<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
TRANSITION REPORT PURSUANT TO 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.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 33 - 0614889
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3738 Ruffin Road, San Diego, California, 92123
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(619) 467 - 9900
-------------------------------
(Issuer's telephone number)
Check whether the issuer (1) 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
--- ---
As of November 1, 1999 the Company had 3,533,037 shares of its common
stock issued and outstanding.
Transitional Small Business Disclosure Format Yes No X
--- ---
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<PAGE>
FOTOBALL USA, INC.
INDEX
Sequential
Page No.
----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1998 and
September 30, 1999 3
Condensed Statement of Operations for the three months and
nine months ended September 30, 1998 and 1999 4
Condensed Statement of Cash Flows for the nine months
ended September 30, 1998 and 1999 5
Notes to Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis or Plan of Operations 9-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2 of 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 8,498 $1,995,587
Accounts receivable 3,041,633 4,963,769
Inventories 3,438,552 3,817,424
Prepaid expenses and other 157,608 298,866
Deferred income taxes 90,000 794,000
----------- -----------
TOTAL CURRENT ASSETS 6,736,291 11,869,646
----------- -----------
PROPERTY AND EQUIPMENT, net 1,126,551 1,297,876
----------- -----------
OTHER ASSETS
Deposits and other 31,767 30,185
----------- -----------
TOTAL OTHER ASSETS 31,767 30,185
----------- -----------
$ 7,894,609 $13,197,707
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note Payable to Bank $ 400,000 $ --
Current portion of capital leases 95,970 125,818
Accounts payable and accrued expenses 1,315,831 1,970,446
Income Taxes Payable 39,800 (22,000)
----------- -----------
TOTAL CURRENT LIABILITIES 1,851,601 2,074,264
LONG TERM LIABILITIES
Capital leases, net of current portion 154,503 270,696
----------- -----------
TOTAL LIABILITIES 2,006,104 2,344,960
----------- -----------
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 as of December 31, 1998
and 3,495,074 shares as of September 30, 1999 26,992 34,951
Additional paid-in capital 8,590,994 11,430,521
Accumulated deficit (2,729,481) (612,725)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 5,888,505 10,852,747
----------- -----------
$7,894,609 $13,197,707
=========== ===========
</TABLE>
3 of 16
<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1999 1998 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $4,675,501 $9,797,852 $12,462,847 $21,672,411
COST OF SALES 2,796,056 5,754,368 7,772,688 13,021,915
---------- ---------- ----------- -----------
GROSS PROFIT 1,879,445 4,043,484 4,690,159 8,650,496
---------- ---------- ----------- -----------
OPERATING EXPENSES
Royalties 417,152 693,476 919,505 1,575,629
Marketing 559,861 929,832 1,428,932 2,134,697
General and administrative 555,596 1,292,774 1,569,477 2,650,182
Depreciation and amortization 80,629 102,012 235,821 300,248
---------- ---------- ----------- -----------
TOTAL OPERATING EXPENSES 1,613,238 3,018,094 4,153,735 6,660,756
---------- ---------- ----------- -----------
INCOME FROM OPERATIONS 266,207 1,025,390 536,424 1,989,740
---------- ---------- ----------- -----------
OTHER EXPENSE
Interest expense 28,101 47,394 55,536 108,109
Interest income (809) (7,473) (9,088) (9,127)
---------- ---------- ----------- -----------
TOTAL OTHER EXPENSE 27,292 39,921 46,448 98,982
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAX 238,915 985,469 489,976 1,890,758
INCOME TAX EXPENSE(BENEFIT) 95,200 (316,000) 195,200 (226,000)
---------- ---------- ----------- -----------
NET INCOME $ 143,715 $1,301,469 $ 294,776 $ 2,116,758
========== ========== =========== ===========
NET INCOME PER COMMON SHARE:
BASIC $ .05 $ .43 $ .11 $ .75
========== ========== =========== ===========
DILUTED $ .05 $ .40 $ .11 $ .70
========== ========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
BASIC 2,694,242 3,048,724 2,692,575 2,832,685
========== ========== =========== ===========
DILUTED 2,823,065 3,254,832 2,772,654 3,024,993
========== ========== =========== ===========
</TABLE>
4 of 16
<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------
1998 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 294,776 $ 2,116,758
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 248,237 320,996
Amortization of stock compensation expense 7,425 25,816
Changes in operating assets and liabilities
Accounts receivable (1,543,390) (1,922,136)
Inventories (1,005,144) (378,872)
Prepaid expenses and other (20,618) (141,258)
Deferred income taxes 163,000 (704,000)
Accounts payable and accrued expenses 544,971 654,614
Income taxes payable -- (61,800)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,310,743) (89,882)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (134,113) (492,321)
----------- -----------
Decrease in long term deposits 34,615 1,582
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (99,498) (490,739)
CASH FLOWS FROM FINANCING ACTIVITIES
Net additions (reductions) of short-term credit facilities 700,000 (400,000)
Proceeds (net of repayments) from capitalized leases (46,298) 146,041
Proceeds from exercise of stock options 12,825 148,034
Proceeds from warrant exercise -- 2,673,635
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 666,527 2,567,710
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (743,714) 1,987,089
CASH AND EQUIVALENTS, Beginning of period 764,855 8,498
----------- -----------
CASH AND EQUIVALENTS, End of period $ 21,141 $ 1,995,587
=========== ===========
</TABLE>
5 of 16
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
1. CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet as of September 30, 1999, the condensed
statement of operations for the three months and nine months ended
September 30, 1998 and 1999, and the condensed statement of cash flows for
the nine months ended September 30, 1998 and 1999 have been prepared by the
Company without audit. A quarterly review was completed by the Company's
auditors for the three months ended September 30, 1999. In the opinion of
management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. It is suggested that
these condensed financial statements are read in conjunction with the
financial statements and notes thereto included in the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998.
