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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 2002
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ________________ to ________________
Commission file number: 0-24608
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FOTOBALL USA, INC.
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(Name of small business issuer in its charter)
Delaware 33-0614889
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6740 Cobra Way, San Diego, California 92121
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (858) 909-9900
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Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Preferred Stock Purchase Right
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-K is not contained in this form and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as described in Rule 12b-2 of the Act). Yes No X
--- ---
The aggregate market value of the Registrant's Common Stock held by
non-affiliates, computed by reference to the close price of such stock, as of
June 28, 2002, was $14,717,017.
As of March 14, 2003, the Registrant's had 3,651,501 shares of Common
Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
INDEX
PART I Page
Item 1. Description of Business 3
Item 2. Description of Property 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the Company 22
Item 11. Executive Compensation 24
Item 12. Security Ownership of Certain Beneficial Owners and Management 27
Item 13. Certain Relationships and Related Transactions 28
Item 14. Disclosure Controls and Procedures 28
PART IV
Item 15. Exhibits and Reports on Form 8-K 29
SIGNATURES 31
RULE 13a-14 CERTIFICATIONS 32
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA 34
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 involve risks,
uncertainties and assumptions that, if they never materialize or prove
incorrect, could cause the results of the Company to differ materially from
those expressed or implied by such forward-looking statements. All statements
other than statements of historical fact are forward-looking statements,
including statements regarding increases in sales, adding product lines, adding
new license properties, gross margin trends, operating cost trends, the
Company's expectations as to funding its capital expenditures and operations
during 2003, the Company's ability to renew expiring license agreements,
expectations as to acquisitions 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 risks,
uncertainties and assumptions referred to above include the risk factors listed
in Part I, Item 1 and Part II, Item 7 and as listed from time to time in the
Company's filings with the Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Fotoball USA, Inc., a Delaware corporation (the "Company"),
manufactures and markets souvenir and promotional products. Four separate sales
groups sell the Company's products and services into distinct markets. Fotoball
Sports services national and regional retailers; Fotoball Entertainment
Marketing services entertainment destinations such as theme parks, resorts,
restaurants and casinos; Fotoball Sports Team supports the retail needs of
professional sports franchises and concessionaires across the nation; and
Marketing Headquarters develops custom promotional programs for Fortune 500
companies. The Company currently holds licenses with Major League Baseball
("MLB"), the National Football League ("NFL"), the National Hockey League
("NHL"), the National Basketball Association ("NBA"), over a hundred National
Collegiate Athletic Association ("NCAA") colleges and universities, Warner Bros.
"Scooby Doo," Marvel's "Spider-Man," "Incredible Hulk" and "X-Men,"
Nickelodeon's "Blue's Clues," Mattel's "Barbie" and The Coca-Cola Company.
The Company sells similar types of products to four different types of
customers: retail, entertainment, team and promotions. The Company employs
creative design and product development personnel to design and develop the
Company's products. In general, the Company's retail, team and promotions sales
are products sold under various license agreements. The majority of the
Company's entertainment sales and a portion of the promotions sales are not
subject to license agreements and therefore do not have associated royalty
expense. The Company is restricted by its licensing agreements as to the type of
products, territory and in some cases, type of customer it can sell under each
license. The Company sells a wider variety of products when not subject to a
licensing agreement.
The Company's retail sales represents a customer base of national,
regional and local retailers, including selected department stores and mass
merchants (such as Target, Wal-Mart, Toys "R" Us and Sears), airport
concessionaires, various licensed sports specialty and sporting goods chains
(such as The Sports Authority, Gart Sports Company, Champs, Modell's Sporting
Goods and Dick's Sporting Goods) and various consumer catalogs.
The Company's team sales customers include professional sports team
stores and stadium concessionaires (such as Aramark and Volume Services) from
the NFL, MLB, Minor League Baseball, the NHL, the NBA and the Arena Football
League ("AFL").
The Company's entertainment sales customers include entertainment
related companies with retail sales operations such as The Walt Disney Company,
Universal Studios, Six Flags and Busch
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Gardens theme parks, QVC, Home Shopping Network, Sports Illustrated, Dave and
Buster's and Hard Rock Cafe.
The Company's Marketing Headquarters promotion customers include
national companies such as Kraft, General Mills, Bank of America, McDonalds and
Carl's Jr., which companies purchase the Company's products for use in
promotional campaigns and in connection with their sponsorship of sports teams
and leagues.
Fotoball USA, Inc., a California corporation and the predecessor to the
Company ("Fotoball California"), was incorporated under the laws of the State of
California on December 13, 1988. The Company then was incorporated under the
laws of the State of Delaware on April 27, 1994, for the purpose of merging and
continuing the business of Fotoball California. On July 29, 1994, Fotoball
California merged with and into the Company, with Fotoball USA, Inc. being the
surviving corporation.
PRODUCTS
The Company offers a variety of custom-imprinted sports and non-sports
products across a broad range of price points. The Company currently markets
over 500 custom-imprinted sports and non-sports related products with general
wholesale prices ranging from approximately $1.00 to $19.95 per item. The
following is a description of each of the Company's main product lines:
Baseball:
The Company uses a synthetic leather, official size and weight
baseball, as well as a synthetic leather, composite core jumbo baseball, on
which it prints or embosses various images. The baseball product line includes
baseballs featuring a player's image and statistics, embroidered baseballs, logo
team baseballs featuring logos of MLB and minor league baseball teams
(collectively "Professional Baseball"), mini-glove and baseball gift sets,
specialty baseballs including glow in the dark baseballs, medallion logo
baseballs and Softee(R) soft vinyl polyester filled baseballs licensed by
Professional Baseball, colleges and universities and several entertainment
properties and promotional baseballs custom-printed and used for promotions.
Football:
The Company uses a synthetic leather football in a variety of sizes and
finishes. The football product line includes Teamball TM and the NFL Player
Fotoball(R), mini-footballs featuring NFL team logos and full color images of
NFL players, official size footballs and Sofgrip(TM) footballs featuring
university or college logos, NFL souvenir official size footballs featuring team
and Super Bowl logos and NFL marks produced in limited edition,
performance/official size footballs featuring color images for specialty
retailers such as The Walt Disney Company and promotional full-size, Sofgrip(TM)
and miniature footballs custom-printed and used for promotions.
Basketball:
The Company uses a basketball with a high-grade synthetic leather
finish on six panels and white synthetic leather on two panels for its official
size and miniature basketballs. The Company uses an official size basketball
constructed of vulcanized rubber and an official size basketball constructed of
synthetic leather for its brand licensed and college product line. The
basketball product line includes University Teamball(R) made from synthetic
leather, both full and youth-size vulcanized rubber basketballs featuring a
full-color image of a university or college logo and nickname, NBA team logo
ball featuring full-color logos of several NBA teams sold to individual teams
for exclusive sale by the respective team within the arena, basketball hoop sets
with backboards featuring college logos combined with a mini-basketball,
performance/official size basketballs featuring full-color images for specialty
retailers and promotional basketballs in all sizes made primarily from
vulcanized rubber featuring graphic designs of team, college or corporate logos
for promotions.
Soccer Ball:
The Company uses a 16-inch, 12-panel machine stitched synthetic leather
soccer ball for its
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miniature soccer balls. The Company uses an official size 5 machine stitched
soccer ball for its brand-licensed products. The soccer product line includes
size 3 and performance/size 5 soccer ball featuring color images for specialty
retailers and promotional soccer balls custom-printed and used for promotions.
Hockey Puck:
The Company uses a hockey puck that is officially licensed with the
NHL. The hockey product line includes team puck featuring NHL team logos on a
brass medallion that adheres to the puck, player images and player facsimile
autographs on pucks packaged in a mini-net or with a stand.
Lapel Pin:
The Company produces a variety of lapel pin styles including
cloisonne, die struck, brass etched and steel for the licensed product retail
market, for corporate promotions and to brand licensed retail customers. The
lapel pin product line includes customized lapel pins for entertainment
customers, NCAA lapel pins for the NCAA championship series and the Final
Four(TM) tournament licensed by the NCAA and promotional pins custom
manufactured and used for corporate promotions and programs.
Playground Ball:
The Company uses a soft vulcanized rubber ball in various sizes for its
entertainment-related licensed products such as for Warner Bros. "Scooby Doo,"
Nickelodeon's "Blue's Clues" and Marvel Entertainment's "Spider-Man,"
"Incredible Hulk" and "X-Men" characters. The Company uses an 8-inch playground
ball for its MLB team logo playground ball featuring all MLB teams, as well as
for its NFL team logo playground ball featuring all NFL teams.
Softee(R)Sports Products:
The Company uses polyester-filled soft vinyl for its Softee(R) sport
balls. The Softee(R) product line includes a miniature bat and baseball set with
MLB and entertainment property logos, a Teamball(R) basketball featuring college
and minor league team logos and promotional miniature footballs and baseballs
custom-printed and used for promotions.
Bobblehead:
The Company offers a hard polymer doll figure with a moveable head in
sizes ranging from 3-inches to 7-inches high. The Company's 4-inch high dolls
are marketed under the brand Lil Bobbers(TM). The Company also offers a version
of the bobblehead doll under the brand Pencil Bobbers(TM) that can be attached
to the end of a pen or pencil. The bobblehead line features sports and
entertainment figures. The bobbleheads are currently being sold to promotions
and retail customers.
Plastic Souvenir Helmets:
The Company offers a line of souvenir baseball cap style helmets made
of injection molded plastic in full size for wear, and mini concession size to
be used as food containers. The souvenir helmets are currently sold under the
Company's MLB license to team and retail and promotions customers.
PRODUCT WARRANTIES
In general, the Company does not offer warranties for its products. The
Company does warrant to certain promotional customers that its products comply
with various consumer product safety laws, are of merchantable quality and are
safe for their intended use. A high rate of defective or broken products may
adversely affect the Company's image and sales performance in the marketplace,
as well as the overall operating results of the Company.
