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 March 31, 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
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FOTOBALL USA, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 33-0614889
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3738 Ruffin Road, San Diego, California, 92123
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(Address of principal executive offices) (Zip Code)
(619) 467 - 9900
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(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 April 30, 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 16
<PAGE>
FOTOBALL USA, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31,
1996 and March 31, 1997 3
Condensed Statements of Operations for the
three months ended March 31, 1996 and 1997 4
Condensed Statements of Cash Flows for the
three months ended March 31, 1996 and 1997 5
Notes to Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis or
Plan of Operations 10-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
Page 2 of 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, 1996 March 31, 1997
----------------- --------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 981,554 $ 3,547,389
Accounts receivable-net 7,369,617 1,078,939
Inventories (Note 4) 2,081,206 2,919,418
Prepaid expenses and other 176,285 269,567
Deferred income taxes 187,000 146,200
------------ -----------
TOTAL CURRENT ASSETS 10,795,662 7,961,513
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PROPERTY AND EQUIPMENT, net 1,039,225 1,190,467
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OTHER ASSETS
Deferred income taxes 264,000 264,000
Deposits and other 55,449 56,663
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TOTAL OTHER ASSETS 319,449 320,663
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$ 12,154,336 $ 9,472,643
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note payable to bank $ 1,825,000 $ --
Current portion of capital leases 58,516 80,534
Accounts payable and accrued expenses 1,954,106 1,022,830
Income taxes payable 119,200 11,500
------------ -----------
TOTAL CURRENT LIABILITIES 3,956,822 1,114,864
CAPITAL LEASES, net of current portion 138,976 220,051
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TOTAL LIABILITIES 4,095,798 1,334,915
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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) (451,233)
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TOTAL STOCKHOLDERS' EQUITY 8,058,538 8,137,728
------------ -----------
$ 12,154,336 $ 9,472,643
============ ===========
See accompanying notes to condensed financial statements.
Page 3 of 16 <PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
1996 1997
------------ -----------
SALES $ 2,401,656 $ 3,601,385
COST OF SALES 1,404,863 2,227,164
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GROSS PROFIT 996,793 1,374,221
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OPERATING EXPENSES
Royalties 171,086 118,779
Marketing 305,753 530,495
General and administrative 458,135 554,133
Depreciation and amortization 54,670 50,479
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TOTAL OPERATING EXPENSES 989,644 1,253,886
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INCOME BEFORE OTHER (INCOME)
EXPENSE AND INCOME TAXES 7,149 120,335
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OTHER (INCOME) EXPENSE
Interest expense 8,597 12,815
Interest income (43,087) (24,769)
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TOTAL OTHER INCOME (34,490) (11,954)
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INCOME BEFORE INCOME TAX 41,639 132,289
INCOME TAX EXPENSE 16,700 53,100
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NET INCOME $ 24,939 $ 79,189
============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 2,691,676 2,691,710
============ ===========
NET INCOME PER COMMON SHARE $ .01 $ .03
============ ===========
See accompanying notes to condensed financial statements.
Page 4 of 16 <PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------------
1996 1997
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 24,939 $ 79,189
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 54,670 55,817
Amortization of stock compensation expense 6,375 --
Changes in operating assets and liabilities:
Accounts receivable 47,413 6,290,678
Inventories (435,857) (838,212)
Production-in-process (30,766) --
Prepaid expenses and other (113,294) (94,496)
Deferred income taxes 16,700 40,800
Accounts payable and accrued expenses (122,516) (931,276)
Customer deposits 1,358,029 --
Income taxes payable -- (107,700)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 805,693 4,494,800
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (47,165) (92,305)
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NET CASH USED IN INVESTING ACTIVITIES (47,165) (92,305)
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of related party loans (21,331) --
Repayment of capital lease obligations (14,186) (11,660)
Repayment of short-term credit facilities -- (1,825,000)
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NET CASH USED IN FINANCING ACTIVITIES (35,517) (1,836,660)
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NET INCREASE IN CASH AND EQUIVALENTS 723,011 2,565,835
CASH AND EQUIVALENTS, Beginning of period 2,162,268 981,554
============ ===========
CASH AND EQUIVALENTS, End of period $ 2,885,279 $ 3,547,389
============ ===========
See accompanying notes to condensed financial statements
Page 5 of 16 <PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
1. CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet as of March 31, 1997, the condensed statements
of operations for the three months ended March 31, 1996 and 1997, and the
condensed statements of cash flows for the three months ended March 31,
1996 and 1997 have been prepared by the Company without audit. In the
opinion of management, all adjustments (which include only normal
reoccurring 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 ended March 31, 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
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.
