SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D. C. 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
______ SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________.
Commission file number 0 - 24608
FOTOBALL USA, INC.
(Exact name of registrant as specified in its charter)
Delaware 33 - 0614889
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3738 Ruffin Road, San Diego, California 92123
(Address of principal executive offices)(Zip Code)
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 Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes__X___ No _____
As of October 31, 1996, the Company had 2,676,742 shares of its common
stock issued and outstanding.
Transitional Small Business Disclosure Format Yes______ No ___X_
Page 1 of 19
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FOTOBALL USA, INC.
INDEX
Sequential
Part I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1995
and September 30, 1996 3-4
Condensed Statements of Operations for the
three months and nine months ended
September 30, 1995 and 1996 5
Condensed Statements of Cash Flows for the
nine months ended September 30, 1995 and 1996 6
Notes to Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis or
Plan of Operation 11-17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
Page 2 of 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, September 30,
1995 1996
---------- ----------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 2,162,268 $ 1,855,598
Restricted cash 1,000,000 1,087,790
Accounts receivable-net 588,280 2,315,023
Inventories (Note 4) 1,288,085 1,803,457
Production-in-process 628,631 534,974
Prepaid expenses and other 125,535 278,858
Deferred income taxes 525,000 572,900
--------- ---------
TOTAL CURRENT ASSETS 6,317,799 8,448,600
--------- ---------
PROPERTY AND EQUIPMENT - net 860,071 809,882
OTHER ASSETS
Deferred income taxes 601,000 -
Deposits and other 13,023 13,023
Deferred consulting fee, less accumulated
amortization of $42,500 at December 31, 1995 17,500 -
--------- ---------
TOTAL OTHER ASSETS 631,523 13,023
--------- ---------
$ 7,809,393 $ 9,271,505
========= =========
(continued)
Page 3 of 19
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FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, September 30,
1995 1996
------------ -------------
CURRENT LIABILITIES
Current portion of long-term debt $ 58,011 $ -
Current portion of capital leases 50,889 49,088
Customer deposits 23,042 11,792
Accounts payable and
accrued expenses (Note 5) 772,470 1,059,947
--------- ---------
TOTAL CURRENT LIABILITIES 904,412 1,120,827
CAPITAL LEASES, net of current portion 147,443 110,038
--------- ---------
TOTAL LIABILITIES 1,051,855 1,230,865
--------- ---------
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
- 2,676,742 shares 26,617 26,767
Additional paid-in capital 8,562,194 8,562,194
Accumulated deficit (1,805,773) (541,946)
Less unamortized compensation expense (25,500) (6,375)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 6,757,538 8,040,640
---------- ---------
$ 7,809,393 $ 9,271,505
========== =========
See accompanying notes to
condensed financial statements
Page 4 of 19
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FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1995 1996 1995 1996
---- ---- ---- ----
SALES $ 3,558,298 $ 3,025,753 $ 5,700,152 $ 18,179,613
COST OF SALES 1,778,561 1,840,805 3,086,021 12,221,116
----------- ----------- ----------- ------------
GROSS PROFIT 1,779,737 1,184,948 2,614,131 5,958,497
----------- ----------- ----------- ------------
OPERATING EXPENSES
Royalties 227,052 161,340 388,877 773,564
Marketing 416,536 467,408 865,630 1,513,122
General and
administrative 513,363 525,198 1,226,129 1,506,840
Depreciation and
amortization 46,847 50,047 138,368 156,897
----------- ----------- ----------- ------------
TOTAL OPERATING
EXPENSES 1,203,798 1,203,993 2,619,004 3,950,423
----------- ----------- ----------- ------------
0PERATING INCOME(LOSS) 575,939 (19,045) (4,873) 2,008,074
----------- ----------- ----------- ------------
OTHER (INCOME) EXPENSE
Interest expense 6,842 3,821 21,025 20,397
Interest income (44,672) (31,321) (176,262) (123,650)
----------- ----------- ----------- ------------
TOTAL OTHER INCOME (37,830) (27,500) (155,237) (103,253)
----------- ----------- ----------- ------------
INCOME BEFORE
INCOME TAX 613,769 8,455 150,364 2,111,327
INCOME TAX EXPENSE 246,400 3,400 60,400 847,500
----------- ----------- ----------- ------------
NET INCOME $ 367,369 $ 5,055 $ 89,964 $ 1,263,827
=========== =========== =========== ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 2,661,742 3,830,817 2,661,742 3,830,817
=========== =========== =========== ============
NET INCOME PER
COMMON SHARE $ .14 $ NIL $ .03 $ .37
=========== =========== =========== ============
See accompanying notes to
condensed financial statements
Page 5 of 19
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FOTOBALL USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES ---- ----
Net income $ 89,964 $ 1,263,827
