one or
more of them; whether now or hereafter existing, voluntary or
involuntary, due or not due, absolute or contingent, liquidated or
unliquidated; whether Borrower may be liable individually or
jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such
Indebtedness may be or hereafter may become barred by any statute
of limitations; and whether such Indebtedness may be or hereafter
may become otherwise unenforceable.
Inventory. The word "Inventory" means all of Borrower's raw every kind
and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter, acquires any
right, whether held by Borrower or others, and all documents of tile,
warehouse receipts, bills of lading, and all other documents
every typo covering all or any part of the foreging. Inventory includes
inventory temporarily out of Borrower's custody or possession and all
returns on Accounts.
Lender. The word "Lender" means Scripps Bank, its successors and
assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on
hand plus Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without
limitation any and all commercial loans and financial
accommodations from Lender to Borrower, whether now or hereafter
existing, and however evidenced, including without limitation those
loans and financial accommodations described herein or described on
any exhibit or schedule attached to this Agreement from time to
time.
Note. The word "Note" means and includes without limitation
Borrower's promissory note or notes, if any, evidencing Borrower's
Loan obligations in favor of Lender, as well as any substitute,
replacement or refinancing note or notes therefor.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security
agreements, mortgages, deeds of trust, and all other instruments,
agreements and documents, whether now or hereafter existing,
executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants,
arrangements, understandings or other agreements, whether created
by law, contract, or otherwise, evidencing, governing,
representing, or creating a Security Interest.
Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the
form of a lien, charge, mortgage, deed of trust, assignment,
pledge, chattel mortgage, chattel trust, factor's lien, equipment
trust, conditional sale, trust receipt, lien or title retention
contract, lease or consignment intended as a security device, or
any other security or lien interest whatsoever, whether created by
law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness
and liabilities of Borrower which have been subordinated by written
agreement to indebtedness owed by Borrower to Lender in form and
substance acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's
total assets excluding all intangible assets (i.e., goodwill,
trademarks patents, copyrights, organizational expenses, and
similar intangible items, but including leaseholds and leasehold
improvements) less total Debt.
Working Capital. The words "Working Capital" mean Borrower's
current assets, excluding prepaid expenses, less Borrower's current
liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to
time from the date of this Agreement to the Expiration Date, provided
the aggregate amount of such Advances outstanding at any time does not
exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow,
partially or wholly prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make
any Advance to or for the account of Borrower under this Agreement
is subject to the following conditions precedent, with all
documents, instruments, opinions, reports, and other items required
under this Agreement to be in form and substance satisfactory to
Lender:
(a) Lender shall have received evidence that this Agreement
and all Related Documents have been duly authorized, executed,
and delivered by Borrower to Lender.
(b) Lender shall have received such opinions of counsel,
supplemental opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been
duly authorized, created, and perfected with first lien
priority and shall be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit
shall have been executed by each Guarantor, delivered to
Lender, and be in full force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, books,
records, and operations, and Lender shall be satisfied as to
their condition.
(f) Borrower shall have paid to Lender all fees, costs, and
expenses specified in this Agreement and the Related Documents
as are then due and payable.
(g) There shall not exist at the time of any Advance a
condition which would constitute an Event of Default under
this Agreement, and Borrower shall have delivered to Lender
the compliance certificate called for in the paragraph below
titled "Compliance Certificate."