Page 6 of 16<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(continued)
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 the
previously mentioned 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, consistent with
years prior to 1996. 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, its sales tend to be concentrated during the second
and third quarters which coincides with the baseball season. As a result
of the Major League Baseball ("MLB") strike commencing in August 1994, and
the delay in the start of the 1995 MLB season, the Company's baseball-
related business was materially adversely impacted during 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 recent signing of a collective bargaining agreement
between MLB players and owners should have a positive impact upon the
Company's future baseball business. 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 these toy car sales, which are
not anticipated to be material in the future, 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.
Page 7 of 16<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(continued)
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
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
Page 8 of 16<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
(continued)
sales will be far less in 1997 and 1998 than in 1996, due to the 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 March 31, 1997
----------------- --------------
Finished goods $ 439,332 $ 593,623
Raw material 1,641,874 2,325,795
----------- ------------
Total inventory $ 2,081,206 $ 2,919,418
=========== ============
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 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
$300,000 and $10,079,000 as of April 30, 1997 and 1996, respectively. The
current backlog reflects the non-reoccurrence of the 1996 toy car promotion
sales as well as the absence of a "national" baseball promotion in 1997.
The Company expects a transitional year during 1997 from the record year
realized in 1996. Sales and earnings are expected to be significantly
lower in the second quarter of 1997 than the corresponding period in 1996,
due to the absence of the above mentioned promotions, and the expectation
that anticipated retail sales increases and higher aggregate margins will
not replace the net income from these promotions. 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 third and fourth quarter of 1997, which could contribute
to higher earnings, although there is no way to currently predict such
developments.
Page 9 of 16 <PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
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,
---------------------------------------
1996 1997
---------------- -----------------
Sales $2,401,656 100% $ 3,601,385 100%
Cost of Sales 1,404,863 58 2,227,164 62
Operating Expenses 989,644 41 1,253,886 35
Operating Income 7,149 1 120,335 3
Interest Expense 8,597 1 12,815 1
Interest Income 43,087 2 24,769 1
Income Before Income Tax 41,639 2 132,289 4
Income Tax Expense 16,700 1 53,100 1
Net Income $ 24,939 1% $ 79,189 2%
Three Months Ended March 31, 1996 and 1997:
Sales:
Sales were $3,601,000 for the three months ended March 31, 1997, an
increase of 50% from sales of $2,402,000 for the three months ended March 31,
1996. The increase was due to both promotional and retail divisions
realizing substantial increases over the three months ended March 31, 1996.
For the three months ended March 31, 1997, promotional sales were $2,017,000,
or 56% of sales, as compared to promotional sales of $1,310,000, or 55% of
sales, for the three months ended March 31, 1996. This increase was due
principally to a $1,690,000 "Fotopuck" hockey puck promotion with Burger
King, combined with the successful delivery of the Company's first European
promotional order which totaled $250,000. Retail sales were $1,585,000 for
the three months ended March 31, 1997, an increase of 45% from retail sales
of $1,092,000 for the three months ended March 31, 1996. This increase was
primarily due to increases in retail baseball, football and basketball-related
sales. For the three months ended March 31, 1997, total retail baseball,
football and basketball-related sales were $773,000, $612,000, and $106,000,
respectively, as compared to $640,000, $373,000, and $50,000 respectively,
for the three months ended March 31, 1996. The Company's new or expanded
product lines of hockey, Fototires, label pins and soccer contributed
insignificantly to the sales growth for the three months ended March 31, 1997.
