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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
/ / 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.
-----------------------
(Exact name of Registrant as specified in its charter)
Delaware 13-3672716
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1350 Broadway, Suite 2300
New York, NY 10018
(Address of Principal Executive Offices)
(212)239-0990
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year if changed since last report)
Indicate by check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
Indicate by check whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange act)
Yes No __X__
The number of common equity shares outstanding as of May 10, 2004
was 3,028,904 shares of Common Stock, $.002 par value, and 100,000 shares of
Class A Common Stock, $.01 par value.
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
March 31, 2004 (Unaudited) and December 31, 2003 3
Consolidated Statements of Income -
Three Months ended March 31, 2004 and 2003 (Unaudited) 4
Consolidated Statements of Cash Flows -
Three Months ended March 31, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements -
Three Months ended March 31, 2004 - (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Items 1 through 5 not applicable
Item 6. Exhibits and Current Reports on Form 8-K 15
SIGNATURES 16
2
EVERLAST WORLDWIDE INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2004 2003
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 594,358 $ 1,937,334
Accounts receivable - net 6,765,886 8,405,404
Inventories 10,406,557 11,012,010
Prepaid expenses and other current assets 1,147,789 1,107,043
------------ ------------
Total current assets 18,914,590 22,461,791
Restricted cash 1,017,625 1,015,097
Property and equipment, net 6,195,037 6,188,388
Goodwill 6,718,492 6,718,492
Trademarks, net 24,260,853 24,489,021
Other assets 3,357,956 3,383,924
------------ ------------
$ 60,464,553 $ 64,256,713
============ ============
LIABILITIES, REDEEMABLE PARTICIPATING PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of Series A redeemable participating preferred stock $ 3,000,000 $ 3,000,000
Due to factor 4,131,718 6,898,081
Current maturities of long term debt 311,874 335,475
Accounts payable 4,336,931 5,175,558
Accrued expenses and other current liabilities 556,279 1,018,944
Preferred dividend payable 150,112 --
------------ ------------
Total current liabilities 12,486,914 16,428,058
License deposits payable 599,193 568,833
Series A Redeemable participating preferred stock 27,000,000 27,000,000
Note payable 2,000,000 2,000,000
Other liabilities 1,152,558 1,165,738
Long term debt, net of current maturities 2,810,278 2,866,111
------------ ------------
Total liabilities 46,048,943 50,028,740
Stockholders' equity:
Common stock, par value $.002; 19,000,000 shares
authorized; 3,202,904 issued, 3,028,904 outstanding 6,406 6,406
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000 1,000
Paid-in capital 11,697,178 11,697,178
Retained earnings 3,438,035 3,250,340
Accumulated other comprehensive income 210 268
------------ ------------
15,142,829 14,955,192
Less treasury stock, at cost (174,000 common shares) (727,219) (727,219)
------------ ------------
14,415,610 14,227,973
------------ ------------
$ 60,464,553 $ 64,256,713
============ ============
See accompanying notes to the financial statements.
Note: The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date.
3
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended
March 31,
--------------------------------
2004 2003
--------------------------------
(Unaudited) (Unaudited)
Net sales $ 14,095,093 $ 12,355,283
Net license revenues 2,076,217 1,648,838
------------ ------------
Net revenues 16,171,310 14,004,121
------------ ------------
Cost of goods sold 10,698,362 8,920,042
------------ ------------
Gross profit 5,472,948 5,084,079
------------ ------------
Operating expenses:
Selling and shipping 2,506,547 3,036,444
General and administrative 1,737,641 1,386,864
Amortization 228,168 228,168
------------ ------------
4,472,356 4,651,476
------------ ------------
Income from operations 1,000,592 432,603
------------ ------------
Other income (expense):
Interest expense and financing costs (393,732) (236,912)
Interest expense on redeemable participating preferred
stock (150,112) --
Investment income 4,284 12,347
------------ ------------
(539,560) (224,565)
------------ ------------
Income before provision for income taxes 461,032 208,038
Provision for income taxes 273,337 175,360
------------ ------------
Net income $ 187,695 $ 32,678
============ ============
Redeemable preferred stock dividend -- 17,100
------------ ------------
Net income available to common shareholders $ 187,695 $ 15,578
============ ============
Basic earnings per common share $ 0.06 $ 0.01
============ ============
Diluted earnings per common share $ 0.04 $ --
============ ========
See accompanying notes to financial statements.
