Fotoball USA Inc. reported net sales for the second quarter
of 2003 were $7.5 million with a net loss per diluted common share of ($0.02) versus second quarter of 2002 net sales of $14.3 million with a net income of $0.12 per diluted common share.
Net sales for the six months ended June 30, 2003 were $16.4 million with a net loss per diluted common share of ($0.05) versus the six months ended June 30, 2002 net sales of $25.0 million with a net income of $0.16 per diluted common share.
“The $8.6 million decline in sales for the first six months of 2003 compared to the first six months of 2002 was primarily due to the $7.1 million Post promotion, $1.6 million of other Quick-Serve restaurant bobblehead promotions and $1.6 million in Disney Store business we secured in 2002 but were not able to repeat in 2003.
Despite the loss of the Disney Store business, year-to-date June 30, 2003 entertainment sales were down only $1.1 million from year-to-date June 30, 2002 indicating we have made significant progress in expanding our tourist attractions business beyond Disney. In addition, year-to-date June 30, 2003 retail sales are up 10% versus year-to-date June 30, 2002 and the team division completed its 11th consecutive quarter of year over year growth,” said Michael Favish, chairman and chief executive officer.
“The Disney Store was a $3.4 million account for Fotoball in 2002 and, due to the current challenges facing the Disney Store, we do not expect to secure any significant revenue from this client for the remainder of the year. The loss of the Disney Store business, combined with the loss of the Post promotion, has left a bigger hole in 2003
than we have been able to fill. As a consequence, we do not expect to attain the level of profitability we had previously planned to achieve in 2003. While we expect the third quarter, traditionally our strongest period, to assist in closing the shortfall of the first half, our fourth quarter forecast represents a challenge that will
result in the Company not being able to achieve any real level of profitability this year,” stated Scott Dickey, president & chief operating officer.
“Today’s business model requires greater promotional revenue in order to achieve the profitability that
management, the Board and our investors require. Given the
unpredictability and non-recurring nature of the promotions business, we are developing a strategic plan to structure Fotoball as a more profitable entity in 2004. Our strategy will not rely simply on top-line growth, but also on process improvements that will improve the efficiency of our operations. Additionally, we will embark upon an aggressive cost of sales reduction initiative including product cost reductions with our primary Far East vendors by year-end. Finally, as noted below, we have reorganized our sales and product marketing staff.”
The company announced that it has hired former Salt Lake Olympic Committee executive Kevin Donovan and former Nike executive Sandy McElfresh to lead the promotional and retail sales and marketing initiatives of the Company. Also joining the team to lead product marketing is former Upper Deck marketing executive Jason Taitano.
As Vice President and Managing Director of Marketing Headquarters (MHQ), the premium and promotional arm of the company, Donovan will be accelerating the MHQ full service promotional marketing agency growth strategy and leading the company’s continued efforts in supporting corporate investment in sports and entertainment. As Vice President of Retail Sales & Marketing, McElfresh will be overseeing a newly restructured product marketing team and the combined sales teams servicing the mass merchant and sporting goods retail and team concessionaire customer base.
“Over the past six months, as we have incorporated Sandy’s sales leadership and Jason’s product marketing expertise, the organization has made tremendous progress in restructuring and expanding our sales coverage and elevating our ability to bring new products to market in
a timely and more effective manner,” stated Scott Dickey, president & chief operating officer. “With Kevin joining the team, we now have the necessary talent and required leadership to successfully grow and expand the company’s full service promotional marketing capabilities and capture a sustainable revenue stream with Fortune 500 clientele.”
The company announced that it intends to move forward with its stock buyback plan and is planning to purchase shares of Fotoball common stock in the coming weeks. The share purchases may be made from time to time on the open market or in privately negotiated transactions depending on market conditions and other factors all in accordance with the requirements of the Securities and Exchange Commission. The plan does not obligate the company to acquire any specific number of shares and may be discontinued at any time.
The company also announced that it has received from a third party an unsolicited non-cash preliminary indication of interest for the acquisition of the outstanding shares of Fotoball common stock at a price in excess of the current market price of Fotoball common stock, which the board of directors determined not to pursue at this time.