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 138,368 156,897
Amortization of stock compensation expense 19,125 19,125
Changes in operating assets and liabilities:
(Increase) decrease in:
Restricted cash 323,529 (87,790)
Accounts receivable (709,734) (1,726,743)
Inventories (633,033) (515,372)
Production-in-process - 93,657
Prepaid expenses and other (84,210) (153,322)
Deferred income taxes 60,400 553,100
Increase (decrease) in:
Accounts payable and accrued expenses 451,326 264,435
Customer deposits - 11,792
Consulting fee payable (20,000) -
----------- -------------
NET CASH USED IN OPERATING ACTIVITIES (364,265) (120,394)
----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (3,113,062) -
Proceeds from sale and maturities of
short-term investments 4,011,471 -
Purchase of property and equipment (157,157) (89,209)
----------- -------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 741,252 (89,209)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options and warrants - 150
Principal reductions of related party loans (190,311) (58,010)
Repayment of capital lease obligations (23,870) (39,207)
----------- -------------
NET CASH USED IN FINANCING ACTIVITIES (214,181) (97,067)
----------- -------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 162,806 (306,670)
CASH AND EQUIVALENTS, Beginning of period 1,352,838 2,162,268
----------- -------------
CASH AND EQUIVALENTS, End of period $1,515,644 $ 1,855,598
=========== =============
See accompanying notes to
condensed financial statements
Page 6 of 19
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FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
1. CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet as of September 30, 1996, the condensed statements
of operations for the three months and nine months ended September 30, 1995
and 1996, and the condensed statements of cash flows for the nine months ended
September 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 nine months ended September
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 March 31, 1998. The Company is in the process of extending the
term of the Major League Baseball Properties ("MLBP) and Major League Baseball
Players Association ("MLBPA") licenses through December 31, 1997. 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, 1998
Page 7 of 19
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FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(continued)
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 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 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 70% to $ 8,220,000 for the nine months
ended September 30, 1996 as compared to $4,840,000 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
September 30, 1996, 22 % of the Company's sales was derived from a $ 667,000
reorder of the toy cars featured in Chevron's spring 1996 promotion.
Page 8 of 19
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FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(continued)
3. NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period,
increased by dilutive common stock equivalents using the modified treasury
stock method. Fully diluted earnings per share was substantially the same
as primary earnings per share during the three and nine month periods ended
September 30, 1995 and 1996. Common equivalent shares result from the assumed
exercise of outstanding stock options and the Company's redeemable common stock
purchase warrants, redeemed into common stock at the beginning of the period
with earnings being increased for interest income, net of taxes, that would
have been earned had redemption taken place. The dilutive effect of rights
to purchase preferred or common shares under the Fotoball USA, Inc.,
Shareholder Rights Plan (Note 7) has not been included in weighted average
share amounts as the conditions necessary to cause these rights to be exercised
were not met.
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, 1995 September 30, 1996
------------------ ------------------
Raw materials $ 997,648 $ 1,321,198
Finished goods 290,437 482,259
------------------ ------------------
Total inventories $ 1,288,085 $ 1,803,457
================== ==================
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
December 31, 1995 and September 30, 1996:
December 31, 1995 September 30, 1996
------------------ ------------------
Accounts payable $ 573,526 $ 567,465
Accrued payroll and related 52,554 62,344
Accrued commissions 82,061 90,156
Royalties payable 58,298 28,609
Income taxes payable - 293,600
Other 6,031 17,773
------------------ ----------------
$ 772,470 $ 1,059,947
================== ================
Page 9 of 19
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FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(continued)
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 $ 6,000,000 as of October 31, 1996, representing the Chevron toy car
promotion to be shipped in the fourth quarter of 1996. The Company had no
backlog at October 31, 1995.
