U.S. 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 June 30, 1997
___ 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 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) (Zip Code)
(619) 467 - 9900
---------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes (X) No ___
As of August 1, 1997, 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<PAGE>
FOTOBALL USA, INC.
INDEX
Sequential
Page No.
----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1996 and
June 30, 1997 3
Condensed Statements of Operations for the three months
and six months ended June 30, 1996 and 1997 4
Condensed Statements of Cash Flows for the six months
ended June 30, 1996 and 1997 5
Notes to Condensed Financial Statements 6-10
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, 1996 June 30, 1997
----------------- -------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 981,554 $ 1,798,178
Accounts receivable-net 7,369,617 1,930,280
Inventories (Note 4) 2,081,206 3,408,030
Prepaid expenses and other 176,285 283,369
Deferred income taxes 187,000 -
------------- ------------
TOTAL CURRENT ASSETS 10,795,662 7,419,857
------------- ------------
PROPERTY AND EQUIPMENT, net 1,039,225 1,191,259
------------- ------------
OTHER ASSETS
Deferred income taxes 264,000 446,900
Deposits and other 55,449 77,227
------------- ------------
TOTAL OTHER ASSETS 319,449 524,127
------------- ------------
$ 12,154,336 $ 9,135,243
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank $ 1,825,000 $ -
Current portion of capital leases 58,516 79,410
Accounts payable and accrued expenses 1,954,106 775,237
Income taxes payable 119,200 -
------------- ------------
TOTAL CURRENT LIABILITIES 3,956,822 854,647
CAPITAL LEASES, net of current portion 138,976 214,080
------------- ------------
TOTAL LIABILITIES 4,095,798 1,068,727
------------- ------------
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 26,767 26,767
Additional paid-in capital 8,562,194 8,562,194
Accumulated deficit (530,423) (522,445)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY 8,058,538 8,066,516
------------- ------------
$ 12,154,336 $ 9,135,243
============= ============
See accompanying notes to condensed financial statements.
Page 3 of 19<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ --------------------------
1996 1997 1996 1997
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
SALES $ 12,752,204 $ 3,203,450 $ 15,153,860 $ 6,804,835
COST OF SALES 8,975,448 2,084,759 10,380,311 4,311,923
------------ ----------- ----------- -----------
GROSS PROFIT 3,776,756 1,118,691 4,773,549 2,492,912
------------ ----------- ----------- -----------
OPERATING EXPENSES
Royalties 441,138 207,585 612,224 326,364
Marketing 739,961 497,579 1,045,714 1,028,074
General &
administrative 523,507 499,053 981,642 1,053,186
Depreciation &
amortization 52,180 56,139 106,850 106,618
------------ ----------- ------------ -----------
TOTAL OPERATING
EXPENSES 1,756,786 1,260,356 2,746,430 2,514,242
------------ ----------- ------------ -----------
INCOME (LOSS) BEFORE
OTHER (INCOME) EXPENSE
& INCOME TAXES 2,019,970 (141,665) 2,027,119 (21,330)
------------ ------------ ----------- -----------
OTHER (INCOME) EXPENSE
Interest expense 7,980 7,539 16,577 20,354
Interest income (49,242) (30,193) (92,329) (54,962)
------------ ----------- ----------- -----------
TOTAL OTHER INCOME (41,262) (22,654) (75,752) (34,608)
------------ ----------- ----------- -----------
INCOME (LOSS)
BEFORE TAXES 2,061,232 (119,011) 2,102,871 13,278
INCOME TAX
EXPENSE (BENEFIT) 827,400 (47,800) 844,100 5,300
------------ ----------- ----------- -----------
NET INCOME (LOSS) $ 1,233,832 $ (71,211) $ 1,258,771 $ 7,978
============ =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
PRIMARY 3,833,817 2,691,707 2,728,710 2,691,707
============ =========== =========== ===========
FULLY DILUTED 3,833,817 2,691,707 3,833,817 2,691,707
============ =========== =========== ===========
NET INCOME (LOSS) PER
COMMON SHARE:
PRIMARY $ .33 $ (.03) $ .46 $ NIL
============ =========== =========== ===========
FULLY DILUTED $ .33 $ (.03) $ .35 $ NIL
============ ============ =========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
Page 4 of 19<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
-------------------------
1996 1997
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,258,771 $ 7,978
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 106,850 128,437
Amortization of stock compensation expense 12,750 -
Changes in operating assets and liabilities:
Restricted cash 1,000,000 -
