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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURUSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] 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
EVERLAST WORLDWIDE INC.
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(Exact name of registrant as specified in Its Charter)
Delaware 13-3672716
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1350 Broadway, Suite 2300, New York, New York 10018
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(Address of Principal Executive Offices) Zip Code
Registrant's telephone number (212) 239-0990
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title Of Each Class On Which Registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.002 par value
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(Title of class)
Indicate by check mark 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 mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2).
YES NO X
----- -----
On March 19, 2004, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $5,435,000 based upon the
average of the highest and lowest bid quotations for such Common Stock as
obtained from the Nasdaq Stock Market on that date. Solely for the purpose of
this calculation, shares held by directors and officers of the registrant have
been excluded. Such exclusion should not be deemed a determination or an
admission by registrant that such individuals are, in fact, affiliates of the
registrant.
The number of shares outstanding on March 19, 2004 was 3,028,904
shares of Common Stock, $.002 par value, and 100,000 shares of Class A Common
Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10 through 14 of this Annual Report
on Form 10-K is incorporated by reference from the issuer's definitive proxy
materials for its 2004 Annual Meeting of Stockholders, which proxy materials are
to be filed with the Securities and Exchange Commission not later than April 29,
2004.
TABLE OF CONTENTS
Page
----
PART I
Item 1 Business..............................................................1
Item 2 Properties...........................................................10
Item 3 Legal Proceedings....................................................10
Item 4 Submission of Matters to a Vote of Security Holders..................11
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities............................11
Item 6 Selected Financial Data..............................................13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................14
Item 7A Quantitative and Qualitative Disclosures About Market Risk...........19
Item 8 Financial Statements and Supplementary Data..........................19
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.............................................19
Item 9A Controls and Procedures..............................................19
PART III
Item 10 Directors and Executive Officers of the Registrant...................20
Item 11 Executive Compensation...............................................20
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ......................20
Item 13 Certain Relationships and Related Transactions.......................20
Item 14 Principal Accountant Fees and Services...............................20
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K......20
Signatures......................................................................22
PLEASE NOTE THAT THE COMPANY HAS USED SOME TERMS IN THIS ANNUAL REPORT WHICH MAY
BE REGISTERED TRADEMARKS WHICH IT DOES NOT OWN. THE COMPANY HAS MARKED THESE
TERMS WITH AN ASTERISK (`*') AND HAS USED THEM WITHOUT THE PERMISSION OF THE
HOLDERS OF SUCH REGISTERED TRADEMARKS.
PART I
ITEM 1. BUSINESS
NOTE REGARDING FORWARD LOOKING INFORMATION
Certain statements contained in this annual 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., a Delaware corporation and its subsidiaries
(collectively, the Company and herein referred to as "we", "us" and "our"), was
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. The Company is a member of the U.S.
Sporting Goods Manufacturers Association, the U.S. National Sporting Goods
Association, and the Canadian Sporting Goods Association.
The Merger
- ----------
On October 24, 2000 the Company completed a merger whereby Everlast
Holding Corp., the parent company of Everlast World's Boxing Headquarters Corp.
("Everlast"), was merged with and into Active Apparel New Corp. ("AANC"), a
wholly-owned subsidiary of the Company (the "Merger"). As a result of the
Merger, Everlast became a wholly-owned subsidiary of the Company. The Merger
involved (i) payment of $10 million in cash; (ii) the issuance of an aggregate
of 505,000 shares of common stock, $.002 par value of the Company (the "Common
Stock") and an aggregate of 45,000 shares of redeemable participating preferred
stock, stated value $1,000 per share (the "Preferred Stock"), to the former
stockholders of Everlast Holding Corp.; and (iii) payment of approximately $1.4
million in transaction costs, for an aggregate purchase price of $61.9 million.
Pursuant to the terms of that certain Agreement and Plan of Merger by and
between Everlast Holding Corp., Everlast, the Company and AANC, as amended, if
the fair market value of the Common Stock is not $13.00 by October 24, 2007, the
Company will be required to issue additional shares of Common Stock or, at its
option, pay such amount in cash.
1
Everlast World's Boxing Headquarters Corp.
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Everlast was founded in 1910 as a manufacturer of men's swimwear under
the name "Everlast." Soon thereafter, Everlast began to manufacture boxing
gloves, protective headgear, and related items. As the owner of the registered
trademark Everlast(R), Everlast also licensed its brand name worldwide.
Everlast(R) is a leading brand name in boxing and a widely-recognized
brand name in boxing related sporting goods. Everlast is the market leader in
several of its product categories, including boxing gloves, heavy bags,
protective headgear and speed bags (the "Sports Products"). Sports Products have
been used or endorsed by boxers such as Jack Dempsey, Joe Louis, "Sugar" Ray
Robinson, Jake LaMotta, Muhammad Ali, Joe Frazier, George Foreman, Larry Holmes,
"Sugar" Ray Leonard, Evander Holyfield, Mike Tyson and "Sugar" Shane Mosley.
PRODUCTS
The Company sells a diverse collection of consumer products which
encompasses apparel and sports products, and licenses the Everlast(R) trademark
to numerous companies which source or manufacture ancillary products such as
women's and children's apparel, footwear, fitness exercise equipment, back to
school supplies, eyewear, sports bags, hats, fragrances, batteries, nutritional
products and other products. All business activities and decisions as it relates
to these products are made by the Company's executive management.
Apparel Products
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The Company sells a diverse collection of Apparel Products consisting
of women's and men's activewear, and sportswear, all under the Everlast
trademark and logo. The Apparel Products consist of approximately 200 separate
products with varying styles and functions. These include fitness apparel and
sportswear made of nylon, fleece, cotton, Lycra spandex, and other technical
polyester fabrics with moisture management properties. The Apparel Products are
designed to feature the Everlast trademark and logo and to focus on the use of
appropriate fabric blends to maximize comfort and performance. The retail prices
for the Apparel Products generally range from $15 to $100.
Sports Products
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The Company manufactures and markets a line of boxing related sporting
goods which consist primarily of the following:
(1) Boxing Gloves: These are Everlast's most recognizable product and
are made for professional, amateur, and home gym use. Everlast's
professional gloves are certified throughout the United States
and by the World Boxing Council*, World Boxing Association*,
International Boxing Organization* and World Boxing Organization*
for all of their professional fights;
(2) Heavy Bags: Everlast's heavy bags are punching bags weighing
between 25 and 150 lbs.;
(3) Speed Bags: Speed bags are small, air-filled bags which are
mounted on swivels and platforms (at eye level);
(4) Platforms: Platforms are the wall mountings used in suspending
speed or heavy bags;
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(5) Boxing Trunks; and
(6) Miscellaneous Gym Equipment: In addition to the aforementioned
core offerings, Everlast also manufactures and markets the
following products to complement its product line: protective
headgear, protection cups, mouthpieces, hand wraps, boxing rings;
martial arts equipment, gym mats (assorted), and medicine balls.
Licensed Products
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The Company owns and utilizes the Everlast(R) trademark worldwide and
is registered with the United States Patent and Trademark Office and in many
foreign jurisdictions as well. The Company regards its Everlast(R) trademark as
its most valuable asset based on the evaluation of an independent consulting
firm. The Company believes the Everlast(R) trademark has significant value in
the marketing of the Company's products. The Company actively protects its
trademarks against infringement.
The Company licenses the Everlast(R) trademark to numerous companies
which source or manufacture ancillary products such as children's wear,
footwear, cardiovascular equipment, back to school stationery, eyewear, sports
bags, hats and other accessories ( the "Licensed Products"). Licensing the
Everlast(R) trademark has enabled the Company to expand product offerings into
arenas outside of its core manufacturing arenas, to strengthen its brand image,
and to increase profitability, while at the same time minimizing inventory risk.
The Company utilizes a network of licensees for worldwide brand
distribution in the U.S. and over 80 foreign countries. It also sells directly
to distributors and retailers. In return for exclusive rights to market Sports
Products and accessories in certain regions, the licensees pay Everlast a fixed
royalty rate upon the net revenues, among other criteria, of the licensees.
MARKETING, ADVERTISING, AND PROMOTIONS
Apparel Products
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The Company's advertising and promotional efforts are directed towards
the demographic customer profile for the Company's Apparel Products which aim to
heighten its visibility. The Company maintains its own marketing and advertising
staff which conceives and oversees implementation of most aspects of the
Company's advertising and sales promotions. In addition, the Company has a
graphic arts department that works with the marketing and advertising staff to
develop catalogs for all of the Company's product lines.
The Company advertises and promotes its Apparel Products to different
consumer segments through a variety of trade and consumer print advertising
campaigns, generally in selected magazines and other publications. The Company
also takes part in various cooperative advertising programs such as national
advertising, in-store signage, point-of-purchase promotional giveaways and
cooperative advertising arrangements with several of its retail customers, which
the Company believes assists in raising consumer awareness and increasing retail
floor space for its products. The Company has received continued exposure in
both the print and television media from famous celebrities and athletes wearing
the Apparel Products.
The Company also believes that grass roots promotional programs, such
as the limited distribution of samples of its Apparel Products to local gyms,
athletic clubs, and fitness professionals, help to advance the recognition and
reputation of its products. In addition, the Company has focused many of its
promotional programs on charitable and community events, such as the American
Heart Association's "Black Tie/Blue Jeans*" event, and the "A Funny Thing
Happened on the Way to Cure Parkinson's*," a New York fundraiser to raise funds
3
for Parkinson's Disease research. The Company also sponsors high school and
college women's basketball teams, and NBA* and NCAA* dance teams.
The Company attends and participates in the Sporting Goods
Manufacturers Association Supershow*, and MAGIC International* annual national
trade shows, and other appropriate trade shows.
Sports Products
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The Company's Sports Products have received continued exposure through
coverage in movies, print media and television because of its association with
the history of boxing and its distribution of the Sports Products to amateur and
professional boxers for use in nationally televised events. The Company has
focused on bringing the brand back into the boxing ring with multiple sponsored
events, such as HBO Latino Boxeo de Oro*, ESPN 2 Friday Night Fights*, a boxing
match benefiting the WTC Fund*, Everlast Heavyweight Explosion, a monthly boxing
series televised on MSG* network and SRL Boxing Series* with Sugar Ray Leonard.
The Company has promotional and consulting contracts with noted
boxing champions, trainers, and spokespersons, such as Oscar De La Hoya, Sugar
Shane Mosley, Fres Oquendo, Chris Byrd, Steve Forbes, Sugar Ray Leonard, Larry
Holmes, Sean O'Grady and Cedric Kushner. The Company uses the boxing industry
expertise and the relationships of these individuals to assist it in various
promotional activities designed to generate interest of the consumers in the
Sports Products.
The Company employs six full-time sales persons to promote the Sports
Products to professional and amateur boxers. Additionally, the Company has also
redesigned its professional line of boxing equipment and the product packaging
of its retail Sports Products. Finally, the Company's graphic arts department
has produced two new catalogs, one focusing on wholesalers for the consumer
retail market, and the other directed at professional and amateur boxers.
Licensed Products
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The Company employs an executive, who reporting to Mr. George
Horowitz, President and Chief Executive Officer (CEO), are jointly responsible
for developing a marketing plan for expansion of the Licensed Products. The
executive attends sporting goods trade shows to promote the Everlast(R) brand
name. Part of the executive's other duties is to generate leads and to meet with
potential licensees. The executive in concert with the CEO are also responsible
for renegotiating terms and possibly expanding the scope of existing licensing
agreements.
MANUFACTURING AND SUPPLIERS
Apparel Products
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The Company does not manufacture any of its Apparel Products, relying
instead on independent contractors. Manufacturers in the United States supply
approximately 70% of the Apparel Products while the remaining 30% are imported
from manufacturers abroad, principally in Asia. Currently, the Company uses over
ten separate manufacturers. While the Company has no long-term agreements with
any of its contractors, the Company believes that it has good relationships with
each of them. The Company does not believe that the loss of any particular
contractor would have a material adverse effect on its business, financial
condition, or operations. The Company believes that alternative sources of
products would be readily available.
