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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 March 31, 2003
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.
- --------------------------------------------------------------------------------
(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
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
As of April 30, 2003, the Company had 3,651,501 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 March 31, 2003 (unaudited) and December 31, 2002 3
Statements of Operations for the three months ended March 31, 2003 and 2002 (unaudited) 4
Statements of Cash Flows for the three months ended March 31, 2003 and 2002 (unaudited) 5
Notes to Financial Statements (unaudited) 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 10 -14
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
Item 4. 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
March 31, 2003 December 31,
(unaudited) 2002
-------------------- --------------------
ASSETS
Current assets
Cash and equivalents $ 3,091,992 $ 5,189,250
Accounts receivable, net 4,911,351 3,684,133
Income tax and other receivables 224,309 125,489
Inventories 4,087,796 3,946,922
Prepaid expenses and other 362,840 317,841
Deferred income taxes 908,560 908,560
-------------------- --------------------
Total current assets 13,586,848 14,172,195
Property and equipment, net 2,246,000 2,203,169
Deposits and other assets 79,498 79,498
-------------------- --------------------
$ 15,912,346 $ 16,454,862
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 2,874,468 $ 3,137,987
Customer deposits 156,315 163,102
Income taxes payable -- 99,200
Current portion of capital leases 92,815 73,796
-------------------- --------------------
Total current liabilities 3,123,598 3,474,085
-------------------- --------------------
Long-term liabilities
Line of credit 526,898 669,397
Capital leases, net of current portion 98,298 135,075
Deferred rent 306,137 293,969
Deferred income taxes 53,000 53,000
Long-term reserve for discontinued operations -- 1,480
-------------------- --------------------
Total long-term liabilities 984,333 1,152,921
-------------------- --------------------
Total liabilities 4,107,931 4,627,006
-------------------- --------------------
Stockholders' equity
Preferred stock, $.01 par value; Series A, authorized - 1,000,000 shares, 0
shares issued and outstanding at March 31, 2003 and
December 31, 2002, respectively -- --
Common stock, $.01 par value; authorized - 15,000,000 shares;
Issued and outstanding - 3,651,501 shares at March 31, 2003
and 3,609,834 shares at December 31, 2002 36,515 36,098
Additional paid-in capital 11,833,448 11,754,368
Retained earnings (accumulated deficit) (65,548) 37,390
-------------------- --------------------
Total stockholders' equity 11,804,415 11,827,856
-------------------- --------------------
$ 15,912,346 $ 16,454,862
==================== ====================
See accompanying Notes to Unaudited Financial Statements
Page 3 of 19
FOTOBALL USA, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
----------------------------------
2003 2002
--------------- ---------------
Net sales $ 8,880,629 $ 10,704,270
Cost of sales 5,293,480 6,838,914
--------------- ---------------
Gross profit 3,587,149 3,865,356
--------------- ---------------
Operating expenses
Royalties 825,979 811,753
Marketing 1,214,418 1,306,507
General and administrative 1,597,708 1,326,365
Depreciation and amortization 125,362 130,417
--------------- ---------------
Total operating expense 3,763,467 3,575,042
--------------- ---------------
Income (loss) from operations (176,318) 290,314
--------------- ---------------
Other income (expense)
Interest expense (3,060) (14,918)
Interest income 7,814 23,778
--------------- ---------------
Total other income (expense) 4,754 8,860
--------------- ---------------
Income (loss) before income taxes (171,564) 299,174
Income tax expense (benefit) (68,626) 119,670
--------------- ---------------
Net income (loss) $ (102,938) $ 179,504
=============== ===============
Weighted average number of common shares outstanding:
Basic 3,641,168 3,581,677
=============== ===============
Diluted 3,641,168 3,863,073
=============== ===============
Net Income (loss) per common share:
Basic $ (0.03) $ 0.05
=============== ===============
Diluted $ (0.03) $ 0.05
=============== ===============
See accompanying Notes to Unaudited Financial Statements
Page 4 of 19
FOTOBALL USA, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
--------------------------------------
2003 2002
----------------- -----------------
Cash flows from operating activities:
Net income (loss) $ (102,938) $ 179,504
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization of property and equipment 166,615 138,115
Provision for accounts receivable reserves 42,132 25,066
Changes in operating assets and liabilities:
Accounts receivable (1,269,350) (468,465)
Income tax and other receivables (98,820) --
Inventories (140,874) 101,165
Prepaid expenses and other (44,999) (502,902)
Accounts payable and accrued expenses (263,519) 1,268,917
Customer deposits (6,787) (1,421,029)
Income taxes payable (99,200) 119,670
Deferred rent 12,168 10,964
Long-term reserve for discontinued operations (1,480) (8,352)
----------------- -----------------
Net cash used in operating activities (1,807,052) (557,347)
----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment (209,446) (146,525)
----------------- -----------------
Net cash used in investing activities (209,446) (146,525)
----------------- -----------------