Accounts receivable (4,762,505) 5,439,337
Inventories (546,203) (1,326,824)
Production-in-process 233,496 -
Prepaid expenses and other (106,785) (107,084)
Deferred income taxes 553,100 4,100
Accounts payable and accrued expenses 3,479,490 (1,178,869)
Customer deposits 10,310 (21,778)
Income taxes payable - (119,200)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,239,274 2,826,097
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (140,979) (150,674)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (140,979) (150,674)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments of short-term credit facilities - (1,825,000)
Principal reductions of related party loans (45,707) -
Repayment of capital lease obligations (30,130) (33,799)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (75,837) (1,858,799)
----------- -----------
NET INCREASE IN CASH AND EQUIVALENTS 1,022,458 816,624
CASH AND EQUIVALENTS, Beginning of period 2,162,268 981,554
----------- -----------
CASH AND EQUIVALENTS, End of period $ 3,184,726 $ 1,798,178
=========== ===========
See accompanying notes to condensed financial statements.
Page 5 of 19<PAGE>
FOTOBALL USA, INC.
NOTES TO CONSENSED FINANCIAL STATEMENTS (unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
1. CONDENSED FINANCIAL STATEMENTS
-----------------------------
The condensed balance sheet as of June 30, 1997, the condensed statements
of operations for the three months and six months ended June 30, 1996 and
1997, and the condensed statements of cash flows for the six months ended
June 30, 1996 and 1997 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. 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, 1996.
The results of operations for the three months and six months ended June 30,
1997 are not necessarily indicative of the results of operations to be
expected for the year ending December 31, 1997.
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, NFL and,
to a lesser extent, Colleges. The Company's licensing arrangements expire
at various times through December 31, 1999. The following table
summarizes, in descending order of 1996 revenue contribution, the
Company's significant license agreements and their terms:
Licensor Product Term Expiration Date
-------- ------------ ---------------
MLBP Baseball 3 years December 31, 1999
MLBPA Baseball 1 year (2 year option) December 31, 1999
NFL Team Logo Football 2 years March 31, 1998
The Company believes that its relationships with these licensors are
satisfactory and anticipates that each of the license agreements will be
renewed on acceptable terms and conditions. The non-renewal or
termination of one or more of the Company's licenses, particularly with
Professional Baseball or the NFL, could have a material adverse effect on
the Company's business.
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
Page 6 of 19<PAGE>
FOTOBALL USA, INC.
NOTES TO CONSENSED FINANCIAL STATEMENTS (unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(continued)
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, 1996, 76% of the Company's sales was
derived from promotions, of which one customer accounted for aggregate
sales of $14,122,000, or 54% of sales, and another customer accounted for
aggregate sales of $4,400,000 or 17% of sales. During the year ended
December 31, 1995, 40% of the Company's sales was derived from sales of
the Company's promotional products, of which one customer accounted for
aggregate sales of $2,015,000, or 26% of sales.
Variability of Gross Margins - Historically, the Company has realized
gross margins as a percentage of total sales of between 45-50% on an
annual basis. This represented an aggregation of somewhat lower margin
promotions sales offset by higher margin retail sales. Generally, the
Company's promotions sales realize lower margins than its retail sales.
In 1996, the Company realized gross margins of 29% as a result of
$14,000,000 of low margin toy car promotion sales. As the Company does
not anticipate any material toy car sales during 1997, the Company expects
that its higher margin sports-related promotions and retail business
should contribute to higher margins in 1997, comparable with gross margins
realized during the six months ended June 30, 1997. The Company's gross
margins fluctuate, particularly between quarters, based in part on the
concentration of promotions and retail sales during the reporting period.
The type of product sold, the size of the promotion and extent of
competition also create variability in realized gross margins.