The results of operations for the three months and nine months ended
September 30, 1999 are not necessarily indicative of the results of
operations to be expected for the year ending December 31, 1999.
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 deferred
tax assets and the provision for discontinued and excess inventories.
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, likeness and
other identifying marks and images borne by many of its products pursuant
to license arrangements with MLB, NFL, Nickelodeon, NHL and, to a lesser
extent, colleges and universities. The Company's licensing arrangements
expire at various times in the future. The following table summarizes the
Company's significant license agreements expiring within the next six
months and their renewal periods, in expiration date order:
Licensor Product Expiration Date
-------- ------- ---------------
MLBPA Baseball December 31, 1999
MLBP Baseball December 31, 1999
Nickelodeon Rugrats (USA) December 31, 1999
NFL Team Logo Football March 31, 2000
The Company believes that its relationships with these licensors are
satisfactory and anticipates that each of the expiring license agreements
will be renewed on acceptable terms and conditions. The non-renewal or
termination of one or more of the Company's significant licenses could have
a material adverse effect on the Company's business.
Page 6 of 16
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(CONTINUED)
VARIABILITY OF GROSS MARGINS - Historically, the Company has realized
higher gross margins on its retail sales as compared to promotional sales.
The Company realized gross margins of 39% during 1998 and margins have
increased to 40% through the first nine months of 1999. The Company's gross
margins may fluctuate, particularly between quarters, based in part on the
concentration of promotions, retail sales and product mix during the
reporting period. The types of products sold, the size of the promotion and
the extent of competition also may create variability in realized gross
margins.
VARIABILITY OF OPERATING RESULTS; SEASONALITY - The Company has
historically experienced significant quarter-to-quarter variability in its
sales and net income resulting primarily from two factors. The first factor
is the seasonality of the sporting industry and the effect this has on the
Company's licensed sports product business. The continued introduction of
quality product lines involving a diverse group of sports and entertainment
related products will help mitigate this seasonality. The second factor,
which significantly contributed to prior years' variability of the
Company's operations, was its dependence on the promotions business.
However, the Company has successfully grown the retail distribution channel
of the business to help mitigate this variability. The Company's retail
business during the first nine months of 1999 accounted for approximately
84% of total sales. The Company presently does not anticipate that its
existing business mix between retail and promotional sales will change
significantly in the future.
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 three-year
employment agreement with the Company, commencing on August 11, 1999,
which, among other things, precludes Mr. Favish from competing with the
Company for a period of two years following termination of his employment
with the Company. The loss of the services of Mr. Favish would have a
material adverse effect on the Company's business and prospects. The
Company maintains "key man" life insurance on the life of Michael Favish in
the amount of $1,000,000.
DEPENDENCE ON SUPPLIERS - In 1998, the Company purchased approximately 87%
of its raw material and finished goods, 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 the Company's products because products originating from China could be
subjected to substantially higher rates of duty.
Page 7 of 16
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
December 31, 1998 September 30, 1999
----------------- ------------------
Accounts receivable - trade $ 3,188,445 $ 5,213,769
Less allowance for bad debt (146,812) (250,000)
----------- -----------
Total accounts receivable $ 3,041,633 $ 4,963,769
=========== ===========
4. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
on the first-in first-out (FIFO) method. Inventories consist of the
following:
December 31, 1998 September 30, 1999
----------------- ------------------
Finished goods $ 1,700,148 $ 2,118,279
Raw material 1,738,404 1,699,145
----------- -----------
Total inventory $ 3,438,552 $ 3,817,424
=========== ===========
Page 8 of 16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The following table sets forth certain unaudited operating data (in
dollars and as a percentage of the Company's sales) for the periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
1998 1999 1998 1999
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 4,675,501 100% $9,797,852 100% $12,462,847 100% $21,672,411 100%
Cost of Sales 2,796,056 60 5,754,368 59 7,772,688 62 13,021,915 60
Operating Expenses 1,613,238 35 3,018,094 31 4,153,735 33 6,660,756 31
Operating Income 266,207 6 1,025,390 10 536,424 4 1,989,740 9
Interest Expense 28,101 1 47,394 - 55,536 - 108,109 -
Interest Income (809) - (7,473) - (9,088) - (9,127) -
Income before Income Tax 238,915 5 985,469 10 489,976 4 1,890,758 9
Income Tax Expense (Benefit) 95,200 2 (316,000) (3) 195,200 2 (226,000) (1)
Net Income $ 143,715 3% $1,301,469 13% $ 294,776 2% $2,116,758 10%
</TABLE>
For the Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1999:
SALES:
Sales increased 110% for the three months ended September 30, 1999 from
sales for the three months ended September 30, 1998. The Company's retail sales
grew 114% and its promotion sales grew 78% over the prior year period. For the
three months ended September 30, 1999, retail sales constituted 89% of total
sales, as compared to retail sales constituting 88% of total sales for the three
months ended September 30, 1998. Contributing to the rapid retail sales growth
were national account sales, which are expanding both in sales per store and the
number of stores serviced, and the introduction of new product lines featuring
new designs. Additionally, the Company's entertainment/amusement-related
business experienced significant growth during the three months ended September
30, 1999 due to certain millennium-related products. Although the Company is
concentrating on the growth of the retail business, the Company will continue to
pursue the promotions business aggressively, focusing on leveraging its sports
league relationships and product development. Promotion sales increased in 1999
as compared to 1998 due primarily to one large baseball promotion and several
one-time college and professional football promotions. For the three months
ended September 30, 1999, promotion sales were 11% of sales compared to
promotion sales of 12% for the three months ended September 30, 1998.
GROSS PROFIT:
Gross profit increased 115% for the three months ended September 30,
1999 from gross profit for the three months ended September 30, 1998. Gross
profit increased on an absolute basis as a result of the significant increase in
total sales. The Company's gross margin increased to 41% for the three months
ended September 30, 1999 from 40% for the three months ended September 30, 1998.