The licensing of drivers and product and packaging development of the
Fototire product and the design development of the hockey puck displayed in a
net were completed in March 1997 and therefore no material sales were realized
during the three months ended March 31, 1997. The Company's actual results
for 1997 and future years, and its ability to maintain the growth rate of its
retail sales as realized in prior years are dependent in part, upon how well
the Company's new NASCAR, hockey and lapel pin product lines will be received
both in the retail and promotional marketplace.
Page 10 of 16 <PAGE>
Gross Profit:
Gross profit was $1,374,000 for the three months ended March 31, 1997, an
increase of 38% from gross profit of $997,000 for the three months ended March
31, 1996. Gross profit increased on an absolute basis as a result of the
increase in sales. Gross margins as a percentage of sales decreased to 38%
for the three months ended March 31, 1997 from 42% for the three months ended
March 31, 1996. The gross margins as a percentage of sales were somewhat
lower in the first quarter of 1997 as compared to the prior year primarily as
a result of the following factors: (1) higher retail sales of lower margin
football and basketball sales during 1997 versus 1996; (2) sales to
distributors who service the Company's national mass merchant customers are
increasing, resulting in somewhat lower margins due to volume pricing; and
(3) the European promotional basketball order totaling $250,000, realized,
as anticipated, lower margins. 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 first quarter of 1997.
Operating Expenses:
Operating expenses were $1,254,000, or 35% of sales, for the three months
ended March 31, 1997, as compared to operating expenses of $990,000, or 41%
of sales, for the three months ended March 31, 1996. The increase in
operating expenses on an absolute basis was due to an increase in marketing
and general and administrative expenses offset in part by lower royalties
expenses.
Royalties expenses were $119,000 for the three months ended March 31, 1997,
a decrease of 30% from royalties expenses of $171,000 for the three months
ended March 31, 1996. Royalties expense as a percentage of sales decreased
to 3% of sales for the three months ended March 31, 1997 from 7% of sales for
the three months ended March 31, 1996, due in part to the $1,690,000 hockey
puck promotion and the $250,000 European promotional order which had no
royalty obligations. As previously noted, the Company is dependent upon its
licensing arrangements and their successful renewal (See Footnote 2, "Notes
to Condensed Financial Statements"). Most of the Company's significant
licenses expire on December 31, 1999 except for the NFL Team Logo license,
which expires on March 31, 1998.
Marketing expenses were $530,000 for the three months ended March 31, 1997,
an increase of 73% from marketing expenses of $306,000 for the three months
ended March 31, 1996. Marketing expenses as a percentage of sales increased
to 15% of sales for the three months ended March 31, 1997 from 13% of sales
for the three months ended March 31, 1996. The increase in marketing
expenses of $224,000 was primarily the result of higher wages and related
expenses associated with additional sales personnel, and higher travel and
advertising costs. The Company anticipates increases in marketing expenses
to continue throughout 1997, as a direct result of management's efforts to
maximize and leverage the Company's current brand equity and greater product
diversity by adding additional sales professionals.
General and administrative expenses were $554,000 for the three months
ended March 31, 1997, an increase of 21% from general and administrative
Page 11 of 16<PAGE>
expenses of $458,000 for the three months ended March 31, 1996. This $96,000
increase is a result of several factors, including increased personnel costs,
increased general office expenses and an increase in legal fees.
Other Income (Expense):
Interest expense was $13,000 for the three months ended March 31, 1997,
an increase of 44% from interest expense of $9,000 for the three months ended
March 31, 1996. The increase reflects the interest incurred on the $1,825,000
outstanding on the line of credit, which was subsequently repaid in late
January 1997, combined with an increase in interest charges from capitalized
leases. Total capitalized equipment and machinery leases were $330,000 at
March 31, 1997, an increase of $146,000 from $184,000 at March 31, 1996.