LICENSE AGREEMENTS
More than 50% of the Company's sales are based primarily upon its use
of the insignia, logos, names, colors, likeness and other identifying marks and
images borne by many of its products pursuant to license arrangements with MLB,
the NFL, various NCAA colleges and universities and, to a lesser extent, other
licensors including the NBA, the NHL, The Coca-Cola Company, Warner Bros.
"Scooby-
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Doo," MTV Networks' (Nickelodeon) "Blue's Clues" characters, Mattel's "Barbie"
and Marvel Entertainment's "Spider-Man," "Incredible Hulk" and "X-Men"
characters. The Company may acquire additional licenses for new product lines;
however, there can be no assurance that the Company will be successful in
obtaining new licenses. The non-renewal or termination of one or more of the
Company's current material licenses, particularly with MLB, the NFL or
collectively the various colleges and universities, could have a material
adverse effect on the Company's business as a whole. The following is a brief
description of the Company's material license arrangements with its licensors:
The Company was granted by National Football League Properties, Inc.
("NFLP") the non-exclusive right to utilize in the United States and Canada, the
names, symbols, designs and colors of the following: "National Football League,"
"NFL," "NFC," "AFC," "Super Bowl," "Pro Bowl," the Member Clubs of the NFL
(including the helmet designs, uniforms, team names, nicknames, identifying
slogans and logos and other member club indicia) (the "Team" license) and player
names, likeness, portraits, pictures, photographs, signatures and biographical
information. The terms of the licenses extend through March 31, 2003. The
Company is obligated to pay a royalty based on net sales of licensed products
subject to an annual minimum royalty fee. The Company anticipates that it will
renew its license with NFLP, but there can be no assurance that the Company will
be able to renew its license agreement with the NFLP upon acceptable terms at
its expiration.
The Company was granted by the Major League Baseball Players
Association ("MLBPA") the non-exclusive right to utilize in the United States,
its territories and Canada the "MLBPA" and "Major League Baseball Players
Association" trade names, the MLBPA logo and the names, nicknames, likeness,
signatures, pictures, playing records and/or biographical data of all active
baseball players of the National League and the American League who have entered
into commercial agreements with the MLBPA. The term of the license extends
through December 31, 2003 with two renewal periods at the Company's option from
January 1, 2004 to December 31, 2004 and from January 1, 2005 to December 31,
2005. The Company is obligated to pay a royalty based on net sales of licensed
products, subject to an annual minimum royalty fee. There can be no assurance
that the Company will be able to renew its license agreement with the MLBPA upon
acceptable terms at its expiration.
The Company was granted by Major League Baseball Properties, Inc.
("MLBP") the non-exclusive right to utilize in the United States the names,
symbols, logos and other similar or related identification of "MLBP." The term
of the license extends through December 31, 2003. The Company is obligated to
pay a royalty based on net sales of licensed products, subject to an annual
minimum royalty fee. There can be no assurance that the Company will be able to
renew its license agreement with the MLBP upon acceptable terms.
The Company maintains licenses with various colleges and universities
to use their names and logos on the Company's products. The Company was granted
a license by The Collegiate Licensing Company and the Licensing Resource Group,
both of which provide the licensing rights to several colleges and universities.
In addition, the Company has individual licenses with several colleges and
universities. No single college or university license represents a material
portion of the Company's license sales business. However, taken as a whole, all
of the college and university license sales are a material portion of the
Company's license sales business. There can be no assurance that the Company
will be able to renew all of its various college and university license
agreements upon acceptable terms at their expirations.
In December 2000, the Company entered into a five-year license
agreement, beginning January 1, 2001, with two five-year renewal terms, with
Rawlings Sporting Goods Company Inc. ("Rawlings") for the exclusive global
rights to sell golf clubs and golf related merchandise under the Rawlings brand
name. The Company paid a one-time licensing fee of $500,000, and was obligated
to pay a royalty based on net sales of licensed products, subject to an annual
minimum royalty fee. The Company gave Rawlings a termination notice in November
2001 and paid a final minimum royalty fee of $100,000 in four equal installments
of $25,000 during 2002.
6
Historically, the Company's material licenses have been renewed by its
licensors. Although the Company believes it will be able to renew its licenses
upon their expiration, there can be no assurance that such renewal can be
obtained on terms acceptable to the Company. The inability of the Company to
renew existing licenses and/or acquire additional licenses could have a material
adverse effect on the Company's sales and earnings.
GROSS MARGINS
The Company realized gross margins of 37% for the year ended December
31, 2002, an increase from 36% and 35% during the years ended December 31, 2001
and 2000, respectively. The Company's gross margins may fluctuate, based in part
on the concentration of promotion, retail sales, sales direct to licensors 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. The Company currently relies on various types of retail
customers for most of its revenue. The mass merchant retail business and
promotion business is very competitive and price sensitive for certain of the
Company's products and there is no guarantee that the Company will not be
required to reduce prices or change its product mix to replace higher margin
products with lower margin products in the future to remain competitive in the
marketplace. Such price reductions and product changes could lead to overall
lower gross margins and operating results.
SEASONALITY
The Company has historically experienced significant quarter-to-quarter
variability in its sales and net income resulting primarily from its sports
license sales focused on the fall and winter, the retail industry's holiday
shopping season and the timing of various large promotions. The Company has
successfully grown its various retail distribution channels to help mitigate the
variability caused by the promotions business. However, as the Company continues
to attempt to grow its promotions business, the potential for significant
quarter-to-quarter variability in revenue still exists as the Company produces
larger and larger promotions.
SALES CONCENTRATION
The Walt Disney Company, accounted for approximately 18%, 26% and 20%
of total sales in 2002, 2001 and 2000, respectively. Kraft Foods North America
Inc. accounted for 17% of total sales in 2002. No other customer represented
more than 10% of total sales in 2002, 2001 or 2000.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company is largely dependent on the personal efforts
of Michael Favish, its Chairman and Chief Executive Officer and Scott P. Dickey,
its President and Chief Operating Officer. Mr. Favish has entered into a
three-year employment agreement with the Company, commencing on August 10, 2002,
which, among other things, precludes Mr. Favish from competing with the Company
for a period of one year following termination of his employment with the
Company. Mr. Dickey has entered into a two-year employment agreement with the
Company, commencing on April 2, 2001. The Company is currently negotiating with
Mr. Dickey to renew his employment agreement and the Company anticipates that it
will be able to negotiate a mutually acceptable renewal. The loss of the
services of Mr. Favish or Mr. Dickey 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.
DEPENDENCE ON SUPPLIERS
In 2002, the Company purchased approximately 86% of its raw material
and finished goods, consisting primarily of synthetic baseballs, footballs,
basketballs, hockey pucks and playground balls, from twelve companies located in
China, with five manufacturers accounting for 82% of total raw materials and
finished goods purchased. In both 2001 and 2000, the Company purchased
approximately 88% of its raw materials from six suppliers.
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COMPETITION AND TECHNOLOGICAL CHANGE
The promotion and sports related retail businesses are highly
competitive, diverse and constantly changing. The Company experiences
substantial competition in most of its product categories from a number of
companies, some of which have greater financial resources, marketing and
manufacturing capabilities than the Company. The Company's competitors include:
Rawlings, Franklin Sports Inc. ("Franklin"), Baden Sports Inc. ("Baden"), Wilson
Sporting Goods Co. ("Wilson") Spalding Sports Worldwide, Inc. ("Spalding"),
Hedstrom Corporation ("Hedstrom") and Inglasco Corp. Ltd. ("Inglasco").
The Company competes primarily on the basis of customer service,
creativity in product design, quality and uniqueness of products, prompt
delivery and a reputation of reliability. The Company believes that it
successfully competes in each of the above areas and that the Company has an
advantage by offering a full range of services from design through distribution.
The future success of the Company is increasingly dependent upon the creativity
of its design team, its ability to reproduce these designs onto sports products
with high quality output and new product development.
The licensed sports-related product industry differentiates itself from
other industries in that the licensors control the extent of competition among
licensees and typically do not grant exclusive licenses. Generally, licensors
allow vendors to use licensed products under non-exclusive license agreements
and such licensors may license more than one vendor in a particular product
line. Although the Company has been successful in obtaining and renewing such
licenses and in being the sole vendor of certain licensed product lines, there
can be no assurance that other competitors will not obtain competing licenses to
sell the same or similar products in the future. The Company competes directly
with Franklin, Baden, Hedstrom and Wilson in the recreational vulcanized rubber
sports ball business. The Company also competes directly with Rawlings in the
team logo baseball business and for certain promotional baseball programs, as
noted below.
The domestic promotion business is highly competitive. The Company
competes frequently with the same companies as in its licensed sports product
business, particularly Inglasco, Spalding, Wilson and Rawlings. Additionally, a
variety of companies who outsource sports ball products from China do compete
against the Company for certain promotional orders. However, the Company
believes that its creativity, higher quality and reliable service result in a
competitive advantage. The Company's competitors include companies that have
significantly greater financial and other resources than the Company. There can
be no assurance that the Company will be able to compete effectively against
such companies in the future.
Within its retail business, the Company competes on the basis of its
quality manufacturing process, its strong relationships with its licensors, its
price point, brand equity of the Fotoball name in the marketplace and its use of
selected distribution channels for retail products. As previously noted, a
significant competitive advantage of the Company is its creative design
capabilities and its ability to reproduce these designs onto high quality
products.
TRADEMARKS, PROPRIETARY INFORMATION AND PATENTS
Fotoball(R) is a registered trademark of the Company. The Company
believes that Fotoball(R) is the best known brand name for baseballs and other
sports balls with imprinted color images. The Company also uses trademarks, such
as Teamball(R), Fotopuck(R), Dunk This(R) and Heads Up(R), which are registered
with the U.S. Patent and Trademark Office. The Company has applied for
trademarks with the U.S. Patent and Trademark Office for Lil Bobbers and Pencil
Bobbers. The Company considers the Fotoball(R) trademark to be material to its
business.
