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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File Number: 0-25918
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EVERLAST WORLDWIDE INC.
-----------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3672716
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1350 BROADWAY, SUITE 2300
NEW YORK, NY 10018
(Address of Principal Executive Offices)
(212) 239-0990
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year if changed since last report)
Indicate by check whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
Indicate by check whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange act)
Yes No X
----- -----
The number of common equity shares outstanding as of November 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 -
September 30, 2004 (Unaudited) and December 31, 2003 3
Consolidated Statements of Operations -
Three and Nine Months ended September 30, 2004 and 2003 (Unaudited) 4
Consolidated Statements of Cash Flows -
Nine Months ended September 30, 2004 and 2003 (Unaudited) 5
Notes to Consolidated Financial Statements -
Nine Months ended September 30, 2004 - (Unaudited) 6-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11-16
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Items 1 thru 5 not applicable
Item 6. Exhibits and Current Reports on Form 8-K 16
SIGNATURES 17
2
EVERLAST WORLDWIDE INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
-------------- --------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 533,489 $ 1,937,334
Accounts and licensing receivable - net 6,743,698 8,405,404
Inventories 15,246,642 11,012,010
Prepaid expenses and other current assets 1,742,468 1,107,043
-------------- --------------
Total current assets 24,266,297 22,461,791
Restricted cash 1,023,462 1,015,097
Property and equipment, net 6,297,151 6,188,388
Goodwill 6,718,492 6,718,492
Trademarks, net 23,804,517 24,489,021
Other assets 3,016,491 3,383,924
-------------- --------------
$65,126,410 $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 5,968,261 6,898,081
Current maturities of long term debt 264,072 335,475
Accounts payable 7,802,525 5,175,558
Accrued expenses and other current liabilities 1,027,687 1,018,944
Preferred dividend payable 13,935 -
-------------- --------------
Total current liabilities 18,076,480 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 2,698,612 2,866,111
-------------- --------------
Total liabilities 50,877,657 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 2004 and 2003 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 3,267,755 3,250,340
Accumulated other comprehensive income 1,403 268
-------------- --------------
14,975,972 14,955,192
Less treasury stock, at cost (174,000 common shares) (727,219) (727,219)
-------------- --------------
14,248,753 14,227,973
-------------- --------------
$ 65,126,410 $ 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 OPERATIONS
Three months ended Nine months ended
September 30, September 30,
---------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
(Unaudited) (Unaudited)
Net sales $ 13,329,565 $ 16,075,363 $ 39,519,037 $ 41,369,708
Net license revenues 2,474,691 1,592,237 6,952,151 4,827,488
------------ ------------ ------------ ------------
Net revenues 15,804,256 17,667,600 46,471,188 46,197,196
------------ ------------ ------------ ------------
Cost of goods sold 10,982,830 12,042,771 30,275,822 30,349,610
------------ ------------ ------------ ------------
Gross profit 4,821,426 5,624,829 16,195,366 15,847,586
------------ ------------ ------------ ------------
Operating expenses:
Selling and shipping 3,256,688 3,235,446 9,008,897 9,067,557
General and administrative 1,817,460 1,482,815 5,270,711 4,420,156
Amortization 228,168 228,168 684,504 684,504
------------ ------------ ------------ ------------
5,302,316 4,946,429 14,964,112 14,172,217
------------ ------------ ------------ ------------
(Loss) income from operations (480,890) 678,400 1,231,254 1,675,369
------------ ------------ ------------ ------------
Other income (expense):
Interest expense and financing costs (403,211) (242,739) (1,178,492) (717,948)
Interest income (expense) on redeemable participating
preferred stock 199,724 (112,440) (13,935) (112,440)
Investment income 4,119 14,382 12,550 42,391
------------ ------------ ------------ ------------
(199,368) (340,797) (1,179,877) (787,997)
------------ ------------ ------------ ------------
(Loss) income before provision for income taxes (680,258) 337,603 51,377 887,372
(Benefit) provision for income taxes (430,659) 233,395 33,962 519,220
------------ ------------ ------------ ------------
Net (loss) income $ (249,599) $ 104,208 $ 17,415 $ 368,152
============ ============ ============ ============
Redeemable preferred stock dividend -- -- -- 136,805
------------ ------------ ------------ ------------
Net (loss) income available to common shareholders $ (249,599) $ 104,208 $ 17,415 $ 231,347
============ ============ ============ ============
Basic (loss) earnings per common share $ (0.08) $ 0.03 $ 0.01 $ 0.07
============ ============ ============ ------------
Diluted (loss) earnings per common share $ (0.08) $ 0.02 $ -- $ 0.05
============ ============ ============ ------------
See accompanying notes to financial statements.