The supply of the Company's foreign made Apparel Products is subject
to constraints imposed by bilateral textile agreements between the United States
and foreign nations. Quotas are used to determine the amount and types of goods
which can be imported into the United States. Some of the Company's
4
manufacturers may be adversely affected by political instability in their
respective countries resulting in the disruption of trade, and the imposition of
additional regulations relating to imports or duties and taxes and other charges
on imports. In order to ensure quality control and timely delivery, the Company
(or its agents), conducts on-site inspections at manufacturers' facilities. See
"Quality Control." The Company's strategy is to find manufacturers with specific
product category expertise, such as with fitness apparel, tee shirts, or
outerwear, with extensive experience in the major athletic brand name apparel
industry. The Company has no long-term agreements with any of its manufacturers
and competes with other apparel companies for production capacity.
Sports Products
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Effective December 2003, we manufacture sole out of one company-owned
facility, which produces most of our Sports Products. This facility, located in
Moberly Missouri, has 304,000 square feet and is used to produce products such
as heavy bag and speed bag platforms, heavy bags, and boxing rings, as well as a
"cut and sew" production department where boxing gloves, speed bags, boxing
trunks, and other related items are produced. Certain of these products were
formerly produced in our Bronx, New York facility which was closed in December
2003.
Raw materials used to manufacture Sports Products are top-grain
leather, synthetic fabrics, canvas, assorted wood and steel tubing, as well as
various other materials used in stuffing gloves and heavy bags. These raw
materials are basic commodities, which the Company buys from several independent
suppliers. No one supplier accounts for more than ten percent (10%) of the
Company's purchases of raw materials. The majority of raw materials are obtained
domestically, with the exception of Nevatear(R), the material used in moderately
priced gloves, bags, and gym mats. Nevatear(R) is a vinyl coated fabric with
tire-cord nylon content designed to withstand years of usage. The primary
supplier for Nevatear(R) is Erez, an Israeli company. Alternate sources for
Nevatear(R) are widely available.
The Company also imports sub-assemblies and parts used in the
production of its finished Sports Products such as shells for heavy bags,
hardware, components for speed bags and finished products. The Company imports
approximately 60% of its purchased raw material, sub assemblies, and finished
goods.
INVENTORY MANAGEMENT
As of the year ended December 31, 2003, the Company's inventory for
both Apparel Products and Sports Products was $11.0 million with net sales of
$58 million.
As of December 31, 2003, the Company's backlog of unfilled orders for
its Apparel Products and Sports Products was approximately $7 million and $1
million, respectively. The Company expects that substantially all of its current
orders will be shipped within 120 days of the receipt of such orders. The
Company's backlog can be affected by a variety of factors, including scheduling
of manufacturing, shipment of products, and customer preferences.
Apparel Products
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The Company has installed an Electronic Data Interchange (EDI) Quick
Response Replenishment System for its Apparel Products to facilitate its effort
to fill customer orders in seven working days. The EDI Quick Response
Replenishment System requires a higher level of inventory than usual to
facilitate shipment. The Company also practices a "just in time" manufacturing
and purchasing program for its customers who don't have access to the EDI Quick
Response Replenishment System. The Company makes arrangements with its
manufacturers for delivery approximately 30 days before the scheduled shipment
of products to the Company's customers. The objectives of the "just-in-time"
5
system are twofold. One is to decrease the Company's inventory risk. The other
is to allow the Company flexibility in reaction to consumer responses to its
products as well as changing consumer preferences. The Company also schedules
shipments from its manufacturers in a manner that accounts for possible
manufacturing lateness and transport time from manufacturers to the Company's
warehouse facilities. At present, manufacturing delays have not been a material
factor in the Company's inventory management. However, the inability or
unwillingness of a manufacturer to ship orders of Apparel Products in a timely
manner could adversely affect the Company's ability to deliver Apparel Products
to its customers on time. Delays in delivery could result in missing certain
retailing seasons with respect to all or some of the Apparel Products and could
adversely affect the Company's relationship with its customers, which could have
a material adverse effect on the Company's business.
Sports Products
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The Company uses a fully integrated inventory management system for
finished goods and the manufacturing of products by its factories. The Company
has an automated perpetual inventory for finished goods, raw materials and work
in progress merchandise. If required by major retailers, the Company has also
incorporated its Sports Products into an EDI Quick Response Replenishment System
to fill sales orders.
SALES AND DISTRIBUTION
For the fiscal years ended 2003, 2002 and 2001, The Sports Authority
Inc. ("Sports Authority") , including Gart's Sports, which was merged into
Sports Authority in October 2003, accounted for approximately 17%, 19% and 22%
of net sales of the Company, respectively. Sports Authority has been a customer
of the Company since its inception in 1992. There is no long-term contract
between the Company and Sports Authority. The Company believes that its business
relationship with Sports Authority is excellent.
The Company's strategy is to expand its network of retailers carrying
the Company's products. The Company plans to focus on department stores,
specialty stores, sporting goods stores, catalog operations, and better mass
merchandisers for its Apparel Products and sporting goods stores, mass
merchandisers, gymnasiums and martial arts studios for its Sports Products. In
addition to a wholesale catalog for the retailers, the Company published a
Professional and Amateur Boxing Equipment catalog. Recent developments in
technology led the Company to re-engineer some of its professional and amateur
boxing equipment. Professional and amateur boxers, promoters and trainers can
order products through the catalog with a fax order form, a toll-free number or
by visiting the Company's web site @ www.everlastboxing.com.
Reference is made to page 24-f of the Consolidated Financial
Statements of the Company for a breakdown of domestic and foreign sales for the
fiscal years ended December 31, 2003, 2002 and 2001.
Apparel Products
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Apparel Products are distributed through department stores, specialty
stores, sporting goods stores, catalog operations and better mass merchandisers,
encompassing over 20,000 retail locations throughout the United States and
Canada. The retailers selling Apparel Products include Federated Department
Stores*, Champs Sports*, Modell's*, Acadamy*, The Sports Authority* Sports
Chalet* and the Army Air Force Exchange*. Apparel Products are also sold through
the Internet at the Company's web site, and other third party web sites such as
MCSports.com*, TSA.com* and Garts.com*.
The Company currently has ten in-house sales representatives and
thirteen non-employee sales representatives for its Apparel Products. Mr. George
Horowitz, the Company's President and Chief Executive Officer, and other Company
senior executives coordinate sales and manage the representatives to ensure that
6
the sales representatives project a consistent and unified image of the Company
to customers.
The Company cooperates with major retailers to gauge promptly which of
the styles of its Apparel Products are the most popular, and tracks consumer
preferences regarding its Apparel Products. Based upon its market data, as well
as information gained from trade shows, the Company attempts to shift its
production orders toward styles that are most popular. This shift may take up to
a maximum of eight weeks. Many of the retail stores offering the Company's
products rely upon the Company's market information and solicit the Company's
advice regarding the products and quantities to order. Since most of the
Company's products are manufactured in the United States, the amount of time
between orders placed with its manufacturers and orders shipped by them is
generally reduced. The Company believes that the information it gathers from the
market, together with its efforts in shifting to production towards more popular
styles, will help reduce inventory risk.
Consistent with industry practice, the Company accepts returns of
Apparel Products and Sports Products within 30 days. Returns are allowed due to
poor quality, defects in materials or workmanship. The Company believes that its
return levels are better than industry norms. In addition to returns, customers
deduct chargebacks from the purchase price for sales allowances, new store
opening discounts and other marketing development funds, which in the opinion of
management promotes brand awareness. Chargebacks have an adverse effect on the
Company's business and results of operations since they reduce overall gross
profit margins on sales. The Company experienced rates of charge-backs of
approximately 5.6%, 4.3% and 4.5% during fiscal years 2003, 2002 and 2001,
respectively, which are consistent with the industry norms of 3% to 6% for both
Apparel Products and Sports Products. The Company believes that sales of the
Apparel Products are not seasonal.
Canadian Branch
- ---------------
The Company has a Canadian branch that markets Apparel Products in
Canada. The Company also has two exclusive distributors who wharehouse and sell
its Sports Products in Canada. During fiscal years 2003, 2002 and 2001, net
sales, in U.S. Dollars, from operations in Canada were $3,934,000, $5,228,000
and $4,184,000, respectively. During 2003, certain customers from Canada became
licensees. Although there can be no assurances, the Company does not believe
that exchange rate fluctuations will have a material adverse effect on the
Company's results of operations in the future. During fiscal years 2003, 2002
and 2001, the Company's foreign sales accounted for 7.3%, 8.4% and 8.9%,
respectively, of the Company's net sales, the majority of which were in Canada.
Sports Products
- ---------------
The Company's Sports Products are distributed through sporting goods
stores, mass merchandisers, catalog operations, gymnasiums, and martial arts
studios. The Company distributes its Sports Products to over 7,000 retail
locations throughout the United States and Canada. The Sports Products are sold
by retailers such as Modell's*, The Sports Authority*, Big 5* and Academy*.
The Company has a national sales manager who oversees sales and
marketing for Sports Products. The Company also has nine sales representatives
who are assigned different territories in the United States. The Company has
focused its marketing efforts for its Sports Products in the following areas:
o TRADE SHOWS: The Company participates in more than ten trade
shows annually, which are attended by most major sporting goods
retailers and manufacturers;
o PRODUCT CATALOGS: The Company publishes a retail and a
professional catalog which features all products manufactured by
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the Company. The Company also produces merchandise to be sold in
certain catalogs for selected licensed items; and
o Mail-Order: The Company uses an independent mail-order
distributor.
The Company believes that the sales of Sports Products are not
seasonal.
Licensed Products
- -----------------
The Company employs an executive who is responsible for worldwide
licensing of the Everlast brand name. Until February 10, 2003, the Company also
had a non-exclusive agreement with a license consultant whose remuneration was
determined by license revenues received from certain licensees. The nonexclusive
agreement was terminated on February 10, 2003 but, pursuant to the termination
provisions of such agreement, commissions to be paid to the consultant will
continue for two years thereafter.
There are 60 licenses worldwide that are held by 44 licensees.
Licensed Products, such as men's, women's, and children's apparel, sleepwear,
underwear, hosiery, footwear, eyewear, hats, sports bags, cardiovascular
equipment, fragrances, nutritional products and batteries are sold in over 80
other countries where licenses have been issued. The Company believes it can
expand its licensing base to new geographic locations and in new product
categories such as sports drinks, bottled water, infant apparel, and cosmetics.
The Company believes that sales of Licensed Products are not seasonal.
Reference is made to page 19-f of the Consolidated Financial Statements of the
Company for the net revenues from License Products for the fiscal years ended
December 31 2003, 2002 and 2001.
QUALITY CONTROL
Apparel Products
- ----------------
Because the Company emphasizes fit, performance and quality of its
Apparel Products, the Company places a high priority on quality control. The
Company has established stringent procedures both domestically and
internationally. Inspections of independent manufacturers are made regularly to
ensure compliance with the Company's quality control specifications, delivery
requirements, and shipping needs. Prior to manufacturing in large quantities,
the Company receives samples of its Apparel Products for inspection and
comments. The Company performs various tests, including fit tests on live
models. This ensures that the product meets specifications prior to shipping. In
addition, senior employees of the Company periodically inspect the manufacturing
process and quality of Apparel Products.
The Company believes that its relationships with its warehouses,
customs brokers and international consolidators are an important part of its
quality control program. The Company views these service organizations as
important resources in maintaining high standards for its Apparel Products and
assisting in the reliable and timely delivery of its Apparel Products to its
retail customers.
Sports Products
- ---------------
The Company has quality control procedures in effect at its
manufacturing facility in Moberly, Missouri. Manufacturing supervisors inspect
Sports Products for defects throughout both the manufacturing process and the
finishing stages, including imported products.
8
Licensed Products
- -----------------
The Company requires its licensees to submit samples of products that
are to be sold under exclusive license agreements. These sample Licensed
Products are inspected by the Company's management for quality and proper
placement of the Company's Everlast(R) trademark. Licensees that do not comply
with the Company's quality or trademark standards are notified that they are in
breach of their license agreement.
COMPETITION
Apparel Products
- ----------------
The apparel industry is highly competitive. The Company's competitors
for its Apparel Products include apparel manufacturers of all sizes, many of
which have greater financial and manufacturing resources than the Company. The
Company believes that it has been able to compete in the brand name men's and
women's activewear and sportswear market because of high brand name recognition,
as well as the high quality and affordability of its Apparel Products. The
Company's products also compete with lower-priced men's, women's, and girls'
activewear and sportswear products, which may or may not be brand name products.