7. SHAREHOLDER RIGHTS PLAN
In August 1996, the Company implemented a shareholder rights plan to protect
shareholders' rights in the event of a proposed takeover of the Company.
Under the shareholder rights plan, each share of the Company's outstanding
Common Stock carries one Right to Purchase Series "A" Preferred Stock
(a "Right"). 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.
Page 10 of 19
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Recent Developments
During the past few months, the Company had been engaged in a very competitive
bidding process for a proposed Spring 1997 promotion with Chevron utilizing
two new car characters. The Company was recently notified that another supplier
had been selected for the Spring 1997 promotion. However, the Company still
has an agreement with Chevron for a Holiday 1996 promotion featuring a Sports
Utility Vehicle, for which Chevron has committed to a minimum order of
approximately $6,000,000 for December 1996. Any additional sales in 1997 will
be limited to reorders, if any, of the car models previously provided to
Chevron during the two 1996 promotions.
Results of Operations
The following table sets forth certain (unaudited) operating data (in dollars
and as a percentage of the Company's sales) for the periods presented:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1995 1996 1995 1996
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $3,558,298 100% $3,025,753 100% $5,700,152 100% $18,179,613 100%
Cost of
Sales 1,778,561 50 1,840,805 61 3,086,021 54 12,221,116 67
Operating
Expenses 1,203,798 34 1,203,993 40 2,619,004 46 3,950,423 22
Operating
Income (Loss) 575,939 16 (19,045) (1) (4,873) (1) 2,008,074 11
Interest
Expense 6,842 1 3,821 1 21,025 1 20,397 1
Interest
Income 44,672 1 31,321 1 176,262 3 123,650 1
Income Before
Income Tax 613,769 17 8,455 1 150,364 3 2,111,327 12
Income Tax
Expense 246,400 7 3,400 1 60,400 1 847,500 5
Net Income $ 367,369 10% $ 5,055 1% $ 89,964 2% $ 1,263,827 7%
</TABLE>
Three Months Ended September 30, 1995 and 1996:
Sales were $ 3,025,753 for the three months ended September 30, 1996 a
decrease of 15% from sales of $ 3,558,298 for the three months ended
September 30, 1995. For the three months ended September 30, 1996,premium
sales were $ 1,365,000, or 45% of sales, as compared to premium sales of
Page 11 of 19
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$1,754,000, or 49% of sales, for the three months ended September 30, 1995.
Retail sales were $ 1,660,000 for the three months ended September 30, 1996,
a decrease of 8% from retail sales of $1,805,000 for the three months ended
September 30, 1995. This decrease in retail sales was due to two "hot market"
baseball related events during the third quarter of 1995 that did not reoccur
during 1996: the popularity of Los Angeles Dodgers pitcher Hideo Nomo and the
surpassing of Lou Gehrig's consecutive game record by Baltimore Orioles
shortstop Cal Ripken. Excluding the approximately $ 780,000 of retail sales
from these two events, the Company's core retail business increased from
$1,025,000 in 1995 to $ 1,660,000, or 62%.
Gross profit was $ 1,184,948 for the three months ended September 30, 1996,
a decrease of 33% from gross profit of $1,779,737 for the three months ended
September 30, 1995. Gross profit decreased on an absolute basis as a result
of the decrease in sales. Gross margins, as a percentage of sales, decreased
from 50% to 39% for the three months ended September 30, 1995 and 1996,
respectively. The three months ended September 30, 1996, as previously noted,
included approximately $670,000 of sales to Chevron resulting from the reorder
of toy cars featured in the Spring 1996 promotion. The margins realized on
the toy cars is significantly lower than the margins realized on the Company's
sports-related promotions and retail sales, thereby reducing the margins in
the aggregate. As previously noted, the Company expects toy car sales to
constitute a nominal amount of total sales in 1997, and therefore the
Company's core sports-related business should contribute to higher aggregate
margins in 1997.
