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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 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: 0-25918
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EVERLAST WORLDWIDE INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3672716
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1350 Broadway, Suite 2300
New York, NY 10018
(Address of Principal Executive Offices)
(212) 239-0990
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year if changed since last report)
Indicate by check whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes / / No /X/
The number of common equity shares outstanding as of November 11, 2003 was
3,008,236 shares of Common Stock, $.002 par value, and 100,000 shares of Class A
Common Stock, $.01 par value.
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
September 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statements of Income -
Three Months and Nine Months ended September 30, 2003
and 2002 (Unaudited) 4
Consolidated Statements of Cash Flows -
Nine Months ended September 30, 2003 and 2002 (Unaudited) 5
Notes to Consolidated Financial Statements -
Nine Months ended September 30, 2002 - (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 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Items 1 through 5 not applicable
Item 6. Exhibits and Current Reports on Form 8-K 15
SIGNATURES 16
2
EVERLAST WORLDWIDE INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
----------------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 2,151,045 $ 2,530,452
Marketable equity securities 374,235 308,841
Accounts receivable - net 7,004,441 7,697,847
Inventories 12,968,165 11,460,160
Prepaid expenses and other current assets 1,357,521 819,053
------------ ------------
Total current assets 23,855,407 22,816,353
Restricted cash 1,012,542 1,003,701
Property and equipment, net 6,333,309 6,487,830
Goodwill 6,718,492 6,718,492
Trademarks, net 24,717,189 25,401,693
Other assets 1,400,255 1,418,683
------------ ------------
$ 64,037,194 $ 63,846,752
============ ============
LIABILITIES, REDEEMABLE PARTICIPATING PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of Series A redeemable participating preferred stock $ 5,000,000 $ --
Due to factor 3,977,429 3,351,997
Current maturities of long term debt 356,499 363,028
Accounts payable 4,489,674 3,391,334
Income taxes payable 213,557 553,850
Accrued expenses and other current liabilities 772,189 794,543
Preferred dividend payable 249,245 1,450,808
------------ ------------
Total current liabilities 15,058,593 9,905,560
License deposits payable 568,833 563,526
Series A Redeemable participating preferred stock 30,000,000 --
Long term debt, net of current maturities 2,962,683 3,227,324
------------ ------------
Total liabilities 48,590,109 13,696,410
Series A redeemable participating preferred stock -- 35,000,000
------------ ------------
Stockholders' equity:
Common stock, par value $.002; 19,000,000 shares
authorized; 3,182,236 issued, 3,008,236 outstanding 6,364 6,364
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000 1,000
Paid-in capital 11,662,825 11,662,825
Retained earnings 4,436,527 4,205,179
Accumulated other comprehensive income 67,588 2,193
------------ ------------
16,174,304 15,877,561
Less treasury stock, at cost (174,000 common shares) (727,219) (727,219)
------------ ------------
15,447,085 15,150,342
------------ ------------
$ 64,037,194 $ 63,846,752
============ ============
See accompanying notes to the financial statements
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date.
3
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Nine months ended
September 30, September 30,
------------------------------------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
Net sales $ 16,075,363 $ 16,905,001 $ 41,369,708 $ 47,365,508
Cost of goods sold 12,042,771 11,580,971 30,349,610 32,185,853
------------ ------------ ------------ ------------
Gross profit 4,032,592 5,324,030 11,020,098 15,179,655
Net license revenues 1,592,237 1,387,712 4,827,488 4,191,329
------------ ------------ ------------ ------------
5,624,829 6,711,742 15,847,586 19,370,984
------------ ------------ ------------ ------------
Operating expenses:
Selling and shipping 3,235,446 3,373,159 9,067,557 9,255,200
General and administrative 1,482,815 1,384,253 4,420,156 4,465,518
Amortization 228,168 228,168 684,504 684,504
------------ ------------ ------------ ------------
4,946,429 4,985,580 14,172,217 14,405,222
------------ ------------ ------------ ------------
Income from operations 678,400 1,726,162 1,675,369 4,965,762
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (242,739) (203,542) (717,948) (523,122)
Interest expense on redeemable participating preferred
stock (112,440) -- (112,440) --
Investment income 14,382 23,217 42,391 36,875
------------ ------------ ------------ ------------
(340,797) (180,325) (787,997) (486,247)
------------ ------------ ------------ ------------
Income before provision for income taxes 337,603 1,545,837 887,372 4,479,515
Provision for income taxes 233,395 633,780 519,220 2,034,214
------------ ------------ ------------ ------------
Net income $ 104,208 $ 912,057 $ 368,152 $ 2,445,301
------------ ------------ ------------ ------------
Redeemable preferred stock dividend -- 540,477 136,805 1,449,062
------------ ------------ ------------ ------------
Net income available to common shareholders $ 104,208 $ 371,580 $ 231,347 $ 996,239
============ ============ ============ ============
Basic earnings per common share $0.03 $0.12 $0.07 $0.32
===== ===== ===== =====
Diluted earnings per common share $0.02 $0.06 $0.05 $0.17
===== ===== ===== =====
See accompanying notes to financial statements.
