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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, 2001
[ ] 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.
(Name of small business issuer in its charter)
Delaware 33-0614889
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(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 during the past 12 months (or for
such shorter period that the registrant was required to file such reports) and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-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. [ ]
The Issuer's revenues for the fiscal year ended December 31, 2001 were
31,796,813.
The aggregate market value of the Issuer's Common Stock held by
non-affiliates, computed by reference to the close price of such stock, as of
March 15, 2002, was $14,928,738.
As of March 15, 2002, the Company had 3,580,033 shares of Common Stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Company's 2002 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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 2002, the Company's ability to renew expiring license agreements and
other statements of expectations, beliefs, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that are
not historical facts. The risks, uncertainties and assumptions referred to above
include the risk factors listed in Part I, Item 1, Part II, Item 7 and the
"Disclosure of Certain Significant Risks and Uncertainties" included in the
Notes to Financial Statements in this report 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 Promotions develops custom programs for Fortune 500
companies; and Fotoball Sports Team supports the retail needs of professional
sports franchises and concessionaires across the nation. The Company currently
holds licenses with Major League Baseball ("MLB"), the National Football League
("NFL"), the National Hockey League ("NHL"), hundreds of National Collegiate
Athletic Association ("NCAA") colleges and universities, Warner Bros. "Looney
Tunes(R)" and "Scooby Doo", Marvel's "Spiderman", "Incredible Hulk" and "Xmen",
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 people 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 teams and
stadium concessionaires (such as Aramark and Volume Services) from the NFL, MLB,
Minor League Baseball, the NHL, the National Basketball Association ("NBA") and
the Arena Football League ("AFL").
The Company's entertainment sales customers include entertainment related
companies with
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retail sales operations such as The Walt Disney Company, Paramount, Six Flags
and Busch Gardens theme parks, QVC, Home Shopping Network, Sports Illustrated,
Dave and Buster's and Hard Rock Cafe.
The Company's promotion customers include large 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 miniature soccer balls. The Company uses a size 5 machine
stitched soccer ball for its brand-licensed
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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. Looney Tunes(R)
and "Scooby Doo" and Nickelodeon's "Blue's Clues" 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.
Coins:
The Company uses fully minted solid metal coins with an industry first
printed metal insert custom manufactured for its entertainment customers and
used for corporate promotions and programs.
Bobblehead:
The Company offers a hard polymer doll figure with a moveable head in sizes
up to 8" high. The Company also plans in 2002 to offer 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 offered through corporate
promotions and will begin to be offered to our entertainment and retail
customers in 2002.
Plastic Souvenir Helmets:
The Company plans to offer 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 will initially be sold under
the Company's MLB license to team and retail 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
safer 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.
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
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license arrangements with MLB, the NFL, various NCAA colleges and universities
and, to a lesser extent, other licensors include the NHL, The Coca-Cola Company,
Warner Bros. Looney Tunes(R) and "Scooby-Doo", MTV Networks' (Nickelodeon)
"Blue's Clues" characters, Mattel's "Barbie" and Marvel Entertainment's
"Spiderman," "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 the
names, likeness, portraits, pictures, photographs, signatures and biographical
information of the NFL Quarterback Club(TM) and its members ("Quarterback Club"
license). The Company also received from NFLP the right to utilize team and
league logos on limited edition, collectible, official size synthetic-leather
footballs. 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. There can be no assurance that the Company will
be able to renew its license agreements with the NFLP upon acceptable terms at
its expiration.
The Company was granted by the Major League Baseball Players Association
("MLBPA") the non-exclusive right to utilize 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, 2000 with two renewal periods from January 1, 2001 to
December 31, 2001 and from January 1, 2002 to December 31, 2002. The Company has
renewed its license for 2002. The Company is obligated to pay a royalty based on
net sales of licensed products, subject to an annual minimum royalty fee. There
can be no assurance that the Company will be able to renew its license
agreements with the MLBPA upon acceptable terms at its expiration.
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 extended through December 31, 2001. The Company is currently negotiating
with MLBP to renew the license through December 31, 2003. The Company continues
to sell MLBP licensed merchandise and fully expects that it will sign a new
license agreement with MLBP. 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,
5
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 has negotiated a final
minimum royalty fee of $100,000 to be paid in four equal installments during
2002.
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,
2001, an increase from 36% during the year ended December 31, 2000 and a
decrease from 41% during the year ended December 31, 1999. 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.
SEASONALITY
The Company has historically experienced significant quarter-to-quarter
variability in its sales and net income resulting primarily from it 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
One large customer, The Walt Disney Company, accounted for approximately
26%, 20% and 25% of total sales in 2001, 2000 and 1999 respectively. No other
customer accounted for more than 10% of the total sales in 2001, 2000 or 1999.
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. Mr. Favish has entered
into a three-year employment agreement with the Company, commencing on August
10, 1999, which, among other things, precludes Mr. Favish from competing with
the Company for a period of two years following termination of his employment
with the Company. The loss of the services of Mr. Favish could have a material
adverse effect on the Company's business and prospects. The Company maintains
"key man" life insurance on the life of Michael Favish.
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
6
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(TM), Fotopuck(TM), Dunk This(TM) and Heads Up(TM), 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. To
the Company's knowledge, no other company currently has the ability to perform
the complete process. The Company does not rely upon any material patents or
licensed technology in the operation of its business. The Company does not
believe that it is possible to be issued a patent on its proprietary printing
process and, accordingly, there can be no assurance that the Company's
techniques, processes and formulations will not otherwise become known to, or
independently developed by, competitors of the Company.
7
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. 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, 2002, the Company employed 123 persons, all on a full-time
basis, including 7 in executive positions, 11 in sales, 12 in graphic
production, 42 in administrative support positions and 51 in factory production
and shipping. None of the Company's employees are covered by a collective
bargaining agreement. The Company's relationship with its employees is
satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's headquarters and warehouses are 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.
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ITEM 3. LEGAL PROCEEDINGS
Jeff Kull Construction Development v. Fotoball USA, Inc. and Michael
Favish. In February 2001, plaintiff filed a lawsuit in the Superior Court of The
County of San Diego against the Company and its CEO claiming breach of contract
and failure to pay fees related to the construction of tenant improvements on
the Company's headquarters. The Company filed a cross-complaint against
plaintiff claiming damages as a result of plaintiff's failure to perform its
obligations as general contractor. In February 2002, the Company and plaintiff
settled the dispute out of court. The Company treated the loss as a capitalized
expenditure as part of the cost of the tenant improvements for the Company's
headquarters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of security holders during
the fourth quarter of the year ended December 31, 2001.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY 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)
1999
First quarter $ 4.38 $ 3.13
Second quarter $ 5.88 $ 3.44
Third quarter $ 7.25 $ 3.53
Fourth quarter $ 8.91 $ 5.63
2000
First quarter $ 6.56 $ 4.63
Second quarter $ 5.00 $ 3.25
Third quarter $ 4.25 $ 3.13
Fourth quarter $ 3.00 $ 1.13
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
On March 16, 2002, there were approximately 83 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
2001 2000 1999 1998 1997
Statements of operations
Net sales $ 31,796,813 $ 26,929,330 $ 28,690,211 $ 19,147,728 $ 12,176,780
Income (loss) from continuing
operations $ 123,444 $ 179,271 $ 2,646,066 $ 597,874 $ (2,796,932)
Per share from cont. ops
Basic $ .03 $ .05 $ .88 $ .22 $ (1.04)
Diluted $ .03 $ .05 $ .83 $ .22 $ (1.04)
Balance sheets
Total assets $ 17,000,488 $ 14,808,886 $ 13,827,878 $ 7,894,609 $ 6,577,406
Total debt $ 1,945,061 $ 944,651 $ 406,937 $ 250,476 $ 320,112
Stockholders equity $ 10,821,411 $ 11,806,523 $ 11,588,721 $ 5,888,505 $ 5,267,906
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999:
The following table sets forth certain operating data (in whole dollars and
as a percentage of the Company's sales) for the years ended December 31, 2001,
2000 and 1999:
2001 % 2000 % 1999 %
------------ --- ------------ --- ------------ ---
Sales $ 31,796,813 100 $ 26,929,330 100 $ 28,690,211 100
Cost of sales 20,164,421 63 17,241,579 64 16,922,249 59
Gross profit 11,632,392 37 9,687,751 36 11,767,962 41
Operating expenses 11,474,951 36 9,517,331 35 8,939,658 31
Operating income 157,441 1 170,420 1 2,828,304 10
Interest expense 96,036 -- 32,249 -- 120,711 --
Interest income 104,039 -- 127,100 -- 51,473 --
Income before income tax 165,444 1 265,271 2 2,759,066 10
Income tax expense 42,000 -- 86,000 -- 113,000 --
Income from continuing operations 123,444 -- 179,271 1 2,646,066 9
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) $ (990,582) (3) $ 179,271 1 $ 2,646,066 9
CRITICAL ACCOUNTING POLICIES
Sales of products domestically are recognized when the products are shipped
from the Company's facility. 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 returns
or customer acceptance provisions with respect to the Company's sales.
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 account 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 Company treats bad debts and other uncollectible amounts as operating
expenses and volume discounts as a reduction in revenue. 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 would have a negative impact on the profitability of the Company.
Effective for its fiscal year beginning January 1, 2002, the Company will
adopt new accounting pronouncements that require certain sales incentives,
slotting fees and cooperative advertising expenses to be classified as
reductions to revenue rather than as expenses. Had the Company chosen early
adoption of these pronouncements for the year ended December 31, 2001, revenue
would have been reduced by $162,000 and operating expenses would have been
reduced by $162,000. There will be 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
11
advertising to remain competitive in the marketplace, it could have a negative
impact on the Company's gross margin. 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 (first-in, first-out) or
market. The Company periodically reviews its inventory to evaluate it for
discontinued and obsolete products. These products usually include products that
are dated and produced for special promotional events, such as Super Bowls,
Final Four college tournaments and World Series, products that are produced
under licenses that have been terminated or products with low turnover rates.
The difference between the market value of products and their cost is included
in the reserve allowance. Additions to the reserve allowance are treated as
costs of sales. The loss from the liquidation or destruction of obsolete and
discontinued inventory is applied against the 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.
