<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 OF 1934
For the quarterly period ended March 31, 2000
[ ] 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
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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 Identification No.)
incorporation or organization)
3738 Ruffin Road, San Diego, California 92123
---------------------------------------------
(Address of principal executive offices) (Zip Code)
(858) 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 April 30, 2000, the Company had 3,576,034 shares of its common stock
issued and outstanding.
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE>
FOTOBALL USA, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 2000 and
December 31, 1999 3
Condensed Statements of Operations for the three months
ended March 31, 2000 and 1999 4
Condensed Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 5
Notes to Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis or
Plan of Operations 9-13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
--------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and equivalents $ 2,225,406 $ 3,797,918
Accounts receivable less allowances of $250,015 at March 31, 2000 and
$250,000 at December 31, 1999 3,741,017 3,713,015
Inventories 4,761,704 4,105,675
Prepaid expenses and other 372,099 253,659
Deferred income taxes 661,000 661,000
------------ ------------
TOTAL CURRENT ASSETS 11,761,226 12,531,267
------------ ------------
PROPERTY AND EQUIPMENT, net 1,219,314 1,263,626
------------ ------------
OTHER ASSETS
Deposits and other 264,792 29,985
------------ ------------
TOTAL OTHER ASSETS 264,792 29,985
------------ ------------
$ 13,245,332 $ 13,824,878
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital leases $ 129,368 $ 135,197
Accounts payable and accrued expenses 1,007,387 1,671,035
Income taxes payable 97,835 158,185
------------ ------------
TOTAL CURRENT LIABILITIES 1,234,590 1,964,417
CAPITAL LEASES, net of current portion 242,820 271,740
------------ ------------
TOTAL LIABILITIES 1,477,410 2,236,157
------------ ------------
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 - 3,575,368 shares issued as of March 31, 2000
and 3,566,536 shares issued as of December 31, 1999 35,754 35,665
Additional paid-in capital 11,666,109 11,636,471
Accumulated earnings (deficit) 66,059 (83,415)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 11,767,922 11,588,721
------------ ------------
$ 13,245,332 $ 13,824,878
============ ============
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 3 of 15
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FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
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<S> <C> <C>
SALES $ 5,934,149 $ 5,593,349
COST OF SALES 3,795,053 3,469,360
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GROSS PROFIT 2,139,096 2,123,989
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OPERATING EXPENSES
Royalties 366,611 469,796
Marketing 771,928 589,998
General and administrative 683,878 566,848
Depreciation and amortization 106,540 98,107
----------- -----------
TOTAL OPERATING EXPENSES 1,928,957 1,724,749
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INCOME FROM OPERATIONS 210,139 399,240
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OTHER (INCOME) EXPENSE
Interest expense 9,748 26,660
Interest income (48,734) (599)
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TOTAL OTHER (INCOME) EXPENSE (38,986) 26,061
----------- -----------
INCOME BEFORE INCOME TAX 249,125 373,179
INCOME TAX EXPENSE 99,650 90,000
=========== ===========
NET INCOME $ 149,475 $ 283,179
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING
BASIC 3,571,384 2,699,242
=========== ===========
DILUTED 3,784,510 2,926,385
=========== ===========
NET INCOME PER COMMON SHARE
BASIC $ .04 $ .10
====== ======
DILUTED $ .04 $ .10
====== ======
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 4 of 15
<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 149,475 $ 283,179
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 106,540 102,030
Amortization of stock compensation expense 13,153 4,875
Changes in operating assets and liabilities:
Accounts receivable (28,003) (461,817)
Inventories (656,029) (396,578)
Prepaid expenses and other (118,439) (39,743)
Deferred income taxes -- 90,000
Accounts payable and accrued expenses (663,648) (64,908)
Income taxes payable (60,350) (39,800)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,257,301) (522,762)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (62,228) (108,420)
Change in long-term deposits (234,807) 1,382
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (297,035) (107,038)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of capital lease obligations (34,750) (32,874)
Proceeds from exercise of stock options 16,574 --
Net additions to short-term credit facilities -- 775,000
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (18,176) 742,126
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (1,572,512) 112,326
CASH AND EQUIVALENTS, Beginning of period 3,797,918 8,498
----------- -----------
CASH AND EQUIVALENTS, End of period $ 2,225,406 $ 120,824
=========== ===========
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 5 of 15
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FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
1. CONDENSED FINANCIAL STATEMENTS
The condensed balance sheets as of March 31, 2000, the condensed statements of
operations for the three months ended March 31, 2000 and 1999, and the condensed
statements of cash flows for the three months ended March 31, 2000 and 1999 have
been prepared by the Company without audit. In the opinion of management, all
adjustments (which include only normal reoccurring 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, 1999.