4
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended
March 31,
---------------------------
2004 2003
---------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 187,695 $ 32,978
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 299,814 142,586
Amortization 228,168 228,168
Interest income on restricted cash (2,528) --
Changes in assets (increase) decrease:
Accounts receivable 1,639,518 3,155,393
Inventories 605,453 (1,548,097)
Prepaid expenses and other current assets (40,804) 55,864
Other assets 6,794 (34,839)
Changes in liabilities increase (decrease):
Accounts payable, accrued expenses
and other current liabilities (1,164,362) (730,380)
License deposits payable 30,360 5,606
----------- -----------
Net cash provided by operating activities 1,790,108 1,304,155
----------- -----------
Cash flows used by investing activities:
Purchases of property and equipment (187,288) (44,304)
----------- -----------
Cash flows from financing activities:
Payment of preferred stock dividend -- (1,450,808)
(Repayments) borrowings from factor (2,766,363) 557,597
Payment of financing costs (100,000) --
Repayments of debt instruments (79,433) (76,677)
----------- -----------
Net cash used by financing activities: (2,945,796) (969,888)
----------- -----------
Net (decrease) increase in cash and cash equivalents (1,342,976) 289,963
Cash and cash equivalents, beginning of period 1,937,334 2,530,452
----------- -----------
Cash and cash equivalents, end of period $ 594,358 $ 2,820,415
=========== ===========
Supplemental disclosures of cash flow information: Cash paid during the
period for:
Interest $ 280,268 $ 236,912
Income taxes -- 500,348
See accompanying notes to financial statements.
5
EVERLAST WORLDWIDE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION:
Everlast Worldwide, Inc. (herein referred to as "the Company", "we", "us",
and "our") is a manufacturer, marketer and licensor of sporting goods and
apparel under the Everlast brand name. The consolidated financial
statements of the Company are presented herein as of March 31, 2004 and for
the three months ended March 31, 2004 and 2003 are unaudited and, in the
opinion of management, include all adjustments (consisting only of normal
and recurring adjustments) necessary for a fair presentation of financial
position and results of operations. Such financial statements do not
include all of the information and footnote disclosures normally included
in audited financial statements prepared in accordance with generally
accepted accounting principles. The accompanying unaudited consolidated
financial statements have been prepared in accordance with the instructions
to Form 10-Q. The results of operations for the three month period ended
March 31, 2004 are not necessarily indicative of the results that may be
expected for any other interim periods or the full year ending December 31,
2004. The Company has reviewed the status of its legal contingencies and
believes that there are no material changes from that disclosed on Form
10-K for the year ended December 31, 2003.
Certain items on the 2003 financial statements have been reclassified to
conform to 2004 presentations. The reclassifications made had no impact on
net income available to common stockholder's or stockholder's equity.
2. EARNINGS PER SHARE:
We report basic and diluted earnings per share in accordance with SFAS
Statement No. 128 "Earnings Per Share" ("SFAS No. 128"). Basic earnings per
share amounts are computed based on the weighted average number of shares
actually outstanding during the period. Diluted earnings per share amounts
are based on an increased number of shares that would be outstanding
assuming the exercise of dilutive stock options and contingent
consideration pursuant to the Merger Agreement dated October 24, 2000.
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128:
Three Months Ended
March 31,
------------------------
2004 2003
------------------------
Numerator:
Numerator for basic and diluted
earnings per common share --
Net income available to common stockholders $ 187,695 $ 15,578
---------- ----------
Denominator:
Denominator for basic earnings per
common share --
Weighted average shares
outstanding during the period 3,128,904 3,108,236
---------- ----------
Effect of diluted securities:
Stock options 36,619 69,230
Contingent stock consideration related to the Merger 1,550,811 1,362,160
---------- ----------
1,587,430 1,431,390
Denominator for diluted earnings per
common share --
adjusted weighted average shares and assumed conversions
4,716,334 4,539,626
---------- ----------
Basic net income per common share $ 0.06 $ 0.01
=======================
Diluted net income per common share $ 0.04 $ --
=======================
6
3. ADOPTION OF SFAS NO. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY":
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." SFAS No. 150 is effective for all
financial instruments, in existence prior to May 31, 2003, meeting this
definition, at the beginning of the first interim period beginning after
June 15, 2003. The Company had adopted the provisions of SFAS No. 150,
effective July 1, 2003 for the third quarter ending September 30, 2003, as
part of its year ending December 31, 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") met this definition, and
thus has been reclassified as a liability (current and long-term) on our
Consolidated Balance Sheet for the periods ended March 31, 2004 and
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 have been classified as interest expense for the three months
ended March 31, 2004. Dividends and other amounts paid or accrued prior to
reclassification of the instrument to a liability (July 1, 2003) are not
reclassified as interest cost upon transition in accordance with SFAS No.
