<PAGE>
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, 2000
[ ] 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.
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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)
6740 Cobra Way, San Diego, California 92121
-------------------------------------------
(Address of principal executive offices) (Zip Code)
(858) 909 - 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, 2000, the Company had 3,579,615 shares of its common
stock issued and outstanding.
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE>
FOTOBALL USA, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of June 30, 2000 and
December 31, 1999 3
Condensed Statements of Operations for the three months
and six months ended June 30, 2000 and 1999 4
Condensed Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 5
Notes to Condensed Financial Statements 6 - 8
Item 2. Management's Discussion and Analysis or
Plan of Operations 9 - 17
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 1,796,209 $ 3,797,918
Accounts receivable less allowances of $183,372 at
June 30, 2000 and $250,000 at December 31, 1999 4,033,775 3,713,015
Receivable - other 754,517 --
Inventories 4,569,831 4,105,675
Prepaid expenses and other 523,868 253,659
Deferred income taxes 661,000 661,000
------------ ------------
TOTAL CURRENT ASSETS 12,339,200 12,531,267
------------ ------------
PROPERTY AND EQUIPMENT, net 1,247,374 1,263,626
------------ ------------
OTHER ASSETS
Deposits and other 264,742 29,985
------------ ------------
TOTAL OTHER ASSETS 264,742 29,985
------------ ------------
$ 13,851,316 $ 13,824,878
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital leases $ 121,731 $ 135,197
Accounts payable and accrued expenses 1,319,671 1,671,035
Income taxes payable 164,789 158,185
------------ ------------
TOTAL CURRENT LIABILITIES 1,606,191 1,964,417
CAPITAL LEASES, net of current portion 215,730 271,740
------------ ------------
TOTAL LIABILITIES 1,821,921 2,236,157
------------ ------------
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 - 3,578,616 shares issued as of
June 30, 2000 and 3,566,536 shares issued as of
December 31, 1999 35,786 35,665
Additional paid-in capital 11,666,619 11,636,471
Accumulated earnings (deficit) 326,990 (83,415)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,029,395 11,588,721
------------ ------------
$ 13,851,316 $ 13,824,878
============ ============
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 3 of 19
<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ -----------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 7,076,128 $ 6,281,210 $13,010,276 $11,874,559
COST OF SALES 4,409,325 3,826,838 8,204,377 7,267,547
----------- ----------- ----------- -----------
GROSS PROFIT 2,666,803 2,454,372 4,805,899 4,607,012
----------- ----------- ----------- -----------
OPERATING EXPENSES
Royalties 502,061 412,357 868,673 882,153
Marketing 796,529 586,217 1,568,457 1,204,865
General and administrative 846,161 790,561 1,530,039 1,357,408
Depreciation and amortization 105,969 100,128 212,509 198,236
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 2,250,720 1,889,263 4,179,678 3,642,662
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 416,083 565,109 626,221 964,350
----------- ----------- ----------- -----------
OTHER (INCOME) EXPENSE
Interest expense 7,943 34,055 17,690 60,715
Interest income (26,744) (1,055) (75,479) (1,654)
----------- ----------- ----------- -----------
TOTAL OTHER (INCOME) EXPENSE (18,801) 33,000 (57,789) 59,061
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX 434,884 532,109 684,010 905,289
INCOME TAX EXPENSE 173,954 -- 273,604 90,000
----------- ----------- ----------- -----------
NET INCOME $ 260,930 $ 532,109 $ 410,406 $ 815,289
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC 3,576,415 2,739,117 3,573,913 2,722,028
=========== =========== =========== ===========
DILUTED 3,730,810 2,992,056 3,753,554 2,961,260
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
BASIC $ .07 $ .19 $ .11 $ .30
===== ===== ===== =====
DILUTED $ .07 $ .18 $ .11 $ .28
===== ===== ===== =====
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 4 of 19
<PAGE>
FOTOBALL USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
2000 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 410,406 $ 815,289
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 212,509 206,080
Amortization of stock compensation expense 8,212 15,019
Changes in operating assets and liabilities:
Accounts receivable (320,760) (926,846)
Receivable - other (754,517) --
Inventories (464,156) (663,462)
Prepaid expenses and other (270,208) (189,909)
Deferred income taxes -- 90,000
Accounts payable and accrued expenses (351,363) (55,439)
Income taxes payable 6,604 (39,800)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (1,523,273) (749,068)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (196,258) (197,267)
Change in long-term deposits (234,757) 1,380
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (431,015) (195,887)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of capital lease obligations (69,476) (66,546)
Proceeds from exercise of stock options 22,055 139,315
Net additions to short-term credit facilities -- 1,100,000
---------- ----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (47,421) 1,172,769
---------- ----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (2,001,709) 227,814
CASH AND EQUIVALENTS, Beginning of period 3,797,918 8,498
---------- ----------
CASH AND EQUIVALENTS, End of period $1,796,209 $ 236,312
========== ==========
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 5 of 19
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
1. CONDENSED FINANCIAL STATEMENTS
The condensed balance sheet as of June 30, 2000, the condensed statements of
operations for the three months and six months ended June 30, 2000 and 1999
and the condensed statements of cash flows for the six months ended June 30,
2000 and 1999 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 are 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, 1999.