The results of operations for the three months ended March 31, 2000 are not
necessarily indicative of the results of operations to be expected for the year
ending December 31, 2000.
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 the disclosure of contingent assets and liabilities as of the
date of the financial statements, as well as 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,
allowance for doubtful accounts and the provision for discontinued 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 numerous licensors. 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 Renewal Period
-------- ------- --------------- --------------
MLBP Baseball December 31, 1999 In process
Nickelodeon Rugrats (USA) December 31, 1999 In process
NFL Team Logo Football March 31, 2000 In process
NHL Hockey June 30, 2000 In process
NHL Players Hockey June 30, 2000 In process
Page 6 of 15
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FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (CONTINUED)
The Company is currently finalizing the above renewal agreements with each
licensor, while operating under the agreed-upon renewal terms. 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 Company has received signed letters of
interest from MLBP and NFL, and is currently awaiting renewal license agreements
from each, as well as from Nickelodeon. The non-renewal or termination of one or
more of the Company's current material licenses could have a material adverse
effect on the Company's business.
VARIABILITY OF GROSS MARGINS - The Company realized gross margins of 36% through
the first three months of 2000, a decrease from 41% during 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 helps
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 and promotions business for the three months ended March 31,
2000 accounted for approximately 95% and 5%, respectively, of total sales.
CONCENTRATION ON RETAIL SALES - Retail sales were 95% of total sales for the
three months ended March 31, 2000, as compared to 81% of total sales for the
three months ended March 31, 1999. Two large customers accounted for
approximately 20% and 10%, respectively, of total sales for the three months
ended March 31, 2000, and no customer accounted for 10% or more of total sales
in the three months ended March 31, 1999.
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 10, 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 could 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.
Page 7 of 15
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (CONTINUED)
DEPENDENCE ON SUPPLIERS - In 1999, the Company purchased approximately 88% 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 78% 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 primarily
because products originating from China could be subjected to substantially
higher rates of duty.
3. 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:
March 31, 2000 December 31, 1999
-------------- -----------------
Finished goods $2,850,906 $2,382,025
Raw material 1,910,798 1,723,650
---------- ---------
Total inventory $4,761,704 $4,105,675
========== ==========
Page 8 of 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
RESULTS OF OPERATIONS:
The following table sets forth certain operating data (in dollars and
as a percentage of the Company's sales) for the periods presented:
(Unaudited)
Three Months Ended
March 31,
--------------------------------------------
2000 1999
--------------------------------------------
Sales $5,934,149 100% $5,593,349 100%
Cost of Sales 3,795,053 64 3,469,360 62
Operating Expenses 1,928,957 32 1,724,749 31
Operating Income 210,139 4 399,240 7
Interest Expense 9,748 -- 26,660 1
Interest Income 48,734 1 599 1
Income Before Income Tax 249,125 4 373,179 7
Income Tax Expense 99,650 2 90,000 2
Net Income $ 149,475 3% $ 283,179 5%
THREE MONTHS ENDED MARCH 31, 2000 AND 1999:
SALES:
Sales increased $.3 million, or 6%, for the three months ended March 31,
2000 from sales for the three months ended March 31, 1999. The growth in sales
was due to an increase in retail sales of $1.1 million, or 24%, offset by a
decline in promotion sales of $.7 million, or 69%, as compared to the prior year
period. During the quarter, the Company realized product sales increases in
soccer/volleyball (237%), playground balls (128%) and basketballs (42%), with
offsetting declines in footballs (-26%) and baseballs (-17%) attributed
primarily to the decrease in the Company's promotions business, as further
discussed below.
