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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 June 30, 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 August 10, 2004
was 3,029,904 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 -
June 30, 2004 (Unaudited) and December 31, 2003 3
Consolidated Statements of Income -
Three and Six Months ended June 30, 2004 and 2003 (Unaudited) 4
Consolidated Statements of Cash Flows -
Six Months ended June 30, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements -
Six Months ended June 30, 2004 - (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Items 1 thru 3 and 5 not applicable
Item 4 Submission of Matters to Vote of Security Holders 15
Item 6. Exhibits and Current Reports on Form 8-K 16
SIGNATURES 17
2
EVERLAST WORLDWIDE INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
2004 2003
------------- ------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 787,153 $ 1,937,334
Accounts receivable - net 5,618,979 8,405,404
Inventories 12,359,836 11,012,010
Prepaid expenses and other current assets 1,399,481 1,107,043
------------ ------------
Total current assets 20,165,449 22,461,791
Restricted cash 1,020,153 1,015,097
Property and equipment, net 6,280,028 6,188,388
Goodwill 6,718,492 6,718,492
Trademarks, net 24,032,685 24,489,021
Other assets 3,136,964 3,383,924
------------ ------------
$ 61,353,771 $ 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 4,423,275 6,898,081
Current maturities of long term debt 289,832 335,475
Accounts payable 4,701,230 5,175,558
Accrued expenses and other current liabilities 1,371,466 1,018,944
Preferred dividend payable 213,659 --
------------ ------------
Total current liabilities 13,999,462 16,428,058
License deposits payable 532,565 568,833
Series A Redeemable participating preferred stock 27,000,000 27,000,000
Note payable 2,000,000 2,000,000
Other liabilities 570,000 1,165,738
Long term debt, net of current maturities 2,754,445 2,866,111
------------ ------------
Total liabilities 46,856,472 50,028,740
------------ ------------
Stockholders' equity:
Common stock, par value $.002; 19,000,000 shares authorized;
3,203,904 issued (3,202,904-2003), 3,029,904 and 3,028,904
outstanding in 2003 and 2002 6,408 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 11,699,406 11,697,178
Retained earnings 3,517,354 3,250,340
Accumulated other comprehensive income 350 268
------------ ------------
15,224,518 14,955,192
Less treasury stock, at cost (174,000 common shares) (727,219) (727,219)
------------ ------------
14,497,299 14,227,973
------------ ------------
$ 61,353,771 $ 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 Six months ended
June 30, June 30,
------------------------------ -------------------------------
2004 2003 2004 2003
----------------------------- -------------------------------
(Unaudited) (Unaudited)
Net sales $ 12,094,379 $ 12,939,061 $ 26,189,472 $ 25,294,344
Net license revenues 2,401,244 1,586,415 4,477,461 3,235,251
------------ ------------ ------------ ------------
Net revenues 14,495,623 14,525,476 30,666,933 28,529,595
------------ ------------ ------------ ------------
Cost of goods sold 8,594,631 9,386,797 19,292,994 18,306,839
------------ ------------ ------------ ------------
Gross profit 5,900,992 5,138,679 11,373,939 10,222,756
Operating expenses:
Selling and shipping 3,245,661 2,795,667 5,752,209 5,832,111
General and administrative 1,715,610 1,550,477 3,453,251 2,937,341
Amortization 228,168 228,168 456,336 456,336
------------ ------------ ------------ ------------
5,189,439 4,574,312 9,661,796 9,225,788
------------ ------------ ------------ ------------
Income from operations 711,553 564,367 1,712,143 996,968
------------ ------------ ------------ ------------
Other income (expense):
Interest expense and financing costs (381,548) (238,297) (775,280) (475,209)
Interest expense on redeemable participating preferred
stock (63,547) -- (213,659) --
Investment income 4,146 15,259 8,430 27,906
------------ ------------ ------------ ------------
(440,949) (223,038) (980,509) (447,303)
------------ ------------ ------------ ------------
Income before provision for income taxes 270,604 341,329 731,634 549,665
Provision for income taxes 191,286 110,465 464,620 285,825
------------ ------------ ------------ ------------
Net income $ 79,318 $ 230,864 $ 267,014 $ 263,840
============ ============ ============ ============
Redeemable preferred stock dividend -- 119,705 -- 136,805
------------ ------------ ------------ ------------
Net income available to common shareholders $ 79,318 $ 111,159 $ 267,014 $ 127,035
============ ============ ============ ============
Basic earnings per common share $ 0.03 $ 0.04 $ 0.09 $ 0.04
============ ============ ============ ============
Diluted earnings per common share $ 0.02 $ 0.02 $ 0.06 $ 0.03
============ ============ ============ ============
See accompanying notes to financial statements.