Variability of Operating Results; Seasonality; Dependence Upon Baseball-
Related Sales - The Company has experienced, and expects to continue to
experience, significant quarter-to-quarter variability in its sales and
net income. This is due in part to the seasonality of its licensed sports
product business combined with a significant concentration of its business
from baseball. Historically, the Company has derived a significant amount
of sales from baseball-related products, representing 74% and 35% of the
Company's sales during the years ended December 31, 1995 and 1996,
respectively. As such, the Company's sales tend to be concentrated during
the second and third quarters which coincides with the baseball season.
Baseball-related sales as a percentage of total sales decreased
significantly in 1996 due to the $14,000,000 of toy car sales realized in
1996. Despite the absence in the future of any material toy car sales,
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. The second factor which significantly contributes to the
variability of the Company's operations is its dependence on promotions
business as more fully explained above.
Dependence Upon Key Personnel - The success of the Company is largely
dependent on the personal efforts of Michael Favish, its President and
Chief Executive Officer, and Fred Ostern, its Vice President of Marketing.
Mr. Favish has entered into a five-year employment agreement with the
Page 7 of 19<PAGE>
FOTOBALL USA, INC.
NOTES TO CONSENSED FINANCIAL STATEMENTS (unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(continued)
Company, commencing on August 11, 1994, which, among other things,
precludes Mr. Favish from competing with the Company for a period of two
years following termination of his employment with the Company. The loss
of the services of Mr. Favish would have a material adverse effect on the
Company's business and prospects. The Company maintains "key man" life
insurance on the life of Michael Favish in the amount of $1,000,000.
Mr. Ostern has entered into a three-year employment agreement with the
Company (the "Ostern Agreement"), commencing on January 1, 1996, which,
among other things, precludes Mr. Ostern from competing with the Company
for a period of one year following termination of his employment with the
Company. In March 1997, Mr. Ostern brought an action against the Company
alleging that the Company breached the employment agreement between the
Company and Mr. Ostern. See Footnote 3, "Legal Proceedings."
Dependence on Suppliers - In 1996, the Company purchased approximately 89%
of its raw material, consisting primarily of synthetic baseballs, footballs
and basketballs, from four companies located in China, with one
manufacturer accounting for 57% of total raw material purchased. China
currently holds most favored nation ("MFN") trading status with the United
States. Any conditions imposed by the President of the United States and
any legislation in the United States revoking or placing further
conditions on China's MFN trading status could have a material adverse
effect on the cost of all of the Company's products because products
originating from China could be subjected to substantially higher rates of
duty.
3. LEGAL PROCEEDINGS
-----------------
The Company is a defendant in an action brought in San Diego County,
California Superior Court on March 14, 1997 by Fred S. Ostern, the
Company's Vice President-Marketing. The complaint alleges that the
Company has breached the employment agreement between the Company and Mr.
Ostern by failing to pay Mr. Ostern the entire amount of the annual cash
bonus for 1996 in accordance with the provisions of his employment
agreement. The claim seeks unspecified damages in excess of $50,000.
A reserve in an amount deemed adequate by the Company has been recorded
for the year ended December 31, 1996. The Company believes that it has
meritorious defenses to the claim which it intends to assert vigorously.
In the opinion of management, except as noted in the following paragraph,
the outcome of the foregoing action will not, in the aggregate, have a
material adverse effect on the Company's financial condition. On
April 14, 1997 the Company filed an answer to Mr. Ostern's complaint
denying the allegations of the complaint and asserting affirmative
defenses.
Mr. Ostern was instrumental in bringing in approximately $19,000,000 and
$2,000,000 in sales in 1996 and 1995, respectively. Such amounts
represented 73% and 26% of total sales in 1996 and 1995, respectively.
The Company anticipates that Mr. Ostern's contribution to the Company's
sales will be far less in 1997 and 1998 than in 1996, due to the
Page 8 of 19<PAGE>
FOTOBALL USA, INC.
NOTES TO CONSENSED FINANCIAL STATEMENTS (unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(continued)
non-reoccurrence of the toy car promotions and the anticipated expansion
of the Company's sales and marketing department. Despite the anticipated
reduced contribution from Mr. Ostern in 1997 and 1998, the loss of the
services of Mr. Ostern could have a material adverse effect on the Company's
business and prospects.