Retail sales were 95% of total sales for the three months ended March 31,
2000 compared to 81% for the three months ended March 31, 1999. The increase in
retail sales was primarily due to increased retail sales in each product line
category over the prior year period. Contributing also to the rapid retail sales
growth are national account sales, which are expanding both in sales per retail
store and the number of retail stores serviced, including additional
merchandising space per retail store. Additionally, the Company's entertainment
and team business experienced 30% and 36% growth, respectively, during the first
quarter of 2000 over the prior year period. While no assurances can be made,
several factors support continued retail sales growth in the future including
expanding penetration into national retailers and the leveraging of existing
licensed properties, such as Warner Bros. Looney Tunes and Scooby-Doo, Coca-Cola
and Nickelodeon's "Rugrats" and "Blues Clues" characters. The Company will also
continue to pursue new licenses and create additional product lines based on
those licenses to broaden the scope of the Company's business.
Page 9 of 15
<PAGE>
Promotion sales were 5% of total sales for the three months ended March 31,
2000 compared to 19% for the three months ended March 31, 1999. Although
reducing its dependence upon promotion sales, the Company will continue to
pursue its objective of expanding its promotions business and its contribution
to operating profits. These strategies will include leveraging its relationships
with its existing licensors to secure promotions with companies who sponsor
sports related organizations, in addition to obtaining new licensing
opportunities.
GROSS PROFIT:
Gross profit increased 1% for the three months ended March 31, 2000 from
gross profit for the three months ended March 31, 1999. Gross profit as a
percentage of sales decreased to 36% for the three months ended March 31, 2000
from 38% for the three months ended March 31, 1999. The decline in the Company's
gross margins as a percentage of sales can be attributed primarily to a
non-recurring, lower margin program shipped during the first quarter of 2000 and
to the significant sales contribution recognized during the first quarter of
1999 from the introduction of the high margin, official-size football product
line. As 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:
Total operating expenses increased 12% for the three months ended March 31,
2000 from total operating expenses for the three months ended March 31, 1999.
Total operating expenses increased to 32% as a percentage of sales as of March
31, 2000 from 31% as of March 31, 1999. The Company anticipates that total
operating expenses will increase in absolute terms in 2000 due to the expansion
of the Company's infrastructure.
Royalty expenses decreased 22% for the three months ended March 31, 2000
from royalty expenses for the three months ended March 31, 1999. Royalty
expenses as a percentage of sales decreased to 6% of sales for the three months
ended March 31, 2000 from 8% of sales for the three months ended March 31, 1999.
The decrease is primarily due to the increased concentration of non-royalty
bearing sales in 2000 as compared to 1999, as the Company's entertainment
business increased 30% from the prior year period. As previously noted, the
Company is dependent upon its licensing arrangements and their successful
renewal (See Footnote 2, "Notes to Condensed Financial Statements"). To broaden
the Company's scope of product lines and expand market share, the Company will
continue to pursue additional license agreements with various organizations and
licensors in the future.
Marketing expenses increased 31% for the three months ended March 31, 2000
from marketing expenses for the three months ended March 31, 1999. Marketing
expenses as a percentage of sales increased to 13% of sales for the three months
ended March 31, 2000 from 11% of sales for the three months ended March 31,
1999. These increases are primarily due from an increase in personnel and trade
show expenses as the Company expanded its exhibits and booth space to increase
sales and industry recognition. The Company anticipates that marketing expenses
will increase in absolute terms in 2000, reflecting increases in both variable
and fixed costs.
Page 10 of 15
<PAGE>
General and administrative expenses increased 21% for the three months
ended March 31, 2000 from general and administrative expenses for the three
months ended March 31, 1999. General and administrative expenses as a percentage
of sales increased to 12% for the three months ended March 31, 2000 from 10% for
the three months ended March 31, 1999 due primarily to an increase in personnel
and increases in rent due to the growth of the Company's infrastructure. The
Company anticipates that general and administrative expenses will continue to
increase in 2000 primarily as a result of the Company's infrastructure expansion
throughout the year, including its relocation to a new facility as discussed
further in "Liquidity and Capital Resources".
OTHER INCOME (EXPENSE):
Interest expense decreased 63% for the three months ended March 31, 2000
from interest expense for the three months ended March 31, 1999. This decrease
reflects no borrowings against the Company's line of credit throughout the
quarter as a result of a higher average cash balance available during the period
in 2000. There were no outstanding borrowings under the line of credit as of
March 31, 2000, compared to $1.2 million as of March 31, 1999. Total capitalized
equipment and machinery lease liabilities were $372,187 as of March 31, 2000
compared to $464,033 as of March 31, 1999, reflecting a 20% decrease in the
Company's notes payable, as some of the original lease agreements have been
fulfilled, thereby lowering interest expense.