Cash flows from financing activities:
Net borrowings from line of credit (142,499) --
Proceeds from long-term debt -- 410,006
Payments on capital leases (17,758) (28,160)
Payments on long-term debt -- (595,883)
Proceeds from exercise of stock options 79,497 6,752
----------------- -----------------
Net cash used in financing activities (80,760) (207,285)
----------------- -----------------
Net decrease in cash and equivalents (2,097,258) (911,157)
Cash and equivalents, beginning of period 5,189,250 5,779,203
----------------- -----------------
Cash and equivalents, end of period $ 3,091,992 $ 4,868,046
================= =================
Supplemental disclosure of cash flow information:
Interest paid $ 12,447 $ 33,676
Incomes taxes paid $ 99,200 $ --
See accompanying Notes to Unaudited Financial Statements
Page 5 of 19
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
1. BASIS OF PRESENTATION
The balance sheet as of March 31, 2003, the statements of operations for the
three months ended March 31, 2003 and 2002 and the statements of cash flows for
the three months ended March 31, 2003 and 2002 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, 2002.
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 months ended March 31, 2003 are not
necessarily indicative of the results of operations to be expected for any other
interim period or for the year ending December 31, 2003.
RECLASSIFICATIONS - Certain amounts in the 2002 financial statements have been
reclassified to conform to the 2003 presentation.
STOCK-BASED COMPENSATION - In December 2002, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123 (SFAS 148). SFAS 148 amends FASB Statement No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of Statement 123 to require prominent disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company adopted the disclosure provisions of SFAS 148 beginning with its annual
financial statements for the year ended December 31, 2002.
The Company applies Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations in accounting for its
stock options. No compensation expense has been recognized for the options
granted under the Company's 1998 Stock Option Plan. Compensation cost is based
upon the fair value at the grant date consistent with the methodology prescribed
under SFAS No. 123, "Accounting for Stock-Based Compensation". The following
table represents the effect on net income (loss) and earnings per share if the
Company had applied the fair value recognition provisions of FASB Statement No.
123 "Accounting for Stock-Based Compensation" as amended by SFAS No. 148
"Accounting for Stock-Based Compensation Transition and Disclosure". The fair
value of
Page 6 of 19
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
the options granted during 2003 is estimated to be $1.94 on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
dividend yield 0%, volatility of 75%, risk-free interest rate of 1.41%, actual
forfeitures and an expected option life of 4 years. The fair value of the
options granted during 2002 is estimated to range from $2.61 to $2.87 on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: dividend yield 0%, volatility of 77%, risk-free interest rate of
1.57%, actual forfeitures and an expected option life of 4 years.
Three Months Ended
March 31,
2003 2002
----------------- -----------------
Net income (loss) as reported $ (102,938) $ 179,504
Deduct: stock based compensation determined
under the fair value based method for all
rewards, net of tax (17,000) (30,000)
----------------- -----------------
Pro forma net income (loss) $ (119,938) $ 149,504
================= =================
Earnings per share:
Basic - as reported $ (0.03) $ 0.05
================= =================
Basic - pro forma $ (0.03) $ 0.04
================= =================
Diluted - as reported $ (0.03) $ 0.05
================= =================
Diluted - pro forma $ (0.03) $ 0.04
================= =================
2. 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
March 31, 2003 and December 31, 2002:
March 31, December 31,
2003 2002
-------------- ---------------
Finished goods $ 3,128,486 $ 2,817,140
Raw material 1,411,846 1,560,081
Less allowance for discontinued and obsolete inventory (452,536) (430,299)
-------------- ---------------
Total $ 4,087,796 $ 3,946,922
============== ===============
Page 7 of 19
FOTOBALL USA, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at March 31,
2003 and December 31, 2002:
March 31, December 31,
2003 2002
-------------- --------------
Accounts payable $ 2,334,173 $ 1,867,852
Accrued payroll and benefit expenses 215,152 211,829
Accrued commissions and bonuses 103,820 756,703
Royalties payable 6,390 26,355
Current reserve for discontinued operations 15,002 25,206
Accrued joint advertising costs 198,312 247,644
Accrued other taxes 1,619 2,398
-------------- --------------
$ 2,874,468 $ 3,137,987
============== ==============
4. 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 (4.25% as of March 31, 2003) plus 0.5%. The credit line
contains a special sublimit of $1.2 million that is reduced by $0.3 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 twelve 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 credit line matures on December 24, 2004. On April 16, 2003 the
Company retroactively amended the net income covenant from $100,000 on a rolling
six month basis to $100,000 on a rolling twelve month basis. The Company is in
compliance with the amended covenants as of March 31, 2003. At March 31, 2003,
$0.5 million under the special sublimit was the only outstanding borrowings.