The Company is able to successfully reproduce a variety of intricate
designs on its products with detail and accuracy, using the Company's
proprietary printing process. The Company developed this process by combining
several pre-existing techniques that are used in other similar industries. The
Company does not rely upon any material patents or licensed technology in the
operation of its business.
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The Company does not believe that it is possible to be issued a patent on its
proprietary printing process and, accordingly, there can be no assurance that
the Company's techniques, processes and formulations will not otherwise become
known to, or independently developed by, competitors of the Company.
The cost of advancing the technology used in its printing process and
research and development costs associated with designing and creating new
products are presently not considered significant.
GOVERNMENTAL REGULATIONS
In the United States, the Company is subject to the provisions of,
among other laws, the Federal Hazardous Substances Act and the Federal Consumer
Products Safety Act. These laws empower the Consumer Product Safety Commission
(the "CPSC") to protect consumers from hazardous toys and other articles. The
CPSC has the authority to exclude from the market articles that are found to be
unsafe or hazardous and can require a recall of such products under certain
circumstances. Similar laws exist in some states and cities in the United
States, as well as in Canada and Europe. The Company has established a strong
quality assurance program (including the inspection of goods at the factories,
the retention of independent testing laboratories and the independent testing by
certain licensors of which product must pass certain external safety standards
for their own purposes) to ensure compliance with applicable laws and
regulations. While the Company believes that its products comply in all material
respects with regulatory standards, there can be no assurance that the Company's
products will not be found to violate applicable laws or rules and regulations
which could have a material adverse effect on the business, financial condition
and results of operations of the Company. In addition, there can be no assurance
that more restrictive laws, rules and regulations will not be adopted in the
future, or that the Company's products will not be marketed in the future in
countries with more restrictive laws, rules and regulations, either of which
could make compliance more difficult or expensive and which could have a
material adverse effect on the business, financial condition and results of
operations of the Company.
The Company is engaged in a business that could result in possible
claims for injury or damage resulting from its products. The Company is not
currently, nor has it been in the past, a defendant in any product liability
lawsuit. The Company currently maintains product liability insurance coverage in
amounts that it believes are adequate. There can be no assurance that the
Company will be able to maintain such coverage or obtain additional coverage on
acceptable terms, or that such insurance will provide adequate coverage against
all potential claims.
The Company's operations are subject to federal, state and local laws
and regulations relating to the environment, health and safety and other
regulatory matters. Certain processes of the Company's operations may, from time
to time, involve the use of substances that are classified as toxic or hazardous
within the meaning of these laws and regulations. The Company's imprinting
process involves the use of inks, ink thinners and xylene in the cleaning
process of the ball. The Company believes that it has obtained all material
permits and that its operations are in substantial compliance with all material
applicable environmental laws and regulations. Any non-compliance with
environmental laws and regulations is not likely to have a material adverse
effect on the Company under current operations, its results of operations or its
liquidity due primarily to the small quantities used in the processes. The cost
of compliance with environmental laws and regulations are not considered to be
significant at this time.
EMPLOYEES
As of March 1, 2003, the Company employed 142 persons, all on a
full-time basis, including 6 in executive positions, 17 in sales, 16 in graphic
production, 49 in administrative support positions and 54 in factory production
and shipping. None of the Company's employees are covered by a collective
bargaining agreement. The Company believes its relationship with its employees
is satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters, decorating and inflate and pack operations
and warehouses are
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located in approximately 101,000 square feet of leased space at 6740 Cobra Way,
San Diego, California 92121. The headquarters are leased from an unaffiliated
party under a ten-year lease agreement, which commenced in August 2000 and
expires July 2010 with monthly rent increasing incrementally from $79,498 to
$101,461.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders
during the fourth quarter of the year ended December 31, 2002.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") is traded over-the-counter
on the Nasdaq National Market. The following table sets forth the range of trade
prices for the Common Stock during the periods indicated and represents
inter-dealer prices, without retail mark-ups, mark-downs or commissions to the
broker-dealer and may not necessarily represent actual transactions.
Symbol High Low
------------------ ------------------ ------------------
Common Stock: (FUSA)
2001
First quarter $ 2.13 $ 1.05
Second quarter $ 2.75 $ 1.25
Third quarter $ 3.10 $ 1.51
Fourth quarter $ 3.60 $ 2.95
2002
First quarter $ 4.70 $ 3.01
Second quarter $ 5.63 $ 4.50
Third quarter $ 4.90 $ 4.20
Fourth quarter $ 4.85 $ 3.90
On March 14, 2003, there were approximately 82 holders of record of the
Common Stock. Based on information provided by the Company's transfer agent and
registrar, the Company believes that there are approximately 1,379 beneficial
owners of the Common Stock.
The Company has never paid dividends on the Common Stock and does not
anticipate paying any dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
---------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
Statements of operations
Net sales $43,995,967 $31,631,931 $26,687,158 $28,690,211 $19,147,728
Income from continuing operations $ 932,116 $ 123,444 $ 179,271 $ 2,646,066 $ 597,874
Income from continuing operations
per common share
Basic $ 0.26 $ 0.03 $ 0.05 $ 0.88 $ 0.22
Diluted $ 0.24 $ 0.03 $ 0.05 $ 0.83 $ 0.22
As of December 31,
---------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ---------------- ---------------- ---------------- ----------------
Balance sheet data
Total assets $16,454,862 $17,000,488 $14,808,886 $13,827,878 $7,894,609
Total debt $ 878,268 $ 1,945,061 $ 944,651 $ 406,937 $ 250,476
Stockholders' equity $11,827,856 $10,821,411 $11,806,523 $11,588,721 $5,888,505
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000:
The following table sets forth certain operating data (in whole dollars
and as a percentage of the Company's net sales) for the years ended December 31,
2002, 2001 and 2000:
Years ended December 31,
-----------------------------------------------------------------------------------
2002 % 2001 % 2000 %
----------------- ------- ---------------- ------- ----------------- -------
Net sales $43,995,967 100 $31,631,931 100 $26,687,158 100
Cost of sales 27,713,725 63 20,164,421 64 17,241,579 65
Gross profit 16,282,242 37 11,467,510 36 9,445,579 35
Operating expenses 14,811,786 34 11,310,069 36 9,275,159 35
Income from operations 1,470,456 3 157,441 1 170,420 1
Interest expense (39,754) -- (96,036) -- (32,249) --
Interest income 77,414 -- 104,039 -- 127,100 --
Income from continuing operations
before income tax 1,508,116 3 165,444 1 265,271 1
Income tax expense 576,000 1 42,000 -- 86,000 --
Income from continuing operations 932,116 2 123,444 -- 179,271 1
Loss on discontinued operations
net of tax benefit -- -- (484,650) 2 -- --
Loss on disposal of discontinued
operations net of tax benefit -- -- (629,376) 2 -- --
----------------- ---------------- -----------------
Net income (loss) $ 932,116 2 $ (990,582) (3) $ 179,271 1
================= ================ =================
CRITICAL ACCOUNTING POLICIES
In response to the SEC's Release Numbers 33-8050 "Cautionary Advice
Regarding Disclosure about Critical Accounting Policies" and 33-8056 "Commission
Statement about Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Company has identified critical accounting policies
that reflect the more significant judgments and estimates used in its financial
statements. On an ongoing basis the Company evaluates its estimates, bases its
estimates on the information that is currently available to and on various other
assumptions that the Company believes to be reasonable under the circumstances.
Actual results could vary from those estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies reflect
the more significant judgments and estimates used in the preparation of its
financial statements.
Sales of products domestically are recognized when the products are
shipped from the Company's facility. Sales terms in general are FOB shipping
point and title passes at the time of shipment. Sales of imported products,
which are drop shipped directly to the customer, are recognized at the time
shipments are received at the customer's designated location. There are no
significant rights of return or customer acceptance provisions with respect to
the Company's sales. The Company may from time to time agree to accept returns
from customers as an accommodation. Consignment sales, which are generally not
significant, are recognized when the consignee sells the products.
In order to determine the value of the Company's accounts receivable,
the Company makes allowances for estimated bad debts based on a variable
percentage applied by credit risk, for other uncollectible amounts including
estimated chargebacks and volume discounts based on type of customer and
applicable customer agreements, and for estimated sales returns based upon
actual return rates. The
12
Company treats bad debts and other uncollectible amounts as operating expenses
and volume discounts as a reduction of sales. If the credit worthiness or
payment experience of the Company's customers deteriorates significantly, it
could cause the Company to revise its allowance estimates, which could have a
negative impact on the profitability of the Company.
Effective for its fiscal year beginning January 1, 2002, the Company
adopted new accounting pronouncements that require certain sales incentives,
slotting fees and cooperative advertising expenses to be classified as
reductions of sales rather than as expenses. There is no impact to the Company's
net income (loss) as a result of the adoption of these pronouncements. The
Company estimates cooperative advertising fees as a percentage of sales in
accordance with its various cooperative advertising agreements. If the Company
is required to significantly increase the amount of cooperative advertising to
remain competitive in the marketplace, it could have a negative impact on the
Company's gross margin and overall operating results. The Company believes that,
in general, increases in cooperative advertising allowances will lead to higher
sales and more than offset the negative impact on the gross margins.
Inventories have been valued at the lower of cost or market. Cost is
determined using the first-in, first-out method. The Company periodically
reviews its inventory to evaluate it for discontinued and obsolete products by
looking at the turnover of each item and identifying slow moving inventory. The
Company applies a realization factor to the slow moving inventory based on
historical dispositions of discontinued and obsolete inventory. Any inventory
items where the cost exceeds the realizable value is provided for in the reserve
for discontinued and obsolete inventory. Additions to the reserve allowance are
charged to costs of sales. The loss from the liquidation or destruction of
obsolete and discontinued inventory is applied against the inventory reserve
allowance. If the Company is unable to reasonably forecast customer demand for
its products, it may cause the Company to write-down larger than usual amounts
of excess inventory that becomes obsolete or discontinued, which would have a
negative impact on the profitability of the Company.
