U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
__X__ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
_____ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________.
Commission file number 0 - 24608
FOTOBALL USA, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 33 - 0614889
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3738 Ruffin Road, San Diego, California 92123
(Address of principal executive offices)
Issuer's telephone number, including area code (619) 467-9900
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes __X__ No _____
As of August 1, 1996, the Company had 2,676,742 shares of its common stock
issued and outstanding.
Transitional Small Business Disclosure Format Yes _____ No __X__
<PAGE>
FOTOBALL USA, INC.
INDEX
Sequential
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1995
and June 30, 1996 3-4
Condensed Statements of Operations for the
three months and six months ended
June 30, 1995 and 1996 5-6
Condensed Statements of Cash Flows for the
six months ended June 30, 1995 and 1996 7
Notes to Condensed Financial Statements 8-11
Item 2. Management's Discussion and Analysis or
Plan of Operation 12-17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
page 2<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 2,162,268 $ 3,184,726
Restricted cash 1,000,000 --
Accounts receivable-net 588,280 5,350,785
Inventories (Note 4) 1,288,085 1,834,288
Production-in-process 628,631 395,135
Prepaid expenses and other 125,535 245,397
Deferred income taxes 525,000 --
------------ ------------
TOTAL CURRENT ASSETS 6,317,799 11,010,331
------------ ------------
PROPERTY AND EQUIPMENT - net 860,071 896,123
------------ ------------
OTHER ASSETS
Deferred income taxes 601,000 572,900
Deposits and other 13,023 13,023
Deferred consulting fee, less accumulated amortization
of $42,500 and $ 57,500 at December 31, 1995 and
June 30, 1996, respectively 17,500 2,500
------------ ------------
TOTAL OTHER ASSETS 631,523 588,423
------------ ------------
$ 7,809,393 $ 12,494,877
============ ============
(continued)
page 3
<PAGE>
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, June 30,
1995 1996
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 58,011 $ 12,304
Current portion of capital leases 50,889 45,288
Customer deposits 23,042 10,310
Accounts payable and accrued expenses 772,470 4,275,002
------------ ------------
TOTAL CURRENT LIABILITIES 904,412 4,342,904
CAPITAL LEASES, net of current portion 147,443 122,913
------------ ------------
TOTAL LIABILITIES 1,051,855 4,465,817
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value;
authorized-1,000,000 shares; issued and
outstanding-none
Common stock, $.01 par value;
authorized-15,000,000 shares;issued and
outstanding - 2,661,742 shares 26,617 26,617
Additional paid-in capital 8,562,194 8,562,194
Accumulated deficit (1,805,773) (547,001)
Less unamortized compensation expense (25,500) (12,750)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 6,757,538 8,029,060
------------ ------------
$ 7,809,393 $ 12,494,877
============ ============
See accompanying notes to
condensed financial statements.
page 4
<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1995 1996 1995 1996
------------ ------------ ------------ ------------
SALES $ 1,184,561 $12,752,204 $ 2,141,854 $15,153,860
COST OF SALES 739,585 8,975,448 1,307,460 10,380,311
------------ ------------ ------------ ------------
GROSS PROFIT 444,976 3,776,756 834,394 4,773,549
------------ ------------ ------------ ------------
OPERATING EXPENSES
Royalties 67,251 441,138 161,824 612,224
Marketing 244,953 739,961 449,094 1,045,714
General and
administrative 367,911 523,507 712,766 981,642
Depreciation
and amortization 47,499 52,180 91,522 106,850
------------ ------------ ------------ ------------
TOTAL OPERATING
EXPENSES 727,614 1,756,786 1,415,206 2,746,430
------------ ------------ ------------ ------------
OPERATING INCOME
(LOSS) (282,638) 2,019,970 (580,812) 2,027,119
------------ ------------ ------------ ------------
OTHER (INCOME) EXPENSE
Interest expense 6,087 7,980 14,183 16,577
Interest income (62,472) (49,242) (131,590) (92,329)
------------ ------------ ------------ ------------
TOTAL OTHER (INCOME)
EXPENSE (56,385) (41,262) (117,407) (75,752)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAX (226,253) 2,061,232 (463,405) 2,102,871
INCOME TAX EXPENSE
(BENEFIT) (91,600) 827,400 (186,000) 844,100
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (134,653) $ 1,233,832 $ (277,405) $ 1,258,771
============ ============ ============ ============
(continued)
page 5<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING:
PRIMARY 2,661,742 3,833,817 2,661,742 2,728,710
============ ============ ============ ============
FULLY DILUTED 2,661,742 3,833,817 2,661,742 3,833,817
============ ============ ============ ============
NET INCOME (LOSS)
PER COMMON SHARE:
PRIMARY $ (.05) $ .33 $ (.10) $ .46
============ ============ ============ ============
FULLY DILUTED $ (.05) $ .33 $ (.10) $ .35
============ ============ ============ ============
See accompanying notes to
condensed financial statements.
