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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ --------------------
Commission file number 0-24608
FOTOBALL USA, INC.
- -------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 33-0614889
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer 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 July 31, 2002, the Company had 3,608,667 shares of its common
stock issued and outstanding.
FOTOBALL USA, INC.
INDEX
Page No.
-------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of June 30, 2002 (unaudited) and December 31, 2001 3
Statements of Operations for the three and six months ended
June 30, 2002 and 2001 (unaudited) 4
Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 (unaudited) 5
Notes to Financial Statements (unaudited) 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10 -15
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
BALANCE SHEETS
June 30, 2002 December 31, 2001
(unaudited)
------------------ ------------------
ASSETS
Current assets
Cash and equivalents $ 3,471,143 $ 5,779,203
Accounts receivable less uncollectible allowances of $219,784 in
2002 and $198,441 in 2001 4,590,295 3,705,873
Income tax and other receivable 21,123 359,400
Inventories 5,024,292 2,655,702
Prepaid expenses and other 330,352 1,165,209
Deferred income taxes 951,000 951,000
------------------ ------------------
Total current assets 14,388,205 14,616,387
Property and equipment, net 2,181,460 2,225,106
Deposits and other assets 158,995 158,995
------------------ ------------------
$ 16,728,660 $ 17,000,488
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 3,145,697 $ 1,861,842
Customer deposits 334,189 1,978,779
Income taxes payable 173,009 --
Current portion of line of credit 54,398 --
Current portion of long-term debt -- 741,368
Current portion of capital leases 74,877 92,773
------------------ ------------------
Total current liabilities 3,782,170 4,674,762
------------------ ------------------
Long-term liabilities
Line of credit, net of current portion 900,000 --
Long-term debt, net of current portion -- 927,145
Capital leases, net of current portion 149,703 183,775
Deferred rent 270,033 248,105
Deferred income taxes 121,000 121,000
Long-term reserve for discontinued operations 7,991 24,290
------------------ ------------------
Total long-term liabilities 1,448,727 1,504,315
------------------ ------------------
Total liabilities 5,230,897 6,179,077
------------------ ------------------
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 - 3,600,500 shares at June 30 2002;
3,580,033 at December 31, 2001 36,005 35,800
Additional paid-in capital 11,720,770 11,680,337
Accumulated deficit (259,012) (894,726)
------------------ ------------------
Total stockholders' equity 11,497,763 10,821,411
------------------ ------------------
$ 16,728,660 $ 17,000,488
================== ==================
See accompanying Notes to Unaudited Financial Statements
Page 3 of 17
FOTOBALL USA, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
---------------- ----------------- --------------- ----------------
Net sales $ 14,274,321 $ 7,322,369 $ 24,978,592 $ 12,902,935
Cost of sales 9,135,471 4,962,699 15,974,386 8,737,206
---------------- ----------------- --------------- ----------------
Gross profit 5,138,850 2,359,670 9,004,206 4,165,729
---------------- ----------------- --------------- ----------------
Operating expenses
Royalties 1,082,203 538,194 1,893,956 977,608
Marketing 1,372,337 772,897 2,678,844 1,665,754
General and administrative 1,807,655 1,220,644 3,134,020 2,326,377
Depreciation and amortization 127,718 125,138 258,135 248,763
---------------- ----------------- --------------- ----------------
Total operating expense 4,389,913 2,656,873 7,964,955 5,218,502
---------------- ----------------- --------------- ----------------
Income (loss) from operations 748,937 (297,203) 1,039,251 (1,052,773)
---------------- ----------------- --------------- ----------------
Other income (expense)
Interest expense (11,161) (26,051) (26,080) (52,320)
Interest income 22,573 28,319 46,352 67,570
---------------- ----------------- --------------- ----------------
Total other income (expense) 11,412 2,268 20,272 15,250
---------------- ----------------- --------------- ----------------
Income (loss) from continuing operations
before income tax 760,349 (294,935) 1,059,523 (1,037,523)
Income tax expense (benefit) 304,140 -- 423,809 (297,035)
---------------- ----------------- --------------- ----------------