2001 VS. 2000
SALES:
DISTRIBUTION CHANNEL
2001 2000 1999
% Sales % Sales % Sales
------------- -------------- -------------
Retail 37% 48% 40%
Entertainment 36% 31% 38%
Team 14% 13% 10%
Promotion 13% 8% 12%
Sales increased $4.9 million, or 18%, 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. The
Company anticipates retail sales growth in 2002 from 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 anticipates
entertainment sales growth in 2002 from The Walt Disney Company, restaurant and
other entertainment destination customers. The Company has supplied product for
an annual promotion for the Disney Store in 2001, 2000 and 1999. The inability
of the Company to secure another promotion for the Disney Store in 2002 would
significantly impair the Company's ability to achieve sales increases over 2001
with The Walt Disney Company.
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.
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. The Company anticipates this trend will
continue in 2002; however, due to the timing of large promotional sales, there
can be significant quarterly fluctuations in sales.
12
The possibility exists for a MLB player's strike sometime in the 2002
season. Such a strike would have an adverse effect on the Company's team and
retail and promotions sales and would significantly impair the Company's ability
to achieve sales increases over 2001 in those areas.
PRODUCT LINE SALES
2001 2000 1999
% Sales % Sales % Sales
------------- -------------- -------------
Football 28% 33% 39%
Baseball 21% 20% 20%
Basketball 9% 13% 13%
Lapel pins 17% 5% 18%
Playground balls 13% 13% 5%
Soccer/volleyball 6% 8% 3%
Coins -- 5% --
Other 6% 3% 2%
------------- -------------- -------------
Total 100% 100% 100%
============= ============== =============
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).
GROSS PROFIT:
Gross profit increased 20% for the year ended December 31, 2001 from gross
profit for the year ended December 31, 2000. Gross margins as a percentage of
sales increased to 37% in 2001 from 36% in 2000. The Company's gross margins as
a percentage of 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 $.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"). The Company anticipates that, with
its planned product mix and lower raw material costs, it will be able to sustain
gross margin levels in 2002 at or above the 2001 gross margin level.
OPERATING EXPENSES:
Total operating expenses increased 21% for the year ended December 31, 2001
from total operating expenses for the year ended December 31, 2000. Operating
expenses as a percentage of sales increased to 36% in 2001 from 35% in 2000.
Operating expenses increased in absolute terms 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 sales, was the same in both
2001 and 2000 (7%). The Company expects that, in absolute terms, royalty expense
will increase in 2002 due to an increase in sales. 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 16% for the year ended December 31, 2001 from
marketing expenses for the year ended December 31, 2000. Marketing expenses as a
percentage of sales remained at 12% for both years. The increase in absolute
figures reflects increases in personnel and salary expenses, show expenses,
sample expenses and marketing and sales incentive programs. The Company
anticipates
13
that its marketing expenses, as a percentage of sales, will remain constant in
2002 from 2001.
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 sales
increased to 16% in 2001 from 14% in 2000. General and administrative expenses
increased in absolute terms 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.
The Company anticipates that its general and administrative expenses, as a
percentage of sales, will remain constant in 2002 from 2001.
OTHER INCOME (EXPENSE):
Interest expense was $96,036 for the year ended December 31, 2001, a
increase of $63,787 from interest expense of $32,249 for the year ended December
31, 2000 due to the Company's $.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 is deposited into an interest-bearing depository account.
INCOME TAX EXPENSE:
The effective 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.
2000 VS. 1999
SALES:
Sales decreased $1.8 million or 6% from sales for the year ended December
31, 2000 from the sales for the year ended December 31, 1999. Retail sales for
2000 increased by 12% from 1999. The increase was due to increased sales to toy
specialty stores and mass merchants.
Entertainment sales for 2000 decreased 22% from 1999. The decrease was
primarily due to a decrease in sales to The Walt Disney Company for 2000.
Team sales for 2000 increased 18% from 1999. The increase was primarily due
to sales increases from new baseball stadiums.
Promotion sales for 2000 decreased 38% from 1999. The promotion sales
decrease was due primarily to a general decline in the number and size of
corporate promotions in 2000 compared to 1999.
During 2000, the Company realized product sales increases of soccer balls
(195%), playground balls (133%) and coins (growth percentage is not meaningful,
as 2000 was the first year of coin sales). This growth was offset by declines in
the sales of baseballs (8%) and lapel pins (75%).
GROSS PROFIT:
Gross profit decreased 18% for the year ended December 31, 2000 from gross
profit for the year ended December 31, 1999. Gross margins as a percentage of
sales for 2000 decreased to 36% from 41% for 1999. The decline in the Company's
gross margins as a percentage of sales can be attributed primarily to product
mix including a decrease in lapel pin sales from 1999, which carried higher than
average gross margins, and an increase in playground and soccer balls in 2000,
which sell at lower margins than some of the Company's other products.
14
OPERATING EXPENSES:
Total operating expenses increased 7% for the year ended December 31, 2000
from total operating expenses for the year ended December 31, 1999. Operating
expenses as a percentage of sales increased to 35% in 2000 from 31% in 1999.
Operating expenses increased in absolute terms due to an increase in personnel
and salary expenses, costs incurred moving to new facilities and the loss on the
sale of equipment and the write-off of tenant improvements related to the move.
Royalty expense decreased 2% for the year ended December 31, 2000 from
royalty expense for the year ended December 31, 1999 due to the decrease in
overall sales. Royalty expense, as a percentage of sales, was the same in both
2000 and 1999 (7%).
Marketing expenses increased 9% for the year ended December 31, 2000 from
marketing expenses for the year ended December 31, 1999. Marketing expenses as a
percentage of sales increased to 12% in 2000 from 10% in 1999, reflecting
additional retail and entertainment sales personnel and related expenses and
increased cooperative advertising allowances as a result of the Company's
increased mass merchant retail sales.
General and administrative expenses increased 6% for the year ended
December 31, 2000 from general and administrative expenses for the year ended
December 31, 1999. General and administrative expenses as a percentage of sales
increased to 14% in 2000 from 13% in 1999. General and administrative expenses
increased in absolute terms in 2000 from 1999 due in part to increases in
salary-related expenses, increased facilities cost and one-time expenses and
losses incurred when the Company relocated its facilities.
On July 31, 2000 the Company relocated its headquarters to 6740 Cobra Way,
San Diego CA. As a result of the relocation, the Company incurred one-time
relocation expenses of $64,024 and a loss of $122,541 on the sales of equipment
and write-off of tenant improvements.
OTHER INCOME (EXPENSE):
Interest expense decreased $88,462 and interest income increased $75,628
between the years ended December 31, 2000 and 1999, due to the Company not
utilizing its revolving line of credit during 2000. The interest income
increased due to the Company's average cash balance available for investment
being higher in 2000 than 1999.
INCOME TAX EXPENSE:
The effective tax rate for the year ended December 31, 2000 was 32% as
compared to 4% for the year ended December 31, 1999. Income tax benefits
recognized during 1999 relate primarily to the elimination of a deferred tax
valuation allowance established in a prior year for uncertainty relating to the
utilization of a net operating loss carryforward. As of December 31, 1999, the
Company had utilized all of its available net operating loss carryforward from
prior years. Had the Company been taxed at a combined Federal and state
effective tax rate of 32% in 2000 and 1999, then proforma diluted earnings per
share for 1999 would have been $.59.
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
15
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 and
terminal rights fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital remained constant at $9.9 million between
the years ended December 31, 2001 and 2000.
Cash flow provided by operations increased $1.8 million in 2001 from cash
provided by operations in 2000. This increase was primarily the result of
increases in customer deposits, accounts payable and accrued expenses and a
decrease in inventory offset by a decrease in net income and a increase in
accounts receivable. The increase in customer deposits resulted from a down
payment for a large promotion project expected to be completed in the first half
of 2002 (see below). Inventory decreased in 2001 due to the write-down and
liquidation of discontinued or obsolete inventory and higher inventory turnover.
Accounts receivable increased in 2001 due to higher sales in the fourth quarter
2001 than the fourth quarter 2000.
Days sales outstanding, calculated on a quarterly basis, improved 3% over
2000. Inventory turns, calculated on an annual basis, improved 65% over 2000 due
to the liquidation of discontinued and obsolete inventory and a reduction in
inventory stocking levels.
Cash and equivalents were $5.8 million at December 31, 2001, an increase of
$2.9 million from approximately $2.9 million of cash and equivalents at December
31, 2000. This increase in cash was primarily due to the increase in customer
deposits and lower purchases of inventory as noted above.
In February 2002, the Company extended its credit line with US Bank to May
15, 2002 and combined two outstanding term loans with US Bank into a single term
loan. The credit line extension includes a decrease in the credit line from $2.5
million to $2.0 million and an increase in the interest rate from the US Bank
prime rate to the US Bank prime rate plus 1%. The accounts receivable of the
Company collateralize this credit line and actual borrowings are limited to
available collateral, as defined in the agreement. The term loans combined were
a 48-month note with a 9.5% interest rate dated June 13, 2000 for $250,000 and
36-month note dated August 9, 2000 with a 9.5% interest rate for $400,000. The
term loans were combined into a single term loan with a variable interest rate
of US Bank prime rate plus 1% to be fully amortized over 24 months and due
October 1, 2003. The loan agreement contains financial covenants applicable to
the credit line and outstanding term loans requiring the Company to maintain a
minimum net worth of $9.75 million, minimum working capital of $7 million, a
minimum current ratio of 2 to 1 and a maximum debt to equity ratio of .75 to 1.
The Company is in compliance with the covenants as of December 31, 2001. There
were no outstanding borrowings under the credit line at December 31, 2001 or
December 31, 2000. The Company has entered into a letter of credit for $158,911
with US Bank and the Company has a $150,000 Automatic Clearing House ("ACH")
hold on its credit line relating to funding its payroll on a semi-monthly basis.
Both the letter of credit and the ACH hold reduce the Company's ability to
borrow against its credit line.
In December 2000, the Company signed a term loan agreement with US Bank
with a loan advance period effective December 19, 2000 through March 30, 2001.
During this period the Company submitted expenses related to the Rawlings Golf
division of $1,500,000 which were financed under the agreement. On March 30,
2001, the amount advanced was converted to a term loan. The loan provides for a
variable interest rate equal to the "Wall Street Journal" prime rate. Interest
only payments were paid on January 30, 2001, February 28, 2001 and March 30,
2001 followed by 36 consecutive monthly payments necessary to fully amortize the
loan balance outstanding as of March 30, 2004. The Company's receivables,
inventory, equipment and furniture collaterialize the loan.
