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, 1998
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, 1998, the Company had 2,691,742 shares of its common
stock issued and outstanding.
Transitional Small Business Disclosure Format Yes ( ) No (X)
1<PAGE>
FOTOBALL USA, INC.
INDEX
Sequential
Page No.
----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1997
and June 30, 1998 3
Condensed Statements of Operations for the
three months and six months ended
June 30, 1997 and 1998 4
Condensed Statements of Cash Flows for the
six months ended June 30, 1997 and 1998 5
Notes to Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis or Plan
of Operations 10-15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
2<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
December 31, 1997 June 30, 1998
----------------- -------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 764,855 $ 187,154
Accounts receivable less allowances of
$151,000 in 1997 and $62,000 in 1998 1,402,607 2,537,630
Inventories (Note 3) less reserve of
$1,175,000 in 1997 and $1,126,000 in 1998 2,476,815 3,127,714
Prepaid expenses and other 148,855 168,709
Deferred income taxes 150,000 82,200
------------ ------------
TOTAL CURRENT ASSETS 4,943,132 6,103,407
------------ ------------
PROPERTY AND EQUIPMENT, net 1,217,892 1,141,831
OTHER ASSETS
Deferred income taxes 301,000 301,000
Deposits and other 115,382 187,043
------------ ------------
TOTAL OTHER ASSETS 416,382 488,043
------------ ------------
$ 6,577,406 $ 7,733,281
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital leases $ 90,182 $ 94,730
Accounts payable and accrued expenses 789,388 1,212,714
Settlement liability 200,000 100,000
Revolving credit loan -- 700,000
------------ ------------
TOTAL CURRENT LIABILITIES 1,079,570 2,107,444
CAPITAL LEASES, net of current portion 229,930 201,775
------------ ------------
TOTAL LIABILITIES 1,309,500 2,309,219
------------ ------------
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 in 1997 and 2,691,742
shares in 1998 26,767 26,917
Additional paid-in capital 8,568,494 8,573,444
Accumulated deficit (3,327,355) (3,176,299)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 5,267,906 5,424,062
------------ ------------
$ 6,577,406 $ 7,733,281
============ ============
See accompanying notes to condensed financial statements.
3<PAGE>
<TABLE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
Six Months Ended
June 30,
June 30,
-------------------------------------------
- -----------
1997 1998 1997
1998
------------ ----------- -----------
- -----------
<S> <C> <C> <C>
<C>
SALES $ 3,203,450 $ 4,025,943 $ 6,804,835
$ 7,787,346
COST OF SALES 2,084,759 2,553,550 4,311,923
4,976,632
------------ ----------- -----------
- -----------
GROSS PROFIT 1,118,691 1,472,393 2,492,912
2,810,714
------------ ----------- -----------
- -----------
OPERATING EXPENSES
Royalties 207,585 266,429 326,364
502,353
Marketing 497,579 420,124 1,028,074
867,755
General and administrative 499,053 514,100 1,053,186
1,015,197
Depreciation and amortization 56,139 78,412 106,618
155,192
------------ ----------- -----------
- -----------
TOTAL OPERATING EXPENSES 1,260,356 1,279,065 2,514,242
2,540,497
------------ ----------- -----------
- -----------
INCOME(LOSS) BEFORE
OTHER (INCOME) EXPENSE
AND INCOME TAXES (141,665) 193,328 (21,330)
270,217
------------ ----------- -----------
- -----------
OTHER (INCOME) EXPENSE
Interest expense 7,539 17,558 20,354
27,435
Interest income (30,193) (124) (54,962)
(8,279)
------------ ----------- -----------
- -----------
TOTAL OTHER (INCOME)
EXPENSE (22,654) 17,434 (34,608)
19,156
------------ ----------- -----------
- -----------
INCOME(LOSS) BEFORE
TAXES (119,011) 175,894 13,278
251,061
INCOME TAX EXPENSE
(BENEFIT) (47,800) 70,100 5,300
100,000
------------ ----------- -----------
- -----------
NET INCOME (LOSS) $ (71,211) $ 105,794 $ 7,978
$ 151,061
============ =========== ===========
===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 2,676,742 2,691,742 2,676,742
2,691,742
============ =========== ===========
===========
DILUTED 2,676,742 2,810,624 2,691,707
2,738,795
============ =========== ===========
===========
NET INCOME(LOSS) PER
COMMON SHARE:
BASIC $ (.03) $ .04 $ NIL
$ .06
============ =========== ===========
===========
DILUTED $ (.03) $ .04 $ NIL
$ .06
============= =========== ===========
===========
</TABLE>
See accompanying notes to condensed financial statements.