Income (loss) from continuing operations 456,209 (294,935) 635,714 (740,488)
Discontinued operations
Loss on discontinued operations
net of tax benefit
($0;$82,471 respectively -- (200,625) -- (324,332)
---------------- ----------------- --------------- ----------------
Net income (loss) $ 456,209 $ (495,560) $ 635,714 $(1,064,820)
================ ================= =============== ================
Weighted average number of common shares outstanding:
Basic 3,594,460 3,579,303 3,588,104 3,579,168
================ ================= =============== ================
Diluted 3,946,857 3,579,303 3,905,549 3,579,168
================ ================= =============== ================
Income (loss) from continuing operations per share
Basic $ .13 $ (.08) $ .18 $ (.21)
================ ================= =============== ================
Diluted $ .12 $ (.08) $ .16 $ (.21)
================ ================= =============== ================
Loss from discontinued operations per common share:
Basic $ -- $ (.06) $ -- $ (.09)
================ ================= =============== ================
Diluted $ -- $ (.06) $ -- $ (.09)
================ ================= =============== ================
Net income (loss) per common share:
Basic $ .13 $ (.14) $ .18 $ (.30)
================ ================= =============== ================
Diluted $ .12 $ (.14) $ .16 $ (.30)
================ ================= =============== ================
See accompanying Notes to Unaudited Financial Statements
Page 4 of 17
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
2002 2001
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ 635,714 $ (1,064,819)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization of property and equipment 275,510 308,509
Stock-based compensation - 3,780
Provision for doubtful accounts 45,000 29,500
Changes in operating assets and liabilities:
Accounts receivable (929,422) (351,208)
Income tax and other receivable 338,277 (74,006)
Inventories (2,368,590) (229,324)
Prepaid expenses and other 834,857 (110,915)
Accounts payable and accrued expenses 1,283,855 (106,157)
Customer deposits (1,644,590) --
Income taxes payable 173,009 --
Deferred rent 21,928 (4,331)
Long term reserve for discontinued operations (16,299) --
----------------- -----------------
Net cash used in operating activities (1,350,751) (1,598,971)
----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (231,864) (199,296)
Decrease in long-term deposits -- 14,274
----------------- -----------------
Net cash used in investing activities (231,864) (185,022)
----------------- -----------------
Cash flows from financing activities:
Proceeds from line of credit 954,398 --
Proceeds from long-term debt 410,006 1,500,000
Payments on capitalized leases (51,968) (53,709)
Payments on long-term loans (2,078,519) (87,046)
Proceeds from exercise of stock options 40,638 1,126
----------------- -----------------
Net cash provided by (used in) financing activities (725,445) 1,360,371
----------------- -----------------
Net decrease in cash and equivalents (2,308,060) (423,622)
Cash and equivalents, beginning of period 5,779,203 2,921,358
----------------- -----------------
Cash and equivalents, end of period $ 3,471,143 $ 2,497,736
================= =================
Supplemental disclosure of cash flow information:
Interest paid $ 67,840 $ 79,916
Incomes taxes paid $ 250,000 $ --
Supplemental schedule of noncash investing and financing activities-
equipment acquired under capital leases $ -- $ 15,418
See accompanying Notes to Unaudited Financial Statements
Page 5 of 17
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
1. BASIS OF PRESENTATION
---------------------
The balance sheet as of June 30, 2002, the statements of operations for
the three and six months ended June 30, 2002 and 2001, and the
statements of cash flows for the six months ended June 30, 2002 and 2001
have been prepared by the Company without audit. In the opinion of
management, all entries (which include only normal recurring items)
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 accounting principles
generally accepted in the United States of America have been omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. It is suggested that these financial statements are read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and 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 bad
debt and uncollectible receivables, allowance for sales returns and the
provision for discontinued and obsolete inventories. Actual results
could differ from these estimates.