The Company had a $3.0 million line of credit facility (the "facility")
with Merrill Lynch International Bank Limited which was used solely to
collateralize the issuance of stand-by letters of
16
credit to manufacturers. The facility expired on December 10, 2001 and the
Company did not renew the facility. There were no borrowings under the facility
as of December 31, 2001 and 2000.
For the next twelve months, the Company anticipates that its capital
expenditure requirements will approximate $.6 million, which will be used to
purchase additional computer systems and product molds.
The following table summarizes future contractual obligations of the
Company:
Payments due by period
--------------------------------------------------------------------------------------
Less than --------------- --------------- ---------------
Total 1 year 1-3 years 4-5 years After 5 years
--------------- ---------------- --------------- --------------- ---------------
Long-term debt(1) $ 1,668,672 $ 763,634 $ 905,038 $ -- $ --
Capital leases 322,589 113,434 193,869 15,286 --
Operating leases 8,942,780 984,773 3,096,907 2,178,008 2,683,092
Royalties 1,638,500 981,000 657,500 -- --
--------------- ---------------- --------------------------------- ----------------
Total contractual
cash obligations $12,572,541 $ 2,842,841 $ 4,853,314 $ 2,193,294 $ 2,683,092
=============== ================ ================ ================ ================
(1) Principle payments only. Subject to financial covenants noted
above and includes the impact of the February 2002 term loan
combination noted above.
The Company has recently been able to fund its continuing operations from
cash flow from operations and has not accessed its line of credit since 1999.
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 and avoid the need to access its
line of credit. 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 believes it will be able to extend its line of credit
beyond May 15, 2002; however, its inability to do so or to obtain short-term
financing from other sources may impact its ability to meet increases in demand
for its products and fulfill large promotion orders.
Management believes that the Company's existing cash position, ability to
extend its credit facilities, combined with internally generated cash flows,
will be adequate to support the Company's liquidity and capital needs at least
through 2002.
2002 OUTLOOK
The Company anticipates increases in retail, entertainment, team and
promotion sales in 2002 with the largest increase coming from promotion sales.
Due to the increasing size of individual promotions and timing of those
promotions, the Company may experience significant quarterly fluctuations in
promotion sales. The Company has acquired new licensing rights for 2002 through
new agreements and the expansion of existing agreements to replace and expand
upon licensing rights held in 2001.
With its planned product mix and lower raw material costs, the Company
anticipates that it will be able to sustain gross margin levels in 2002 at or
above the 2001 gross margin level. The Company further anticipates that it will
be able to keep operating expenses in 2002 at the same percentage of sales as
2001. The combination of increased sales, equal to or higher gross margins and
proportionately equal operating expenses is expected to lead to higher profits
in 2002 over 2001.
There can be no assurance given that the Company will be able to
successfully increase its sales or income in 2002. 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
17
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 independent sales representative organizations
to expand the breadth of the Company's customer base and significantly
increase 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 The Walt Disney Company,
which represented 26% of total sales in 2001.
o The potential negative impact on operating results from a MLB players
strike.
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.
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, 2001, the Company's only variable rate debt outstanding was the $1.2 million
remaining balance on the term loan used to finance the discontinued Rawlings
Golf operation. There were no outstanding borrowings under the line of credit as
of December 31, 2001. In February 2002 the Company consolidated two fixed rate
term loans into a single variable rate term loan. 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
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.
18
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 has determined that a national accounting
firm will better serve its future auditing needs.
19
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March 15, 2002
concerning the executive officers and directors of the Company:
NAME AGE POSITION
- ---- --- --------
Michael Favish 53 Chairman, Chief Executive Officer and Director
Nicholas A. Giordano(12) 59 Director
Joel K. Rubenstein(12) 65 Director
John J. Shea(12) 64 Director
Scott P. Dickey 35 President and Chief Operating Officer
Thomas R. Hillebrandt 40 Senior Vice President and Chief Financial Officer
Carl E. Francis 43 Senior Vice President, Retail Sales and Marketing
Karen M. Betro 51 Vice President, Operations
Steven B. Katzke 35 Vice President, Entertainment Sales and Marketing
Jon D. Schneider 34 Vice President, Promotion and Team Sales
- --------
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 27 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.
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 Company, Philadelphia,
serving ultimately as Senior Vice President and a member of the Executive
20
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.
SCOTT P. DICKEY has served 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
Financial 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.
CARL E. FRANCIS has served as Senior Vice President, Retail Sales and
Marketing since June 2001, as Senior Vice President, Sales and Marketing from
January 1998 through May 2001, as Vice President, Retail Development of the
Company from January 1996 through December 1997 and as Director of Retail
Development from November 1994 through December 1995. Prior to such time, he was
a Customer Service Analyst for Prudential Mutual Funds Services, a mutual funds
service company and Charmont, a Japanese eyewear company. From June 1987 through
December 1990, Mr. Francis was employed as Retail Sales Manager for Major League
Baseball Properties in New York City. Prior to this, from January 1981 through
May 1987, Mr. Francis was a retail buyer for J.C. Penney Company (1982-1987) and
Abraham & Straus (1981-1982), both of which are retail department store chains.
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.
JON D. SCHNEIDER has served as Vice President, Promotion and Team Sales
since June 2001 and as Vice President, Promotions of the Company from July 2000
through May 2001. From October 1999 through June 2000, Mr. Schneider was Senior
Vice President for Communicator Sports and Entertainment, a sports marketing
company. From April 1993 through September 1999, the Company employed Mr.
Schneider in various positions including Vice President, Marketing, Team
Business from January 1998 through September 1999. From 1990 to 1993, Mr.
Schneider was employed in various
21
positions in the sports industry, including Assistant General Manager of the
Newport Beach Dukes and positions with the Oakland Athletics and Sun City Rays.
ITEM 11 EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to
the section labeled "Executive Compensation" in the Company's definitive Proxy
Statement in connection with the Company's 2002 Annual Meeting of Stockholders.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to
the section labeled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's definitive Proxy Statement in connection with the
Company's 2002 Annual Meeting of Stockholders.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to
the section labeled "Election of Directors" and "Executive Compensation" in the
Company's definitive Proxy Statement in connection with the Company's 2002
Annual Meeting of Stockholders.
ITEM 14 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(1) License Agreement with Major League Baseball Properties,
Inc., dated May 14, 1997 (incorporated herein by reference
to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997).
10.1(2) Amended License Agreement with Major League Baseball
Properties, Inc., dated December 11, 1998 (incorporated
herein by reference to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1998).
10.1(3) License Agreement with Major League Baseball Players
Association dated March 29, 1997 (incorporated herein by
reference to the Company's Annual Report on
22
Form 10-KSB for the year ended December 31, 1997).
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).
10.3(5)* Stock Option Agreement dated January 30, 1998 with
Salvatore T. DiMascio (incorporated herein by reference to
the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997).
10.3(6)* 1998 Stock Option Plan of the Company (incorporated herein
by reference to Exhibit 4.1 of the Form S-8 filed on July
23, 1998).
10.3(7)* Form of Stock Option Agreement (incorporated herein by
reference to Exhibit 4.2 of the Form S-8 filed on July 23,
1998).
10.4(1)* Form of Employment Agreement with Michael Favish dated
August 10, 1999 (incorporated herein by reference to the
Form 10-QSB for the period ended September 30, 1999).
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).
10.6 Lease, dated March 13, 2000, by and between the Company
and LBA VF-II, LLC, with respect to 6740 Cobra Way, San
Diego, California (incorporated herein by reference to
Exhibit 10.6 of the 1999 Form 10-KSB).
10.9(2) Merrill Lynch International Bank Limited irrevocable
stand-by letter of credit dated December 1, 1995
(incorporated herein by reference to Exhibit 10.9(2) of
the Form SB-2).
10.10 Revolving Credit Agreement dated November 13, 1996 between
Fotoball USA, Inc. and Scripps Bank (incorporate herein by
reference to Exhibit 10.10(1) of the Form SB-2).
10.10(1) Amended Revolving Credit Agreement dated February 19, 1998
between Fotoball USA, Inc. and Scripps Bank (incorporated
herein by reference to Exhibit 10.10(1) of the 1997 Form
10-KSB).
10.10(2) Amended Revolving Credit Agreement dated December 28, 1998
between Fotoball USA, Inc. and Scripps Bank (incorporated
herein by reference to Exhibit 10.10(2) of the 1998 Form
10-KSB).
10.10(3) Amended Revolving Credit Agreement dated April 6, 2000
between Fotoball USA, Inc. and Scripps Bank (incorporated
herein by reference to the Form 10-QSB for the period
ended March 31, 2000).
10.10(4) Loan Advance Agreement dated June 13, 2000 between
Fotoball USA, Inc. and Scripps Bank (incorporated herein
by reference to the Form 10-QSB for the period ended June
30, 2000).
10.10(5) Loan Advance Agreement dated August 9, 2000 between
Fotoball USA, Inc. and Scripps Bank (incorporated herein
by reference to the Form 10-QSB for the period ended
September 30, 2000).
10.10(6) Amended Loan Advance Agreement dated June 13, 2000 between
Fotoball USA, Inc. and U.S. Bank National Association
(incorporated herein by reference to Exhibit 10.10(6) of
the 2000 Form 10-KSB).
10.10(7) Amended Loan Advance Agreement dated August 9, 2000
between Fotoball USA, Inc. and U.S. Bank National
Association (incorporated herein by reference to Exhibit
10.10(7) of the 2000 Form 10-KSB).
23
10.10(8) Loan Advance Agreement dated December 19, 2000 between
Fotoball USA, Inc. and U.S. Bank National Association
(incorporated herein by reference to Exhibit 10.10(8) of
the 2000 Form 10-KSB).
10.10(9) Amended Revolving Credit Agreement dated January 22, 2001
between Fotoball USA, Inc. and U.S. Bank National
Association (incorporated herein by reference to Exhibit
10.10(9) of the 2000 Form 10-KSB).
10.10(10) Loan Agreement dated July 15, 2001 between Fotoball USA,
Inc. and U.S. Bank National Association (incorporated
herein by reference to the Form 10-Q for the period ended
September 30, 2001).