Making Loan Advances. Advances under the Line of Credit may be
requested either orally or in writing by authorized persons. Lender
may, but need not, require that all oral requests be confirmed in
writing. Each Advance shall be conclusively deemed to have been
made at the request of and for the benefit of Borrower (a) when
credited to any deposit account of Borrower maintained with Lender
or (b) when advanced in accordance with the instructions of an
authorized person. Lender, at its option, may set a cutoff time,
after which all requests for Advances will be treated as having
been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal
amount of the outstanding Advances shall exceed the applicable
Borrowing Base, Borrower, immediately upon written or oral notice
from Lender, shall pay to Lender an amount equal to the difference
between the outstanding principal balance of the Advances and the
Borrowing Base. On the Expiration Date, Borrower shall pay to
Lender in full the aggregate unpaid principal amount of all
Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
Loan Account. Lender shall maintain on its books a record of
account in which Lender shall make entries for each Advance and
such other debits and credits as shall be appropriate in connection
with the credit facility. Lender shall provide Borrower with
periodic statements of Borrower's account, which statements shall
be considered to be correct and conclusively binding on Borrower
unless Borrower notifies Lender to the contrary within thirty (30)
days after Borrower's receipt of any such statement which Borrower
deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of
all other Loans, obligations and duties owed by Borrower to Lender,
Borrower (and others, if required) shall grant to Lender Security
Interests in such property and assets as Lender may require (the
"Collateral"), including without limitation Borrower's present and future
Accounts, general intangibles, and Inventory. Lender's Security Interests
in the Collateral shall be continuing liens and shall include the
proceeds and products of the Collateral, including without limitation the
proceeds of any insurance. With respect to the Collateral, Borrower
agrees and represents and warrants to Lender:
Perfection of Security Interests. Borrower agrees to execute such
financing statements and to take whatever other actions are
requested by Lender to perfect and continue Lender's Security
Interests in the Collateral. Upon request of Lender, Borrower will
deliver to Lender any and all of the documents evidencing or
constituting the Collateral, and Borrower will note Lender's
interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the execution of
this Agreement, Borrower will execute one or more UCC financing
statements and any similar statements as may be required by
applicable law, and will file such financing statements and all
such similar statements in the appropriate location or locations.
Borrower hereby appoints Lender as its irrevocable attorney-in-fact
for the purpose of executing any documents necessary to perfect or
to continue any Security Interest. Lender may at any time, and
without further authorization from Borrower, file a carbon,
photograph, facsimile, or other reproduction of any financing
statement for use as a financing statement. Borrower will reimburse
Lender for all expenses for the perfection, termination, and the
continuation of the perfection of Lender's security interest in the
Collateral. Borrower promptly will notify Lender of any change in
Borrower's name including any change to the assumed business names
of Borrower. Borrower also promptly will notify Lender of any
change in Borrower's Social Security Number or Employer
Identification Number. Borrower further agrees to notify Lender in
writing prior to any change in address or location of Borrower's
principal governance office or should Borrower merge or consolidate
with any other entity.
Collateral Records. Borrower does now and at all times hereafter
shall, keep correct and accurate records of the Collateral, all of
which records shall be available to Lender or Lender's
representative upon demand for inspection and copying at any
reasonable time. With respect to the Accounts, Borrower agrees to
keep and maintain such records as Lender may require, including
without limitation information concerning Eligible Accounts and
Account balances and agings. With respect to the Inventory,
Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning
Eligible Inventory and records itemizing and describing the kind,
type, quality, and quantity of Inventory, Borrower's Inventory
costs and selling prices, and the daily withdrawals and additions
to Inventory.
Collateral Schedules. Concurrently with the execution and delivery
of this Agreement, Borrower shall execute and deliver to Lender
schedules of Accounts and Inventory and Eligible Accounts and
Eligible Inventory, in form and substance satisfactory to the
Lender. Thereafter and at such frequency as Lender shall require,
Borrower shall execute and deliver to Lender such supplemental
schedules of Eligible Accounts and Eligible Inventory and such
other matters and information relating to the Accounts and
Inventory as Lender may request.
Representations and Warranties Concerning Accounts. With respect to
the Accounts, Borrower represents warrants to Lender: (a) Each
Account represented by Borrower to be an Eligible Account for
purposes of this Agreement conforms to the requirements of the
definition of an Eligible Account; (b) All Account information
listed on schedules delivered to Lender will be true and correct,
subject to immaterial variance, and (c) Lender, its assigns, or
agents shall have the right at any time and at Borrower's expense
to inspect, examine, and audit Borrower's records and to confirm
with Account Debtors the accuracy of such Accounts.
Representations and Warranties Concerning Inventory. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All
Inventory represented by Borrower to be Eligible Inventory for purposes
of this Agreement conforms to the requirements of the definition of
Eligible Inventory; (b) All Inventory values listed on schedules
delivered to Lender will be true and correct, subject to immaterial
variance; (c) The value of the Inventory will be determined on a
consistent accounting basis; (d) Except as agreed to the contrary by
Lender in writing, all Eligible Inventory is now and at all times
hereafter will be in Borrower's physical possession end shall not be
held by others on consignment, sale on approval, or sale or return; (e)
Except as reflected in the Inventory schedules delivered to Lender, all
Eligible Inventory is now and at all times hereafter will be of good and
merchantable quality, free from defects; (f) Eligible Inventory is not now
and will not at any time hereafter be stored with a bailee, warehouseman, or
similar party without Lender's prior written consent, and, in such event,
Borrower will concurrently at the time of bailment cause
any such bailee, warehouseman, or similar party to issue and deliver to
Lender in form acceptable to Lender, warehouse receipts in Lender's
name evidencing the storage of Inventory; and (g) Lender, Its assigns,
or agents shall have the right at any time and at Borrower's expense to
inspect and examine, the Inventory and to check and 1~1 the same M to
quality, quantity, value, and condition.