The results of operations for the three and six months ended June 30,
2002 are not necessarily indicative of the results of operations to be
expected for any other interim period or for the year ending December
31, 2002.
RECLASSIFICATION - Certain amounts in the 2001 financial statements have
been reclassified to conform to the 2002 presentation.
2. NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
EITF 00-14 "Accounting for Certain Sales Incentives" and EITF 00-25
"Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products" issued by the Emerging Issues Task
Force require certain sales incentives, slotting fees and co-operative
advertising expenses to be classified as reductions to revenue rather
than as expenses. The provisions of EITF 00-14 and EITF 00-25 are
effective for financial statements issued for fiscal years beginning
after December 15, 2001. The Company adopted EITF 00-14 and EITF 00-25
on January 1, 2002. For comparison purposes, the three months ending
June 30, 2001 sales and operating expenses were reduced by $41,384 from
previously reported results to comply with the provisions of EITF 00-14
and EITF 00-25. For the six months ending June 30, 2001 sales and
operating expenses were reduced by $75,152. There was no impact to the
Company's net income/(loss) as a result of the adoption of EITF 00-14 or
EITF 00-25.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Obligations
Associated with the Retirement of Long-Lived Assets" (SFAS 143). SFAS
143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It also applies to certain legal
obligations associated with the retirement of long-lived assets. SFAS
143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
Page 6 of 17
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. This Statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company plans
to adopt the provisions of SFAS 143 beginning January 1, 2003 and does
not expect it will have a material impact on the results of operations
or financial position.
In August 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. This Statement supersedes FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for the disposal of a segment of a business (as
previously defined in that Opinion). Under SFAS 144, discontinued
operations are no longer measured on a net realizable value basis, and
future operating losses are no longer recognized before they occur. The
provisions of this Statement are effective for financial statements
issued for fiscal years beginning after December 15, 2001. The Company
adopted SFAS 144 beginning January 1, 2002. The adoption of SFAS 144 did
not have a material effect on the Company's financial statements.
In April 2002, the FASB issued statement of Financial Accounting
Standards No. 145 (SFAS 145), "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
This statement updates, clarifies and simplifies existing accounting
pronouncements including: rescinding SFAS 4, which required all gains
and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income tax
effect and amending SFAS 13 to require that certain lease modifications
that have economic effect similar to sale lease-back transactions be
accounted for in the same manner as sales lease-back transactions. SFAS
145 is effective for fiscal years beginning after May 15, 2002 with an
early adoption of the provisions related to the recession of SFAS 4
encouraged. The Company does not anticipate that the adoption of SFAS
145 will have a material effect on the Company's financial statements.
3. INVENTORIES
-----------
Inventories are valued at the lower of cost or market. Cost is
determined on the first-in first-out (FIFO) method. Inventories
consisted of the following at June 30, 2002 and December 31, 2001:
June 30, December 31,
2002 2001
------------------ -------------------
Finished goods $ 4,291,080 $ 2,018,335
Raw material 1,383,846 1,205,933
Less allowance for discontinued and obsolete inventory (650,634) (568,566)
------------------ -------------------
Total $ 5,024,292 $ 2,655,702
================== ===================
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
-------------------------------------
Accounts payable and accrued expenses consisted of the following at June
30, 2002 and December 31, 2001:
Page 7 of 17
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
June 30, December 31,
2002 2001
------------------- -------------------
Accounts payable $ 1,843,551 $ 972,059
Accrued payroll and benefit expenses 201,808 192,691
Accrued commissions and bonuses 750,166 294,583
Royalties payable 7,804 20,051
Current reserve for discontinued operations 62,373 147,472
Accrued joint advertising costs 260,494 199,892
Accrued other taxes 19,501 35,094
------------------- -------------------
$ 3,145,697 $ 1,861,842