The results of operations for the three months and six months ended June 30,
2000 are not necessarily indicative of the results of operations to be
expected for any other interim period or for the year ending December 31,
2000.
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, the disclosure of contingent assets and liabilities as of
the date of the financial statements, as well as 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, allowance for doubtful accounts, bonuses and the provision for
discontinued 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, likeness and
other identifying marks and images borne by many of its products, pursuant
to license arrangements with numerous licensors. The Company's material
licenses are with Major League Baseball and the National Football League. To
a lesser extent, other licensors include the National Hockey League, over
300 NCAA colleges and universities, Coca-Cola, Warner Bros. Looney Tunes(R)
and Scooby-Doo, MTV Networks' (Nickelodeon) "Rugrats" and "Blues Clues"
characters, United Media "Peanuts", Disney's ESPN(R), Saban Merchandising,
Inc.'s "Digimon: Digital MonstersTM" and the United States Professional
Softball League. The Company's licensing arrangements expire at various
times in the future. The Company may acquire additional licenses for new
product lines; however, there can be no assurance that the Company will be
successful in obtaining new licenses. The non-renewal or termination of one
of the Company's current material licenses with MLB or the NFL could have a
material adverse effect on the Company's business as a whole.
Page 6 of 19
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (CONTINUED)
The Company signed a new license agreement in June 2000 with Saban
Merchandising, Inc. to produce sporting goods for "Digimon: Digital
MonstersTM", including playground balls, basketballs, baseballs, footballs
and sports sets. The Company began shipping during the period ended June 30,
2000. In addition, the Company signed a new license agreement in July 2000
with the newly created United States Professional Softball League. The
Company will be the exclusive supplier of USPSL Official Game Balls, in
addition to creating a line of souvenir softballs for the league with 24
teams located throughout the United States. The inaugural season will begin
April 6, 2001.
VARIABILITY OF GROSS MARGINS - The Company realized gross margins of 38% for
the three months ended June 30, 2000, a decrease from 39% during the prior
year period. The Company's gross margins may fluctuate, particularly between
quarters, based in part on the concentration of promotions, retail sales and
product mix during the reporting period. The types of products sold, the
size of the promotion and the extent of competition also may create
variability in realized gross margins.
VARIABILITY OF OPERATING RESULTS; SEASONALITY - 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 sporting industry and the effect this has on the
Company's licensed sports product business. The continued introduction of
quality product lines involving a diverse group of sports and
entertainment-related products helps mitigate this seasonality. The second
factor, which significantly contributed to prior years' variability of the
Company's operations, was its dependence on the promotions business.
However, the Company has successfully grown the retail distribution channel
of the business to help mitigate this variability. The Company's retail and
promotions business for the three months ended June 30, 2000 accounted for
approximately 93% and 7%, respectively, of total sales.
CONCENTRATION ON RETAIL SALES AND KEY CUSTOMERS - Retail sales were 93% of
total sales for the three months ended June 30, 2000, as compared to 76% of
total sales for the three months ended June 30, 1999. Two large customers
accounted for approximately 17% and 12%, respectively, of total sales for
the three months ended June 30, 2000, and one customer accounted for
approximately 14% of total sales in the three months ended June 30, 1999.