Interest income increased $48,135 for the three months ended March 31,
2000, as compared to interest income for the three months ended March 31, 1999.
This increase is due to the Company's average cash balances available for
investment being substantially higher in 2000 as compared to 1999, primarily
from the proceeds received from warrant exercises last year, as more fully
explained in "Liquidity and Capital Resources" below. Excess cash is deposited
into an interest-bearing depository account.
INCOME TAX EXPENSE:
Income tax expense was $99,650 for the three months ended March 31, 2000,
an effective tax rate of 40%, as compared to income tax expense of $90,000, or
24%, for the prior year period. The deferred tax asset of $90,000 at December
31, 1998 was eliminated as a result of the income tax expense recognized during
the three months ended March 31, 1999. Had the Company been taxed at a combined
federal and state effective tax rate of 40% in 1999, then earnings per share
would have been as follows:
March 31, 2000 March 31, 1999
-------------- --------------
Income before income taxes $ 249,125 $ 373,179
Proforma Income tax expense @ 40% 99,650 149,272
--------- ---------
Proforma Net Income $ 149,475 $ 223,907
========= =========
Proforma Diluted Earnings per Share $ .04 $ .08
===== =====
Page 11 of 15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
Cash and equivalents aggregated $2.2 million at March 31, 2000, a decrease
of $1.6 million from cash and equivalents of $3.8 million at December 31, 1999.
This decrease in cash was primarily the result of an increase of $.7 million in
inventory, while accounts receivable and the related allowance for doubtful
accounts balance remained constant during the period. The increase in inventory
is due primarily to the growth in the retail business requiring on-hand
inventory items, as the Company generally fulfills retail orders in one to four
weeks, its expanding product lines and in preparation for the baseball season
which officially begins in April 2000. In addition, accounts payable and accrued
expenses decreased $.7 million primarily due from accrued expenses in 1999,
payable in 2000, for income taxes, year-end bonuses and minimum guaranteed
royalties. The cash balances at March 31, 2000 and December 31, 1999 included a
portion of the $2.6 million of net proceeds from the exercise of warrants as
further discussed 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
$.7 million, which will be used to purchase additional product molds, production
machinery, leasehold improvements and office and computer equipment due
primarily to the Company's expansion.
The Company's net working capital decreased less than $.1 million from
December 31, 1999 to March 31, 2000, to a net working capital surplus of $10.5
million at March 31, 2000 from a net working capital surplus of $10.6 million at
December 31, 1999.
At March 31, 2000, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $1.1 million in the aggregate
through 2002, of which $0.4 million is due at various times during 2000. Based
upon the net income realized by the Company during the first quarter of 2000 and
on the expectation of continuing increases in its retail business, management
expects these guaranteed royalties to be funded from operating cash flows.
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. A total of 686,167 warrants, or 49% of the total warrants originally
issued and outstanding were exercised on or before August 27, 1999. Gross
proceeds received by the Company in the offering were $2.7 million (solicitation
fees and other costs associated with the offering were approximately $.1 million
as of December 31, 1999). Net proceeds received by the Company have been
retained for working capital purposes to finance the Company's continued growth
in all areas and possible acquisitions. Separately, 22,000 shares of common
stock were issued to the underwriter of the Company's initial public offering in
a cash-free, negotiated transaction.
In April 2000, the Company amended and renewed a one-year credit agreement
with Scripps Bank, increasing the amount of the credit line to $4 million from
$3.5 million under the previous agreement. The line of credit 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 prime rate, which was reduced from the prior agreement at prime
Page 12 of 15
<PAGE>
rate plus .75%. The credit line contains financial covenants requiring the
Company to maintain minimum net worth levels, minimum working capital and
current ratios, and a maximum debt to equity ratio. Total advances are
restricted to 80% of eligible accounts receivable plus 15% of eligible
inventory, as specifically defined in the agreement. The credit line expires
April 15, 2001. There were no borrowings under the line of credit as of March
31, 2000 compared to $1.2 million at March 31, 1999.
The Company has a $3 million 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 March 31, 2000 and 1999.
In March 2000, the Company executed a lease for new headquarters and
warehouse space. The new space consists of approximately 101,000 square feet of
leased space at 6740 Cobra Way, San Diego 92121. The new space is being leased
from an unaffiliated party under a lease agreement, which provides for a
123-month term commencing in August 2000, with two five-year option periods.