4<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------------
1997 1998
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 7,978 $ 151,061
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 128,437 163,672
Amortization of stock compensation expense - 4,950
Changes in operating assets and liabilities
Accounts receivable 5,439,337 (1,135,023)
Inventories (1,326,824) (650,899)
Prepaid expenses and other (107,084) (19,853)
Deferred income taxes 4,100 67,800
Accounts payable and accrued expenses (1,200,647) 323,322
Income taxes payable (119,200) -
------------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 2,826,097 (1,094,970)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (150,674) (59,461)
Increase in long term deposits - (71,661)
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES (150,674) (131,122)
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net additions (repayments) of short-term
credit facilities (1,825,000) 700,000
Repayment of capital lease obligations (33,799) (51,759)
Proceeds from exercise of stock option - 150
------------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (1,858,799) 648,391
------------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 816,624 (577,701)
CASH AND EQUIVALENTS, Beginning of period 981,554 764,855
------------- -----------
CASH AND EQUIVALENTS, End of period $ 1,798,178 $ 187,154
============= ===========
See accompanying notes to condensed financial statements.
5<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
1. CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet as of June 30, 1998, the condensed statements
of operations for the three months and six months ended June 30, 1997 and
1998, and the condensed statements of cash flows for the six months ended
June 30, 1997 and 1998 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, 1997.
The results of operations for the three months and six months ended June 30,
1998 are not necessarily indicative of the results of operations to be
expected for the year ending December 31, 1998.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Significant Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and the reported amounts of revenue and
expenses during the period. Significant estimates have been made by
management with respect to the realizability of the Company's deferred tax
assets, the possible outcome of threatened litigation and the provision for
discontinued and excess inventories. Actual results could differ from these
estimates making it reasonably possible that a change in these estimates
could occur in the near term.
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 except for the NFL Team Logo
license, which the Company has received a letter of intent extending the
license through March 31, 2000. The following table summarizes, in
descending order of 1997 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, 2000
6 <PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(continued)
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.
During the year ended December 31, 1997, 33% of the Company's sales was
derived from promotions, of which one customer accounted for aggregate
sales of $2,438,000, or 20% of total sales. During six month period ended
June 30, 1998, 26% of the Company's sales were derived from sales of the
Company's promotional products, with no one customer accounting for sales
greater than 10%.
Variability of Gross Margins - Historically, the Company has realized higher
gross margins on its retail sales as compared to promotional sales. In 1996,
the Company realized gross margins of 29% as a result of $14,000,000 of
low margin toy promotion sales. In 1997, the Company realized gross
margins of 26% as a result of a $1,175,000 provision for discontinued and
excess inventory. Excluding this operating charge, gross margins were 36%
in 1997, which are consistent with the margins realized on the Company's
sports-related sales in 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 historically experienced significant
quarter-to-quarter variability in its sales and net income. This was due in
part to the seasonality of its licensed sports product business, a reliance
upon significant promotional programs combined with a significant
concentration of its business from baseball. The Company anticipates that the
expected increasing contribution of retail sales in future periods should
mitigate this quarter-to-quarter variability. Historically, the Company has
derived a significant amount of sales from baseball-related products,
representing 35% and 47% of the Company's sales during the years ended
December 31, 1996 and 1997, respectively. As such, its sales tended to be
concentrated during the second and third quarters which coincided with the
baseball season. Baseball-related sales as a percentage of total sales dec-
reased significantly in 1996 due to the $14,000,000 of toy car sales realized
in 1996. Excluding the toy car sales, baseball-related sales accounted for
76% of the Company's total sales in 1996. The Company believes that the dec-
rease in the dependence upon baseball-related sales during the past several
years will continue in the future, with the introduction of new product lines
7<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(continued)
including new vulcanized rubber sports balls. Baseball-related sales, how-
ever, are expected to remain a significant percentage of total sales for the
foreseeable future. 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. 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.