4
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2004 2003
-----------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 267,014 $ 263,840
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 249,768 307,742
Amortization 694,684 456,336
Interest income on restricted cash (5,056) (6,285)
Changes in assets (increase) decrease:
Accounts receivable 2,786,506 2,562,170
Inventories (1,347,826) (1,571,581)
Prepaid expenses and other current assets (292,438) (57,905)
Other assets 108,612 (68,782)
Changes in liabilities increase (decrease):
Accounts payable, accrued expenses
and other liabilities (503,885) (587,942)
License deposits payable (36,268) 5,307
----------- -----------
Net cash provided by operating activities 1,921,111 1,302,900
----------- -----------
Cash flows used by investing activities:
Purchases of property and equipment (341,408) (117,242)
----------- -----------
Cash flows from financing activities:
Payment of preferred stock dividend -- (1,450,808)
Proceeds from stock option exercises 2,230 --
(Repayments) borrowings from factor (2,474,806) 344,059
Payment of financing costs (100,000) --
Repayments of debt instruments (157,308) (180,059)
----------- -----------
Net cash used by financing activities: (2,729,884) (1,286,808)
----------- -----------
Net decrease in cash and cash equivalents (1,150,181) (101,150)
Cash and cash equivalents, beginning of period 1,937,334 2,530,452
----------- -----------
Cash and cash equivalents, end of period $ 787,153 $ 2,429,302
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 555,995 $ 475,209
Income taxes 2,695 580,348
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 June 30, 2004 and for
the three and six months ended June 30, 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 and
six month periods ended June 30, 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 stockholders or stockholders' 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 Six Months Ended
June 30, June 30,
--------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per common share --
Net income available to common stockholders $ 79,318 $ 111,159 $ 267,014 $ 127,035
---------- ---------- ---------- ----------
Denominator:
Denominator for basic earnings per
common share --
Weighted average shares
outstanding during the period 3,129,157 3,108,236 3,129,031 3,108,236
--------- ---------- ---------- -----------
Effect of diluted securities:
Stock options 27,214 40,500 31,509 54,865
Contingent stock consideration related to the
Merger 1,418,561 1,535,709 1,347,228 1,448,935
--------- --------- ---------- -----------
1,445,775 1,586,209 1,378,737 1,503,800
Denominator for diluted earnings per
common share --
adjusted weighted average shares and assumed
conversions 4,574,932 4,684,445 4,507,768 4,612,036
Basic net income per common share $ 0.03 $ 0.04 $ 0.09 $ 0.04
=======================================================
Diluted net income per common share $ 0.02 $ 0.02 $ 0.06 $ 0.03
=======================================================
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
ended September 30, 2003, as part of its year ended 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 June 30, 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 and six months ended June 30, 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
and six months ended June 30, 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 (herein
defined), 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 the term of the then existing lease 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 2003 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 June 30, 2004, these amounts have been paid in their entirety.
No restructuring and non-recurring charges were incurred during the three
and six months ended June 30, 2004 and 2003.
6. INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
Raw materials $ 2,139,624 $ 1,460,586
Work-in-process 844,366 1,705,995
Finished goods 9,375,846 7,845,429
----------- -----------
$12,359,836 $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 and six month periods ended June 30,
2004 and 2003 would have been the pro forma amounts that follow:
Three Months Ended Six Months Ended
June 30, June 30
---------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------
Net income, as reported $ 79,318 $ 230,864 $ 267,014 $ 263,840
Stock-based employee compensation
expense determined under fair value
method net of related tax effects (8,081) (9,082) (16,162) (18,163)
----------- ----------- ----------- ---------
Pro-forma net income $ 71,237 $ 221,782 $ 250,852 $ 245,677
=========== =========== =========== =========
Basic net income per common share:
As reported $ 0.03 $ 0.04 $ 0.09 $ 0.04
=========== =========== =========== =========
Pro-forma $ 0.02 $ 0.03 $ 0.08 $ 0.04
=========== =========== =========== =========
Diluted net income per common share:
As reported $ 0.02 $ 0.02 $ 0.06 $ 0.03
=========== =========== =========== =========
Pro-forma $ 0.02 $ 0.02 $ 0.06 $ 0.02
=========== =========== =========== =========
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 JUNE 30, 2004
Net revenues were $14.5 million for each of the three month periods
ended June 30, 2004 and 2003. Net revenues in the second quarter ended June 30,
2004 would have been 4% higher than reported 2003 net revenues, after reflecting
a change in revenues sources in 2003, as certain customers became licensees
during the second half of fiscal 2003. The adjusted 4% increase was primarily a
result of an increase in licensing revenues on existing licenses and higher
sales on our equipment and sporting goods. Overall net licensing revenues
increased $800,000, or 51.4%
Gross profit increased to $5.9 million (40.7% of net revenues) for the
three months ended June 30, 2004 from $5.1 million (35.4%) for the three months
ended June 30, 2003. The increase in gross profit dollars and gross profit
percentage was a result of the aforementioned increase in net licensing revenues
along with higher gross profits achieved within our sporting goods business as a
result of cost efficiencies realized from our December 2003 closure of our
Bronx, New York manufacturing facility.