2002 VS. 2001
NET SALES:
DISTRIBUTION CHANNEL Years ended December 31,
------------------------------------------------
2002 2001 2000
% Sales % Sales % Sales
------------- -------------- -------------
Retail 28% 37% 48%
Entertainment 27% 36% 31%
Team 12% 14% 13%
Promotion 33% 13% 8%
Sales increased $12.4 million, or 39%, for the year ended December 31,
2002 from sales for the year ended December 31, 2001. Retail sales for 2002
increased by 5% from 2001. The increase was due to an increase in sales to mass
merchant and sporting goods stores offset by a decline in sales to toy
specialty, distributor and department stores. The Company anticipates retail
sales growth in 2003 from mass merchant and sporting goods customers.
Entertainment sales for 2002 increased 3% from 2001. The increase was
primarily due to increases in sales to restaurant and direct response retail
customers offsetting a decrease in sales to The Walt Disney Company. The Company
anticipates entertainment sales declines in 2003 from The Walt Disney Company
due to the Disney Store's strategic move towards direct sourcing of product and
entertainment sales increases from restaurant and other entertainment
destination customers.
Team sales for 2002 increased 25% from 2001. The increase was due to
sales increases to MLB and NFL teams and concessionaires. NFL sales were up 325%
for 2002 and had the largest dollar increases in sales compared to 2001. The
Company anticipates increases in team sales in 2003 from a full
13
season of souvenir helmet sales.
Promotion sales for 2002 increased 245% from 2001. The increase was due
to promotions in 2002 with Kraft Foods North America and major quick-serve
restaurants. The Company anticipates that its promotions sales will decrease in
2003 compared to 2002 sales.
PRODUCT LINE SALES
2002 2001 2000
% Sales % Sales % Sales
------------- -------------- -------------
Bobbleheads 27% -- --
Football 19% 28% 33%
Baseball 13% 21% 20%
Basketball 7% 9% 13%
Lapel pins 14% 18% 5%
Playground balls 12% 13% 13%
Soccer/volleyball 2% 6% 8%
Helmets 1% -- --
Coins -- -- 5%
Other 5% 5% 3%
------------- -------------- -------------
Total 100% 100% 100%
============= ============== =============
During 2002, the Company realized product sales increases when compared
to 2001 of playground balls (35%), basketball (12%) and lapel pins (7%). This
growth was offset by declines in the sales of soccer/volleyball (53%), baseballs
(16%) and footballs (6%).
GROSS PROFIT:
Gross profit increased 42% for the year ended December 31, 2002 from
gross profit for the year ended December 31, 2001. Gross margins as a percentage
of net sales increased to 37% in 2002 from 36% in 2001. The Company's gross
margins as a percentage of net sales increased from 2001 to 2002 due primarily
to higher inventory write-downs in 2001 and higher gross margins on its main
product lines in 2002 offset by a higher proportion of promotional sales in 2002
which typically carry lower gross margins than the Company's retail customer
sales. As previously noted, the Company's gross margins may fluctuate,
particularly between quarters, based on several factors including sales and
product mix (See Part I, Item 1. "Description of Business"). The Company
anticipates that, with its planned product mix and lower raw material costs, it
will be able to sustain gross margin levels in 2003 at or above the 2002 gross
margin level.
OPERATING EXPENSES:
Total operating expenses increased 31% for the year ended December 31,
2002 from total operating expenses for the year ended December 31, 2001.
Operating expenses as a percentage of net sales decreased to 34% in 2002 from
36% in 2001. Operating expenses increased in absolute dollars due to an increase
in royalty expense and personnel and salary expenses.
Royalty expense increased 51% for the year ended December 31, 2002 from
royalty expense for the year ended December 31, 2001 due to the increase in
overall sales. Royalty expense, as a percentage of net sales, increased to 8% in
2002 from 7% in 2001. To broaden the Company's scope of product lines and expand
market share, the Company will continue to pursue additional product categories
with existing licensees and new license agreements with various organizations in
the future.
Marketing expenses increased 37% for the year ended December 31, 2002
from marketing expenses for the year ended December 31, 2001. Marketing expenses
as a percentage of net sales remained at 11% for both years. The increase in
marketing expenses reflects increases in personnel and salary expenses and
outside commission expenses offset by lower advertising expenses, compared to
14
prior year. The Company anticipates that its marketing expenses, as a percentage
of net sales, will remain constant in 2003 from 2002.
General and administrative expenses increased 21% for the year ended
December 31, 2002 from general and administrative expenses for the year ended
December 31, 2001. General and administrative expenses as a percentage of net
sales decreased to 14% in 2002 from 16% in 2001. General and administrative
expenses increased in 2002 from 2001 due in part to increases in salary-related
expenses and facilities expense offset by lower bad debt expense. The Company
anticipates that its general and administrative expenses, as a percentage of net
sales, will increase in 2003 from 2002.
OTHER INCOME (EXPENSE):
Interest expense was $39,754 for the year ended December 31, 2002, a
decrease of $56,282 from interest expense of $96,036 for the year ended December
31, 2001 due to the reduction in the Company's bank debt outstanding in 2002. As
of December 31, 2002 the Company had $0.7 million of bank debt outstanding
versus $1.7 million at December 31, 2001.
Interest income was $77,414 for the year ended December 31, 2002, a
decrease of $26,625 from interest income of $104,039 for the year ended December
31, 2001. This decrease is due to the lower interest rates in 2002 as compared
to 2001. Excess cash is deposited into an interest-bearing depository account.
INCOME TAX EXPENSE:
The effective income tax rate on income from continuing operations for
the year ended December 31, 2002 was 38% as compared to 25% for the year ended
December 31, 2001. Income tax benefits recognized during 2001 relate primarily
to the net operating loss generated by the discontinued Rawlings Golf
operations.
2001 VS. 2000
NET SALES:
Sales increased $4.9 million, or 19%, for the year ended December 31,
2001 from sales for the year ended December 31, 2000. Retail sales for 2001
decreased by 8% from 2000. The decrease was due to a decrease in sales to toy
specialty, distributor and department stores. This decrease was partially offset
by increases in sales to certain mass merchant and sporting goods customers.
Entertainment sales for 2001 increased 36% from 2000. The increase was
primarily due to a 29% increase in sales to The Walt Disney Company for 2001. A
decrease in 2001 sales to other theme parks was offset by increases in sales to
restaurant and direct response retail customers. The Company has supplied
product for an annual promotion for the Disney Store in 2001 and 2000.
Team sales for 2001 increased 27% from 2000. The increase was due to
sales increases to all professional league teams and concessionaires except for
the NFL sales, which were down from 2000. MLB and Minor League Baseball sales
were up 30% and 45%, respectively, for 2001 and had the largest dollar increases
in sales compared to 2000.
Promotion sales for 2001 increased 94% from 2000. The increase was due
to promotions in 2001 with a national auto parts retailer and two different
major quick-serve restaurants. The Company has experienced an increase in both
the number and size of its promotions compared to 2000.
During 2001, the Company realized product sales increases when compared
to 2000 of lapel pins 324%, baseballs 24% and playground balls 19%. This growth
was offset by declines in the sales of footballs 1%, soccer 14%, basketball 21%
and coins (percentage is not meaningful since sales only occurred in 2000).
15
GROSS PROFIT:
Gross profit increased 21% for the year ended December 31, 2001 from
gross profit for the year ended December 31, 2000. Gross margins as a percentage
of net sales increased to 36% in 2001 from 35% in 2000. The Company's gross
margins as a percentage of net sales increased from 2000 to 2001 due primarily
to a differing product mix, including an increase in lapel pin sales from the
prior year, which carried higher than average gross margins when compared to
footballs, baseballs and the other products. The increase in lapel pin and
baseball sales in combination with raw material cost savings was offset by a
$0.6 million increase from 2000 to 2001 in write-downs of discontinued and
obsolete inventory. As previously noted, the Company's gross margins may
fluctuate, particularly between quarters, based on several factors including
sales and product mix (See Part I, Item 1. "Description of Business").
OPERATING EXPENSES:
Total operating expenses increased 22% for the year ended December 31,
2001 from total operating expenses for the year ended December 31, 2000.
Operating expenses as a percentage of net sales increased to 36% in 2001 from
35% in 2000. Operating expenses increased in absolute dollars due to an increase
in royalty expense, personnel and salary expenses and a full year of facilities
costs for the new building in 2001 versus a partial year in 2000.
Royalty expense increased 16% for the year ended December 31, 2001 from
royalty expense for the year ended December 31, 2000 due to the increase in
overall sales. Royalty expense, as a percentage of net sales was 7% in both 2001
and 2000.
Marketing expenses increased 20% for the year ended December 31, 2001
from marketing expenses for the year ended December 31, 2000. Marketing expenses
as a percentage of net sales remained at 11% for both years. The increase in
marketing expense reflects increases in personnel and salary expenses, show
expenses and sample expenses.
General and administrative expenses increased 31% for the year ended
December 31, 2001 from general and administrative expenses for the year ended
December 31, 2000. General and administrative expenses as a percentage of net
sales increased to 16% in 2001 from 14% in 2000. General and administrative
expenses increased in absolute dollars in 2001 from 2000 due in part to
increases in salary-related expenses, bad debt expense and facilities expense
based on a full year of occupation in the current facilities in 2001 versus six
months in 2000.
OTHER INCOME (EXPENSE):
Interest expense was $96,036 for the year ended December 31, 2001, an
increase of $63,787 from interest expense of $32,249 for the year ended December
31, 2000. The increase was primarily due an increase in the Company's term debt
including a $0.4 million term loan in December 2000 and $1.5 million term loan
in March 2001. As of December 31, 2001 and December 31, 2000, there were no
borrowings under the credit line.
Interest income was $104,039 for the year ended December 31, 2001, a
decrease of $23,061 from interest income of $127,100 for the year ended December
31, 2000. This decrease is due to the Company's lower average cash balances
available for investment and lower interest rates in 2001 as compared to 2000.
Excess cash was deposited into an interest-bearing depository account.