=================== ===================
5. LINE OF CREDIT
--------------
The Company's credit line with U.S. Bank National Association ("US
Bank") expired on May 15, 2002. There were no outstanding borrowings
under the US Bank credit line at June 30, 2002 or when it expired. The
Company obtained a new credit line from Comerica Bank-California
("Comerica") on June 24, 2002. The Comerica credit line is limited to
the lesser of $5 million or 80% of eligible accounts receivable, as
defined in the loan agreement, and carries interest at the rate of the
Comerica prime rate plus .5% (5.25% as of June 30, 2002). The credit
line contains a special sublimit of $1.2 million that is reduced by $.3
million on each anniversary of the loan agreement. On June 26, 2002, the
Company borrowed $1 million under the special sublimit to refinance the
outstanding balance on its $1.5 million term loan with US Bank. The
Company's assets collateralize the Comerica credit line. The loan
agreement contains financial covenants applicable to the credit line
requiring the Company to maintain a minimum current ratio of 2 to 1, a
minimum quick ratio of 1.25 to 1, a maximum debt to worth ratio of 1 to
1, net income of more than $100,000 on a rolling six month basis and a
minimum earnings before interest and taxes to interest expense ratio of
2 to 1. For purposes of calculating the financial covenant ratios,
"current liabilities" include amounts outstanding under the credit line
except for the special sublimit. The Company is in compliance with the
covenants as of June 30, 2002. The $1 million borrowed under the special
sublimit was the only outstanding borrowings under the credit line at
June 30, 2002.
6. COMMITMENTS AND CONTINGENCIES
-----------------------------
DEBT - On June 26, 2002 the Company refinanced the $1 million
outstanding on its $1.5 million term loan with US Bank under its credit
line with Comerica as detailed in Note 5 above. On June 27, 2002, the
Company paid off the $.3 million outstanding on its $.4 million term
loan with US Bank. As of June 30, 2002 the Company's only bank debt
outstanding consisted of the $1 million borrowed under the Comerica
credit line.
7. EARNING PER SHARE
-----------------
Basic earnings per share ("EPS") excludes dilution and is computed by
dividing net income or loss attributable to common stockholders by the
weighted-average of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if common stock
options using the treasury stock method were exercised or converted into
common stock. Potential common shares in the diluted EPS are excluded in
loss periods, as their effect would be anti-dilutive.
Page 8 of 17
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
Basic and Diluted EPS was computed as follows:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- ------------------------------------
2002 2001 2002 2001
----------------- ----------------- ----------------- -----------------
Net income (loss) $ 456,209 $ (495,560) $ 635,714 $ (1,064,820)
================= ================= ================= =================
Weighted average shares for basic EPS 3,594,460 3,579,303 3,588,104 3,579,168
================= ================= ================= =================
Basic EPS $ .13 $ (.14) $ .18 $ (.30)
================= ================= ================= =================
Weighted average shares for basic EPS 3,594,460 3,579,303 3,588,104 3,579,168
Plus Stock Options 352,397 -- 317,445 --
----------------- ----------------- ----------------- -----------------
Weighted average shares for diluted EPS 3,946,857 3,579,303 3,905,549 3,579,168
================= ================= ================= =================
Diluted EPS $ .12 $ (.14) $ .16 $ (.30)
================= ================= ================= =================
For the three months ended June 30, 2002 and 2001 shares related to stock
options of 93,200 and 308,701, respectively, were excluded from the calculation
of diluted EPS, as the effect of their inclusion would be anti-dilutive. For the
six months ending June 30, 2002 and 2001 shares related to stock options of
110,200 and 308,701, respectively, were excluded from the calculation of diluted
EPS, as the effect of their inclusion would be anti-dilutive
Page 9 of 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS 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 adding
new license properties, overall sales trends, gross margin trends,
operating cost trends, liquidity and capital needs 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, the
prospect of a Major League Baseball players' strike and the risk factors
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 Form 10-K for the year ended December 31, 2001 and Quarterly Report
on Form 10-Q for the quarter ended March 31 2002.