Operating expenses were $1,203,993, or 40% of sales, for the three months
ended September 30, 1996, as compared to operating expenses of $1,203,798,
or 34% of sales, for the three months ended September 30, 1995. Operating
expenses as a percentage of sales increased due to such expenses being
allocated over lower sales volumes. Operating expenses on an absolute basis
remained unchanged resulting from an increase in marketing expenses offset by
decreases in royalty expense as more fully explained below.
Royalties expense was $161,340 for the three months ended September 30, 1996,
a decrease of 29% from royalties expense of $227,052 for the three months
ended September 30, 1995. The decrease in royalties expense during this
period was a result of two promotions, the Chevron toy car reorder and the
McDonald's Ozzie Smith promotion, which had little or no royalty obligations.
Royalties expense as a percentage of sales decreased to 5% of sales for the
three months ended September 30, 1996 from 6% of sales for the three months
ended September 30, 1995, due to the premium promotions noted above.
Marketing expenses were $467,408 for the three months ended September 30, 1996,
an increase of 12% from marketing expenses of $416,536 for the three months
ended September 30, 1995. The increase in marketing expenses is the result
of a greater number of sales and support staff personnel employed by the
Company as well as increased compensation which was not incurred during the
corresponding period in 1995. Marketing expenses as a percentage of sales
increased to 15% of sales for the three months ended September 30, 1996,
from 12% of sales for the three months ended September 30, 1995, primarily
as a result of allocating the non-variable components of marketing expenses,
such as wages, advertising, and exhibiting costs, over lower sales volume.
General and administrative expenses were $525,198 for the three months ended
September 30, 1996, an increase of 2% from general and administrative expenses
Page 12 of 19
<PAGE>
of $513,363 for the three months ended September 30, 1995. This nominal
increase is principally the result of consulting and legal fees incurred
during the three months ended September 30, 1996 in connection with the
Company's adoption of a shareholder rights plan.
Interest expense was $ 3,821 for the three months ended September 30, 1996,
a decrease of 44% from interest expense of $6,842 for the three months ended
September 30, 1995. The decrease of $3,021 reflects the elimination of the
Company's long-term debt.
Interest income was $ 31,321 for the three months ended September 30, 1996,
as compared to $44,672 for the three months ended September 30, 1995. This
decrease is reflective of the lower cash balances during the three months
ended September 30, 1996 as compared to the corresponding prior year period.
Nine Months Ended September 30, 1995 and 1996:
Sales were $ 18,179,613 for the nine months ended September 30, 1996, an
increase of 219% from sales of $5,700,152 for the nine months ended
September 30, 1995. The increase was the result of both promotional and
retail divisions realizing substantial increases in sales over the nine
months ended September 30, 1995. For the nine months ended September 30, 1996,
promotional sales were $13,400,000, of which Chevron and Burger King accounted
for 59% and 34% of promotional sales, respectively. The Company anticipates
that Chevron will account for the majority of promotional sales during the
fourth quarter of 1996. Additionally, the Company anticipates that, given
the lack of any significant toy car business in 1997, Chevron will account
for an insignificant percentage of total promotional sales in 1997. The
Company is pursuing broadening its customer base by creating new promotional
programs for prospective corporate clients that are sponsors of sports in
which the Company is introducing new products. Examples of this include the
new NASCAR Fototire product, the Fotopuck hockey puck, and the lapel pin
business. 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 nine months ended September 30, 1996 as a result of
increasing sales with national mass merchants particularly JC Penney and
Wal-Mart, and to a lesser extent, K-Mart. Overall, retail sales were
$4,780,000 for the nine months ended September 30, 1996, a 50% increase over
retail sales of $ 3,188,000 for the corresponding prior year period.