4
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
------------------------------
2003 2002
------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 368,152 $ 2,445,301
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 470,802 408,759
Amortization of trademarks 684,504 684,504
Interest income on restricted cash (8,841) --
Changes in assets (increase) decrease:
Accounts receivable 693,406 (142,450)
Inventories (1,508,005) (1,397,389)
Prepaid expenses and other current assets (538,468) (392,360)
Other assets (92,223) (221,007)
Changes in liabilities increase (decrease):
Accounts payable, accrued expenses
and other current liabilities 848,135 (1,018,786)
License deposits payable 5,307 106,152
----------- -----------
Net cash provided by operating activities 922,769 472,724
----------- -----------
Cash flows used by investing activities:
Purchases of property and equipment (205,630) (128,802)
Cash flows from financing activities:
Payment of preferred stock dividend (1,450,808) (1,702,164)
Due to factor 625,432 397,728
Repayments of debt instruments (271,170) (75,561)
----------- -----------
Net cash used by financing activities: (1,096,546) (1,379,997)
----------- -----------
Net decrease in cash and cash equivalents (379,407) (1,036,075)
Cash and cash equivalents, beginning of period 2,530,452 3,100,026
----------- -----------
Cash and cash equivalents, end of period $ 2,151,045 $ 2,063,951
=========== ===========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 717,948 $ 483,384
Income taxes 600,348 1,400,176
See accompanying notes to financial statements.
5
EVERLAST WORLDWIDE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The Company and Basis of Presentation:
Everlast Worlwide, Inc. (herein referred to as "the Company", "we", "us", and
"our") is a manufacturer, marketer and licensor of sporting goods and apparel
under the Everlast brand name. The consolidated financial statements of the
Company are presented herein as of September 30, 2003 and for the three and
nine months ended September 30, 2003 and 2002 are unaudited and, in the
opinion of management, include all adjustments (consisting only of normal and
recurring adjustments) necessary for a fair presentation of financial
position and results of operations. Such financial statements do not include
all of the information and footnote disclosures normally included in audited
financial statements prepared in accordance with generally accepted
accounting principles. The accompanying unaudited consolidated financial
statements have been prepared in accordance with the instructions to Form
10-Q. The results of operations for the three and nine month periods ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for any other interim periods or the full year ending December 31,
2003. The Company has reviewed the status of its legal contingencies and
believes that there are no material changes from that disclosed on Form 10-K
for the year ended December 31, 2002.
Certain items on the 2002 financial statements have been reclassified to
conform to 2003 presentations. The reclassifications made had no impact on
net income available to common stockholder's or stockholder's equity.
2. Earnings Per Share:
We report basic and diluted earnings per share in accordance with SFAS
Statement No. 128 "Earnings Per Share" ("SFAS No. 128"). Basic earnings per
share amounts are computed based on the weighted average number of shares
actually outstanding during the period. Diluted earnings per share amounts
are based on an increased number of shares that would be outstanding assuming
the exercise of dilutive stock options and contingent consideration pursuant
to the Merger Agreement dated October 24, 2000.