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 10, 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 could 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.
Page 7 of 19
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (CONTINUED)
DEPENDENCE ON SUPPLIERS - In 1999, the Company purchased approximately 88%
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 78% 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 primarily 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:
June 30, 2000 December 31, 1999
------------- -----------------
Finished goods $ 2,678,740 $2,382,025
Raw material 1,891,091 1,723,650
---------- ----------
Total inventory $4,569,831 $4,105,675
========== ==========
Page 8 of 19
<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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 7,076,128 100% $ 6,281,210 100% $13,010,276 100% $11,874,559 100%
Cost of Sales 4,409,325 62 3,826,838 61 8,204,377 63 7,267,547 61
Operating Expenses 2,250,720 32 1,889,263 30 4,179,678 32 3,642,662 31
Operating Income 416,083 6 565,109 9 626,221 5 964,350 8
Interest Expense 7,943 -- 34,055 1 17,690 -- 60,715 1
Interest Income (26,744) -- (1,055) -- (75,479) -- (1,654) --
Income Before Income Tax 434,884 6 532,109 8 684,010 5 905,289 8
Income Tax Expense 173,954 2 -- -- 273,604 2 90,000 1
Net Income $ 260,930 4% $ 532,109 8% $ 410,406 3% $ 815,289 7%
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999:
SALES:
Sales increased $.8 million, or 13%, for the three months ended June
30, 2000 from sales for the three months ended June 30, 1999. The growth in
sales was due to an increase in retail sales of $1.8 million, or 37%, offset by
a decline in promotion sales of $1.0 million, or 66%, as compared to the prior
year period. During the quarter, the Company realized product sales increases in
soccer/volleyballs (197%), playground balls (181%) and lapel pins (78%), with
offsetting declines in basketballs (-30%) and baseballs (-12%) attributed
primarily to the decrease in the Company's promotions business, as further
discussed below.
Retail sales were 93% of total sales for the three months ended June
30, 2000 compared to 76% for the three months ended June 30, 1999. The increase
in retail sales was primarily due to increased sales in each product line
category over the prior year period. Contributing also to the rapid retail sales
growth are national account sales, which are expanding both in sales per retail
store and the number of retail stores serviced, including additional
merchandising space per retail store. Additionally, the Company's team business
experienced 18% growth during the second quarter of 2000 over the prior year
period. While no assurances can be made, several factors support continued
retail sales growth in the future, including expanding penetration into national
retailers and the leveraging of existing and new licensed properties, such as
Saban Merchandising, Inc.'s "Digimon: Digital MonstersTM", Warner Bros. Looney
Tunes and Scooby-Doo, Coca-Cola, Nickelodeon's "Rugrats" and "Blues Clues"
characters and the United States Professional Softball League ("USPSL"). The
Company intends to pursue new licenses and create additional product lines based
on those licenses to broaden the scope of the Company's business.
Page 9 of 19
<PAGE>
Promotion sales were 7% of total sales for the three months ended June
30, 2000 compared to 24% for the three months ended June 30, 1999. Although
reducing its dependence upon promotion sales, the Company will continue to
pursue its objective of expanding its promotions business and its contribution
to operating profits. These strategies will include leveraging its relationships
with its existing licensors to secure promotions with companies who sponsor
sports related organizations, in addition to obtaining new licensing
opportunities.
GROSS PROFIT:
Gross profit increased $.2 million, or 9%, for the three months ended
June 30, 2000 from gross profit for the three months ended June 30, 1999. Gross
profit as a percentage of sales decreased to 38% for the three months ended June
30, 2000 from 39% for the three months ended June 30, 1999. The decline in the
Company's gross margins as a percentage of sales can be attributed primarily to
product mix and special pricing to increase penetration in the retail channel.
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 EXPENSES:
Total operating expenses increased less than $.4 million, or 19%, for
the three months ended June 30, 2000 from total operating expenses for the three
months ended June 30, 1999. Total operating expenses increased to 32% as a
percentage of sales as of June 30, 2000 from 30% as of June 30, 1999. The
Company anticipates that total operating expenses will increase in absolute
terms and as a percentage of sales in 2000 primarily due to the expansion of the
Company's infrastructure and relocation effective August 2000.
