<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 September 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
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FOTOBALL USA, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 33 - 0614889
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6740 Cobra Way, San Diego, California 92121
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(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 November 1, 2000, the Company had 3,715,669 shares of its common
stock issued and outstanding.
Transitional Small Business Disclosure Format Yes No X
--- ---
See accompanying Notes to Condensed Financial Statements
Page 1 of 19
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FOTOBALL USA, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 2000 and
December 31, 1999 3
Condensed Statements of Operations for the three months
and nine months ended September 30, 2000 and 1999 4
Condensed Statements of Cash Flows for the nine months
ended September 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 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
See accompanying Notes to Condensed Financial Statements
Page 2 of 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 1,614,154 $ 3,797,918
Accounts receivable less allowances of $175,410 at September 30, 2000 and
$250,000 at December 31, 1999 4,340,226 3,713,015
Receivable - other 639,293 --
Inventories 4,609,201 4,105,675
Prepaid expenses and other 501,053 253,659
Deferred income taxes 661,000 661,000
------------ ------------
TOTAL CURRENT ASSETS 12,364,927 12,531,267
------------ ------------
PROPERTY AND EQUIPMENT, net 2,326,055 1,263,626
------------ ------------
OTHER ASSETS
Deposits and other 252,767 29,985
------------ ------------
TOTAL OTHER ASSETS 252,767 29,985
------------ ------------
$ 14,943,749 $ 13,824,878
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of capital leases $ 113,033 $ 135,197
Current portion of long term debt 53,927 --
Accounts payable and accrued expenses 2,152,505 1,671,035
Income taxes payable 8,582 158,185
------------ ------------
TOTAL CURRENT LIABILITIES 2,328,047 1,964,417
CAPITAL LEASES, net of current portion 227,180 271,740
LONG TERM DEBT, net of current portion 196,073 --
OTHER LIABILITIES 157,552 --
------------ ------------
TOTAL LIABILITIES 2,908,852 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 - 3,579,092 shares issued as of September
30, 2000 and 3,566,536 shares issued as of December 31, 1999 35,790 35,665
Additional paid-in capital 11,671,097 11,636,471
Accumulated earnings (deficit) 328,010 (83,415)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 12,034,897 11,588,721
------------ ------------
$ 14,943,749 $ 13,824,878
============ ============
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 3 of 19
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FOTOBALL USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
SALES $ 7,097,750 $ 9,797,852 $20,108,026 $ 21,672,411
COST OF SALES 4,538,861 5,754,368 12,743,238 13,021,915
----------- ----------- ----------- ------------
GROSS PROFIT 2,558,889 4,043,484 7,364,788 8,650,496
----------- ----------- ----------- ------------
OPERATING EXPENSES
Royalties 605,354 693,476 1,474,027 1,575,629
Marketing 743,688 929,832 2,312,144 2,134,697
General and administrative 984,934 1,292,774 2,514,972 2,650,182
Depreciation and amortization 113,227 102,012 325,737 300,248
Loss from the sale of equipment 125,518 -- 125,518 --
----------- ----------- ----------- ------------
TOTAL OPERATING EXPENSES 2,572,721 3,018,094 6,752,398 6,660,756
----------- ----------- ----------- ------------
INCOME FROM OPERATIONS (13,832) 1,025,390 612,390 1,989,740
----------- ----------- ----------- ------------
OTHER (INCOME) EXPENSE
Interest expense 11,486 47,394 29,176 108,109
Interest income (27,017) (7,473) (102,496) (9,127)
----------- ----------- ----------- ------------
TOTAL OTHER (INCOME) EXPENSE (15,531) 39,921 (73,320) 98,982
----------- ----------- ----------- ------------
INCOME BEFORE INCOME TAX 1,699 985,469 685,710 1,890,758
INCOME TAX EXPENSE 680 (316,000) 274,284 (226,000)
----------- ----------- ----------- ------------
NET INCOME $ 1,019 $ 1,301,469 $ 411,425 $ 2,116,758
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
BASIC 3,578,616 3,048,724 3,566,536 2,832,682
=========== =========== =========== ===========
DILUTED 3,715,669 3,254,832 3,744,000 3,024,993
=========== =========== =========== ===========
NET INCOME PER COMMON SHARE
BASIC $ .00 $ .43 $ .11 $ .75
===== ===== ===== =====
DILUTED $ .00 $ .40 $ .11 $ .70
===== ===== ===== =====
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 4 of 19
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FOTOBALL USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 411,425 $ 2,116,758
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 325,736 320,996
Loss on Sale of Equipment 125,518 --
Amortization of stock compensation expense 11,992 25,816