Notification Basis. Borrower agrees and understands that this Loan
shall be on a notification basis pursuant to which Lender shall
directly collect and receive all proceeds and payments from the
Accounts in which Lender has a security interest. In order to
facilitate the foregoing, Borrower agrees to deliver to Lender,
upon demand, any and all of Borrower's records, ledger sheets,
payment cards, and other documentation, in the form requested by
Lender, with regard to the Accounts. Borrower further agrees that
Lender shall have the right to notify each Account Debtor, pay such
proceeds and payments directly to Lender, and to do any and all
other things as Lender may deem to be necessary and appropriate,
within its sole discretion, to carry out the terms and intent of
this Agreement. Lender shall have the further right, where
appropriate and within Lender's sole discretion, to file suit,
either in its own name or in the name of Borrower, to collect any
and all such Accounts. Borrower further agrees that Lender may take
such other actions, either in Borrower's name or Lender's name, as
Lender may deem appropriate within its sole judgment, with regard
to collection and payment of the Accounts, without affecting the
liability of Borrower under this Agreement or on the Indebtedness.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Lender, as of the date of this Agreement, as of the date of each
disbursement of Loan proceeds, as of the date of any renewal, extension
or modification of any Loan, and at all times any indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California
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(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 my of the
properties. (b) Borrower her 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 my 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 we,
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 err 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 my
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,
end (b) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expense 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 of a hazardous waste or substance on the properties. 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.
Year 2000. All software utilized by Borrower in the conduct of Borrower's
business will record, store, process, and present calendar dates hang
on or after January 1, 2000, and all information pertaining to such
calendar dates, in the same manner and with the same functionality as
this software does respecting calendar dates telling on or before
December 31, 1999. Further, Borrower warrants and represents that the
software or shall have all appropriate capabilities and compatibility
for operation and for handling century-aware or year 2000 compliant data.
Borrower also warrants and represents that the data-related user interface
functions, data-fields, and data-related program instructions and
functions of the software include the indication of the century.
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 then forty five (45) days
after the end of each month, Borrower's balance sheet and profit and loss
statement for the period ended, prepared and certified as correct to the
best knowledge end belief by Borrower's chief financial officer or other
officer or person acceptable to Lender. All financial reports required
to be provided under the Agreement shall be prepared in accordance with
generally accepted accounting principles, applied 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.
COVENANTS C CONDITIONS.
1. BORROWER TO MAINTAIN TTS PRIMARY BANKING RELATIONSHIP WITH BANK.
THIS.MEANS THE MAJORITY OF DEPOSIT ACCOUNTS, BALANCES AND LOANS. IF THE
BORROWER FAILS TO MEET THIS CONDITION, BANK MAY, AT ITS SOLE DISCRETION,
INCREASE THE RATE CHARGED ON ALL OF THE BORROWER'S INDEBTEDNESS BY UP TO
5% OR MAY DECLARE ALL INDEBTEDNESS OWED BY BORROWER TO BANK, IMMEDIATELY
DUE AND PAYABLE.
2. BORROWER WILL PROVIDE BANK WITH A COMPANY PREPARED FINANCIAL
STATEMENT FOR EACH MONTH END, TO BE RECEIVED NO LATER THAN 45 DAYS AFTER
MONTH END.
3. BORROWER WILL PROVIDE BANK WITH FISCAL YEAR END CPA AUDITED FINANICAL
STATEMENT WITHIN 120 DAYS OF FISCAL YEAR END.
4. BORROWER WILL PROVIDE BANK WITH A COPY OF ITS IRS RETURN CONCURRENT
WITH FILING.