Royalty expenses increased $.09 million, or 22%, for the three months
ended June 30, 2000 from royalty expenses for the three months ended June 30,
1999 due primarily to the overall increase in sales. Royalty expenses as a
percentage of sales remained constant at 7% for the three months ended June 30,
2000 and June 30, 1999. As previously noted, the Company is dependent upon its
licensing arrangements and their successful renewal (See Footnote 2, "Notes to
Condensed Financial Statements"). To broaden the Company's scope of product
lines and expand market share, the Company will continue to pursue additional
license agreements with various organizations and licensors in the future.
Marketing expenses increased $.2 million, or 36%, for the three months
ended June 30, 2000 from marketing expenses for the three months ended June 30,
1999. Marketing expenses as a percentage of sales increased to 11% of sales for
the three months ended June 30, 2000 from 9% of sales for the three months ended
June 30, 1999. These increases are primarily due to an increase in personnel and
salary-related items, cooperative advertising allowances as the Company
increases its penetration of the number of mass merchants and product sample
expenses as the Company has expanded its product lines to increase sales and
promote industry recognition. The Company anticipates that marketing expenses
will increase in absolute terms and as a percentage of sales in 2000, reflecting
increases in both variable and fixed costs.
Page 10 of 19
<PAGE>
General and administrative expenses increased $.06 million, or 7%, for
the three months ended June 30, 2000 from general and administrative expenses
for the three months ended June 30, 1999. General and administrative expenses as
a percentage of sales decreased to 12% for the three months ended June 30, 2000
from 13% for the three months ended June 30, 1999 due primarily to an increase
in overall sales. The Company anticipates that general and administrative
expenses will continue to increase in absolute terms and as a percentage of
sales in 2000, primarily as a result of the Company's infrastructure expansion
throughout the year, including its relocation to a new facility as discussed
further in "Liquidity and Capital Resources".
OTHER INCOME (EXPENSE):
Interest expense decreased $.02 million, or 77%, for the three months
ended June 30, 2000 from interest expense for the three months ended June 30,
1999. This decrease reflects no borrowings against the Company's line of credit
throughout the quarter as a result of a higher average cash balance available
during the period in 2000. There were no outstanding borrowings under the line
of credit as of June 30, 2000, compared to $1.5 million as of June 30, 1999.
Total capitalized equipment and machinery lease liabilities were $337,461 as of
June 30, 2000 compared to $430,360 as of June 30, 1999, reflecting a 22%
decrease in the Company's notes payable, as some of the original lease
agreements have been fulfilled, thereby lowering interest expense.
Interest income increased less than $.03 million for the three months
ended June 30, 2000, as compared to interest income for the three months ended
June 30, 1999. This increase is due to the Company's average cash balances
available for investment being substantially higher in 2000 as compared to 1999,
primarily from the proceeds received from warrant exercises last year, as more
fully explained in "Liquidity and Capital Resources" below. Excess cash is
deposited into an interest-bearing depository account.
INCOME TAX EXPENSE:
Income tax expense was $173,954 for the three months ended June 30,
2000, an effective tax rate of 40%, compared to no income tax expense for the
prior year period. Had the Company been taxed at a combined federal and state
effective tax rate of 40% in 1999, then earnings per share would have been as
follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Income before income taxes $ 434,884 $ 532,109
Proforma Income tax expense @ 40% 173,954 212,844
--------- ---------
Proforma Net Income $ 260,930 $ 319,265
========= =========
Proforma Diluted Earnings per Share $ .07 $ .11
===== =======
</TABLE>
Page 11 of 19
<PAGE>
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999:
SALES:
Sales increased $1.1 million, or 10%, for the six months ended June 30,
2000 from sales for the six months ended June 30, 1999. The growth in sales was
due to an increase in retail sales of $2.9 million, or 31%, offset by a decline
in promotion sales of $1.7 million, or 68%, as compared to the prior year
period. During the six months ended June 30, 2000, the Company realized product
sales increases in soccer/volleyballs (215%), playground balls (162%) and lapel
pins (66%), with offsetting declines in footballs (-15%) and baseballs (-14%)
attributed primarily to the decrease in the Company's promotions business, as
further discussed below.
