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 March 31, 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 Identification Number)
incorporation or organization)
3738 Ruffin Road, San Diego, California 92123
(Address of principal executive offices) (Zip Code)
(619) 467-9900
Registrant's telephone number, including area code
Indicate by check whether the registrant (1) has 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 May 1, 1996, the Company had 2,661,742 shares of its common
stock, $.01 par value, issued and outstanding.
Transitional Small Business Disclosure Format Yes ( ) No (X)
<PAGE>
FOTOBALL USA, INC.
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1995
and March 31, 1996 3-4
Condensed Statements of Operations for the three
months ended March 31, 1995 and 1996 5
Condensed Statements of Cash Flows for the three
months ended March 31, 1995 and 1996 6
Notes to Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
December 31, March 31,
1995 1996
________________ _______________
(derived from audited (unaudited)
financial statements)
ASSETS
CURRENT ASSETS
Cash and equivalents $2,162,268 $2,885,279
Restricted cash 1,000,000 1,000,000
Accounts receivable--net 588,280 540,867
Inventories (Note 3) 1,288,085 1,723,942
Production-in-process 628,631 659,397
Prepaid expenses and other 125,535 251,906
Deferred income taxes 525,000 508,300
----------- -----------
TOTAL CURRENT ASSETS 6,317,799 7,569,691
----------- -----------
PROPERTY AND EQUIPMENT - net 860,071 846,989
----------- -----------
OTHER ASSETS
Deferred income taxes 601,000 601,000
Deposits and other 13,023 13,023
Deferred consulting fee, less accumulated
amortization of $42,500 and $50,000 at December
31, 1995 and March 31, 1996, respectively 17,500 10,000
----------- -----------
TOTAL OTHER ASSETS 631,523 624,023
----------- -----------
$7,809,393 $9,040,703
=========== ===========
(continued)
<PAGE>
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, March 31,
1995 1996
_______________ ______________
(derived from audited (unaudited)
financial statements)
CURRENT LIABILITIES
Current portion of long-term debt $ 58,011 $ 36,680
Current portion of capital leases 50,889 48,768
Customer deposits 13,640 1,358,029
Accounts payable and accrued expenses 781,872 672,996
----------- -----------
TOTAL CURRENT LIABILITIES 904,412 2,116,473
----------- -----------
CAPITAL LEASES, net of current portion 147,443 135,377
----------- -----------
TOTAL LIABILITIES 1,051,855 2,251,850
----------- -----------
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) (1,780,833)
Less unamortized compensation expense (25,500) (19,125)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 6,757,538 6,788,853
----------- -----------
$7,809,393 $9,040,703
=========== ===========
The accompanying notes are an integral part
of the condensed financial statements.
<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
March 31,
____________________________
1995 1996
___________ ___________
SALES $ 957,293 $2,401,656
COST OF SALES 567,875 1,404,863
----------- -----------
GROSS PROFIT 389,418 996,793
----------- -----------
OPERATING EXPENSES
Royalties 94,573 171,086
Marketing 204,141 305,753
General and administrative 344,855 458,135
Depreciation and amortization 44,023 54,670
----------- -----------
TOTAL OPERATING EXPENSES 687,592 989,644
----------- -----------
OPERATING INCOME (LOSS) (298,174) 7,149
----------- -----------
OTHER (INCOME) EXPENSE
Interest expense 8,096 8,597
Interest income ( 69,118) ( 43,087)
----------- -----------
TOTAL OTHER (INCOME) EXPENSE ( 61,022) ( 34,490)
----------- -----------
INCOME (LOSS) BEFORE INCOME TAX (237,152) 41,639
INCOME TAX EXPENSE (BENEFIT) ( 94,400) 16,700
----------- -----------
NET INCOME (LOSS) $ (142,752) $ 24,939
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,661,742 2,691,676
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE $ (.05) $ .01
=========== ===========
The accompanying notes are an integral part
of the condensed financial statements.