Selling and shipping expenses increased to $3.2 million (22.4% of net
revenues) for the three months ended June 30, 2004 from $2.8 million (19.2% of
net revenues) for the three months ended June 30, 2003. The increase was a
result of planned advertising and promotional spending and an increase in fixed
selling costs associated with our launch of our Heritage apparel line for the
fall of 2004.
General and administrative expenses increased to $1.7 million for the
three months ended June 30, 2004 from $1.6 million for the three months ended
June 30, 2003, an increase of $0.1 million. The increase is due to added and
11
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 June 30, 2004 and 2003.
Operating income increased to $0.7 million for the three months ended
June 30, 2004 from $0.5 million for the three months ended June 30, 2003.
Operating income as a percentage of net revenues was 4.9% for the three months
ended June 30, 2004 as compared to 3.9% for the three months ended June 30,
2003. The increases in both dollar amounts and percentage of net revenues were
primarily a result of higher gross margin dollars offset by higher 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 June 30, 2003 to $0.4
million during the June 30, 2004 period. $0.1 million of this increase was a
result of the adoption of SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." We adopted
SFAS No. 150 during the period ending September 30, 2003. The adoption of SFAS
No. 150 required us to classify dividends associated with our Preferred Stock
instruments as interest expense. SFAS No. 150 prohibits reclassification of
prior period amounts for the 2003 periods presented prior to the adoption. In
addition, $0.1 million, of the remaining increase was due to higher borrowing
costs 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 was $0.3 million for each of the three month
periods ended June 30, 2004 and 2003.
We incurred a tax provision of $0.2 million for the three months ended
June 30, 2004 as compared to $0.1 million for the three months ended June 30,
2003. We expect our effective tax rate to be approximately 49% 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 available to common stockholders of
approximately $79,000 for the three months ended June 30, 2004 as compared to
approximately $111,000 for the three months ended June 30, 2003. The small
decrease was a result of higher taxes.
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 June
30, 2004 is $64,000 as compared to $120,000 for the three months ended June 30,
2003. The 2004 dividend is equal to 44.4% of net after tax profits, while the
2003 was equal to 52% of our net after tax profits. As described above, the
dividend in the June 2004 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.
SIX MONTHS ENDED JUNE 30, 2004
Net revenues were $30.7 million for the six months ended June 30, 2004
as compared to $28.5 million for the six months ended June 30, 2003, an increase
of $2.1 million or 8%. Net revenues in the second quarter ended June 30, 2004
would have been 11% higher than reported 2003 net revenues, after reflecting a
change in revenues sources in 2003, as more fully explained above. The increase
in net revenues was primarily a result of an increase in net licensing revenues
from new licensees and from existing licenses as well as an increase in sporting
goods sales. Overall net licensing revenues increased $1.2 million, or 38.4%
12
Gross profit increased to $11.4 million (37.1% of net revenues) for the
six months ended June 30, 2004 from $10.2 million (35.8%) for the six months
ended June 30, 2003. The increase in gross profit dollars and gross profit
percentage was a result of the aforementioned increase in net licensing revenues
along with higher gross profits achieved within our sporting goods business as a
result of cost efficiencies realized from our December 2003 closure of our
Bronx, New York manufacturing facility.
Selling and shipping expenses was $5.8 million for each of the six month
periods ended June 30, 2004 and 2003. Selling and shipping expenses, as a
percentage of net revenues, decreased to 18.8% in the June 2004 period as
compared to 20.4% in the June 2003 period. The 1.6 basis point improvement was
largely the result of higher net revenues explained above.
General and administrative expenses increased to $3.4 million for the
six months ended June 30, 2004 from $2.9 million for the six months ended June
30, 2003, an increase of $0.5 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 $0.5 million for both six
month periods ended June 30, 2004 and 2003.