Retail sales were 94% of total sales for the six months ended June 30,
2000 compared to 79% for the six months ended June 30, 1999. The increase in
retail sales was primarily due to increased sales in each product line category
over the prior year period. Contributing also to the rapid retail sales growth
are national account sales, which are expanding both in sales per retail store
and the number of retail stores serviced, including additional merchandising
space per retail store. Additionally, the Company's team business experienced
25% growth during the first six months of 2000 over the prior year period.
Promotion sales were 6% of total sales for the six months ended June
30, 2000 compared to 21% for the six months ended June 30, 1999. Although
reducing its dependence upon promotion sales, the Company will continue to
pursue its objective of expanding its promotions business and its contribution
to operating profits. These strategies will include leveraging its relationships
with its existing licensors to secure promotions with companies who sponsor
sports related organizations, in addition to obtaining new licensing
opportunities.
GROSS PROFIT:
Gross profit increased $.2 million, or 4%, for the six months ended
June 30, 2000 from gross profit for the six months ended June 30, 1999. Gross
profit as a percentage of sales decreased to 37% for the six months ended June
30, 2000 from 39% for the six months ended June 30, 1999. The decline in the
Company's gross margins as a percentage of sales can be attributed primarily to
product mix and special pricing to increase penetration in the retail channel.
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 EXPENSES:
Total operating expenses increased $.5 million, or 15%, for the six
months ended June 30, 2000 from total operating expenses for the six months
ended June 30, 1999. Total operating expenses increased to 32% as a percentage
of sales as of June 30, 2000 from 31% as of June 30, 1999. The Company
anticipates that total operating expenses will increase in absolute terms in
2000 primarily due to the expansion of the Company's infrastructure.
Page 12 of 19
<PAGE>
Royalty expenses decreased $.01 million, or 2%, for the six months
ended June 30, 2000 from royalty expenses for the six months ended June 30,
1999. Royalty expenses as a percentage of sales remained constant at 7% of sales
for the six months ended June 30, 2000 and for the six months ended June 30,
1999. The stability in royalty expense as a percentage of sales is primarily due
to the mix of non-royalty bearing sales increases in 2000 compared to 1999, as
the Company's entertainment business increased 9% from the prior year period,
offset by the growth in the Company's retail business which is royalty bearing.
As previously noted, the Company is dependent upon its licensing arrangements
and their successful renewal (See Footnote 2, "Notes to Condensed Financial
Statements"). To broaden the Company's scope of product lines and expand market
share, the Company will continue to pursue additional license agreements with
various organizations and licensors in the future.
Marketing expenses increased less than $.4 million, or 30%, for the six
months ended June 30, 2000 from marketing expenses for the six months ended June
30, 1999. Marketing expenses as a percentage of sales increased to 12% of sales
for the six months ended June 30, 2000 from 10% of sales for the six months
ended June 30, 1999. These increases are primarily due to an increase in
personnel and salary-related items, cooperative advertising allowances as we
increase penetration of the number of mass merchants and product sample expenses
as the Company has expanded its product lines to increase sales and promote
industry recognition. The Company anticipates that marketing expenses will
increase in absolute terms in 2000, reflecting increases in both variable and
fixed costs due to the Company's expansion.
General and administrative expenses increased less than $.2 million, or
13%, for the six months ended June 30, 2000 from general and administrative
expenses for the six months ended June 30, 1999. General and administrative
expenses as a percentage of sales increased to 12% for the six months ended June
30, 2000 from 11% for the six months ended June 30, 1999. The Company
anticipates that general and administrative expenses will continue to increase
in absolute terms in 2000 primarily as a result of the Company's infrastructure
expansion throughout the year, including its relocation to a new facility as
discussed further in "Liquidity and Capital Resources".
OTHER INCOME (EXPENSE):
Interest expense decreased $.04 million, or 71%, for the six months
ended June 30, 2000 from interest expense for the six months ended June 30,
1999. This decrease reflects no borrowings against the Company's line of credit
throughout the first six months as a result of a higher average cash balance
available during the period in 2000. There were no outstanding borrowings under
the line of credit as of June 30, 2000, compared to $1.5 million as of June 30,
1999.