Dependence on Suppliers - In 1997, the Company purchased approximately
97% of its raw material, consisting primarily of synthetic baseballs,
footballs and basketballs, hockey pucks and Fototires, from six companies
located in China, with one manufacturer accounting for 52% 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. 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, 1997 June 30, 1998
----------------- -------------
Finished goods $ 970,886 $ 1,595,630
Raw material 2,680,830 2,658,471
Allowance for discontinued and
excess inventory (1,174,901) (1,126,387)
-------------- -----------
Total inventory $ 2,476,815 $ 3,127,714
============== ===========
4. THREATENED LITIGATION
In October 1997, Chevron U.S.A., Inc. ("Chevron") filed and subsequently
dismissed without prejudice a claim for breach of contract against the
Company arising from the 1996 toy car promotions. Discussions between
8<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998
(continued)
the Company and Chevron to resolve the matter are on-going. The Company
vigorously denies any wrongdoing and believes it has substantial meritorious
defenses if the matter is pursued by Chevron. While the effect, if any, on
future financial results is not subject to reasonable estimates because
considerable uncertainty exists, any unfavorable outcome could materially
affect the financial position of the Company.
9<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
Results of Operations
<TABLE>
The following table sets forth certain unaudited operating data (in
dollars and as a percentage of the Company's sales) for the periods
presented:
<CAPTION>
Three Months Ended
Six Months Ended
June 30,
June 30,
--------------------------------------
- -----------------------------------
1997 1998
1997 1998
--------------------------------------
- -----------------------------------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Sales $ 3,203,450 100% $ 4,025,943 100%
$ 6,804,835 100% $ 7,787,346 100%
Cost of Sales 2,084,759 65 2,553,550 63
4,311,923 63 4,976,632 64
Operating Expenses 1,260,356 39 1,279,065 32
2,514,242 37 2,540,497 33
Operating Income (Loss) (141,665) (4) 193,328 5
(21,330) (1) 270,217 3
Interest Expense 7,539 1 17,558 1
20,354 1 27,435 1
Interest Income 30,193 1 124 -
54,962 1 8,279 1
Income (Loss) Before
Income Tax (119,011) (4) 175,894 4
13,278 1 251,061 3
Income Tax Expense
(Benefit) (47,800) (1) 70,100 2
5,300 1 100,000 1
Net Income (Loss) $ (71,211) (2)% $ 105,794 3%
$ 7,978 1% $ 151,061 2%
</TABLE>
Three Months Ended June 30, 1997 and 1998:
Sales:
Sales were $4,026,000 for the three months ended June 30, 1998, an
increase of 26% from sales of $3,203,000 for the three months ended June 30,
1997. The increase was due to a $456,000, or 18% increase in the Company's
retail sales and a $367,000, or 50% increase in promotions sales, as compared
to the prior year period. For the three months ended June 30, 1998, retail
sales were $2,929,000, or 73% of sales, as compared to retail sales of
10<PAGE>
$2,472,000, or 77% of sales, for the three months ended June 30, 1997. The
Company realized increases of $461,000 and $100,000 in basketball and softee
(polyester filled) related sales, respectively, offset by decreases of
$65,000 and $71,000 in baseball and hockey related sales, respectively. For
the three months ended June 30, 1998, promotional sales were $1,097,000, or
27% of sales, as compared to promotional sales of $731,000, or 23% of sales,
for the three months ended June 30, 1997. The 1998 promotional sales included
a $400,000 national football promotion with a major oil company combined with
various baseball, basketball and soccer related promotions as compared to
promotional sales in 1997 which were derived from various baseball and
basketball related promotions.
