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, 1999
( ) 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
incorporation or organization) Identification Number)
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 August 1, 1999 the Company had 2,785,907 shares of its
common stock issued and outstanding.
Transitional Small Business Disclosure Format Yes ( ) No (X)
1
FOTOBALL USA, INC.
INDEX
Sequential
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1998
and June 30, 1999 3
Condensed Statements of Operations for the three months
and six months ended June 30, 1998 and 1999 4
Condensed Statements of Cash Flows for the six months
ended June 30, 1998 and 1999 5
Notes to Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis or Plan of Operations 10-16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONSENSED BALANCE SHEETS
(Unaudited)
December 31, 1998 June 30, 1999
----------------- -------------
ASSETS
CURRENT ASSETS
Cash and equivalents $ 8,498 $ 236,312
Accounts receivable 3,041,633 3,968,479
Inventories 3,438,552 4,102,014
Prepaid expenses and other 157,608 347,518
Deferred income taxes 90,000 ---
------------ ------------
TOTAL CURRENT ASSETS 6,736,291 8,654,323
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PROPERTY AND EQUIPMENT, net 1,126,551 1,364,171
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OTHER ASSETS
Deposits and other 31,767 30,385
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TOTAL OTHER ASSETS 31,767 30,385
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$ 7,894,609 $ 10,048,879
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Note Payable to Bank $ 400,000 $ 1,500,000
Current portion of capital leases 95,970 129,097
Accounts payable and accrued expenses 1,315,831 1,260,392
Income Taxes Payable 39,800 ---
------------ ------------
TOTAL CURRENT LIABILITIES 1,851,601 2,889,489
CAPITAL LEASES, net of current portion 154,503 301,263
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TOTAL LIABILITIES 2,006,104 3,190,752
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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 - 2,699,242
shares in 1998 and 2,781,741 shares
in 1999 26,992 27,817
Additional paid-in capital 8,590,994 8,744,503
Accumulated deficit (2,729,481) (1,914,193)
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TOTAL STOCKHOLDERS' EQUITY 5,888,505 6,858,127
------------ ------------
$ 7,894,609 $10,048,879
============ ============
See accompanying notes to condensed financial statements.
3
FOTOBALL USA, INC.
CONSENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
SALES $ 4,025,943 $ 6,281,210 $ 7,787,346 $11,874,559
COST OF SALES 2,553,550 3,826,838 4,976,632 7,267,547
----------- ----------- ----------- -----------
GROSS PROFIT 1,472,393 2,454,372 2,810,714 4,607,012
----------- ----------- ----------- -----------
OPERATING EXPENSES
Royalties 266,429 412,357 502,353 882,153
Marketing 420,124 586,217 867,755 1,204,865
General and administrative 514,100 790,561 1,015,197 1,357,408
Depreciation and amortization 78,412 100,128 155,192 198,236
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,279,065 1,889,263 2,540,497 3,642,662
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 193,328 565,109 270,217 964,350
----------- ----------- ----------- -----------
OTHER EXPENSE
Interest expense 17,558 34,055 27,435 60,715
Interest income (124) (1,055) (8,279) (1,654)
----------- ----------- ----------- -----------
TOTAL OTHER EXPENSE 17,434 33,000 19,156 59,061
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 175,894 532,109 251,061 905,289
INCOME TAX EXPENSE 70,100 -- 100,000 90,000
----------- ----------- ----------- -----------
NET INCOME $ 105,794 $ 532,109 $ 151,061 $ 815,289
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE:
BASIC $ .04 $ .19 $ .06 $ .30
=========== =========== =========== ===========
DILUTED $ .04 $ .18 $ .06 $ .28
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
BASIC 2,691,742 2,739,117 2,691,742 2,722,028
=========== =========== =========== ===========
DILUTED 2,810,624 2,992,056 2,738,795 2,961,260
=========== =========== =========== ===========
See accompanying notes to condensed financial statements.
4
FOTOBALL USA, INC.
CONSENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------------
1998 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 151,061 $ 815,289
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 163,672 206,080
Amortization of stock compensation expense 4,950 15,019
Changes in operating assets and liabilities
Accounts receivable (1,135,023) (926,846)
Inventories (650,899) (663,462)
Prepaid expenses and other (19,853) (189,909)
Deferred income taxes 67,800 90,000
Accounts payable and accrued expenses 323,322 (55,439)
Income taxes payable -- (39,800)
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NET CASH USED IN OPERATING ACTIVITIES (1,094,970) (749,068)
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (59,461) (197,267)
Increase (decrease) in long term deposits (71,661) 1,380
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NET CASH USED IN INVESTING ACTIVITIES (131,122) (195,887)
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CASH FLOWS FROM FINANCING ACTIVITIES
Net additions of short-term credit facilities 700,000 1,100,000
Repayment of capital lease obligations (51,759) (66,546)
Proceeds from exercise of stock options 150 139,315
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NET CASH PROVIDED BY FINANCING ACTIVITIES 648,391 1,172,769
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NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (577,701) 227,814
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CASH AND EQUIVALENTS, Beginning of period 764,855 8,498
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CASH AND EQUIVALENTS, End of period $ 187,154 $ 236,312
========== ===========
See accompanying notes to condensed financial statements.
5
FOTOBALL USA, INC.
NOTES TO CONSENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
1. CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet as of June 30, 1999, the
condensed statements of operations for the three months and
six months ended June 30, 1998 and 1999, and the condensed
statements of cash flows for the six months ended June 30,
1998 and 1999 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, 1998.
The results of operations for the three months and six
months ended June 30, 1999 are not necessarily indicative of
the results of operations to be expected for the year ending
December 31, 1999.
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 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 March 31, 2000.
6
FOTOBALL USA, INC.
NOTES TO CONSENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(continued)
The following table summarizes, in descending
order of 1998 revenue contribution, the Company's
significant license agreements and their terms:
Licensor Product Term Expiration Date
-------- -------- ----- ---------------
NFL Team Logo Football 2 years March 31, 2000
MLBPA Baseball 1 year (2 year option) December 31, 1999
MLBP Baseball 3 years December 31, 1999
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. In prior years, the Company's promotions
business contributed the largest percentage of the Company's
total sales and earnings and as such resulted in significant
reliance upon generating promotion sales sufficient to operate
profitably. The large increase in the Company's retail business
in 1998 and 1999 reduced the importance of the promotions
business in determining the Company's profitability. During the
year ended December 31, 1998, 25% of the Company's total sales was
derived from promotional sales, of which no customer accounted
for greater than 10% of total sales. During the six month period
ended June 30, 1999, 21% of the Company's total sales were
derived from sales of promotional products, with no customer
accounting for greater than 10% of total sales.
Variability of Gross Margins - Historically, the Company has
realized higher gross margins on its retail sales as compared to
promotional sales. In 1997, the Company realized gross margins of
36%, excluding a $1,175,000 provision for discontinued and
excess inventory. In 1998, the Company realized gross margins of
39%. 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 types of products 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 resulting primarily from two factors. The first factor is
the seasonality of the Company's licensed sports product business
7
FOTOBALL USA, INC.
NOTES TO CONSENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(continued)
combined with a significant concentration of its business from
baseball. The Company believes that the decrease in the
dependence upon baseball-related sales during the past several
years will continue in the future. The introduction of quality
product lines involving other sports and entertainment related
products in addition to baseball will help mitigate the
seasonality. The second factor which in prior years
significantly contributed to the variability of the Company's
operations, was its dependence on the promotions business as more
fully explained above. However, the Company realized increasing
sales and profitability in each quarter of 1998 primarily due to
significant increases in its retail business. The Company
anticipates that the contribution of retail sales in future
periods should mitigate this quarter-to-quarter variability.
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 three-year employment agreement with the Company,
commencing on August 11, 1999, 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 1998, the Company purchased
approximately 87% of its raw material and finished goods,
consisting primarily of synthetic baseballs, footballs,
basketballs, hockey pucks and playground balls, from six
companies located in China, with two manufacturers accounting
for 77% of total raw materials and finished goods 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
the Company's products because products originating from China
could be subjected to substantially higher rates of duty.