<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
______________________
1995 1996
___________ __________
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(142,752) $ 24,939
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 44,023 54,670
Amortization of stock compensation expense 6,375 6,375
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (189,774) 47,413
Inventories 120,854 (435,857)
Production-in-process - ( 30,766)
Prepaid expenses and other ( 31,550) (113,294)
Deferred income taxes ( 95,200) 16,700
Increase (decrease) in:
Accounts payable and accrued expenses 201,682 (122,516)
Customer deposits - 1,358,029
Consulting fee payable ( 7,500) -
----------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ( 93,842) 805,693
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments (2,257,187) -
Proceeds from sale and maturities
of short-term investments 1,800,000 -
Purchase of property and equipment (128,267) ( 47,165)
----------- ----------
NET CASH USED IN INVESTING ACTIVITIES (585,454) ( 47,165)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of related party loans ( 88,101) ( 21,331)
Repayment of capital lease obligations ( 7,068) ( 14,186)
----------- ----------
NET CASH USED IN FINANCING ACTIVITIES ( 95,169) ( 35,517)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (774,465) 723,011
CASH AND EQUIVALENTS, Beginning of period 1,352,838 2,162,268
----------- -----------
CASH AND EQUIVALENTS, End of period $ 578,373 $2,885,279
=========== ===========
The accompanying notes are an integral part
of the condensed financial statements.
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
1. CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet as of March 31, 1996, the condensed
statements of operations for the three months ended March 31, 1995 and 1996,
and the condensed statements of cash flows for the three months ended March
31, 1995 and 1996 have been prepared by the Company without audit. In the
opinion of management, all 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. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1995.
The results of operations for the three months ended March 31, 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
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 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 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. However, the Company
experienced an upsurge in its baseball and football-related business during
the last half of 1995. The Company believes that the current lack of a CBA
will not have a material negative impact upon the results of operations for
1996, given an order backlog of $10,079,000 including $2,879,000 in baseball-
related promotional orders and sales of at least $7,200,000 from the Chevron
toy car promotion as more fully explained herewith. However, the Company
believes that the current lack of a CBA may be adversely affecting the
Company's baseball business. 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.
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(continued)
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 March 31, 1996, 55% of the Company's sales was derived from
promotions, of which one customer accounted for aggregate sales of $1,050,000
or 44% of total sales. This represented $664,000 of baseball-related sales
and $386,000 of hockey puck-related sales.
3. INVENTORIES
Inventories are valued at the lower of cost or market. Cost is
determined on the first-in first-out (FIFO) method.
Inventories consist of the following:
December 31, 1995 March 31, 1996
__________________ ________________
Raw materials $ 997,648 $ 1,227,226
Finished goods 290,437 496,716
------------------ ----------------
Total inventories $ 1,288,085 $ 1,723,942
================== ================
4. 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. In November 1995, the
Company entered into an agreement with Chevron to design, manufacture and
distribute toy cars based upon Chevron's "claymation" Car Characters national
advertising campaign. The contract specified a minimum order aggregating
approximately $9,100,000. Subsequently, in April 1996, the Company agreed
with Chevron to lower the minimum order quantity, resulting in aggregate sales
of $7,200,000. Chevron may, at its option, increase the total quantity
ordered beyond the revised unit guarantee prior to completion of
manufacturing. Additionally, the Company and Chevron entered into a letter
agreement authorizing the Company to proceed with the engineering design and
production of a new toy car model to be used in a possible Christmas 1996
promotion.
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
(continued)
Chevron agreed to reimburse the Company for the total model costs if Chevron
does not enter into an agreement to purchase toy cars from the Company during
the Christmas 1996 promotion. The Company's backlog of orders was $10,079,000
and $391,000 as of April 30, 1996 and 1995, respectively. The current backlog
represents two promotions, the $7,200,000 toy car promotion previously noted
and a "Teamstar Fotoball" baseball national promotion with Burger King
aggregating $2,879,000.
5. 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 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, 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 expires on May 15,
1996, was issued to the same supplier. 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 borrowings are limited to available collateral, as
defined in the agreement. Borrowings 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 borrowings under either line of credit as of March 31,
1996.<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
In November 1995, the Company entered into an agreement with Chevron to
design, manufacture and distribute toy cars based upon Chevron's "claymation"
Car Characters national advertising campaign. The contract specified a minimum
order aggregating approximately $9,100,000. Subsequently, in April 1996, the
Company agreed with Chevron to lower the minimum order quantity, resulting in
aggregate sales of $7,200,000. Chevron may, at its option, increase the total
quantity ordered beyond the revised quantity guarantee prior to completion of
manufacturing. Additionally, the Company and Chevron entered into a letter
agreement authorizing the Company to proceed with the engineering design and
production of a new toy car model to be used in a possible Christmas 1996
promotion. Chevron agreed to reimburse the Company for the total model costs
if Chevron does not enter into an agreement to purchase toy cars from the
Company during the Christmas 1996 promotion.
