Fotoball USA Inc. reported net sales for the third quarter of 2003 were $8.2 million with a net loss per diluted common share of ($0.01) versus third quarter of 2002 net sales of $11.1 million with a net income of $0.07 per diluted common share.
Net sales for the nine months ended Sept. 30, 2003 were $24.7 million with a net loss per diluted common share of ($0.06) versus the nine months ended Sept. 30, 2002 net sales of $36.1 million with a net income of $0.23 per diluted common share. The pre-tax loss of ($367,000) for the nine months ended Sept. 30, 2003 includes $333,000 of expenses related to the unsolicited offer and to the company's attempted acquisition in the first quarter of 2003.
“The decline in third quarter sales compared to last year's third quarter was primarily due to declines in Disney Store and Disney theme park business and Quick-Serve restaurant promotional activity which we were not able to repeat in 2003. The team division has continued its winning streak completing its 12th consecutive quarter of year over year growth. Retail sales also had year over year quarterly growth coming in at 8% higher than last year's third quarter on strong sales to catalog retailers,” said Michael Favish, chairman and chief executive officer.
“Unfortunately, the record revenue, gross profit and margin gains of the retail and team sales divisions achieved this year have not been enough to offset the declines in the entertainment and promotional sales groups. The lower than expected revenue combined with the expense of the unsolicited offer kept us from reaching profitability in the third quarter. Knowing that the fourth quarter is historically a challenging sales quarter for us, we anticipate that we will record a loss in the fourth quarter and therefore a loss for the full year 2003,” stated Scott Dickey, president & chief operating officer.
In response to shareholder questions, the company announced that the special committee, comprised of the independent directors, continues the process of evaluating several strategic alternatives and proposals with the help of its financial advisor, Imperial Capital LLC.
Financial Review (See table below for financial statements)
The decrease in third quarter 2003 sales compared to third quarter 2002 sales was attributable to a 65% decrease in promotion sales and a 49% decrease in entertainment sales offset by a 13% increase in team sales and an 8% increase in retail sales. For the third quarter of 2003, retail sales represented 47% of total company sales, team sales were 21% of sales, entertainment sales were 20% of sales, and promotion sales were 12% of sales.
Sales of Major League Baseball licensed merchandise decreased from the third quarter of 2002 to the third quarter of 2003 as a result of lower promotional sales. Sales of National Football League licensed merchandise increased from the third quarter of 2002 to the third quarter of 2003 as a result of higher team facsimile autograph football sales. Sales of college licensed merchandise decreased from the third quarter of 2002 to the third quarter of 2003 as a result of decreased department store and mass merchant sales.
The decrease in net income for the third quarter of 2003 from the third quarter of 2002 was due to a decrease in sales and $171,000 of expenses related to the un-solicited offer (offset by an increase in gross margin of 4.9 percentage points). The increase in gross margin was due to higher gross margin on retail and promotional sales.
Marketing expenses as a percentage of sales increased 2.6 percentage points from the third quarter of 2002 to the third quarter of 2003 due to lower sales in 2003. Marketing expenses decreased by $98,000 from the third quarter of 2002 to the third quarter of 2003 due to lower selling and bonus expenses offset by higher salary and sample expenses. Excluding the un-solicited offer related expenses general and administrative expenses as a percentage of sales increased 3.4 percentage points from the third quarter of 2002 to the third quarter of 2003. Excluding the un-solicited offer related expenses, general and administrative expenses decreased by $126,000 from the third quarter of 2002 to the third quarter of 2003 due to lower bonus, salary related, travel and computer consulting expenses.
Working capital decreased $0.4 million from Dec. 31, 2002 to Sept. 30, 2003. Cash decreased $1.7 million from Dec. 31, 2002 to Sept. 30, 2003 as $1.0 million of cash was used in operating activities, $0.3 million of cash was used in investing activities and $0.4 million of cash was used in financing activities. Annualized gross DSO decreased from 50 days at Sept. 30, 2002 to 49 days as of Sept. 30, 2003. Annualized gross inventory turns decreased from 6.7 as of Sept. 30, 2002 to 4.4 as of Sept. 30, 2003. Bank debt was reduced to $0.2 million at Sept. 30, 2003 from $0.7 million at Dec. 31, 2002. As of Sept. 29, 2003, the company obtained a modification to its letter of credit agreement removing the net income and interest coverage covenants.
FOTOBALL USA, INC.
FINANCIAL STATEMENTS
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
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Net sales $8,249,992 $11,113,641 $24,679,127 $36,092,233
Cost of sales 4,762,213 6,959,131 14,735,023 22,933,517
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Gross profit 3,487,779 4,154,510 9,944,104 13,158,716
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Operating expenses
Royalties 708,484 801,311 2,127,257 2,695,267
Marketing 1,120,037 1,218,448 3,329,052 3,897,291
General and
administrative 1,609,920 1,565,124 4,487,436 4,699,145
Depreciation and
amortization 124,911 128,087 375,500 386,222
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Total operating
expense 3,563,352 3,712,970 10,319,245 11,677,925
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Income (loss)
from operations (75,573) 441,540 (375,141) 1,480,791
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Other income (expense)
Interest expense (2,734) (7,043) (8,905) (33,123)
Interest income 3,584 16,900 16,809 63,252
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Total other
income
(expense) 850 9,857 7,904 30,129
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Income (loss) from
operations before
income tax (74,723) 451,397 (367,237) 1,510,920
Income tax expense
(benefit) (29,889) 180,559 (146,895) 604,368
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Net income (loss) $(44,834) $270,838 $(220,342) $906,552
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Net income (loss) per
common share:
Basic $(0.01) $0.08 $(0.06) $0.25
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Diluted $(0.01) $0.07 $(0.06) $0.23