8
FOTOBALL USA, INC.
NOTES TO CONSENSED FINANCIAL STATEMENTS (Unaudited)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(continued)
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
December 31, 1998 June 30, 1999
----------------- -------------
Accounts receivable - Trade $ 3,188,445 $ 4,126,730
Less Allowance for Bad Debt (146,812) (158,251)
------------- ------------
Total Accounts Receivable $ 3,041,633 $ 3,968,479
============= ============
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, 1998 June 30, 1999
----------------- -------------
Finished goods $ 2,715,860 $ 3,449,399
Raw material 1,738,404 1,665,346
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Total Inventory 4,454,264 5,114,745
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Less inventory reserve (1,015,712) (1,012,731)
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Total inventory $ 3,438,552 $ 4,102,014
============= ============
9
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,
-------------------------------------------------------------------
1998 1999 1998 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $4,025,943 100% $6,281,210 100% $7,787,346 100% $11,874,559 100%
Cost
of Sales 2,553,550 63 3,826,838 61 4,976,632 64 7,267,547 61
Operating
Expenses 1,279,065 32 1,889,263 30 2,540,497 33 3,642,662 31
Operating
Income 193,328 5 565,109 9 270,217 3 964,350 8
Interest
Expense 17,558 - 34,055 1 27,435 - 60,715 1
Interest
Income (124) - (1,055) - (8,279) - (1,654) -
Income Before
Income Tax 175,894 4 532,109 8 251,061 3 905,289 8
Income Tax
Expense 70,100 2 - - 100,000 1 90,000 1
Net Income $ 105,794 3% $ 532,109 8% $ 151,061 2% $ 815,289 7%
</TABLE>
For the Three Months Ended June 30, 1998 Compared to the Three Months
Ended June 30, 1999:
Sales:
Sales increased 56% for the three months ended June 30, 1999 from
sales for the three months ended June 30, 1998. The increase was due
primarily to the Company's retail business realizing substantial increases
over the prior year period combined with moderate increases in its promotions
sales. The Company realized a 63% increase in retail sales and a 37%
increase in promotions sales, as compared to the prior year period. For the
three months ended June 30, 1999, retail sales were 76% of total sales,
as compared to retail sales of 73% for the three months ended June 30, 1998.
Also contributing to the rapid retail sales growth were national account
sales, which are expanding both in sales per store and the number of stores
serviced. Additionally, the Company's entertainment/amusement-related
business experienced significant growth during the three months ended
June 30, 1999, and this growth is expected to accelerate in the
10
second half of 1999 due to certain millennium related projects.
Although there was significant growth in retail sales and
anticipated continued growth for the remainder of 1999, the Company will
continue to pursue the promotions business aggressively, focusing on
leveraging its sports league relationships. For the three months ended
June 30, 1999, promotions sales were 24% of sales compared to
promotions sales of 27% for the three months ended June 30, 1998.
Gross Profit:
Gross profit increased 67% for the three months ended June 30, 1999
from gross profit for the three months ended June 30, 1998. 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 39% for
the three months ended June 30, 1999 from 37% for the three months
ended June 30, 1998. The gross margins as a percentage of sales
increased from 1998 to 1999 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 may fluctuate, particularly between quarters, based on several
factors including sales and product mix. See Footnote 2, "Notes to
Condensed Financial Statements."
Operating Expense:
Operating expenses were 30% of sales for the three months ended
June 30, 1999, as compared to 32% of sales for the three months ended
June 30, 1998. The increase in operating expenses on an absolute basis
was due primarily to increased royalty 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.
Royalty expense increased 55% for the three months ended
June 30, 1999 from royalty expense for the three months ended June 30, 1998
due to a significant increase in sales. As a percentage of sales, royalty
expense remained constant at 7% during the second quarter of 1999
and 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 increased 40% for the three months ended
June 30, 1999 from marketing expenses for the three months ended June 30, 1998.