INCOME TAX EXPENSE:
The effective income tax rate on income from continuing operations for
the year ended December 31, 2001 was 25% as compared to 32% for the year ended
December 31, 2000. Income tax benefits recognized during 2001 relate primarily
to the net operating loss generated by the discontinued Rawlings Golf
operations.
16
DISCONTINUED OPERATIONS
In December 2000, the Company entered into an agreement with Rawlings
for the exclusive global rights to sell golf clubs and golf related merchandise
under the Rawlings brand name beginning January 1, 2001. In January 2001, the
Company established a new Rawlings Golf division to design, develop, manufacture
and market golf products under the Rawlings brand name. On November 13, 2001,
the Company made the decision to terminate its license with Rawlings and
discontinue its Rawlings Golf operations. Revenue and expenses incurred from
January 2001 to November 13, 2001 have been included in the loss on discontinued
operations, net of a tax benefit of $245,000. The majority of this loss was the
result of sales and marketing costs and travel costs incurred to launch this
division. Loss on disposal of discontinued operations includes costs from the
termination of the licensing agreement with Rawlings, including the write-off of
the remaining unamortized global rights fees, unamortized minimum royalties,
inventory, interest costs and terminal rights fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital increased to $10.7 million at
December 31, 2002 from $9.9 million at December 31, 2001.
Cash flows provided by operations decreased $1.4 million in 2002 from
cash provided by operations in 2001. This decrease was primarily the result of a
decrease in customer deposits and an increase in inventories partially offset by
decreases in prepaid expenses and an increase in accounts payable and accrued
expenses. The decrease in customer deposits resulted from a down payment at the
end of 2001 for a large promotion project that was completed in the first half
of 2002. Inventory increased in 2002 due to the Company purchasing more
inventory at the end of 2002 due to the uncertainty over the West Coast dock
labor situation that existed at the end of 2002. Since the end of 2002 the West
Coast dock labor situation has been resolved. Accounts payable and accrued
expenses increased in 2002 due to higher inventory payables and higher bonus
accruals.
Days sales outstanding, calculated in 2002 on a annual basis, improved
29% over 2001 due to the higher proportion of promotional sales in 2002 carrying
more favorable payment terms than retail customer sales. Inventory turns,
calculated on an annual basis, improved 38% over 2001.
Cash and equivalents were $5.2 million at December 31, 2002, a decrease
of $0.6 million from $5.8 million of cash and equivalents at December 31, 2001.
This decrease in cash was primarily due to the repayment of bank debt in 2002.
The Company's credit line with U.S. Bank National Association ("US
Bank") expired on May 15, 2002. There were no outstanding borrowings under the
US Bank credit line when it expired. The Company obtained a new credit line from
Comerica Bank-California ("Comerica") on June 24, 2002. The Comerica credit line
is limited to the lesser of $5 million or 80% of eligible accounts receivable,
as defined in the loan agreement, and carries interest at the rate of the
Comerica prime rate (4.25% as of December 31, 2002) plus 0.5%. The credit line
contains a special sublimit of $1.2 million that is reduced by $0.3 million on
each anniversary of the loan agreement. On June 26, 2002, the Company borrowed
$1 million under the special sublimit to refinance the outstanding balance on
its $1.5 million term loan with US Bank. The Company's assets collateralize the
Comerica credit line. The loan agreement contains financial covenants applicable
to the credit line requiring the Company to maintain a minimum current ratio of
2 to 1, a minimum quick ratio of 1.25 to 1, a maximum debt to worth ratio of 1
to 1, net income of more than $100,000 on a rolling six month basis and a
minimum earnings before interest and taxes to interest expense ratio of 2 to 1.
For purposes of calculating the financial covenant ratios, "current liabilities"
include amounts outstanding under the credit line except for the special
sublimit. The credit line matures on December 24, 2004. On June 27, 2002, the
Company paid off the $0.3 million outstanding on its $0.4 million term loan with
US Bank. The Company is in compliance with the covenants as of December 31,
2002. At December 31, 2002, $0.67 million under the special sublimit was the
only outstanding borrowings.
17
For the next twelve months, the Company anticipates that its capital
expenditure requirements will approximate $0.9 million, which will be used to
upgrade accounting and manufacturing systems, purchase additional computer
systems and product molds.
The following table summarizes future minimum contractual obligations
of the Company:
Payments due by period
--------------------------------------------------------------------------------------
Less than --------------- --------------- ---------------
Total 1 year 1-3 years 4-5 years After 5 years
--------------- ---------------- --------------- --------------- ---------------
Line of Credit (1) $ 669,397 $ -- $ 669,397 $ -- $ --
Capital leases 239,089 89,166 144,762 5,161 --
Operating leases 8,542,617 1,012,597 3,157,975 2,231,692 2,140,353
Royalties 1,135,000 697,500 437,500 -- --
--------------- ---------------- ---------------- ---------------- ----------------
Total contractual
cash obligations $10,586,103 $ 1,799,263 $ 4,409,634 $ 2,236,853 $2,140,353
=============== ================ ================ ================ ================
(1) Principal payments only. Subject to financial covenants noted
above.
The Company has recently been able to fund its continuing operations
from cash flow from operations. The nature of the promotions business leads to
large individual orders that require the up-front purchase of large amounts of
inventory. The Company has successfully negotiated payment terms with its
promotions customers allowing for deposits to help fund the cost of inventory.
There can be no guarantee that the Company will be able to continue negotiating
deposits with its promotions customers. In addition, significant increases in
retail sales may require the purchase of additional inventory to meet the short
turn-around times required by large retail customers. The Company's line of
credit requires it maintain net income of more than $100,000 on a rolling six
month basis. The Company must achieve net income of at least $75,000 in the
first quarter of 2003 to stay in compliance with this covenant. If the Company
fails to stay in compliance with his covenant, it may not be able to negotiate a
waiver from Comerica thereby requiring repayment of the total amount outstanding
on its line of credit and potentially impacting its ability to fund its future
working capital requirements or it may be able to negotiate a waiver but
experience an increase in the cost of its debt financing.
Management believes that if the Company is able to stay in compliance
with the net income covenant on its line of credit or negotiate a waiver of such
covenant, its existing cash position and credit facilities, combined with
internally generated cash flows, will be adequate to support the Company's
liquidity and capital needs at least through 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets (SFAS 143)."
SFAS 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. It also applies to certain legal obligations associated with
the retirement of long-lived assets. SFAS 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company plans to
adopt the provisions of SFAS 143 beginning January 1, 2003 and does not expect
it will have a material impact on the results of operations or financial
position.
In April 2002 the FASB issued Statement of Financial Accounting
Standards No. 145 (SFAS No. 145), "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections." This
statement updates, clarifies and simplifies existing accounting
18
pronouncements including: rescinding SFAS No. 4, which required all gains and
losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect and
amending SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale lease-back transactions be accounted for in the
same manner as sale lease-back transactions. SFAS No. 145 is effective for
fiscal years beginning after May 15, 2002 with early adoption of the provisions
related to the rescission of SFAS No. 4 encouraged. The Company plans to adopt
the provisions of SFAS 145 beginning January 1, 2003 and does not anticipate
that it will have a material effect on the results of operations or financial
position.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS No. 146), "Accounting for Costs Associated with Exit or
Disposal Activities," which addresses accounting for restructuring and similar
costs. SFAS No. 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force Issue No. 94-3. SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
was recognized at the date of the Company's commitment to an exit plan. SFAS No.
146 also establishes that the liability should initially be measured and
recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of
recognizing any future restructuring costs as well as the amounts recognized.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002. The Company will adopt the provisions of SFAS No. 146
on January 1, 2003. The Company does not anticipate that the adoption of SFAS
No. 146 will have a material effect on the results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 provides expanded
accounting guidance surrounding liability recognition and disclosure
requirements related to guarantees, as defined by this interpretation. The
disclosure requirements of this interpretation are effective for interim or
annual periods ending after December 15, 2002. The recognition and measurment
provisions of this interpretation are applicable on a prospective basis only to
guarantees issued or modified after December 31, 2002. The Company adopted the
disclosure provisions of FIN 45 during the quarter ended December 31, 2002. In
the ordinary course of business, the Company is not subject to potential
obligations under guarantees that fall within the scope FIN 45.
On January 17, 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities." Variable interest entities
include such entities often referred to as structured finance or special purpose
entities. FIN 46 expands upon and strengthens existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either does not have equity investors with voting rights or has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or is entitled to
receive a majority of the entity's residual returns or both. The consolidation
requirements of FIN 46 apply immediately to variable interest entities created
after January 31, 2003. The consolidation requirements apply to older entities
in the first fiscal year or interim period beginning after June 15, 2003. FIN 46
will also affect leasing transactions where the lessor is a variable interest
entity. Disclosure requirements apply to any financial statements issued after
January 31, 2003. The Company does not believe that the adoption of this
accounting pronouncement will have a material impact on the Company's financial
statements and related disclosures.
2003 OUTLOOK
The Company is seeking to generate growth both internally and
externally during 2003. The Company anticipates increases in retail and team
sales in 2003, based on continued product line expansion and increased licensing
rights with the professional leagues. The Company anticipates a
19
decrease in entertainment sales due to a decline in sales to the Disney Stores
and lower promotional sales in 2003 due to the magnitude of the one-time $7
million Post Cereal promotion from the spring of 2002. Due to the size and
timing of individual promotions, the Company may experience significant
quarterly fluctuations in promotion sales. The Company intends to seek to
enhance its internal growth opportunities by exploring acquisitions of
established souvenir and sporting goods products that will provide opportunities
to expand the Company's product lines, leverage the Company's relationships with
its licensors and increase promotional opportunities.
In an effort to pursue growth through acquisitions in 2003, the Company
has incurred, and anticipates that it will continue to incur,
acquisition-related expenses that will only be capitalizable if it is successful
in such acquisitions. If the Company is unsuccessful in its acquisition
attempts, any acquisition-related expenses will be expensed in the quarter in
which it is determined that it is reasonably likely the acquisition will not
occur. The result of the expensing of any acquisition-related expenses may have
a material adverse impact on the Company's profitability in the quarter in which
they are expensed and may likely have a material adverse impact on the Company's
profitability in 2003.