Gross profit was $ 5,958,497 for the nine months ended September 30, 1996, an
increase of 128% from gross profit of $2,614,131 for the nine months ended
September 30, 1995. As previously noted, gross profit increased on an
absolute basis due to increased sales. Gross margins as a percentage of
sales decreased from 46% to 33% for the nine months ended September 30, 1995
and 1996, respectively, reflecting the effects of the $ 7,867,000 in low
margin toy car sales to Chevron during the nine months ended September 30,
1996. These low margins were mitigated in part by significantly higher margins
on its sports-related promotions and retail sales. The Company anticipates
that the margins in the fourth quarter of 1996 will be lower than the
aggregate margins of 33% realized during the nine months ended September 30,
1996, due to the $ 6,000,000 toy car promotion to be delivered during this
period. As previously noted, the Company expects toy car sales to constitute
a nominal amount of total sales in 1997, and therefore the Company's core
sports-related business should contribute to higher aggregate margins in 1997.
Page 13 of 19
<PAGE>
Operating expenses were $ 3,950,423 for the nine months ended September 30,
1996, an increase of 51% from operating expenses of $2,619,004 for the nine
months ended September 30, 1995. Operating expenses as a percentage of sales
decreased to 22% of sales for the nine months ended September 30, 1996 from
46% of sales for the nine months ended September 30, 1995, as a result of the
Company's fixed operating costs being allocated over significantly higher
sales volumes.
Royalties expense was $ 773,564 for the nine months ended September 30, 1996,
an increase of 99% from royalties expense of $388,877 for the nine months
ended September 30, 1995. The increase in royalties expense during this
period was the result of significantly higher retail sales, which typically
require royalties of between 8-15%, and substantially higher promotional
baseball-related sales which required a 10% royalty. Royalties expense as a
percentage of sales decreased to 4% of sales for the nine months ended
September 30, 1996 from 7% of sales for the nine months ended September 30,
1995. This decrease was due to royalties expense for the nine months ended
September 30, 1996 being allocated over significantly higher sales volumes
that included $ 7,867,000 of non-royalty bearing toy car sales. The Company
anticipates that, given the expected increase in contribution from the
Company's sports-related business, royalties expense as a percentage of sales
in 1997 will be more reflective of the percentage realized during the nine
months ended September 30, 1995. As previously noted, the Company is
dependent upon its licensing arrangements and their successful renewal. Most
of the Company's significant licenses expire on December 31, 1996 with the
exception of the NFL license which expires on March 31, 1998. Although
historically the Company's licenses have been renewed by its licensors, and
the Company does not anticipate the non-renewal of any of its significant
licenses, there can be no assurance that the Company will continue to be
able to renew its licenses, that the renewal will be on acceptable terms
and conditions, or that the Company will be able to enter into comparable
new licensing agreements.
Marketing expenses were $ 1,513,122 for the nine months ended September 30,
1996, an increase of 75% from marketing expenses of $865,630 for the nine
months ended September 30, 1995. The $ 647,492 increase in marketing
expenses during this period is principally due to increased personnel and
benefit costs along with higher travel and related expenses. Marketing
expenses as a percentage of sales decreased to 8% of sales for the nine
months ended September 30, 1996 from 15% of sales for the nine months ended
September 30, 1995 as a result of the non-variable components of marketing
expenses, such as wages and exhibiting costs, being allocated over
substantially higher sales volumes.
General and administrative expenses were $ 1,506,840 for the nine months
ended September 30, 1996, an increase of 23% from general and administrative
expenses of $1,226,129 for the nine months ended September 30, 1995. This
increase is a result of several factors, including increased personnel and
compensation costs, higher occupancy costs associated with the Company's
production facility, and higher insurance costs reflecting the increase in
sales during this period.
Interest expense was $ 20,397 for the nine months ended September 30, 1996,
a decrease of 3% from interest expense of $21,025 for the nine months ended
September 30, 1995. The nominal change in interest expense between the periods
Page 14 of 19
<PAGE>
reflects the elimination of the Company's long-term debt offset by increases
in capital leases of equipment and machinery purchases. The Company
anticipates that interest expense in 1997 will increase moderately reflecting
additional capital lease purchases as more fully explained in "Liquidity and
Capital Resources" below.