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:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
------------------------- ------------------------ ------------------------- ----------------------
Net sales $ 14,274,321 100% $7,322,369 100% $ 24,978,592 100% $ 12,902,935 100%
Cost of sales 9,135,471 64 4,962,699 68 15,974,386 64 8,737,206 68
Operating expenses 4,389,913 31 2,656,873 36 7,964,955 32 5,218,502 40
Operating income (loss) 748,937 5 (297,203) (4) 1,039,251 4 (1,052,773) (8)
Interest expense (11,161) -- (26,051) -- (26,080) -- (52,320) --
Interest income 22,573 -- 28,319 -- 46,352 -- 67,570 --
Inc. (loss) from continuing
operations before inc. tax 760,349 5 (294,935) (4) 1,059,523 4 (1,037,523) (8)
Income tax exp. (benefit) 304,140 2 -- -- 423,809 2 (297,035) 2
Loss on discontinued ops -- -- (200,625) (3) -- -- (324,332) 3
Net income (loss) $ 456,209 3% $ (495,560) (7%) $ 635,714 3% $ (1,064,820) (8%)
FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001:
SALES:
DISTRIBUTION CHANNEL % OF SALES THREE MONTHS ENDED JUNE 30,
2002 2001
Retail 24% 33%
Entertainment 25% 34%
Team 14% 21%
Promotion 37% 12%
Page 10 of 17
Sales increased $7.0 million, or 95%, for the second quarter 2002
from sales for the second quarter 2001. The increase in sales was due to
an increase in promotion sales (up 537%), entertainment sales (up 42%),
retail sales (up 39%), and in team sales (up 30%). Promotion sales were
up due to several bobblehead doll promotions, including a national 21
million piece mini-bobblehead doll promotion for Kraft's Post cereal
division that was completed in the second quarter 2002. The other
promotions were regional promotions for quick serve restaurants tied to
the San Francisco Giants, Cleveland Indians and the St. Louis Cardinals
baseball teams. Entertainment sales were up due to greater penetration
of pins into the Disney resort properties as well as a special Super
Bowl program done in association with Sports Illustrated. Retail sales
were up due to increased sales to Walmart and The Sports Authority which
more than offset decreases in sales to Toys "R" Us and Target. Team
sales were up in large part from increased sales to Major League
Baseball teams and concessionaires.
PRODUCT LINE % OF SALES Three Months Ended June 30,
2002 2001
Footballs 9% 12%
Baseballs 16% 30%
Basketballs 9% 13%
Bobbleheads 33% --
Helmets 2% --
Collector pins 10% 11%
Playground balls 14% 17%
Soccer/volleyballs 3% 11%
Other 4% 6%
------------- -------------
Total 100% 100%
============= =============
The Company realized product sales increases in the second quarter
2002 versus the second quarter 2001 from new product lines (bobbleheads
and helmets) and from collector pins (up 90%), playground balls (up
62%), basketballs (up 45%), footballs (up 42%) and baseballs (up 3%)
with an offsetting decline in soccer/volleyballs (down 53%).
GROSS PROFIT:
Gross profit increased $2.8 million, or 118%, for the second
quarter 2002 from gross profit for the second quarter 2001. Gross profit
as a percentage of sales increased to 36% for the second quarter 2002
from 32% for the second quarter 2001. The increase in gross margin was
due to higher margins on all of the Company's main product lines,
including a seven percentage point increase in playground ball gross
margins and a five percentage point increase in collector pin gross
margins. Increases in gross margin were reduced by the lower than
average gross margin on promotional sales. Promotions typically carry
lower gross margins than the Company's other areas of business.
OPERATING EXPENSES:
Total operating expenses increased $1.7 million, or 65%, for the
second quarter 2002 from total operating expenses for the second quarter
2001. The increase in total operating expenses is primarily due to an
increase in royalties, commissions, and personnel and salary related
items. Total operating expenses as a percentage of sales decreased to
31% for the second quarter 2002 from 36% for the second quarter 2001.
Non-revenue and non-salary related operating expenses increased by 3%
for the second quarter 2002 compared to the second quarter 2001.