5. TOTAL ADVANCES ARE RESTRICTED TO 80% OF ELIGIBLE ACCOUNTS RECEIVABLE,
PLUS 25% OF ELIGIBLE INVENTORY TO A MAXIMUM INVENTORY ADVANCE OF
$1,000,000.00. ELIGIBLE ACCOUNTS RECEIVABLE ARE DEFINED AS THOSE
ACCOUNTS AGED LESS THAN 90 DAYS AGED MINUS ALL CONTRA, FOREIGN,
BANKRUPT, DIRECT FEDERAL GOVERNMENT AGENCY ACCOUNTS AND AS FURTHER
DEFINED ELSEWHERE IN THIS LOAN AGREEMENT. ELIGIBLE INVENTORY IS DEFINED
AS RAW MATERIALS AND FINISHED GOODS, LESS THE ENTIRE ALLOWANCE FOR
INVENTORY RESERVE. ADVANCES AGAINST INVENTORY ARE FUTHER SUBJECT TO
APPROVAL BY BANK. EACH ADVANCE AGAINST INVENTORY MUST BE REOUESTED WITH
A REASON FOR THE ADVANCE, AND APPROVED BY THE BANK.
6. AN EXECUTED BORROWING BASE CERTIFICATE (COLLATERAL SCHEDULE) IS
REOUIRED FOR EACH ADVANCE.
7. BORROWER TO PROVIDE BANK WITH A MONTH END AGING OF ACCOUNTS
RECEIVABLE AND ACCOUNTS PAYABLE ON A MONTHLY BASIS, WITHIN 20 DAYS OF
EACH MONTH END.
8. BORROWER AUTHORIZES BANK OR TTS AGENT, TO CONDUCT ACCOUNTS RECEIVABLE
AUDTTS, AND OTHER SUNDRY FINANCIAL AUDITS AT BORROWER'S PLACE OF
BUSINESS AS BANK DEEMS NECESSARY. BORROWER AGREES TO PAY THE COST OF
SUCH AUDITS AND AUTHORIZES BANK TO DEBIT BORROWER'S ACCOUNTS TO PAY FOR
SAID AUDITS.
9. BORROWER TO PROVIDE BANK A COPY OF ITS 10-Q STATEMENTS, AND TTS 10K
STATEMENTS, CONCURRENTLY WITH FILING.
10. BORROWER TO PROVIDE BANK WITH A LISTING OF ACCOUNTS RECEIVABLES,
INCLUDING NAME, ADDRESS AND TELEPHONE NUMBER FOR EACH ACCOUNT, WHENEVER
REOUESTED BY BANK.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory
security interest in, and hereby assigns, conveys, delivers, pledges,
and transfers to Lender all Borrower's right, title and interest in and to,
Borrower's accounts with Lender (whether checking, savings, or some
other account), including without limitation all accounts held jointly with
someone else and all accounts Borrower may open in the future, excluding
however all IRA and Keogh accounts, and all trust accounts for which the
grant of a security interest would be prohibited by law. Borrower
authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such
accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of
Default under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
Default In Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or
sales agreement, or any other agreement, in favor of any other creditor
or person that may materially affect any of Borrower's property or
Borrower's or any Grantor's ability to repay the Loans or perform their
respective obligations under this Agreement or any of the Related
Documents.
False Statement. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.
Detective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfected Security Interest) at
any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against
Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by Judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the Indebtedness,
or by any governmental agency. This includes a garnishment, attachment,
or levy on or of any of Borrower's deposit accounts with Lender. However,
this Event of Default shall not apply if there is a good faith dispute
by Borrower or Grantor, as the case may be, as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding, and if Borrower or Grantor gives Lender written
notice of the creditor or forfeiture proceeding and furnishes reserves
or a surety bond for the creditor or forfeiture proceeding satisfactory to
Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness. Lender, at its
option, may, but shall not be required to, permit the Guarantor's estate to
assume unconditionally the obligations arising under the guaranty in a
manner satisfactory to Lender, and, in doing so, cure the Event of
Default.