The gross margins as a percentage of sales increased from 1998 to 1999 due to a
greater percentage of higher margin retail and promotional sales, combined with
the introduction of new and exciting higher margin product lines. As
Page 9 of 16
<PAGE>
previously noted, the Company's gross margins may fluctuate, particularly
between quarters, based on several factors including sales and product mix. See
Footnote 2, "Notes to Condensed Financial Statements."
OPERATING EXPENSES:
Operating expenses constituted 31% of sales for the three months ended
September 30, 1999, as compared to 35% of sales for the three months ended
September 30, 1998. The increase in operating expenses on an absolute basis was
due primarily to increased royalty expenses and sales commissions resulting from
significantly higher sales and an increase in general and administrative
expenses overall. Operating expenses as a percentage of sales decreased due to
the fixed component of marketing and general and administrative expenses being
allocated over significantly higher sales volumes.
Royalty expense increased 66% for the three months ended September 30,
1999 from royalty expense for the three months ended September 30, 1998 due to a
significant increase in overall sales. As a percentage of sales, royalty expense
decreased to 7% for the three months ended September 30, 1999, as compared to 9%
for the three months ended September 30, 1998 due primarily to an increase in
sales of non-royalty bearing products introduced during 1999. As previously
noted, the Company is dependent upon its licensing arrangements and their
successful renewal. See Footnote 2, "Dependence Upon Licensing Arrangements."
Marketing expenses increased 66% for the three months ended September
30, 1999 from marketing expenses for the three months ended September 30, 1998.
Marketing expenses as a percentage of sales decreased to 9% of sales for the
three months ended September 30, 1999 from 12% of sales for the three months
ended September 30, 1998, primarily as a result of allocating the fixed
components of marketing expenses over significantly higher sales volume.
Marketing expenses increased from 1998 to 1999 in absolute terms primarily due
to an increase in outside sales commissions related to the Company's retail
business and an increase in headcount related items.
General and administrative expenses increased 133% for the three months
ended September 30, 1999 from general and administrative expenses for the three
months ended September 30, 1998. This increase is a result of increases in rent
expense, salary expenses related to additional personnel and professional
services fees. As a percentage of sales, general and administrative expenses
increased slightly to 13% for the three months ended September 30, 1999 from 12%
for the three months ended September 30, 1998. The Company anticipates that
general and administrative expenses will continue to increase as a result of the
need to expand the Company's infrastructure to accommodate the continued growth
anticipated in the future.
INTEREST EXPENSE AND INCOME:
Interest expense was $47,394 for the three months ended September 30,
1999, an increase of $19,293 from interest expense of $28,101 for the comparable
period in 1998. The increase reflects interest charges on the line of credit as
a result of a higher average loan balance reached during the period ended
September 30, 1999, combined with interest charges from capitalized equipment
leases. The Company paid down its revolving line of credit entirely during the
three months ended September 30, 1999, utilizing a portion of the proceeds from
the warrants exercised during the period, as more fully discussed in "Liquidity
and Capital Resources". Total capitalized equipment and machinery leases
increased to $397,000 at September 30, 1999 from total capitalized equipment and
machinery leases of $274,000 at September 30, 1998. Interest income was $7,473
for the three months ended September 30, 1999, an increase of $6,664 from
interest income of $809 for the comparable period in 1998. This increase was
primarily due to proceeds received from the exercise of warrants during the
quarter that were invested in an interest bearing depository account, as more
fully discussed in "Liquidity and Capital Resources".
Page 10 of 16
<PAGE>
INCOME TAX EXPENSE (BENEFIT):
The Company incurred an income tax benefit of ($316,000) for the three
months ended September 30, 1999 compared to income tax expense of $95,200, or a
40% effective tax rate, for the prior year period. Had the Company been taxed at
a combined federal and state effective tax rate of 40% in 1999, then diluted
earnings per share would have been as follows:
Income before income tax 985,469
Proforma income tax expense (40% tax rate) 394,188
---------
Proforma net income $ 591,281
=========
Proforma diluted earnings per share $ .18
=========
As of September 30, 1999 the Company had deferred tax assets of
approximately $794,000 consisting primarily of valuation reserves. The income
tax benefit was primarily due to the elimination of a deferred tax valuation
allowance established in a prior year for uncertainty relating to the
utilization of a net operating loss carryforward. As of September 30, 1999, the
Company has utilized all of its available net operating loss carryforward.
For the Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1999:
SALES:
Sales increased 74% for the nine months ended September 30, 1999 from
sales for the nine months ended September 30, 1998. The increase was due
primarily to an 84% increase in the Company's retail sales during the nine
months ended September 30, 1999, as compared to September 30, 1998. Promotion
sales increased 36% for the nine months ended September 30, 1999, as compared to
September 30, 1998. Sales increased in all product categories except baseball,
with the most significant increases in football (159%), basketball (43%), lapel
pins, soccer and hockey product lines. Baseball sales decreased by 19% for the
period ended September 30, 1999 compared to the prior year period due primarily
to sales related to the breaking of the home run record in 1998. Other product
lines increased due to new product development design introductions. Promotion
sales increased in 1999 as compared to 1998 due primarily to two major baseball
promotions and several one-time college and professional football promotions.
GROSS PROFIT:
Gross profit increased 84% for the nine months ended September 30, 1999
from gross profit for the nine months ended September 30, 1998. As previously
noted, gross profit increased on an absolute basis in 1999 due to higher sales.
The Company's gross margin increased from 38% to 40% for the nine months ended
September 30, 1998 and 1999, respectively, reflecting a greater percentage of
higher margin retail sales.