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, 1996 June 30, 1997
----------------- -------------
Finished goods $ 439,332 $ 665,118
Raw material 1,641,874 2,742,912
----------- -----------
Total inventory $ 2,081,206 $ 3,408,030
=========== ===========
5. 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
generally not deemed part of the Company's backlog. The Company considers
its backlog as those promotional orders and certain retail orders in which
an agreement has been signed defining the terms and quantity of the
promotion or order, 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 $515,000 and
$300,000 as of August 1, 1997 and 1996, respectively. The Company expects
to realize operating losses for the fiscal year ending December 31, 1997,
since current retail sales growth along with current promotional business
in hand is not expected to exceed the Company's cost of operations in 1997.
However, given the inherent variability of the promotions business, and
despite the significant uncertainty in predicting the occurrence of future
promotions, it is possible that significant promotional programs or "hot
markets" could develop during the fourth quarter of 1997, which could
mitigate the expected operating losses, although there is no way to
currently predict such developments.
Page 9 of 19<PAGE>
FOTOBALL USA, INC.
NOTES TO CONSENSED FINANCIAL STATEMENTS (unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(continued)
6. NET INCOME (LOSS) PER SHARE
---------------------------
Net income (loss) per share was computed by dividing net income (loss) by
the weighted average number of common shares and common share equivalents
outstanding during each period. Common share equivalents represent stock
options and warrants and are included in the weighted average shares
pursuant to the treasury stock method as prescribed by APB Opinion No. 15
"Earnings Per Share."
In February 1997, the Financial Accounting Standards Board issued
statement of Financial Accounting Standards No. 128 "Earnings per Share"
which is effective for financial statements for periods ending after
December 15, 1997. If the new pronouncement had been in effect for the
three and six-month periods ended June 30, 1997 and 1996, earnings (loss)
per share would have been as follows:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1996 1997 1996 1997
---------- ---------- --------- ---------
Primary $ .33 $ (.03) $ .46 $ NIL
Fully diluted $ .33 $ (.03) $ .35 $ NIL
FAS No. 128:
Basic EPS $ .46 $ (.03) $ .47 $ NIL
Diluted EPS $ 39 $ (.03) $ .40 $ NIL
Basic weighted average
shares outstanding 2,661,742 2,676,742 2,661,742 2,676,742
Diluted weighted average
shares outstanding 3,182,168 2,691,707 3,182,168 2,691,707
Page 10 of 19<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
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 Six Months Ended
June 30, June 30,
----------------------------------- ------------------------------
1996 1997 1996 1997
----------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $12,752,204 100% $3,203,450 100% $15,153,860 100% $6,804,835 100%
Cost of
Sales 8,975,448 70 2,084,759 65 10,380,311 61 4,311,923 63
Operating
Expenses 1,756,786 14 1,260,356 39 2,746,430 18 2,514,242 37
Operating
Income
(Loss) 2,019,970 16 (141,665) (4) 2,027,119 13 (21,330) (1)
Interest
Expense 7,980 1 7,539 1 16,577 1 20,354 1
Interest
Income 49,242 1 30,193 1 92,329 1 54,962 1
Income (Loss)
Before Income
Tax 2,061,232 16 (119,011) (4) 2,102,871 14 13,278 1
Income Tax
Expense
(Benefit) 827,400 6 (47,800) (1) 844,100 6 5,300 1
Net Income
(Loss) $1,233,832 10% $ (71,211) (2)% $1,258,771 8% $ 7,978 1%
</TABLE>
Three Months Ended June 30, 1996 and 1997:
Sales:
Sales were $3,203,000 for the three months ended June 30, 1997, a decrease
of 75% from sales of $12,752,000 for the three months ended June 30, 1996.
The decrease was due to the significant decrease in the company's promotional
contracts as a result of the absence of a "national" baseball promotion and
the non-reoccurrence of toy car sales. For the three months ended June 30,
1997, promotional sales were $731,000, or 23% of sales, as compared to
promotional sales of $10,852,000, or 85% of sales, for the three months ended
June 30, 1996. The 1997 promotional sales represented various baseball and
basketball related promotions as compared to promotional sales in 1996 which
were derived from two customers: $7,200,000 in toy car sales to Chevron and
a $3,315,000 baseball promotion with Burger King. Retail sales were
$2,472,000 for the three months ended June 30, 1997, an increase of 30%
from retail sales of $1,900,000 for the three months ended June 30, 1996.
