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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 September 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 October 31, 2002, the Company had 3,609,834 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 September 30, 2002 (unaudited) and December 31, 2001 3
Statements of Operations for the three and nine months ended
September 30, 2002 and 2001 (unaudited) 4
Statements of Cash Flows for the nine months ended
September 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
Item 4. Evaluation of Disclosure Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
RULE 13a-14 CERTIFICATIONS 18 - 19
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FOTOBALL USA, INC.
BALANCE SHEETS
September 30, December 31,
2002 2001
(unaudited)
---------------- ------------------
ASSETS
Current assets
Cash and equivalents $ 4,098,975 $ 5,779,203
Accounts receivable less uncollectible allowances of $226,352 in
2002 and $198,441 in 2001 5,365,297 3,705,873
Other receivables 22,820 359,400
Inventories 3,719,026 2,655,702
Prepaid expenses and other 364,388 1,165,209
Deferred income taxes 951,000 951,000
------------ ------------
Total current assets 14,521,506 14,616,387
Property and equipment, net 2,212,275 2,225,106
Deposits and other assets 79,498 158,995
------------ ------------
$ 16,813,279 $ 17,000,488
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $3,337,367 $ 1,861,842
Customer deposits 153,674 1,978,779
Income taxes payable 73,568 --
Current portion of long-term debt -- 741,368
Current portion of capital leases 76,596 92,773
------------ ------------
Total current liabilities 3,641,205 4,674,762
------------ ------------
Long-term liabilities
Line of credit 811,898 --
Long-term debt, net of current portion -- 927,145
Capital leases, net of current portion 154,026 183,775
Deferred rent 281,800 248,105
Deferred income taxes 121,000 121,000
Long-term reserve for discontinued operations 3,570 24,290
------------ ------------
Total long-term liabilities 1,372,294 1,504,315
------------ ------------
Total liabilities 5,013,499 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 - 3,608,667 shares at September, 30,
2002; 3,580,033 at December 31, 2001 36,087 35,800
Additional paid-in capital 11,751,867 11,680,337
Retained earnings (accumulated deficit) 11,826 (894,726)
------------ ------------
Total stockholders' equity 11,799,780 10,821,411
------------ ------------
$ 16,813,279 $ 17,000,488
============ ============
See accompanying Notes to Unaudited Financial Statements
Page 3 of 19
FOTOBALL USA, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 11,113,641 $ 10,756,653 $ 36,092,233 $ 23,659,588
Cost of sales 6,959,131 6,690,473 22,933,517 15,427,679
------------ ------------ ------------ ------------
Gross profit 4,154,510 4,066,180 13,158,716 8,231,909
------------ ------------ ------------ ------------
Operating expenses
Royalties 801,311 761,173 2,695,267 1,738,781
Marketing 1,218,448 945,957 3,897,291 2,611,711
General and administrative 1,565,124 1,407,653 4,699,145 3,734,031
Depreciation and amortization 128,087 132,593 386,222 381,355
------------ ------------ ------------ ------------
Total operating expense 3,712,970 3,247,376 11,677,925 8,465,878
------------ ------------ ------------ ------------
Income (loss) from operations 441,540 818,804 1,480,791 (233,969)
------------ ------------ ------------ ------------
Other income (expense)
Interest expense (7,043) (22,538) (33,123) (74,858)
Interest income 16,900 17,785 63,252 85,355
------------ ------------ ------------ ------------
Total other income (expense) 9,857 (4,753) 30,129 10,497
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income taxes 451,397 814,051 1,510,920 (223,472)
Income tax expense (benefit) 180,559 207,646 604,368 (89,389)
------------ ------------ ------------ ------------
Income (loss) from continuing operations 270,838 606,405 906,552 (134,083)
Loss on discontinued operations net of tax benefit ($182,421;
$264,892 respectively) -- (73,007) -- (397,339)
------------ ------------ ------------ ------------
Net income (loss) $ 270,838 $ 533,398 $ 906,552 $ (531,422)
============ ============ ============ ============
Weighted average number of common shares outstanding:
Basic 3,606,536 3,579,699 3,594,316 3,579,347
============ ============ ============ ============
Diluted 3,934,946 3,723,358 3,915,050 3,579,347
============ ============ ============ ============
Income (loss) from continuing operations per common share:
Basic $ .08 $ .17 $ .25 $ (.04)
============ ============ ============ ============
Diluted $ .07 $ .16 $ .23 $ (.04)
============ ============ ============ ============
Loss from discontinued operations per common share:
Basic $ -- $ (.02) $ -- $ (.11)
============ ============ ============ ============
Diluted $ -- $ (.02) $ -- $ (.11)
============ ============ ============ ============
Net income (loss) per common share:
Basic $ .08 $ .15 $ .25 $ (.15)
============ ============ ============ ============
Diluted $ .07 $ .14 $ .23 $ (.15)
============ ============ ============ ============
See accompanying Notes to Unaudited Financial Statements
Page 4 of 19
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
----------- ------------
Cash flows from operating activities:
Net income (loss) $ 906,552 $ (531,422)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization of property and equipment 414,889 472,308
Stock-based compensation -- 3,780
Provision for doubtful accounts 67,500 248,300