With its planned product mix and lower promotion sales, the Company
anticipates that it will be able to sustain gross margin levels in 2003 at or
above the 2002 gross margin level.
There can be no assurance that the Company will be able to successfully
increase its sales or income in 2003. The most important factors that could
prevent the Company from achieving these goals - and cause actual results to
differ materially from those expressed in the forward-looking statements -
include, but are not limited to, the following:
o The ability of the Company to maintain its retail division sales
by maintaining the appeal and desirability of its existing product
lines and continuing to develop new product offerings.
o The impact of increasing competition from other sports product
licensed companies, including companies that have or may receive
the same or similar licensing rights as the Company and may have
substantially greater financial resources than the Company.
o The ability to maintain and renew its significant licensing
arrangements.
o The popularity of current or future licensing properties and the
ability of the Company to leverage these properties to produce
sales.
o The growth in the popularity of licensed sports products.
o The effectiveness of the Company's sales staff in expanding the
breadth of the Company's customer base and significantly
increasing sales.
o The employment and retention of high producing sales staff.
o The ability to maintain or increase its overall gross margins or
the inability to maintain the higher level of gross margins
realized from its sports related products.
o The potential negative impact on operating margins resulting from
an expansion of the Company's cost infrastructure at a rate that
exceeds its growth in sales and gross margins.
o The ability to expand its customer base, particularly in its
promotion business, and to decrease its concentration of sales
among a few significant customers.
o The ability to maintain or increase sales with divisions of The
Walt Disney Company other than the Disney Store.
o The ability to source products from Asia at competitive prices
without delays, increased tariffs, other restrictions or
unanticipated costs.
o The ability to effectively meet customer demands regarding timely
delivery and order fulfillment without incurring air freight and
other expedite costs.
o The ability of the Company to find available acquisition
opportunities, to obtain appropriate financing and to consummate
acquisitions on acceptable terms. There can be no assurance that
the Company will be able to consummate any acquisition on
acceptable terms.
20
These and other risks and uncertainties affecting the Company are
discussed in greater detail in this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk relates to interest rate risk
with its variable rate term loans and credit line. The Company does not use
derivative financial instruments to manage or reduce market risk. As of December
31, 2002, the Company's only variable rate debt outstanding was the $0.67
million balance on its line of credit with Comerica used to finance the
discontinued Rawlings Golf operation. A 10% change in future interest rates on
the variable rate term loans would not lead to a material decrease in future
earnings assuming all other factors remained constant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements referred to in the
accompanying index to Financial Statements and Supplemental Data of Fotoball
USA, Inc., together with the independent auditors' reports.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In February 2001, the accounting firm Hollander, Lumer & Co. LLP
("HLC") merged with Good Swartz Brown & Berns LLP ("GSBB") and the partner in
charge of the Company's account, Victor Hollander ("Hollander"), became a
partner of GSBB. As a result of the merger of GSBB and HLC and Hollander
becoming a partner of GSBB, the Company became a client of GSBB. Effective March
26, 2001, HLC resigned as the independent accountant of the Company. Effective
March 26, 2001, the Company engaged GSBB as the Company's new independent
accountants. The Company's Board of Directors approved the retention of GSBB.
In March 2002, the Company dismissed GSBB as the Company's independent
accountant and engaged KPMG LLP ("KPMG") as the Company's new independent
accountants. The dismissal of GSBB and retention of KPMG were approved by the
Company's Audit Committee. The Company determined that a national accounting
firm will better serve its future auditing needs.
The reports of HLC and GSBB on the financial statements of the Company
for the past two fiscal years contained no adverse opinion or disclaimer of
opinion and were not qualified or modified as to uncertainty, audit scope or
accounting principle. During the two most recent fiscal years and through March
2002, there were no disagreements between the Company and HLC or GSBB on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of HLC and GSBB, would have caused HLC or GSBB to make reference to
the subject matter thereof in its report on the Company's financial statements
for such periods. During the two most recent fiscal years and through March
2002, there were no "reportable events" (as defined in Item 304(a)(1)(v) of
Regulation S-K).
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information as of March 15, 2003
concerning the executive officers and directors of the Company:
NAME AGE POSITION
- ---- --- --------
Michael Favish 54 Chairman, Chief Executive Officer and Director
Nicholas A. Giordano 1,2 60 Director
Joel K. Rubenstein 1,2 66 Director
John J. Shea 1,2 65 Director
James D. McQuaid 65 Director
Scott P. Dickey 36 President, Chief Operating Officer and Director
Thomas R. Hillebrandt 41 Senior Vice President and Chief Financial Officer
Arthur E. McElfresh 47 Vice President, Sales and Marketing, Retail and Team Business
Karen M. Betro 52 Vice President, Operations
Steven B. Katzke 36 Vice President, Entertainment Sales and Marketing
- --------
1. Member of compensation committee
2. Member of audit committee
MICHAEL FAVISH has served as a director of the Company since his
founding of the Company in December 1988 and as Chairman and Chief Executive
Officer since April 2001 and as President, Chief Executive Officer and a
director of the Company from March 1994 to April 2001. Mr. Favish has over 28
years of product design, manufacturing and sourcing experience and has
established a number of strategic international sourcing alliances.
NICHOLAS A. GIORDANO has served as a director of the Company since July
1998. In July 1998, Mr. Giordano was appointed interim President of LaSalle
University for a one-year term. Additionally, from 1971 through August 1997, Mr.
Giordano held various positions at The Philadelphia Stock Exchange, including
from 1981 to 1997 as President and Chief Executive Officer. He also served as
Chairman of the Board of the exchange's two subsidiaries: Stock Clearing
Corporation of Philadelphia and Philadelphia Depository Trust Company. Mr.
Giordano's previous business experience includes serving as Chief Financial
Officer at two brokerage firms (1968-1971) and as a Certified Public Accountant
at Price Waterhouse (1965-1971). Mr. Giordano is currently serving on the Board
of Directors of W.T. Mutual Fund, Kalmar Investment, DaisyTek International, and
Selas Corporation of America, all of which are publicly-held corporations.
JOEL K. RUBENSTEIN has served as a director of the Company since August
1994. From April 1990 through April 1992 and from March 1994 to present, Mr.
Rubenstein has been a partner of the Contrarian Group, Inc., an operating
management company. In addition, from April 1994 to present, Mr. Rubenstein has
been a principal of Oracle One Partners, Inc., a marketing management company.
From April 1992 through March 1994, Mr. Rubenstein served as the Senior Project
Manager, Business & Economic Development for Rebuild L.A., the recovery
organization created after the Los Angeles riots. Prior to such time, from
January 1985 through April 1990, Mr. Rubenstein served as the Vice President,
Corporate Marketing for Major League Baseball, Office of the Commissioner. Mr.
Rubenstein is currently serving on the Board of Directors of SSP Solutions, a
publicly held corporation.
JOHN J. SHEA has served as director of the Company since August 1999.
Mr. Shea served as President and Chief Executive Officer of Spiegel, Inc. from
1985 through 1997 and Vice Chairman of Spiegel from 1989 to 1997. Before joining
Spiegel, Mr. Shea worked 21 years at the John Wanamaker
22
Company, Philadelphia, serving ultimately as Senior Vice President and a member
of the Executive Board. Mr. Shea also served as Chairman of the Board of the
National Retail Federation, the world's largest retail trade association. Mr.
Shea also serves as a member of the Advisory Board of the Kellogg Graduate
School of Management at Northwestern University. Mr. Shea is currently serving,
and has served, as a member of the Board of Directors of Pulte Corporation, a
publicly-held corporation, since January 1995.
JAMES D. MCQUAID has served as director of the Company since January
2003. In 1997 Mr. McQuaid co-founded MFM Asset Management, a broker/dealer that
was sold to Wunderlick Securities, Inc. in 2001. Mr. McQuaid served as President
of Marketing Electronics Corp. from 1969 until its merger into Metromail Corp.
in 1979. While at Metromail Corp. Mr. McQuaid served as Executive Vice
President from 1979 to 1985, President from 1985 to 1989 and Chairman from 1989
to 1996 and continued to serve as a consultant to Metromail Corp. until 2001.
Metromail Corp. went public in 1984 and was sold to R.R. Donnelley & Sons in
1987. Prior to Marketing Electronics Corp., Mr. McQuaid worked eight years in
various positions for Spiegel, Inc., Montgomery Ward and Consumer Systems Corp.
Mr. McQuaid has also served as a member and Chairman of the Direct Marketing
Association's Board of Directors for 12 years. Currently, Mr. McQuaid serves as
a member of the Northwestern University Cancer Center Development Advisory
Committee.
SCOTT P. DICKEY has served as a director of the Company since January
2003 and as President and Chief Operating Officer of the Company since April
2001. Prior to joining Fotoball, from July 1999 to December 2000, Mr. Dickey
served as the Chief Operating Officer and Senior Vice President of Business
Development for Sundance, a privately held entertainment organization. From July
1997 through July 1999, Mr. Dickey was Director of Sales and Marketing for
Disney Regional Entertainment, a division of The Walt Disney Company. From
January 1994 to July 1997, Mr. Dickey was the Director and Group Manager of
Marketing and Sales for the National Basketball Association. From August 1991 to
December 1993, Mr. Dickey was the Business Manager of Team Sports for Spalding
Sports Worldwide.
THOMAS R. HILLEBRANDT has served as Senior Vice President and Chief
Fiancial Officer since June 2001 and as Vice President and Chief Financial
Officer of the Company from July 2000 through May 2001. Prior to joining
Fotoball, from August 1998 through July 2000, Mr. Hillebrandt served as the Vice
President and Chief Financial Officer of ChatSpace, Inc., a privately held
Internet software and services company. From May 1996 through July 1998, Mr.