page 6
<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30,
---------------------------
1995 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (277,405) $ 1,258,771
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 91,522 106,850
Amortization of stock compensation expense 12,750 12,750
Changes in operating assets and liabilities:
(Increase) decrease in:
Restricted cash 323,529 1,000,000
Accounts receivable (473,921) (4,762,505)
Inventories (241,633) (546,203)
Production-in-process -- 233,496
Prepaid expenses and other (62,815) (106,785)
Deferred income taxes (186,000) 553,100
Increase (decrease) in:
Accounts payable and accrued expenses 198,099 3,479,490
Customer deposits -- 10,310
Consulting fee payable (15,000) --
------------ ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (630,874) 1,239,274
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (3,094,677) --
Proceeds from sale and maturities of short-term
investments 3,121,471 --
Purchase of property and equipment (143,312) (140,979)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (116,518) (140,979)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of related party loans (163,099) (45,707)
Repayment of capital lease obligations (14,306) (30,130)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (177,405) (75,837)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (924,797) 1,022,458
CASH AND EQUIVALENTS, Beginning of period 1,352,838 2,162,268
------------ ------------
CASH AND EQUIVALENTS, End of period $ 428,041 $ 3,184,726
============ ============
See accompanying notes to
condensed financial statements.
page 7<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
1. CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet as of June 30, 1996, the condensed statements of
operations for the three months and six months ended June 30, 1995 and 1996, and
the condensed statements of cash flows for the six months ended June 30, 1995
and 1996 have been prepared by the Company without audit. In the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted, pursuant to the rules and regulations of the Securities and
Exchange Commission. For further information refer to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1995.
The results of operations for the three months and six months ended June 30,
1996 are not necessarily indicative of the results of operations to be expected
for the year ending December 31, 1996.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Dependence Upon Licensing Arrangements - The Company's business is based
primarily upon its use of the insignia, logos, names, colors, likenesses and
other identifying marks and images borne by many of its products pursuant to
license arrangements with Professional Baseball, the NFL and, to a lesser
extent, Colleges. The Company's licensing arrangements expire at various times
through February 15, 1997. The Company is in the process of extending the term
of the NFL Team Logo license through March 31, 1998. The following table
summarizes, in descending order of 1995 revenue contribution, the Company's
significant license agreements and their terms:
Licensor Product Term Expiration Date
-------- ------- ---- ---------------
MLBP Baseball 2 years December 31, 1996
MLBPA Baseball 1 year (2 year option) December 31, 1996
NFL Team Logo Football 2 years March 31, 1996
Historically, the Company's licenses have been renewed by its licensors.
Although the Company believes it will be able to renew its licenses upon their
expiration, there can be no assurance that such renewal will be on terms
acceptable to the Company. The non-renewal or termination of one or more of the
Company's licenses, particularly with Professional Baseball, the NFL and, to a
lesser extent, Colleges, could have a material adverse effect on the Company's
business.
Seasonality; Concentration of Business; Major League Baseball Strike - During
the year ended December 31, 1995, 75% of the Company's sales was derived from
baseball-related products and 72% of the Company's sales was recorded during the
third (46%) and fourth (26%) quarters. During the year ended December 31, 1994,
85% of the Company's sales was derived from baseball-related products and 86% of
page 8<PAGE>
the Company's sales was recorded during the first (19%) and second (67%)
quarters. Sales during the third and fourth quarters of 1994 were adversely
impacted due to the Major League Baseball ("MLB") strike, as discussed below.