Changes in operating assets and liabilities:
Accounts receivable (1,726,924) (2,963,244)
Other receivables 336,580 (42,122)
Inventories (1,063,324) (16,543)
Prepaid expenses and other 800,821 58,125
Accounts payable and accrued expenses 1,475,525 450,375
Customer deposits (1,825,105) 13,255
Income taxes payable 73,568 --
Deferred rent 33,695 2,256
Long term reserve for discontinued operations (20,720) --
----------- -----------
Net cash used in operating activities (526,943) (2,304,932)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (376,252) (393,366)
Decrease in long-term deposits 79,497 93,772
----------- -----------
Net cash used in investing activities (296,755) (299,594)
----------- -----------
Cash flows from financing activities:
Net borrowings from line of credit 811,898 --
Proceeds from long-term debt 410,006 1,500,000
Payments on capital leases (71,732) (80,266)
Payments on long-term debt (2,078,519) (268,501)
Proceeds from exercise of stock options 71,817 1,126
----------- -----------
Net cash provided by (used in) financing activities (856,530) 1,152,359
----------- -----------
Net decrease in cash and equivalents (1,680,228) (1,452,167)
Cash and equivalents, beginning of period 5,779,203 2,921,358
----------- -----------
Cash and equivalents, end of period $ 4,098,975 $ 1,469,191
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 68,273 $ 126,901
Incomes taxes paid $ 530,800 $ --
Supplemental schedule of noncash investing and financing activities-
equipment acquired under capital leases $ 25,806 $ --
See accompanying Notes to Unaudited Financial Statements
Page 5 of 19
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
1. BASIS OF PRESENTATION
The balance sheet as of September 30, 2002, the statements of operations
for the three and nine months ended September 30, 2002 and 2001, and the
statements of cash flows for the nine months ended September 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 nine months ended September 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 September 30, 2001 sales and
operating expenses were reduced by $47,095 from previously reported results
to comply with the provisions of EITF 00-14 and EITF 00-25. For the nine
months ending September 30, 2001 sales and operating expenses were reduced
by $122,247. 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 (SFAS 143), "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets". 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
Page 6 of 19
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
incurred if a 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 (SFAS 144), "Accounting for the
Impairment or Disposal of Long-Lived Assets". 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 September 30, 2002 and December 31, 2001:
September 30, December 31,
2002 2001
------------- --------------
Finished goods $ 3,196,278 $ 2,018,335
Raw material 1,174,969 1,205,933
Less allowance for discontinued and obsolete inventory (652,221) (568,566)
----------- -----------
Total $ 3,719,026 $ 2,655,702
=========== ===========
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at
September 30, 2002 and December 31, 2001:
Page 7 of 19
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
September 30, December 31,
2002 2001
------------- -----------
Accounts payable $ 1,661,739 $ 972,059
Accrued payroll and benefit expenses 234,290 192,691
Accrued commissions and bonuses 1,102,848 294,583
Royalties payable 43,567 20,051
Current reserve for discontinued operations 33,772 147,472
Accrued joint advertising costs 273,455 199,892
Accrued other taxes (12,304) 35,094
----------- -----------
$ 3,337,367 $ 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 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 September 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
September 30, 2002. At September 30, 2002, $.8 million under the special
sublimit was the only outstanding borrowings.
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 September 30, 2002 the Company's only bank debt outstanding consisted
of the $.8 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 19
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
Basic and Diluted EPS was computed as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
----------- ------------ ----------- -----------
Net income (loss) $ 270,838 $ 533,398 $ 906,552 $ (531,422)
=========== =========== =========== ===========
Weighted average shares for basic EPS 3,606,536 3,579,699 3,594,316 3,579,347
=========== =========== =========== ===========
Basic EPS $ .08 $ .15 $ .25 $ (.15)
=========== =========== =========== ===========
Weighted average shares for basic EPS 3,606,536 3,579,699 3,594,316 3,579,347
Plus dilutive stock options 328,410 143,659 320,734 --
----------- ----------- ----------- -----------
Weighted average shares for diluted EPS 3,934,946 3,723,358 3,915,050 3,579,347
=========== =========== =========== ===========
Diluted EPS $ .07 $ .14 $ .23 $ (.15)
=========== =========== =========== ===========
For the three months ended September 30, 2002 and 2001 shares related to
stock options of 105,200 and 220,701, respectively, were excluded from the
calculation of diluted EPS, as the effect of their inclusion would be
anti-dilutive. For the nine months ending September 30, 2002 and 2001
shares related to stock options of 123,867 and 380,664, respectively, were
excluded from the calculation of diluted EPS, as the effect of their
inclusion would be anti-dilutive.