Financial Review
The decrease in second quarter 2003 sales compared to second quarter 2002 sales was attributable to a 93% decrease in promotion sales and a 29% decrease in entertainment sales, a 25% decrease in retail sales offset by a 9% increase in team sales. For the second quarter of 2003, retail sales represented 34% of total company sales,
entertainment sales were 33% of sales, team sales were 28% of sales and promotion sales were 5% of sales.
Sales of Major League Baseball licensed merchandise decreased from the second quarter of 2002 to the second quarter of 2003 as a result of lower promotional sales. Sales of National Football League licensed merchandise decreased from the second quarter of 2002 to the second
quarter of 2003 as a result of the timing of sales of Super Bowl merchandise to Sports Illustrated in 2002 versus 2003. Sales of college licensed merchandise increased from the second quarter of 2002 to the second quarter of 2003 as a result of increased national basketball championship sales. Sales of Scooby-Doo licensed
merchandise decreased in the second quarter of 2003 compared to the second quarter of 2002 due to a Wal-Mart promotion in the second quarter of 2002.
The decrease in net income for the second quarter of 2003 from the second quarter of 2002 was due to a decrease in sales (offset by an increase in gross margin of 2.0 percentage points and decrease in royalty expense as a percentage of sales of 0.3 percentage points from the second quarter of 2002). The increase in gross margin was due to a lower percentage of sales coming from promotions and margin improvements with key retail customers such as Target.
Marketing expenses as a percentage of sales increased 3.6 percentage points from the second quarter of 2002 to the second quarter of 2003 due to lower sales in 2003. Marketing expenses decreased by $0.4 million from the second quarter of 2002 to the second quarter of 2003 due to lower commission and bonus expenses. General and administrative expenses as a percentage of sales increased
4.3 percentage points from the second quarter of 2002 to the second quarter of 2003. General and administrative expenses decreased by $0.5 million from the second quarter of 2002 to the second quarter of 2003 due to lower bonus, travel and telecommunications expenses resulting from the credit of re-billing past charges under a new contract.
Working capital decreased $0.3 million from December 31, 2002 to June 30, 2003. Cash decreased $1.4 million from December 31, 2002 to June 30, 2003 as $0.9 million of cash was used in operating activities, $0.2 million of cash was used in investing activities and $0.2 million of cash was used in financing activities. Annualized gross DSO increased from 43 days at June 30, 2002 to 51 days as of June 30, 2003. The increase in DSO was due to the unusually low DSO in the first half of 2002 resulting from the Post Cereal promotion. Annualized gross inventory turns decreased from 7.7 as of June 30, 2002 to 5.4 as of June 30, 2003. Bank debt was reduced to $0.4 million at June 30, 2003 from $0.7 million at December 31, 2002.
FOTOBALL USA INC.
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------- ------------ ------------ ------------
Net sales $7,548,506 $14,274,321 $16,429,135 $24,978,592
Cost of sales 4,679,330 9,135,471 9,972,810 15,974,386
----------- ------------ ------------ ------------
Gross profit 2,869,176 5,138,850 6,456,325 9,004,206
----------- ------------ ------------ ------------
Operating expenses
Royalties 592,794 1,082,203 1,418,773 1,893,956
Marketing 994,597 1,372,337 2,209,015 2,678,844
General and
administrative 1,279,807 1,807,655 2,877,515 3,134,020
Depreciation and
amortization 125,227 127,718 250,589 258,135
----------- ------------ ------------ ------------
Total
operating
expense 2,992,425 4,389,913 6,755,892 7,964,955
----------- ------------ ------------ ------------
Income (loss)
from
operations (123,249) 748,937 (299,567) 1,039,251
----------- ------------ ------------ ------------
Other income
(expense)
Interest expense (3,112) (11,161) (6,172) (26,080)
Interest income 5,410 22,573 13,224 46,352
----------- ------------ ------------ ------------
Total other
income
(expense) 2,298 11,412 7,052 20,272
----------- ------------ ------------ ------------
Income (loss) from
continuing
operations before
income tax (120,951) 760,349 (292,515) 1,059,523
Income tax
expense
(benefit) (48,380) 304,140 (117,006) 423,809
----------- ------------ ------------ ------------
Net income (loss) $(72,571) $456,209 $(175,509) $635,714