OPERATING EXPENSES:
Operating expenses constituted 31% of sales for the nine months ended
September 30, 1999, a decrease from 33% of sales for the nine months ended
September 30, 1998. Operating expenses as a percentage of sales decreased as a
result of the Company's fixed operating costs being allocated over substantial
increases in sales volumes. Operating expenses on an absolute basis increased
60% during this period for the reasons discussed below.
Royalty expense increased 71% for the nine months ended September 30,
1999 from royalty expense for the nine months ended September 30, 1998. Royalty
expense as a percentage of sales remained constant at 7% for the nine months
ended September 30, 1999 and 1998 respectively, principally due to a higher mix
of sales coming from non-licensed products in 1999 versus 1998, offset by a
substantial growth in total sales in 1999.
Page 11 of 16
<PAGE>
Marketing expenses increased 49% for the nine months ended September
30, 1999 from marketing expenses for the nine months ended September 30, 1998.
Marketing expenses as a percentage of sales decreased to 10% for the nine months
ended September 30, 1999 from 11% for the nine months ended September 30, 1998,
primarily as a result of the non-variable component of marketing expenses, such
as wages and exhibiting costs, being allocated over substantially higher sales
volumes.
General and administrative expenses increased 69% for the nine months
ended September 30, 1999 from general and administrative expenses for the nine
months ended September 30, 1998. General and administrative expenses as a
percentage of sales decreased to 12% for the nine months ended September 30,
1999 from 13% for the nine months ended September 30, 1998. This decrease is a
result of several factors, including the Company's sales growing at a faster
rate than the Company's fixed costs. Although the Company's sales are growing at
a significant rate, the Company strives to keep down overhead costs in relation
to total sales, although absolute increases are anticipated due to the Company's
overall growth rate.
INTEREST EXPENSE:
Interest expense was $108,109 for the nine months ended September 30,
1999, an increase of $52,573 from interest expense of $55,536 for the comparable
period in 1998. The increase in interest expense reflects the additional
borrowings under the Company's revolving line of credit during fiscal year 1999
over 1998. The Company does not anticipate use of the revolving line of credit
for the remainder of 1999, thereby decreasing interest expense for the fourth
quarter of 1999.
INCOME TAX EXPENSE (BENEFIT):
The Company received a ($226,000) income tax benefit for the nine
months ended September 30, 1999 compared to income tax expense of $195,200, or a
40% effective tax rate, for the prior year period. Had the Company been taxed at
a combined federal and state effective tax rate of 40% in 1999, then diluted
earnings per share would have been as follows:
Income before income taxes $ 1,890,757
Proforma income tax expense (40% tax rate) 756,303
-----------
Proforma net income $ 1,134,454
===========
Proforma diluted earnings per share $ .38
===========
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital increased $4,910,692, or 101%, during
1999 to $9,795,382 at September 30, 1999 from $4,884,690 at December 31, 1998.
Accounts receivable increased by approximately $1.9 million and inventory
increased by approximately $380,000 from December 31, 1998 to September 30,
1999. The increase in accounts receivable is due primarily to higher sales in
1999, as compared to 1998 and due to a greater percentage of total sales derived
from national retail accounts which typically require longer repayment terms
than the Company's normal thirty-day credit terms. Since the Company expects an
increasing contribution from national retailers in the future, it expects a
corresponding moderate increase in its accounts receivable days sales
outstanding. The Company's increase in inventory is due primarily to the rapid
growth in its retail business requiring on-hand inventory items, its expanding
line of products and its expectation of increasing demand for these products in
future periods.
Cash flow used in operations decreased by approximately $1.2 million,
or 93%, to cash used in operations of $89,882 for the nine months ended
September 30, 1999 from cash used in operations of $1,310,743 for the nine
months ended September 30, 1998. This decrease can be attributed primarily to
approximately $1.8 million, or 618%, in additional net income generated during
the first nine months of 1999 compared to 1998, partially offset by higher
accounts receivable and deferred income taxes.
Page 12 of 16
<PAGE>
Cash and equivalents totaled $1,995,587 at September 30, 1999, an
increase of $1,987,089 from cash and equivalents of $8,498 at December 31, 1998.
This increase can be attributed primarily to the net proceeds received from the
exercise of warrants, as more fully explained below. The Company also utilized
cash resources for the acquisition of non-current assets, including property and
equipment. For the next twelve months, the Company anticipates that its capital
expenditure requirements will approximate $700,000, which will be used to
purchase additional product molds, production machinery, leasehold improvements
and office and computer equipment.
On June 24, 1999, the Company announced that it reduced the exercise
price of its publicly traded redeemable common stock purchase warrants from
$6.50 to $4.00 and extended the term of the warrants to August 27, 1999. During
the special exercise price period of June 24, 1999 through August 27, 1999,
warrantholders who exercised each warrant for $4.00 received one share of
Fotoball common stock. When the special exercise period expired at the close of
business on August 27, 1999, the unexercised warrants expired in accordance with
its terms. The Company previously registered the shares underlying the warrants
for resale by the holders and filed a prospectus supplement in order to update
the prospectus to reflect the repricing and extension of the warrants. A total
of 686,167 warrants were exercised on or before August 27, 1999. The Company
realized a 49% exercise rate of the total warrants originally issued and
outstanding (1,411,673) with net proceeds received by the Company of $2,673,635
(after costs associated with the offering were deducted). All funds received
will be retained for working capital purposes to finance the Company's continued
rapid growth in all areas and possible acquisitions.
At September 30, 1999 the Company has commitments for minimum
guaranteed royalties under licensing agreements approximating $560,000 in the
aggregate through 2002, of which $167,000 is due at various times in 1999. Given
the Company's expectation that it will realize operating profits due to
increases in its retail business during the fourth quarter of 1999, these
guaranteed royalties are anticipated to be funded from operations.