On August 12, 1994, the Major League Baseball Players Association (the "MLBPA")
went on strike citing differences with team owners regarding compensation. On
April 2, 1995, the MLBPA ended their strike and agreed to return to MLB teams
without having signed a collective bargaining agreement ("CBA") with team
owners. The beginning of the 1995 MLB season was delayed from April 2, 1995
until April 25, 1995. As a result of the strike and the uncertainty as to the
continuation in full of the 1995 MLB season, the Company's baseball-related
business was materially adversely impacted during the last half of 1994 and the
first half of 1995. The current lack of a CBA has not had an adverse impact upon
the Company's baseball business, with baseball-related sales increasing 382%, to
$ 5,188,000 for the three months ended June 30, 1996 as compared to $1,076,000
for the corresponding prior year period. However, if a CBA remains unresolved
into 1997, it could adversely affect the Company's baseball business in future
periods. The Company believes that the continuing decrease in the dependence
upon baseball-related sales during the past several years will continue in the
future, with the introduction of new product lines and non baseball-related
promotions.
Dependence on Promotions Business - The Company's promotions business depends
primarily upon a series of one-time projects with its customers. Although the
Company has had repeat business from certain promotions customers, there can be
no assurance that the Company will be able to continue its relationships with
its promotions customers or attract new promotions customers to generate
sufficient revenues to operate profitably. During the year ended December 31,
1995, 40% of the Company's sales was derived from sales of the Company's
promotional products to 189 customers, of which one customer accounted for
aggregate sales of $2,015,000 or 26% of sales. During the quarter ended June 30,
1996, 82 % of the Company's sales was derived from two promotions, a toy car
promotion with Chevron of $ 7,200,000 and a baseball promotion with Burger King
of $ 3,315,000.
3. NET INCOME (LOSS) PER COMMON SHARE
Primary earnings (loss) per common share have been computed based upon the
weighted average number of common and common equivalent shares outstanding.
Common equivalent shares result from the assumed exercise of outstanding stock
options and the Company's redeemable common stock purchase warrants that have
a dilutive effect when applying the modified treasury stock method. The fully
diluted per share calculation assumes, in addition to the above, that the
Company's warrants were redeemed into common stock at the beginning of the
period with earnings being increased for the interest income, net of taxes,
that would have been earned had redemption taken place.
page 9<PAGE>
4. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined on the
first-in first-out (FIFO) method.
Inventories consist of the following:
December 31, June 30,
1995 1996
------------ ------------
Raw materials $ 997,648 $ 1,275,866
Finished goods 290,437 558,422
------------ ------------
Total inventories $ 1,288,085 $ 1,834,288
============ ============
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at December 31,
1995 and June 30, 1996:
December 31, June 30,
1995 1996
------------ ------------
Accounts payable $ 573,526 $ 3,612,498
Accrued payroll and related 52,554 56,842
Accrued commissions 82,061 236,364
Royalties payable 58,298 63,780
Income taxes payable -- 291,000
Other 6,031 14,518
------------ ------------
$ 772,470 $ 4,275,002
============= ============
6. BACKLOG
Generally, substantially all of the Company's retail orders are processed within
one to four weeks after receipt of an order and are therefore not deemed part of
the Company's backlog. The Company considers its backlog as those promotional
orders in which an agreement has been signed defining the terms and quantity of
the promotion, and delivery extends beyond the normal processing time of up to
four weeks. Historically, the Company's backlog of orders, which have consisted
mainly of baseball-related products, are highest between January and April of
each year and are significantly lower during the remainder of the year.
The Company's backlog of orders was $ 330,000 and $ 0 as of
August 1, 1996 and 1995, respectively.
page 10<PAGE>
7. LINE OF CREDIT
In December 1994, the Company entered into a $1,000,000 line of credit with
Merrill Lynch International Bank Limited ("Merrill Lynch") at an interest rate
which is at 1.75% above the London Interbank Offering Rate term that the Company
chooses to select. Any borrowing under the line of credit are secured by cash
collateral deposited with Merrill Lynch equal to the credit outstanding. In
December 1995, the Company increased its existing line of credit with Merrill
Lynch, from $1,000,000 to $3,000,000. The line of credit, which expires on
December 19, 1996, supports an irrevocable stand-by letter of credit of
$1,000,000 which expired on March 15, 1996 that had been issued to a supplier
and was collateralized by cash. Subsequently, on January 2, 1996, an additional
stand-by letter of credit of $1,000,000, which expired on May 15, 1996 was
issued to the same suppliers. Subsequently, in August 1996, the Company issued
to this same supplier an additional stand-by letter of credit of $1,000,000,
which expires on December 15, 1996. The Company may provide future letters of
credit as a means of guaranteeing payment, either as required by the above-
mentioned supplier or in procuring goods from other overseas suppliers.