Change In Ownership. Any change In ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been
given a notice of a similar default within the preceding twelve (12)
months, it may be cured (and no Event of Default will have occurred) if
Borrower or Grantor, as the case may be, after receiving written notice
from Lender demanding cure of such default: (a) cures the default within
fifteen (15) days; or (b) if the cure requires more than fifteen (15)
days, immediately initiates steps which Lender deems in Lender's sole
discretion to be sufficient to cure the default and thereafter continues
and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur,
except where otherwise provided in this Agreement or the Related
Documents, all commitments and obligations of Lender under this
Agreement or the Related Documents or any other agreement immediately will
terminate (including any obligation to make Loan Advances or
disbursements), and, at Lender's option, all Indebtedness immediately
will become due and payable, all without notice of any kind to Borrower,
except that in the case of an Event of Default of the type described in
the "Insolvency" subsection above, such acceleration shall be automatic
and not optional. In addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all
of Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy
shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Borrower or
of any Grantor shall not affect Lender's right to declare a default and to
exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a
part of this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted
by Lender In the State of California. It there is a lawsuit, Borrower
agrees upon Lender's request to submit to the jurisdiction of the courts
of San Diego County, the State of California. This Agreement shall be
governed by and construed in accordance with the laws of the State of
California.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the
provisions of this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any rights
to privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well as
all notices of any repurchase of such participation interests. Borrower
also agrees that the purchasers of any such participation interests will
be considered as the absolute owners of such interests in the Loans and
will have all the rights granted under the participation agreement
or agreements governing the sale of such participation interests.
Borrower further waives all rights of offset or counterclaim that it
may have now or later against Lender or against any purchaser of such
a participation interest and unconditionally agrees that either Lender
or such purchaser may enforce Borrower's obligation under the Loans
irrespective of the failure or insolvency of any holder of any interest
in the Loans. Borrower further agrees that the purchaser of any such
participation interests may enforce its interests irrespective of any
personal claims or defenses that Borrower may have against Lender.
Borrower Information. Borrower consents to the release of information on
or about Borrower by Lender in accordance with any court order, law or
regulation and in response to credit inquiries concerning Borrower.
Non-Liability of Lender. The relationship between Borrower and Lender is
a debtor and creditor relationship and not fiduciary in nature, nor is
the relationship to be construed as creating any partnership or joint
venture between Lender and Borrower. Borrower is exercising its own
judgment with respect to Borrower's business. All information supplied
to Lender is for Lender's protection only and no other party is entitled to
rely on such information. There is no duty for Lender to review, inspect,
supervise, or inform Borrower of any matter with respect to Borrower's
business. Lender and Borrower intend that Lender may reasonably rely on
all information supplied by Borrower to Lender, together with all
representations and warranties given by Borrower to Lender, without
investigation or confirmation by Lender and that any investigation or
failure to investigate will not diminish Lender's right to so rely.
Notice of Lender's Breach. Borrower must notify Lender in writing of any
breach of this Agreement or the Related Documents by Lender and any other
claim, cause of action or offset against Lender within thirty (30) days
after the occurrence of such breach or after the accrual of such claim
cause of action or offset. Borrower waives any claim, cause of action or
offset for which notice is not given in accordance with this paragraph.
Lender is entitled to rely on any failure to give such notice.
Borrower Indemnification. Borrower shall indemnify and hold Lender
harmless from and against all claims, costs, expenses, losses, damages,
and liabilities of any kind, including but not limited to attorneys' fees
and expenses, arising out of any matter relating directly or indirectly
to the Indebtedness, whether resulting from internal disputes of the
Borrower, disputes between Borrower and any Guarantor, or whether
involving any third parties, or out of any other matter whatsoever
related to this Agreement or the Related Documents, but excluding any
claim or liability which arises as a direct result of Lender's gross
negligence or willful misconduct. This indemnity shall survive full
repayment and satisfaction of the Indebtedness and termination of this
Agreement.
Counterparts. This Agreement may be executed in multiple counterparts,
each of which, when so executed, shall be deemed an original, but all
such counterparts, taken together, shall constitute one and the same
Agreement.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that
amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including attorneys' fees for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower
also will pay any court costs, in addition to all other sums provided by
law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimilie(unless otherwise
required by law), 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 DECEMBER 28, 1998.
BORROWER: FOTOBALL U.S.A. INC.
By: /s/ David G. Forester
--------------------------
DAVID G. FORSTER, Vice President
LENDER:
Scripps Bank<PAGE>
CORPORATE RESOLUTION TO BORROW
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
I, the undersigned Secretary or Assistant Secretary of FOTOBALL U.S.A.