The Company currently has a one-year credit agreement with Scripps Bank
with a credit line of $3,500,000, which expires April 15, 2000. This credit line
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 Company is in
compliance with the covenants through September 30, 1999. There were no
outstanding borrowings under the credit line as of September 30, 1999 as
compared to $700,000 at September 30, 1998.
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 were no
borrowings under the line of credit as of September 30, 1999.
Management believes that the Company's existing cash position, credit
facilities and internally generated cash flows, in addition to the net proceeds
received from the warrants will be adequate to support the Company's growth,
liquidity and capital needs at least through the end of 1999.
The Company has implemented its Year 2000 plan and believes it is Year
2000 compliant. Pursuant to the Company's Year 2000 plan, the Company upgraded
and tested 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 also evaluated the systems of its key
customers and suppliers to ensure that these companies are Year 2000 compliant.
The cost of this evaluation was nominal. Based upon the results of this
evaluation, the Company believes that its key customers and suppliers are Year
2000 compliant. However, there can be no assurance that the Company's key
customers or material suppliers, vendors or other third parties will not suffer
a Year 2000 business disruption. Such failures could have a material adverse
affect on the Company's financial condition and results of operations.
Page 13 of 16
<PAGE>
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, its ability to
realize increasing profitability in the fourth quarter of 1999, overall sales
trends, gross margin trends, operating cost trends and cost reduction strategies
and their results, 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 and those included in the Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998 are subject to
risks and uncertainties that could cause actual results to differ materially
from those expressed in or implied by the statements.
Page 14 of 16
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10 Material Contract
27 Financial Data Schedule
(b) Reports on Form 8-K for the three months ended September 30,
1999 - None
Page 15 of 16
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOTOBALL USA, INC
-------------------------------------
(Registrant)
Dated: November 12, 1999 BY: /s/ Michael Favish
------------------
Michael Favish
President and Chief Executive Officer
Dated: November 12, 1999 BY: /s/ Clifford A. Lyon
--------------------
Clifford A. Lyon
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Page 16 of 16
<PAGE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (the "Agreement") is dated as of August 10,
1999 by and between FOTOBALL USA, INC., a Delaware corporation (the "Company"),
and Michael Favish ("Executive").
W I T N E S S E T H :
WHEREAS, Executive is currently serving as the President and Chief
Executive Officer of the Company under a five-year employment agreement with the
Company dated as of August 10, 1994 (the "Old Agreement");
WHEREAS, the Company and Executive desires to extend the employment
relationship upon the terms set forth in this Agreement;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the adequacy and
receipt of which are hereby acknowledged, the parties agree as follows:
1. Employment. (a) The Company hereby employs (the "Employment")
Executive as the President and Chief Executive Officer of the Company. It is the
intention of the parties to vest full authority to control the day-to-day
operations of the Company with Executive, subject to the general supervision,
control and guidance of the Board of Directors of the Company (the "Board").
Executive hereby accepts the Employment and agrees to (i) render such executive
services, (ii) perform such executive duties and (iii) exercise such executive
supervision and powers to, for and with respect to the Company, as may be
established by the Board, for the period and upon the terms set forth in this
Agreement.
(b) Executive shall devote substantially all of his business time
and attention to the business and affairs of the Company consistent with his
executive positions with the Company, except for vacations permitted pursuant to
Section 3.5 and Disability (as defined in Section 6.2). This Agreement shall not
be construed as preventing Executive from engaging in charitable and community
affairs, or giving attention to his passive investments, provided that such
activities do not interfere with the regular performance of his duties and
responsibilities under this Agreement.
2. Term. Except as otherwise specifically provided in Section 6 below,
the term of this Agreement (as may be extended, the "Term") shall commence on
the date hereof, and shall continue until August 9, 2002, subject to the terms
and conditions of this Agreement. The Term may be extended for consecutive
one-year renewal terms by written notice by either party to the other between
sixty (60) and ninety (90) days prior to the end of the original three-year term
or one-year renewal terms.
<PAGE>
3. Compensation.
3.1 Base Salary. Executive shall be paid a base salary (the "Base
Salary") at an annual rate of one hundred ninety thousand dollars ($190,000),
payable at such intervals as the other executive officers of the Company are
paid, but in any event at least on a monthly basis. The Base Salary shall be
reviewed by the Board on or before January 1 of each year during the Term, with
such reviews to commence prior to such date, and shall be subject to increase in
the discretion of the Board, taking into account merit, corporate and individual
performance and general business conditions, including changes in the consumer
price index published by the United States Bureau of Labor, Bureau of Labor
Statistics, for the San Diego, California metropolitan area. Such increase, if
any, in Executive's Base Salary shall be effective on January 1 of each year
during the Term commencing in 2000.
3.2 Bonus. In addition to the Base Salary, Executive shall be
entitled to such bonus compensation ("Bonus Compensation") as may be determined
from time to time by the Compensation Committee of the Board, in its sole
discretion.
3.3 Stock Options.
(a) During each year of this Agreement (August-August), the
Company shall cause the issuance to Executive of non-qualified options (the
"Options") to purchase not less than 10,000 shares of common stock, $.01 par
value (the "Common Stock"), of the Company at a per share exercise price equal
to the then-current fair market value of the Common Stock, subject to three-year
vesting and subject to and in accordance with the terms of the 1998 Stock Option
Plan of the Company or any successor stock option plan (the "Plan").
(b) Executive's vested Options shall be exercisable for a period
of ten years from the date of issuance. Upon the termination of this Agreement,
any unvested Options shall lapse, except as otherwise provided in Section 6
below, and Executive shall have ninety (90) days from the date of termination in
accordance with the terms of this Agreement to exercise any vested Options (one
year in the case of termination by reason of death or Disability of Executive).