Provision for allowance accounts 100 --
Changes in operating assets and liabilities:
Accounts receivable (627,211) (1,922,136)
Accounts receivable other (620,859) --
Inventories (503,526) (378,872)
Prepaid expenses and other (265,827) (141,258)
Deferred income taxes -- (704,000)
Deferred rent 157,552 --
Accounts payable and accrued expenses 452,936 654,614
Income taxes payable (121,068) (61,800)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (653,232) (89,882)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,602,684) (492,321)
Change in long-term deposits (222,782) 1,582
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,825,466) (490,739)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of capital lease obligations 22,176 146,041
Proceeds from long term debt 250,000 --
Proceeds from exercise of stock options 22,758 148,034
Proceeds from warrant exercise -- 2,673,635
Net additions to short-term credit facilities -- (400,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 294,934 2,567,740
----------- -----------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (2,183,764) 1,987,089
CASH AND EQUIVALENTS, Beginning of period 3,797,918 8,498
----------- -----------
CASH AND EQUIVALENTS, End of period $ 1,614,154 $ 1,995,587
=========== ===========
</TABLE>
See accompanying Notes to Condensed Financial Statements
Page 5 of 19
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FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. CONDENSED FINANCIAL STATEMENTS
------------------------------
The condensed balance sheet as of September 30, 2000, the condensed
statements of operations for the three months and nine months ended
September 30, 2000 and 1999 and the condensed statements of cash flows for
the nine months ended September 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 nine months ended
September 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (CONTINUED)
VARIABILITY OF GROSS MARGINS - The Company realized gross margins of 36%
for the three months ended September 30, 2000, a decrease from 41% 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, sales direct to licensors 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. The Company currently relies on the retail sales channel for most
of its revenue. The retail channel is very competitive and price sensitive
for certain of the Company's products and there is no guarantee that the
Company will not be required to reduce prices in the future to remain
competitive in the marketplace. Such price reductions could lead to lower
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 September 30, 2000 accounted
for approximately 90% and 10%, respectively, of total sales.
CONCENTRATION ON RETAIL SALES AND KEY CUSTOMERS - Retail sales were 90% of
total sales for the three months ended September 30, 2000, as compared to
88% of total sales for the three months ended September 30, 1999. One large
customer accounted for approximately 18% of total sales for the three
months ended September 30, 2000, and one customer accounted for
approximately 38% of total sales in the three months ended September 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.
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
Page 7 of 19
<PAGE>
FOTOBALL USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (CONTINUED)
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:
September 30, 2000 December 31, 1999
------------------ -----------------
Finished goods $ 2,913,091 $2,382,025
Raw material 1,696,109 1,723,650
----------- ----------
Total inventory $ 4,609,200 $4,105,675
=========== ==========
Page 8 of 19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATIONS
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 involve risks,
uncertainties and assumptions that, if they never materialize or prove
incorrect, could cause the results of the Company to differ materially from
those expressed or implied by such forward-looking statements. All
statements other than statements of historical fact are forward-looking
statements, including statements regarding, expanding the promotions
business, expanding retail capabilities, adding product lines, adding new
license properties, overall sales trends, gross margin trends, operating
cost trends, the Company's expectations as to funding its capital
expenditures and operations during 2000, 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 risks,
uncertainties and assumptions referred to above include the Company's
inability to obtain new licenses, expanding its retail capabilities and the
risk factors listed in the "Disclosure of Certain Significant Risks and
Uncertainties" in this report and as listed from time to time in the
Company's filings with the Securities and Exchange Commission including but
not limited to, the annual report on From 10-KSB for the year ended
December 31, 1999 and the quarterly report on Forms 10-QSB for the quarters
ended March 31, 2000 and June 30, 2000.