The Company believes that its principal competitors in the brand name men's and
women's activewear and sportswear industry are Nike*, Reebok*, Adidas* and
Fila*. In addition, the Company believes that its principal competitors in the
brand name women's activewear and sportswear industry are The Weekend Exercise
Company* and Danskin*. Competition in the activewear and sportswear segment of
the apparel industry is based on price, design, quality, name recognition, and
the ability to respond quickly to changing consumer preferences.
Sports Products
- ---------------
The sporting goods industry is also highly competitive. However, the
Company believes that it is the preeminent name in boxing equipment and as such
is able to compete in that segment of the sporting goods industry. The Company's
competitors for its Sports Products at the retail level are Technical
Knockout/TKO* and Century Sporting Goods*. At the professional and amateur
boxing level, the Company's competitors are Ringside*, Grant*, and Reyes*.
Licensed Products
- -----------------
Aggressive competition is also found in the licensing of sporting
goods brands and trademarks. The Company believes that the Everlast(R)
trademark, however, is the most recognized brand associated with the sport of
boxing. The Company believes that none of its competitors in the boxing segment
of the sporting goods industry have significant licensing programs.
EMPLOYEES
As of February 29, 2004, the Company had 215 employees who are
employed on a full-time basis. These include 75 administrative and sales
employees at its New York City main office and 140 employees at its
manufacturing facility in Moberly, Missouri. 107 employees of the Company at its
manufacturing facility in Moberly, Missouri are covered under a collective
bargaining agreement that expires on June 5, 2005. The Company believes it has
satisfactory relationships with its employees under the collective bargaining
agreement.
The Company also employs additional full-time and part-time employees
in connection with the design, marketing, and sale of its products on an as
needed basis. The Company hires temporary employees from time to time. The
Company considers its relations with its employees to be satisfactory.
9
ENVIRONMENTAL CONSIDERATIONS
The Company's manufacturing facility is subject to various federal,
state and local environmental laws and regulations limiting the discharge,
storage, handling and disposal of a variety of substances set by the
Environmental Protection Agency, particularly the federal Water Pollution
Control Act, the Clean Air Act of 1970 (as amended in 1990), the Resource
Conservation and Recovery Act (including amendments relating to underground
tanks) and the federal "Superfund" program. The Company cannot, with certainty,
assess at this time the impact upon its operations or capital expenditure
requirements of future emission standards and enforcement practices under the
1990 amendments to the Clean Air Act.
The Company also is subject to federal, state and local laws and
regulations relating to workplace safety and worker health, including those
promulgated under the Occupational Safety and Health Act ("OSHA"). As part of
its OSHA compliance efforts, the Company requires all personnel working in high
noise areas and those working in certain areas with high concentrations of dust
to wear protective equipment.
To the best of the Company's knowledge, its manufacturing facility is
currently in compliance in all-material respects with existing OSHA standards
and environmental laws and regulations. The Company does not believe that there
is a substantial likelihood that further OSHA or environmental compliance will
require substantial expenditures or materially affect its operations or
competitive position. The Company currently has no capital expenditures relating
to satisfying environmental standards.
ITEM 2. PROPERTIES
PRINCIPAL PLACE OF BUSINESS
The Company renewed its real property leases at its principal office
at 1350 Broadway, New York, New York effective December 2003. The lease is for
12,087 square feet with an annual base rent of $407,728 through November 2008.
Additionally, the Company leases approximately 1,200 square feet of
office and showroom space in Montreal, Canada, at an annual base rent of
CAD$18,000 through April 2006.
MANUFACTURING FACILITY
The Company owns a manufacturing facility in Moberly, Missouri of
approximately 304,000 square feet. The Company believes that its existing
facility will be adequate to meet its needs for the foreseeable future. The
Company further believes that additional manufacturing space will be available
at its Moberly, Missouri manufacturing plant in the event the Company requires
additional capacity.
From January 1, 2003 to December 31, 2003, the Company operated a
leased manufacturing facility in the Bronx, New York. On December 31, 2003 the
Company closed the Bronx facility and centralized its manufacturing operations
in its Moberly, Missouri manufacturing facility. For details concerning the
closure and relocation of the Bronx facility, please see the Section "Results of
Operations -- 2003 Restructuring and Non-Recurring Charges."
ITEM 3. LEGAL PROCEEDINGS
Joan Hansen & Co.
- -----------------
On December 20, 2000, Joan Hansen & Co., a non-exclusive licensing
agent of the Company (the "Agent"), filed a lawsuit in the Supreme Court of the
State of New York against the Company, Everlast, George Horowitz, President and
Chief Executive Officer of the Company, and Ben Nadorf, a former principal
stockholder of Everlast and a Director of the Company, individually. The Agent
alleged a breach of contract on the basis that after the Merger the Company
stopped paying royalties to Everlast, which had become its wholly-owned
subsidiary, and accordingly the Company discontinued the payment of remuneration
to the Agent.
10
The Agent further alleged that the Merger was a sham transaction; that
the Company intended to default on its obligations to the former Everlast
stockholders and that the Everlast(R) trademark and licenses would then revert
to those stockholders. There were three other causes of action allegedly
predicated on the theories of tortious interference with contractual relations
and tortious interference with prospective business relations. Damages were
alleged in varying amounts, up to an aggregate of $55,500,000.
On November 30, 2001, the Supreme Court of the State of New York
dismissed the causes of action alleging tortious interference with contractual
relations and tortious interference with prospective business relations, made
against George Horowitz and Ben Nadorf. The court also denied a cross-motion,
made by the Agent, seeking partial summary judgment for breach of contract
against the Company. The decisions were appealed by the Agent. The Appellate
Court affirmed the dismissal and the denial of the Agent's cross-motion.
Thereafter the Company filed a motion for summary judgment against the
Agent seeking dismissal of the balance of the Agent's claims. That motion was
decided in the Company's favor on December 23, 2002. The Agent's appeal of that
portion of the decision dismissing its claim for a breach of contract, was
unanimously affirmed by the Appellate Division on December 16, 2003. The Agent
has subsequently filed a motion seeking permission to further appeal to the
Court of Appeals as well as reasserting its breach of contract claims in a
separate demand for arbitration.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
last quarter of fiscal year 2003.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
MARKET INFORMATION
The Company's shares of common stock, par value $.002 per share (the
"Common Stock") are quoted on the Nasdaq SmallCap Market under the symbol
"EVST." The following table sets forth, for the period indicated, the highest
and lowest bid quotations for the Common Stock, as reported by the Nasdaq
system. Quotations reflect prices between dealers, do not reflect retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
2002
High Low
---- ---
1st Quarter $3.15 $2.10
2nd Quarter $4.89 $2.81
3rd Quarter $4.00 $1.65
4th Quarter $4.25 $1.51
2003
High Low
---- ---
1st Quarter $4.20 $2.79
2nd Quarter $3.15 $2.20
3rd Quarter $3.30 $2.54
4th Quarter $3.45 $2.46
11
HOLDERS
The closing bid price of each share of Common Stock as of March 19,
2004 was $2.95. There were 440 record holders of the shares of Common Stock and
one record holder of the Company's Class A Common Stock, $.01 par value (the
"Class A Common Stock"). Based upon information received from some of these
record holders, the Company believes there are approximately 2,400 beneficial
holders of the shares of Common Stock.
DIVIDENDS
The Company has never paid dividends on its Common Stock or its Class
A Common Stock. The Company anticipates that, for the foreseeable future,
earnings will be retained for use in its business and does not anticipate the
payment of dividends on its Common Stock or its Class A Common Stock.
The Company continues to pay dividends to the holders of its shares of
its $.01 par value preferred stock (the "Preferred Stock"). The shares of
Preferred Stock are entitled to a dividend equal to two-thirds (2/3) of the net
after tax profits after adding back goodwill amortization and stock based
compensation. In 2002 and years thereafter, the dividend is reduced in
proportion to the redeemed Preferred Stock. The percentage of net income (as
defined) to be paid to holders of Preferred Stock is as follows:
Twelve months ended Percentage
December 31
2003 51.9
2004 44.4
2005 37.0
2006 29.6
2007 22.2
2008 14.8
2009 7.4
DISCLOSURE OF EQUITY COMPENSATION PLAN INFORMATION (AS OF DECEMBER 31, 2003)
------------------------------------------------------------ ----------------------------- ------------------------
Plan Category Number of securities to Weighted-average Number of securities remaining
be issued upon exercise price of available for future issuance
exercise of outstanding outstanding options, under equity compensation
options, warrants warrants and rights plans (excluding securities
and rights (a) reflected in column (a))
-------------------------------------------------------------------------------------------------------------------
Equity compensation 555,500 10.03 431,900
plans approved by
security holders
-------------------------------------------------------------------------------------------------------------------
Equity compensation 325,111 3.80 -
plans not approved by
security holders
-------------------------------------------------------------------------------------------------------------------
Total 880,611 7.73 431,900
-------------------------------------------------------------------------------------------------------------------
12
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information has been
taken or derived from the Company's audited consolidated financial statements.
The information set forth below is not necessarily indicative of the Company's
results of future operations and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and related
notes included elsewhere in this Form 10-K. See "Item 8. Consolidated Financial
Statements and Supplementary Data."
For the year ended
===========================================================================
December 31 December 31 December 31 December 31 December 31
2003 (a) 2002 2001 2000 1999
====================== ===================== ==============================
Net Sales $ 58,035,886 $ 65,613,012 $ 52,951,510 $ 36,897,562 $ 24,464,139
Net License Revenues 6,669,640 5,501,388 5,141,024 537,330 0
Net Income (Loss) (a) (954,839) 2,448,251 2,338,896 1,425,731 816,152
Preferred Stock Dividend 0 1,450,808 1,674,840 27,324 0
Basic Earnings (Loss) per
Common Share (0.31) 0.32 0.21 0.52 0.31
Diluted Earnings (Loss) per
Common Share (0.31) 0.24 0.14 0.44 0.31
Total Assets 64,256,713 63,846,752 63,952,774 66,877,884 8,274,198
Long Term Debt 4,866,111 3,227,324 140,508 3,125,000 0
Redeemable Preferred Stock 30,000,000 35,000,000 40,000,000 45,000,000 0
(a) During fiscal 2003, the Company incurred restructuring and non-recurring
duplicative manufacturing costs aggregating $3.3 million, pretax, related to the
relocation and consolidation of its Bronx, New York manufacturing facility which
closed in December 2003.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. 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.
o 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 the Company's licensees. The Company's
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.
o TRADE RECEIVABLES. We perform ongoing credit evaluations on
existing and new customers daily. We apply reserves for
delinquent or uncollectible trade receivables based on specific
identification methodology and also apply a general reserve based
on our trade receivable aging categories. Credit losses have been
within our estimates over the last few years.
o 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, the
Company does 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.
o 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.
o VALUATION OF GOODWILL, LONG-LIVED ASSETS AND INTANGIBLE ASSETS.
The Company periodically evaluates 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 the Company 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 the Company's financial condition and results of
operations.
o CONTINGENCIES AND LITIGATION. Management evaluates contingent
liabilities including threatened or pending litigation in
accordance with SFAS No. 5, "Accounting for Contingencies" and
14
records 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
2003 Restructuring and Non-Recurring Charges
- --------------------------------------------
During the fourth quarter of fiscal 2003 we recorded charges
aggregating $2.1 million, before taxes, related to the relocation and
consolidation of our Bronx, New York manufacturing facility into our Moberly,
Missouri facility. Approximately $1.2 million of these charges were non-cash
nature.
Commencing July 2003, we decided to pursue and execute a plan to close
the Bronx, New York facility. Our decision to close this facility was largely
the result of significant lease escalation costs expected at the end of our
existing lease term in April 2004 and our inability to reach practical capacity
at both the Bronx, New York and Moberly, Missouri facilities. Accordingly,
during the fourth quarter of fiscal 2003, we completed the relocation and
consolidation of the facilities.