Page 9 of 19
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 a slowdown by workers at west coast ports 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 the Quarterly Report on Form 10-Q for
the quarters ended March 31, 2002 and June 30, 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------
Net sales $ 11,113,641 100% $ 10,756,653 100% $ 36,092,233 100% $ 23,659,588 100%
Cost of sales 6,959,131 63 6,690,473 62 22,933,517 64 15,427,679 65
Operating expenses 3,712,970 33 3,247,376 30 11,677,925 32 8,465,878 36
Operating income (loss) 441,540 4 818,804 8 1,480,791 4 (233,969) (1)
Interest expense (7,043) -- (22,538) -- (33,123) -- (74,858) --
Interest income 16,900 -- 17,785 -- 63,252 -- 85,355 --
Inc. (loss) from continuing
operations before inc. tax 451,397 4 814,051 8 1,510,920 4 (223,472) (1)
Income tax exp. (benefit) 180,559 2 207,646 2 604,368 2 (89,389) --
Loss on discontinued ops -- -- (73,007) (1) -- -- (397,339) (2)
Net income (loss) $ 270,838 2% $ 533,398 5% $ 906,552 3% $ (531,422) (2%)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001:
SALES:
DISTRIBUTION CHANNEL % OF SALES THREE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------ ------
Retail 31% 35%
Entertainment 30% 31%
Team 13% 9%
Promotion 26% 25%
------ ------
Total 100% 100%
====== ======
Page 10 of 19
Net sales increased $.4 million, or 3%, for the third quarter 2002 from
sales for the third quarter 2001. The increase in sales was due to an increase
in team sales (up 50%) and promotion sales (up 6%), with an offsetting decrease
in retail sales (down 5%) and entertainment sales (down 1%). Team sales were up
due to an increase in sales to NFL teams. Promotion sales were up due a
promotion for a New York area quick serve restaurant. The Company agreed to buy
back a limited number of dolls if the restaurant does not sell them. The Company
has estimated it will incur the maximum amount of the buyback and has reduced
sales and gross profit accordingly for the quarter ended September 30, 2002.
Retail sales were down due to increases in sales to Target and Sears offset by
decreases in sales to Toys R Us, Wal-Mart and college bookstores.
PRODUCT LINE % OF SALES Three Months Ended
September 30,
2002 2001
------ ------
Footballs 33% 39%
Baseballs 12% 22%
Basketballs 6% 5%
Bobbleheads 11% --
Helmets 2% --
Collector pins 19% 20%
Playground balls 10% 7%
Soccer/volleyballs 2% 3%
Other 5% 4%
------ ------
Total 100% 100%
====== ======
The Company realized product sales increases for the third quarter 2002
versus the third quarter 2001 from new product lines (bobbleheads and helmets)
and from playground balls (up 35%) and basketballs (up 8%) with an offsetting
decline in baseballs (down 43%), soccer/volleyballs (down 31%), and footballs
(down 14%).
GROSS PROFIT:
Gross profit increased $.1 million, or 2%, for the third quarter 2002
from gross profit for the third quarter 2001. Gross profit as a percentage of
sales decreased to 37% for the third quarter 2002 from 38% for the third quarter
2001. The decrease in gross margin was primarily due to lower margins on
promotional, entertainment and retail sales.
OPERATING EXPENSES:
Total operating expenses increased $.5 million, or 14%, for the third
quarter 2002 from total operating expenses for the third quarter 2001. The
increase in total operating expenses is primarily due to an increase in
marketing and personnel and salary related items. Total operating expenses as a
percentage of sales increased to 33% for the third quarter 2002 from 30% for the
third quarter 2001. Non-revenue and non-salary related operating expenses
decreased by 3% for the third quarter 2002 compared to the third quarter 2001.
Royalty expenses increased $.04 million, or 5%, for the third quarter
2002 from royalty expenses for the third quarter 2001. The increase in royalty
expense was the result of higher sales. Royalty expenses as a percentage of
sales remained at 7% for the third quarter 2002 as compared to the third quarter
2001.