150.
4. REDEEMABLE PARTICIPATING PREFERRED STOCK AND NOTES PAYABLE:
The percentage of net income, as defined in the Company's October 24, 2000
Merger Agreement, to be paid to holders of the Preferred Stock for the
annual dividend ( now classified as interest expense for the three months
ended March 31, 2004 as more fully explained above) is as follows:
Twelve months ending December 31, 2004 44.4%
2005 37.0%
2006 29.6%
2007 22.2%
2008 14.8%
2009 7.4%
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,
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 above. As a further condition of this refinance, the Company paid
financing costs aggregating $800,000 of which $700,000 was paid by December
2003 and $100,000 was paid in January 2004.
The minimum redemption amounts, as amended for the aforementioned
refinance, including the repayment of the notes payable requirements are as
follows:
December 2004 $ 3,000,000
2005 3,000,000
2006 3,000,000
2007 5,000,000
2008 13,000,000
2009 5,000,000
7
5. RESTRUCTURING AND NON-RECURRING CHARGES:
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.
A restructuring charge of $2.1 million was recorded during the fourth
quarter of fiscal 2004 which consisted 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. At March 31, 2004, approximately $225,000 remains for costs,
principally lease exit costs, expected to be paid during our second quarter
of fiscal 2004. No restructuring and non-recurring charges were incurred
during the three months ended March 31, 2004 and 2003.
6. INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
March 31, 2004 December 31, 2003
-------------- -----------------
Raw materials $ 1,220,934 $ 1,460,586
Work-in-process 1,728,577 1,705,995
Finished goods 7,457,046 7,845,429
----------- -----------
$10,406,557 $11,012,010
=========== ===========
7. ACCOUNTING FOR STOCK BASED COMPENSATION:
The Company accounts for its stock-based compensation plans using the
intrinsic value method under APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related Interpretations. Under APB 25,
when the exercise price of our employee stock options are at least equal to
the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
As of December 2002, the Company adopted SFAS No. 148, "Accounting for
Stock-Based Compensation-Transaction and Disclosure, an Amendment of FASB
No. 123." SFAS No. 148 revises the methods permitted by SFAS No. 123 of
measuring compensation expense for stock-based employee compensation plans.
The Company uses the intrinsic value method prescribed in Accounting
Principles Board Option No. 25, as permitted under SFAS No. 123. Therefore,
this change did not have a material effect on the financial statements.
SFAS No. 148 requires the Company to disclose pro forma information related
to stock-based compensation, in accordance with SFAS No. 123, on a
quarterly basis in addition to the annual basis disclosure.