5. 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 MONTHS ENDED MARCH 31, 2003 AND 2002
Basic and Diluted EPS was computed as follows:
Three Months Ended March 31,
-------------------------------
2003 2002
--------------- ---------------
Net income (loss) $ (102,938) $ 179,504
=============== ===============
Weighted average shares for basic EPS 3,641,168 3,581,677
=============== ===============
Basic EPS $ (0.03) $ 0.05
=============== ===============
Weighted average shares for basic EPS 3,641,168 3,581,677
Plus dilutive stock options -- 281,396
--------------- ---------------
Weighted average shares for diluted EPS 3,641,168 3,863,073
=============== ===============
Diluted EPS $ (0.03) $ 0.05
=============== ===============
For the three months ended March 31, 2003 and 2002 shares related to stock
options of 642,225 and 173,200, 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 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, 2002.
RESULTS OF OPERATIONS:
The following table sets forth certain operating data (in dollars and
as a percentage of the Company's net sales) for the periods presented:
Three Months Ended March 31,
2003 2002
----------------------------------------------------
Net sales $ 8,880,629 100% $ 10,704,270 100%
Cost of sales 5,293,480 60 6,838,914 64
Operating expenses 3,763,467 42 3,575,042 33
Income (loss) from operations (176,318) (2) 290,314 3
Interest expense (3,060) -- (14,918) --
Interest income 7,814 -- 23,778 --
Inc. (loss) before inc. tax (171,564) (2) 299,174 3
Income tax exp. (benefit) (68,626) (1) 119,670 1
------------------ ------------------
Net income (loss) $ (102,938) (1)% $ 179,504 2%
================== ==================
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002:
SALES:
DISTRIBUTION CHANNEL % OF SALES Three Months Ended March 31,
2003 2002
---------------- ---------------
Retail 45% 24%
Entertainment 26% 22%
Team 18% 10%
Promotion 11% 44%
---------------- ---------------
Total 100% 100%
================ ===============
Net sales decreased $1.8 million, or 17%, for the first quarter of 2003
from sales for the first quarter of 2002. The decrease in sales was due to a
decrease in promotion sales (down 78%) and entertainment sales (down 2%), with
an offsetting increase in retail sales (up 55%) and team sales (up
Page 10 of 19
44%). Promotion sales decreased due to a $3.8 million promotion in the first
quarter of 2002 that the Company was not able to replace in the first quarter of
2003. Entertainment sales decreased due to a decrease in Disney Store sales,
which represented over $0.8 million in sales in the first quarter of 2002,
offset by increases in Super Bowl merchandise sales to direct marketing
customers. Retail sales were up due to increases in college football national
championship and Super Bowl licensed merchandise sales as well as the advent of
new product categories being sold into the existing customer base. The new
products consisted of Super Bowl collector pins, souvenir batting helmets and
mini-bobblehead dolls available in all four professional sports leagues. Team
sales were up due to increased Major League Baseball sales.
PRODUCT LINE % OF SALES Three Months Ended March 31,
2003 2002
------------- -------------
Footballs 34% 14%
Baseballs 15% 13%
Basketballs 9% 6%
Bobbleheads 7% 25%
Helmets 3% --
Collector pins 10% 12%
Playground balls 17% 13%
Soccer/volleyballs 2% 1%
Other 3% 16%
------------- -------------
Total 100% 100%
============= =============
The Company realized product sales increases for the first quarter of
2003 versus the first quarter of 2002 from football (up 102%), helmets (up
100%), basketball (up 28%) and playground balls (up 11%) with an offsetting
decline in bobbleheads (down 85%), soccer/volleyballs (down 34%) and collector
pins (down 38%). Baseball sales remained consistent in 2003 and 2002.
GROSS PROFIT:
Gross profit decreased $0.3 million, or 7%, for the first quarter of
2003 from gross profit for the first quarter of 2002. Gross profit as a
percentage of sales increased to 40% for the first quarter of 2003 from 36% for
the first quarter of 2002. The increase in gross margin was primarily due to
higher margins on promotion, retail and team sales.