Interest income was $25,000 for the three months ended March 31, 1997,
a decrease of $18,000, or 42% from interest income of $43,000 for the three
months ended March 31, 1996. This decrease is due to the Company's average
cash balances available for investment being lower during the three months
ended March 31, 1997 as compared to the three months ended March 31, 1996.
Liquidity and Capital Resources:
The Company's net working capital increased an insignificant amount from
December 31, 1996 to March 31, 1997, to a net working capital surplus of
$6,847,000 at March 31, 1997 from a net working capital surplus of $6,839,000
at December 31, 1996. Cash flow from operations increased by $3,689,000 from
cash provided by operations of $806,000 for the year ended December 31, 1996
to cash provided by operations of $4,495,000 for the year ended December 31,
1996. This increase was primarily the result of a $5,600,000 accounts
receivable with a major oil company, resulting from a December 1996 toy car
promotion, which was subsequently collected in January 1997, offset in part,
by an increased investment in inventory and a decrease in accounts payable.
Cash and equivalents aggregated $3,547,000 at March 31, 1997, an increase
of $2,565,000 from cash and equivalents of $982,000 at December 31, 1996.
As previously noted, collection of the significant accounts receivable
balance at December 31, 1996, offset in part by increased inventory levels in
support of an expanded product line contributed to this increase. The
Company's expanding product lines, including mini-baseball gloves, hockey
pucks, and the Fototires, substantially all of which are imprinted at the
San Diego facility, will require the Company, in the future, to maintain
these higher inventory levels. The Company also utilized cash resources for
the acquisition of non-current assets, such as property and equipment
additions. For the next twelve months, the Company anticipates that its
capital expenditure requirements will approximate $600,000, to be used to
purchase additional production machinery, office and computer equipment and
software. Additionally, the Company's facility has reached its space
utilization capacity. The Company anticipates incurring costs, which are
included in the $600,000 capital expenditure budget, on facility and
leasehold improvements to accommodate the Company's need for additional space.
In March 1997, the Company began leasing an additional 7,500 square feet
of inventory warehousing space from an unaffiliated party under a five-year
lease agreement for a monthly rent of $4,500. It is the Company's intent to
meet its increasing space requirements, resulting principally from the
expansion of its retail business, by weighing the incremental costs of future
Page 12 of 16<PAGE>
additional space and expanding in a manner that is congruent with the overall
profitability of the Company. There can be no assurance, however, that the
Company will be successful in this regard.
At March 31, 1997, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $1,005,000 in the aggregate
through 1999, of which $256,000 is due at various times in 1997. Given the
Company's operating profits to date and anticipated increases in retail
product sales, management expects these guaranteed royalties to be funded
from operating cash flows.
In December 1994, the Company entered into a $1,000,000 line of credit
with Merrill Lynch International Bank Limited at an interest rate which is
at 1.75% above the London Interbank Offering Rate term that the Company
chooses to select. Borrowings under the line of credit were 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 in
support of stand-by letters of credit which were issued to an overseas
supplier in 1996. The line of credit, which expired on December 19, 1996,
was subsequently renewed on March 27, 1997 extending its term until
December 10, 2001. 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.
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.
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 reduction strategies and their
results, the Company's expectations as to funding its capital expenditures
and operations during 1997, and other statement 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, sales and earnings are expected to be
significantly lower in the second quarter of 1997 than the corresponding
period in 1996, due to the non-reoccurrence of the 1996 toy car promotions
and the absence of a "national" baseball promotion. Historically, the
Company has realized its highest sales and earnings during the second
quarter, coinciding with the baseball season, and in 1996, a significant
toy car promotion. Given this, and the absence of a national or multi-
regional baseball promotion in 1997, combined with the uncertainty as to the
market acceptance of the new Fototire product, the Company anticipates that
Page 13 of 16<PAGE>
sales and earnings for the year are likely to be significantly lower than
1996. 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 third and fourth quarter of 1997,
which could contribute to higher earnings, although there is no way to
currently predict such developments.