10.10(11) Amended Loan Agreement dated February 20, 2002 between
Fotoball USA, Inc. and U.S. Bank National Association.
16.1 Letter from Good Swartz Brown & Berns LLP addressed to the
United States Securities and Exchange Commission.
(incorporated herein by reference to Exhibit 16.1 of the
Form 8-K Current Report dated March 26, 2001).
16.2 Letter from Good Swartz Brown & Berns LLP addressed to the
United States Securities and Exchange Commission.
(incorporated herein by reference to Exhibit 16.2 of the
Form 8-K Current Report dated March 12, 2002).
* Indicates exhibits relating to executive compensation.
(P) Indicates that document was originally filed with the Securities and
Exchange Commission in paper form and that there have been no
changes or amendments to the document which would require filing of
the document electronically with this Form 10-K.
(B) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter
of the year ended December 31, 2001.
24
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Fotoball USA, Inc.
--------------------
(Registrant)
Dated: March 28, 2002 By: /s/ Michael Favish
-----------------------------------------
Michael Favish
Chairman and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Dated: March 28, 2002 By: /s/ Michael Favish
-----------------------------------------
Michael Favish
Chairman and Chief Executive Officer
Dated: March 28, 2002 By: /s/ Thomas R. Hillebrandt
-----------------------------------------
Thomas R. Hillebrandt
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
Dated: March 28, 2002 By: /s/ Nicholas A. Giordano
-----------------------------------------
Nicholas A. Giordano
Director
Dated: March 28, 2002 By: /s/ Joel K. Rubenstein
-----------------------------------------
Joel K. Rubenstein
Director
Dated: March 28, 2002 By: /s/ John J. Shea
-----------------------------------------
John J. Shea
Director
25
FOTOBALL USA, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.10(11) Amended Loan Agreement dated February 20, 2002 between Fotoball
USA, Inc. and U.S. Bank National Association.
26
FOTOBALL USA, INC.
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
THREE YEARS ENDED DECEMBER 31, 2001
Report of Independent Auditors F-1 to F2
Balance Sheets at December 31, 2001 and 2000 F-3
Statements of Operations for the years ended December 31, 2001, 2000 and 1999 F-4
Statement of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999 F-5
Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 F-6
Notes to Financial Statements F-7 to F-21
Selected Quarterly Data (unaudited) F-22
Schedule II - Valuation and Qualifying Accounts F-23
27
REPORT OF INDEPENDENT AUDITORS
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Stockholders
Fotoball USA, Inc.
We have audited the accompanying balance sheet of FOTOBALL USA, INC. as of
December 31, 2001 and the related statements of operations, stockholders' equity
and cash flows for the year then ended. Our audit also included the supplemental
data on page F-23. These financial statements and supplemental data are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and supplemental data based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FOTOBALL USA, INC. as of
December 31, 2001 and the results of operations, stockholders' equity and cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
supplemental data, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.
Good Swartz Brown & Berns LLP
Los Angeles, California
February 1, 2002
F-1
REPORT OF INDEPENDENT AUDITORS
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Board of Directors and Stockholders
Fotoball USA, Inc.
We have audited the accompanying balance sheet of FOTOBALL USA, INC. as of
December 31, 2000 and the related statements of operations, stockholders' equity
and cash flows for the two years ended December 31, 2000 and 1999. Our audit
also included the supplemental data on page F-23. These financial statements and
supplemental data are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
supplemental data based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FOTOBALL USA, INC. as of
December 31, 2000 and the results of operations, stockholders' equity and cash
flows for the two years ended December 31, 2000 and 1999 in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such supplemental data, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
Hollander, Lumer & Co. LLP
Los Angeles, California
February 2, 2001
F-2
BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
------------ ------------
ASSETS
Current assets
Cash and equivalents $ 5,779,203 $ 2,921,358
Accounts receivable less uncollectible allowances of $198,441 in 2001
and $163,188 in 2000 3,705,873 3,277,700
Other receivables 359,400 298,559
Inventories 2,655,702 4,033,094
Prepaid expenses and other 1,165,209 567,275
Deferred income taxes 951,000 729,000
------------ ------------
Total current assets 14,616,387 11,826,986
------------ ------------
Property and equipment, net 2,225,106 2,229,133
------------ ------------
Other assets
Deposits and other 158,995 752,767
------------ ------------
Total other assets 158,995 752,767
------------ ------------
$ 17,000,488 $ 14,808,886
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 1,861,842 $ 1,503,833
Customer deposits 1,978,779 143,995
Current portion of long term debt 741,368 178,309
Current portion of capital leases 92,773 103,494
------------ ------------
Total current liabilities 4,674,762 1,929,631
Long term liabilities
Long term debt, net of current portion 927,145 440,350
Capital leases, net of current portion 183,775 222,498
Deferred rent 248,105 234,884
Deferred income taxes 121,000 175,000
Long term reserve for discontinued operations 24,290 --
------------ ------------
Total liabilities 6,179,077 3,002,363
------------ ------------
Stockholders' equity
Preferred stock, $.01 par value;
Authorized - 1,000,000 shares; issued and outstanding-none
Common stock, $.01 par value; authorized - 15,000,000 shares;
Issued and outstanding - 3,580,033 shares in 2001 and 3,579,032
shares in 2000 35,800 35,790
Additional paid-in capital 11,680,337 11,674,877
Retained earnings/(accumulated deficit) (894,726) 95,856
------------ ------------
Total stockholders' equity 10,821,411 11,806,523
------------ ------------
$ 17,000,488 $ 14,808,886
============ ============
F-3
FOTOBALL USA, INC.
STATEMENTS OF OPERATIONS
THREE YEARS ENDED DECEMBER 31, 2001
2001 2000 1999
------------ ------------ ------------
Net sales $ 31,796,813 $ 26,929,330 $ 28,690,211
Cost of sales 20,164,421 17,241,579 16,922,249
------------ ------------ ------------
Gross profit 11,632,392 9,687,751 11,767,962
------------ ------------ ------------
Operating expenses
Royalties 2,264,291 1,951,647 1,993,212
Marketing 3,700,489 3,184,901 2,932,889
General and administrative 4,996,058 3,807,588 3,610,320
Depreciation and amortization 514,113 450,654 403,237
Loss from sale of equipment -- 122,541 --
------------ ------------ ------------
Total operating expense 11,474,951 9,517,331 8,939,658
------------ ------------ ------------
Income from operations 157,441 170,420 2,828,304
------------ ------------ ------------
Other income (expense)
Interest expense (96,036) (32,249) (120,711)
Interest income 104,039 127,100 51,473
------------ ------------ ------------
Total other income (expense) 8,003 94,851 (69,238)
------------ ------------ ------------
Income before income tax 165,444 265,271 2,759,066
Income tax expense 42,000 86,000 113,000
------------ ------------ ------------
Income from continuing operations 123,444 179,271 2,646,066
------------ ------------ ------------
Discontinued operations
Loss on discontinued operations net of tax
benefit ($245,000) (484,650) -- --
Loss on disposal of discontinued operations net of
tax benefit ($446,000) (629,376) -- --
------------ ------------ ------------
Net income (loss) $ (990,582) $ 179,271 $ 2,646,066
============ ============ ============
Weighted average number of common shares outstanding:
Basic 3,579,516 3,576,472 3,011,044
============ ============ ============
Diluted 3,699,613 3,720,952 3,201,494
============ ============ ============
Net income from continuing operations per common share:
Basic $ .03 $ .05 $ .88
============ ============ ============
Diluted $ .03 $ .05 $ .83
============ ============ ============
Net loss from discontinued operations per common share:
Basic $ (.31) -- --
============ ============ ============
Diluted $ (.31) -- --
============ ============ ============
Net income/(loss) per common share:
Basic $ (.28) $ .05 $ .88
============ ============ ============
Diluted $ (.28) $ .05 $ .83
============ ============ ============
F-4
FOTOBALL USA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 2001
Retained
Common Stock Additional Earnings/
------------------------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
-------------- -------------- ---------------- ---------------- ---------------
BALANCE, December 31, 1998 2,699,242 $ 26,992 $ 8,590,994 $(2,729,481) $ 5,888,505
Stock-based compensation expense 36,613 36,613
Exercise of stock options 159,127 1,591 369,731 371,322
Common stock issued to underwriter 22,000 220 (220) --
Exercise of warrants 686,167 6,862 2,639,353 2,646,215
Net income 2,646,066 2,646,066
-------------- -------------- ---------------- ---------------- ---------------
BALANCE, December 31, 1999 3,566,536 35,665 11,636,471 (83,415) 11,588,721
Stock-based compensation expense 15,772 15,772
Exercise of stock options 12,496 125 22,634 22,759
Net income 179,271 179,271
-------------- -------------- ---------------- ---------------- ---------------
BALANCE, December 31, 2000 3,579,032 35,790 11,674,877 95,856 11,806,523
Stock-based compensation expense 3,780 3,780
Exercise of stock options 1,001 10 1,680 1,690
Net income (990,582) (990,582)
============== ============== ================ ================ ===============
BALANCE, December 31, 2001 3,580,033 $ 35,800 $ 11,680,337 $ (894,726) $ 10,821,411
============== ============== ================ ================ ===============
F-5
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 2001
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities
Net income (loss) $ (990,582) $ 179,271 $ 2,646,066
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation of property and equipment 537,829 463,174 427,907
Amortization of intangibles 500,000 -- --
Amortization of stock compensation expense 3,780 15,772 36,613
Loss on sale of equipment -- 122,541 --
Provision for doubtful accounts 278,300 25,200 395,011
Changes in operating assets and liabilities:
Accounts receivable (706,474) 410,115 (1,066,393)
Other receivables (60,841) (298,559) --
Inventories 1,377,392 72,581 (667,123)
Prepaid expenses and other (597,933) (313,616) (96,051)
Deferred income taxes (276,000) 107,000 (571,000)
Accounts payable and accrued expenses 358,008 (328,948) 383,846
Customer deposits 1,834,784 5,742 (28,642)
Income taxes payable -- (158,185) 118,385
Deferred rent (5,053) 234,884 --
Deferred rent amortization 18,273 -- --
Long term reserve for discontinued operations 24,290 -- --
----------- ----------- -----------
Net cash provided by operating activities 2,295,773 536,972 1,578,619
----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment (476,416) (1,451,488) (319,813)
Decrease (increase) in long-term deposits 93,772 (422,782) 1,782
----------- ----------- -----------
Net cash used in investing activities (382,644) (1,874,270) (318,031)
----------- ----------- -----------
Cash flows from financing activities
Proceeds from term loans 1,500,000 650,000 --
Payments of capitalized leases (106,828) (180,680) (88,705)
Payments of term loans (450,146) (31,341) --
Proceeds of short term credit facilities -- -- 1,975,000
Payment of short term credit facilities -- -- (2,375,000)
Proceeds from exercise of warrants -- -- 2,646,215
Proceeds from exercise of stock options 1,690 22,759 371,322
----------- ----------- -----------
Net cash provided by financing activities 944,716 460,738 2,528,832
----------- ----------- -----------
Net increase (decrease) in cash and equivalents 2,857,845 (876,560) 3,789,420
Cash and equivalents, beginning of period 2,921,358 3,797,918 8,498
=========== =========== ===========
Cash and equivalents, end of period $ 5,779,203 $ 2,921,358 $ 3,797,918
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 75,095 $ 32,249 $ 120,711
Incomes taxes paid $ $ 305,000 $ 532,800
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under capital leases $ 57,385 $ 99,735 $ 292,207
F-6
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS - 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 Promotions develops custom programs for
Fortune 500 companies; and Fotoball Sports Team supports the retail needs
of professional sports franchises and concessionaires across the nation.