The restructuring charge includes $2.1 million of costs associated
with the discontinuance of certain products, factory labor and related overhead
costs resulting from the idle capacity in the Bronx, New York facility,
severance, lease exit and other disposal costs. Of this $2.1 million of charges,
our 2003 gross profit was reduced by $1.1 million charged to cost of sales as
required by accounting rules. At December 31, 2003, approximately $0.5 million
was accrued principally related to lease exit costs. In addition, we wrote off
and disposed of approximately $0.1 million of fixed assets. Additional
restructuring charges of $0.4 million were incurred during the year ended
December 31, 2003 related to severance liabilities and related employee costs
and other disposal and lease exit costs.
Year End 2003 Compared to Year End 2002
- ---------------------------------------
Net sales were $58.0 million for the year ended December 31, 2003 as
compared to $65.6 million for the year ended December 31, 2002, a decrease of
$7.6 million or 11.6%. 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 and approximately $3.5 million in sales to certain
customers in 2002 who became licensees in 2003.
Gross profit in 2003 decreased to $14.5 million, 25% of net sales, as
compared to $18.9 million, or 28.8% of net sales in 2002. Gross profit adjusted
for the restructuring and non-recurring costs, included within cost of sales,
was $15.6 million or 26.9% of net sales. The decrease in both dollar amounts and
percentage of net sales was related to reduced sales volume and mix of sales
mentioned above and in addition, $1.2 million of duplicative manufacturing costs
incurred in the second half of fiscal 2003 related to the facility relocation
and consolidation.
Net license revenues were $6.7 million for the year ended December 31,
2003 as compared to $5.5 million for the year ended December 31, 2002, an
increase of 21%. The increase in license revenues was primarily due to new
license agreements and increased revenues on existing licenses.
Selling and shipping expenses increased to $12.7 million for the year
ended December 31, 2003 from $12.5 million for the year ended December 31, 2002.
Selling and shipping expenses as a percentage of net sales increased to 21.9%
from 18.9%. 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.
15
General and administrative expenses increased to $6.4 million for the
year ended December 31, 2003 as compared to $5.9 million in the 2002 period. The
increase was due to higher infrastructure costs required to support our
diversified organization.
As discussed above, during the fourth quarter of 2003, we recorded
approximately $1.1 million of restructuring and non-recurring charges. There
were no such charges in 2002. These charges are related to certain asset
write-offs, lease exit and disposed costs, and severance liabilities and related
employee costs.
Amortization expense remained $0.9 million for the years ended
December 31, 2003 and 2002.
Operating income decreased to $34,414 for the year ended December 31,
2003 from $5.1 million for the year ended December 31, 2002. The $5.1 million
decrease was a result of the aforementioned restructuring and non-recurring
charges, lower gross margins and higher selling, general and administrative
costs as described above.
Interest expense, net of interest income, increased to $1.0 million
for the year ended December 31, 2003 from $0.7 million for the year ended
December 31, 2002. The increase is attributable to the increase in our net
borrowings from our factor to fund the annual mandatory preferred stock
redemption.
Income (loss) before income taxes for the year ended December 31, 2003
was $(0.9) million as compared to $4.5 million in the 2002 period. The decrease
of $5.4 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 $35,000 for the year ended December 31,
2003 as compared to $2.0 million for the year ended December 31, 2002. The
decrease in taxes is a result of lower pre-tax earnings as compared to the prior
year.
Year End 2002 Compared to Year End 2001
- ---------------------------------------
Net sales increased to $65.6 million for the year ended December 31,
2002 from $53 million for the year ended December 31, 2001, an increase of $12.6
million or 23.9%. This increase in sales was principally attributable to the
additional sales of Apparel Products and Sports Products due to increased market
penetration.
Gross profit increased to $18.9 million for the year ended December
31, 2002 from $18 million for the year ended December 31, 2001, an increase of
$.9 million or 4.8%. Gross profit decreased as a percentage of net sales to
28.8% from 34.0%. The decrease as a percentage of net sales is primarily
attributed to product mix.
Net license revenues increased to $5.5 million for the year ended
December 31, 2002 from $5.1 million for the year ended December 31, 2001, an
increase of $.4 million or 7.0%. The increase in license revenues was primarily
due to new license agreements and increased revenues on existing licenses.
Selling and shipping expenses increased to $12.4 million for the year
ended December 31, 2002 from $11.5 million for the year ended December 31, 2001,
an increase of $.9 million or 7.8%. Selling and shipping expenses as a
percentage of net sales decreased to 19.0% from 21.8%. This decrease as a
percentage of net sales was primarily attributable to the increase in sales as
it relates to the fixed nature of certain selling and shipping expenses.
16
General and administrative expenses increased to $5.9 million for the
year ended December 31, 2002 from $5.8 million for the year ended December 31,
2001, an increase of $.1 million or 1.0%. General and administrative expenses as
a percentage of net sales decreased to 9.0% from 11.0%. This decrease as a
percentage of net sales was primarily attributable to the increase in sales as
it relates to the fixed nature of general and administrative expenses.
Amortization expense decreased to $.9 million for the year ended
December 31, 2002 from $1.2 million for the year ended December 31, 2001, a
decrease of $.3 million. This decrease is primarily attributable to new
standards established by the Financial Accounting Standards Board which
eliminated the amortization of goodwill.
Operating income increased to $5.1 million for the year ended December
31, 2002 from $4.6 million for the year ended December 31, 2001, an increase of
$.5 million for the reasons stated above. Operating income as a percentage of
net sales was 7.8% for the year ended December 31, 2002 as compared to 8.7% for
the year ended December 31, 2001.
Interest expense increased to $.8 million for the year ended December
31, 2002 from $.5 million for the year ended December 31, 2001, an increase of
$.3 million or 46.3%. The increase is attributable to the increase in the
Company's net borrowings from its factor to finance growth and the redemption of
the Preferred Stock.
The Company incurred a non-recurring charge related to the settlement
of a litigation claim in the amount of $.1 million for the year ended December
31, 2001.
The Company incurred a tax provision of $2 million (45%) for the year
ended December 31, 2002 as compared to $1.8 million (44.1%) for the year ended
December 31, 2001.
The Company had net income of $2.5 million for the year ended December
31, 2002 as compared to $2.4 million for the year ended December 31, 2001, an
increase of $.1 million.
Preferred Stock dividends payable for the year ended December 31, 2002
was $1.4 million and was paid in March 2003. The dividends paid for fiscal year
ended December 31, 2001 were $1.6 million.
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.
Net cash provided by operating activities for the year ended December
31, 2003 was $1.3 million compared to $1.8 million for the year ended December
31, 2002. This decrease was primarily due to the decrease in net income, as
adjusted for the add back of non-cash restructuring and non-recurring charges,
offset by increases in working capital items, principally accounts receivable
and accounts payable.
Net cash provided by investing activities for the years ended December
31, 2003 was $40,000 compared to $.7 million for the year ended December 31,
2002. This decrease was due to reductions in capital expenditures for
manufacturing equipment and proceeds from the sale of marketable securities.
Net cash used by financing activities for the year ended December 31,
2003 was $2.0 million as compared to $1.6 million in 2002.
During the year ended December 31, 2003, the Company's primary need
for funds was to finance working capital, and the annual mandatory redemption of
its Preferred Stock and the preferred stock dividend. The Company has relied
primarily upon its cash flow from operations and its asset based borrowings from
17
the factor to finance its operations and expansion. Cash and cash equivalents
and short term investments were approximately $2 million at December 31, 2003
compared to $2.5 million at December 31, 2002, a decrease of $.5 million.
Working capital was $6.2 million at December 31, 2003 compared to $12.9 million
at December 31, 2002. The decrease in working capital was due increased
borrowings from our factor aggregating $3.5 million to fund our preferred stock
payments made of $3.0 million and deferred financing costs of $0.7 million, and
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 ended September 30, 2003, which required us to classify our Preferred
Stock as a debt instrument, whereby $3 million is currently due December 31,
2004 (restatement of prior period amounts was prohibited.)
The balance of the amount due to factor represents accounts receivable
assigned to the factor by the Company net of outstanding advances made by the
factor to the Company under the factoring agreement. At December 31, 2003 the
amount due to factor was $6.9 million as compared to $3.4 million at December
31, 2002.
2004 Liquidity Outlook
- ----------------------
On January 13, 2004, we announced that we had entered into our
Agreement with our principal preferred stockholder (the "Principal Preferred
Stockholder"), modifying its annual minimum redemptions.
Under the terms of the Agreement, in lieu of a cash payment for the
redemption of a portion of their Series A Preferred Stock, $2,000,000 for each
of the four years commencing December 14, 2003, through December 14, 2006, will
be converted into four term loans ("Loans"). The Loans are evidenced by four
promissory notes from the Company which shall provide for the payment of
interest and deferred finance costs. Interest and deferred finance costs are to
be paid at a combined annual rate of 9.5% per annum on the aggregate $8 million
note during each of the years 2004 through 2007, and 10% during 2008 payable
each December 14th until maturity on December 14, 2008.
In addition, with the aforementioned closing of our Bronx, New York
facility, we are anticipating annual cost savings of approximately $2.8 million
commencing in the first quarter of fiscal 2004.
Management anticipates that as a result of the Preferred Stock
refinancing and the costs savings mentioned above, existing cash and cash
equivalent balances, and expected positive cash flows generated from our
operations, will create sufficient cash flows to fund our preferred stock
redemptions, debt instruments and other contractual obligations due throughout
2004 although no assurance to that effect can be given. If positive cash flow
does not occur and the anticipated cost savings do not materialize, there will
be a decrease in cash and cash equivalents and additional borrowings may be
required by our Factor and/or other lenders.
Obligations for all preferred stock redemptions, debt instruments,
capital and operating leases and other contractual obligations are as follows:
Payments Due by Period (In 000's)
---------------------------------------------------------------------------
Less than
Total 1 Year 1-3 Years Thereafter
---------------------------------------------------------------------------
Preferred Stock redemptions
and notes payable $ 32,000 $3,000 $ 11,000 $ 18,000
Debt instruments and capital lease
obligations 3,201 335 2,867 -
Operating leases 2,038 422 1,242 374
---------------------------------------------------------------------------
Total contractual cash obligations $ 37,240 $ 3,757 $ 15,109 $ 18,374
===========================================================================
18
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the
values of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes.
Interest: From time to time the Company invests its excess cash in
interest-bearing temporary investments of high-quality issuers. Due to the short
time the investments are outstanding and their general liquidity, these
instruments are classified as cash equivalents in the Company's consolidated
balance sheet and the Company believes that these investments do not represent a
material interest rate risk to it. The Company's long-term debt obligations are
the Mortgage loan on its Moberly facility and its equipment finance obligations.
The Company believes that these long-term debt obligations do not represent a
material interest rate risk to the Company. The Company's note payable to its
Principal Preferred Stockholder has been set at a fixed rate of interest.
Foreign Currency: The Company conducts business in Canada and the
Licensed Products are sold in various parts of the world. Revenues from the
Company's licensees are denominated in US Dollars and do not expose the Company
to risks due to currency exchange rate fluctuations. The Company's revenues from
its Canadian operations are exposed to fluctuations in foreign exchange rate
between the Canadian Dollar versus the US Dollar. Revenues from the Company's
Canadian operations represented 6.8% of the Company's consolidated revenues for
the fiscal year ended 2003 and the Company believes that the foreign exchange
rate risk due to its Canadian operations is not material.
ITEM 8. FINANCIAL STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS
PLEASE SEE PAGE 2-F THROUGH 6-F.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have reviewed
our disclosure controls and procedures as of the end of the period covered by
this report. Based upon this review, these officers concluded that, as of the
end of the period covered by this report, our disclosure controls and procedures
are adequately designed to ensure that information required to be disclosed by
the Company in the reports it files or submits under the Exchange Act is
19
recorded, processed, summarized and reported, within the time periods specified
in applicable rules and forms.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls during the quarter
covered by this report or from the end of the reporting period to the date of
this Form 10-K.