Sales increases were realized in all of the Company's product lines, except
for the Fototire product which continues to realize less than expected sales.
The Company recently received licensing rights from Jeff Gordon and is
attempting to obtain licensing rights from another top driver. If the Company
is successful in securing a license with this top driver, management believes
that having the two most popular NASCAR drivers should, combined with renewed
marketing efforts, improve sales of this product in the future. Sales were
also higher during the period due to significant increases in the Company's
"team" business representing sales of baseballs and lapel pins to MLB
teams and concessionaires, combined with continued growth in its amusement
park and entertainment business, represented by sales to Disney Attractions
and Planet Hollywood.
Page 11 of 19<PAGE>
Gross Profit:
Gross profit was $1,119,000 for the three months ended June 30, 1997, a
decrease of 70% from gross profit of $3,777,000 for the three months ended
June 30, 1996. Gross profit decreased on an absolute basis as a result of
the significant decrease in promotional sales. Gross margins as a percentage
of sales increased to 35% for the three months ended June 30, 1997 from 30%
for the three months ended June 30, 1996. The gross margins as a percentage
of sales increased from 1996 to 1997 due to the absence in 1997 of the much
lower margin toy car promotional sales which significantly lowered the
Company's aggregate margins in 1996. The gross margins realized during the
three months ended June 30, 1997 are somewhat lower than the margins that the
Company has historically realized on its sports product sales primarily as a
result of the following factors: (1) higher retail sales of lower margin
basketball sales during 1997 versus 1996; and (2) sales to distributors who
service the Company's national mass merchant customers are increasing,
resulting in somewhat lower margins due to volume pricing. As previously
noted, the Company's gross margins fluctuate, particularly between quarters,
based on several factors including sales and product mix (See Footnote 2,
"Notes to Condensed Financial Statements"). The Company anticipates that its
gross margins for the fiscal year ending December 31, 1997 should be
consistent with the gross margins realized during the six months ended
June 30, 1997.
Operating Expense:
Operating expenses were $1,260,000, or 39% of sales, for the three months
ended June 30, 1997, as compared to operating expenses of $1,757,000, or 14%
of sales, for the three months ended June 30, 1996. The decrease in
operating expenses on an absolute basis was due to decreased royalties and
marketing expenses resulting from significantly lower sales. Operating
expenses as a percentage of sales increased due to the fixed component of
marketing expenses, such as wages, exhibiting and travel costs, being
allocated over significantly lower sales volumes.
Royalties expense was $208,000 for the three months ended June 30, 1997, a
decrease of 53% from royalties expense of $441,000 for the three months ended
June 30, 1996. Royalties expense as a percentage of sales increased to 6% of
sales for the three months ended June 30, 1997 from 3% of sales for the three
months ended June 30, 1996, due to the $7,200,000 toy car promotion in 1996
which had no royalty obligation. Royalties expense in 1996 as a percentage
of sales, excluding the toy car promotion, would have been 8%. The Company's
royalties expense as a percentage of sales may increase in the future if
higher royalty-bearing products such as the Fototire and hockey products
begin to contribute significantly to the overall sales mix. As previously
noted the Company is dependent upon its licensing arrangements and their
successful renewal. See Note 2, "Disclosure of Certain Significant Risks and
Uncertainties - Dependence Upon Licensing Arrangements."
Marketing expenses were $498,000 for the three months ended June 30, 1997,
a decrease of 33% from marketing expenses of $740,000 for the three months
ended June 30, 1996. Marketing expenses as a percentage of sales increased
to 16% of sales for the three months ended June 30, 1997 from 6% of sales for
the three months ended June 30, 1996, primarily as a result of allocating the
fixed components of marketing expenses over significantly lower sales volume.
Page 12 of 19<PAGE>
Marketing expenses decreased significantly from 1996 to 1997 in absolute
terms due to substantially lower commissions and bonuses which were paid in
1997 resulting from substantially lower operating income in 1997. Lower
mid-year bonus compensation in 1997 was offset in part by higher wages, and
commissions paid to manufacturer representatives. These costs are
anticipated to increase in the future as a direct result of the Company's
efforts to leverage its brand equity by expanding its sales force.