8
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the date of grant consistent
with the method prescribed by Statement of Financial Accounting Standard
No. 123, "Accounting For Stock-Based Compensation", net earnings and
earnings per share for the three month periods ended March 31, 2004 and
2003 would have been the pro forma amounts that follow:
Three Months Ended
March 31,
-----------------------------------------
2004 2003
-----------------------------------------
Net income, as reported $ 187,695 $ 15,578
------------------- -------------------
Stock-based employee compensation expense determined under fair
value method net of related tax effects (8,074) (9,082)
------------------- -------------------
Pro-forma net income $ 179,621 $ 6,496
=================== ===================
Basic net income per common share:
As reported $ 0.06 $ 0.01
=================== ===================
Pro-forma $ 0.06 $ -
=================== ===================
Diluted net income per common share:
As reported $ 0.04 $ -
=================== ===================
Pro-forma $ 0.04 $ -
=================== ===================
8. RECENT ACCOUNTING PRONOUNCEMENTS:
On March 31, 2004, the FASB issued its Exposure Draft, Share-Based Payment,
which is a proposed amendment to FASB Statement No. 123, Accounting for
Stock-Based Compensation. Generally the approach in the Exposure Draft is
similar to the approach described in FASB 123. However, the Exposure Draft
would require all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on
their fair values. The FASB expects to issue a final standard late in 2004
that would be effective for fiscal years beginning after December 15, 2004.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this quarterly report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Sections 21E of the Exchange Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, levels of activity, performance or achievements of the
Company, or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, the ability of the Company
to implement its business strategy; the ability of the Company to obtain
financing for general corporate purposes; competition; availability of key
personnel, and changes in, or the failure to comply with, government's
regulations. As a result of the foregoing and other factors, no assurance can be
given as to the future results, levels of activity and achievements and neither
the Company nor any person assumes responsibility for the accuracy and
completeness of these statements.
GENERAL
Everlast Worldwide Inc. is a Delaware corporation organized on July 6,
1992. We are engaged in the design, manufacture, marketing and sale of women's
activewear and sportswear; and the design, manufacture, marketing and sale of
men's activewear, sportswear and outerwear (the "Apparel Products") each
featuring the widely-recognized Everlast(R) trademark. We also manufacture
sporting goods related to the sport of boxing such as boxing gloves, heavy bags,
speed bags, boxing trunks, and miscellaneous gym equipment that are sold through
sporting goods stores, mass merchandisers, catalog operations, gymnasiums, and
martial arts studios. In addition, we license the Everlast(R) trademark to
numerous companies that source and manufacture products such as men's, women's
and children's apparel, footwear, cardiovascular equipment, back to school
stationery, eyewear, sports bags, hats, fragrances, batteries, nutritional
products and other accessories.
Our financial statements and the notes thereto contain detailed information
that should be referred to in conjunction with this discussion.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The accounting principles we
use require us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting periods presented. We
believe in the quality and reasonableness of our critical accounting policies,
however it is likely that materially different amounts would be reported under
different conditions or using different assumptions that we have consistently
applied. We believe our critical accounting policies are as follows, including
our methodology for estimates made and assumptions used.
REVENUE RECOGNITION POLICY. Revenues from royalty and finders
agreements are recognized when earned by applying contractual royalty
rates to quarterly point of sale data, among other criteria, received
from our licensees. Our royalty recognition policy provides for
recognition of royalties in the quarter earned, although a large
portion of such royalty payments are actually received during the
month following the end of a quarter. Revenues are not recognized
unless collectibility is reasonably assured.
TRADE RECEIVABLES. We perform ongoing credit evaluations on existing
and new customers daily. We apply reserves for delinquent or
uncollectible trade receivables based on a specific identification
methodology and also apply a general reserve based on our trade
receivables aging categories. Credit losses have been within our
estimates over the last few years.
10
INVENTORY. Our inventory is valued at the lower of cost or market.
Cost has been derived principally on the standard cost methodology,
where we utilize a first-in-first-out method. We provide for reserve
allowances on finished goods and specifically identify and reserve for
slow moving or obsolete raw materials and packaging.
DEFERRED TAXES. Deferred taxes are determined based on the differences
between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized. In assessing the need for a valuation
allowance management considers estimates of future taxable income and
ongoing prudent and feasible tax planning strategies. In accordance
with APB Opinion 23, "Accounting for Income Taxes - Special Areas," we
do not accrue income taxes on the undistributed earnings of a
subsidiary which is a "DISC" since the repayment of the earnings of
the DISC is not expected in the foreseeable future. If circumstances
change and it becomes apparent that some or all of the undistributed
earnings of the DISC will be remitted in the foreseeable future, then
taxes will be accrued.
VALUATION OF GOODWILL, LONG-LIVED ASSETS AND INTANGIBLE ASSETS. We
periodically evaluate goodwill, long-lived assets and intangible
assets for potential impairment indicators. Judgements regarding the
existence of impairment indicators are based on estimated future cash
flows, market conditions, and legal factors. Future events could cause
management to conclude that impairment indicators exist and that the
net book value of goodwill, long-lived assets and intangible assets is
impaired. Any resulting impairment loss could have a material adverse
impact on our financial condition and results of operations.