Page 11 of 19
Marketing expenses increased $.3 million, or 29%, for the third quarter
2002 from marketing expenses for the third quarter 2001. The increase in
marketing expenses is attributable to rights fees associated with a New York
area quick serve restaurant promotion and salary related items resulting from
increased headcount and higher bonus accruals. Marketing expenses as a
percentage of sales increased to 11% for the third quarter 2002 from 9% for the
third quarter 2001.
General and administrative expenses increased $.2 million, or 11%, for
the third quarter 2002 from general and administrative expenses for the third
quarter 2001. The increase is primarily attributable to salary-related items
resulting from increased headcount and higher bonus accruals offset by a
reduction in bad debt expense. General and administrative expenses as a
percentage of sales increased to 14% for the third quarter 2002 from 13% for the
third quarter 2001.
OTHER INCOME (EXPENSE):
Interest expense decreased by 69% for the third quarter 2002 from
interest expense for the third quarter 2001. This decrease reflects a decrease
in the amount outstanding on the Company's debt and capital lease obligations as
further discussed under "Liquidity and Capital Resources". As of September 30,
2002 there was $811,898 outstanding under the credit line.
Interest income decreased by 5% for the third quarter 2002, from
interest income for the third quarter 2001. Excess cash is deposited into an
interest-bearing depository account. The decrease was due to lower interest
rates during the third quarter 2002 as compared to the third quarter 2001.
INCOME TAX EXPENSE (BENEFIT):
The Company recorded income tax expense of $.2 million for the third
quarter 2002 calculated at an effective tax rate of 40% compared to $.2 million
tax expense, offset by a $.2 million tax benefit from discontinued operations
for the third quarter 2001.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001:
SALES:
DISTRIBUTION CHANNEL % OF SALES Nine Months Ended
September 30,
2002 2001
------ ------
Retail 26% 36%
Entertainment 26% 33%
Team 12% 15%
Promotion 36% 16%
----- -----
Total 100% 100%
====== =====
Net sales increased by $12.4 million, or 53%, for the nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001. The
increase was due to increases in all channels of distribution. Promotion sales
increased $9 million (up 230%), entertainment sales increased $1.5 million (up
20%), retail sales increased $1.2 million (up 14%) and team sales increased $1
million (up 29%). Promotional sales increased due to several bobblehead programs
for Kraft's Post cereal division and for regional quick serve restaurants.
Entertainment sales increased for the first nine months of 2002 versus the same
period of 2001 due to better penetration of collector pins into the Disney
resort
Page 12 of 19
properties, as well as higher sales of collector pins to the Disney Store
in the first nine months of 2002. The Company anticipates that its sales of
collector pins to The Disney Store will decrease in 2003. Retail sales increases
were due to increases in sales to Wal-Mart, Target and The Sports Authority,
which more than offset lower sales to Toys R Us. Team sales increased due to
higher sales to concessionaires and NFL teams.
The Company has experienced delays in receiving inventory from Asia due
to the west coast port work stoppage that occurred in October 2002. Due to the
large backlog of products waiting to be brought in to the U.S., the Company
anticipates delays in getting products for several weeks. The Company has not
had any material orders cancelled as a result of the delays, but it is possible
that some of its orders that are expected to ship in the fourth quarter 2002 may
not ship until the first quarter 2003. There is still the potential for another
west coast port work stoppage at the end of the 80-day Taft-Hartley injunction
period in January 2003. To reduce the impact of another work stoppage, the
Company will likely accelerate its inventory deliveries in the fourth quarter
2002 to allow for the fulfillment of first quarter 2003 orders.
PRODUCT LINE % OF SALES Nine Months Ended
September 30,
2002 2001
------ ------
Footballs 17% 27%
Baseballs 14% 20%
Basketballs 7% 8%
Bobbleheads 28% --
Helmets 1% --
Collector pins 14% 15%
Playground balls 12% 13%
Soccer/volleyballs 2% 7%
Other 5% 10%
------ ------
Total 100% 100%
====== ======
The Company realized product sales increases in the first nine months
of 2002, versus the first nine months of 2001 from its new product lines
(bobbleheads and helmets), and from playground balls (up 46%), collector pins
(up 37%), basketballs (up 30%), and baseballs (up 1%), with offsetting declines
in soccer/volleyballs (down 50%) and footballs (down 3%).
GROSS PROFIT:
Gross profit increased $4.9 million, or 60%, for the first nine months
of 2002 from the gross profit for the first nine months of 2001. Gross profit as
a percentage of sales increased to 36% for the first nine months of 2002 from
35% for the first nine months of 2001. The increase in gross margin is due to
higher margins on all the Company's main product lines and in each sales
channel, except promotions.