Operating income increased to $1.7 million for the six months ended June
30, 2004 from $1 million for the six months ended June 30, 2003. Operating
income as a percentage of net revenues was 5.6% for the six months ended June
30, 2004 as compared to 3.5% for the six months ended June 30, 2003. The
increases in both dollar amounts and percentage of net revenues were primarily a
result of higher gross margin dollars offset in part, by higher general and
administrative costs as described above.
Interest expense and finance costs, net of interest income, increased
from $0.4 million in the six month period ending June 30, 2003 to $1.0 million
during the June 30, 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, $0.3 million, of the remaining increase was due to higher borrowing
costs 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 was $0.7 million for the six months ended
June 30, 2004 as compared to $0.55 million for the six months ended June 30,
2003. The increase was a result of higher operating income offset in part, by
higher borrowing costs as more fully explained above.
We incurred a tax provision of $0.5 million for the six months ended
June 30, 2004 as compared to $0.3 million for the six months ended June 30,
2003. We expect our effective tax rate to be approximately 49% 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 available to common stockholders of
approximately $267,000 for the six months ended June 30, 2004 as compared to
approximately $127,000 for the six months ended June 30, 2003. The increase was
a result of higher pre-tax profits offset by higher income taxes.
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 six months ended June 30,
2004 is $214,000 as compared to $137,000 for the six months ended June 30, 2003.
The 2004 dividend is equal to 44.4% of net after tax profits, while the 2003 was
13
equal to 52% of our net after tax profits. As described above, the dividend in
the June 2004 period has been classified as interest expense in accordance with
SFAS No. 150. Restatement of prior periods is prohibited in accordance with SFAS
No. 150.
LIQUIDITY AND CAPITAL RESOURCES
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 the term
of the then existing lease 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 which have been paid
during the six months ended June 2004 and no restructuring accrual remains.
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 six months ended June
30, 2004 was $1.9 million as compared to $1.3 million for the six months ended
June 30, 2003. This increase was primarily attributable to an increase in net
income, depreciation and amortization along with changes in certain working
capital items. Net cash used for investing activities for the six months ended
June 30, 2004 was $0.3 million compared to $0.1 million for the six months ended
June 30, 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 six months ended June 30, 2004, our primary need for funds
was to finance working capital and for the repayment of the borrowings from our
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 six months ended June 30, 2004, we repaid
the Factor $2.5 million, reducing our outstanding obligation to $4.4 million at
June 30, 2004.
14
Net cash used in financing activities was $2.7 million for the six
month period ended June 30, 2004 as compared to $1.3 million for the six month
period ended June 30, 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.
At June 30, 2004, cash and cash equivalents was $0.8 million compared
to $1.9 million and $2.4 million at December 31, 2003 and June 30, 2003,
respectively. Working capital was $6.2 million at June 30, 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
and cash equivalent balances and/or borrowings with our 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 our 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, our Chief Executive Officer and Chief Financial Officer have concluded
that our 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 4, 2004, the Company held its annual meeting of stockholders,
whereby the stockholders elected directors and approved a proposal to ratify the
appointment of Berenson, LLP as the Company's independent auditors for the
fiscal year ending December 31, 2004. The votes on such matters were as follows:
1. Election of directors:
FOR WITHHELD AGAINST
--- -------- -------
George Horowitz 2,855,287 138,347
Rita Cinque Kriss 2,939,383 54,251
James Anderson 2,926,692 66,942
Edward Epstein 2,946,152 47,482
Larry Kring 2,955,528 40,106
Teddy Atlas 2,961,717 31,917
James J. McGuire Jr. 2,982,557 11,077
Jeffrey M. Schwartz 2,979,227 14,407
Mark Ackereizen 2,981,057 12,577
15
2. Ratification of appointment of auditors: To ratify the appointment of
Berenson, LLP as the Company's auditors for the fiscal year ending December 31,
2004.
FOR AGAINST ABSTAIN
--- ------- -------
2,986,397 4,345 2,892
Messrs. Ben Nadorf and Wayne Nadorf are continuing directors and who
were separately elected by the holders of the Preferred Stock. Their terms as
directors expire concurrent with the terms of other directors elected at this
annual meeting.
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 May 4, 2004, the Company filed an 8-K related to its press release
dated May 3, 2004 announcing its results of operations and financial
condition for its fiscal 2004 first quarter ended March 31, 2004
16
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: August 12, 2004 By: /s/ George Q Horowitz
---------------------
Name: George Q Horowitz
Title: Chief Executive Officer,
President and Treasurer
By: /s/ Gary J. Dailey
---------------------
Name: Gary J. Dailey
Title: Chief Financial Officer,
17