Hillebrandt was Chief Financial Officer of Link sandiego.com, Inc. and DITR
Marketing, Inc., both privately held Internet service companies. From January
1994 to April 1996, Mr. Hillebrandt was the Chief Financial Officer of Emerald
Systems/St. Bernard Software a privately held PC networks management software
company. From March 1990 to December 1993, Mr. Hillebrandt was the Director of
Finance of Ventura Software, a multinational Xerox subsidiary and from September
1985 to February 1990 he was a CPA with the firm KPMG Peat Marwick.
ARTHUR E. MCELFRESH has served as Vice President, Sales and Marketing,
Retail and Team Business since December 2002. Prior to joining the Company, Mr.
McElfresh worked as a Senior Account Manager of Cadence Design Systems, a
publicly held supplier of electronic design technologies, from May 2000 to
December 2002. From October 1998 to May 2000, Mr. McElfresh worked as Sales
Business Lead - Supply Chain at Nike, Inc. From January 1993 to October 1998 Mr.
McElfresh served in various sales positions culminating in Category Sales
Manager within the golf division of Nike, Inc. From August 1991 to November
1992, Mr. McElfresh was the National Sales Manager for American Precision, a
privately held custom gear manufacturer. From March 1998 to July 1991 he served
as Equipment Finance Specialist for Perry Morris Corporation, a privately held
equipment financing company. From January 1981 to March 1988 he served in
various positions culminating in General Manager with California Recreational
Services, a privately held company operating commercial recreation facilities.
From May 1977 to November 1980 Mr. McElfresh was a Sales Representative for
Packaging Corporation of America, a subsidiary of Tenneco Company.
23
KAREN M. BETRO has served as Vice President, Operations of the Company
since January 1996 and previously served as Controller of the Company from its
organization in December 1988. During this time, Ms. Betro was responsible for
the administration and operation systems of the Company. Ms. Betro has served as
Controller and Administrative Manager of several large corporations, including
Hill & Knowlton.
STEVEN B. KATZKE has served as Vice President, Entertainment Sales and
Marketing since June 2001, as Vice President, Specialty Sales and Marketing from
January 1998 through May 2001 and as Manager of Retail Sales since January 1993.
From 1989 through 1992, Mr. Katzke was employed as the sales manager of Robert
Katzke and Associates.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers and
persons who own beneficially more than ten percent of the Common Stock to file
with the Securities and Exchange Commission initial reports of beneficial
ownership and reports of changes in beneficial ownership of the Common Stock.
Officers, directors and persons owning more than ten percent of the Common Stock
are required to furnish the Company with copies of all such reports. To the
Company's knowledge, based solely on a review of copies of such reports
furnished to the Company, the Company believes that, during fiscal 2002, all
Section 16(a) filing requirements applicable to its officers, directors and
persons owning beneficially more than ten percent of the Common Stock were in
compliance except for a Form 4 for Michael Favish filed in November 2002 and a
Form 3 for Arthur E. McElfresh filed in December 2002, both of which incorrectly
listed stock options granted. Mr. Favish and Mr. McElfresh filed Form 4s in
February 2003 to correct the reporting error.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ended December 31,
2002, 2001 and 2000, the compensation paid by the Company, as well as certain
other compensation paid or accrued for those years, to the Company's Chief
Executive Officer and the four other most highly compensated executive officers
of the Company (the "Named Executives") for the fiscal year ended December 31,
2002.
- --------------------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------------ --------------------
Name and Principal Position Year Salary ($) Bonus ($) Other ($) Options (#)
- ------------------------------------------------------------------------------------------ --------------------
Michael Favish 2002 $250,000 $150,000 $17,408 (1) --
Chairman and Chief Executive 2001 230,000 25,000 19,663 (2) 23,000
Officer 2000 210,000 -- 19,746 (3) --
Scott P. Dickey 2002 $200,000 $100,000 $10,554 (4) --
President and Chief Operating 2001 150,000 37,500 7,035 (5) 160,938
Officer 2000 -- -- -- --
Thomas R. Hillebrandt 2002 $135,000 $ 33,750 $15,825 (6) --
Senior Vice President and Chief 2001 120,000 10,000 8,051 (7) 20,000
Financial Officer 2000 51,923 10,000 1,500 (8) 20,000
Jon D. Schneider 2002 $115,000 $190,168 $15,297 (9) --
Vice President, Promotion and 2001 105,000 24,000 13,516 (10) 5,000
Team Sales 2000 51,500 10,000 1,500 (11) 10,000
Steven B. Katzke 2002 $120,000 $63,299 $8,533 (12) --
Vice President, Entertainment 2001 100,000 54,837 3,000 (13) 7,000
Sales and Marketing 2000 90,000 20,000 3,000 (14) --
24
(1) Includes $9,000 for reimbursement of automobile expenses, $5,923 for
disability insurance coverage and $2,485 for health insurance coverage
(2) Includes $9,000 for reimbursement of automobile expenses, $8,546 for
disability insurance coverage and $2,117 for health insurance coverage.
(3) Includes $9,000 for reimbursement of automobile expenses, $8,000 for
disability insurance coverage and $2,746 for health insurance coverage.
(4) Includes $6,000 for reimbursement of automobile expenses, $2,069 for
disability insurance coverage and $2,485 for health insurance coverage
(5) Includes $4,500 for reimbursement of automobile expenses, $1,034 for
disability insurance coverage and $1,501 for health insurance coverage.
(6) Includes $3,000 for reimbursement of automobile expenses, $528 for
disability insurance coverage and $12,297 for health insurance coverage
(7) Includes $3,000 for reimbursement of automobile expenses, $132 for
disability insurance coverage and $4,919 for health insurance coverage.
(8) Includes $1,500 for reimbursement of automobile expenses.
(9) Includes $3,000 for reimbursement of automobile expenses and $12,297 for
health insurance coverage.
(10) Includes $3,000 for reimbursement of automobile expenses and $10,516 for
health insurance coverage.
(11) Includes $1,500 for reimbursement of automobile expenses.
(12) Includes $3,000 for reimbursement of automobile expenses and $5,533 for
health insurance coverage.
(13) Includes $3,000 for reimbursement of automobile expenses.
(14) Includes $3,000 for reimbursement of automobile expenses.
STOCK OPTIONS
No grants of stock options under the 1998 Stock Option Plan were made
to the Named Executives during 2002.
OPTION HOLDINGS
The following table sets forth stock options exercised by the Named
Executives during 2002 and unexercised options held by the Named Executives as
of the end of 2002.
- ----------------------------------------------------------------------------------------------------------------------------
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
- ----------------------------------------------------------------------------------------------------------------------------
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES VALUE UNEXERCISED OPTIONS AT 12/31/02 IN-THE-MONEY OPTIONS AT 12/31/02
EXERCISED REALIZED (#)(1) ($)(2)
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------------
Michael Favish -- -- 134,667 15,333 $299,371 $32,659
Scott P. Dickey -- -- 80,469 80,469 $233,407 $233,407
Thomas R. Hillebrandt -- -- 20,000 20,000 $18,434 $30,516
Jon D. Schneider -- -- 8,333 6,667 $4,417 $ 7,533
Steven B. Katzke -- -- 20,667 4,667 $34,197 $ 9,941
(1) This represents the total number of shares subject to stock options held by
the Named Executives as of December 31, 2002. These options were granted on
various dates during the years 1994 through 2001.
(2) Based on the $4.13 closing price of the Company's Common Stock on the
Nasdaq National Market on December 31, 2002.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company is party to an employment agreement (the "Favish
Agreement") with Michael Favish, which provides that Mr. Favish will serve as
Chief Executive Officer for a three-year term commencing on August 10, 2002. Mr.
Favish's annual base salary was $210,000 during 2000, $230,000 during 2001 and
$250,000 during 2002, with annual increases at the discretion of the
compensation committee. Mr. Favish is also entitled to a bonus at the discretion
of the compensation committee and
25
will be granted options, vesting over a three-year period, to purchase not less
than 10,000 shares of Common Stock per year at a per share exercise price equal
to the then-current fair market value. During 2000 and 2002, Mr. Favish waived
his right to receive options to purchase 10,000 shares of Common Stock, pursuant
to the Favish Agreement. During 2001, Mr. Favish received options to purchase
23,000 shares of Common Stock pursuant to the Favish Agreement. The Favish
Agreement also provides that Mr. Favish will not engage in a business which
competes with the Company for the term of the Favish Agreement and for one year
thereafter.
If the Favish Agreement is terminated by the Company, including a
constructive termination (as defined in the Favish Agreement), other than as a
result of death or disability of Mr. Favish or for cause (and other than in
connection with a change in control (as defined in the Favish Agreement) of the
Company), the Company shall pay Mr. Favish a severance and non competition
payment equal to the sum of (x) an amount equal to the base salary for the
remainder of the term plus (y) an amount equal to the bonus compensation earned
by Mr. Favish in respect of the last full fiscal year immediately preceding the
year of termination multiplied by the number of full fiscal years remaining in
the term. In the event of a termination of employment (including a constructive
termination) within six (6) months following a change in control of the Company,
the Company shall pay Mr. Favish a severance and non competition payment equal
to the greater of (x) the sum of (i) an amount equal to the base salary for the
remainder of the term plus (ii) an amount equal to the bonus compensation earned
by Mr. Favish in respect of the last full fiscal year immediately preceding the
year of termination multiplied by the number of full fiscal years remaining in
the Term; or (y) 2.99 times the sum of the base salary plus the bonus
compensation in respect of the year immediately preceding the year of
termination. If the Favish Agreement is not renewed beyond the term or if the
Favish Agreement is terminated by the Company, including a constructive
termination, other than as a result of death or disability of Mr. Favish or for
cause (and other than in connection with a change in control), during the last
twelve (12) months of the term, the Company shall pay Mr. Favish a severance and
non competition payment equal to the sum of (x) an amount equal to the base
salary in respect of the calendar year immediately preceding the year of
termination plus (y) an amount equal to the bonus compensation earned by Mr.