Interest income was $ 123,650 for the nine months ended September 30, 1996,
as compared to $176,262 for the nine months ended September 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 nine
months ended September 30, 1996 as compared to the corresponding prior year
period. Additionally, the interest rate yield realized on its cash during
the nine months ended September 30, 1996 was lower than the corresponding
prior year period, reflecting both a modest decline in interest rates in the
market, and the Company taking a shorter term investment position in order to
meet working capital requirements during the period.
Income tax expense of $ 847,500 was recorded for the nine months ended
September 30, 1996, as compared to income tax expense of $60,400 for the
nine months ended September 30, 1995. The Company recognized income tax
expense for the nine months ended September 30, 1996, as a result of the
income before income taxes of $ 2,111,327. As of December 31, 1995, the
Company had net operating loss carry forwards for federal tax purposes of
approximately $ 1,800,000 expiring in various amounts through 2009. 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 $ 1,263,827 or $.37 per share for the nine months ended
September 30, 1996, as compared to a net income of $89,964 or $.03 per
share for the nine months ended September 30, 1995.
Liquidity and Capital Resources
The Company's net working capital increased by $ 1,914,386 from December 31,
1995 to September 30, 1996, to a net working capital surplus of $ 7,327,773
at September 30, 1996 from a net working capital surplus of $5,413,387 at
December 31, 1995. Cash flow used in operating activities decreased by
$ 243,871 from cash used in operations of $364,265 for the nine months ended
September 30, 1995 to cash used in operations of $ 120,394 for the nine months
ended September 30, 1996. This decrease in cash used in operations was
primarily the result of significant increases in the Company's accounts
receivable and inventory balances offset by income from operations. The
Company's expanding product lines, including mini-baseball gloves, hockey
pucks, and Fototire motor sport products, substantially all of which are
imprinted at the San Diego facility, will require the Company, in the future,
to maintain these higher inventory levels. During the nine months ended
September 30, 1996, the Company used approximately $ 58,010 to reduce its
debt obligations. The Company also utilized cash resources for the acquisition
of non-current assets, such as property and equipment additions. Management
is continuously evaluating its systems and facilities to promote efficiencies,
lower its operating costs and remain technologically competitive. For the nine
months ended September 30, 1996, the Company acquired fixed assets for an
aggregate purchase price of approximately $ 89,000, including production
machinery and office computer equipment. For the next twelve months, the
Company anticipates that its capital expenditure requirements will approximate
$ 700,000, which includes approximately $ 450,000 earmarked for an additional
Page 15 of 19
<PAGE>
6,000 square foot in its existing building. The Company is in preliminary
negotiation with the landlord with respect to this addition. This additional
office space will accomodate the increase in sales and support staff
anticipated during the next several years. The remaining $ 250,000 will be
used to purchase additional production machinery, furniture, computer equipment
and software. The Company has secured five year term financing from a bank for
the above capital requirements.
Cash and equivalents aggregated $ 1,855,598 at September 30, 1996, a decrease
of $ 306,670 from cash and equivalents of $2,162,268 at December 31, 1995. As
previously noted, total cash decreased during the period as a result of
significant increases in accounts receivable and inventory balances. Cash
and equivalents was reclassified to restricted cash at September 30, 1996 as
a result of the issuance by the Company's bank of a stand-by letter of credit
to a supplier. The $3,000,000 credit facility with a bank as described below,
which expires on December 19, 1996, supports this stand-by letter of credit,
and is collateralized by treasury bill investments. 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.
At September 30, 1996, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $ 195,000 in the aggregate
through 1999, of which $ 38,000 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.
Accounts receivable were $ 2,315,023 at September 30, 1996, an increase of
$ 1,726,743 from accounts receivable of $588,280 at December 31, 1995. The
increase was due to substantially higher sales during the three months ended
September 30, 1996, as compared to the three months ended December 31, 1995.
Additionally, amounts due from Chevron and McDonald's resulting from third
quarter 1996 orders aggregated $ 1,139,000 of this accounts receivable
balance.
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 borrowings 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 expires on December 15, 1996, that has
been issued to a supplier and is collateralized by treasury bill investments.
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.
Borrowings under the facility bear 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.