General and administrative expenses were $499,000 for the three months ended
June 30, 1997, a decrease of 5% from general and administrative expenses of
$524,000 for the three months ended June 30, 1996. This decrease is a result
of a significant decrease in mid-year bonus compensation in 1997, offset in
part by increased wages and facility costs associated with the Company's
expanded facility. The Company recently signed a one year renewable lease for
a 22,000 square foot storage warehouse, at a monthly rental of $9,900. This
additional warehouse space will alleviate the Company's space requirements by
permitting modest reconfiguration of its existing corporate facility.
Other Income (Expense):
Interest expense was $7,500 for the three months ended June 30, 1997, a
decrease from interest expense of $8,000 for the three months ended June 30,
1996. The Company expects interest expense to increase moderately in the
future reflecting the continued financing of machinery and equipment
purchases through capital leases. Total capitalized equipment and machinery
leases were $293,000 at June 30, 1997, an increase of $125,000 from total
capitalized equipment and machinery leases of $168,000 at June 30, 1996.
Interest income was $30,000 for the three months ended June 30, 1997, a
decrease of $19,000 or 39% from interest income of $49,000 for the three
months ended June 30, 1996. This decrease is due to the Company's average
cash balances available for investment being significantly lower during the
three months ended June 30, 1997 as compared to the three months ended
June 30, 1996.
Six Months Ended June 30, 1996 and 1997:
Sales:
Sales were $6,805,000 for the six months ended June 30, 1997, a decrease
of 55% from sales of $15,154,000 for the six months ended June 30, 1996.
The decrease was due to the significant decrease in promotional sales offset
in part by increases in the Company's retail business. For the six months
ended June 30, 1997, promotional sales were $2,748,000 (including $2,059,000
of sales to Burger King) as compared to promotional sales of $12,162,000
(including $7,200,000 and $4,365,000 of sales to Chevron and Burger King,
respectively) for the corresponding period in 1996. In contrast to the
decline in promotional sales, the Company's retail sales increased 36%
to $4,057,000 in 1997 as compared to $2,992,000 in 1996. The Company
believes that this rate of retail growth can continue, supported in part by
continued penetration into the national mass merchants. Current retail sales
growth along with current promotional business in hand is not expected,
however, to exceed the Company's cost of operations in 1997. Based on
existing sales trends, it is anticipated that the Company will realize
operating losses during the third and fourth quarter of 1997.
Page 13 of 19<PAGE>
Gross Profit:
Gross profit was $2,493,000 for the six months ended June 30, 1997, a
decrease of 48% from gross profit of $4,774,000 for the six months ended
June 30, 1996. As previously noted, gross profit decreased on an absolute
basis due to significantly lower sales. Gross margins as a percentage of
sales increased from 32% to 37% for the six months ended June 30, 1996 and
1997, respectively, reflecting higher margins on its sports-related promotions
and retail sales.
Operating Expenses:
Operating expenses were $2,514,000 or 37% of sales, for the six months
ended June 30, 1997, as compared to operating expenses of $2,746,000, or 18%
of sales, for the six months ended June 30, 1996, as a result of the Company's
fixed operating costs being allocated over substantially lower sales volumes.
Operating expenses on an absolute basis decreased by $232,000 during this
period due primarily to a $286,000 or 47% decrease in royalties expense.
Royalties expense was $326,000 for the six months ended June 30, 1997, a
decrease of 47% from royalties expense of $612,000 for the six months ended
June 30, 1996. Royalties expense as a percentage of sales increased to 5% of
sales for the six months ended June 30, 1997 from 4% of sales for the six
months ended June 30, 1996, principally due to the non-reoccurrence of the
toy car sales which had no royalty obligation.
Marketing expenses were $1,028,000 for the six months ended June 30, 1997,
a nominal decrease from marketing expenses of $1,046,000 for the six months
ended June 30, 1996. Marketing expenses as a percentage of sales increased
to 15% of sales for the six months ended June 30, 1997 from 7% of sales for
the six months ended June 30 1996, as a result of the non-variable component
of marketing expenses, such as wages and exhibiting costs, being allocated
over substantially lower sales volumes. Marketing expenses on an absolute
basis decreased only nominally between periods due to the increase in
marketing personnel and commissions to manufacturer representatives during
1997 offset by a significant decrease in employee mid-year bonuses.