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $7,097,750 100% $9,797,852 100% $20,108,026 100% $ 21,672,411 100%
Cost of Sales 4,538,861 64 5,754,368 59 12,743,238 63 13,021,915 60
Operating Expenses 2,572,721 36 3,015,094 31 6,752,398 34 6,660,756 31
Operating Income (13,832) -- 1,028,390 10 612,390 3 1,989,740 9
Interest Expense 11,486 -- 47,394 -- 29,176 -- 108,109 --
Interest Income (27,017) -- (7,473) -- (102,496) 1 (9,127) --
Income Before Income Tax 1,699 -- 985,469 10 685,710 3 1,890,758 9
Income Tax Expense 680 -- (316,000) (3) 274,284 1 (226,000) 1
Net Income $ 1,019 -- $1,301,469 13% $ 411,425 2% $ 2,116,758 10%
</TABLE>
Page 9 of 19
<PAGE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999:
SALES:
Sales decreased $2.7 million, or 28%, for the three months ended September
30, 2000 from sales for the three months ended September 30, 1999. The decline
in sales was due to a decrease in entertainment sales of $2.5 million, or 58%, a
decline in promotion sales of $.4 million, or 33%, offset by an increase in
college sales of $.2 million or 49% as compared to the prior year period. During
the quarter, the Company realized product sales increases in soccer/volleyballs
(26%), playground balls (258%) and coins (100%), with offsetting declines in
basketballs (-19%), baseballs (-40%), footballs (-13%) and lapel pins (-93%).
Retail sales were $6.4 million, or 90%, of total sales for the three months
ended September 30, 2000 compared to $8.8 million, or 89%, for the three months
ended September 30, 1999. The decrease in retail sales was primarily due to a
decrease in entertainment retail sales which were down (-58%) from the prior
year period. The decrease in entertainment retail sales related to a 93%
decrease in lapel pin sales from one of the Company's largest customers. The
Company's college retail sales, which experienced 49% growth during the third
quarter of 2000 over the prior year period offset some of the decrease in
entertainment retail sales. The Company intends to pursue new licenses and
create additional product lines based on existing licenses to broaden the scope
of the Company's business.
Promotion sales were 10% of total sales for the three months ended
September 30, 2000 constant when compared to the three months ended September
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 decreased $1.5 million, or 37%, for the three months ended
September 30, 2000 from gross profit for the three months ended September 30,
1999. Gross profit as a percentage of sales decreased to 36% for the three
months ended September 30, 2000 from 41% for the three months ended September
30, 1999. The decline in the Company's gross margins as a percentage of sales
can be attributed primarily to product mix including a decrease in lapel pin
sales from the prior year, which carried higher than average gross margins and
an increase in playground and soccer balls in the current period which sell at
lower margins than some of the Company's other products. 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 decreased $.5 million, or 15%, for the three
months ended September 30, 2000 from total operating expenses for the three
months ended September 30, 1999. Total operating expenses increased to 36% as a
percentage of sales as of September 30, 2000 from 31% as of September 30, 1999.
These increases are primarily due to an increase in
Page 10 of 19
<PAGE>
personnel and salary related items, expenses incurred in moving the Company to
its new headquarters, and losses incurred from the sales of assets and
abandonment of tenant improvements at its old facilities.