INC. (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of
California as a corporation for profit, with its principal office at
3738 RUFFIN ROAD, SAN DIEGO, CA 92123, and is duly authorized to transact
business in the State of California.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and held on December 28, 1998 at which a quorum was present
and voting, or by other duly authorized corporate action in lieu of a
meeting, the following resolutions were adopted:
BE IT RESOLVED, that any one (1) of the following named officers,
employees. or agents of this Corporation, whose actual signatures are
shown below:
NAME POSITION ACTUAL SIGNATURE
/s/ David G. Forester
- ----------------------------------
DAVID G. FORSTER Vice President/CFO
acting for and on behalf of the Corporation and as its act and deed be,
and he or she hereby is, authorized and empowered:
Borrow Money. To borrow from time to time from Scripps Bank ("Lender"),
on such terms as may be agreed upon between the Corporation and Lender,
such sum or sums of money as in his or her judgment should be borrowed
however, not exceeding at any one time the amount of Three Million Five
Hundred Thousand & 00/100 Dollars (S3,500.000.00), in addition to such
sum or sums of money as may be currently borrowed by the Corporation
from Lender.
Execute Notes. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accommodations and/or revision
agreement or other evidence of obligation of the Corporation, on
Lender's forms, at such rates of interest and on such terms as may be agreed
upon, evidencing the sums of money so borrowed or any indebtedness of the
Corporation to Lender, and also to execute and deliver to Lender one or
more renewals, extensions, modifications, refinancing, consolidations,
or substitutions for one or more of the notes, any portion of the notes, or
any other evidence of credit accommodations.
Grant Security. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of
any loans or credit accommodations so obtained, any promissory notes so
executed (including any amendments to or modifications, renewals and
extensions of such promissory notes), or any other or further
indebtedness of the Corporation to Lender at any time owing, however the
same may be evidenced, any property now or hereafter belonging to the
Corporation or in which the Corporation now or hereafter may have an
interest including without limitation all real property and all personal
property (tangible or intangible) of the Corporation. Such property may
be mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered
at the time such loans are obtained or such indebtedness is incurred, or
at any other time or times, and may be either in addition to or in lieu
of any property theretofore mortgaged, pledged, transferred, endorsed,
hypothecated, or encumbered.
Execute Security Documents. To execute and deliver to Lender the forms
of mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be required
by Lender, and which shall evidence the terms and conditions under and
pursuant to which such liens and encumbrances, or any of them, are given;
and also to execute and deliver to Lender any other written instruments,
any chattel paper, or any other collateral, of any kind or nature, which
Lender may deem necessary or proper in connection with or pertaining to
the giving of the liens and encumbrances.
Negotiate Items. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation in which the Corporation may
have an interest, and either to receive cash for the same or to cause
such proceeds to be credited to the account of the Corporation with
Lender, or to cause such other disposition of the proceeds derived
therefrom as they may deem advisable.
Further Acts. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay
any and all fees and costs, and to execute and deliver such other
documents and agreements as he or she may in his or her discretion deem
reasonably necessary or proper in order to carry into effect the
provisions of these Resolutions. The following person or persons
currently are authorized to request advances and authorize payments under
the line of credit until Lender receives written notice of revocation of
their authority: DAVID G. FORSTER, Vice President/CFO.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these Resolutions and performed prior to the passage of these Resolutions
are hereby ratified and approved, that these Resolutions shall remain in
full force and effect and Lender may rely on these Resolutions until
written notice of his or her revocation shall have been delivered to and
received by Lender. Any such notice shall not affect any of the
Corporation's agreements or commitments in effect at the time notice is
given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in
writing at Lender's address shown above (or such other addresses as
Lender may designate from time to time) prior to any (a) change in the
name of the Corporation, (b) change in the assumed business name(s) of
the Corporation, (c) change in the management of the Corporation, (d)
change in the authorized signer(s), (e) conversion of the Corporation to
a new or different type of business entity, or (f) change in any other
aspect of the Corporation that directly or indirectly relates to any
agreements between the Corporation and Lender. No change in the name of
the Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that at a special meeting of the shareholders of the
Corporation, duly called and held (or by consent of the shareholders in
accordance with the laws of the State of California), not less than the
required percentage of shareholders adopted or consented to all the
Resolutions set forth above.