3.4 Employee Benefits. In addition to the Base Salary and the Bonus
Compensation, Executive shall be entitled (i) to continue to receive the fringe
benefits now provided by the Company in addition to any additional benefits
hereafter provided to its executive offers, including, but not limited to, life,
hospitalization, surgical, major medical and disability insurance and sick
leave, (ii) to be a full participant in all of the Company's other benefit
plans, pension plans, retirement plans and profit-sharing plans which may be in
effect from time to time or may hereafter be adopted by the Company and (iii) to
all costs and expenses for the maintenance, including insurance, and operation
of Executive's automobile; provided, however, that such costs and expenses shall
not exceed $750 in any month.
-2-
<PAGE>
3.5 Vacation. During the Term, Executive shall be entitled to such
vacation with pay during each calendar year of his Employment hereunder
consistent with his position as an executive officer of the Company, but in no
event less than four (4) weeks in any such calendar year (pro-rated as necessary
for partial calendar years during the Term). Such vacation may be taken, in
Executive's discretion, at such time or times as are not inconsistent with the
reasonable business needs of the Company. Executive shall not be entitled to any
additional compensation in the event that Executive, for whatever reason, fails
to take such vacation during any year of his Employment hereunder. Executive
shall also be entitled to all paid holidays given by the Company to its
executive officers.
4. Indemnification. Executive shall be entitled at all times to the
benefit of the maximum indemnification and advancement of expenses available
from time to time under the laws of the State of Delaware.
5. Expenses. During the Term, the Company shall reimburse Executive
upon presentation of appropriate vouchers or receipts in accordance with the
Company's expense reimbursement policies for executive officers, for all
out-of-pocket business travel and entertainment expenses incurred or expended by
Executive in connection with the performance of his duties under this Agreement.
6. Consequences of Termination of Employment.
6.1 Death. In the event of the death of Executive during the Term,
Executive's Employment hereunder shall be terminated as of the date of his death
and Executive's designated beneficiary, or, in the absence of such designation,
the estate or other legal representative of Executive (collectively, the
"Estate") shall be paid, Executive's unpaid Base Salary through the month in
which the death occurs and any unpaid Bonus Compensation for any fiscal year
which has ended as of the date of such termination or which was at least one
half (1/2) completed as of the date of death. In the case of such incomplete
fiscal year, the Bonus Compensation shall be pro-rated and all such Bonus
Compensation payable as a result of this Section 6.1 shall be otherwise payable
as determined by the Compensation Committee of the Board, in its sole
discretion. The Estate shall be entitled to all other death benefits in
accordance with the terms of the Company's benefit programs and plans.
6.2 Disability. In the event Executive shall be unable to render the
services or perform his duties hereunder by reason of illness, injury or
incapacity (whether physical, mental, emotional or psychological) (any of the
foregoing shall be referred to herein as a "Disability") for a period of either
(i) ninety (90) consecutive days or (ii) one hundred eighty (180) days in any
consecutive three hundred sixty-five (365) day period, the Company shall have
the right to terminate this Agreement by giving Executive ten (10) days prior
written notice. If Executive's Employment hereunder is so terminated, Executive
shall be paid, in addition to payments under any disability insurance policy in
effect, Executive's unpaid Base
-3-
<PAGE>
Salary through the month in which the termination occurs, plus Bonus
Compensation on the same basis as is set forth in Section 6.1 above.
6.3 Termination of Employment of Executive by the Company for Cause.
(a) Nothing herein shall prevent the Company from terminating
Executive's Employment for Cause (as defined below). From and after the date of
such termination, Executive shall no longer be entitled to receive Base Salary
and Bonus Compensation and the Company shall no longer be required to pay
premiums on any life insurance or disability policy for Executive. Any rights
and benefits which Executive may have in respect of any other compensation or
any employee benefit plans or programs of the Company, whether pursuant to
Section 3.4 or otherwise, shall be determined in accordance with the terms of
such other compensation arrangements or plans or programs. The term "Cause," as
used herein, shall mean that: (i) Executive shall embezzle funds or
misappropriate other property of the Company or any subsidiary; or (ii)
Executive shall willfully disobey a lawful directive of the Board, whether
through commission or omission; or (iii) Executive shall breach the Agreement in
a material manner or engage in fraudulent conduct as regards the Company.
(b) The Company shall provide Executive with written notice
stating that it intends to terminate Executive's Employment for Cause under this
Section 6.3 and specifying the particular act or acts on the basis of which the
Board intends to so terminate Executive's Employment. Executive shall then be
given the opportunity, within fifteen (15) days of his receipt of such notice,
to have a meeting with the Board to discuss such act or acts (other than with
respect to an action described in Section 6.3(a)(i) above as to which the Board
may immediately terminate Executive's Employment for Cause). Other than with
respect to an action described in Section 6.3(a)(i) above, Executive shall be
given seven (7) days after his meeting with the Board to take reasonable steps
to cease or correct the performance (or nonperformance) giving rise to such
written notice. In the event Board determines that Executive has failed within
such seven-day period to take reasonable steps to cease or correct such
performance (or nonperformance), Executive shall be given the opportunity,
within ten (10) days of his receipt of written notice to such effect, to have a
meeting with the Board to discuss such determination. Following that meeting, if
the Board believes that Executive has failed to take reasonable steps to cease
or correct his performance (or nonperformance) as above described, the Board may
thereupon terminate the Employment of Executive for Cause.
6.4 Termination of Employment Other than for Cause, Death or
Disability.
(a) Termination. This Agreement may be terminated by the Company
(in addition to termination pursuant to Sections 6.1, 6.2 or 6.3 above) at any
time and for any reason or upon the expiration of the Term.
-4-
<PAGE>
(b) Severance and Non-Competition Payments.
