Fotoball USA Inc. reported nets sales of $8.9 million for the first quarter of 2003 and a loss per diluted common share of ($0.03) versus 2002 net sales of $10.7 million and net income of $0.05 per diluted common share.
The net loss for the current quarter was ($103,000), as compared to $180,000 net income reported for the first quarter of 2002.
“As we previously indicated, the lack of a similar sized promotion to the Post Cereal promotion which represented $3.8 million in 2002 Q1 revenue, has resulted in a slower than anticipated start to our fiscal 2003 performance. Despite the volatility of our existing promotional revenue, the company’s core retail consumer products business continues to show tremendous top line growth and margin improvement. While we are disappointed with our current 2003 outlook, we are committed to creating a solid foundation of promotional revenue reducing the lack of predictability in our current business model,” said Michael Favish, chairman and chief executive officer.
In November 2002 the company began pursuing the acquisition of the assets of a global sporting goods company. The company was unsuccessful in acquiring 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 conclude the acquisition, it is required to expense these costs currently. As these costs are unusual for the company and not a part of its recurring business, the company believes it is of value to investors to view its first quarter 2003 loss both with and without the acquisition costs. The net loss and loss per diluted common share excluding the acquisition costs for the first quarter 2003 are as follows:
Net loss as reported ($103,000) Add acquisition costs, net of tax benefit of $65,000 97,000 ---------- Net loss excluding acquisition costs ($6,000) ========== Loss per diluted common share excluding acquisition costs ($0.00) ==========
“As part of our continuing strategy to expand the business through a combination of organic growth and product line acquisitions, the company was involved in the pursuit of a significant transaction over the past few months. While the costs incurred negatively impacted our current quarterly performance, we believe the direction and outcome of our efforts significantly increased the company’s ability to successfully execute transactions of this nature in the future. Given the size and the synergies of the acquisition, it would have been a giant step forward in increasing the value of our company and the return to our current shareholders. We remain committed to growing our existing business, but we will continue to consider future acquisitions that will be accretive in nature and easily integrated into the existing infrastructure of Fotoball,” stated Scott Dickey, president and chief operating officer.
The decrease in first quarter 2003 sales compared to first quarter 2002 sales was attributable to a 78% decrease in promotion sales and a 2% decrease in entertainment sales, offset by a 55% increase in retail sales and a 44% increase in team sales. Without the impact of the Post revenue, promotional sales for the first quarter increased 20% versus year prior. Entertainment sales were significantly impacted by the loss of Disney Store revenue which represented over $0.8 million in sales in the first quarter 2002. Retail and team sales increases were attributable to strong Fiesta Bowl and Super Bowl sales efforts 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. For the first quarter of 2003, retail sales represented 45% of total company sales, entertainment sales were 26% of sales, team sales were 18% of sales and promotion sales were 11% of sales.
The decrease in net income for the first quarter of 2003 was due to a decrease in sales (offset by an increase in gross margin of 4.3 percentage points from the first quarter of 2002), an increase in royalty expenses as a percentage of sales, up 1.7 percentage points from the first quarter of 2002 and the acquisition costs noted above. The increase in royalty expense as a percentage of sales was due to a higher percentage of licensed merchandise sales in 2003 versus 2002 as well as the mix of entertainment license sales carrying higher royalty rates. Sales of Major League Baseball licensed merchandise decreased from the first quarter of 2002 to the first quarter of 2003 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 as a percentage of sales increased 1.5 percentage points from the first quarter of 2002 to the first quarter of 2003 due to lower sales in 2003. Marketing expenses decreased by $92,000 from the first quarter of 2002 to the first quarter of 2003 due to lower commission expenses offset in part by higher trade show and salary related expenses. General and administrative expenses as a percentage of sales increased 5.6 percentage points from the first quarter of 2002 to the first quarter of 2003. The increase in general and administrative expenses was due to an increase in salary related and facility expenses and the acquisition costs noted above.
Working capital decreased $0.2 million from Dec. 31, 2002 to March 31, 2003. Cash decreased $2.1 million from Dec. 31, 2002 to March 31, 2003 as $1.8 million of cash was used in operating activities, $0.2 million of cash was used in investing activities and $0.1 million of cash was used in financing activities. Quarterly gross DSO increased from 40 days for the first quarter of 2002 to 56 days for the first quarter of 2003. The increase in DSO was due to the unusually low DSO in the first quarter 2002 resulting from the Post Cereal promotion. Quarterly gross inventory turns decreased from 6.9 for the first quarter 2002 to 6.2 for the first quarter 2003. Bank debt was reduced to $0.5 million at March 31, 2003 from $0.7 million at Dec. 31, 2002. Comerica Bank has agreed to retroactively amend the company’s $100,000 rolling six months of net income covenant to $100,000 net income on a rolling 12 month basis.
FOTOBALL USA INC. FINANCIAL STATEMENTS 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 tax (171,564) 299,174 Income tax expense (benefit) (68,626) 119,670 ------------ ------------- Net income (loss) $(102,938) $179,504