Additionally, in March 1996, the Company entered into an agreement with
Burger King to produce baseballs for a national promotion being held in four
of Burger King's United States geographic regions. This contract will generate
revenues in excess of $3,500,000, of which $664,000 was recognized during the
three months ended March 31, 1996 and the remaining $2,879,000 will be
recognized during the quarter ending June 30, 1996.
RESULTS OF OPERATIONS
The following table sets forth certain operating data (in dollars and as
a percentage of the Company's sales) for the periods presented: (unaudited)
Three Months Ended
March 31,
------------------------------
1995 1996
__________ ___________
Sales $ 957,293 100% $2,401,656 100%
Cost of Sales 567,875 59 1,404,863 58
Operating Expenses 687,592 72 989,644 41
Operating Income (Loss) (298,174) (31) 7,149 1
Interest Expense 8,096 1 8,597 1
Interest Income 69,118 7 43,087 2
Income (Loss) Before Income Tax (237,152) (25) 41,639 2
Income Tax Expense (benefit) (94,400) (10) 16,700 1
Net Income (Loss) $(142,752) (15)% 24,939 1%
<PAGE>
THREE MONTHS ENDED MARCH 31, 1995 AND 1996:
Sales were $2,401,656 for the three months ended March 31, 1996, an
increase of 151% from sales of $957,293 for the three months ended March 31,
1995. The increase was due to both promotional and retail divisions realizing
substantial increases over the three months ended March 31, 1995. For the
three months ended March 31, 1996, promotional sales were $1,310,000, or 55%
of sales, as compared to promotional sales of $306,000, or 32% of sales, for
the three months ended March 31, 1995. This increase was due principally to a
$664,000 baseball-related promotion and a $386,000 hockey puck promotion, both
with Burger King. Retail sales were $1,092,000 for the three months ended
March 31, 1996, an increase of 68% from sales of $651,000 for the three months
ended March 31, 1995. This increase was principally due to two factors: an
110% increase in retail baseball-related sales, due to greater expectations
that an MLB season would occur in 1996, as compared to the continuing MLB
strike during this time in 1995; and higher sales from the Company's football
and basketball product lines as compared to the comparable prior period. For
the three months ended March 31, 1996, total baseball, football and
basketball-related sales were $1,498,000, $395,000, and $86,236, or 62%, 16%,
and 4% of sales, respectively, as compared to $608,000, $269,000, and $0, or
64%, 28% and 0% of sales, respectively, for the three months ended March 31,
1995.
Gross profit was $996,793 for the three months ended March 31, 1996, an
increase of 156% from gross profit of $389,418 for the three months ended
March 31, 1995. Gross profit increased on an absolute basis as a result of
the increase in sales. Gross margins as a percentage of sales increased to
42% for the three months ended March 31, 1996 from 41% for the three months
ended March 31, 1995. The gross margins as a percentage of sales fluctuated
an insignificant amount from 1995 to 1996 principally due to the fact that
promotional sales, which typically realize lower margins than retail sales,
constituted a greater percentage of sales (55%) for the three months ended
March 31, 1996 as compared to the three months ended March 31, 1995 (32%).
Additionally, retail sales realized somewhat lower than normal margins for the
three months ended March 31, 1996 reflecting low margin sales to professional
minor league teams and a greater percentage of sales of the Company's mini-
glove and basketball products which realize somewhat lower margins. The
Company believes that the historical trend of promotional sales constituting
a greater percentage of the Company's overall sales will continue and,
therefore, the Company anticipates that margins for the year ending December
31, 1996 will be lower than those realized during the three months ended March
31, 1996.
Operating expenses were $989,644, or 41% of sales, for the three months
ended March 31, 1996, as compared to operating expenses of $687,592, or 72% of
sales, for the three months ended March 31, 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 personnel and facility operating costs incurred to accommodate
significantly higher anticipated sales.
Royalties expense was $171,086 for the three months ended March 31, 1996,
an increase of 81% from royalties expense of $94,573 for the three months
ended March 31, 1995. Royalties expense as a percentage of sales decreased to
7% of sales for the three months ended March 31, 1996 from 10% of sales for
the three months ended March 31, 1995, due in part to the $386,000 hockey puck
promotion which had no royalty obligation. The decrease was also due to a
higher percentage of total sales consisting of promotional sales for the three
months ended March 31, 1996 as compared to the corresponding prior year
period. Retail sales typically require a royalty of 15-18% as compared to
10% for promotional sales. 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 licenses which expired on March 31, 1996. The Company has
received a preliminary term sheet extending the NFL Team Logo license
through March 31, 1998, and is in the process of finalizing this into a
license agreement. 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 $305,753 for the three months ended March 31,
1996, an increase of 50% from marketing expenses of $204,141 for the three
months ended March 31, 1995. Marketing expenses as a percentage of sales
decreased to 13% of sales for the three months ended March 31, 1996 from 21%
of sales for the three months ended March 31, 1995, primarily as a result of
allocating the non-variable components of marketing expenses, such as wages,
exhibiting and travel costs, over significantly higher sales volumes.