(1) If this Agreement is terminated by the Company,
including a Constructive Termination (as defined below), other than as a result
of death or Disability of Executive or for Cause (and other than in connection
with a change in control (as defined below) of the Company), the Company shall
pay Executive a severance and non-competition payment equal to the sum of (x) an
amount equal to the Base Salary for the remainder of the Term plus (y) an amount
equal to the Bonus Compensation earned by Executive in respect of the last full
fiscal year immediately preceding the year of termination multiplied by the
number of full fiscal years remaining in the Term; provided, however, that a
termination during the last twelve (12) months of the Term shall be governed by
Section 6.4(b)(5) below. Such severance and non-competition payment shall be
payable, in Executive's sole discretion, either (i) in a lump sum on the first
day of the month following the termination or (ii) in equal monthly installments
commencing on the first day of the month following termination and continuing
for the remainder of the Term. In addition, all unvested Options shall be deemed
to have vested on the date of such termination.
(2) For purposes of this Agreement, a "change in control" of
the Company shall be deemed to have occurred if (i) the Company shall have
merged or consolidated with an unaffiliated entity in which (A) the Company is
not the surviving corporation or (B) the Company shall have transferred or sold
all or substantially all of its assets to an unaffiliated entity (other than a
transaction which would cause the stockholders immediately prior to such
transaction to own at least fifty (50%) of the voting securities of the Company
immediately after such transaction), or (ii) there shall be a change in the
constituency of a majority of the members of the Board within any twelve (12)
month period (other than a change of which a majority of the existing directors
voted in favor).
(3) For purposes of this Agreement, "Constructive
Termination" shall be deemed to have occurred upon (x) the removal of Executive
from, or a failure of Executive to continue as, President and Chief Executive
Officer of the Company and (y)(i) any material diminution in the nature or scope
of the authorities, powers, functions, duties or responsibilities attached to
such positions or (y)(ii) the material breach by the Company of this Agreement
and, in any such case, Executive does not agree to such change and elects to
terminate his Employment.
(4) In the event of a termination of Employment (including a
Constructive Termination) within six (6) months following a change in control of
the Company, the Company shall pay Executive a severance and non-competition
payment equal to the greater of (x) the sum of (i) an amount equal to the Base
Salary for the remainder of the Term plus (ii) an amount equal to the Bonus
Compensation earned by Executive in respect of the last full fiscal year
immediately preceding the year of termination multiplied by the number of full
fiscal years remaining in the Term; or (y) 2.99 times the sum of the Base Salary
plus the Bonus Compensation in respect of the year immediately preceding the
year of
-5-
<PAGE>
termination. Such severance and non-competition payment shall be payable, in
Executive's sole discretion, either (i) in a lump sum on the first day of the
month following the termination or (ii) in equal monthly installments commencing
on the first day of the month following termination and continuing for the
remainder of the Term. In addition, all unvested Options shall be deemed to have
vested on the date of such change in control.
(5) If this Agreement is not renewed beyond the Term by the
parties hereto or if this Agreement is terminated by the Company, including a
Constructive Termination, other than as a result of death or Disability of
Executive or for Cause (and other than in connection with a change in control)
in accordance with this Section 6, during the last twelve (12) months of the
Term, the Company shall pay Executive a severance and non-competition payment
equal to the sum of (x) an amount equal to the Base Salary in respect of the
calendar year immediately preceding the year of termination plus (y) an amount
equal to the Bonus Compensation earned by Executive in respect of the calendar
year immediately preceding the year of termination. Such severance and
non-competition payment shall be payable, in Executive's sole discretion, either
(i) in a lump sum of the first day of the month following the termination or
(ii) in twelve (12) equal monthly installments commencing on the first day of
the month following termination. In addition, all unvested Options shall be
deemed to have vested on the date of such termination.
(6) Executive shall not be required to mitigate the amount
of any severance and non-competition payment provided for under this Agreement
by seeking other employment or otherwise.
7. Confidential Information.
7.1 Executive covenants and agrees that he will not at any time,
either during the Term or thereafter, use, disclose or make accessible to any
other person, firm, partnership, corporation or any other entity any
Confidential Information (as defined below) pertaining to the business of the
Company except (i) while employed by the Company, in the business of and for the
benefit of the Company or (ii) when required to do so by a court of competent
jurisdiction, by any governmental agency having supervisory authority over the
business of the Company, or by any administrative body or legislative body
(including a committee thereof) with jurisdiction to order the Company to
divulge, disclose or make accessible such information. For purposes of this
Agreement, "Confidential Information" shall mean non-public information
concerning the Company's financial data, statistical data, strategic business
plans, product development (or other proprietary product data), customer and
supplier lists, customer and supplier information, information relating to
practices, processes, methods, trade secrets, marketing plans and other
non-public, proprietary and confidential information of the Company; provided,
however, that Confidential Information shall not include any information which
(x) is known generally to the public other than as a result of unauthorized
disclosure by Executive, (y) becomes available to the Executive on a
non-confidential basis from a source other than the Company or (z) was available
to Executive
-6-
<PAGE>
on a non-confidential basis prior to its disclosure to Executive by the Company.
It is specifically understood and agreed by Executive that any Confidential
Information received by Executive during his Employment by the Company is deemed
Confidential Information for purposes of this Agreement. In the event
Executive's Employment is terminated hereunder for any reason, he immediately
shall return to the Company all Confidential Information in his possession.
7.2 Executive and the Company agree that this covenant regarding
Confidential Information is a reasonable covenant under the circumstances, and
further agree that if, in the opinion of any court of competent jurisdiction,
such covenant is not reasonable in any respect, such court shall have the right,
power and authority to excise or modify such provision or provisions of this
covenant as to the court shall appear not reasonable and to enforce the
remainder of the covenant as so amended. Executive agrees that any breach of the
covenant contained in this Section 7 would irreparably injure the Company.
Accordingly, Executive agrees that the Company, in addition to pursuing any
other remedies it may have in law or in equity, may obtain an injunction against
Executive from any court having jurisdiction over the matter, restraining any
further violation of this Section 7.