In December 1995, the Company entered into a separate one year credit agreement
with Scripps Bank. This revolving line of credit facility (the "credit line") in
the amount of $1,000,000 is collateralized by the assets of the Company and
actual borrowing are limited to available collateral, as defined in the
agreement. Borrowing under the credit line bear interest at the bank's prime
rate plus .75%. The credit line contains covenants requiring the Company to
maintain minimum net worth levels, and minimum working capital and debt to
equity ratios.
There were no borrowing under either line of credit as of June 30, 1996.
page 11<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Recent Developments
On August 12, 1996, the Board of Directors of the Company adopted a shareholder
rights plan. Each right will, upon becoming exercisable, entitle its holder
to buy one one-thousandth (1/1,000) of a share of a new series of preferred
stock at an exercise price of $30. If any person or group acquires 15% or more
of Fotoball common stock (except in transactions approved by the Board of
Directors of the Company in advance), each right will then entitle its holder,
other than the person or group owning 15%, to acquire, at the exercise price,
Fotoball common stock with a market value equal to twice the exercise price.
Fotoball may elect, however, to exchange a newly issued share of Fotoball
common stock for each right. If any person or group owns 15% or more of
Fotoball common stock, and Fotoball is acquired in a merger or other business
combination, or if 50% of its earning power or assets are sold, each right
will entitle its holder, other than the person or group owning 15%, to
acquire, at the exercise price, shares of the acquiring company's common
stock with a market value of twice the exercise price. Persons owning 15%
or more of Fotoball common stock on the date the plan is adopted are exempt,
so long as they do not acquire an additional number of shares greater than 2%
of the outstanding shares, other than in a transaction approved by the Board
of Directors of Fotoball in advance. The record date for the distribution of
the rights is August 30, 1996. The rights expire on August 11, 2006.
Results of Operations
The following table sets forth certain unaudited operating data (in dollars and
as a percentage of the Company's sales) for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------- ---------------------------------------------
1995 1996 1995 1996
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 1,184,561 100 % $ 12,752,204 100 % $ 2,141,854 100 % $ 15,153,860 100 %
Cost of Sales 739,585 62 8,975,448 70 1,307,460 61 10,380,311 68
Operating Expenses 727,614 61 1,756,786 14 1,415,206 66 2,746,430 18
Operating Income (Loss) (282,638) (23) 2,019,970 16 (580,812) (27) 2,027,119 13
Interest Expense 6,087 1 7,980 1 14,183 1 16,577 1
Interest Income 62,472 5 49,242 1 131,590 6 92,329 1
Income (Loss) Before Income Tax (226,253) (19) 2,061,232 16 (463,405) (22) 2,102,871 14
Income Tax Expense (Benefit) (91,600) (8) 827,400 6 (186,000) (9) 844,100 6
Net Income (Loss) $ (134,653) (11)% $ 1,233,832 10 % $ (277,405) (13)% $ 1,258,771 8 %
</TABLE>
<PAGE>
page 12<PAGE>
Three Months Ended June 30, 1995 and 1996:
Sales were $12,752,204 for the three months ended June 30, 1996, an increase of
977% from sales of $1,184,561 for the three months ended June 30, 1995. The
increase was due to both promotional and retail divisions realizing substantial
increases over the three months ended June 30, 1995. For the three months ended
June 30, 1996, promotional sales were $10,852,000, or 85% of sales, as compared
to promotional sales of $457,000, or 39% of sales, for the three months ended
June 30, 1995. This increase was due principally to a toy car promotion with
Chevron of $7,200,000 and a baseball promotion with Burger King of $3,315,000.
Retail sales were $1,900,000 for the three months ended June 30, 1996, an
increase of 161% from retail sales of $727,000 for the three months ended June
30, 1995. This increase was principally due to an 162% increase in retail
baseball-related sales, due in part to the lack of labor strife impacting the
1996 MLB season as compared to the strike-delayed 1995 MLB season. Sales were
also higher during the period due to significant increases in sales to national
mass merchants, such as J.C. Penney, as compared to the prior year period.