Page 11 of 17
Royalty expenses increased $.5 million, or 101%, for the second
quarter 2002 from royalty expenses for the second quarter 2001. The
increase in royalty expense was the result of higher sales. Royalty
expenses as a percentage of sales increased to 8% for the second quarter
2002 as compared to 7% for the second quarter 2001.
Marketing expenses increased $.6 million, or 78%, for the second
quarter 2002 from marketing expenses for the second quarter 2001. The
increase in marketing expenses is attributable to salary related items
resulting from increased headcount and higher bonus accruals and
commission expenses. Marketing expenses as a percentage of sales
decreased to 10% for the second quarter 2002 from 11% for the second
quarter 2001.
General and administrative expenses increased $.6 million, or 48%,
for the second quarter 2002 from general and administrative expenses for
the second quarter 2001. The increase is primarily attributable to
salary-related items resulting from increased headcount and higher bonus
accruals. General and administrative expenses as a percentage of sales
decreased to 13% for the second quarter 2002 from 17% for the second
quarter 2001.
OTHER INCOME (EXPENSE):
Interest expense decreased by 57% for the second quarter 2002 from
interest expense for the second quarter 2001. This decrease reflects a
decrease in the amount outstanding on Fotoball's debt and capital lease
obligations as further discussed under "Liquidity and Capital
Resources". As of June 30, 2002 there was $954,000 outstanding under the
credit line.
Interest income decreased by 20% for the second quarter 2002, from
interest income for the second quarter 2001. Excess cash is deposited
into an interest-bearing depository account. The decrease was due to
lower interest rates during the second quarter 2002 compared to the
second quarter 2001.
INCOME TAX EXPENSE (BENEFIT):
The Company recorded income tax expense of $.3 million for the
second quarter 2002 calculated at an effective tax rate of 40% compared
to no income tax for the second quarter 2001.
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001:
SALES:
DISTRIBUTION CHANNEL % OF SALES Six Months Ended June 30,
2002 2001
Retail 24% 37%
Entertainment 24% 34%
Team 12% 20%
Promotion 40% 9%
Sales increased by $12 million, or 94%, for the six months ending
June 30, 2002 as compared to the six months ending June 30, 2001. The
increase was due to increases in all channels of distribution. Promotion
sales increased $8.8 million (up 729%), entertainment sales increased
$1.6 million (up 36%), retail sales increased $1.3 million (up 28%) and
team sales increased $.5 million (up 21%) as compared to the six months
ending June 30, 2001. Promotional sales increased due to several
bobblehead programs
Page 12 of 17
for Kraft's Post cereal division and other regional quick serve
restaurants. The Company does not anticipate promotional sales in the
second half of 2002 to be at the level of promotional sales in the first
half of 2002. Entertainment sales increased for the first half of 2002
versus the same period of 2001 due to better penetration of collector
pins into the Disney resort properties, as well as higher sales of
collector pins to the Disney Store in the first half of 2002. The
company anticipates producing another third quarter 2002 promotion for
the Disney Store as the Company has done the past three years. Retail
sales increases were due to increases in sales to Walmart and The Sports
Authority, which more than offset lower sales to Toys R Us. Team sales
increased for the six months ending June 30, 2002 from the same period
in 2001 due to higher sales to concessionaires and Major League baseball
teams. The Company expects moderate growth in this area coming from
sales of its new souvenir batting helmets in the third quarter of 2002
and from sales of NFL merchandise in the third and fourth quarter of
2002.
The company has been working on a bobblehead doll promotion for a
New York area quick serve restaurant Co-op that originally was scheduled
to run beginning the week of June 10, 2002. The promotion has been
rescheduled to run beginning August 9, 2002, but the Company has
incurred additional manufacturing costs and has agreed to buy back a
limited number of dolls if they do not sell. The Company anticipates
that any buy back of dolls will have an immaterial impact on its
results.