The following table sets forth the computation of basic and diluted earnings
per share pursuant to SFAS No. 128:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------
2003 2002 2003 2002
----------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per common share --
Net income available to common stockholders $ 104,208 $ 371,580 $ 231,347 $ 996,239
---------- ---------- ---------- ----------
Denominator:
Denominator for basic earnings per common share
Weighted average shares
outstanding during the period 3,108,236 3,098,936 3,108,236 3,098,936
---------- ---------- ---------- ----------
Effect of diluted securities:
Stock options 36,475 53,992 42,997 53,992
Contingent stock consideration related to a Merger 1,365,296 2,613,939 1,421,055 2,613,939
---------- ---------- ---------- ----------
1,401,771 2,667,931 1,464,052 2,667,931
Denominator for diluted earnings per common share -- adjusted weighted
average shares and assumed conversions
4,510,007 5,766,867 4,572,288 5,766,867
---------- ---------- ---------- ----------
Basic net income per common share $ 0.03 $ 0.12 $ 0.07 $ 0.32
========== ========== ========== ==========
Diluted net income per common share $ 0.02 $ 0.06 $ 0.05 $ 0.17
========== ========== ========== ==========
6
3. Adoption of SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity"
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." SFAS No. 150 is effective for all financial
instruments, in existence prior to May 31, 2003, meeting this definition, at
the beginning of the first interim period beginning after June 15, 2003. The
Company has adopted the provisions of SFAS No. 150, effective July 1, 2003
for the third quarter ending September 30, 2003. The Statement establishes
standards for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. The Company's Series A Redeemable Participating
Preferred Stock ("Preferred Stock") meets this definition, and thus has been
reclassified as a liability (current and long-term) on our Consolidated
Balance Sheet for the period ended September 30, 2003.
Application of SFAS No. 150 requires our Preferred Stock instruments to be
reclassified at its current carrying amount with no cumulative adjustment
recognized. In addition, dividends associated with our Preferred Stock
instrument have been classified as interest expense for the three months
ended September 30, 2003. Dividends and other amounts paid or accrued prior
to reclassification of the instrument to a liability are not reclassified as
interest cost upon transition in accordance with SFAS No. 150.
4. Redeemable Participating Preferred Stock Dividend:
The percentage of net income, as defined in the Company's October 24, 2000
Merger Agreement, to be paid to holders of the Preferred Stock for the annual
dividend ( now classified as interest expense for the three months ended
September 30, 2003 as more fully explained above) is as follows:
Twelve months ending December 31, 2003 51.9%
2004 44.4%
2005 37.0%
2006 29.6%
2007 22.2%
2008 14.8%
2009 7.4%
The mandatory redemption requirements are as follows:
Twelve months ending December 31, 2003 $5,000,000
2004 5,000,000
2005 5,000,000
2006 5,000,000
2007 5,000,000
2008 5,000,000
2009 5,000,000
5. Inventories:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
September 30, 2003 December 31, 2002
------------------ -----------------
Raw materials $ 2,246,570 $ 2,067,637
Work-in-process 1,636,039 2,181,506
Finished goods 9,085,556 7,211,017
----------- -----------
$12,968,165 $11,460,160
=========== ===========
6. Accounting for Stock Based Compensation:
The Company accounts for its stock-based compensation plans using the
intrinsic value method under APB Opinion No. 25, "Accounting for Stock Issued
7
to Employees" ("APB 25") and related Interpretations. Under APB 25, when the
exercise price of our employee stock options are at least equal to the market
price of the underlying stock on the date of grant, no compensation expense is
recognized.
As of December 2002, the Company adopted SFAS No. 148, "Accounting for
Stock-Based Compensation-Transaction and Disclosure, an Amendment of FASB No.
123." SFAS No. 148 revises the methods permitted by SFAS No. 123 of measuring
compensation expense for stock-based employee compensation plans. The Company
uses the intrinsic value method prescribed in Accounting Principles Board Option
No. 25, as permitted under SFAS No. 123. Therefore, this change did not have a
material effect on the financial statements. SFAS No. 148 requires the Company
to disclose pro forma information related to stock-based compensation, in
accordance with SFAS No. 123, on a quarterly basis in addition to the current
annual basis disclosure.