8. Non-Competition; Non-Solicitation.
8.1 Executive agrees that during the Non-Competition Period (as
defined in Section 8.4 below), without the prior written consent of the Company:
(i) he shall not be a principal, manager, agent, consultant, officer, director
or employee of, or, directly or indirectly, own more than one (1%) percent of
any class or series of equity securities in, any partnership, corporation or
other entity, which, now or at such time, has material operations which are
engaged in any business activity competitive (directly or indirectly) with the
business of the Company; and (ii) he shall not, on behalf of any competing
entity, directly or indirectly, have any dealings or contact with any suppliers
or customers of the Company.
8.2 During the Non-Competition Period, Executive agrees that,
without the prior written consent of the Company (and other than on behalf of
the Company), Executive shall not, on his own behalf or on behalf of any person
or entity, directly or indirectly hire or solicit the employment of any employee
who has been employed by the Company at any time during the six (6) months
immediately preceding such date of hiring or solicitation.
8.3 Executive and the Company agree that the covenants of non-
competition and non-solicitation are reasonable covenants under the
circumstances, and further agree that if, in the opinion of any court of
competent jurisdiction such covenants are not reasonable in any respect, such
court shall have the right, power and authority to excise or modify such
provision or provisions of these covenants as to the court shall appear not
reasonable and to enforce the remainder of these covenants as so amended.
Executive agrees that any breach of the covenants contained in this Section 8
would irreparably injure the
-7-
<PAGE>
Company. Accordingly, Executive agrees that the Company, in addition to pursuing
any other remedies it may have in law or in equity, may obtain an injunction
against Executive from any court having jurisdiction over the matter,
restraining any further violation of this Section 8.
8.4 The provisions of this Section 8 shall extend for the Term and
survive the termination of this Agreement for one year from the date of such
termination (herein referred to as the "Non-Competition Period").
9. Notices. All notices and other communications hereunder shall be
in writing and shall be deemed to have been given if delivered personally or
sent by facsimile transmission, overnight courier, or certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally or sent by facsimile transmission (provided that a
confirmation copy is sent by overnight courier), one day after deposit with an
overnight courier, or if mailed, five (5) days after the date of deposit in the
United States mails, as follows:
If to the Company, to: Fotoball USA, Inc.
3738 Ruffin Road
San Diego, California 92123
Telecopy: (619) 467-9947
Attention: Chief Financial Officer
If to Executive, to: Mr. Michael Favish
4181 Raya Way
San Diego, California 92122
10. Entire Agreement. This Agreement and the Plan contain the entire
agreement between the parties hereto with respect to the matters contemplated
herein and supersede all prior agreements or understandings among the parties
related to such matters, including the Old Agreement.
11. Binding Effect. Except as otherwise provided herein, this Agreement
shall be binding upon and inure to the benefit of the Company and its successors
and assigns and upon Executive. "Successors and assigns" shall mean, in the case
of the Company, any successor pursuant to a merger, consolidation, or sale, or
other transfer of all or substantially all of the assets or Common Stock of the
Company.
12. No Assignment. Except as contemplated by Section 11 above, this
Agreement shall not be assignable or otherwise transferable by either party.
13. Amendment or Modification; Waiver. No provision of this Agreement
may be amended or waived unless such amendment or waiver is authorized by the
Board and is agreed to in writing, signed by Executive and by a duly authorized
officer of the Company
-8-
<PAGE>
(other than Executive). Except as otherwise specifically provided in this
Agreement, no waiver by either party hereto of any breach by the other party
hereto of any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of a similar or dissimilar provision or
condition at the same or at any prior or subsequent time.
14. Fees and Expenses. If either party institutes any action or
proceedings to enforce any rights the party has under this Agreement, or for
damages by reason of any alleged breach of any provision of this Agreement, or
for a declaration of each party's rights or obligations hereunder or to set
aside any provision hereof, or for any other judicial remedy, the prevailing
party shall be entitled to reimbursement from the other party for its costs and
expenses incurred thereby, including but not limited to, reasonable attorneys'
fees and disbursements.
15. Governing Law. The validity, interpretation, construction,
performance and enforcement of this Agreement shall be governed by the internal
laws of the State of California, without regard to its conflicts of law rules.
16. Titles. Titles to the Sections in this Agreement are intended
solely for convenience and no provision of this Agreement is to be construed by
reference to the title of any Section.
17. Counterparts. This Agreement may be executed in one or more
counterparts, which together shall constitute one agreement. It shall not be
necessary for each party to sign each counterpart so long as each party has
signed at least one counterpart.
18. Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms and
provisions of this Agreement in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first set forth above.
FOTOBALL USA, INC.
By: -------------------------------
Clifford A. Lyon
Chief Financial Officer
-----------------------------------
Michael Favish
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS CONTAINED IN THE FOTOBALL USA, INC. FORM 10-QSB FOR THE
PERIOD ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,995,587
<SECURITIES> 0
<RECEIVABLES> 5,213,769
<ALLOWANCES> 250,000
<INVENTORY> 3,817,424
<CURRENT-ASSETS> 11,869,646
<PP&E> 3,016,777
<DEPRECIATION> 1,718,901
<TOTAL-ASSETS> 13,197,707
<CURRENT-LIABILITIES> 2,074,264
<BONDS> 0
0
0
<COMMON> 34,951
<OTHER-SE> 10,817,796
<TOTAL-LIABILITY-AND-EQUITY> 13,197,707
<SALES> 21,672,411
<TOTAL-REVENUES> 21,672,411
<CGS> 13,021,915
<TOTAL-COSTS> 6,660,756
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,109
<INCOME-PRETAX> 1,890,758
<INCOME-TAX> (226,000)
<INCOME-CONTINUING> 2,116,758
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,116,758
<EPS-BASIC> .75
<EPS-DILUTED> .70
</TABLE>