Gross profit was $3,776,756 for the three months ended June 30, 1996, an
increase of 749% from gross profit of $444,976 for the three months ended June
30, 1995. Gross profit increased on an absolute basis as a result of the
increase in sales. Gross margins as a percentage of sales decreased to 30% for
the three months ended June 30, 1996 from 38% for the three months ended June
30, 1995. The gross margins as a percentage of sales decreased from 1995 to 1996
due to two factors: the toy car promotion had margins significantly lower than
what the Company has typically realized from sports-related promotions and
production and other delays during the toy car promotion resulted in significant
anomalous shipping costs, which resulted in substantially lower than anticipated
margins on this promotion. The Company believes that the margins for the
year ending December 31, 1996 will be comparable to those realized during the
three months ended June 30, 1996, due to the following factors: (i) the Company
generally realizes higher margins on its sports related promotions as compared
to non-sports related promotions. Therefore, to the extent that non-sports
related promotions constitute a greater percentage of future aggregate sales,
it would be expected that overall margins would be lower as compared to prior
years; (ii) the Company generally realizes higher margins on its retail
sales as compared to promotional sales. The increasing growth of the
Company's retail sales along with the expected introduction of additional
higher margin retail products, will mitigate in part, the impact of a greater
non-sports related sales mix, as noted above.
Operating expenses were $1,756,786, or 14 % of sales, for the three months ended
June 30, 1996, as compared to operating expenses of $727,614, or 61% of sales,
for the three months ended June 30, 1995. The increase in operating expenses on
an absolute basis was due to increased royalties and marketing expenses
resulting from significantly higher sales. The increase was also due to general
and administrative expenses that increased in absolute terms due to higher
consulting, compensation and facility operating costs.
Royalties expense was $441,138 for the three months ended June 30, 1996, an
increase of 556 % from royalties expense of $67,251 for the three months ended
June 30, 1995. Royalties expense as a percentage of sales decreased to 3% of
sales for the three months ended June 30, 1996 from 6 % of sales for the three
months ended June 30, 1995, due to the $7,200,000 toy car promotion which had no
page 13<PAGE>
royalty obligation. Royalties expense as a percentage of sales, excluding the
toy car promotion, would have been 8%, which would have been an increase as
compared to the prior year period due to a higher percentage of total sales
which carried a royalty obligation. As previously noted, the Company is
dependent upon its licensing arrangements and their successful renewal. See Note
2, Dependence Upon Licensing Arrangements.
Marketing expenses were $739,961 for the three months ended June 30, 1996, an
increase of 202% from marketing expenses of $244,953 for the three months ended
June 30, 1995. Marketing expenses as a percentage of sales decreased to 6 % of
sales for the three months ended June 30, 1996 from 21% of sales for the three
months ended June 30, 1995, primarily as a result of realizing economies of
scale from the Company's operations as a result of the two significant
promotions noted above. Marketing expenses increased significantly from 1995 to
1996 in absolute terms due to substantially higher wages, bonuses, exhibiting
and travel costs that were the direct result of significantly higher sales.
General and administrative expenses were $523,507 for the three months ended
June 30, 1996, an increase of 42% from general and administrative expenses of
$367,911 for the three months ended June 30, 1995. This increase is a result of
several factors, including increased financial and public relations consulting
costs, increased facility costs associated with the Company's expanded
facility, and $103,000 of accrued bonus compensation for executive and
administrative staff.
Interest expense was $7,980 for the three months ended June 30, 1996, an
increase of 31% from interest expense of $6,087 for the three months ended June
30, 1995. The increase reflects the reduction in the amount of the Company's
long-term debt offset by an increase in interest charges from capitalized
leases. Total capitalized equipment and machinery leases were $168,201 at June
30, 1996, an increase of $40,949 from total capitalized equipment and machinery
leases of $127,252 at June 30, 1995.
Interest income was $49,242 for the three months ended June 30, 1996, a decrease
of $13,230 or 21% from interest income of $62,472 for the three months ended
June 30, 1995. This decrease is due to two factors: the Company's average cash
balances available for investment were lower during the three months ended June
30, 1996 as compared to the three months ended June 30, 1995. Additionally, the
interest rate yield realized on its cash and short-term marketable investments
during the three months ended June 30, 1996 was significantly lower than the
corresponding prior year period, reflecting the decline in interest rates in the
market during this period.
Income tax expense was $827,400 for the three months ended June 30, 1996 as
compared to an income tax benefit of $91,600 for the three months
ended June 30, 1995.
Net income was $1,233,832 or $.33 per share for the three months ended June 30,
1996, as compared to a net loss of $134,653 or ($.05) per share for the three
months ended June 30, 1995.