Gross Profit:
Gross profit was $1,472,000 for the three months ended June 30, 1998, an
increase of 32% from gross profit of $1,119,000 for the three months ended June
30, 1997. Gross profit increased on an absolute basis as a result of the
significant increase in total sales. Gross margins as a percentage of sales
increased to 37% for the three months ended June 30, 1998 from 35% for the
three months ended June 30, 1997. The gross margins as a percentage of sales
increased from 1997 to 1998 due to both a greater percentage of higher margin
retail sales combined with certain promotional programs which realized high
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").
Gross margins as a percentage of sales for the fiscal year ending December
31, 1998 should be consistent with the gross margin percentage realized
during the second quarter of 1998.
Operating Expense:
Operating expenses were $1,279,000, or 32% of sales, for the three
months ended June 30, 1998, as compared to operating expenses of $1,260,000,
or 39% of sales, for the three months ended June 30, 1997. The nominal
increase in operating expenses on an absolute basis was due primarily to
increased royalties expenses resulting from significantly higher sales.
Operating expenses as a percentage of sales decreased due to the fixed
component of marketing and general and administrative expenses being
allocated over significantly higher sales volumes.
Royalties expense was $266,000 for the three months ended June 30,
1998, an increase of 28% from royalties expense of $208,000 for the three
months ended June 30, 1997. Royalties expense as a percentage of sales
increased insignificantly for the three months ended June 30, 1998 as
compared to the three months ended June 30, 1997. Royalties expense as a
percentage of sales for the fiscal year ending December 31, 1998 should be
consistent with the percentage royalties expense realized during the second
quarter of 1998. As previously noted, the Company is dependent upon its
licensing arrangements and their successful renewal. See footnote 2,
"Dependence Upon Licensing Arrangements."
Marketing expenses were $420,000 for the three months ended June 30,
1998, a decrease of 16% from marketing expenses of $498,000 for the three
11<PAGE>
months ended June 30, 1997. Marketing expenses as a percentage of sales
decreased to 10% of sales for the three months ended June 30, 1998 from 16%
of sales for the three months ended June 30, 1997, primarily as a result of
allocating the fixed components of marketing expenses over significantly
higher sales volume. Marketing expenses decreased significantly from 1998 to
1997 in absolute terms due to substantially lower salary, show and travel
expenses offset in part by an increase in sales commissions expense. The
Company has significantly expanded its independent representative sales force
and consequently anticipates a moderate increase in marketing expenses in
future periods resulting from this variable expense.
General and administrative expenses were $514,000 for the three months
ended June 30, 1998, an increase of 3% from general and administrative expenses
of $499,000 for the three months ended June 30, 1997. This moderate increase
is a result of increases in rent expense and administrative salary expense
offset by lower legal and bad debt expense. Depreciation and amortization
expense was $78,000 for the three months ended June 30, 1998, an increase of
$22,000 or 39% from depreciation and amortization expense of $56,000 for the
three months ended June 30, 1997. This increase is a result of higher
capital expenditures during the previous twelve months.
Other Income (Expense):
Interest expense was $18,000 for the three months ended June 30, 1998,
an increase from interest expense of $8,000 for the three months ended
June 30, 1997. The Company expects interest expense to increase in future
periods reflecting the anticipated increased usage of the Company's revolving
line of credit as more fully explained below. The Company also expects
continued financing of machinery and equipment purchases through capital
leases, resulting in higher interest expense. Total capitalized equipment
and machinery leases were $297,000 at June 30, 1998, an insignificant
increase from total capitalized equipment and machinery leases of $293,000 at
June 30, 1997.