The Company currently holds licenses with Major League Baseball, the
National Football League, the National Hockey League, hundreds of NCAA
colleges, Warner Bros. "Looney Tunes(R)" and "Scooby Doo", Marvel's
"Spiderman", "Incredible Hulk" and "Xmen", Nickelodeon's "Blue's Clues",
Mattel's "Barbie" and The Coca-Cola Company.
CASH AND EQUIVALENTS - Cash and equivalents include money market funds and
marketable securities that are highly liquid and have original maturities
of three months or less at the date of purchase.
Cash and cash equivalents consist of the following:
2001 2000
---------------- -----------------
Cash deposits $ 731,362 $ 661,440
Short-term securities 5,047,841 2,259,918
---------------- -----------------
Total $ 5,779,203 $ 2,921,358
================ =================
Short-term securities (money market fund account maturing in less than
three months) are stated at fair market value including earned interest. At
times such investments may be in excess of the Federal Deposit Insurance
(FDIC) insurance limits.
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in
various investment grade instruments such as certificates of deposit and
money market funds. The Company invests its cash in what it believes to be
credit-worthy financial institutions and has established guidelines
relative to diversification and maturities with the objectives of
maintaining safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends and interest rates. The
Company has not experienced any losses on its cash equivalents or
short-term investments.
Concentrations of credit risk with respect to accounts receivable are
mitigated in part due to the large number of retail and team customers to
which the Company's retail products are sold. Additionally, a significant
percentage of the Company's promotion and entertainment sales are sold to
Fortune 500 companies. The Walt Disney Company accounted for approximately
26%, 20% and 25% of total sales in 2001, 2000 and 1999, respectively. No
other customer accounted for more than 10% of the total sales in 2001, 2000
or 1999. Any increase to the allowance for doubtful accounts, which offsets
accounts receivable, is charged to the statement of operations, net of
actual accounts receivable write-offs.
The Company does not engage in any future contracts or hedging activities
and does not do any business in currency other than US currency.
ACCOUNTS RECEIVABLE - In order to determine the value of the Company's
account 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
F-7
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
actual return rates.
ADVERTISING - Advertising costs are generally expensed as incurred.
INVENTORIES - Inventories have been valued at the lower of cost (first-in,
first-out) or market. The Company periodically reviews its inventory to
evaluate it for discontinued and obsolete products. These products usually
include products that are dated and produced for special promotional
events, such as Super Bowls, Final Four college tournaments and World
Series, products that are produced under licenses that have been terminated
or products with low turnover rates. The difference between the market
value of products and their cost is included in the reserve allowance. The
loss from the liquidation or destruction of obsolete and discontinued
inventory is applied against the reserve allowance.
PROPERTY AND EQUIPMENT - Property and equipment is stated at cost and is
depreciated on the straight-line method over their estimated useful lives
as follows:
Office equipment and furniture 5 to 7 years
Show exhibit 7 years
Machinery and equipment 7 years
Molds 3 to 5 years
Leasehold improvements 10 years or remaining life of lease
The Company reviews, in accordance with SFAS 121, for impairment of
long-lived assets, certain identifiable intangibles and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. When reviewing for
impairment, the Company takes into account the market value of the asset,
the asset's current use, the physical appearance of the asset, changes in
business climate, the accumulation of cost significantly in excess of the
amount originally anticipated, as well as current or historic operating or
cash flow losses associated with the asset.
INCOME TAXES - Deferred income taxes are recorded for temporary differences
in reporting income and expense for tax and financial statement purposes in
accordance with Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes (SFAS No. 109).
STOCK-BASED COMPENSATION - For employee stock options, the Company adopted
only the disclosure requirements of SFAS No. 123 and continues to recognize
the intrinsic value-based method in accordance with APB 25, providing pro
forma footnote disclosures of net income and earnings per share as if the
fair value accounting provisions of SFAS No. 123 statement had been
adopted. The Company follows SFAS No. 123 for non-employee stock options,
recognizing the fair market value of the options as an expense.
ROYALTIES AND LICENSING ARRANGEMENTS - Royalties due to licensors are
generally provided for based upon a negotiated percentage of related net
sales, as defined contractually, frequently subject to a minimum guaranteed
royalty over the term of the contract. Prepaid license costs are charged to
operations over the term of the contractual agreement, or based upon a
percentage of related net sales.
REVENUE RECOGNITION - The Company recognizes sales in accordance with SAB
No. 101 "Revenue Recognition in Financial Statements". Sales of products
domestically are recognized when the products are shipped from the
Company's facility. Sales of imported products, which are drop shipped
directly to the customer, are recognized at the time shipments are received
at the customer's
F-8
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
designated location. There are no significant rights of returns or customer
acceptance provisions with respect to the Company's sales. Consignment
sales, which are generally not significant, are recognized when the
consignee sells the products.
NET INCOME PER COMMON SHARE - Basic net income per common share is
calculated by dividing net income by the weighted average number of common
shares outstanding during the period. Diluted net income per common share
is calculated by dividing net income by the number of common shares
outstanding increased by exercisable or convertible securities of 120,097
in 2001, 144,480 in 2000 and 190,450 in 1999. The dilutive effect of rights
to purchase preferred or common shares under the Company's Stockholder
Rights Plan (Note 9) have not been included in the weighted average share
amounts as the conditions necessary to cause these rights to be exercised
were not met. However, all warrants exercised during the Company's warrant
repricing in 1999 are included in the diluted share calculation. Any
unexercised warrants expired in accordance with their terms, thereby not
having a dilutive effect. When the effect of using diluted shares results
in a lower loss per share, basic shares are used in the diluted earning per
share.
RECLASSIFICATION - Certain 1999 and 2000 balances have been reclassified to
conform to the current year's presentation.
SEGMENT INFORMATION - The Company has one operating segment, the sale of
custom souvenir and promotional products to various retail customers and
Fortune 500 companies. These customers have similar characteristics in the
nature of products sold, production processes and methods of distribution.
As such, the Company's financial statements reflect this one operating
segment and no additional segment information has been provided.
DISCONTINUED OPERATIONS - The Company calculated the Loss on discontinued
operations and the Loss on disposal of Discontinued Operations in
accordance with APB No. 30 Reporting the Results of Operations.
NEW ACCOUNTING STANDARDS - In accordance with EITF 00-22 "Accounting for
'Points' and Certain Other Time-Base or Volume-Based Sales Incentive
Offers, and Offers for Free Products or Services to be Delivered in the
Future" issued by the Emerging Issues Task Force, volume discounts allowed
to customers are treated as a reduction in revenue. The volume discount
amount is estimated based on the terms of the discount allowed and
estimated sales from the customer. The liability for volume discounts is
included as an offset to accounts receivable on the balance sheet.
Historically, the Company treated the volume discount as an operating
expense. The Company did not incur an expense for volume discounts in 2000.
Prior to 2000, the Company did not separately account for volume discounts
and was unable to estimate the impact of EITF 00-22 on the 1999 results of
operations. There was no impact to the Company's net income/(loss) as a
result of the adoption of EITF 00-22.
EITF 00-14 "Accounting for Certain Sales Incentives" and EITF 00-25 "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products" issued by the Emerging Issues Task Force require
certain sales incentives, slotting fees and cooperative advertising
expenses to be classified as reductions to revenue rather than as expenses.
The provisions of EITF 00-14 and EITF 00-25 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company will adopt EITF 00-14 and EITF 00-25 beginning January 1, 2002. Had
the Company chose early adoption of the provisions of EITF 00-14 and EITF
00-25, for the year ended December 31, 2001, revenue would have been
reduced by $162,000 and operating expenses would have been reduced by
$162,000. There will be no impact to the Company's net income/(loss) as a
result of the adoption of EITF 00-14 or EITF 00-25.
F-9
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, Business Combinations (SFAS 141).
SFAS 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, Business Combinations, and
FASB Statement No. 38, Accounting for Preacquisition Contingencies of
Purchased Enterprises. All business combinations in the scope of this
Statement are to be accounted for using one method, the purchase method.
The provisions of this Statement apply to all business combinations
initiated after June 30, 2001. The Company will adopt SFAS 141 beginning
January 1, 2002 and does not expect a material impact on the results of
operations or financial position.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 142 addresses financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes APB
Opinion No. 17, Intangible Assets. Under the new rules, goodwill and
intangible assets that have indefinite useful lives will not be amortized
but rather will be tested at least annually for impairment. Intangible
assets that have finite useful lives will continue to be amortized over
their useful lives, but without the constraint of an arbitrary ceiling. The
provisions of this Statement are required to be applied starting with
fiscal years beginning after December 15, 2001. The Company will adopt SFAS
142 beginning January 1, 2002 and does not expect a material impact on the
results of operations or financial position.