Marketing expenses as a percentage of sales decreased to 9% of sales for the
three months ended June 30, 1999 from 10% of sales for the three
months ended June 30, 1998, primarily as a result of allocating the
fixed components of marketing expenses over significantly higher sales
volume. Marketing expenses increased from 1998 to 1999 in absolute terms
due primarily to an increase in outside sales commissions.
General and administrative expenses increased 54% for
the three months ended June 30, 1999 from general and administrative
expenses for the three months ended June 30, 1998. This increase is a
11
result of increases in rent expense, administrative salary expense and
professional services fees. As a percentage of sales, general and
administrative expenses remained constant at 13% during the second quarter of
1999 and 1998. The Company anticipates that general and administrative
expenses will continue to increase in each of the remaining
quarters of 1999 as a result of the need to expand the Company's
infrastructure to accommodate higher sales in the future.
Interest Expense:
Interest expense was $34,055 for the three months ended June
30, 1999, an increase of $16,497 from interest expense of $17,558
for the comparable period in 1998. The increase reflects an
increase in interest charges on the line of credit as a result of
a higher average loan balance during the period, combined with an
increase in interest charges from capitalized leases. Total
capitalized equipment and machinery leases were $430,000 at
June 30, 1999, an increase from total capitalized equipment and machinery
leases of $297,000 at June 30, 1998.
Income Tax Expense:
The Company incurred no income tax expense for the three
months ended June 30, 1999 compared to income tax expense of
$70,100, or 40%, for the prior year period. Had the Company
been taxed at a combined federal and state effective tax rate of
40%, then diluted earnings per share would have been as follows:
Income before income taxes $ 532,109
Proforma Income tax expense (40% tax rate) 212,844
----------
Proforma Net Income $ 319,265
==========
Proforma Diluted Earnings per Share $ .11
==========
As of June 30, 1999 the Company had gross deferred tax
assets of approximately $559,000 consisting primarily of
unutilized loss carryforwards, which will expire through 2012.
The full amount of the deferred tax assets was offset by a
valuation allowance due to uncertainties associated with the
future realization of these loss carryforwards.
For the Six Months Ended June 30, 1998 Compared to the Six Months
Ended June 30, 1999:
Sales:
Sales increased 52% for the six months ended June 30, 1999
from sales for the six months ended June 30, 1998. The increase
was due primarily to a 202% increase in the Company's retail
sales during the six month period ended June 30, 1999, as compared to
12
June 30, 1998. Sales increased in all retail product categories,
with the most significant increases in football ($1,991,787),
basketball ($1,251,350) and soccer ($307,699) product lines.
Promotions sales also increased in 1999 as compared to 1998 due
primarily to one $400,000 baseball promotion. Promotions sales
increased 24% for the six months ended June 30, 1999 compared to
June 30, 1998.
Gross Profit:
Gross profit increased 64% for the six months ended June 30, 1999
from gross profit for the six months ended June 30, 1998. As previously
noted, gross profit increased on an absolute basis due to higher sales.
Gross margins as a percentage of sales increased from 36% to 39% for
the six months ended June 30, 1998 and 1999, respectively, reflecting
a greater percentage of higher margin retail sales.
Operating Expenses:
Operating expenses were 31% of sales for the six months ended
June 30, 1999, as compared to 33% of sales for the six months ended
June 30, 1998. 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 43% during this period for the reasons noted below.
Royalty expense increased 76% for the six months ended June
30, 1999 from royalty expense for the six months ended June 30,
1998. Royalty expense as a percentage of sales increased to
7% for the six months ended June 30, 1999 from 6% for the
six months ended June 30, 1998 principally due to a higher
percentage of sales coming from licensed products in 1999 versus 1998.
Marketing expenses increased 39% for the six months ended
June 30, 1999 from marketing expenses for the six months ended
June 30, 1998. Marketing expenses as a percentage of sales decreased
to 10% for the six months ended June 30, 1999 from 11% for the
six months ended June 30, 1998, primarily as a result of the
non-variable component of marketing expenses, such as wages and
exhibiting costs, being allocated over substantially higher sales
volumes.