Interest income increased $.07 million for the six months ended June
30, 2000, as compared to interest income for the six months ended June 30, 1999.
This increase is due to the Company's average cash balances available for
investment being substantially higher in 2000 as compared to 1999, primarily
from the proceeds received from warrant exercises last year, as more fully
explained in "Liquidity and Capital Resources" below. Excess cash is deposited
into an interest-bearing depository account.
Page 13 of 19
<PAGE>
INCOME TAX EXPENSE:
Income tax expense was $273,604 for the six months ended June 30, 2000,
an effective tax rate of 40%, as compared to income tax expense of $90,000, or
24%, for the prior year period. The deferred tax asset of $90,000 at December
31, 1998 was eliminated and recognized as income tax expense during the first
six months of 1999. Had the Company been taxed at a combined federal and state
effective tax rate of 40% in 1999, then earnings per share would have been as
follows:
June 30, 2000 June 30, 1999
------------- -------------
Income before income taxes $ 684,010 $ 905,289
Proforma Income tax expense @ 40% 273,604 362,116
--------- ---------
Proforma Net Income $ 410,406 $ 543,173
========= =========
Proforma Diluted Earnings per Share $ .11 $ .18
===== =======
Page 14 of 19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
Cash and equivalents aggregated $1.8 million at June 30, 2000, a
decrease of $2.0 million from cash and equivalents of $3.8 million at December
31, 1999. This decrease in cash was the result of a 50% decrease in net income
from the prior year period and other increases in assets. Specifically,
increases of $.3 million in accounts receivable, $.8 million in
receivable-other, $.5 million in inventory, $.3 million in prepaid assets and a
decrease of $.4 million in accounts payable and accrued expenses. 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 and to the overall increase in
sales. The increase in receivable-other represents prepaid improvements in
accordance with the new building lease at 6740 Cobra Way, which will be
reimbursed as discussed further below. The increase in inventory is due in part
to an increase in the number of products offered to expand existing and new
licenses and to growth in the retail business requiring on-hand inventory items,
as retail orders are generally fulfilled in one to four weeks. Prepaid assets
increased due primarily to annual insurance renewals and advanced royalties.
Accounts payable and accrued expenses decreased primarily due to payments made
in 2000 for bonuses and royalties accrued in 1999. The cash balance at December
31, 1999 also included a portion of the $2.6 million of net proceeds from the
exercise of warrants as further discussed below.
The Company will also utilize cash resources of approximately $1.0
million for the acquisition of non-current assets, including property, equipment
and improvements during 2000. The Company anticipates that its capital
expenditure requirements for the last six months of 2000 will approximate $.5
million, which will be used to purchase additional office and computer equipment
due to the Company's expansion. Of the $.5 million, $.25 million will be
financed via a term loan agreement with Scripps Bank as discussed further below.
The Company also anticipates non-reimbursable improvements at 6740 Cobra Way of
approximately $.5 million, which the Company expects to be funded primarily
through external financing.
The Company's net working capital increased approximately $.2 million
from December 31, 1999 to June 30, 2000, to a net working capital surplus of
$10.7 million at June 30, 2000 from a net working capital surplus of $10.6
million at December 31, 1999.
In March 2000, the Company executed a lease, including headquarter and
warehousing space, consisting of approximately 101,000 square feet at 6740 Cobra
Way, San Diego, California 92121. The space is being leased from an unaffiliated
party, which provides for a 123-month term commencing in August 2000, with two
five-year option periods. Monthly rent is $79,500 per month, with 5% fixed
increases to occur every two years. A security deposit of $.2 million and first
month's rent of $79,500 was paid to the landlord in March 2000. The Company will
receive a three-month rent credit during its first three months of occupancy and
has received certain other improvement allowances from the landlord. All
improvements must be paid in advance by the Company and reimbursed by the
landlord. The Company's cash outlay for improvements was $.8 million as of June
30, 2000 and is expected to be reimbursed in the third quarter. In addition, the
Company expects additional improvements of approximately $.5 million, which are
not reimbursable and will be funded primarily through external financing. The
Company anticipates the new premises will meet its space requirements for the
foreseeable future. The Company terminated its lease commitments at 3738 Ruffin
Road and 4000 Ruffin Road effective July 31, 2000 without any penalties and does
not expect to incur any additional material expenses associated with such
termination.