Royalty expenses decreased $.09 million, or 13%, for the three months ended
September 30, 2000 from royalty expenses for the three months ended September
30, 1999 due primarily to the overall decrease in sales offset by greater mix of
royalty versus nonroyalty product sales. Royalty expenses as a percentage of
sales increased to 9% for the three months ended September 30, 2000 from 7% as
of September 30, 1999 as a result of a greater mix of royalty versus non-royalty
sales. 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 decreased $.2 million, or 20%, for the three months
ended September 30, 2000 from marketing expenses for the three months ended
September 30, 1999. Marketing expenses as a percentage of sales increased to 10%
of sales for the three months ended September 30, 2000 from 9% of sales for the
three months ended September 30, 1999. These increases are primarily due to an
increase in personnel and salary-related items, and cooperative advertising
allowances as the Company increases its penetration of the number of mass
merchants to increase sales and promote industry recognition.
General and administrative expenses decreased $.3 million, or 24%, for the
three months ended September 30, 2000 from general and administrative expenses
for the three months ended September 30, 1999. Increases in salary-related
items, facility costs, one time relocation costs and loss from the sale of
equipment as further discussed below, were offset by decreases in bad debt
expense, legal expense and bonus accruals compared to the prior year period.
General and administrative expenses as a percentage of sales were 14% for the
three months ended September 30, 2000 and 13% for the three months ended
September 30, 1999.
On July 31, 2000 the Company relocated its corporate headquarters and
manufacturing and warehouse operations to its new facility at 6740 Cobra Way,
San Diego, California. As a result of the relocation, the company incurred
relocation costs of $64,323, which are included in general and administrative
expenses, and a loss of $125,518 on the sale of equipment and write-off of
tenant improvements at the old facilities for the period ended September 30,
2000.
OTHER INCOME (EXPENSE):
Interest expense decreased $.04 million, or 75%, for the three months ended
September 30, 2000 from interest expense for the three months ended September
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 September 30, 2000, or as of September 30, 1999. Total
capitalized equipment and machinery lease liabilities were $340,211 as of
September 30, 2000 compared to $396,514 as of September 30, 1999, The decrease
in the Company's capital leases is due to the expiration of old leases, and term
loans being used to fund new equipment entered into as a result of the move into
the new corporate headquarters. As further discussed under "Liquidity and
Capital Resources" the Company entered into a term loan with its bank for
Page 11 of 19
<PAGE>
$250,000. The loan was funded at the end of the third quarter 2000 and as a
result the company did not incur material interest expense during the quarter
ended September 30, 2000.
Interest income increased $.02 million for the three months ended September
30, 2000, as compared to interest income for the three months ended September
30, 1999. This increase is due to the Company's average cash balances available
for investment being higher in 2000 as compared to 1999. See also "Liquidity and
Capital Resources" below. Excess cash is deposited into an interest-bearing
depository account.
INCOME TAX EXPENSE:
Income tax expense was $680 for the three months ended September 30, 2000,
an effective tax rate of 40% compared to an income tax benefit of ($316,000) for
the prior year period. As of September 30, 1999 the Company had deferred tax
assets of approximately $794,000 consisting primarily of valuation reserves. The
income tax benefit for the three months ended September 30, 1999, was primarily
due to the elimination of a deferred tax valuation allowance established in a
prior year for uncertainty relating to the utilization of a net operating loss
carryforward. As of September 30, 1999, the Company has utilized all of its
available net operating loss carryforward. 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:
September 30, 2000 September 30, 1999
------------------ ------------------
Income before income taxes $ 1,699 $ 985,469
Proforma Income tax expense @ 40% 680 394,188
------- ---------
Proforma Net Income $ 1,019 $ 591,281
======= =========
Proforma Diluted Earnings per Share $ .00 $ .18
======= =========
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999:
SALES:
Sales decreased $1.6 million, or 7%, for the nine months ended September
30, 2000 from sales for the nine months ended September 30, 1999. The decline in
sales was due to a decrease in promotion sales of $2 million, or 57%, offset by
an increase in retail sales of $.4 million, or 3%, as compared to the prior year
period. During the nine months ended September 30, 2000, the Company realized
product sales increases in soccer/volleyballs (137%), playground balls (186%)
and coins (100%), with offsetting declines in footballs (-14%), baseballs
(-20%), basketballs (-5%) and lapel pins (-77%).