Page 16 of 19
<PAGE>
The Company recently received from Scripps Bank an increase to this revolving
credit line to $ 2,000,000 for purposes of financing the production of the
Holiday 1996 promotion with Chevron. Additionally, the terms of this
revolving line of credit were extended thru April 15, 1998. The Company also
received from Scripps Bank a term loan of $500,000 to fund the proposed
leasehold improvements of the Company's San Diego facility. The term loan is
to be repaid over 60 months.
There were no borrowing under either line of credit as of September 30, 1996.
Management believes that the Company's existing cash position, credit
facilities, combined with internally generated cash flows, will be adequate
to support the Company's liquidity and capital needs at least through the end
of 1997.
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 acquire capital improvements, and for working
capital and general corporate purposes.
This report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited, to those discussed in the
"Management's Discussion and Analysis or Plan of Operation" of this report
and "Description of Business", "Manufacturing, Supply and Distribution",
"License Agreements", "Backlog" and "Other Considerations" included in the
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995.
Page 17 of 19
<PAGE>
PART II. OTHER INFORMATION
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
September 30, 1996 - None
Page 18 of 19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FOTOBALL USA, INC.
_________________
(Registrant)
Dated: November 13, 1996 BY: /s/ Michael Favish
________________________
Michael Favish
President and
Chief Executive Officer
(Duly Authorized Officer)
Dated: November 13, 1996 BY: /s/ David G. Forster
_________________________
David G. Forster
Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Accounting Officer)
Page 19 of 19
<PAGE>
FOTOBALL USA, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, 1996 SEPTEMBER 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 2,676,742 2,676,742
Add-shares issuable from assumed exercise
of options and warrants (1) 1,689,423 1,689,423
Less-maximum purchase under modified treasury
stock method (20% of shares outstanding) < 535,348> <535,348>
------------ -----------
Weighted average number of shares outstanding
as adjusted 3,830,817 3,830,817
------------ -----------
ADJUSTMENTS TO NET INCOME:
Net income $ 5,055 $ 1,263,827
Add-invested proceeds from hypothetical
option and warrant conversion, net of
income tax 51,458 159,627
---------- ----------
$ 56,513 $1,423,454
---------- ----------
PRIMARY EARNINGS PER SHARE $ .01 $ .37
========== ==========
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 2,676,742 2,676,742
Add-shares issuable from assumed exercise of
options and warrants 1,689,423 1,689,423
Less-maximum purchase under modified treasury
stock method (20% of shares outstanding) < 535,348> < 535,348>
------------ -----------
3,830,817 3,830,817
------------ -----------
ADJUSTMENTS TO NET INCOME:
Net income $ 5,055 $ 1,263,827
Add-invested proceeds from hypothetical
option and warrant conversion, net of
income tax 50,093 150,278
---------- ----------
$ 55,148 $ 1,414,105
---------- ----------
FULLY DILUTED EARNINGS PER SHARE $ .01 $ .37
========== ==========
</TABLE>
(1) The weighted average number of common share equivalents outstanding during
the three and nine month periods ended September 30, 1996 is computed using
the modified treasury stock method in which the Company's warrants are
included due to the average common stock price during the periods exceeding
the exercise price of the warrants.
< /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 SEPTEMBER 30, 1996, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,943,388
<SECURITIES> 0
<RECEIVABLES> 2,315,023
<ALLOWANCES> 0
<INVENTORY> 1,803,457
<CURRENT-ASSETS> 8,448,600
<PP&E> 1,422,052
<DEPRECIATION> 612,170
<TOTAL-ASSETS> 9,271,505
<CURRENT-LIABILITIES> 1,120,827
<BONDS> 0
0
0
<COMMON> 26,767
<OTHER-SE> 8,013,873
<TOTAL-LIABILITY-AND-EQUITY> 9,271,505
<SALES> 18,179,613
<TOTAL-REVENUES> 18,179,613
<CGS> 12,221,116
<TOTAL-COSTS> 3,950,423
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,397
<INCOME-PRETAX> 2,111,327
<INCOME-TAX> 847,500
<INCOME-CONTINUING> 1,263,827
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,263,827
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