Interest income was $NIL for the three months ended June 30, 1998, a
decrease of $30,000 or 100% from interest income of $30,000 for the three
months ended June 30, 1997. This decrease is due to the Company's usage of
the bank credit facility and the absence of material cash balances available
for investment. The Company anticipates, as more fully explained below, that
for the foreseeable future the Company will be drawing on the revolving
credit line for its cash requirements resulting in no interest income.
Six Months Ended June 30, 1997 and 1998:
Sales:
Sales were $7,787,000 for the six months ended June 30, 1998, an
increase of $982,000, or 14%, from sales of $6,805,000 for the six months ended
June 30, 1997. The increase was due to significant increases in the Company's
retail sales offset in part by a decrease in promotional sales during the six
month period. Sales increases were realized in all retail product categories
except hockey, with the most significant increases in basketball ($1,230,000),
football ($211,000) and "softee" ($101,000) product lines. Promotional sales
declined in 1998 as compared to 1997 due to the non recurrence in 1998 of a
12<PAGE>
$1,700,000 hockey puck promotion which was realized in 1997. The sales
decline was partially offset by increases in baseball and football related
promotion sales. Based on current sales trends, it is anticipated that the
Company will realize increased profitability during the third quarter of 1998
and continued profitability during the fourth quarter of 1998.
Gross Profit:
Gross profit was $2,811,000 for the six months ended June 30, 1998, an
increase of 13% from gross profit of $2,493,000 for the six months ended June
30, 1997. As previously noted, gross profit increased on an absolute basis
due to higher sales. Gross margins as a percentage of sales decreased from
37% to 36% for the six months ended June 30, 1997 and 1998, respectively,
reflecting the effect of $800,000 of lower margin amusement park related
sales to a new customer, offset in part by a greater percentage of other
higher margin retail sales.
Operating Expenses:
Operating expenses were $2,540,000, or 33% of sales, for the six months
ended June 30, 1998, as compared to operating expenses of $2,514,000, or 37%
of sales, for the six months ended June 30, 1997. Operating expenses as a
percentage of sales decreased as a result of the Company's fixed operating
costs being allocated over higher sales volumes. Operating expenses on an
absolute basis increased by $26,000 during this period due primarily to a
$176,000 and $48,000 increase in royalties and depreciation expense,
respectively offset by a $160,000 and $38,000 reduction in marketing and
general and administrative expenses, respectively.
Royalties expense was $502,000 for the six months ended June 30, 1998,
an increase of 54% from royalties expense of $326,000 for the six months
ended June 30, 1997. Royalties expense as a percentage of sales increased to
6% of sales for the six months ended June 30, 1998 from 5% of sales for the
six months ended June 30, 1997, principally due to certain promotions in 1997
which had no royalty obligation.
Marketing expenses were $868,000 for the six months ended June 30, 1998,
a decrease of $160,000, or 16%, from marketing expenses of $1,028,000 for
the six months ended June 30, 1997. Marketing expenses as a percentage of
sales decreased to 11% of sales for the six months ended June 30, 1998 from
15% of sales for the six months ended June 30, 1997, as a result of the
non-variable component of marketing expenses, such as wages and exhibiting
costs, being allocated over substantially higher sales volumes. Marketing
expenses on an absolute basis also decreased between periods due to lower
salary, travel and advertising costs.
General and administrative expenses were $1,015,000 for the six months
ended June 30, 1998, a decrease of 4% from general and administrative
expenses of $1,053,000 for the six months ended June 30, 1997. This decrease
is a result of several factors, including significant reductions in legal and
professional service costs offset in part by higher salary and occupancy
costs associated with the Company's expanded warehousing facility.
13<PAGE>
Other Income (Expense):
Interest expense was $27,000 for the six months ended June 30, 1998, an
increase of 35% from interest expense of $20,000 for the six months ended
June 30, 1997. The increase of $7,000 in interest expense reflects the
increase in the amount of the Company's outstanding borrowings under the
Company's revolving line of credit.