CONTINGENCIES AND LITIGATION. We evaluate contingent liabilities
including threatened or pending litigation in accordance with SFAS No.
5, "Accounting for Contingencies" and record accruals when the outcome
of these matters is deemed probable and the liability could be
reasonably estimated. Management makes these assessments based on the
facts and circumstances and in some instances based in part on the
advice of outside legal counsel.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004
Net revenues increased to $16.2 million for the three months ended March
31, 2004 from $14.0 million for the three months ended March 31, 2003, an
increase of $2.2 million, or 16%. This increase was a result of increases in
sales of apparel and sporting goods equipment of $1.7 million (14% increase),
and licensing revenues of $.4 million (26% increase). The increase in licensing
revenues was a result of new license agreements and increased revenues on
existing licenses
Gross profit increased to $5.5 million for the three months ended March 31,
2004 from $5.1 million for the three months ended March 31, 2003. Gross profit
decreased as a percentage of net revenues to 33.8% from 36.3%. The increase in
gross profit dollars was primarily a result of the aforementioned increase in
net licensing revenues. The decrease in gross profit percentage was a result of
unfavorable change in sales mix.
Selling and shipping expenses decreased to $2.5 million (15.5% of net
revenues) for the three months ended March 31, 2004 from $3.0 million (21.7% of
net revenues) for the three months ended March 31, 2003. The decrease in dollars
was primarily a result of the closure of the Bronx, New York manufacturing and
distribution facility in December 2003 resulting in reduced fixed shipping costs
and the ability for us to ship consolidated orders out of our Moberly, Missouri
manufacturing facility which provided us beneficial cost savings on freight. The
decrease in percentage basis points was a result of the aforementioned increase
in net revenues and lower selling and shipping costs dollars.
11
General and administrative expenses increased to $1.7 million for the three
months ended March 31, 2004 from $1.4 million for the three months ended March
31, 2003, an increase of $0.3 million. The increase is due to added and
increased infrastructure costs such as rent, insurance and employee costs
required for our diversified and expanding organization.
Amortization expense remained approximately $0.2 million for both three
month periods ended March 31, 2004 and 2003.
Operating income increased to $1.0 million for the three months ended March
31, 2004 from $0.4 million for the three months ended March 31, 2003. Operating
income as a percentage of net revenues was 6.2% for the three months ended March
31, 2004 as compared to 3.1% for the three months ended March 31, 2003. The
increases in both dollar amounts and percentage of net revenues were primarily a
result of higher gross margin dollars and lower selling and shipping costs as
described above.
Interest expense and finance costs, net of interest income, increased from
$0.2 million in the three month period ending March 31, 2003 to $0.5 million
during the March 31, 2004 period. $0.2 million of this increase was a result of
the adoption of SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." We adopted SFAS No. 150 during
the period ending September 30, 2003. The adoption of SFAS No. 150 required us
to classify dividends associated with our Preferred Stock instruments as
interest expense. SFAS No. 150 prohibits reclassification of prior period
amounts for the 2003 periods presented prior to the adoption. In addition, $.1
million, of the remaining increase was due to higher borrowing costs associated
with our average outstanding factor balance as compared to the prior period, and
borrowings associated with our outstanding $2 million note payable and
amortization of deferred finance costs associated with our preferred stock
refinance completed in January 2004.
Income before income taxes for the three months ended March 31, 2004 was
$0.5 million compared to $0.2 million for the three month period ended March 31,
2003. The increase was a result of higher operating profits offset by higher
interest costs as explained above.
We incurred a tax provision of $0.3 million for the three months ended
March 31, 2004 as compared to $0.2 million for the three months ended March 31,
2003. We expect our effective tax rate to be approximately 47% this year after
adding to pretax profits the dividends associated with our preferred stock which
have been classified as interest expense in conformity with SFAS No. 150.
The Company had net income of approximately $188,000 for the three months
ended March 31, 2004 as compared to approximately $33,000 for the three months
ended March 31, 2003, an increase of $155,000. The increase was primarily
attributable to the aforementioned increase in income before income taxes offset
by higher tax expense in the current period.