PART III
Item 10, "Directors and Executive Officers of the Registrant", Item 11,
"Executive Compensation", Item 12, "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters", Item 13, "Certain
Relationships and Related Transactions", and Item 14, "Principal Accountant Fees
and Services" have been omitted from this report inasmuch as the Company will
file with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report a
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held on June 4, 2004, at which meeting the stockholders will vote upon
selection of the directors. This information in such Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) (1) List of Financial statements
Report of Independent Auditors
Consolidated Balance Sheets - December 31, 2003 and 2002
Consolidated Statements of Operations - Years ended December 31, 2003,
2002 and 2001
Consolidated Statements of Stockholders' Equity - Years ended December 31,
2003, 2002 and 2001
Consolidated Statements of Cash Flows - Years ended December 31, 2003,
2002 and 2001
Notes to Consolidated Financial Statements
(2) List of Financial Statement Schedule
Valuation and Qualifying Accounts (Schedule II)
EVERLAST WORLDWIDE, INC.
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2003
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions Period
------ -------- ---------- ------
Allowance for Doubtful Accounts:
Year ended December 31, 2003 $276,000 $136,000 $412,000
Year ended December 31, 2002 257,000 52,496 33,496 276,000
Year ended December 31, 2001 117,000 191,434 51,434 257,000
Year ended December 31, 2000 117,000 - - 117,000
(b) Reports on Form 8-K
(1) Form 8-K dated November 3, 2003.
The Company announced in a press release the relocation and
consolidation of its Bronx, New York manufacturing facility into its Moberly,
Missouri facility.
(2) Form 8-K dated November 13, 2003.
The Company announced in a press release its results of operations and
financial condition for its fiscal 2003 third quarter ended September 30, 2003.
20
(C) Exhibits
EXHIBIT FILED INCORPORATED BY
INDEX DESCRIPTION OF DOCUMENT HEREWITH REFERENCE TO:
3.1(a) Certificate of Incorporation of the Company, Exhibit 3.(i) of Registration Statement File No.33-
as amended ("Certificate of Incorporation"). 87954 (the "1995 Registration Statement")
3.1(b) Certificate of Amendment of the Certificate of Exhibit 3.1(b) of the 2000 Form 10-KSB for the year
Incorporation. ended December 31, 2000
3.1(c) Certificate of Designations, Powers, Exhibit 4.1 of the Current Report on Form 8-K filed
Preferences and Rights of the Series A on October 24, 2002.
Redeemable Participating Preferred Stock.
3.2 Bylaws of the Company. Exhibit 3.(ii) of the 1995 Registration Statement.
10.1 1995 Non-Employee Director Stock Option Plan Exhibit 10.29 of the 1996 Form 10-KSB for the year
of the Company, adopted on October 6, ended December 31, 1995.
1995.
10.2 Lease, dated as of December 1, 2003, X
between the Company and 1350 Broadway
Associates.
10.3 Agreement and Plan of Merger dated August Exhibit 99.1 of the Current Report on Form 8-K filed
21, 2000 by and among Everlast Worldwide November 7, 2000.
Inc. (f/k/a Active Apparel Group, Inc.),
Everlast Holding Corp., a Delaware
corporation, and the stockholders of Everlast
Holding.
10.4 2000 Stock Option Plan of the Company. Appendix B of Schedule 14A filed
on October 3, 2000.
10.5 Form of Registration Rights Agreement. Appendix D of Schedule 14A filed on October 3, 2000.
10.6 Agreement made by and between Everlast Exhibit 99.2 of the Current Report on Form 8-K filed
Worldwide Inc., and Ben Nadorf ("Nadorf"). January 15, 2004
("Nadorf"). dated December 16, 2003
10.7 Promissory Note issued by Everlast Exhibit 99.3 of the Current Report on Form 8-K filed
Worldwide Inc., on behalf of Ben Nadorf January 15, 2004
("Nadorf"). dated December 16, 2003
21 List of Subsidiaries X
23.1 Consent of Independent Auditors X
31.1 Certification of Chief Executive Officer X
pursuant to Rul 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended.
31.2 Certification of Chief Financial Officer X
pursuant to Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended.
32.1 Certification by CEO pursuant to 18 U.S.C. X
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by CFO pursuant to 18 U.S.C. X
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
21
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Everlast Worldwide Inc.
By: /s/ George Horowitz
----------------------------------------
George Horowitz
Chairman and Chief Executive Officer
Dated: March 29, 2004
In accordance with the Exchange Act this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
March 29, 2004 /s/ George Horowitz
-----------------------------
George Horowitz (Chairman; Chief Executive Officer;
and Principal Executive Officer)
March 29, 2004 /s/ Matthew F. Mark
-----------------------------
Matthew F Mark (Chief Financial Officer; and
Chief Accounting Officer)
March 29, 2004 /s/ James Anderson
-----------------------------
James Anderson (Director)
March 29, 2004 /s/ Rita Cinque Kriss
-------------------------------
Rita Cinque Kriss (Director)
March 29, 2004 /s/ Larry Kring
------------------------------
Larry Kring (Director)
March 29, 2004 /s/ Edward Epstein
------------------------------
Edward Epstein (Director)
------------------------------
Ben Nadorf (Director)
March 29, 2004 /s/ Wayne Nadrof
------------------------------
Wayne Nadorf (Director)
22
EVERLAST WORLDWIDE INC.
AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2003
ITEM 8: FINANCIAL STATEMENTS
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Independent Auditors' Report 1f
Consolidated Balance Sheets 2f
Consolidated Statements of Operations 3f
Consolidated Statements of Changes in Stockholders' Equity 4-5f
Consolidated Statements of Cash Flows 6f
Notes to Consolidated Financial Statements 7f-26f
INDEPENDENT AUDITORS' REPORT
Board of Directors
Everlast Worldwide Inc. and Subsidiaries
New York, NY
We have audited the accompanying consolidated balance sheets of Everlast
Worldwide Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2003. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Everlast Worldwide
Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
Our audits of the consolidated financial statements referred to above also
included an audit of the financial statement schedule listed in the index
appearing under Item 15(b)(1). In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
New York, NY /s/ Berenson LLP
February 13, 2004,
except for Note 13; as to
which the date is March 3, 2004
1-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------
ASSETS 2003 2002
Current assets:
Cash and cash equivalents $ 1,937,334 $ 2,530,452
Marketable equity securities - 308,841
Accounts receivable, net 8,405,404 7,697,847
Inventories 11,012,010 11,460,160
Prepaid expenses and other current assets 1,107,043 819,053
----------- -----------
Total current assets 22,461,791 22,816,353
Property and equipment, net 6,188,388 6,487,830
Goodwill 6,718,492 6,718,492
Trademarks, net 24,489,021 25,401,693
Restricted cash 1,015,097 1,003,701
Other assets 3,383,924 1,418,683
----------- -----------
$64,256,713 $63,846,752
=========== ===========
LIABILITIES, REDEEMABLE PARTICIPATING
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of Series A redeemable participating preferred stock $ 3,000,000 $ -
Due to factor 6,898,081 3,351,997
Current maturities of long-term debt 335,475 363,028
Accounts payable 5,175,558 3,391,334
Income taxes payable - 553,850
Accrued expenses and other current liabilities 1,018,944 794,543
Redeemable preferred stock dividends payable - 1,450,808
----------- -----------
Total current liabilities 16,428,058 9,905,560
License deposits payable 568,833 563,526
Series A redeemable participating preferred stock 27,000,000 -
Note payable 2,000,000 -
Other liabilities 1,165,738 -
Long-term debt, net of current maturities 2,866,111 3,227,324
----------- -----------
50,028,740 13,696,410
----------- -----------
Series A redeemable participating preferred stock - 35,000,000
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.002; 19,000,000 shares authorized;
3,202,904 issued, 3,028,904 outstanding, 3,008,236-2002 6,406 6,364
Class A common stock, par value $.01; 100,000 shares authorized, issued
and outstanding 1,000 1,000
Paid-in capital 11,697,178 11,662,825
Retained earnings 3,250,340 4,205,179
Accumulated other comprehensive income 268 2,193
----------- -----------
14,955,192 15,877,561
Less: treasury stock, at cost (174,000 common shares) 727,219 727,219
----------- -----------
14,227,973 15,150,342
----------- -----------
$64,256,713 $63,846,752
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
2-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net sales $ 58,035,886 $ 65,613,012 $ 52,951,510
Cost of goods sold 43,505,127 46,729,288 34,929,074
------------ ------------ ------------
Gross profit 14,530,759 18,883,724 18,022,436
Net license revenues 6,669,640 5,501,388 5,141,024
------------ ------------ ------------
21,200,399 24,385,112 23,163,460
------------ ------------ ------------
Operating expenses:
Selling and shipping 12,722,039 12,446,838 11,547,922
General and administrative 6,436,274 5,891,549 5,834,813
Restructuring and non-recurring costs 1,095,000 - -
Amortization expense 912,672 912,672 1,193,485
------------ ------------ ------------
21,165,985 19,251,059 18,576,220
------------ ------------ ------------
Income from operations 34,414 5,134,053 4,587,240
------------ ------------ ------------
Other expense (income):
Interest expense 1,002,579 777,159 531,256
Investment income (48,326) (96,129) (242,026)
Miscellaneous - - 112,500
------------ ------------ ------------
954,253 681,030 401,730
------------ ------------ ------------
Income (loss) before provision for income taxes (919,839) 4,453,023 4,185,510
Provision for income taxes 35,000 2,004,772 1,846,614
------------ ------------ ------------
Net income (loss) (954,839) 2,448,251 2,338,896
Redeemable preferred stock dividends - 1,450,808 1,674,840
------------ ------------ ------------
Net income available to common stockholders $ (954,839) $ 997,443 $ 664,056
============= ============ ============
Basic earnings (loss) per common share $ (0.31) $ 0.32 $ 0.21
============= ============ ============
Diluted earnings (loss) per common share $ (0.31) $ 0.24 $ 0.14
============= ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Total Class A
comprehensive Common Stock Common Stock
income Shares Amount Shares Amount
Balance, December 31, 2000 2,998,936 $6,346 100,000 $1,000
Comprehensive income:
Net income $2,338,896
Unrealized holding gain 36,164
----------
Comprehensive income $2,375,060
==========
Redeemable preferred dividends - - - -
---------- ---------- ---------- ----------
Balance, December 31, 2001 2,998,936 6,346 100,000 1,000
Comprehensive income:
Net income $2,448,251
Unrealized holding loss (148,467)
----------
Comprehensive income $2,299,784
==========
Exercise of stock options 9,300 18 - -
Redeemable preferred stock dividends - - - -
---------- ---------- ---------- ----------
Balance, December 31, 2002 3,008,236 6,364 100,000 1,000
========== ========== ========== ==========
Comprehensive income:
Net loss $ (954,839)
Unrealized holding loss (1,925)
----------
Comprehensive loss $(956,764)
==========
Exercise of stock options 20,668 42 - -
Redeemable preferred stock dividends - -
---------- ---------- ---------- ----------
Balance, December 31, 2003 3,028,904 $6,406 100,000 $1,000
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(Continued)
Accumulated
Other Treasury stock
Paid-in Retained comprehensive --------------------
capital earnings Income Shares Amount Total
---------- ------------ ------------ ------ ------ -----
Balance, December 31, 2000 $ 11,642,105 $ 2,543,680 $ 114,496 174,000 $ (727,219) $ 13,580,408
Comprehensive income:
Net income - 2,338,896 - - - 2,338,896
Unrealized holding gain - - 36,164 - - 36,164
Comprehensive income
Redeemable preferred dividends
- (1,674,840) - - - (1,674,840)
Balance, December 31, 2001 ------------ ------------ ------------ ------- ------------ ------------
11,642,105 3,207,736 150,660 174,000 (727,219) 14,280,628
Comprehensive income:
Net income - 2,448,251 - - - 2,448,251
Unrealized holding loss - - (148,467) - - (148,467)
Comprehensive income
Exercise of stock options 20,720 - - - - 20,738
Redeemable preferred stock dividends - (1,450,808) - - - (1,450,808)
------------ ------------ ------------ ------- ------------ ------------
Balance, December 31, 2002 11,662,825 4,205,179 2,193 174,000 (727,219) 15,150,342
========== ========= ===== ======= ======== ==========
Comprehensive income:
Net loss (954,839) (954,839)
Unrealized holding loss (1,925) (1,925)
Comprehensive loss 34,353 34,395
Exercise of stock options
- -
Redeemable preferred stock dividends ------------ ------------ ------------ ------- ------------ ------------
$ 11,697,178 $ 3,250,340 $ 268 174,000 $ (727,219) $ 14,227,973
Balance, December 31, 2003 ============ ============ ============ ======= ============ ============
5-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-----------------------------------------
2003 2002 2001
------------ ----------- -----------
Cash flows from operating activities:
Net income (loss) $ (954,839) $ 2,448,251 $ 2,338,896
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Bad debts 136,120 52,496 191,434
Depreciation 534,321 559,110 529,655
Amortization 1,061,672 912,672 1,193,485
(Increase) decrease in cash surrender value of - (92,600) 80,000
life insurance policies
Interest income on restricted cash (11,396) (3,701) -
Deferred income taxes - (84,070) -
Loss on disposal of fixed assets - - 16,003
Non-cash restructuring and non-recurring charges, including
related inventory charge 1,156,922 - -
Changes in assets (increase) decrease:
Accounts receivable (843,678) (1,303,175) (1,786,588)
Inventories (584,419) 1,201,374 (3,945,600)
Prepaid expenses and other current assets (337,990) 151,298 51,251
Other assets (74,241) (276,767) (507,217)
Changes in liabilities increase (decrease):
Accounts payable, income taxes payable and
accrued expenses and other liabilities 1,237,332 (1,641,153) 2,208,690
License deposits payable 5,307 (125,197) 15,761
------------ ----------- -----------
Net cash provided by operating activities 1,325,111 1,798,538 385,770
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from redemptions of marketable securities 308,841 - -
Acquisition of property and equipment (267,975) (728,656) (280,084)
------------ ----------- -----------
Net cash provided (used) by investing activities 40,866 (728,656) (280,084)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from long-term debt - 3,516,049 -
Repayment of long-term debt (388,766) (145,924) (3,488,632)
Increase in due to factor 3,546,084 2,671,845 4,332,505
Redemption of participating preferred stock (3,000,000) (5,000,000) (5,000,000)
Issuance of common stock in connection with exercises
of options 34,395 20,738 -
Proceeds from loans from cash surrender value
of life insurance policies - - 748,166
Financing costs in connection with preferred stock refinance (700,000) - -
Payment of preferred stock dividend (1,450,808) (1,702,164) -
Restricted cash - (1,000,000) 950,000
------------ ----------- -----------
Net cash used by financing activities (1,959,095) (1,639,456) (2,457,961)
------------ ----------- -----------
Net decrease in cash and cash equivalents (593,118) (569,574) (2,352,275)
Cash and cash equivalents, beginning of year 2,530,452 3,100,026 5,452,301
------------ ----------- -----------
Cash and cash equivalents, end of year $ 1,937,334 $ 2,530,452 $ 3,100,026
============ =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
6-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
1. Nature of business:
Everlast Worldwide Inc., a Delaware corporation and its subsidiaries
(collectively, the Company and herein referred to as "we", "us" and "our")
was 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. The Company is a member of the
U.S. Sporting Goods Manufacturers Association, the U.S. National Sporting
Goods Association, and the Canadian Sporting Goods Association.