General and administrative expenses were $1,053,000 for the six months
ended June 30, 1997, an increase of 7% from general and administrative
expenses of $982,000 for the six months ended June 30, 1996. This increase
is a result of several factors, including increased wages offset by a
decrease in mid-year bonus compensation, combined with an increase in legal
expenses. The Company anticipates that general and administrative expenses
should continue to increase moderately reflecting higher occupancy costs
associated with the Company's expanded warehousing facility and higher legal
fees.
Other Income (Expense):
Interest expense was $20,000 for the six months ended June 30, 1997, an
increase of 23% from interest expense of $17,000 for the six months ended
June 30, 1996. The increase of $3,000 in interest expense reflects the
increase in the amount of the Company's capitalized leases in 1997 as
compared to 1996.
Page 14 of 19<PAGE>
Interest income was $55,000 for the six months ended June 30, 1997, a
decrease of $37,000 or 40% from interest income of $92,000 for the six months
ended June 30, 1996. This decrease is due to the Company's average cash
balances available for investment being significantly lower during the six
months ended June 30, 1997 as compared to the six months ended June 30, 1996,
as more fully explained below.
Liquidity and Capital Resources
The Company's net working capital decreased by approximately $274,000
from December 31, 1996 to June 30, 1997, to a net working capital surplus of
$6,565,000 at June 30, 1997 from a net working capital surplus of $6,839,000
at December 31, 1996. Cash flow provided by operating activities increased by
$1,587,000 from cash provided by operating activities of $1,239,000 for the
six months ended June 30, 1996, to cash provided by operating activities of
$2,826,000 for the six months ended June 30, 1997. The increase in cash
provided by operating activities was principally due to the collection of
accounts receivable partially offset by increases in inventory and reductions
in trade payables. The Company's inventories have increased significantly
during the six months ended June 30, 1997, increasing to $3,408,000 from
$2,081,000 at December 31, 1996. The Company's increasing retail
sales and expanding product lines have required the Company to carry a
higher level of inventory. These higher inventory levels combined with
future anticipated operating losses will result in average cash balances in
1997 being significantly lower than in 1996. Average cash balances were
$2,800,000 for the six month period ended June 30, 1997, a 33% decrease as
compared to $4,200,000 for the prior year period. Average monthly cash
balances for the remaining six months of 1997 are expected to decrease
moderately from the ending cash balance of $1,798,000 at June 30, 1997,
reflecting continued constraint on the Company's cash resources.
Cash and equivalents aggregated $1,798,000 at June 30, 1997, an increase
of $816,000 from cash and equivalents of $982,000 at December 31, 1996.
This increase was due in part to the collection of the $5,600,000 receivable
from Chevron offset in part by investments in inventory and repayment of
trade payables and bank lines of credit. The extent of the Company's future
available cash will be dependent upon the Company's ability to mitigate its
near term future projected operating losses combined with the ability to
reduce its current inventory balance.
Accounts receivable were $1,930,000 at June 30, 1997, a decrease of
$5,440,000 from accounts receivable of $7,370,000 at December 31, 1996. This
decrease was due primarily to the balance of $5,600,000 due from the toy car
promotion contract with Chevron, shown as an account receivable at December
31, 1996, which was subsequently paid during January 1997. The decrease in
accounts receivable was offset by significantly higher retail sales during
the three months ended June 30, 1997 as compared to the three months ended
December 31, 1996.
At June 30, 1997, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $963,000 in the aggregate
through 1999, of which $140,000 is due at various times in 1997. Given the
Company's expectation that it will realize operating losses during the third
and fourth quarter of 1997, these guaranteed royalties are anticipated to be
funded from cash reserves. The Company periodically reviews the amount of
its royalty obligation and unamortized balance of prepaid costs to ensure
that, at a minimum, these amounts are amortized ratably over the license term.
Page 15 of 19<PAGE>
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, which is used solely to
collateralize the issuance of stand-by letters of credit to manufacturers,
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 expired on December 19, 1996, was
subsequently renewed on March 27, 1997 extending its term until December
10, 2001.