We are required to pay a dividend equal to the product of 2/3 of the sum of
the net after tax profits reduced in proportion to the redeemed Preferred Stock.
The dividends are based on annual profits, as defined, payable the following
March. The accrued dividend payable for the three months ended March 31, 2004 is
$150,000 as compared to $17,000 for the three months ended March 31, 2003. The
2004 dividend is equal to 44.4% of net after tax profits. As described above,
the dividend in the September period has been classified as interest expense in
accordance with SFAS No. 150. Restatement of prior periods is prohibited in
accordance with SFAS No. 150.
12
LIQUIDITY AND CAPITAL RESOURCES
2003 RESTRUCTURING AND NON-RECURRING CHARGES
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.
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 of a non-cash nature.
The restructuring charge included $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. At December 31, 2003, approximately $0.5
million was accrued principally related to lease exit costs and during the first
quarter of fiscal 2004, we paid approximately $300,000 of such lease exit costs
with the remainder to be paid during the second quarter of fiscal 2004.
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 three months ended March
31, 2004 was $1.8 million as compared to $1.3 million for the three months ended
March 31, 2003. This increase was primarily attributable to an increase in net
income, depreciation and amortization along with a small increase in working
capital items. Net cash used for investing activities for the three months ended
March 31, 2004 was $0.2 million compared to $0.1 million for the three months
ended March 31, 2003.
On January 13, 2004, we announced that we had entered into an 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. As a further condition
of this refinance, the Company paid financing costs aggregating $800,000 of
which $700,000 was paid in December 2003 and $100,000 was paid in January 2004.
During the three months ended March 31, 2004, the Company's primary need
for funds was to finance working capital and for the repayment of the borrowings
from its Factor. Borrowings from our Factor during the year ended December 31,
2003 were used to pay the $3 million preferred stock redemption along with
deferred finance costs of $800,000. During the three months ended March 31,
2004, we repaid the Factor $2.8 million reducing our outstanding obligation to
$4.1 million at March 31, 2004.
Net cash used in financing activities was $2.9 million for the three month
period ended March 31, 2004 as compared to $1.0 million for the three month
period ended March 31, 2003. This decrease in financing sources is primarily due
to aforementioned repayment of borrowings from our Factor, offset by no dividend
payment requirements necessitated on the Preferred Stock due to our net loss in
2003.
13
At March 31, 2004, cash and cash equivalents was $0.6 million compared to
$1.9 million and $3.1 million at December 31, 2003 and March 31, 2003,
respectively. Working capital was $6.4 million at March 31, 2004 compared to
$6.0 million at December 31, 2003.
Management anticipates it will generate and maintain sufficient cash and
cash equivalent balances, short term investments and a net surplus position with
the factor, although no assurance to that effect can be given to fund our
contractual obligations and working capital needs. Positive cash flow, if it
occurs, will create working capital to fund the Company's anticipated growth
over the next 12 months, the mandatory redemption requirements of the Preferred
Stock due in December 2004 and the Preferred Stock dividend due on March 31,
2005. If a positive cash flow does not occur, there will be a decrease in cash,
cash equivalent balances and short term investments and/or borrowings with the
factor and/or other lenders will increase.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no changes in financial market risk as originally discussed
in the Company's Annual Report on Form 10-K for the year ended December 31,
2003.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this
report, the Company's Chief Executive Officer and Chief Financial Officer have
concluded the Company's disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Current Reports on Form 8-K
On January 15, 2004, the Company filed an 8-K related to its press
release dated January 12, 2004 announcing it had executed an agreement
dated as of December 16, 2003 with the principal preferred stockholder
restructuring the required minimum annual preferred stock redemptions.
On March 31, 2004, the Company filed an 8-K related to its press release
dated March 26, 2004 announcing its results of operations and financial
condition for its fiscal 2003 fourth quarter and fiscal year ended
December 31, 2003.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERLAST WORLDWIDE INC.
Date: May 10, 2004 By: /s/ George Q Horowitz
------------------------------
Name: George Q Horowitz
Title: Chief Executive Officer,
President and Treasurer
By: /s/ Matthew F. Mark
------------------------------
Name: Matthew F. Mark
Title: Chief Financial Officer,
Chief Accounting Officer