2. Significant accounting policies:
a. Principles of consolidation:
Our accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
b. Cash and cash equivalents:
The Company considers all short-term investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
includes commercial paper, money market funds and certain certificates of
deposit.
c. Cash concentration:
The Company maintains its cash and cash equivalents accounts at
various commercial banks. The cash balances are insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000 at each bank. At
December 31, 2003, the amount of bank balances in excess of the FDIC limit
is approximately $1.5 million.
d. Inventories:
Our inventory is valued at the lower of cost or market. Cost has been
derived principally using standard costs utilizing the first-in, first-out
method. We provide write-downs for finished goods expected to become
non-saleable and provide for slow moving or obsolete raw materials and
packaging.
e. Accounts receivable:
The accounts receivable arise in the normal course of business. It is
the policy of management to review the outstanding accounts receivable at
year end, as well as the bad debt write-offs experienced in the past, and
establish an allowance for doubtful accounts for uncollectible amounts. An
allowance for doubtful accounts of $412,000 and $276,000 has been
established as of December 31, 2003 and 2002, respectively.
7-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
f. Property and equipment:
Property and equipment are stated at cost. Depreciation is computed by
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the terms of the respective
leases or estimated life of the assets, whichever is shorter. Expenditures
for maintenance and repairs are charged to operations as incurred.
g. Fair value of financial instruments:
i. Cash and cash equivalents:
The carrying amounts reflected in the balance sheets for cash and
cash equivalents, none of which are held for trading purposes,
approximates fair value due to the short maturity of these
instruments.
ii. Accounts receivable, due to factor and accounts payable:
The carrying amounts of accounts receivable, due to factor and
accounts payable approximate their fair values because of the short
maturities of these instruments.
h. Intangible assets:
i. Goodwill:
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangibles. SFAS 142 addresses the financial accounting and reporting
for acquired goodwill and other intangible assets. As a result of
adopting SFAS 142, goodwill is no longer amortized. Rather, goodwill
is subject to a periodic impairment test based upon its fair value.
During the year ended December 31, 2003, the Company completed its
impairment review of goodwill, which indicated that there was no
impairment. The following table provides a reconciliation of reported
net income for the year ended December 31, 2001 to adjusted net income
had SFAS 142 been applied as of January 1, 2001.
Year ending
-----------------
December 31, 2001
Reported net income $2,338,896
Add back: goodwill amortization 173,389
-----------------
Adjusted net income $2,512,285
=================
8-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
Year ending
------------------
December 31, 2001
Basic earnings per share:
Reported net income $0.21
Goodwill amortization 0.06
--------------
Adjusted net income $0.27
==============
Diluted earnings per share:
Reported net income $0.14
Goodwill amortization 0.03
--------------
Adjusted net income $0.17
==============
ii. Trademarks:
At December 31, 2003, the Company has trademarks acquired from a merger in
2000 deemed to have a finite life. These costs are amortized over 30 years. For
the years ended December 31, 2003, 2002 and 2001, trademark amortization expense
was $912,672 for each year, respectively.
Trademarks are as follows:
2003 2002
----------- -----------
Gross carrying amount of
trademarks, at cost $27,380,000 $27,380,000
Accumulated amortization 2,890,979 1,978,307
----------- -----------
Trademarks - net $24,489,021 $25,401,693
=========== ===========
The estimated aggregate amortization expense for each of the five
successive years is $913,000 per year.
i. Concentration of credit risk:
The Company routinely extends credit to companies for the sale of its
merchandise. This credit risk may be affected by changes in economic or other
conditions and may, accordingly, impact the Company's overall credit risk.
Management believes that the credit risk is mitigated by the strict credit
evaluation of those customers to which it extends credit. Reserves for potential
credit losses are maintained and such losses have been immaterial to the
Company's financial position and within management's expectations.
j. Income taxes:
The Company and its wholly-owned subsidiaries, with the exception of
Everlast Sports International, Inc. ("ESI"), will file a consolidated federal
income tax return. ESI qualifies as a Domestic International Sales Corporation
9-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(DISC), which results in a deferral of tax on its income. No deferred tax
liability has been recorded, since the Company does not anticipate the
repatriation of earnings in the foreseeable future. ESI is authorized to operate
in Canada and files a separate Canadian income tax return reporting only the
income from that country. The provision for income tax is based upon the
consolidated taxable income including that portion of ESI's Canadian income.
Various state and local income tax returns are filed pursuant to reporting
requirements in those locales.
k. Advertising expense:
The Company expenses advertising costs as they are incurred. As of
December 31, 2003, 2002 and 2001, the Company had incurred advertising and
promotional expenses of approximately $2.4 million, $3.2 million and $3.6
million, respectively.
l. Estimates:
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. 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
assumptions different from those that we have consistently applied.
m. Shipping and handling costs:
Shipping and handling costs totaling approximately $1.6 million, $1.6
million and $1.5 million for the years ended December 31, 2003, 2002 and
2001, respectively, are included in selling and shipping expenses on the
income statement.
n. Accounting for stock based compensation:
We have elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related Interpretations, in accounting
for stock options because, as discussed below, the alternative fair value
accounting provided for under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, when the exercise price of
our employee stock options at least equals 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 us 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.
Pro forma information regarding earnings and earnings per share is
required by SFAS No. 123, and has been determined as if we have accounted
for our stock options under the fair value method of that Statement. The
fair value for these
10-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: risk free interest rates
ranging from 1% to 2%; no dividend yield; volatility factors of the expected
market price of our common stock of approximately 6% for fiscal years 2003
through 2001; and a weighted-average expected life of the options of three years
in each year.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because our stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Our pro forma
information is as follows:
2003 2002 2001
------------- ------------- -------------
Net income (loss) as reported $ (954,839) $ 2,448,251 $ 2,338,896
Deduct: total stock-based employee
compensation expense determined under fair value based method for
all awards, net of related tax effects 35,300 33,387 51,896
------------- ------------- -------------
Pro forma net income (loss) $ (990,139) $ 2,414,864 $ 2,287,000
============= ============= =============
Earnings (loss) per share:
Basic - as reported $(0.31) $.32 $.21
====== ==== ====
Basic - pro forma $(0.32) $.32 $.21
====== ==== ====
Diluted - as reported $(0.31) $.24 $.14
====== ==== ====
Diluted - pro forma $(0.32) $.24 $.13
====== ==== ====
o. Foreign currency exchange rate gains and losses:
Foreign currency transactions are based on the functional currency of
the United States dollar. Translation gains and losses of such transactions
are included in the consolidated statements of operations.
p. Impairment of long-lived assets:
Long-lived assets such as property, plant and equipment and
trademarks, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the total of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset.
11-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
q. Revenue recognition:
Product revenues are recognized upon shipment of inventory to the
customers. License revenues are recognized based upon the terms of the
underlying license agreements, when the amounts are reliably measurable and
collectability reasonably assured.
r. Deferred financing costs:
Eligible costs associated with obtaining debt financing are
capitalized and amortized over the related term of the applicable debt
instruments, which approximates the effective interest method.
s. Recent pronouncements:
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", 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 (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS No. 146 and Issue
94-3 relates to SFAS No. 146's requirements for recognition of a liability
for a cost associated with an exit or disposal activity. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as generally defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan.
Therefore, SFAS No. 146 eliminates the definition and requirements for
recognition of exit costs in Issue 94-3. SFAS No. 146 also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are effective for exit or disposal activities
that we may initiate after December 31, 2002. Refer to Note 4,
Restructuring and Non-recurring Charges for our disposal and exit
activities related to our Bronx, New York facility.
3. Adoption of SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity"
In May 2003, 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 year ended December 31, 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 are to be classified as interest expense commencing from
the three months ended September 30, 2003 onward. During the year ended
December 31, 2003, no dividends have been classified as interest expense
due to our net loss. 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.
12-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
4. Restructuring and non-recurring charges:
During the fourth quarter of fiscal 2003 we recorded charges
aggregating $2.1 million, before taxes, related to the relocation and
consolidation of our Bronx, New York manufacturing facility into our
Moberly, Missouri facility. Approximately $1.2 million of these charges
were non-cash in nature.
Commencing July 2003, we decided to pursue and execute a plan to close
the Bronx, New York facility. Our decision to close this facility was
largely the result of significant lease escalation costs expected at the
end of our existing lease term in April 2004 and our inability to reach
practical capacity at both the Bronx, New York and Moberly, Missouri
facilities. Accordingly, during the fourth quarter of fiscal 2003, we
completed the relocation and consolidation of the facilities.
The restructuring charge includes $2.1 million of costs associated
with the discontinuance of certain products, factory labor and related
overhead costs resulting from the idle capacity in the Bronx, New York
facility, severance, lease exit and other disposal costs. Of this $2.1
million of charges, our 2003 gross profit was reduced by $1.1 million
charged to cost of sales as required by accounting rules. At December 31,
2003, approximately $.5 million was accrued principally related to lease
exit costs. In addition, we wrote off and disposed of approximately $.1
million of fixed assets. Additional restructuring charges of $.4 million
were incurred during the year ended December 31, 2003 related to severance
liabilities and related employee costs and other disposal and lease exit
costs.
5. Marketable equity securities:
The Company had marketable equity securities that are classified as
available-for-sale securities. These securities have been recorded at their
fair market value of $308,841 at December 31, 2002. A net unrealized
holding gain, amounting to $2,193 has been included in stockholders' equity
as of December 31, 2002. The securities were sold during 2003.