Monthly rent under the lease commences at $79,500 per month, with 5% fixed
increases to occur every two years. A security deposit of $.2 million was paid
to the landlord in March 2000, in addition to the first month's rent in the
amount of $79,500. The Company will receive a three-month rent credit during its
first three months of occupancy and will receive certain other improvement
allowances from the landlord. The tenant improvements must be paid in advance by
the Company and, in turn, reimbursed by the landlord. The Company anticipates
that the cash outlay for reimbursable tenant improvements could approximate $.5
million to $1 million during the next six months. The Company anticipates that
the new premises will meet its space requirements for the foreseeable future.
The specific timing of relocation to the new space has not yet been determined,
but is expected to take place within the next three to six months. The Company
has received commitments from its current landlords to terminate its present
lease commitments at 3738 Ruffin Road and 4000 Ruffin Road and does not
presently expect to incur any additional material expenses associated with such
lease terminations.
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
2000.
CAUTIONARY STATEMENTS 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 statements
concerning the Company's outlook for 2000, its ability to realize increasing
profitability in 2000, 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 2000,
the Company's ability to consummate strategic acquisitions, the Company's
ability to renew expiring license agreements 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.
Page 13 of 15
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.10(3) Amended Revolving Credit Agreement dated April 6, 2000
between Fotoball USA, Inc. and Scripps Bank.
27 Financial Data Schedule
(b) Reports on Form 8-K for the three months ended March 31, 2000 -
None
Page 14 of 15
<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: May 12, 2000 BY: /s/ Michael Favish
------------------
Michael Favish
President and Chief Executive
Officer
Dated: May 12, 2000 BY: /s/ Clifford A. Lyon
--------------------
Clifford A. Lyon
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
Page 15 of 15
<PAGE>
CHANGE IN TERMS AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
$4,000,000.00 04-15-2001 11620 019 125
- - ----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item.
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: FOTOBALL U.S.A., INC. LENDER: SCRIPPS BANK
3738 RUFFIN ROAD CORPORATE LENDING -- KEARNY MESA
SAN DIEGO, CA 92123 9005 COMPLEX DRIVE
SAN DIEGO, CA 92123
================================================================================
PRINCIPAL AMOUNT: $4,000,000.00 DATE OF AGREEMENT: APRIL 6, 2000
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 IN THE AMOUNT OF
$2,000,000.00.
CHANGE IN TERMS AGREEMENT DATED DECEMBER 28, 1998 IN THE AMOUNT OF
$3,500,000.00.
DESCRIPTION OF COLLATERAL.
AS DESCRIBED IN:
COMMERCIAL SECURITY AGREEMENT DATED DECEMBER 20, 1995.
DESCRIPTION OF CHANGE IN TERMS.
LOAN AGREEMENT DATED APRIL 6, 2000, SUPERCEDES ALL PRIOR LOAN AGREEMENTS.
LINE OF CREDIT IS INCREASED TO $4,000,000.00.
EXTEND MATURITY DATE TO APRIL 15, 2001.
INTEREST RATE REDUCED TO WALL STREET JOURNAL PRIME.
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/ Cliff Lyon
------------------------------------------------------
CLIFF LYON, SR. VICE PRESIDENT/CHIEF FINANCIAL OFFICER
================================================================================
Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off.,
Ver. 3.29(C) Concentrex 2000 All rights reserved.
[CA-D20 11620LOC.LN C1.OVL]
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
$4,000,000.00 04-15-2001 11620 019 125
- - ----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item.
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: FOTOBALL U.S.A., INC. LENDER: SCRIPPS BANK
3738 RUFFIN ROAD CORPORATE LENDING -- KEARNY MESA
SAN DIEGO, CA 92123 9005 COMPLEX DRIVE
SAN DIEGO, CA 92123
================================================================================
LOAN TYPE. This is a Variable Rate (at Wall Street Journal Prime Rate as
published in the Money Rates section. When a range of rates is shown, the
higher rate will be used, making an initial rate of 9.000%), Revolving Line
of Credit Loan to a Corporation for $4,000,000.00 due on April 15, 2001.
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 MATURITY 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 $4,000,000.00 as follows:
UNDISBURSED FUNDS: $4,000,000.00
AMOUNT PAID ON BORROWER'S ACCOUNT: $0.00
-------------
NOTE PRINCIPAL: $4,000,000.00
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 DOCUMENTATION FEE
---------
TOTAL CHARGES PAID IN CASH: $2,000.00
LOAN ADVANCE AGREEMENT CONDITION. UNDISBURSED FUNDS TO BE DISBURSED PER
LOAN ADVANCE AGREEMENT.