OPERATING EXPENSES:
Total operating expenses increased $0.2 million, or 5%, for the first
quarter of 2003 from total operating expenses for the first quarter of 2002. The
increase in total operating expenses is primarily due to an increase in
personnel and salary related items and acquisitions costs described below. Total
operating expenses as a percentage of sales increased to 42% for the first
quarter of 2003 from 33% for the first quarter of 2002. Non-revenue and
non-salary related operating expenses increased by 28% for the first quarter of
2003 compared to the first quarter of 2002.
Royalty expenses increased $14,000, or 2%, for the first quarter of
2003 from royalty expenses for the first quarter of 2002. Royalty expenses as a
percentage of sales increased to 9% for the first quarter of 2003 as compared to
8% for the first quarter of 2002. The increase in royalty expense as a
percentage of sales was due to a higher percentage of licensed merchandise sales
in the first quarter of 2003 compared to the first quarter of 2002 as well as
the mix of entertainment license sales carrying higher royalty rates. Sales of
Major League Baseball licensed merchandise for the first quarter of 2003
Page 11 of 19
decreased from the first quarter of 2002 as a result of lower promotional sales.
Sales of National Football League licensed merchandise increased from the first
quarter of 2002 to the first quarter of 2003 as a result of increased Super Bowl
sales. Sales of college licensed merchandise increased from the first quarter of
2002 to the first quarter of 2003 as a result of increased football national
championship sales. Sales of the Spider-Man licensed merchandise continued to
offset decreases in sales of other entertainment property licensed merchandise.
Marketing expenses decreased $0.1 million, or 7%, for the first quarter
of 2003 from marketing expenses for the first quarter of 2002. The decrease in
marketing expenses is attributable to lower commission expenses offset by an
increase in trade show and salary related items. Marketing expenses as a
percentage of sales increased to 14% for the first quarter of 2003 from 12% for
the first quarter of 2002.
General and administrative expenses increased $0.3 million, or 20%, for
the first quarter of 2003 from general and administrative expenses for the first
quarter of 2002. The increase is primarily attributable to acquisition costs,
increased salary-related and facility costs. In November 2002 the company began
pursuing the acquisition of the assets of a global sporting goods company. The
company was unable to acquire the assets of the business. As a result of its
acquisition efforts, the company incurred various expenses including legal fees
and investment banking fees totaling $162,000. Under generally accepted
accounting principles had the acquisition been successful, these costs would
have been capitalized as part of the acquisition costs. Since the company has
determined that it will be unable to complete the acquisition, it is required to
expense these costs in the current period. General and administrative expenses
as a percentage of sales increased to 18% for the first quarter of 2003 from 12%
for the first quarter of 2002.
OTHER INCOME (EXPENSE):
Interest expense decreased by 79% for the first quarter of 2003 from
interest expense for the first quarter of 2002. 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
March 31, 2003 there was $526,898 outstanding under the credit line.
Interest income decreased by 67% for the first quarter of 2003, from
interest income for the first quarter of 2002. Excess cash is deposited into an
interest-bearing depository account. The decrease was due to higher cash
balances during the first quarter of 2002 as compared to the first quarter of
2003.
INCOME TAX EXPENSE (BENEFIT):
The Company recorded income tax benefit of $69,000 for the first
quarter of 2003 calculated at an effective tax rate of 40% compared to $120,000
tax expense for the first quarter of 2002 calculated at an effective tax rate of
40%.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's net working capital decreased to $10.5 million at March
31, 2002 from $10.7 million at December 31, 2002.
Cash flows used in operations increased $1.2 million for the first
quarter of 2003 from cash provided by operations for the first quarter of 2002.
This decrease was primarily the result of increases in accounts receivable and
inventories and a decrease in accounts payable and accrued expenses.
Page 12 of 19
Accounts receivable increased at March 31, 2003 compared to December 31, 2002
due to increased sales in the first quarter of 2003 compared to the fourth
quarter of 2002 and a greater portion of the sales coming in the third month of
the first quarter of 2003 than in the third month of the fourth quarter of 2002.
Inventory increased at March 31, 2003 compared to December 31, 2002 due to the
Company purchasing inventory in preparation for the baseball season. Accounts
payable and accrued expenses decreased at March 31, 2002 compared to December
31, 2002 due to the payment of 2002 accrued bonuses.
Days sales outstanding, calculated on gross accounts receivable and
trailing twelve months sales, increased 33% at March 31, 2003 compared to
December 31, 2002 due to the higher proportion of promotional sales in the first
half of 2002 carrying more favorable payment terms than retail customer sales.