Interest income was $8,000 for the six months ended June 30, 1998, a
decrease of $47,000 or 85% from interest income of $55,000 for the six months
ended June 30, 1997. This decrease is due to the Company's average cash
balances available for investment being significantly lower during the six
months ended June 30, 1998 as compared to the six months ended June 30, 1997,
as more fully explained below.
Liquidity and Capital Resources
The Company's net working capital increased by approximately $133,000
from December 31, 1997 to June 30, 1998, to a net working capital surplus of
$3,996,000 at June 30, 1998 from a net working capital surplus of $3,863,000
at December 31, 1997. Cash flow provided by operating activities decreased by
$3,921,000, from cash provided by operating activities of $2,826,000 for the
six months ended June 30, 1997 to cash used in operating activities of
$1,095,000 for the six months ended June 30, 1998. The decrease in cash
provided from operations was principally due to increases in both accounts
receivable and inventory as a direct result of increasing sales. The
Company's inventories have increased significantly during the six months
ended June 30, 1998, increasing to $3,128,000 from $2,477,000 at December 31,
1997. The Company's increasing retail sales and expanding product lines have
required it to carry a higher level of inventory.
Cash and equivalents aggregated $187,000 at June 30, 1998, a decrease of
$578,000 from cash and equivalents of $765,000 at December 31, 1997. This
decrease was due to substantial increases in accounts receivable and inventory
as previously noted. The extent of the Company's future cash requirements
will be dependent in part on the level of sales increases in future periods
and the resulting impact on accounts receivable and inventory. The increasing
concentration of the Company's retail sales is expected to result in greater
cash requirements in future periods due to generally longer repayment terms
with key retailers as compared to promotional customers. The Company expects
to meet this increasing cash requirement through both internally generated
cash flow and bank revolving credit as noted below.
Accounts receivable were $2,538,000 at June 30, 1998, an increase of
$1,135,000 from accounts receivable of $1,403,000 at December 31, 1997. This
increase was due primarily to significantly higher sales during the three
months ended June 30, 1998 as compared to the three months ended December 31,
1997.
14<PAGE>
At June 30, 1998, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $686,247 in the aggregate
through 2000, of which $208,247 is due at various times in 1998. Given the
Company's expectation that it will realize operating profits during the third
and fourth quarter of 1998, these guaranteed royalties are anticipated to be
funded from operations.
In December 1995, the Company entered into a 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 assets of the
Company and actual borrowings are limited to available collateral, as defined
in the agreement. Borrowings under the line of credit 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. In February 1998, Scripps Bank renewed the credit line in the amount
of $1,500,000 expiring on October 15, 1998. The bank also waived the net
worth covenant at December 31, 1997 and reduced the working capital
requirements and modified the borrowing base formula on the new credit line.
There were $700,000 in borrowings under the credit line at June 30, 1998.
The Company is currently in discussions with Scripps Bank regarding the
modification of the Company's current credit line to include an increase in
the size of the facility and certain other modifications. There can be no
assurance that the Company will receive an increase in the size of or
modification to the terms of the credit line which are acceptable to the
Company.
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
1998.
The Company has prepared a plan to become Year 2000 compliant. Pursuant
to the Company's Year 2000 plan,the Company is currently evaluating its
information technology ("IT") and non-IT computerized systems to assure that the
transition to a Year 2000 compliant system will not disrupt the Company's
operations. This evaluation should be completed in the fourth quarter of 1998.
The Company is currently in the process of upgrading its accounting and
manufacturing software systems. The Company expects that the new systems should
be Year 2000 compliant. Given that such upgrade is expected to be completed in
the first quarter of 1999, the Company has not prepared a contingency plan and
does not currently believe that a contingency plan is necessary. The costs of
achieving Year 2000 compliance are not expected to have a material impact on the
Company's business, operations or its financial condition.