FINANCIAL STATEMENT CERTIFICATION. The undersigned, on behalf of the above
entities, for the purpose of procuring and establishing credit from time to
time with Scripps Bank and to induce Scripps Bank to permit the undersigned
to become indebted to Scripps Bank on notes, endorsements, guarantees,
overdrafts or otherwise, furnish all current and future statements as being
a true statement of the financial condition of the undersigned and agrees
to notify Scripps Bank immediately of the extent and character of any
material change in said financial condition. If any of the representations
in all current and future statements, prove to be untrue, or if the
undersigned fails to notify Scripps Bank of any material change as above
agreed, then and in such case, at Scripps Bank option, all of the
obligations of the undersigned to Scripps Bank, or held by Scripps Bank
shall immediately become due and payable, without demand or notice.
The undersigned does further agree that any spaces in all current and
future statements under "Liabilities" or "Contingent Liabilities", which
have been or may be left blank, shall be construed by Scripps Bank, the
same as though the word "none" were written in each of such spaces.
All current and future statements shall also be construed by Scripps Bank
to be a continuing statement of the condition of the undersigned, and a new
and original statement of all assets and liabilities upon each and every
transaction in and by which the undersigned hereafter becomes indebted to
Scripps Bank, until the undersigned advises in writing to the contrary.
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 APRIL 6, 2000.
BORROWER:
FOTOBALL U.S.A., INC.
BY: /S/ Cliff Lyon
------------------------------------------------------
CLIFF LYON, SR. VICE PRESIDENT/CHIEF FINANCIAL OFFICER
================================================================================
Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off.,
Ver. 3.29(C) Concentrex 2000 All rights reserved.
[CA-D20 11620LOC.LN C1.OVL]
<PAGE>
LOAN AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - ----------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS
$4,000,000.00 04-15-2001 11620 019 125
- - ----------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item.
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: FOTOBALL U.S.A., INC. LENDER: SCRIPPS BANK
3738 RUFFIN ROAD CORPORATE LENDING -- KEARNY MESA
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 APRIL 6, 2000, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when
used in this Agreement. Terms not otherwise defined in this Agreement shall
have the meanings attributed to such terms in the Uniform Commercial Code.
All references to dollar amounts shall mean amounts in lawful money of the
United States of America.
AGREEMENT: The word "Agreement" means this Loan Agreement, as this
Loan Agreement may be amended or modified from time to time, together
with all exhibits and schedules attached to this Loan Agreement from
time to time.
ACCOUNT. The word "Account" means a trade account, account receivable,
or other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under
this Agreement.
BORROWER. The word "Borrower" means FOTOBALL U.S.A., INC. The word
"Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
BORROWING BASE. The words "Borrowing Base" mean BORROWING BASE
CERTIFICATE/COLLATERAL SCHEDULE.
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
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."
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time,
all of Borrower's Accounts which contain selling terms and conditions
acceptable to Lender. The net amount of any Eligible Account against
which Borrower may borrow shall exclude all returns, discounts,
credits, and offsets of any nature. Unless otherwise agreed to by
Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an
officer, an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a
subsidiary of, or affiliated with or related to Borrower or its
shareholders, officers, or directors.
(c) Accounts with respect to which goods are placed on
consignment, guaranteed sale, or other terms by reason of which
the payment by the Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a
resident of the United States, except to the extent such Accounts
are supported by insurance, bonds or other assurances
satisfactory to Lender.
(e) Accounts with respect to which Borrower is or may become
liable to the Account Debtor for goods sold or services rendered
by the Account Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or
setoff.
(g) Accounts with respect to which the goods have not been
shipped or delivered, or the services have not been rendered, to
the Account Debtor.
(h) Accounts with respect to which Lender, in its sole
discretion, deems the creditworthiness or financial condition of
the Account Debtor to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief
under any provision of any state or federal bankruptcy,
insolvency, or debtor-in-relief acts; or who has had appointed a
trustee, custodian, or receiver for the assets of such Account
Debtor; or who has made an assignment for the benefit of
creditors or has become insolvent or fails generally to pay its
debts (including its payrolls) as such debts become due.