I FURTHER CERTIFY that the officer, employee, or agent named above is
duly elected, appointed, or employed by or for the Corporation, as the
case may be, and occupies the position set opposite the name; that the
foregoing Resolutions now stand of record on the books of the
Corporation; and that the Resolutions are in full force and effect and
have not been modified or revoked in any manner whatsoever. The
Corporation has no corporate seal, and therefore, no seal is affixed to
this certificate.
IN TESTIMONY WHEREOF, I have hereunto set my hand on December 28, 1998
and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED AND ATTESTED BY:
/s/ Karen M, Betro<PAGE>
AGREEMENT TO PROVIDE INSURANCE
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
INSURANCE REQUIREMENTS. FOTOBALL U.S.A., INC. ("Grantor) understands
that insurance coverage is required in connection with the extending of
a loan or the providing of other financial accommodations to Grantor by
Lender. These requirements are set forth in the security documents. The
following minimum insurance coverages must be provided on the following
described collateral (the Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type. All risks, including fire, then and liability.
Amount. Full insurable value.
Basis. Replacement value.
Endorsements. Lender's loss payable clause with stipulation
that coverage will not be cancelled or diminished without a
minimum of ten (10) days' prior written notice to Lender.
Deductibles. $500.00.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Lender.
Grantor understands that credit may not be denied solely because
insurance was not purchased through Lender.
INSURANCE MAILING ADDRESS. All documents and other materials relating to
insurance for this loan should be mailed, delivered or directed to the
following address:
SCRIPPS BANK - NOTE DEPARTMENT
P.O. BOX 420790
SAN DIEGO, CA 92142
(619) 268-3120
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, ten
(10) days from the date of this Agreement, evidence of the required
insurance as provided above, with an effective date of December 28,
1998, or earlier.
AUTHORITION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Lender to provide to any person (Including my
insurance agent or company) all information Lender deems appropriate,
whether regarding the Collateral, the loan or other financial
accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
DECEMBER 28, 1998.
GRANTOR:
FOTOBALL U.S.A., INC.
/S/ David G. Forester
- ----------------------
DAVID G. FORESTER
President/Chief Financial Officer
FOTOBALL USA, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
12 MONTHS ENDED 12 MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ ------------------
<S> <C> <C>
BASIC SHARES CALCULATION:
Reconciliation of weighted average
number of shares outstanding to amount
used in basic earnings per share
computation:
Weighted average number of shares outstanding 2,676,742 2,694,242
Net income (loss) $(2,796,932) $ 597,874
---------- ---------
BASIC EARNINGS PER SHARE $ (1.04) $ .22
========== ==========
DILUTED SHARES CALCULATION:
Reconciliation of weighted average number
of shares outstanding to amount used in
diluted earnings per share computation:
Weighted average number of shares outstanding 2,676,742 2,694,242
Add-shares issuable from assumed exercise of
options(1) -- 79,928
2,676,742 2,774,170
---------- ---------
ADJUSTMENTS TO NET INCOME:
Net income (loss) $(2,796,932) $ 597,874
---------- ----------
DILUTED EARNINGS PER SHARE $ (1.04) $ .22
========== ==========
</TABLE>
(1) The weighted average number of common share equivalents outstanding during
the twelve month period ended December 31, 1997 for the diluted share
calculation is the same as basic because the exercise or conversion of any
potential shares increases the number of shares inthe denominator and results
in a lower loss per share. In that situation, the potential shares are
antidilutive and not included in the Company's EPS calculation.
<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, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,498
<SECURITIES> 0
<RECEIVABLES> 3,188,633
<ALLOWANCES> 147,000
<INVENTORY> 3,438,552
<CURRENT-ASSETS> 6,736,291
<PP&E> 2,533,436
<DEPRECIATION> 1,406,885
<TOTAL-ASSETS> 7,894,609
<CURRENT-LIABILITIES> 1,851,601
<BONDS> 0
0
0
<COMMON> 26,992
<OTHER-SE> 5,888,505
<TOTAL-LIABILITY-AND-EQUITY> 7,894,609
<SALES> 19,147,728
<TOTAL-REVENUES> 19,147,728
<CGS> 11,590,631
<TOTAL-COSTS> 6,448,168
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,183
<INCOME-PRETAX> 1,030,874
<INCOME-TAX> 433,000
<INCOME-CONTINUING> 597,874
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 597,874
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