The Company is also evaluating the systems of its key customers and
suppliers to ensure that these companies are Year 2000 compliant. The cost of
this evaluation is expected to be nominal. In the event that its current
suppliers are either unable to certify that they will be Year 2000 compliant by
early 1999 our unable to give the Company reasonable assurance that Year 2000
issues will have no material adverse impact on their operations, then the
Company will review its alternatives with respect to other suppliers. There
can be no assurance that the Company will be able to find suppliers that are
acceptable to the Company. In the event that its key customers are unable to
certify that they will be Year 2000 compliant by early 1999, the Company will
be assessing the accounts receivable collection risk of such key customers.
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 1998, its ability to
realize increasing profitability in the third quarter of 1998, overall sales
trends, gross margin trends, operating cost trends and cost reduction
strategies and their results, the Company's expectations as to funding its
capital expenditures and operations during 1998, 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, 1997
are subject to risks and uncertainties that could cause actual results to
differ materially from those expressed in or implied by the statements.
15<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
The Annual Meeting of Stockholders of the Company was held on May 28, 1998
at the Company's offices. The matters considered at the meeting consisted of
the following:
The election of one Class I director to serve for a term of three years and
until his successor is elected and qualified. The results of the voting were
as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
Salvatore T. DiMascio 1,559,575 78,475
The adoption of the Fotoball USA, Inc. 1998 Stock Option Plan. The results
of the voting were as follows:
For Against Abstain Not Voted
--- ------- ------- ---------
962,206 130,365 5,500 539,979
The ratification of the Board of Directors' appointment of Hollander,
Lumer & Co. as the Company's independent public accountant for the 1998
fiscal year. The results of the voting were as follows:
For Against Abstain
--- ------- --------
1,628,400 2,200 7,450
A proxy may confer discretionary authority on management of the Company to
vote on any matter brought at the 1999 Annual Meeting of Stockholders unless
the Company receives notice of such matter not less than 60 nor more than 90
days prior to the anniversary date of the 1998 Annual Meeting of Stockholders
(between February 28, 1999 and March 30, 1999), except that, if the 1999
Annual Meeting of Stockholders is not held within 30 days before or after
May 28, 1999, a proxy may confer discretionary authority on management of the
Company to vote on any manner brought at the 1999 Annual Meeting of
Stockholders unless the Company receives notice of such matter within (ten)
days after notice of the date of the meeting is publicly given.
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, 1998 - None
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: August 14, 1998 BY: /s/Michael Favish
-------------------------------------
Michael Favish
President and Chief Executive Officer
(Duly Authorized Officer)
Dated: August 14, 1998 BY: /s/David G. Forster
-------------------------------------
David G. Forster
Executive Vice President-Finance,
Treasurer and Chief Financial Officer
(Principal Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMA-
TION EXTRACTED FROM THE FINANCIAL STATEMENTS
CONTAINED IN THE FOTOBALL USA, INC. FORM 10-QSB
FOR THE PERIOD ENDED JUNE 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 187,154
<SECURITIES> 0
<RECEIVABLES> 2,599,344
<ALLOWANCES> 61,714
<INVENTORY> 3,127,714
<CURRENT-ASSETS> 7,419,857
<PP&E> 2,377,007
<DEPRECIATION> 1,235,176
<TOTAL-ASSETS> 7,733,281
<CURRENT-LIABILITIES> 2,107,444
<BONDS> 0
0
0
<COMMON> 26,917
<OTHER-SE> 5,424,062
<TOTAL-LIABILITY-AND-EQUITY> 7,733,281
<SALES> 7,787,346
<TOTAL-REVENUES> 7,787,346
<CGS> 4,976,632
<TOTAL-COSTS> 2,540,497
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,435
<INCOME-PRETAX> 251,061
<INCOME-TAX> 100,000
<INCOME-CONTINUING> 151,061
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 151,061
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