In June 2001, the Financial Accounting Standards Board 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 August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144). SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. This Statement supersedes FASB Statement No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions, for the disposal of a segment of a
business (as previously defined in that Opinion). Under SFAS 144,
discontinued operations are no longer measured on a net realizable value
basis, and future operating losses are no longer recognized before they
occur. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Company will adopt SFAS 144 beginning January 1, 2002. Had the Company
chose early adoption of the provisions of SFAS 144, its results of
operations for the year ended December 31, 2001, the loss on disposal from
discontinued operations would have been reduced by $71,761 of accrued
interest expense.
F-10
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. DISCONTINUED OPERATIONS
In December 2000, the Company entered into an agreement 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
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. In November 2001, the Company made
the decision to terminate its license with Rawlings and discontinue its
Rawlings Golf operations.
Operating results for the Rawlings Golf business up to November 13, 2001
are included in the Statements of Operations as net loss from discontinued
operations. Operating results subsequent to November 13, 2001 are included
in the net loss on disposal of discontinued operations. Results for the
discontinued operations are as follows:
2001 2000 1999
------------ ------------ ------------
Net revenue $ 224,532 -- --
============ ============ ============
Loss on discontinued operations $ (729,650) -- --
Income tax benefit (245,000) -- --
------------ ------------ ------------
Net loss on discontinued operations $ (484,650) -- --
============ ============ ============
Loss on disposal of discontinued operations $ (1,075,376) -- --
Income tax benefit (446,000) -- --
------------ ------------ ------------
Net loss on disposal of discontinued operations $ (629,376) -- --
============ ============ ============
The loss on disposal of discontinued operations includes the disposal of
the unamortized portion of the global rights fees, accrual of the license
termination fee, disposal and write-down of inventory and accrued interest
expense on a $1.5 million term loan with U.S. Bank National Association.
The balance of the discontinued operations reserve as of December 31, 2001,
was $171,761, of which $147,471 is included in the accounts payable and
accrued expenses on the balance sheet.
3. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
SIGNIFICANT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities as of the date of the financial statements, as well as the
reported amounts of revenue and expenses during the period. Significant
estimates have been made by management with respect to the realization of
the Company's deferred tax assets, allowance for doubtful accounts and the
provision for discontinued inventories. Actual results could differ from
these estimates making it reasonably possible that a change in these
estimates could occur in the near term.
DEPENDENCE UPON LICENSING ARRANGEMENTS - The Company's business is based
primarily upon its use of the insignia, logos, names, colors, likeness and
other identifying marks and images borne by many of its products pursuant
to license arrangements with Major League Baseball ("MLB"), the National
Football League ("NFL"), various colleges and universities and, to a lesser
extent, other licensors include the National Hockey League, The Coca-Cola
Company, Warner Bros. Looney Tunes(R) and Scooby-Doo, MTV Networks'
(Nickelodeon) "Blue's Clues" characters, Mattel's "Barbie" and Marvel
Entertainment's "Spiderman," "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
F-11
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
VARIABILITY OF GROSS MARGINS - The Company realized gross margins of 37%
for the year ended December 31, 2001, an increase from 36% during the year
ended December 31, 2000 and a decrease from 41% during the year ended
December 31, 1999. 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.
VARIABILITY OF 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 exits as
the Company produces larger and larger promotions.
SALES CONCENTRATION - One large customer, The Walt Disney Company,
accounted for approximately 26%, 20% and 25% of total sales in 2001, 2000
and 1999, respectively. No other customer accounted for more than 10% of
the total sales in 2001, 2000 or 1999.
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. Mr. Favish has entered into a three-year employment
agreement with the Company, commencing on August 10, 1999, which, among
other things, precludes Mr. Favish from competing with the Company for a
period of two years following termination of his employment with the
Company. The loss of the services of Mr. Favish could have a material
adverse effect on the Company's business and prospects. The Company
maintains "key man" life insurance on the life of Michael Favish.
DEPENDENCE ON SUPPLIERS - In 2001, the Company purchased approximately 88%
of its raw material and finished goods, consisting primarily of synthetic
baseballs, footballs, basketballs, hockey pucks and playground balls, from
six companies located in China, with two manufacturers accounting for 78%
of total raw materials and finished goods purchased.
F-12
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at December 31, 2001 and
2000:
2001 2000
----------- -----------
Accounts receivable $ 3,904,314 $ 3,440,888
Less: allowance for uncollectible accounts (198,441) (163,188)
----------- -----------
Net accounts receivable $ 3,705,873 $ 3,277,700
=========== ===========
5. INVENTORIES
Inventories consisted of the following at December 31, 2001 and 2000:
2001 2000
----------- -----------
Finished goods $ 2,018,335 $ 2,673,041
Raw material 1,205,933 1,845,118
Less allowance for discontinued and
obsolete inventory (568,566) (485,065)
----------- -----------
Total $ 2,655,702 $ 4,033,094
=========== ===========
6. PROPERTY AND EQUIPMENT
Property and equipment, inclusive of machinery and equipment under capital
leases (see Note 9), less accumulated depreciation consisted of the
following at December 31, 2001 and 2000:
2001 2000
----------- -----------
Office equipment $ 578,200 $ 518,884
Computer equipment & software 1,135,765 1,065,472
Show exhibits 372,157 298,657
Molds 282,866 240,261
Machinery and equipment 1,151,281 1,001,972
Leasehold improvements 1,036,240 964,994
----------- -----------
4,556,509 4,090,240
Less accumulated depreciation and amortization (2,331,403) (1,861,107)
----------- -----------
$ 2,225,106 $ 2,229,133
=========== ===========
7. LINES OF CREDIT
In July 2001, the Company extended its one-year credit line with U.S. Bank
National Association (formerly Scripps Bank) ("US Bank") including a
decrease in the credit line from $6.0 million to $2.5 million with an
expiration date of December 15, 2001. The accounts receivable of the
Company collateralize this credit line and actual borrowings are limited to
available collateral, as defined in the agreement. The interest rate on the
credit line is the US Bank prime rate. The loan agreement contains
financial covenants applicable to the credit line and outstanding term
loans requiring the Company to maintain a minimum net worth of $9 million ,
minimum working capital of $7 million, a minimum current ratio of 2 to 1
and a maximum debt to equity ratio of .75 to 1. The Company is in
compliance with the covenants as of December 31, 2001. There were no
outstanding borrowings under the credit line at December 31, 2001 or
December 31, 2000. The Company has entered into a letter of credit for
$158,911 with US Bank and the Company has a $150,000 Automatic Clearing
House ("ACH") hold on its credit line relating to funding its payroll on a
semi-monthly basis. Both
F-13
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the letter of credit and the ACH hold reduce the Company's ability to
borrow against its credit line. The Company is currently negotiating an
extension to its credit line.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 2001 and 2000:
2001 2000
------------- -------------
Accounts payable $ 972,059 $ 738,464
Accrued payroll and related 192,691 87,284
Accrued commissions and bonuses 294,583 106,500
Royalties payable 20,051 25,250
Current reserve for discontinued operations 147,472 --
Accrued Rawlings licensing fee -- 300,000
Accrued joint advertising costs 199,892 170,368
Accrued other taxes 35,094 19,899
Other -- 56,068
------------- -------------
$ 1,861,842 $ 1,503,833
=========== ===========
9. COMMITMENTS AND CONTINGENCIES
ROYALTIES - At December 31, 2001, the Company has commitments for minimum
guaranteed royalties under licensing agreements through 2005 as follows:
Years ending December 31,
-----------------------------------
2002 $ 981,000
2003 552,500
2004 50,000
2005 55,000
2006 --
-----------
$ 1,638,500
===========
CAPITAL LEASES - The Company is obligated under various capital leases that
expire at various dates through December 2006. Minimum annual payments
including imputed interest under capital lease agreements are as follows at
December 31, 2001:
Years ending December 31,
-----------------------------------
2002 $ 113,434
2003 82,972
2004 69,564
2005 41,333
2006 15,286
-----------
Total minimum lease payments 322,589
Less interest component (46,041)
-----------
Present value of net minimum lease payments 276,548
Less current portion of capital leases (92,773)
===========
Capital leases, net of current portion $ 183,775
===========
F-14
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following property and equipment acquired under capital leases
categorized below is included in the property and equipment listed above at
December 31, 2001 and 2000 (see Note 6):
2001 2000
----------- -----------
Office equipment $ 109,761 $ 109,761
Computer equipment & software 156,442 138,424
Machinery and equipment 310,437 310,437
Less accumulated amortization (269,184) (225,129)
----------- -----------
$ 307,456 $ 333,493
=========== ===========
Amortization of capitalized leases is included in depreciation and
amortization expense.
OPERATING LEASES AND RENTAL EXPENSE - The Company leases certain machinery,
equipment and office and warehouse facilities under operating leases, which
expire on various dates through 2010. The lease for the facilities includes
a cost escalation clause, which allows for fixed rent increases at certain
times during the leasing period, as well as three month rent free period at
the beginning of the lease. In accordance with SFAS No. 13, Accounting for
Leases, the rent expense for the office and warehouse is recognized on a
straight-line basis over the life of the lease. This has resulted in a
deferred rent liability of $248,105 at December 31, 2001. Total rental
expense charged to operations was $1,019,711 in 2001, $856,138 in 2000 and
$628,369 in 1999. At December 31, 2001, the minimum future rental
commitments under noncancellable leases payable over the remaining lives of
the leases are:
Minimum future rental
Years ending December 31, commitments
----------------------------------- --------------------------
2002 $ 984,773
2003 1,012,597
2004 1,032,555
2005 1,051,755
2006 1,073,666
Beyond 3,787,434
--------------------------
$ 8,942,780
==========================
DEBT - In June 2000, the Company signed a term loan agreement with US Bank
with a loan advance period effective June 13, 2000 through September 20,
2000. The Company was allowed to submit capital expenditures for property
and equipment up to $250,000 to finance under the agreement at an interest
rate of 9.5% per annum. The Company received, in accordance with the loan,
$250,000 on September 1, 2000. After the money was received, a 48-month
term loan originated with one monthly interest payment on September 20,
2000, followed by 48 equal monthly payments of $6,281 beginning October 20,
2000 and ending on September 20, 2004. The assets purchased under the
agreement collateralize the loan.
In August 2000, the Company signed a term loan agreement with US Bank with
a loan advance period effective August 9, 2000 through October 20, 2000.