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the date of grant consistent with the
method prescribed by Statement of Financial Accounting Standard No. 123,
"Accounting For Stock-Based Compensation", net earnings and earnings per share
for the three and nine month periods ended September 30, 2003 would have been
the pro forma amounts that follow:
Three Months Ended Nine Months Ended
September 30, September 30,
================================================================
2003 2002 2003 2002
================================================================
Net income, as reported $ 104,208 $ 912,057 $ 368,152 $ 2,445,301
Stock-based employee
compensation expense
determined under fair value
method net of
related tax effects (9,082) (8,347) (27,246) (25,041)
Pro-forma net income $ 95,126 $ 903,710 $ 340,906 $ 2,420,260
============= ============= ============= =============
Basic net income per common share:
As reported
$ 0.03 $ 0.12 $ 0.07 $ 0.32
============= ============= ============= =============
Pro-forma $ 0.03 $ 0.12 $ 0.07 $ 0.31
============= ============= ============= =============
Diluted net income per common share:
As reported $ 0.02 $ 0.06 $ 0.05 $ 0.17
============= ============= ============= =============
Pro-forma $ 0.02 $ 0.06 $ 0.05 $ 0.17
============= ============= ============= =============
8
7. Recent Pronouncements:
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective
after December 31, 2002, and addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies EITF
issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity. The primary difference
between SFAS No. 146 and EITF 94-3 concerns the timing of liability
recognition.
SFAS No. 146 will impact our Company in the fourth quarter of fiscal 2003
with our recent disclosure and communication regarding our relocation and
consolidation of our Bronx, NY facility into our Moberly, Missouri
manufacturing facility.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this quarterly report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Sections 21E of the Exchange Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, levels of activity, performance or achievements of the
Company, or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, the ability of the Company
to implement its business strategy; the ability of the Company to obtain
financing for general corporate purposes; competition; availability of key
personnel, and changes in, or the failure to comply with, government's
regulations. As a result of the foregoing and other factors, no assurance can be
given as to the future results, levels of activity and achievements and neither
the Company nor any person assumes responsibility for the accuracy and
completeness of these statements.
GENERAL
Everlast Worldwide Inc. is a Delaware corporation organized on July 6,
1992. We are engaged in the design, manufacture, marketing and sale of women's
activewear and sportswear; and the design, manufacture, marketing and sale of
men's activewear, sportswear and outerwear (the "Apparel Products") each
featuring the widely-recognized Everlast(R) trademark. We also manufacture
sporting goods related to the sport of boxing such as boxing gloves, heavy bags,
speed bags, boxing trunks, and miscellaneous gym equipment that are sold through
sporting goods stores, mass merchandisers, catalog operations, gymnasiums, and
martial arts studios. In addition, we license the Everlast(R) trademark to
numerous companies that source and manufacture products such as men's, women's
and children's apparel, footwear, cardiovascular equipment, back to school
stationery, eyewear, sports bags, hats, fragrances, batteries, nutritional
products and other accessories.
Our financial statements and the notes thereto contain detailed information
that should be referred to in conjunction with this discussion.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The accounting principles we
use require us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting periods presented. We
believe in the quality and reasonableness of our critical accounting policies,
however it is likely that materially different amounts would be reported under
different conditions or using different assumptions that we have consistently
applied. We believe our critical accounting policies are as follows, including
our methodology for estimates made and assumptions used.
REVENUE RECOGNITION POLICY. Revenues from royalty and finders agreements
are recognized when earned by applying contractual royalty rates to
quarterly point of sale data, among other criteria, received from our
licensees. Our royalty recognition policy provides for recognition of
royalties in the quarter earned, although a large portion of such royalty
payments are actually received during the month following the end of a
quarter. Revenues are not recognized unless collectibility is reasonably
assured.
TRADE RECEIVABLES. We perform ongoing credit evaluations on existing and
new customers daily. We apply reserves for delinquent or uncollectible
trade receivables based on a specific identification methodology and also
apply a general reserve based on our trade receivables aging categories.
Credit losses have been within our estimates over the last few years.
10
INVENTORY. Our inventory is valued at the lower of cost or market.
Cost has been derived principally on the standard cost methodology,
where we utilize a first-in-first-out method. We provide for reserve
allowances on finished goods and specifically identify and reserve for
slow moving or obsolete raw materials and packaging.