6. Due to factor:
Certain of the Company's accounts receivable are assigned without
recourse to a commercial factor. The amount due to the factor represents
advances received in excess of net sales assigned. The amount due to the
factor is net of a provision for future chargebacks of approximately
$215,000 and $150,000 at December 31, 2003 and 2002. Interest is charged at
1% above prime on advances. This factoring arrangement is collateralized by
the Company's factored and non-factored accounts receivable and certain
finished goods.
7. Inventories:
Inventories consist of:
2003 2002
----------- ------------
Raw materials $ 1,460,586 $ 2,067,637
Work-in-process 1,705,995 2,181,506
Finished goods 7,845,429 7,211,017
$11,012,010 $11,460,160
=========== ============
13-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
8. Property and equipment:
2003 2002
----------- -----------
Land $ 309,100 $ 309,100
Buildings and building improvements 5,348,581 5,295,912
Furniture and fixtures 558,117 572,649
Machinery and equipment 3,679,412 3,816,490
Vehicles 265,248 265,249
----------- -----------
10,160,458 10,259,400
Less: accumulated depreciation 3,972,070 3,771,570
----------- -----------
$ 6,188,388 $ 6,487,830
=========== ===========
9. Cash surrender value, life insurance:
The Company is the owner of cash surrender value life insurance
policies on the life of a current stockholder and director. The face value
of these policies approximates $1.6 million. At December 31, 2003, the cash
value, net of outstanding loans of $957,000, is $261,000 and is included in
other assets. At December 31, 2002, the cash value, net of outstanding
loans of $956,885, was $261,000 and is included in other assets.
10. Long-term debt:
Long-term debt consists of the following:
2003 2002
---------- ----------
Term loan of $3,350,000 due in sixty
monthly payments of principal and
interest, based on an amortization of
180 months, with a balloon payment due
on the sixtieth month. The interest rate
is equal to the thirty day LIBOR yield
plus 4% (5.4% at December 31, 2003). The
term loan is secured by property and
equipment having a net book value of
$3,566,000. The term loan requires
maintenance of minimum cash flow
coverage, as defined. A letter of credit
of $1,000,000 must be in place during
the entire term of this loan, or until
no longer required. The Company's factor
has issued this letter of credit on
behalf of the Company. As collateral for
the letter of credit, the Company has
cash restricted as to withdrawal of
$1,015,097. $3,089,444 $3,312,778
Various equipment loans due in monthly
installments of principal and interest
through 2005. The interest rates on
these loans range from 7.50% to 8.77% 112,142 277,574
---------- ----------
3,201,586 3,590,352
Less current maturities 335,475 363,028
---------- ----------
$2,866,111 $3,227,324
========== ==========
14-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
Annual maturities of long-term debt are approximately as follows:
Twelve months ending December 31, 2004 $ 335,000
2005 249,000
2006 223,000
2007 2,395,000
11. Series A Redeemable Participating Preferred Stock and Note Payable:
On October 24, 2000, the Board of Directors designated the issuance of
45,000 shares (1,000,000 total preferred shares authorized) $.01 par value
of Series A Redeemable Preferred Stock (the "preferred shares"). These
preferred shares were issued pursuant to the merger agreement among the
Company, Everlast Holding Corp. and Active Apparel New Corp., a
wholly-owned subsidiary of the Company, and are recorded at their fair
value. The preferred shares have priority liquidation and dividend rights
over other securities issued.
As part of the merger agreement, the Company is to redeem 5,000 shares
($5,000,000 redemption value) on every December 31 until all of the shares
have been redeemed. The Company has the option to redeem all of the
preferred shares at the end of any quarter or an additional amount greater
than the mandatory redemption at the end of any year (December 31st). The
Company is required to pay 105% of the redemption value for any optional
redemption that is made.
On January 13, 2004 we announced that we had entered into an Agreement
on December 14, 2003 with the Principal Preferred Stockholder, modifying
its annual minimum redemptions.
Under the terms of the Agreement, in lieu of a cash payment for the
redemption of a portion of their Series A Preferred Stock, $2,000,000 for
each of the four years commencing December 14, 2003, e through December 14,
2006, will be converted into four term loans ("Notes"). The Notes are
evidenced by four promissory notes from the Company which shall provide for
the payment of interest and deferred finance costs. Interest and deferred
finance costs are to be paid at the combined annual rate of 9.5% per annum
on the aggregate $8 million of notes during each of the years 2004 through
2007, and 10% during 2008 payable each December 14th until maturity on
December 14, 2008. The Company shall have the right to pre-pay the
promissory notes in full, with no prepayment fees, prior to December 14,
2008 together with all unpaid interest and deferred financing costs due at
the time of pre-payment. There are no changes to the existing preferred
dividend formula currently being used on the outstanding redeemable
percentage of the Series A Preferred Stock, mentioned below. As a further
condition of this refinance, the Company paid financing costs aggregating
$800,000 of which $700,000 was paid by December 2003.
If the Company fails to make a mandatory redemption payment within
thirty days after it is due, all licenses and trademarks obtained pursuant
to the merger will be assigned back to the former stockholders of Everlast,
effective 60 days following the assignment, if not remedied.
Commencing on the date of issue, the preferred shares accrue dividends
equal to two-thirds (2/3) of the "net after tax profits" multiplied by the
"outstanding redeemable percentage." Net after tax profits is defined in
the agreement as net income after taxes (pursuant to generally accepted
accounting principles) plus goodwill amortization as it relates to the
merger, plus compensation from the granting and the exercise of the
Company's employee stock options. Outstanding redeemable percentage is
defined in the agreement as the aggregate redemption value of the preferred
shares outstanding as of January 1st divided by $45 million.
15-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
The percentage of net income (as defined) to be paid to holders of
preferred stock 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%
Dividends are due on March 31st of each succeeding fiscal year. As of
December 31, 2003, the Company did not have accrued dividends on these preferred
shares due to its net loss.
If a dividend payment is not made when scheduled, the Company will be
subject to the same terms and conditions as a default on a mandatory redemption
payment.
Minimum redemption amounts, as amended for the aforementioned refinance,
including the repayment of the notes payable are as follows:
Twelve months ending December 31, 2004 $ 3,000,000
2005 3,000,000
2006 3,000,000
2007 5,000,000
2008 13,000,000
2009 5,000,000
12. Commitments and contingencies:
a. Lease commitments:
The Company has two leases for office and showroom space, one of which
will expire April 30, 2006 and the other expiring on November 30, 2008.
At December 31, 2003, future minimum rental payments required under
the noncancellable leases are approximately as follows:
Twelve months ending December 31, 2004 $ 422,000
2005 422,000
2006 413,000
2007 408,000
2008 374,000
Total $2,039,000
Rent expense for the three years ended December 31, 2003, 2002 and 2001 was
$818,000, $746,000 and $746,000, respectively.
16-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
b. Employment agreements:
i. The Company has an employment agreement with its President and
Chief Executive Officer through the term of the agreement. The
initial term of the agreement expires on December 31, 2005, but
continues thereafter for additional one-year periods unless
either the President and Chief Executive Officer of the Company
or the Board of Directors gives the other ninety days prior
written notice of nonrenewal. At the discretion of the Board of
Directors, the Company may reward and pay the President and Chief
Executive Officer with salary increases and a bonus on or before
December 31, of any year during the term.
The agreement also includes a noncompete clause for a period of
one year following its expiration or termination.
ii. The Company has an employment agreement with a senior vice
president with an initial term of five years, expiring September
24, 2005. The agreement will automatically renew for successive
one-year terms unless terminated by either party upon 60 days
prior written notice.
The minimum payments for base salaries (including guaranteed bonuses)
pursuant to the employment agreements are approximately as follows:
Twelve months ending December 31, 2004 590,000
2005 504,000
c. Consulting agreement:
The Company has a consulting agreement with an individual to provide
services with respect to the redeemable participating preferred stock (note
11). The term of the agreement is effective until all shares of the
redeemable preferred stock have been redeemed by the Company. The
consultant will receive $60,000 annually throughout the duration of the
agreement.
d. Contingencies:
i. On December 20, 2000, a claim was brought against the Company,
its subsidiary (EWBH), and two officers of the Company. The
complaint was initiated by the EWBH's licensing representative
(the "plaintiff") in the Supreme Court of the State of New York
(the "Court"). The plaintiff alleged breach of contract, tortuous
interference with contractual relations, tortuous interference
with prospective business relations and unjust enrichment
stemming from the merger of the Company completed on October 24,
2000.
On November 30, 2001, the claims against the officers were
dismissed by the Supreme Court. On June 27, 2002 the Appellate
Divisions unanimously affirmed the order dismissing the
plaintiff's claims.
17-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
On December 23, 2002, the case against the Company was dismissed.
On December 23, 2003, the plaintiff's appeal was unanimously
denied.
Plaintiff has subsequently filed a motion seeking permission to
further appeal its claims to the Court of Appeals as well as
reasserting its breach of contract claims in a separate demand
for arbitration.
After reviewing this case with the Company's legal counsel,
management believes that there is no merit to plaintiff's motion
seeking to further appeal the dismissal of its lawsuit or to the
breach of contract claims asserted in its demand for arbitration
and intends to continue to contest the matter vigorously.
ii. On October 17, 2000, a former heavyweight boxing champion and a
corporation claimed $2.0 million of damages against the Company
and one of its subsidiaries for alleged unauthorized use of his
name and image. The Company's insurance carrier assumed the
defense of the case.
This case was settled on February 4, 2002 for $300,000, of which
$50,000 was paid by the insurance carrier, $137,500 was paid by
the former stockholder of the Company's subsidiary and $112,500
was paid by the Company.
iii. There are product liability claims that arise against the Company
from time to time. Such actions are usually for amounts greatly
in excess of the payments, if any, which may be required to be
made. It is the opinion of management, after reviewing such
actions with legal counsel to the Company, that the ultimate
liability, which might result from such actions, would not have a
material adverse effect on the Company's financial position.
e. Pension plan:
The Company was contributing to a union sponsored multi-employer
pension plan which was covering its union employees in the Bronx, New York.
The Company's contributions to the Plan, incurred in these financial
statements, for the years ended December 31, 2003, 2002 and 2001 were
$74,327, $102,258 and $87,427, respectively. As part of the relocation and
consolidation of this facility, the Company is no longer required to
sponsor this multi-employer pension plan due to the termination of these
employees.
Information as to the Company's portion of accumulated plan benefits
and plan assets is not reported separately by the pension plan. A
contingent liability may exist because an employer under the Employee
Retirement Income Security Act, upon withdrawal from a multi-employer
benefit plan, is required to continue to pay its proportionate share of the
plan's unfunded vested benefits, if any. The potential liability under this
provision has not been determined; however, the Company believes that based
on available financial information from the plan, no provision for a
contingent liability exists nor has been recorded at December 31, 2003.
18-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
f. Profit-sharing plans:
The Company maintains two 401(k) profit-sharing plans for all
qualified non-union, full-time employees. The plans contain a profit
sharing component with tax deferred contributions to each employee based
upon certain criteria and also permits employees to make contributions up
to the maximum limits allowed by Internal Revenue Code Section 401(k).
Pursuant to one of the plans, the Company matches 40% of the first 5% of
each employee's contribution. The Company does not match the employee's
contribution on the other plan. The Company's contributions were
approximately $40,000 for each of the three years ended December 31, 2003.
13. Licensing revenues:
i. The Company, as licensor, has numerous licensing and distribution
agreements with varying expiration dates. Pursuant to the terms
of the licensing agreements, the Company is scheduled to receive
approximate minimum royalty payments, exclusive of renewal option
provisions which would trigger additional minimum royalty
payments, as follows:
Twelve months ending December 31, 2004 $7,758,000
2005 6,900,000
2006 3,435,000
2007 2,521,000
2008 1,891,000
2009 and thereafter 7,000,000
Net licensing revenue generated for the years ended December 31,
2003, 2002 and 2001 amounted to $6,669,640, $5,501,388 and
$5,141,024, respectively. These licensing revenues are reflected
net of related expenses of $845,000, $711,000 and $647,000.