A Major League Baseball players' strike would negatively impact
the Company's sales of Major League Baseball merchandise mostly in the
team, retail and promotional sales areas. The full impact would depend
on the length of the strike. The Company believes an increase in retail
and team National Football League merchandise sales would offset some of
the decrease in Major League Baseball merchandise sales in the second
half of 2002.
For the first time, the Company recently entered into a retail and
promotional licensing agreement with the National Basketball Association
under which Fotoball will retain the right to produce and distribute
mini-bobblehead dolls, pencil bobbles and lollipop light-up candy. The
company also recently expanded their licensing rights with the NFL to
include mini-bobblehead dolls as well as collector pins commemorating
Super Bowl XXXVII in 2003.
PRODUCT LINE % OF SALES Six Months Ended June 30,
2002 2001
Footballs 11% 19%
Baseballs 14% 28%
Basketballs 8% 11%
Bobbleheads 35% --
Helmets 1% --
Collector pins 11% 11%
Playground balls 13% 18%
Soccer/volleyballs 2% 10%
Other 5% 3%
------------- -------------
Total 100% 100%
============= =============
The Company realized product sales increases in the first half of
2002 versus the first half of 2001 from new product lines (bobbleheads
and helmets) and from collector pins (up 96%), playground balls (up
47%), basketballs (up 32%) and footballs (up 12%) with offsetting
declines in soccer/volleyballs (down 55%) and baseball (down 2%)
compared to the first half of 2001.
GROSS PROFIT:
Page 13 of 17
Gross profit increased $4.8 million, or 116%, for the first half
of 2002 from the gross profit for the first half of 2001. Gross profit
as a percentage of sales increased to 36% for the first half of 2002
from 32% for the first half of 2001. The increase in gross margin is due
to higher margins on all the Company's main product lines. This was
offset by lower margins in our promotional projects which is typical of
large promotional sales. The Company anticipates its gross margins in
the second half of 2002 will remain at least as high as the first half
2002 rate and may increase depending on the volume of National Football
League merchandise sold and the volume of promotional sales.
OPERATING EXPENSE:
Total operating expenses increased $2.7 million, or 53%, for the
first half of 2002 as compared to the first half of 2001. The increase
in total operating expenses is primarily due to increased royalty and
commission expenses related to higher revenue and personnel and salary
related items. Total operating expenses as a percentage of sales
decreased to 32% for the first half of 2002 from 40% from the first half
of 2001. Non-revenue and non-salary related operating expenses decreased
by 1% for the first half of 2002 compared to the first half of 2001.
Royalty expenses increased $.9 million, or 94%, for the first half
of 2002 versus the first half of 2001. Royalty expense increased due to
the increase in revenue. Royalty expense as a percentage of sales
remained constant at 8% for both the first half of 2002 and 2001.
Marketing expenses increased $1.0 million, or 61%, for the first
half of 2002 compared to the first half of 2001. The increase in
marketing expenses is attributable to higher salary and salary related
items resulting from increased headcount and higher bonus accruals and
commission expense. Marketing expenses as a percentage of sales
decreased to 11% for the first half of 2002 from 13% for the first half
of 2001.
General and administrative expenses increased $.8 million, or 35%,
for the first half of 2002 compared to the first half of 2001. The
increase is primarily related to salary and salary related items
resulting from increased headcount and higher bonus accruals. General
and administrative expenses as a percentage of sales decreased to 13%
for the first half of 2002 from 18% for the first half of 2001.
OTHER INCOME (EXPENSES):
Interest expense decreased by 50% for the first half of 2002
compared to the first half of 2001. This decrease reflects a decrease in
the amount of Fotoball's debt and capital lease obligations as discussed
under "Liquidity and Capital Resources".
Interest income decreased by 31% for the first half of 2002 from
the interest income for the first half of 2001. Excess cash is deposited
in an interest-bearing account. The decrease reflects lower interest
rates in the first half of 2002 versus the first half of 2001.