Six Months Ended June 30, 1995 and 1996:
Sales were $15,153,860 for the six months ended June 30, 1996, an increase of
608 % from sales of $2,141,854 for the six months ended June 30, 1995. The
increase was due to both promotional and retail divisions realizing substantial
page 14<PAGE>
increases over the six months ended June 30, 1995. The Company's reliance on
baseball- related sales has also decreased significantly since 1994. During the
six months ended June 30, 1996, 41% of the Company's sales was derived from
baseball-related products, as compared to 79% and 91% during the six months
ended June 30, 1995 and 1994, respectively. The Company's baseball-related sales
increased significantly during 1996 as compared to 1995, due in part to the
adverse impact that the MLB labor dispute had on sales during the first half of
1995. Additionally, retail sales, particularly baseball-related sales,
increased significantly for the six months ended June 30, 1996 as a result of
increasing sales with national mass merchants including JC Penney. For the six
months ended June 30, 1996, Chevron and Burger King accounted for aggregate
sales of $7,200,000 and $4,365,000 or 46% and 29%, respectively, as compared to
no sales for either customer during the six months ended June 30, 1995.
Gross profit was $4,773,549 for the six months ended June 30, 1996, an increase
of 472% from gross profit of $834,394 for the six months ended June 30, 1995. As
previously noted, gross profit increased on an absolute basis due to
significantly higher sales. Gross margins as a percentage of sales decreased
from 39% to 32% for the six months ended June 30, 1995 and 1996, respectively,
reflecting the impact of the toy car promotion which realized lower than
anticipated margins. These lower margins were mitigated in part by higher
margins on its sports-related promotions and retail sales. As previously noted,
the Company believes that these lower margins are more representative of
future results given the anticipated increase in non-sports related promotions.
Operating expenses were $2,746,430, or 18% of sales, for the six months ended
June 30, 1996, as compared to operating expenses of $1,415,206, or 66% of sales,
for the six months ended June 30, 1995, as a result of the Company's fixed
operating costs being allocated over substantially higher sales volumes.
Operating expenses on an absolute basis increased by $1,331,224 during this
period due to the increase in direct costs such as royalties, commissions and
travel costs that were derived from higher sales.
Royalties expense was $612,224 for the six months ended June 30, 1996, an
increase of 278% from royalties expense of $161,824 for the six months ended
June 30, 1995. Royalties expense as a percentage of sales decreased to 4% of
sales for the six months ended June 30, 1996 from 8% of sales for the six months
ended June 30, 1995, principally due to the $7,200,000 toy car promotion which
had no royalty obligation.
Marketing expenses were $1,045,714 for the six months ended June 30, 1996, an
increase of 133% from marketing expenses of $449,094 for the six months ended
June 30, 1995. Marketing expenses as a percentage of sales decreased to 7% of
sales for the six months ended June 30, 1996 from 21% of sales for the six
months ended June 30 1995, as a result of the non-variable component of
marketing expenses, such as wages and exhibiting costs, being allocated over
substantially higher sales volumes.
General and administrative expenses were $981,642 for the six months ended June
30, 1996, an increase of 38% from general and administrative expenses of
$712,766 for the six months ended June 30, 1995. This increase is a result of
several factors, including increased financial and public relations consulting
expense, higher occupancy costs associated with the Company's expanded
facility and, as previously noted, accrued bonus compensation for
executive and administrative staff.
page 15<PAGE>
Interest expense was $16,577 for the six months ended June 30, 1996, an increase
of 17% from interest expense of $14,183 for the six months ended June 30, 1995.
The increase of $2,394 in interest expense reflects the increase in the amount
of the Company's capitalized leases in 1996 as compared to 1995.
Interest income was $92,329 for the six months ended June 30, 1996, a decrease
of $39,261 or 30% from interest income of $131,590 for the six months ended June
30, 1995. This decrease is due to two factors: as more fully explained below,
the Company's average cash balances available for investment were lower during
the six months ended June 30 1996 as compared to the six months ended June 30,
1995. Additionally, the interest rate yield realized on its cash and short-term
marketable investments during the six months ended June 30, 1996 was
significantly lower than the corresponding prior year period, reflecting the
decline in interest rates in the market during this period.
Income tax expense was $844,100 for the six months ended June 30, 1996 as
compared to an income tax benefit of $186,000 for the six months ended
June 30, 1995. The Company estimates that it will realize sufficient pre-tax
income in 1996 and future periods to fully utilize prior loss carryforwards.
Net income was $1,258,771 or $.35 per share (fully diluted) for the six months
ended June 30, 1996, as compared to a net loss of $277,405 or ($.10) per share
for the six months ended June 30, 1995.