(j) Accounts with respect to which the Account Debtor is the
United States government or any department or agency of the
United States.
(k) Accounts which have not been paid in full within 60 DAYS FROM
THE INVOICE DUE DATE
(l) MINUS ALL FOREIGN, CONTRA AND BANKRUPT COMPANY ACCOUNTS
(m) AND ACCOUNTS AS FURTHER EXCLUDED PER THE LOAN AGREEMENT
COVENANT & CONDITIONS ADDENDUM
(n) MINUS THE ENTIRE ACCOUNT BALANCE OF ANY ACCOUNT WHICH HAS
BEEN EXTENDED TERMS IN EXCESS OF NET 60.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time,
all of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of
all security interests, liens, encumbrances, and claims of third
parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
(c) 15% OF FINISHED GOODS/RAW MATERIALS INVENTORY TO A CAP OF
$500,000.00.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include
without limitation any of the Events of Default set forth below in the
section titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of
termination of Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or
not due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise;
whether recovery upon such indebtedness may be or hereafter may become
barred by any statute of limitations; and whether such indebtedness
may be or hereafter may become otherwise unenforceable.
INVENTORY. The word "Inventory" means all of Borrower's raw materials,
work in process, finished goods, merchandise, parts and supplies, of
every kind and description, and goods held for sale or lease or
furnished under contracts of service in which Borrower now has or
hereafter
<PAGE>
04-06-2000 LOAN AGREEMENT PAGE 2
LOAN NO 11620 (CONTINUED)
================================================================================
acquires any right, whether held by Borrower or others, and all
documents of title, warehouse receipts, bills of lading, and all other
documents of every type covering all or any part of the foregoing.
Inventory includes inventory temporarily out of Borrower's custody or
possession and all returns on Accounts.
LENDER. The word "Lender" means Scripps Bank, its successors and
assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
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.
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 the 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 and 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 Information values
listed on schedules delivered to Lender will be true and correct,
subject to immaterial variance; (c) The value of
<PAGE>
04-06-2000 LOAN AGREEMENT
LOAN NO. 11620 (CONTINUED) PAGE 3
the Inventory will be determined on a consistent accounting basis; (d)
Except as agreed to the contrary by Lender in writing, all Eligible
Inventory is now and at all times hereafter will be in Borrower's physical
possession and shall not be held by others on consignment, sale on
approval, or sale or return; (e) Except as reflected in the Inventory
schedules delivered to Lender, all Eligible Inventory is now and at all
times hereafter will be of good and merchantable quality, free from
defects; (f) Eligible Inventory is not now and will not at any time
hereafter be stored with a ballee, warehouseman, or similar party without
Lender's prior written consent, and, in such event, Borrower will
concurrently at the time of ballment cause any such ballee, 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 agent shall have the right at
any time and at Borrower's expense to inspect and examine the Inventory and
to check and test the same as to quality, quantity, value, and condition.
NOTIFICATION BASIS. Borrower agrees and understands that this Loan shall be
on a notification basis pursuant to which Lender shall directly collect and
receive all proceeds and payments from the Accounts in which Lender has a
security interest. In order to facilitate the foregoing, Borrower agrees to
deliver to Lender, upon demand, any and all of Borrower's records, ledger
sheets, payment cards, and other documentation, in the form requested by
Lender, with regard to the Accounts. Borrower further agrees that Lender
shall have the right to notify each Account Debtor, pay such proceeds and
payments directly to Lender, and to do any and all other things as Lender
may deem to be necessary and appropriate, within its sole discretion, to
carry out the terms and intent of this Agreement. Lender shall have the
further right, where appropriate and within Lender's sole discretion, to
file suit, either in its own name or in the name of Borrower, to collect
any and all such Accounts. Borrower further agrees that Lender may take
such other actions, either in Borrower's name or Lender's name, as Lender
may deem appropriate within its sole judgment, with regard to collection
and payment of the Accounts, without affecting the liability of Borrower
under this Agreement or on the Indebtedness.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the business 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 financial 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 or Division 20 of the California Health and
Safety Code, Section 25100, et seq., or other applicable state or Federal
Laws, rules, or regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's ownership
of the properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower nor
any tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any of
the properties; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and ordinances,
including with limitation those laws, regulations and ordinances described
above. Borrower authorizes Lender and its agents to enter upon the
properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section of
the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower hereby
(a) releases and waives any future claims against Lender for Indemnity or
contribution in the event Borrower becomes liable for cleanup or other
costs under any such laws, and (b) agrees to Indemnify and hold harmless
Lender against any and all Claims, losses, liabilities, damages, penalties,
and expenses which Lender may directly or indirectly sustain or suffer
resulting from a breach of this section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal, release
or threatened release 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 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, assessment 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 an "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 falling on
or after January 1, 2000, and all information pertaining to such calendar
dates, in the same manner and with the same functionality as the software
does respecting calendar dates falling on or before December 31, 1999.