Retail sales were 92% of total sales for the nine months ended September
30, 2000 compared to 83% for the nine months ended September 30, 1999. The
percentage increase in retail sales was primarily due to the decrease in
promotion sales. Retail sales for the nine months ended September 30, 2000
increased by 3% over the prior year period. The increase in retail sales was
primarily due to increased national account sales, which are expanding in the
number of retail stores serviced.
Page 12 of 19
<PAGE>
Promotion sales were 8% of total sales for the nine months ended September
30, 2000 compared to 17% for the nine months ended September 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 decreased $1.3 million, or 15%, for the nine months ended
September 30, 2000 from gross profit for the nine months ended September 30,
1999. Gross profit as a percentage of sales decreased to 37% for the nine months
ended September 30, 2000 from 40% for the nine months ended September 30, 1999.
The decline in the Company's gross margins as a percentage of sales can be
attributed primarily to product mix including a decrease in lapel pin sales from
the prior year, which carried higher than average gross margins and an increase
in playground and soccer balls in the current period which sell at lower margins
than some of the Company's other products. 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 $.1 million, or 1%, for the nine months
ended September 30, 2000 from total operating expenses for the nine months ended
September 30, 1999. Total operating expenses increased to 34% as a percentage of
sales as of September 30, 2000 from 31% as of September 30, 1999.
Royalty expenses decreased $.1 million, or 6%, for the nine months ended
September 30, 2000 from royalty expenses for the nine months ended September 30,
1999. Royalty expenses as a percentage of sales remained constant at 7% of sales
for the nine months ended September 30, 2000 and for the nine months ended
September 30, 1999. The stability in royalty expense as a percentage of sales is
primarily due to the relatively equal levels of retail sales, which are
generally royalty bearing. The majority of the entertainment portion of retail
sales and some of the promotions sales are non-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 $.2 million, or 8%, for the nine months ended
September 30, 2000 from marketing expenses for the nine months ended September
30, 1999. Marketing expenses as a percentage of sales increased to 11% of sales
for the nine months ended September 30, 2000 from 10% of sales for the nine
months ended September 30, 1999. These increases are primarily due to an
increase in personnel and salary-related items and cooperative advertising
allowances as we increase penetration of the number of mass merchants.
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<PAGE>
General and administrative expenses decreased $.1 million, or 5%, for the
nine months ended September 30, 2000 from general and administrative expenses
for the nine months ended September 30, 1999. Increases in salary-related items,
facility costs and one time relocation costs as further discussed above, were
offset by decreases in bad debt expense, legal expense and bonus accruals
compared to the prior year period. General and administrative expenses as a
percentage of sales increased to 13% for the nine months ended September 30,
2000 from 12% for the nine months ended September 30, 1999.
OTHER INCOME (EXPENSE):
Interest expense decreased $.08 million, or 73%, for the nine months ended
September 30, 2000 from interest expense for the nine months ended September 30,
1999. This decrease reflects no borrowings against the Company's line of credit
throughout the first nine 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 September 30, 2000 or as of September 30, 1999. As
further discussed under "Liquidity and Capital Resources" the Company entered
into a term loan with its bank for $250,000. The loan was funded at the end of
the third quarter 2000 and as a result the company did not incur material
interest expense during the nine months ended September 30, 2000.
Interest income increased $.1 million for the nine months ended September
30, 2000, as compared to interest income for the nine months ended September 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. See
"Liquidity and Capital Resources" below. Excess cash is deposited into an
interest-bearing depository account.