During the advance period, the Company was allowed to submit capital
expenditures for tenant improvements up to $400,000 to finance under the
agreement at an interest rate of 9.5% per annum. The Company received, in
accordance with the loan, $400,000 on October 12, 2000. After the money was
received, a 36-month term loan originated with 36 equal monthly payments of
$12,813 beginning November 20, 2000 and ending on October 20, 2003. The
loan is collaterized by the Company's receivables, inventory, equipment and
furniture.
In December 2000, the Company signed a term loan agreement with US Bank
with a loan advance
F-15
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
period effective December 19, 2000 through March 30, 2001. During this
period the Company submitted $1.5 million in expenses related to the
Rawlings Golf division to be financed under the agreement. The Company
received, in accordance with the loan, $1.5 million on March 30, 2001. The
loan provides for a variable interest rate equal to the Wall Street Journal
prime rate. The loan is payable in 36 consecutive monthly payments
necessary to fully amortize the loan balance outstanding as of March 30,
2001. The Company's receivables, inventory, equipment and furniture
collaterialize the loan. At December 31, 2001 the future minimum principle
payments for all debt are as follows:
Years ending December 31,
-------------------------------------
2002 $ 741,368
2003 735,877
2004 191,268
2005 --
2006 --
-------------
Total minimum debt payments 1,668,513
Less current portion of debt (741,368)
=============
Debt, net of current portion $ 927,145
=============
LITIGATION - Jeff Kull Construction Development v. Fotoball USA, Inc. and
Michael Favish. In February 2001, plaintiff filed a lawsuit in the Superior
Court of The County of San Diego against the Company and its CEO claiming
breach of contract and failure to pay fees related to the construction of
tenant improvements on the Company's headquarters. The Company filed a
cross-complaint against plaintiff claiming damages as a result of
plaintiff's failure to perform its obligations as general contractor. In
February 2002, the Company and plaintiff settled the dispute out of court.
The Company treated the loss as a capitalized expenditure as part of the
cost of the tenant improvements for the Company's headquarters.
10. STOCKHOLDERS' EQUITY
WARRANT CONVERSION - In connection with the Company's initial public
offering in 1994, the Company issued to public investors and the
underwriter 1,411,673 warrants, which entitled the holder to purchase one
share of the Company's common stock for $6.50. On June 24, 1999, the
Company announced that it reduced the exercise price of its publicly traded
redeemable common stock purchase warrants from $6.50 to $4.00 and extended
the term of the warrants to August 27, 1999. During the special exercise
price period of June 24, 1999 through August 27, 1999, warrant holders who
exercised each warrant for $4.00 received one share of Fotoball common
stock. When the special exercise period expired at the close of business on
August 27, 1999, the unexercised warrants expired in accordance with their
terms.
A total of 686,167 warrants, or 49% of the total warrants originally issued
and outstanding, were exercised on or before August 27, 1999. Gross
proceeds received by the Company in the offering were $2,744,668
(solicitation fees and other costs associated with the offering were
$98,453). Net proceeds received by the Company were retained for working
capital. Separately, 22,000 shares of common stock were issued to the
underwriter in a cash-free, negotiated transaction.
EMPLOYEE STOCK OPTION PLAN - In 1998, the Board of Directors of the Company
adopted and the Company's stockholders subsequently approved the 1998 Stock
Option Plan (the "1998 Plan"). The 1998 Plan provides for awards of common
stock to employees and non-employee directors of the Company up to an
aggregate of 800,000 shares of common stock.
The 1998 Plan authorizes the issuance of incentive stock options ("ISOs")
and non-qualified stock
F-16
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
options ("NQSOs"). Under the 1998 Plan, officers, directors and key
employees may be granted options to purchase the Company's common stock at
no less than 100% of the market price on the date the option is granted. In
general, options vest over a three-year period and are exercisable in three
equal installments of the first, second and third anniversary dates of the
option grant and have a maximum term of ten years. Certain options granted
to senior executives have different vesting periods (see Note 11). The 1998
Plan also provided for the termination of the Company's 1994 Plan and the
re-issuance of an identical number of options under the 1998 Plan, at the
then current market price, to the holders of options under the 1994 Plan.
A total of 269,438, 66,000 and 145,000 options were granted in 2001, 2000
and 1999, respectively, under the 1998 Plan.
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees and related interpretations in accounting for
its stock options. Accordingly, no compensation expense has been recognized
for the options granted under the 1998 Plan. Compensation cost is based
upon the fair value at the grant date consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation".
The Company's net income and earnings per share would have been reduced by
approximately $147,000, $164,000 and $134,000, or $.04 per share, $.04 per
share and $.04 per share, for 2001, 2000 and 1999, respectively, had
compensation expense been recognized. The fair value of the options granted
during 2001 is estimated to range from $.64 to $1.90 on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 88%, risk-free interest rate
of 2.93%, assumed forfeiture rate of 4% and an expected life of 3 years.
The following table summarizes information concerning all currently
outstanding and exercisable options as of December 31, 2001:
Options outstanding Options exercisable
----------------------------------------------------------------------- ---------------------------------
Weighted
average Weighted Weighted
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life (years) price exercisable price
------------------ ----------------- ----------------- ---------------- ----------------- ---------------
$1-$2 477,658 5.92 $1.59 238,720 $1.70
$2-$3 41,501 5.98 $2.58 41,501 $2.58
$3-$5 103,500 8.11 $3.99 58,333 $4.20
$5-$7 88,200 7.86 $5.82 75,200 $5.69
----------------- -----------------
710,859 413,754
================= =================
F-17
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the Company's stock option activity for the
years ended December 31, 1999, 2000 and 2001:
Weighted average
Number of Shares Price per share Price per Share
----------------- ------------------- -----------------------
January 1, 1999 459,550 $1.69 to $2.69 $1.81
Granted 145,000 $3.38 to $6.63 $5.34
Exercised (117,827) $1.69 to $2.50 $1.72
Canceled (52,334) $1.69 to $2.69 $1.96
-----------------
December 31, 1999 434,389
-----------------
Granted 66,000 $3.25 to $4.25 $3.96
Exercised (12,496) $1.69 to $2.69 $1.82
Canceled (88,170) $1.69 to $6.23 $4.62
-----------------
December 31, 2000 399,723
Granted 269,438 $1.12 to $3.25 $1.60
Exercised (1,001) $1.68 $1.68
Canceled (18,501) $1.69 to $6.23 $4.08
-----------------
December 31, 2001 649,659
=================
OTHER STOCK OPTIONS - On August 1, 1995, the Company entered into an
agreement with ADR Management Group Ltd. ("ADR" and "ADR Agreement") for
the purpose of providing the Company independent financial relations
management services. Pursuant to the ADR Agreement, the Company agreed to
pay ADR over the term of the agreement a monthly fee plus reasonable
out-of-pocket expenses through July 1997. As further compensation, the
Company granted to ADR options to purchase an aggregate of 75,000 shares of
common stock of the Company at $5.25 per share. The options vested in
amounts of 9,375 at the end of each three-month period following August 1,
1995. As of December 31, 1997, 75,000 options issued under the stock option
agreement were vested. In August 1997, the Company entered into a new
agreement with ADR whereby ADR agreed to provide independent financial
relations management services to the Company through July 31, 1998. In
consideration of the services rendered by ADR, the Company granted ADR
options to purchase an aggregate of 15,000 shares of common stock of the
Company at $2.6875 per share. The options vested in amounts of 1,250 each
month commencing September 1997 until and including August 1998, all of
which were exercisable from the date of their vesting until August 2000.
The Company terminated the ADR Agreement in 1999. In accordance with SFAS
123, the Company valued the options at $16,200 using the Black-Scholes
option-pricing model and no compensation expense was recognized during 1999
and 2000. During 1999, ADR exercised 38,800 shares and, as of December 31,
2001, 51,200 ADR stock options remained unexercised.
On April 1, 1999, the Company entered into an agreement with Integrated
Corporate Relations, Inc., ("ICR" and "ICR Agreement") for the purpose of
providing the Company independent financial relations management services.
Pursuant to the ICR Agreement, the Company agreed to pay ICR over the term
of the agreement a monthly fee plus reasonable out-of-pocket expenses
through March 31, 2001. As further compensation, the Company granted to ICR
options to purchase an aggregate of 25,000 shares of common stock of the
Company at $4.20 per share, 20% above of the market closing price of the
Company's common stock on March 31, 1999. The options vested in amounts of
3,125 at the end of each three-month period commencing June 30, 1999 until
and including March 31, 2001 and were to be exercisable until March 31,
2004. The Company terminated the ICR Agreement effective March 3, 2001.
Under the termination provisions of the ICR stock option agreement, all
stock options granted and vested under this agreement ceased to be
exercisable after April 2, 2001. As of December 31, 2001, all options
issued pursuant to the ICR Agreement expired. In accordance with SFAS 123,
the Company valued the options at $30,250 using the Black-Scholes
option-pricing model, of which $15,120 and $11,340 was recognized as
compensation expense during 2000 and
F-18
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1999, respectively.
On April 16, 1999, the Company entered into an agreement with W.A.B. Growth
Equity Research, ("WAB" and "WAB Agreement") for the purpose of providing
the Company independent financial relations management services. Pursuant
to the WAB Agreement, the Company granted to WAB options to purchase an
aggregate of 10,000 shares of common stock of the Company at $4.00 per
share, 15% above the market closing price of the Company's common stock on
April 16, 1999. The options vest in amounts of 2,500 on the 16th of each
three-month period commencing April 16, 1999 until and including January
16, 2000 and may be exercised until April 16, 2004. As of December 31,
2001, 10,000 shares issued under the WAB Agreement were vested, of which no
options had been exercised. In accordance with SFAS 123, the Company valued
the options at $9,800 using the Black-Scholes option-pricing model, of
which $652 and $9,148 was recognized as compensation expense during 2000
and 1999, respectively.
STOCKHOLDER RIGHTS PLAN - In August 1996, the Company implemented a
stockholder rights plan to protect stockholders' rights in the event of a
proposed takeover of the Company. Under the stockholder rights plan, each
share of the Company's outstanding Common Stock carries one right to
purchase one one-thousandth (1/1000) of Series A preferred stock (a
"Right") at an exercise price of $30, subject to certain anti-dilution
adjustments. Each Right entitles the holder, under certain circumstances,
to purchase Common Stock of the Company or the acquiring company at a
substantially discounted price ten days after a person or group publicly
announces it has acquired or has tendered an offer for 15% or more of the
Company's outstanding Common Stock. The Rights are redeemable by the
Company at $.01 per Right and expire in 2006. The Company has 1,000,000
shares of preferred stock authorized, of which 75,000 shares of Series A
preferred stock have been reserved for issuance upon exercise of the
Rights.