OPERATING EXPENSE:
Total operating expenses increased $3.2 million, or 38%, for the first
nine months of 2002 as compared to the first nine months 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 nine
months of
Page 13 of 19
2002 from 36% for the first nine months of 2001. Non-revenue and non-salary
related operating expenses increased by 8% for the first nine months of 2002
compared to the first nine months of 2001.
Royalty expenses increased $1 million, or 55%, for the first nine
months of 2002 versus the first nine months of 2001. Royalty expense increased
due to the increase in revenue. Royalty expense as a percentage of sales
remained constant at 7% for both the first nine months of 2002 and 2001.
Marketing expenses increased $1.3 million, or 49%, for the first nine
months of 2002 compared to the first nine months of 2001. The increase in
marketing expenses is attributable to higher commissions and higher salary and
salary related items resulting from increased headcount and higher bonus
accruals. Marketing expenses as a percentage of sales remained at a constant 11%
for both the first nine month period of 2002 and 2001.
General and administrative expenses increased $1 million, or 26%, for
the first nine months of 2002 compared to the first nine months of 2001. The
increase is primarily related to salary and salary related items resulting from
increased headcount and higher bonus accruals offset by a decrease in bad debt
expense. General and administrative expenses as a percentage of sales decreased
to 13% for the first nine months of 2002 from 16% for the first nine months of
2001.
OTHER INCOME (EXPENSES):
Interest expense decreased by 56% for the first nine months of 2002
compared to the first nine months of 2001. This decrease reflects a decrease in
the amount of the Company's debt and capital lease obligations as discussed
under "Liquidity and Capital Resources".
Interest income decreased by 26% for the first nine months of 2002 from
the interest income for the first nine months of 2001. Excess cash is deposited
in an interest-bearing account. The decrease reflects lower interest rates in
the first nine months of 2002 versus the first nine months of 2001.
INCOME TAX EXPENSE (BENEFIT):
The Company recorded income tax expense of $.6 million for the first
nine months of 2002 calculated at an effective tax rate of 40% compared to an
income tax benefit of $.1 million for continuing operations and $.3 million for
discontinued operations for the first nine months of 2001.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's net working capital increased $.9 million from December
31, 2001 to September 30, 2002. Cash and equivalents decreased $1.7 million from
December 31, 2001 to September 30, 2002 as $.5 million of cash was used in
operating activities, $.3 million of cash was used in investing activities and
$.9 million of cash was used in financing activities.
At September 30, 2002, the Company has commitments for minimum
guaranteed royalties under licensing agreements totaling $.9 million in the
aggregate through 2005, of which $.09 million is due by December 31, 2002.
Management expects these guaranteed royalties to be funded from operating cash
flows.
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
Page 14 of 19
plus .5% (5.25% as of September 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 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 September 30, 2002. The $.8
million outstanding under the special sublimit was the only outstanding
borrowings under the credit line at September 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 September 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 September 30, 2002,
the Company's only variable rate debt outstanding was the $.8 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.
ITEM 4. VALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES:
The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
reports filed pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms,
and that such information is accumulated and communicated to the Company's
management, including its chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure.
Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including its Chairman and Chief Executive Officer, Michael Favish,
and its Senior Vice President and Chief Financial Officer, Thomas R.
Hillebrandt, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon the foregoing, the Company concluded that its disclosure controls and
procedures are effective in timely alerting the Company's management to material
information relating to the Company required to be included in the Company's
Exchange Act reports.
CHANGES IN INTERNAL CONTROLS:
Since the most recent review of the Company's disclosure controls and
procedures by Messrs. Favish and Hillebrandt, there have been no significant
changes in internal controls or in other factors that could significantly affect
these controls.
Page 15 of 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.4(3) Form of Employment Agreement with Michael Favish
dated August 10, 2002
99.1 Certifications 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 September 30, 2002
None
Page 16 of 19
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 14, 2002 BY:/s/ Michael Favish
------------------------------
Michael Favish
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: November 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 19
RULE 13a-14 CERTIFICATIONS
I, Michael Favish, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FOTOBALL USA, INC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 BY: /s/ Michael Favish
----------------------------------
Michael Favish
Chairman and Chief Executive Officer
(Principal Executive Officer)
Page 18 of 19
I, Thomas R. Hillebrandt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of FOTOBALL USA, INC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 BY: /s/ Thomas R. Hillebrandt
--------------------------------
Thomas R. Hillebrandt
Senior Vice President and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
Page 19 of 19