Further, Borrower warrants and represents that the software has
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04-06-2000 LOAN AGREEMENT
LOAN NO. 11620 (CONTINUED) PAGE 4
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.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
list 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.
INSURANCE. Maintain fire and other risk Insurance, public liability
insurance, and other such 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
stipulation 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, report 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 risk 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 assessments,
taxes, governmental changes, 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 of 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
appropriated 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.
OPERATION. 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 of 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 Borrowers'
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, statues,
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
with 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 ASSURANCE. 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 in 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.
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04-06-2000 LOAN AGREEMENT PAGE 5
LOAN NO 11620 (CONTINUED)
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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.
LOAN AGREEMENT COVENANT & CONDITIONS ADDENDUM. The Loan Agreement Covenant &
Conditions Addendum attached as Exhibit "A" to this agreement is incorporated by
reference herein in full.
RIGHT OF SETOFF. Borrower grants to Lender a contractual 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 STATEMENTS. 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.
DEFECTIVE 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 of
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 the 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 PROVISION. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND
ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF
THE COURTS OF SAN DIEGO COUNTY, THE STATE OF CALIFORNIA. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA.
CAPTION HEADINGS. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any
rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of
any such participation interests will be considered as the absolute
owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may
enforce its interests irrespective of any personal claims or defenses
that Borrower may have against Lender.
BORROWER INFORMATION. Borrower consents to the release of information
on or about Borrower by Lender in accordance with any court order, law
or regulation and in response to credit inquiries concerning Borrower.
NON-LIABILITY OF LENDER. The relationship between Borrower and Lender
is a debtor and creditor relationship and not fiduciary in nature, nor
is the relationship to be construed as creating any partnership or
joint venture between Lender and Borrower. Borrower is exercising its
own judgment with respect to Borrower's business. All information
supplied to Lender is for Lender's protection only and no other party
is entitled to rely on such information. There is no duty for Lender to
review, inspect, supervise, or inform Borrower of any matter with
respect to Borrower's business. Lender and Borrower intend that Lender
may reasonably rely on all information supplied by Borrower to Lender,
together with all representations and warranties given by Borrower to
Lender, without investigation or confirmation by Lender and that any
investigation or failure to investigate will not diminish Lender's
right to so rely.
<PAGE>
04-06-2000 LOAN AGREEMENT PAGE 6
LOAN NO 11620 (CONTINUED)
================================================================================
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 attorney's 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 telefacsimile (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 finding 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 APRIL 6, 2000.
BORROWER:
FOTOBALL U.S.A., INC.
BY: /s/ Cliff Lyon
------------------------------------------------------
CLIFF LYON, SR. VICE PRESIDENT/CHIEF FINANCIAL OFFICER
LENDER:
SCRIPPS BANK
BY:
------------------------------------------------------
AUTHORIZED OFFICER
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Var. 3.29(C) Concentrex 2000
All rights reserved. [CA-C40 11820LOC.LN C1.OVL]
<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 MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,225,406
<SECURITIES> 0
<RECEIVABLES> 3,991,032
<ALLOWANCES> 250,015
<INVENTORY> 4,761,704
<CURRENT-ASSETS> 11,761,226
<PP&E> 3,155,337
<DEPRECIATION> 1,936,023
<TOTAL-ASSETS> 13,245,332
<CURRENT-LIABILITIES> 1,234,590
<BONDS> 0
0
0
<COMMON> 35,754
<OTHER-SE> 11,732,168
<TOTAL-LIABILITY-AND-EQUITY> 13,245,332
<SALES> 5,934,149
<TOTAL-REVENUES> 5,934,149
<CGS> 3,795,053
<TOTAL-COSTS> 1,928,957
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,748
<INCOME-PRETAX> 249,125
<INCOME-TAX> 99,650
<INCOME-CONTINUING> 149,475
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 149,475
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