The Company's retail business is expected to continue to realize in
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 ("MLB") teams,
concessionaires and corporate sponsors has experienced significant growth
through April, 1997 as compared to the prior year period. The Company has
begun to leverage its strong relationships with each of the thirty MLB teams
by offering lapel pins as an additional product line. The Company recently
shipped or received orders for approximately $130,000 of lapel pins to MLB
teams, and anticipates that such sales should continue to increase in 1997
and beyond; (2) the Company continues to aggressively pursue nation wide
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 the third quarter
of 1997; and (3) overall growth in retail sales should be supported by an
increasing line of products, licensing arrangements and customers, including
the new hockey puck, lapel pin and Fototire products, new licensing agreements
with California Sesquicentennial Foundation and WB Sport, and expanding
customer relationships with Walt Disney, and Planet Hollywood.
The Company's promotional business, with its inherent variability, is
more difficult to forecast. As previously noted, the Company anticipates
significantly lower promotions sales in 1997 as compared to 1996 resulting
in 1997 being a transitional year for the Company. The Company is focusing
on leveraging the heightened brand equity of the Fotoball name and its
products that exists currently in the marketplace, by actively pursuing
employment of seasoned promotions and marketing professionals who will
establish new customer relationships in industries in which the Company
currently does not have a presence, including the automotive, beverage,
convenience store and food industries. The Company expects the employment
of such individual(s) to occur within the next few months.
Page 14 of 16<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.9(3) Merrill Lynch International Bank Limited
line of credit dated March 13, 1997.
27 Financial Data Schedule
(b) Reports on Form 8-K for the three months ended March 31,
1997 - None
Page 15 of 16<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 15, 1997 BY: /s/ David G. Forster
----------------------
David G. Forster
Vice President-Finance, Treasurer
and Chief Financial Officer
(Principal Accounting Officer and
Duly Authorized Officer)
Page 16 of 16 <PAGE>
Merrill Lynch International Bank Limited
33 Chester Street
London, SWIX 7DX
March 13, 1997
Fotoball USA, Inc.
Mr. David Forster
3738 Ruffin Road
San Diego, CA 92123
Re: US$3,000,000.00 Facility Agreement
(dated December 20, 1995)
Dear Mr. Forster:
We are writing to give notice to Fotoball USA, Inc. (the "Client") of the
following:
The Maturity Date will be extended until December 10, 2001.
This letter is and shall be part of the "Agreement" as defined in the Term
Sheet forming part of the above Facility Agreement. Kindly acknowledge
receipt of this letter by signing and returning the enclosed copy.
Yours faithfully,
For and on behalf of
Merrill Lynch International Bank Limited
/s/ Alan Stern
- -------------------
I/We acknowledge receipt of your letter.
Signed, Client: /s/ David G. Forster Date: 3/27/97
-------------------- -------
FOTOBALL USA, INC.
Merrill Lynch International Bank Limited is regulated by The Securities
and Futures Authority Limited
<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 MARCH 31, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,547,389
<SECURITIES> 0
<RECEIVABLES> 1,078,939
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<INVENTORY> 2,919,418
<CURRENT-ASSETS> 7,961,513
<PP&E> 1,913,811
<DEPRECIATION> 723,344
<TOTAL-ASSETS> 9,472,643
<CURRENT-LIABILITIES> 1,114,864
<BONDS> 0
0
0
<COMMON> 26,767
<OTHER-SE> 8,137,728
<TOTAL-LIABILITY-AND-EQUITY> 9,472,643
<SALES> 3,601,385
<TOTAL-REVENUES> 3,601,385
<CGS> 2,227,164
<TOTAL-COSTS> 1,253,886
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,815
<INCOME-PRETAX> 132,289
<INCOME-TAX> 53,100
<INCOME-CONTINUING> 79,189
<DISCONTINUED> 0
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<NET-INCOME> 79,189
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
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