Liquidity and Capital Resources
The Company's net working capital increased by $1,254,040 from December 31, 1995
to June 30, 1996, to a net working capital surplus of $6,667,427 at June 30,
1996 from a net working capital surplus of $5,413,387 at December 31, 1995. Cash
flow provided by operating activities increased by $1,870,148 from cash used by
operating activities of $630,874 for the six months ended June 30, 1995, to
cash provided by operating activities of $1,239,274 for the six months ended
June 30, 1996. The increase in cash provided by operating activities was
principally due to income from operations. This increase was offset in part by
investments in inventory to meet greater demand for domestically-produced
merchandise. The Company's expanding product lines, including mini-basketball
and mini-baseball gloves, substantially all of which are imprinted at the San
Diego facility, will require the Company, in the future, to maintain these
higher inventory levels.
Cash and equivalents aggregated $3,184,726 at June 30, 1996, an increase of
$1,022,458 from cash and equivalents of $2,162,268 at December 31, 1995. This
increase was due in part to the reclassification of restricted cash to cash and
equivalents resulting from the expiration of the stand-by letter of credit
issued to a supplier. Total cash also increased as a result of significant
income from operations which was offset by investments in inventory and
increases in accounts receivable from the toy car promotion as further
explained below.
Accounts receivable were $5,350,785 at June 30, 1996, an increase of $4,762,505
from accounts receivable of $588,280 at December 31, 1995. This increase was due
page 16<PAGE>
primarily to the balance of $4,033,000 due from the toy car promotion contract
with Chevron, shown as an accounts receivable at June 30, 1996, which was
subsequently paid. The increase in accounts receivable is also due to
significantly higher retail sales during the three months ended June 30, 1996
as compared to the three months ended December 31, 1995.
At June 30, 1996, the Company has commitments for minimum guaranteed royalties
under licensing agreements totaling $104,250 in the aggregate through 1999, of
which $19,250 is due at various times in 1996. Given the Company's operating
profits to date and anticipated increases in retail product sales, management
expects these guaranteed royalties to be funded from operating cash flows.
In December 1994, the Company entered into a $1,000,000 line of credit with
Merrill Lynch International Bank Limited at an interest rate which is at 1.75%
above the London Interbank Offering Rate term that the Company chooses to
select. Any borrowing under the line of credit are secured by cash collateral
deposited with Merrill Lynch equal to the credit outstanding. In December 1995,
the Company increased its existing line of credit with Merrill Lynch
International Bank Limited, from $1,000,000 to $3,000,000. The line of credit,
which expires on December 19, 1996, supports an irrevocable stand-by letter of
credit of $1,000,000 which expired on March 15, 1996 that had been issued to a
supplier and was collateralized by cash. Subsequently, on January 2, 1996, an
additional stand-by letter of credit of $1,000,000 which expired on May 15,
1996, was issued to the same supplier. Subsequently, in August 1996, the Company
issued to this same supplier an additional stand-by letter of credit of
$1,000,000, which expires on December 15, 1996. The Company may provide future
letters of credit as a means of guaranteeing payment, either as required by the
above-mentioned supplier or in procuring goods from other overseas suppliers.
In December 1995, the Company entered into a separate one year credit agreement
with Scripps Bank. This revolving line of credit facility in the amount of
$1,000,000 is collateralized by the assets of the Company and actual borrowing
are limited to available collateral, as defined in the agreement. Borrowing
under the facility bears interest at the bank's prime rate plus .75%. The
revolving credit contains covenants requiring the Company to maintain a minimum
net worth level and minimum working capital and debt to equity ratios.
There were no borrowing under either line of credit as of June 30, 1996.
Management believes that the Company's existing cash position, credit
facilities, combined with internally generated cash flow, will be
adequate to support the Company's liquidity and capital needs, at least
through the end of 1996.
The Company has approximately $1,000,000 of proceeds remaining from its 1994
initial public offering ("Offering"). The Company anticipates using the
remaining portion of the proceeds of the Offering for marketing and sales
activities, to obtain new licenses, including costs associated with placing new
products in production, to purchase raw materials, to fund capital improvements,
and for working capital and general corporate purposes.
page 17
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
On May 3, 1996, the Company held its Annual Meeting of Stockholders. The matters
considered at the meeting consisted of the following:
The election of two Class II directors to serve for a term of three years and
until their successors are elected and qualified. The results of the voting were
as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
Joel K. Rubenstein 2,253,701 650
Robert N. Weingarten 2,253,701 650
The ratification of the Board of Directors' appointment of Hollander, Gilbert &
Co. as the Company's independent auditors for the year ending December 31, 1996.