General and administrative expenses were $458,135 for the three months
ended March 31, 1996, an increase of 33% from general and administrative
expenses of $344,855 for the three months ended March 31, 1995. This increase
is a result of several factors, including increased personnel costs and
general office expenses incurred in anticipation of higher sales volumes and
higher operating costs associated with the Company's production facility.
Interest expense was $8,597 for the three months ended March 31, 1996, an
increase of 6% from interest expense of $8,096 for the three months ended
March 31, 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
$184,145 at March 31, 1996, an increase of $85,229 from $98,916 at March 31,
1995.
Interest income was $43,087 for the three months ended March 31, 1996, a
decrease of $26,031, or 38% from interest income of $69,118 for the three
months ended March 31, 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 three months ended March 31, 1996 as
compared to the three months ended March 31, 1995. Additionally, the
interest rate yield realized on its cash and short-term marketable invest-
ments during the three months ended March 31, 1996 was significantly lower
than the corresponding prior year period, reflecting the decline in interest
rates in the market during this period.
An income tax expense of $16,700 was recorded for the three months ended
March 31, 1996 as compared to an income tax benefit of $94,400 for the three
months ended March 31, 1995. The Company recognized an income tax expense for
the three months ended March 31, 1996 as a result of the income before income
taxes of $41,639 and based on the Company's estimates that it will realize
sufficient pre-tax income in 1996 and future periods to fully utilize prior
loss carryforwards.
Net income was $24,939 or $.01 per share for the three months ended March
31, 1996, as compared to a net loss of $142,752 or ($.05) per share for the
three months ended March 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net working capital increased by $39,831 from December 31,
1995 to March 31, 1996, to a net working capital surplus of $5,453,218 at
March 31, 1996 from a net working capital surplus of $5,413,387 at December
31, 1995. Cash flow provided by operating activities increased by $899,535
from cash used by operating activities of $93,842 for the three months ended
March 31, 1995, to cash provided by operating activities of $805,693 for the
three months ended March 31, 1996. The increase in cash provided by operating
activities was principally due to advances received for the promotional orders
reflected in the Company's backlog at March 31, 1996. This increase was
offset in part by investments in inventory to meet greater demand for
domestically-produced merchandise, as well as the backlog of promotional
orders noted above. The Company's expanding product lines, including mini-
basketballs 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 $2,885,279 at March 31, 1996, an increase
of $723,011 from cash and equivalents of $2,162,268 at December 31, 1995.
This increase was principally due to the approximately $1,360,000 in advances
received from future promotions offset by investments in inventory, as
previously noted.
Accounts receivable were $540,867 at March 31, 1996, a decrease of
$47,413 from accounts receivable of $588,280 at December 31, 1995. This
decrease was due to a higher amount of retail sales and a lower amount of
promotional sales during the three months ended December 31, 1995 as compared
to the three months ended March 31, 1996. Retail sales generally carry
payment terms of net 30 days whereas the Company receives significant advance
payments on promotional sales, as previously noted.
At March 31, 1996, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $212,000 in the aggregate
through 1998, of which $147,000 is due at various times in 1996. Given the
Company's backlog of orders 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 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 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 expires
on May 15, 1996, was issued to the same supplier. 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
borrowings are limited to available collateral, as defined in the agreement.
Borrowings 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 March 31,
1996.
As previously noted, the Company's backlog of orders at March 31, 1996
was $10,079,000. This consists of two promotional projects which are scheduled
to be delivered during the second quarter of 1996. The Company has received
and will continue to receive significant advance deposit payments against the
total contracted revenues of these projects. Management believes that the
Company's existing cash position, credit facilities, and the scheduled
prepayments noted above, combined with internally generated cash flow, will
be adequate to support the Company's liquidity and capital needs, including
financing the current backlog, at least through the end of 1996.
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>
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K for the three months ended March 31,
1996 - None.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOTOBALL USA, INC.
_____________________________________
(Registrant)
Dated: May 14, 1996 BY: /s/ David G. Forster
__________________________________
David G. Forster
Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Accounting Officer
and Duly Authorized Officer)