Page 15 of 19
<PAGE>
At June 30, 2000, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $1.4 million in the aggregate
through 2003, of which $0.2 million is due at various times during 2000. Based
upon the net income realized by the Company during the first six months of 2000
and the expectation of continuing increases in its retail business, management
expects these guaranteed royalties to be funded from operating cash flows.
On June 24, 1999, the Company announced that it reduced the exercise
price of its publicly traded redeemable common stock purchase warrants from
$6.50 to $4.00 and extended the term of the warrants to August 27, 1999. During
the special exercise price period of June 24, 1999 through August 27, 1999,
warrantholders who exercised each warrant for $4.00 received one share of
Fotoball common stock. When the special exercise period expired at the close of
business on August 27, 1999, the unexercised warrants expired in accordance with
its terms. A total of 686,167 warrants, or 49%, of the total warrants originally
issued and outstanding were exercised on or before August 27, 1999. Gross
proceeds received by the Company in the offering were $2.7 million (solicitation
fees and other costs associated with the offering were approximately $.1 million
as of December 31, 1999). Net proceeds received by the Company have been
retained for working capital purposes to finance the Company's continued growth
in all areas and possible acquisitions. Separately, 22,000 shares of common
stock were issued to the underwriter of the Company's initial public offering in
a cash-free, negotiated transaction.
In April 2000, the Company amended and renewed a one-year credit
agreement with Scripps Bank, increasing the amount of the credit line to $4.0
million from $3.5 million under the previous agreement. The line of credit 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 prime rate, which was reduced from the prior agreement
at prime rate plus .75%. The credit line contains financial covenants requiring
the Company to maintain minimum net worth levels, minimum working capital and
current ratios, and a maximum debt to equity ratio. Total advances are
restricted to 80% of eligible accounts receivable plus 15% of eligible
inventory, as specifically defined in the agreement. The credit line expires
April 15, 2001. There were no borrowings under the line of credit as of June 30,
2000 compared to $1.5 million at June 30, 1999.
In June 2000, the Company signed a loan advance agreement with Scripps
Bank effective June 13, 2000 through September 20, 2000. The Company may submit
capital expenditures up to $250,000 to finance under the agreement at an
interest rate of 9.5% per annum. Once the final balance has been submitted, a
48-month term loan originates with three (3) monthly interest payments beginning
July 20, 2000, followed by 48 monthly payments beginning October 20, 2000 in a
monthly payment necessary to fully amortize the loan balance owing on September
20, 2000. The credit line is collateralized by the assets purchased under the
agreement.
The Company has a $3.0 million 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 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, 2000 and 1999.
Page 16 of 19
<PAGE>
Management believes the Company's existing cash position and 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
2000.
CAUTIONARY STATEMENTS 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 statements
concerning the Company's outlook for 2000, its ability to realize increasing
profitability in 2000, 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 2000,
the Company's ability to consummate strategic acquisitions, the Company's
ability to renew expiring license agreements 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 are subject to risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by the statements.
Page 17 of 19
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on May 9,
2000 at the Sheraton Four Points Hotel located at 8110 Aero Drive, San Diego,
California. The matters considered at the meeting consisted of the following:
The election of two (2) Class III directors to serve for a term of
three years and until their successor is elected and qualified. The results of
the voting were as follows:
NOMINEE FOR AGAINST TOTAL VOTES
------- --- ------- -----------
John J. Shea 3,230,274 17,940 3,248,214
Michael Favish 3,234,174 14,040 3,248,214
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.10(4) Loan Advance Agreement dated June 13, 2000 between
Fotoball USA, Inc. and Scripps Bank.
27 Financial Data Schedule
(b) Reports on Form 8-K for the three months ended June 30, 2000 -
None
Page 18 of 19
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOTOBALL USA, INC
-----------------------------------------
(Registrant)
Dated: August 11, 2000 BY: /s/ Michael Favish
-------------------------------------
Michael Favish
President and Chief Executive Officer
Dated: August 11, 2000 BY: /s/ Thomas R. Hillebrandt
-------------------------------------
Thomas R. Hillebrandt
Vice President - Finance
(Principal Accounting Officer)
Page 19 of 19