11. TRANSACTIONS WITH RELATED PARTIES
EMPLOYMENT AGREEMENTS - The Company is party to an employment agreement
with Michael Favish, which provides that Mr. Favish will serve as Chief
Executive Officer for a term of three years beginning August 10, 1999. His
base salary was $230,000, $210,000 and $165,000 during 2001, 2000 and 1999,
respectively. In May 2001, Mr. Favish was granted 23,000 stock options,
with an exercise price of $2.00 per share. No options were granted to Mr.
Favish in 2000. In December 1999, Mr. Favish was granted 7,000 stock
options, with an exercise price of $6.63 per share. All options vest over a
three-year period and have a ten-year life from the date of grant.
The Company is party to an employment 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 is $200,000. Mr.
Dickey is also entitled to a bonus based on a bonus compensation plan
jointly established between the Board and Mr. Dickey. Under the terms of
his agreement, in March 2001, Mr. Dickey was granted 125,000 stock options,
with an exercise price of $1.12 per share, and in June 2001 Mr. Dickey was
granted 35,938 stock options, with an exercise price of $1.61 per share.
50% of the options vest on April 1, 2002 and 50% of the options vest on
April 1, 2003. All of the options have a ten-year life from the date of
grant.
12. DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan pursuant to Section 401(k) of
the Internal Revenue Code that is available to substantially all employees.
In 1999, 2000, and 2001 the Company matched $.50 of each $1.00 of employee
contributions up to three, two and two percent, respectively, of
F-19
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
covered payroll. Employees are automatically fully vested in their personal
contribution amounts and vest in the Company's contribution ratably over a
five-year period. The Company's contribution expense for the year ended
December 31, 2001, December 31, 2000 and December 31, 1999 was $60,249,
$46,829 and $39,476, respectively.
13. INCOME TAXES
The components of income tax expense (benefits) were as follows for the
years ended December 31, 2001, 2000 and 1999:
Federal State Total
--------- --------- ---------
2001:
Continuing Operations
Current $ -- $ -- $ --
Deferred 66,000 (24,000) 42,000
--------- --------- ---------
$ 66,000 $ (24,000) $ 42,000
========= ========= =========
Discontinued Operations
Current $ -- $ -- $ --
Deferred (217,000) (28,000) (245,000)
--------- --------- ---------
$(217,000) $ (28,000) $(245,000)
========= ========= =========
Loss on Disposal of Discontinued Operations
Current $ -- $ -- $ --
Deferred (388,000) (58,000) (446,000)
--------- --------- ---------
$(388,000) $ (58,000) $(446,000)
========= ========= =========
Total
Current $ -- $ -- $ --
Deferred (539,000) (110,000) (649,000)
--------- --------- ---------
$(539,000) $(110,000) $(649,000)
========= ========= =========
2000:
Current $ (31,000) $ 10,000 $ (21,000)
Deferred 89,000 18,000 107,000
--------- --------- ---------
$ 58,000 $ 28,000 $ 86,000
========= ========= =========
1999:
Current $ 439,000 $ 245,000 $ 684,000
Deferred (445,000) (126,000) (571,000)
--------- --------- ---------
$ (6,000) $ 119,000 $ 113,000
========= ========= =========
Income tax benefits recognized during 1999 relate primarily to the
elimination of a deferred tax valuation allowance established in a prior
year for uncertainty relating to the utilization of a net operating loss
carryforward. As of December 31, 1999, the Company had utilized all of its
available net operating loss carryforward from prior years. The Company
incurred a net operating loss in 2000 of $170,000 for federal tax purposes
only, which was primarily due to the excess of the tax loss over the book
loss on the disposition of fixed assets related to the Company's facility
move in 2000. Income tax benefits recognized during 2001 relate primarily
to the net operating loss of $1.2 million generated by its discontinued
Rawlings Golf operations. The Company's 2000 net operating loss was carried
back to 1999 for federal tax purposes. The Company estimates it will be
able to carryback the 2001 net operating loss to 1999 for federal tax
purposes. For California tax purposes, the 2001 net operating loss cannot
be carried back and the carryover is limited to 55%. Approximately $680,000
of the net operating loss will carryforward to future years and will expire
in 2011.
F-20
The components of net deferred tax assets were as follows at December 31,
2001 and 2000:
2001 2000
----------------- -----------------
Deferred tax assets:
Net operating loss $ 481,000 $ 58,000
Employee benefit plans 56,000 39,000
Uniform capitalization of 110,000 162,000
inventory cost
Bad debt reserves 271,000 222,000
Inventory reserves 244,000 165,000
Impairment loss 46,000 46,000
Co-op reserves 84,000 --
Discontinued operations reserves 74,000 --
State income taxes 5,000 83,000
Other -- --
----------------- -----------------
Total gross deferred tax assets 1,371,000 775,000
Deferred tax liabilities:
Depreciation 94,000 112,000
State income taxes 74,000 109,000
----------------- -----------------
Total deferred tax liability 168,000 221,000
----------------- -----------------
Net deferred tax asset $ 1,203,000 $ 554,000
================= =================
Net current deferred tax assets $ 1,324,000 $ 729,000
Net non-current deferred tax (121,000) (175,000)
assets/(liabilities)
----------------- -----------------
Net deferred tax asset $ 1,203,000 $ 554,000
================= =================
Net current deferred tax asset of $373,000 attributable to net operating
loss carryback available is included in Other Receivables for the year
ended December 31, 2001.
The Company evaluates a variety of factors in determining the amount of the
deferred income tax assets to be recognized including the Company's
earnings history and its near-term earnings expectations. The net operating
loss incurred in 2000 was due to a one-time disposition of assets and the
net operating loss incurred in 2001 was due to the discontinued Rawlings
Golf operation. The 2000 and 2001 operating losses are unrelated to the
future ongoing operations of the Company. Based upon the approximate tax
benefit of $373,000 from a tax net operating loss carryback to 1999 and the
book net income realized from continuing operations in 2001, 2000 and 1999,
and the expectation of continuing increases in its promotions and
entertainment business, it is probable that future taxable income will be
sufficient to realize all of the Company's existing deferred tax assets on
future tax returns.
The actual tax expense (benefit) differs from the expected tax expense,
computed by applying the Federal corporate tax rate of 34% to income before
income taxes, as follows:
2001 2000 1999
----------------- ----------------- -----------------
Expected statutory tax expense/(benefit) $ (557,000) $ 90,000 $ 938,000
Net tax effect of permanent differences 15,000 9,000 12,000
State income tax expense/(benefit), net of
Federal tax effect (73,000) 18,000 79,000
Valuation allowance -- -- (916,000)
Adjustment for prior year over accrual (34,000) (31,000) --
----------------- ----------------- -----------------
Actual tax expense/(benefit) $ (649,000) $ 86,000 $ 113,000
================= ================= =================
F-21
FOTOBALL USA, INC.
SUPPLEMENTAL DATA
SELECTED QUARTERLY DATA (UNAUDITED)
2001
----------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------ ------------ ------------ ------------ ------------
Net sales $ 5,614,333 $ 7,363,753 $ 10,803,747 $ 8,014,980 $ 31,796,813
Gross profit 1,839,827 2,401,054 4,113,273 3,278,238 11,632,392
Income (loss) from continuing
operations (445,553) (294,935) 606,404 257,528 123,444
Loss from discontinued operations (123,707) (200,625) (73,007) (87,311) (484,650)
Loss on disposal of discontinued
operations -- -- -- (629,376) (629,376)
Net income (loss) $ (569,260) $ (495,560) $ 533,397 $ (459,159) $ (990,582)
Earning per share
From continuing operations $ (.12) $ (.08) $ .16 $ .07 $ .03
From discontinued operations $ (.03) $ (.06) $ (.02) $ (.20) $ (.31)
Net income (loss) $ (.15) $ (.14) $ .14 $ (.13) $ (.28)
2000
----------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------------ ------------ ------------ ------------ ------------
Net sales $ 5,934,149 $ 7,076,128 $ 7,097,750 $ 6,821,303 $ 26,929,330
Gross profit 2,139,096 2,666,803 2,558,889 2,322,963 9,687,751
Income (loss) from continuing
operations 149,475 260,930 680 (232,153) 179,271
Loss from discontinued operations -- -- -- -- --
Loss on disposal of discontinued
operations -- -- -- -- --
Net income (loss) $ 149,475 $ 260,930 $ 680 $ (232,153) $ 179,271
Earning per share
From continuing operations $ .04 $ .07 $ .00 $ (.06) $ .05
From discontinued operations -- -- -- -- --
Net income (loss) $ .04 $ .07 $ .00 $ (.06) $ .05
F-22
FOTOBALL USA, INC.
SUPPLEMENTAL DATA (CONTINUED)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 2001
(A) (B) (C) (D) (E)
Additions
Balance at Charged to Charged to Balance at
beginning costs & other end of
Description of period expenses accounts Deductions period
- ----------------------------------- ------------- ------------- ------------- ------------- -------------
2001
Allowance for bad debt $ 163,188 $278,300 -- $243,047 $198,441
Allowance for uncollectible
receivables 130,614 225,000 -- 120,807 234,807
Allowance for sales returns 223,423 135,000 -- 158,540 199,883
Allowance for discontinued and
obsolete inventory 485,065 892,124 -- 808,628 568,566
2000
Allowance for bad debt $ 250,000 $ 25,200 -- $112,012 $163,188
Allowance for uncollectible
receivables 250,000 -- -- 119,386 130,614
Allowance for sales returns 150,000 73,423 -- -- 223,423
Allowance for discontinued and
obsolete inventory 276,730 373,209 -- 164,874 485,065
1999
Allowance for bad debt $ 146,812 $395,011 -- $291,823 $250,000
Allowance for uncollectible
receivables -- -- 250,000 -- 250,000
Allowance for sales returns 150,000 -- -- -- 150,000
Allowance for discontinued and
obsolete inventory 1,015,711 86,067 -- 825,048 276,730
Amount in column (C) represents reclass from allowance for bad debt. Amounts in
column (D) represent accrual usage.