Inventory turns, calculated on gross inventory and trailing twelve months
average cost of sales, decreased 15% at March 31, 2003 compared to December 31,
2002 due to increased inventory levels to prepare for the baseball season.
Cash and equivalents were $3.1 million at March 31, 2003, a decrease of
$2.1 million from $5.2 million of cash and equivalents at December 31, 2002.
This decrease in cash was primarily due to an increase in accounts receivable, a
decrease in accounts payable and accrued expenses, the purchase of fixed assets
and repayment of debt in the first quarter 2003.
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 (4.25% as of March 31, 2003) plus 0.5%. The credit line
contains a special sublimit of $1.2 million that is reduced by $0.3 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 twelve 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 credit line matures on December 24, 2004. On April 16, 2003 the
Company retroactively amended the net income covenant from $100,000 on a rolling
six month basis to $100,000 on a rolling twelve month basis. The Company is in
compliance with the amended covenants as of March 31, 2003. At March 31, 2003,
$0.5 million under the special sublimit was the only outstanding borrowings.
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 at least March 31,
2004.
NEW ACCOUNTING STANDARDS:
In June 2001, the Financial Accounting Standards Board (the "FASB")
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
Page 13 of 19
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 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 adopted the provisions of SFAS 143 on January 1, 2003 and the
adoption of SFAS No. 143 did not have a material effect on its financial
statements.
In April 2002 the FASB issued Statement of Financial Accounting
Standards No. 145 (SFAS No. 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 No. 4, which required all gains and losses from
extinguishments of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect and amending SFAS No. 13 to
require that certain lease modifications that have economic effects similar to
sale lease-back transactions be accounted for in the same manner as sale
lease-back transactions. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002 with early adoption of the provisions related to the
rescission of SFAS No. 4 encouraged. The Company adopted the provisions of SFAS
145 on January 1, 2003 and the adoption of SFAS No. 145 did not have a material
effect on its financial statements.
In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS No. 146), "Accounting for Costs Associated with Exit or
Disposal Activities," which addresses accounting for restructuring and similar
costs. SFAS No. 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force Issue No. 94-3. SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred. Under Issue 94-3, a liability for an exit cost
was recognized at the date of the Company's commitment to an exit plan. SFAS No.
146 also establishes that the liability should initially be measured and
recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of
recognizing any future restructuring costs as well as the amounts recognized.
SFAS No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002. The Company adopted the provisions of SFAS No. 146 on
January 1, 2003 and the adoption of SFAS No. 146 did not have a material effect
on its financial statements.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 provides expanded
accounting guidance surrounding liability recognition and disclosure
requirements related to guarantees, as defined by this interpretation. The
disclosure requirements of this interpretation are effective for interim or
annual periods ending after December 15, 2002. The recognition and measurement
provisions of this interpretation are applicable on a prospective basis only to
guarantees issued or modified after December 31, 2002. The Company adopted the
disclosure provisions of FIN 45 during the quarter ended December 31, 2002. In
the ordinary course of business, the Company is not subject to potential
obligations under guarantees that fall within the scope FIN 45.
On January 17, 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities." Variable interest entities
include such entities often referred to as structured finance or special purpose
entities. FIN 46 expands upon and strengthens existing accounting guidance that
addresses when a company should include in its financial statements the assets,
liabilities and activities of another entity. A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either does not have equity investors with voting rights or has
equity investors that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires a variable interest entity to
be consolidated by a company if that company is subject to a
Page 14 of 19
majority of the risk of loss from the variable interest entity's activities or
is entitled to receive a majority of the entity's residual returns or both. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after June
15, 2003. FIN 46 will also affect leasing transactions where the lessor is a
variable interest entity. Disclosure requirements apply to any financial
statements issued after January 31, 2003. The Company does not believe that the
adoption of this accounting pronouncement will have a material impact on the
Company's financial statements and related disclosures.
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 March 31, 2003, the
Company's only variable rate debt outstanding was the $0.5 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. 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(4) Form of Employment Agreement with Scott P. Dickey
dated April 1, 2003
10.10(13) First Modification to Loan and Security Agreement
with Comerica Bank-California, dated April 16,
2003
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 March 31, 2003
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: May 14, 2003 BY: /s/ Michael Favish
------------------
Michael Favish
Chairman and Chief Executive Officer
(Principal Executive Officer)
Dated: May 14, 2003 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: May 14, 2003 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: May 14, 2003 BY: /s/ Thomas R. Hillebrandt
--------------------------------------
Thomas R. Hillebrandt
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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