DEFERRED TAXES. Deferred taxes are determined based on the differences
between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized. In assessing the need for a valuation
allowance management considers estimates of future taxable income and
ongoing prudent and feasible tax planning strategies. In accordance
with APB Opinion 23, "Accounting for Income Taxes - Special Areas," we
do not accrue income taxes on the undistributed earnings of a
subsidiary which is a "DISC" since the repayment of the earnings of
the DISC is not expected in the foreseeable future. If circumstances
change and it becomes apparent that some or all of the undistributed
earnings of the DISC will be remitted in the foreseeable future, then
taxes will be accrued.
VALUATION OF GOODWILL, LONG-LIVED ASSETS AND INTANGIBLE ASSETS. We
periodically evaluate goodwill, long-lived assets and intangible
assets for potential impairment indicators. Judgements regarding the
existence of impairment indicators are based on estimated future cash
flows, market conditions, and legal factors. Future events could cause
management to conclude that impairment indicators exist and that the
net book value of goodwill, long-lived assets and intangible assets is
impaired. Any resulting impairment loss could have a material adverse
impact on our financial condition and results of operations.
CONTINGENCIES AND LITIGATION. We evaluate contingent liabilities
including threatened or pending litigation in accordance with SFAS No.
5, "Accounting for Contingencies" and record accruals when the outcome
of these matters is deemed probable and the liability could be
reasonably estimated. Management makes these assessments based on the
facts and circumstances and in some instances based in part on the
advice of outside legal counsel.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
Net sales decreased to $16.1 million for the three months ended September
30, 2003 from $16.9 million for the three months ended September 30, 2002, a
decrease of $.8 million. This decrease relates largely to a customer in 2002 who
became a licensee in 2003.
Gross profit decreased to $4.0 million for the three months ended September
30, 2003 from $5.3 million for the three months ended September 30, 2002. Gross
profit decreased as a percentage of net sales to 25.1% from 31.5%. The decreases
in both dollar amount and as a percentage of net sales were primarily due to
reduced sales volumes as explained above, unfavorable change in sales mix and
the overall decrease in net sales as it relates to the fixed portion of
manufacturing expenses compared to the three months ended September 30, 2002.
Net license revenues were $1.6 million for the three months ended September
30, 2003 as compared to $1.4 million for the three months ended September 30,
2002, an increase of 14.7%. The increase in license revenues was primarily due
to new license agreements and increased revenues on existing licenses.
Selling and shipping expenses decreased to $3.2 million for the three
months ended September 30, 2003 from $3.4 million for the three months ended
September 30, 2002. Selling and shipping expenses as a percentage of net sales
remained relatively flat at 20% for both periods. The decrease in dollar amount
was primarily attributable to the decrease in net sales as explained above.
11
General and administrative expenses increased to $1.5 million for the three
months ended September 30, 2003 from $1.4 million for the three months ended
September 30, 2002, an increase of $0.1 million or 7%. The increase is due to
added infrastructure costs required for our diversified and expanding
organization.
Amortization expense remained approximately $0.2 million for both three
month periods ended September 30, 2003 and 2002.
Operating income decreased to $0.7 million for the three months ended
September 30, 2003 from $1.7 million for the three months ended September 30,
2002. Operating income as a percentage of net sales was 4.2% for the three
months ended September 30, 2003 as compared to 10.2% for the three months ended
September 30, 2002. The decreases in both dollar amounts and percentage of net
sales were primarily a result of lower gross margins as described above.
Interest expense, net of interest income, increased from $0.2 million in
the three month period ending September 30, 2002 to $0.3 million during the
September 30, 2003 period. $0.1 million of this increase was a result of the
adoption of SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." We adopted SFAS No. 150 during
the period ending September 30, 2003. The adoption of SFAS No. 150 required us
to classify dividends associated with our Preferred Stock instruments as
interest expense. SFAS No. 150 prohibits reclassification of prior period
amounts for the 2002 periods presented as well as periods in 2003 prior to the
adoption.
Income before income taxes for the three months ended September 30, 2003
was $0.3 million compared to $1.5 million for the three month period ended
September 30, 2002, a decrease of $1.2 million. The decrease was a result of
lower operating profits and higher interest costs as explained above.