In March, 2004, one of the Company's licensees filed for Chapter
11 bankruptcy protection. This licensee has secured
debtor-in-possession financing and has indicated to us that it
plans to petition the courts to allow it to comply with the
provisions of its licensing contract with Everlast. To date, all
of this licensee's minimum monthly licensing amounts have been
paid. The Company has the right to terminate its contract with
this licensee, as defined, and believes if such action is
required, alternative licenses could be arranged with equal or
better terms than its existing arrangement with this licensee.
ii. In connection with the license agreements, certain licensees are
required to make a specified minimum cash deposit to the Company.
The deposit is refundable to the licensee upon expiration of the
license agreement. At December 31, 2003 and 2002, the amounts on
deposit totaled $568,833 and $563,526, respectively. These
amounts are reflected as liabilities to licensees on the balance
sheet.
19-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
14. Stock option plans:
i. 1993 Stock Option Plan:
A maximum of 443,900 options were available to be granted
pursuant to this plan, which terminated in November 2003.
Accordingly, no further stock options grants can be made under
this plan going forward. Options previously granted prior to
November 2003 vest in three years and have a term of ten years.
Options granted pursuant to this plan were designated by the
Board of Directors as either non-qualified or incentive.
The option price of shares designated as nonqualified were
determined by the Board of Directors each year for the following
year at 85% of fair market value and in the case of incentive
stock options were no less than the fair market value of the
shares on the date of the grant.
ii. 1995 Non-employee Director Stock Option Plan:
The 1995 non-employee director stock option plan provides for
automatic grants of options to purchase 3,000 shares and
thereafter yearly grants to purchase 3,000 shares of common stock
to each active director serving on the Board at the time of the
grant who is not an officer or employee of the Company. The
Director Plan provides additional grants of options to
non-employee directors of 100 shares to the Chairman of a board
committee and 200 shares to the Chairman and Secretary of the
Board of Directors. Options granted vest in three years and have
a term of seven years.
iii. 2000 Stock Option Plan:
The Board of Directors will designate options granted pursuant to
this plan as incentive or nonqualified. The number of the
Company's common stock, par value $.002 per share, subject to
this plan is 1,000,000. The maximum allowable grant to any
individual in any one year is 600,000 shares. In the case of
incentive options, the exercise price shall be at minimum equal
to the fair market value of the Company's common stock on the day
the option is granted. In the case of non-qualified options, the
exercise price shall be 80% or more of the fair market value of
the Company's common stock on the day the option is granted.
Options granted to a stockholder holding more than 10% of the
combined voting power, shall have exercise prices equal to or
greater than 100% and 110% of the fair market value of the
Company's common stock on the date the option is granted for
incentive and non-qualified options, respectively. The Board of
Directors can make an appropriate and equitable adjustment in the
number and kind of shares reserved for issuance under this plan
and in the number and option price of shares for outstanding
options in the event of a capital change in the Company. The
options granted vest immediately and have a ten-year term, unless
granted to a stockholder with a greater than 10% combined voting
power, in which case the term is five years.
20-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTETES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
Pursuant to the merger of Everlast Worldwide, Inc. on October 24, 2000 the Board
of Directors granted the President and CEO of the Company, 125,000 non-qualified
stock options with an exercise price of $4.00 and an additional 380,000
non-qualified stock options with an exercise price of $13.00. These options
vested immediately and expire five years from the grant date.
SHARES
-------------------------------------------------------------------------
1995 Weighted
2000 1993 Non-employee average
Stock Stock director stock exercise
2003 option plan option plan option plan Total price
---- ----------- ----------- ----------- ----- -----
Outstanding at January 1 555,500 278,179 58,100 891,779 $7.63
Granted - - 9,500 9,500 $3.83
Cancelled - - - - -
Exercised - (8,468) (12,200) (20,668) $1.66
------- ------- ------ -------
Outstanding at December 31 555,500 269,711 55,400 880,611 $7.73
======= ======= ====== =======
Exercisable at December 31 555,500 246,678 42,600 844,778 $7.92
======= ======= ====== =======
SHARES
-------------------------------------------------------------------------
1995 Weighted
2000 1993 Non-employee average
Stock Stock director stock exercise
2002 option plan option plan option plan Total price
---- ----------- ----------- ----------- ----- -----
Outstanding at January 1 505,000 341,679 64,200 910,879 $7.52
Granted 50,500 - 9,500 60,000 $2.61
Cancelled - 63,500 6,300 69,800 $2.69
Exercised - - 9,300 9,300 $2.23
------- ------- ------ -------
Outstanding at December 31 555,500 278,179 58,100 891,779 $7.63
======= ======= ====== =======
Exercisable at December 31 555,500 244,512 42,267 842,279 $7.92
======= ======= ====== =======
21-f
SHARES
--------------------------------------------------------------------------
1995
2000 1993 Non-employee
2001 Stock Stock director stock Weighted average
---- option plan option plan option plan Total exercise price
----------- ----------- ----------- ----- --------------
Outstanding at January 1 505,000 285,679 54,700 845,379 $ 7.88
Granted -- 60,000 9,500 69,500 $ 2.92
Cancelled -- 4,000 -- 4,000 $ 2.63
Exercised -- -- -- --
-- ------- ------- ------ -------
Outstanding at December 31 505,000 341,679 64,200 910,879 $ 7.52
======= ======= ====== =======
Exercisable at December 31 505,000 244,684 48,368 798,052 $ 8.14
======= ======= ====== =======
Outstanding Exercisable
----------------------------------------------- ---------------------------
Weighted-average
contractual life Weighted-average Weighted-average
Exercise price range Shares remaining exercise price Shares exercise price
$.85 - $2.35 157,900 4.85 years $ 2.22 148,397 $2.21
$3.00 - $3.97 128,712 5.72 years 3.49 102,382 3.53
$4.00 - $6.25 204,499 4.53 years 3.49 204,499 4.76
$9.38 - $13.00 389,500 7.85 years 12.91 389,500 12.91
------- -------
Total 880,611 3.13 years 7.73 844,778 7.92
======= =======
The weighted-average grant-date fair value for options granted
during the years ended December 31, 2003, 2002 and 2001 was $4.01, $2.80 and
$2.88, respectively.
22-f
15. Income taxes:
For the years ended December 31, 2003, 2002 and 2001, the Company's
provision for income taxes consisted of the following:
2003 2002 2001
----------- ----------- -----------
Current tax provision:
Federal $ (63,000) $ 1,590,013 $ 1,249,789
State and local 20,000 409,454 388,157
Foreign 120,000 89,375 208,668
----------- ----------- -----------
77,000 2,088,842 1,846,614
----------- ----------- -----------
Deferred tax benefit:
Federal (42,000) $ (29,380) $ --
State and local -- (14,690) --
Foreign -- (40,000) --
----------- ----------- -----------
(42,000) (84,070) --
----------- ----------- -----------
Total $ 35,000 $ 2,004,772 $ 1,846,614
=========== =========== ===========
Included in prepaid expenses and other current assets is a deferred
tax asset of $197,000 and $239,000 December 31, 2003 and 2002, respectively,
which primarily consists of the temporary difference between the book and tax
basis of inventory, provision for bad debts and a net operating loss
carryforward.
The following is a reconciliation of the reported amount of income
tax expense to the amount of income tax expense that would result from applying
domestic federal statutory rates to income before income taxes:
Years ended December 31,
----------------------------------
2003 2002 2001
---- ---- ----
Federal income tax rate (34.0%) 34.0% 34.0%
State taxes, net of federal income tax benefit 2.2 6.1 6.1
Nondeductible amortization of
intangible assets and other items 27.6 7.9 10.8
Foreign income taxes 11.1 2.0 5.0
Work credit and other credits (4.9) (4.4) (9.3)
Other 1.8 (.6) (2.5)
---- ---- ----
3.8% 45.0% 44.1%
==== ==== ====
16. Economic dependency:
For the years ended December 31, 2003, 2002 and 2001, one customer
accounted for approximately 17%, 19% and 22% of sales, respectively.
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17. Geographic data:
Geographic information for net sales is as follows:
2003 2002 2001
----------- ----------- -----------
U.S $53,791,886 $60,116,686 $48,263,348
Canada 3,934,000 5,227,786 4,184,216
Other foreign countries 310,000 268,540 503,946
----------- ----------- -----------
$58,035,886 $65,613,012 $52,951,510
=========== =========== ===========
18. Earnings per share:
We report basic and diluted earnings (loss) per share in accordance
with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings
(loss) per share excludes the dilutive effects of options and other
contingent consideration that was given as part of the merger in October
2000 of Everlast Worldwide, Inc. Diluted earnings per share includes only
the dilutive effects of common stock equivalents such as stock options and
contingent stock consideration.
The following table sets forth the computation of basic and diluted
earnings (loss) per share pursuant to SFAS No. 128:
2003 2002 2001
----------- ----------- -----------
Net income (loss) available to common stockholders:
Net income (loss) $ (954,839) $ 2,448,251 $ 2,338,896
Redeemable participating
preferred stock dividends -- (1,450,808) (1,674,840)
----------- ----------- -----------
$ (954,839) $ 997,443 $ 664,056
=========== =========== ===========
2003 2002 2001
---- ---- ----
Basic weighted average
common stock outstanding 3,108,293 3,101,261 3,098,936
Effect of dilutive securities:
Stock options -- 48,027 14,870
Contingent consideration -- 989,863 1,722,128
----------- ----------- -----------
Diluted weighted average
common stock outstanding 3,108,293 4,139,151 4,835,934
=========== =========== ===========
Basic earnings (loss) per common share $ (0.31) $ .32 $ .21
=========== =========== ===========
Diluted earnings (loss) per common share (a) $ (0.31) $ .24 $ .14
=========== =========== ===========
(a) As a result of the net loss in 2003, the dilutive effect of options and
contingent consideration (1,434,000) are not shown as the results would be
anti-dilutive.
24-f
As part of the Company's October 2000 acquisition of Everlast
Holding Corp (EHC), contingent consideration may be required to be paid to the
former owners of EHC. This consideration may be in the form of cash, or at the
Company's option, payable in common shares. The consideration will be paid if
the Company's stock does not meet a guaranteed share price of $13.00. This
guarantee pertains to 380,000 outstanding shares, of which 38,000 shares are
subject to an October 2005 payment or issuance date and the remaining 342,000
shares are subject to an October 2007 payment or issuance date.
19. Stockholders' Equity
The holder of the Class A common stock is entitled to five votes per
share on all matters upon which each holder of common stock is
entitled to vote.
20. Cash flow information:
a. Supplemental disclosures of cash flow information:
2003 2002 2001
---- ---- ----
Cash paid during the year for:
Interest $1,000,000 $ 755,665 $ 530,799
Income taxes 600,000 1,576,314 2,449,879
21. Quarterly financial data (unaudited):
Unaudited quarterly financial date for fiscal 2003 and 2002 is
summarized as follows:
2003
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales 12,355,283 $ 12,939,061 $ 16,075,363 $ 16,666,179
Gross profit (a) 3,435,241 3,552,264 4,032,592 3,510,662
Restructuring and non-recurring charges -- -- -- 1,095,000
Net income (loss) available to common stockholder's 15,878 111,159 104,208 (1,186,084)
Earnings (loss) per share - basic (b) $ 0.01 $ 0.04 $ 0.03 $ (0.38)
Earnings (loss) per share - diluted $ 0.00 $ 0.02 $ 0.02 $ (0.38)
25-f
2002
--------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Net sales $15,734,596 $14,725,911 $16,905,001 $18,247,504
Gross profit 5,273,766 4,581,859 5,324,030 3,704,069
Net income available to common stockholder's 384,588 240,073 371,580 1,203
Earnings per share - basic $ 0.12 $ 0.08 $ 0.12 $ 0.00
Earnings per share - diluted $ 0.09 $ 0.06 $ 0.06 $ 0.00
(a) Included within gross profit in the fourth quarter of fiscal 2003 are
restructuring charges aggregating $1.1 million related to inventory
write-downs, which for accounting purposes must be classified as a
reduction of gross profit.
(b) As a result of the net loss in the fourth quarter of fiscal 2003, the
dilutive effect of options and contingent stock consideration are not
shown, as the results would be anti-dilutive.
26-f