INCOME TAX EXPENSE:
Income tax expense was $274,284 for the nine months ended September 30,
2000, an effective tax rate of 40%, as compared to income tax benefit of
($226,000) 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:
September 30, 2000 September 30, 1999
------------------ ------------------
Income before income taxes $ 685,710 $ 1,890,758
Proforma Income tax expense @ 40% 274,284 756,303
--------- -----------
Proforma Net Income $ 411,425 $ 1,134,455
========= ===========
Proforma Diluted Earnings per Share $ .11 $ .38
========= ===========
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
Cash and equivalents aggregated $1.6 million at September 30, 2000, a
decrease of $2.2 million from cash and equivalents of $3.8 million at December
31, 1999. This decrease in cash was the result of a 81% decrease in net income
from the prior year period and other increases in assets. Specifically,
increases of $.6 million in accounts receivable, $.6 million in
receivable-other, $.5 million in inventory, $.2 million in prepaid assets and
other, and an increase 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 and prepaid
represents 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. Accounts payable and accrued expenses increased primarily due to
inclusion of building related items. 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 has also utilized cash resources of approximately $1.6 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 three months of 2000 will approximate $.1 million,
which will be used to purchase additional office and computer equipment due to
the Company's expansion. Of the $1.6 million, $.65 million will be financed
through a term loan with Scripps Bank and $.6 million will be reimbursed by the
landlord as discussed further below.
The Company's net working capital decreased approximately $.6 million from
December 31, 1999 to September 30, 2000, to a net working capital surplus of $10
million at September 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 $1.8 million as of
September 30, 2000. The landlord has reimbursed the Company $.3 million and is
expected to reimburse $.6 million in the fourth quarter. 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.
At September 30, 2000, the Company has commitments for minimum guaranteed
royalties under licensing agreements totaling $1.4 million in the aggregate
through 2003, of
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<PAGE>
which $.2 million is due at various times during 2000. Based upon the net income
realized by the Company during the first nine 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 September 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 September 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
September 30, 2000 or at September 30, 1999.
In June 2000, the Company signed a term loan agreement with Scripps Bank
with a loan advance period effective June 13, 2000 through September 20, 2000.
The Company was allowed to submit capital expenditures for property and
equipment up to $250,000 to finance under the agreement at an interest rate of
9.5% per annum. The Company funded the loan for $250,000 on September 1, 2000.
Once the loan was funded, a 48-month term loan originated with one (1) monthly
interest payment on September 20, 2000, followed by 48 equal monthly payments of
$6,281 beginning October 20, 2000 and ending on September 20, 2004. The credit
line is collateralized by the assets purchased under the agreement.
In August 2000, the Company signed a term loan agreement with Scripps Bank
with a loan advance period effective August 9, 2000 through October 20, 2000.
The Company was allowed to submit capital expenditures for tenant improvements
up to $400,000 to finance under the agreement at an interest rate of 9.5% per
annum. The Company funded the loan for $400,000 on October 12, 2000. Once the
loan was funded, a 36-month term loan originated with 36 equal monthly payments
of $12,813 beginning November 20, 2000 and ending on October 20, 2003. 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
Page 16 of 19
<PAGE>
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 September 30, 2000 and 1999.
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.
Page 17 of 19
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.10(5) Loan Advance Agreement dated August 9, 2000
between Fotoball USA, Inc. and Scripps Bank.
27 Financial Data Schedule
(b) Reports on Form 8-K for the three months ended September 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: November 10, 2000 BY: /s/ Michael Favish
------------------
Michael Favish
President and Chief Executive Officer
Dated: November 10, 2000 BY: /s/ Thomas R. Hillebrandt
-------------------------
Thomas R. Hillebrandt
Vice President and Chief Financial Officer
(Principal Accounting Officer)
Page 19 of 19