Favish in respect of the calendar year immediately preceding the year of
termination.
The Company is party to an employment agreement (the "Dickey
Agreement") with Scott P. Dickey which provides that Mr. Dickey will serve as
President and Chief Operating Officer for a two-year term commencing on April 2,
2001 and continuing until April 1, 2003. Mr. Dickey's annual base salary will be
$200,000 during the term of the Dickey Agreement. Mr. Dickey is also entitled to
a bonus based on a bonus compensation plan jointly established between the Board
of Directors and Mr. Dickey. Such plan will be based on pre-tax net income
targets determined in accordance with generally accepted accounting principles
("GAAP"), applied on a consistent basis. The Dickey Agreement provides that the
Board of Directors will establish three separate pre-tax net income targets
which if achieved by the Company during such period, would entitle Mr. Dickey to
a bonus compensation of fifty percent (50%), seventy five percent (75%) and one
hundred percent (100%), respectively, of his base salary. For the fiscal year
ended December 31, 2001, the minimum bonus compensation was $37,500. The Dickey
Agreement also provides that Mr. Dickey shall receive options to purchase
125,000 shares of Common Stock at $1.12 per share (the market price on March 28,
2001, the date the Dickey Agreement was signed) and purchase 35,938 shares of
Common Stock at $1.61 per share (the market price on June 21, 2001) subject to
and in accordance with, the 1998 Employees Stock Option Plan. Fifty percent
(50%) of all options issued under the Dickey Agreement vested as of April 1,
2002 and the remaining options shall vest as of April 1, 2003. In the event Mr.
Dickey is terminated for cause (as defined in the Dickey Agreement), the Dickey
Agreement provides that Mr. Dickey is no longer entitled to any compensation. In
the event the agreement is involuntary terminated for good reason (as defined in
the Dickey Agreement), Mr. Dickey is entitled to a lump sum payment equal to the
unpaid base salary for the remainder of the term of the agreement, and the
granted options will automatically become fully vested and exercisable.
26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
STOCK OWNERSHIP
The following table sets forth certain information as of March 28, 2003
with respect to the Common Stock of the Company beneficially owned by (a) all
persons known to the Company to own beneficially more than 5% of any class of
voting security of the Company, (b) all directors and nominees, (c) the Named
Executives (as defined under the caption "Executive Compensation") and (d) all
executive officers and directors of the Company as a group.
- --------------------------------------------------------------------------------------------------------------
SUMMARY OF BENEFICIAL OWNERSHIP
- --------------------------------------------------------------------------------------------------------------
AMOUNT OF
BENEFICIAL % OF STOCK
NAME OWNERSHIP (1) OWNERSHIP (1)
- -------------------------------------------------------------------- ------------------- ---------------------
Michael Favish 576,086 (2) 15.8%
Nicholas A. Giordano 32,500 (3) 0.9%
Joel K. Rubenstein 35,000 (4) 1.0%
John J. Shea 44,000 (5) 1.2%
James D. McQuaid -- --
Scott P. Dickey 170,938 (6) 4.7%
Thomas R. Hillebrandt 29,167 (7) 0.8%
Jon D. Schneider -- (8) --
Steven B. Katzke 19,696 (9) 0.5%
Other officers 66,167 1.8%
------------------- ---------------------
All officers and directors as a group 973,554 26.7%
=================== =====================
(1) This table identifies persons and entities having beneficial ownership
with respect to the shares set forth opposite their names as of March
28, 2003, according to information furnished to the Company by each of
them. A person is deemed to be the beneficial owner of securities that
can be acquired by such person within 60 days from the date of this
annual report upon the conversion of convertible securities or the
exercise of warrants or options. Percent of Common Stock ownership is
based on 3,651,501 shares of Common Stock outstanding, and assumes that
in each case the person or entity only, or the group only, exercised
his or its rights to purchase all shares of Common Stock underlying
stock options and warrants.
(2) Includes 110,000, 10,000, 7,000 and 15,333 shares of Common Stock
issuable upon exercise of currently exercisable options at per share
exercise prices of $1.69, $2.69, $6.63 and $2.00, respectively.
(3) Includes 5,000, 5,000, 5,000, 5,000, and 5,000 shares of Common Stock
issuable upon exercise of currently exercisable options at per share
exercise prices of $2.38, $4.75, $4.00, $1.90 and $4.55, respectively.
(4) Includes 7,500, 5,000, 5,000, 5,000, 5,000 and 5,000 shares of Common
Stock issuable upon exercise of currently exercisable options at per
share exercise prices of $1.69, $2.38, $4.75, $4.00, $1.90 and $4.55,
respectively.
(5) Includes 5,000, 5,000, 5,000 and 5,000 shares of Common Stock issuable
upon exercise of currently exercisable options at per share exercise
prices of $4.84, $4.00, $1.90 and $4.55, respectively.
(6) Includes 125,000 and 35,938 shares of Common Stock issuable upon
exercise of currently exercisable options at per share exercise prices
of $1.12 and $1.61, respectively.
(7) Includes 13,334 and 13,333 shares of Common Stock issuable upon
exercise of currently exercisable options at per share exercise prices
of $3.81 and $2.00, respectively.
(8) All options were exercised or lost by February 27, 2003 due to
resignation of officer.
(9) Includes 10,000, 3,334, 5,000 and 7,000 shares of Common Stock
issuable upon exercise of currently exercisable options at per share
exercise prices of $1.69, $2.69, $6.63 and $2.00, respectively.
27
For the year ended December 31, 2002 the Company had the following
compensation plans under which it has authorized the issuance of equity
securities.
Number of
securities to be Weighted average
issued upon exercise price
exercise of of outstanding Number of
outstanding options, securities
options, warrants and remaining
warrants and rights. available for
Plan Category rights future issuance
------------------------------------ ------------------ ------------------ ------------------
Equity compensation plans
approved by security holders 618,525 $2.33 12,850
Equity compensation plans not
approved by security holders 61,200 $5.05 --
------------------ ------------------ ------------------
Total 679,725 $2.57 12,850
================== ================== ==================
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Michael Favish, Chairman and Chief Executive Officer of the Company,
and Karen Betro, Vice President of Operations of the Company, have a long-term
relationship with no spousal rights. Derrick Favish, a non-officer employee and
stockholder of the Company, is the brother of Michael Favish, the Chairman and
Chief Executive Officer of the Company. Terry Favish, non-officer employee of
the Company, is the son of Michael Favish.
Any future transaction with directors, executive officers or their
affiliates, including, without limitation, any granting or forgiveness of loans,
will be made only if the transaction has been approved by a majority of the then
independent and disinterested members of the Board of Directors and is on terms
no less favorable to the Company than could have been obtained from unaffiliated
parties.
ITEM 14. DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports filed pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to the Company's
management, including its chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure.
Within 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chairman and Chief Executive Officer,
Michael Favish, and its Senior Vice President and Chief Financial Officer,
Thomas R. Hillebrandt, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon the foregoing, the Company concluded that its disclosure
controls and procedures are effective in timely alerting the Company's
management to material information relating to the Company required to be
included in the Company's Exchange Act reports.
Since the most recent review of the Company's disclosure controls and
procedures by Messrs. Favish and Hillebrandt, there have been no significant
changes in internal controls or in other factors that could significantly affect
these controls.
28
PART IV
ITEM 15. EXHIBITS AND REPORTS ON FORM 8-K
(A). Exhibits
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
3.1(2)(P) Amended and Restated Certificate of Incorporation of
Fotoball USA, Inc., a Delaware corporation
(incorporated herein by reference to Exhibit 3.1(2) of
the Registration Statement on Form SB-2).
3.2(2)(P) Amended and Restated By-laws of Fotoball USA, Inc., a
Delaware corporation (incorporated herein by reference
to Exhibit 3.2(2) of the Form SB-2).
4.4(P) Specimen Stock Certificate (incorporated herein by
reference to Exhibit 4.4 of the Form SB-2).
4.5(1) Specimen Form of Rights Certificate (incorporated
herein by reference to Exhibit 2.1 of the Registration
Statement on Form 8-A/A No. 1 (File No. 0-21239) (the
"Amended Form 8-A")).
4.5(2) Form of Amended and Restated Rights Agreement, dated as
of August 19, 1996, as amended and restated as of May
18, 2000, between Fotoball USA, Inc. and Continental
Stock Transfer & Trust Company (incorporated herein by
reference to Exhibit 2.2 of the Amended Form 8-A).
4.5(3) Form of Certificate of Designation, Preferences and
Rights of Series A Preferred Stock (incorporated herein
by reference to Exhibit 2.3 of the Registration
Statement on Form 8-A (File No. 0-21239)).
4.5(4) Summary of Rights Plan (incorporated herein by
reference to Exhibit 2.4 of the Amended Form 8-A).
10.1(4) License Agreement with National Football League
Properties, Inc., dated April 14, 1998 (incorporated
herein by reference to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1998).
10.1(5) License Agreement with Major League Baseball Players
Association dated January 8, 2003.
10.1(6) License Agreement with Major League Baseball
Properties, Inc. dated February 26, 2003.
10.3(6)* 1998 Stock Option Plan of the Company (incorporated
herein by reference to Exhibit 4.1 of the Form S-8
filed on July 23, 1998).
10.3(7)* Form of Stock Option Agreement (incorporated herein by
reference to Exhibit 4.2 of the Form S-8 filed on July
23, 1998).
10.3(8)* Amendment to 1998 Stock Option Plan of the Company
(incorporated herein by reference to Exhibit 4.1 of the
From S-8 filed on August 16,1999).
10.3(9)* Amendment to 1998 Stock Option Plan of the Company
(incorporated herein by reference to Exhibit 4.1 of the
From S-8 filed on August 3,2001).
10.4(2)* Form of Employment Agreement with Scott P. Dickey dated
March 28, 2001 (incorporated herein by reference to the
Form 10-Q for the period ended June 30, 2001).
10.4(3)* Form of Employment Agreement with Michael Favish dated
August 10, 2002 (incorporated herein by reference to<