We incurred a tax provision of $0.2 million for the three months ended
September 30, 2003 as compared to $0.6 million for the three months ended
September 30, 2002. The decrease in taxes is a result of lower pre-tax earnings
as compared to the prior year.
The Company had net income of $0.1 million for the three months ended
September 30, 2003 as compared to $0.9 million for the three months ended
September 30, 2002, a decrease of $0.8 million. The decrease was primarily
attributable to the aforementioned decrease in income before income taxes offset
by lower tax expense in the current period.
We are required to pay a dividend equal to the product of 2/3 of the sum of
the net after tax profits reduced in proportion to the redeemed Preferred Stock.
The dividend payable for the three months ended September 30, 2003 is $0.1
million as compared to $0.5 million for the three months ended September 30,
2002. The 2003 dividend is equal to 51.9% of net after tax profits. As described
above, the dividend in the September period has been classified as interest
expense in accordance with SFAS No. 150. Restatement of prior periods is
prohibited in accordance with SFAS No. 150.
NINE MONTHS ENDED SEPTEMBER 30, 2003
Net sales were $41.4 million for the nine months ended September 30, 2003
as compared to $47.4 million for the nine months ended September 30, 2002, a
decrease of $6.0 million or 12.7%. This decrease in sales was principally
attributable to lower sales order volumes from retailers on both the apparel and
sporting goods products due to prevailing general economic and weather
conditions during the first half of fiscal 2003.
Gross profit decreased to $11.0 million for the nine months ended September
30, 2003 from $15.2 million for the nine months ended September 30, 2002. Gross
profit decreased as a percentage of net sales to 26.6% from 32.0%. These
decreases in both dollar amounts and percentage of net sales were primarily due
to reduced sales volumes, unfavorable change in sales mix and the decrease in
net sales as it relates to the fixed portion of manufacturing expenses compared
to the nine months ended September 30, 2002.
12
Net license revenues were $4.8 million for the nine months ended September
30, 2003 as compared to $4.2 million for the nine months ended September 30,
2002, an increase of 15.2%. The increase in license revenues was primarily due
to new license agreements and increased revenues on existing licenses.
Selling and shipping expenses decreased to $9.1 million for the nine months
ended September 30, 2003 from $9.3 million for the nine months ended September
30, 2002. Selling and shipping expenses as a percentage of net sales increased
to 21.9% from 19.5%. This increase, as a percentage of net sales, was primarily
attributable to increased marketing and advertising costs across all business
lines as well as the decrease in net sales as it relates to the fixed portion of
selling and shipping expenses.
General and administrative expenses remained approximately $4.4 million for
both the nine month periods ended September 30, 2003 and 2002.
Amortization expense remained $0.7 million for both the nine month periods
ended September 30, 2003 and 2002 periods.
Operating income decreased to $1.7 million for the nine months ended
September 30, 2003 from $5.0 million for the nine months ended September 30,
2002. Operating income as a percentage of net sales was 4.0% for the nine months
ended September 30, 2003 as compared to 10.5% for the nine months ended
September 30, 2002. The dollar and percentage decrease was primarily a result of
lower gross margins and higher selling and shipping costs as described above.
Interest expense, net of interest income, increased to $0.8 million for the
nine months ended September 30, 2003 from $0.5 million for the nine months ended
September 30, 2002. The increase is attributable to the increase in our net
borrowings from our factor to fund the preferred stock redemption as well as the
interest cost associated with the reclassification of dividends payable on our
Preferred Stock instrument for the three month period ended September 30, 2003,
as required by SFAS No. 150 described in more detail above.
Income before income taxes for the nine months ended September 30, 2003 was
$0.9 million as compared to $4.5 million in the 2002 period. The decrease of
$3.6 million was a result of lower operating profits in the 2003 period as well
as the increase in interest expense.
We incurred a tax provision of $0.5 million for the nine months ended
September 30, 2003 as compared to $2.0 million for the nine months ended
September 30, 2002. The decrease in taxes is a result of lower pre-tax earnings
as compared to the prior year.