General and administrative expenses increased 34% for the
six months ended June 30, 1999 from general and administrative expenses for
the six months ended June 30, 1998. General and administrative expenses
as a percentage of sales decreased to 11% for the six months ended
June 30, 1999 from 13% for the six months ended June 30, 1998.
This decrease is a result of several factors, including the Company's sales
growing at a faster rate than the Company's fixed costs.
13
Interest Expense:
Interest expense was $60,715 for the six months ended June
30, 1999, an increase of $33,280 from interest expense of $27,435
for the comparable period in 1998. The increase in interest
expense reflects the increase in the amount of the Company's
outstanding borrowings under the Company's revolving line of
credit.
Income Tax Expense:
The Company incurred $90,000 in income tax expense for the
six months ended June 30, 1999 compared to income tax expense of
$100,000, or 40%, for the prior year period. Had the Company
been taxed at a combined federal and state effective tax rate of
40%, then diluted earnings per share would have been as follows:
Income before income taxes $ 905,289
Proforma Income tax expense (40% tax rate) 362,116
----------
Proforma Net Income $ 543,173
----------
Proforma Diluted Earnings per Share $ .18
==========
Liquidity and Capital Resources
The Company's net working capital increased $880,144 during 1999
to $5,764,834 at June 30, 1999 from $4,884,690 at December 31, 1998. Cash
flow used in operations decreased by $345,902 to cash used in operations
of $749,068 for the six months ended June 30, 1999 from cash used in
operations of $1,094,970 for the six months ended June 30, 1998.
This decrease can be attributed primarily to approximately $664,000 of
additional net income generated during the first six months of 1999
compared to 1998, partially offset by lower accounts payable and accrued
expenses and higher prepaid assets. Additionally, accounts receivable
increased by $926,846 and inventory increased by $663,462 from December 31,
1998 to June 30, 1999. The increase in accounts receivable is due primarily
to a greater percentage of sales derived from national retail accounts which
typically require longer repayment terms than the Company's normal thirty-day
credit terms. Since the Company expects an increasing contribution from
national retailers in the future, it expects a corresponding moderate
increase in its accounts receivable days sales outstanding. The Company's
increase in inventories is due primarily to the rapid growth in its retail
business, its expanding line of products and its expectation of increasing
demand for these products in future periods.
Cash and equivalents totaled $236,312 at June 30, 1999, an increase of
$227,814 from cash and equivalents of $8,498 at December 31, 1998. This
increase can be attributed primarily to the increased borrowings under the
credit line during 1999. The Company also utilized cash resources for
the acquisition of non-current assets, including property and equipment.
14
For the next twelve months, the Company anticipates that its capital
expenditure requirements will approximate $500,000 which will be used to
purchase additional product molds, production machinery, leasehold
improvement and office and computer equipment. It is anticipated that a
significant amount of the Company's capital expenditures will be financed
through capital leases.
On June 24, 1999 the Company announced that it was reducing
the exercise price of its publicly traded redeemable common stock
purchase warrants from $6.50 to $4.00 and extending the term of the
warrants until August 27, 1999. During the special exercise price period
of June 24, 1999 through August 27, 1999, warrantholders who exercise each
warrant for $4.00 will receive one share of Fotoball common stock. After the
special exercise period expires at the close of business on August 27, 1999,
the warrants will expire in accordance with its terms. The Company's Board
of Directors arrived at the special exercise price based upon a number of
factors, including the existing exercise price, the expiration date of the
warrants, the current trading price of the Company's common stock and
the recommendation of Southwest Securities, Inc., the Company's
financial advisor. If all warrants are exercised during the special
exercise period, the Company would receive in excess of $5.6 million in gross
proceeds (before costs associated with the offering). All funds received
will be applied for working capital purposes to finance the Company's
continued rapid growth and possible acquisitions. The Company has previously
registered the shares underlying the warrants for resale by the holders and
has filed a prospectus supplement in order to update the prospectus
to reflect the repricing and extension of the warrants. As of June 30,
1999, no warrants had been exercised.