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 financial
covenants requiring the Company to maintain minimum net worth levels, minimum
working capital and debt to equity ratios. In November 1996, the credit line
was increased to $2,000,000 and was extended to April 15, 1998, with the same
terms. There was no borrowing under either line of credit as of June 30, 1997.
Management believes that the Company's existing cash position and credit
facilities will be adequate to support the Company's liquidity and capital
needs, at least through the end of 1997.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995:
This report contains "forward-looking statements" within the meaning of
the federal securities laws. These forward-looking statements include, among
others, statements concerning the Company's outlook for 1997, overall sales
trends, gross margin trends, cost and inventory reduction strategies and
their results, the ability to obtain or retain significant licensing rights,
the Company's expectations as to funding its capital expenditures and
operations during 1997, and other statements of expectations, beliefs, future
plans and strategies, anticipated events or trends, and similar expressions
concerning matters that are not historical facts. The forward-looking
statements in this report and those included in the Annual Report on Form
10-KSB for the fiscal year ended December 31, 1996 are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements.
1997 Outlook:
As previously discussed, based on current sales trends, the Company
expects to realize operating losses during the third and fourth quarters of
1997, in part due to a significant reduction in promotional business in hand
combined with less than expected retail sales of the Fototire product. As
previously noted, management has signed one of the two top selling NASCAR
drivers and is attempting to secure the licensing rights from the other top
driver. If the Company is successful in securing this remaining driver, it
should, combined with renewed marketing efforts, improve sales of this
Page 16 of 19<PAGE>
product in the future. The Company's retail business is expected to continue
to realize 1997 growth rates comparable to prior years. Growth in retail
sales is being driven by the following factors: (1) the Company's "team"
business representing sales of product to Major League Baseball teams,
concessionaires and corporate sponsors is experiencing significant growth;
(2) the Company continues to aggressively pursue nationwide representation
with its national mass merchants, supported by a free-standing fixture
program featuring the Company's products along with other sports licensed
product vendors, in many of its mass merchants including Walmart, Kmart,
Target and J.C. Penney. Although implementation of these programs is
dependent upon the mass merchant, and has been slower than anticipated, the
Company expects that these programs should be in place by early 1998; and
(3) overall growth in retail sales should be supported by an increasing line
of products, including the new hockey puck and lapel pin products; and
(4) the Company's amusement park and entertainment business continues to
grow through expanding customer relationships with Walt Disney and Planet
Hollywood.
The Company's promotional business, with its inherent variability, is more
difficult to forecast. Promotions sales are significantly lower in 1997 than
promotions sales in 1996, resulting to a large extent, from the reliance upon
a few significant customers. The Company's primary emphasis is the growth of
its promotional business and the mitigation of its variability through a
broadening of its customer relationships and an expansion of its sales staff.
The Company recently employed two senior promotional salespersons who are
expected to significantly contribute to these initiatives.
Page 17 of 19<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K for the three months ended June 30, 1997
- 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: August 14, 1997 BY: /s/Michael Favish
------------------------
Michael Favish
President and Chief Executive Officer
Dated: August 14, 1997 BY: /s/David G. Forster
------------------------
David G. Forster
Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Accounting Officer)
Page 19 of 19
<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-KSB
FOR THE PERIOD ENDED JUNE 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,798,178
<SECURITIES> 0
<RECEIVABLES> 1,930,280
<ALLOWANCES> 0
<INVENTORY> 3,408,030
<CURRENT-ASSETS> 7,419,857
<PP&E> 1,987,222
<DEPRECIATION> 795,963
<TOTAL-ASSETS> 9,135,243
<CURRENT-LIABILITIES> 854,647
<BONDS> 0
0
0
<COMMON> 26,767
<OTHER-SE> 8,066,516
<TOTAL-LIABILITY-AND-EQUITY> 9,135,243
<SALES> 6,804,835
<TOTAL-REVENUES> 6,804,835
<CGS> 4,311,923
<TOTAL-COSTS> 2,514,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,354
<INCOME-PRETAX> 13,278
<INCOME-TAX> 5,300
<INCOME-CONTINUING> 7,978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,978
<EPS-PRIMARY> .003
<EPS-DILUTED> .003
</TABLE>