The results of the voting were as follows:
For Against Abstained
--- ------- ---------
2,254,351 0 0
The approval of an amendment to the Company's 1994 Stock Option Plan increasing
the number of shares available for issuance upon exercise of options from
245,000 to 375,000:
For Against Abstained Not Voted
--- ------- --------- ---------
2,232,291 650 0 21,410
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re: computation of earnings per share
27 Financial Data Schedule
(b) Reports on Form 8-K for the three months ended June 30, 1996 - None
page 18
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOTOBALL USA, INC.
____________________
(Registrant)
Dated: August 14, 1996 /s/ Michael Favish
BY: ________________________
Michael Favish
President and
Chief Executive Officer
(Duly Authorized Officer)
/s/ David G. Forster
Dated: August 14, 1996 BY: ________________________
David G. Forster
Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Accounting Officer)
page 19
<PAGE>
FOTOBALL USA, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1996
--------------- ---------------
<S> <C> <C>
PRIMARY SHARES CALCULATION:
Reconciliation of weighted average
number of shares outstanding to amount
used in primary earnings per share
computation:
Weighted average number of shares outstanding 2,661,742 2,661,742
Add-shares issuable from assumed exercise
of options and warrants (1) 1,704,423 66,968
Less-maximum purchase under modified treasury
stock method (20% of shares outstanding) < 532,348> -
------------ -----------
Weighted average number of shares outstanding
as adjusted 3,833,817 2,728,710
------------ -----------
ADJUSTMENTS TO NET INCOME:
Net income $ 1,233,832 $ 1,258,771
Add-invested proceeds from hypothetical
option and warrant conversion, net of
income tax 47,118 N/A
---------- ----------
$ 1,280,950 $ 1,258,771
---------- ----------
PRIMARY EARNINGS PER SHARE $ .33 $ .46
========== ==========
FULLY DILUTED SHARES CALCULATION:
Reconciliation of weighted average number
of shares outstanding to amount used in
fully diluted earnings per share computation:
Weighted average number of shares outstanding 2,661,742 2,661,742
Add-shares issuable from assumed exercise of
options and warrants 1,704,423 1,704,423
Less-maximum purchase under modified treasury
stock method (20% of shares outstanding) < 532,348> < 532,348>
------------ -----------
3,833,817 3,833,817
------------ -----------
ADJUSTMENTS TO NET INCOME:
Net income $ 1,233,832 $ 1,258,771
Add-invested proceeds from hypothetical
option and warrant conversion, net of
income tax 43,791 87,582
---------- ----------
$ 1,277,623 $ 1,346,353
---------- ----------
FULLY DILUTED EARNINGS PER SHARE $ .33 $ .35
========== ==========
</TABLE>
Note: Net income per common and common equivalent share presented on the face
of the condensed statement of operations for the three month and six month
periods ended June 30, 1995 exclude common share equivalents outstanding as
their effect would be antidilutive during these periods.
(1) The weighted average number of common share equivalents outstanding during
the six month period ended June 30, 1996 is computed using the treasury stock
method in which the Company's warrants are excluded due to the exercise price
of the warrants exceeding the average common stock price during the period.
< /TEXT>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMA-
TION EXTRACTED FROM THE FINANCIAL STATEMENTS
CONTAINED IN THE FOTOBALL USA, INC. FORM 10-QSB
FOR THE PERIOD ENDED JUNE 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 3,184,726
<SECURITIES> 0
<RECEIVABLES> 5,350,785
<ALLOWANCES> 0
<INVENTORY> 1,834,288
<CURRENT-ASSETS> 11,010,331
<PP&E> 1,460,742
<DEPRECIATION> 564,619
<TOTAL-ASSETS> 12,494,877
<CURRENT-LIABILITIES> 4,342,904
<BONDS> 0
0
0
<COMMON> 26,617
<OTHER-SE> 8,002,443
<TOTAL-LIABILITY-AND-EQUITY> 12,494,877
<SALES> 15,153,860
<TOTAL-REVENUES> 15,153,860
<CGS> 10,380,311
<TOTAL-COSTS> 2,746,430
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,577
<INCOME-PRETAX> 2,102,871
<INCOME-TAX> 844,100
<INCOME-CONTINUING> 1,258,771
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,258,771
<EPS-PRIMARY> .46
<EPS-DILUTED> .35
</TABLE>