The Company had net income of $0.4 million for the nine months ended
September 30, 2003 as compared to $2.4 million for the nine months ended
September 30, 2002, a decrease of $2.0 million. The decrease was primarily
attributable to the aforementioned decrease in income before income taxes offset
by lower tax expense in the current period.
We are required to pay a dividend equal to the product of 2/3 of the sum of
the net after tax profits, reduced in proportion to the redeemed Preferred
Stock. The dividend payable for the nine months ended September 30, 2003 is $0.3
million as compared to $1.4 million for the nine months ended September 30,
2002. The 2003 dividend is equal to 51.9% of net after tax profits. As described
above, the dividend in the September period has been classified as interest
expense in accordance with SFAS No. 150. Restatement of prior periods is
prohibited in accordance with SFAS No. 150.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations and growth primarily with our cash flows we
generate from our operations and from borrowings with our Factor.
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Net cash provided by operating activities for the nine months ended
September 30, 2003 was $.9 million as compared to $.5 million for the nine
months ended September 30, 2002. This increase was primarily attributable to a
decrease in net income offset by increases in working capital items principally,
accounts receivable and accounts payable. Net cash used for investing activities
for the nine months ended September 30, 2003 was $0.2 million compared to $0.1
million for the nine months ended September 30, 2002.
During the nine months ended September 30, 2003, the Company's primary need
for funds was to finance working capital and for the payment of the dividend on
the Preferred Stock. We have relied primarily upon cash and cash equivalents on
hand, cash flow from operations and advances drawn against factored receivables
to finance our operations and obligations. At September 30, 2003, cash and cash
equivalents was $2.2 million compared to $2.5 million and $2.1 million at
December 31, 2002 and September 30, 2002, respectively. Working capital was $8.8
million at September 30, 2003 compared to $12.9 million and $18.5 million at
December 31, 2002 and September 30, 2002, respectively. The decrease in working
capital from September 30, 2002 to September 30, 2003 was due to the adoption of
SFAS No. 150 in the current period which required us to classify our Preferred
Stock as a debt instrument, where $5 million is currently due December 31, 2003
(restatement of prior period amounts was prohibited) and borrowings from our
factor aggregating $6.2 million during the period September 2002 through
September 2003.
Net cash used by financing activities was $1.1 million for the nine month
period ended September 30, 2003 as compared to $1.4 million for the nine month
period ended September 30, 2002. This decrease in financing sources is primarily
due to a lower level of reduced payments on the dividends to the Preferred
Stock.
Management anticipates it will maintain sufficient cash and cash equivalent
balances, short term investments and a net surplus position with the factor,
although no assurance to that effect can be given to fund our contractual
obligations and working capital needs. Positive cash flow, if it occurs, will
create working capital to fund the Company's anticipated growth over the next 12
months, the mandatory redemption requirements of the Preferred Stock due on
December 31, 2003 and the Preferred Stock dividend due on March 31, 2004. If a
positive cash flow does not occur, there will be a decrease in cash, cash
equivalent balances and short term investments and/or borrowings with the factor
and/or other lenders will increase.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no changes in financial market risk as originally discussed
in the Company's Annual Report on Form 10-K for the year ended December 31,
2002.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this
report, the Company's Chief Executive Officer and Chief Financial Officer have
concluded the Company's disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Current Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sabarnes-Oxley Act of 2002 dated November 14, 2003 and
filed herewith.
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sabarnes-Oxley Act of 2002 dated November 14, 2003 and
filed herewith.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sabarnes-Oxley Act of 2002 dated November 14, 2003 and
filed herewith.
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sabarnes-Oxley Act of 2002 dated November 14, 2003 and
filed herewith.
(b) Current Reports on Form 8-K
On August 14, 2003, the Company filed an 8-K related to its press release dated
that same day announcing its results of operations and financial condition for
its fiscal 2003 second quarter ended June 30, 2003.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERLAST WORLDWIDE INC.
Date: November 14, 2003 By: /s/ George Q Horowitz
--------------------------------------
Name: George Q Horowitz
Title: Chief Executive Officer,
President and Treasurer
By: /s/ Matthew F. Mark
--------------------------------------
Name: Matthew F. Mark
Title: Chief Financial Officer,
Chief Accounting Officer
16