INCOME TAX EXPENSE (BENEFIT):
The Company recorded income tax expense of $.4 million for the
first half of 2002 calculated at an effective tax rate of 40% compared
to an income tax benefit of $.3 million for the first half of 2001
calculated at an effective tax rate of 29%.
Page 14 of 17
LIQUIDITY AND CAPITAL RESOURCES:
The Company's net working capital increased to $10.6 million at
June 30, 2002 from $9.9 million at December 31, 2001. Cash and
equivalents aggregated $3.5 million at June 30, 2002, a decrease of $2.3
million from cash and equivalents of $5.8 million at December 31, 2001.
This decrease in cash was the result of $1.4 million used in operations,
$.2 million used in purchasing property and equipment and $.7 million
used in financing activities.
At June 30, 2002, the Company has commitments for minimum
guaranteed royalties under licensing agreements totaling $.9 million in
the aggregate through 2005, of which $.2 million is due at various times
during 2002. Management expects these guaranteed royalties to be funded
from operating cash flows.
The Company's credit line with U.S. Bank National Association ("US
Bank") expired on May 15, 2002. There were no outstanding borrowings
under the US Bank credit line at June 30, 2001 or when it expired. The
Company obtained a new credit line from Comerica Bank-California
("Comerica") on June 24, 2002. The Comerica credit line is limited to
the lesser of $5 million or 80% of eligible accounts receivable, as
defined in the loan agreement, and carries interest at the rate of the
Comerica prime rate plus .5%. The credit line contains a special
sublimit of $1.2 million that is reduced by $.3 million on each
anniversary of the loan agreement. On June 26, 2002, the Company
borrowed $1 million under the special sublimit to refinance the
outstanding balance on a $1.5 million term loan with US Bank. The
Company's assets collateralize the Comerica credit line. The loan
agreement contains financial covenants applicable to the credit line
requiring the Company to maintain a minimum current ratio of 2 to 1, a
minimum quick ratio of 1.25 to 1, a maximum debt to worth ratio of 1 to
1, net income of more than $100,000 on a rolling six month basis and a
minimum earnings before interest and taxes to interest expense ratio of
2 to 1. For purposes of calculating the financial covenant ratios,
"current liabilities" includes amounts outstanding under the credit line
except for the special sublimit. The Company is in compliance with the
covenants as of June 30, 2002. The $1 million borrowed under the special
sublimit was the only outstanding borrowings under the credit line at
June 30, 2002.
Management believes the Company's existing cash position and
credit facility, combined with internally generated cash flows, will be
adequate to support the Company's liquidity and capital needs through
June 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risk relates to interest rate
risk with its variable rate credit line. The Company does not use
derivative financial instruments to manage or reduce market risk. As of
June 30, 2002, the Company's only variable rate debt outstanding was the
$1 million outstanding balance on its credit line. A 10% change in
future interest rates on the variable rate credit line would not lead to
a material decrease in future earnings assuming all other factors
remained constant.
Page 15 of 17
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
21, 2002 at the Wyndham Garden Hotel located at 5975 Lusk Boulevard, San
Diego, California. The matters considered at the meeting consisted of
the following:
To elect one (1) director of the Company to hold office until the
2005 Annual Meeting of Stockholders and until the election and
qualification of his successor. The results of the voting were as
follows:
Nominee For Against Abstain Total Votes
Joel K. Rubenstein 3,233,490 -- 5,470 3,238,960
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.10(12) Loan and Security Agreement and Variable Rate Single Payment Note with Comerica
99.1 CEO Certification Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act Of 2002
99.2 CFO Certification Pursuant To 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act Of 2002
(b) Reports on Form 8-K for the three months ended June 30, 2002
None
Page 16 of 17
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FOTOBALL USA, INC
-----------------------------------
(Registrant)
Dated: August 14, 2002 BY: /s/ Michael Favish
------------------
Michael Favish
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: August 14, 2002 BY: /s/ Thomas R. Hillebrandt
-------------------------
Thomas R. Hillebrandt
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 17 of 17