At June 30, 1999 the Company has commitments for minimum guaranteed
royalties under licensing agreements approximating $775,000 in the
aggregate through 2002, of which $295,000 is due at various
times in 1999. Given the Company's expectation that it will realize
operating profits due to increases in its retail business during the
third and fourth quarter of 1999, these guaranteed royalties are anticipated
to be funded from operations.
The Company currently has a one-year credit agreement with Scripps Bank
with a credit line of $3,500,000 which expires April 15, 2000. This credit
line 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. The Company is in complaince with the covenants through June 30, 1999.
Outstanding borrowings under the credit line totaled $1,500,000 at
June 30, 1999 as compared to $700,000 at June 30, 1998.
The Company has a $3,000,000 line of credit facility (the "facility")
with Merrill Lynch International Bank Limited at an interest rate of 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 required to be secured by cash collateral deposited with Merrill Lynch
15
equal to the credit outstanding. The line of credit extends until
December 10, 2001. There was no borrowing under the line of credit as of
June 30, 1999.
Management believes that the Company's existing cash position, credit
facilities, internally generated cash flows, as well as the expected proceeds
from the warrants will be adequate to support the Company's growth, liquidity
and capital needs at least through the end of 1999.
The Company has implemented a plan and believes it is Year 2000
compliant. Pursuant to the Company's Year 2000 plan, the Company has
upgraded and tested 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. 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 or 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 late 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 1999,
its ability to realize increasing profitability in the third quarter of
1999, 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 1999, 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, 1998 are subject to risks and uncertainties
that could cause actual results to differ materially from those expressed
in or implied by the statements.
16
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 18, 1999
at the Company's offices. The matters considered at the meeting consisted
of the following:
The election of one Class II 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 For Against Total Votes
------- ---- ------- ------------
Joel Rubenstein 2,118,188 10,910 2,129,098
The amendment of the Fotoball USA, Inc. 1998 Stock Option Plan,
increasing the number of the Corporation's shares of common stock reserved
for issuance from 500,000 to 700,000. The results of the voting were as
follows:
For Against Abstain Not Voted Total Votes
--- ------- ------- --------- -----------
933,989 135,240 26,500 1,033,369 2,129,098
The ratification of the Board of Directors' appointment of
Hollander, Lumer & Co. LLP as the Company's independent public
accountant for the 1999 fiscal year. The results of the voting
were as follows:
For Against Abstain Total Votes
--- ------- ------- -----------
2,127,048 700 1,350 2,129,098
A proxy may confer discretionary authority on management of the
Company to vote on any matter brought at the 2000 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 2000 Annual Meeting of Stockholders (between February
18, 2000 and March 30, 2000), except that, if the 2000 Annual
Meeting of Stockholders is not held within 30 days before or
after May 18, 2000, a proxy may confer discretionary authority on
management of the Company to vote on any manner brought at the
2000 Annual Meeting of Stockholders unless the Company receives
notice of such matter within 10 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, 1999 - None
17
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 13, 1999 BY: /s/Michael Favish
--------------------------
Michael Favish
President and Chief Executive Officer
(Duly Authorized Officer)
Dated: August 13, 1999 BY: /s/Clifford A. Lyon
--------------------------
Clifford A. Lyon
Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)
18
<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, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 236,312
<SECURITIES> 0
<RECEIVABLES> 4,126,730
<ALLOWANCES> 158,251
<INVENTORY> 4,102,014
<CURRENT-ASSETS> 8,654,323
<PP&E> 2,977,137
<DEPRECIATION> 1,612,966
<TOTAL-ASSETS> 10,048,879
<CURRENT-LIABILITIES> 2,889,489
<BONDS> 0
0
0
<COMMON> 27,817
<OTHER-SE> 6,830,310
<TOTAL-LIABILITY-AND-EQUITY> 10,048,879
<SALES> 11,874,559
<TOTAL-REVENUES> 11,874,559
<CGS> 7,267,547
<TOTAL-COSTS> 3,642,662
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,715
<INCOME-PRETAX> 905,289
<INCOME-TAX> 90,000
<INCOME-CONTINUING> 815,289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 815,289
<EPS-BASIC> .30
<EPS-DILUTED> .28
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