4
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2004 2003
-------------------------------------
(Unaudited)
Cash flows from operating activities:
Net income $ 17,415 $ 368,152
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 374,652 470,802
Amortization 1,042,025 684,504
Interest income on restricted cash (8,365) (8,841)
Changes in assets (increase) decrease:
Accounts receivable 1,661,706 693,406
Inventories (4,234,632) (1,508,005)
Prepaid expenses and other current assets (634,291) (538,468)
Other assets 109,912 (92,223)
Changes in liabilities increase (decrease):
Accounts payable, accrued expenses
and other liabilities 2,053,907 848,135
License deposits payable (36,268) 5,307
----------- -----------
Net cash provided by operating activities 346,601 922,769
----------- -----------
Cash flows used by investing activities:
Purchases of property and equipment (483,415) (205,630)
----------- -----------
Cash flows from financing activities:
Payment of preferred stock dividend -- (1,450,808)
Proceeds from stock option exercises 2,230 --
Borrowings from factor (929,820) 625,432
Payment of financing costs (100,000) --
Repayments of debt instruments (238,901) (271,170)
----------- -----------
Net cash used by financing activities: (1,266,491) (1,096,546)
----------- -----------
Net decrease in cash and cash equivalents (1,403,845) (379,407)
Cash and cash equivalents, beginning of period 1,937,334 2,530,452
----------- -----------
Cash and cash equivalents, end of period $ 533,489 $ 2,151,045
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 698,911 $ 717,948
Income taxes 3,935 600,348
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 September 30, 2004 and
for the three and nine months ended September 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 nine month periods ended September 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. For
the three months ended September 30, 2004, the inclusion of the dilutive
effects of stock options and contingent consideration has been excluded as
the amounts added to the weighted average shares outstanding would be
anti-dilutive to the per share computation.
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128:
6
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per common share --
Net (loss) income available to common stockholders $ (249,599) $ 104,208 $ 17,415 $ 231,347
----------- ----------- ----------- -----------
Denominator:
Denominator for basic (loss) earnings per
common share --
Weighted average shares
outstanding during the period 3,129,904 3,108,236 3,129,322 3,108,236
Effect of diluted securities:
Stock options -- 36,475 52,493 42,997
Contingent stock consideration related to the Merger
-- 1,365,296 1,268,998 1,421,055
-- 1,401,771 1,321,491 1,464,052
Denominator for diluted (loss) earnings per
common share --
adjusted weighted average shares and assumed conversions
3,129,904 4,510,007 4,450,813 4,572,288
Basic net (loss) income per common share $ (0.08) $ 0.03 $ 0.01 $ 0.07
=========== =========== =========== ===========
Diluted net (loss) income per common share $ (0.08) $ 0.02 $ 0.00 $ 0.05
=========== =========== =========== ===========
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
September 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 as of the periods ended September 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 nine
months ended September 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.
7
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 nine
months ended September 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 our annual minimum redemptions. Under the terms of such
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 (the "Notes") 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 Notes in full
together with all accrued and unpaid interest and deferred financing costs
thereon, with no prepayment penalties, prior to December 14, 2008. 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 to the principal Preferred Stockholder,
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
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 consisting 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. At September 30, 2004, these restructuring charges amounts have been
paid in full. No restructuring and non-recurring charges were incurred
during the three and nine months ended September 30, 2004 and 2003.
8
6. INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Raw materials $ 2,907,592 $ 1,460,586
Work-in-process 794,326 620,886
Finished goods 11,544,724 8,930,538
------------- -----------
$15,246,642 $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.
9
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the date of grant consistent
with the method prescribed by Statement of Financial Accounting Standard
No. 123, "Accounting For Stock-Based Compensation", net earnings and
earnings per share for the three and nine month periods ended September 30,
2004 and 2003 would have been the pro forma amounts that follow:
Three Months Ended Nine Months Ended
September 30, September 30
----------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------------
Net (loss) income, as reported $ (249,599) $ 104,208 $ 17,415 $ 231,347
Stock-based employee compensation
expense determined under fair
value method net of related tax effects (18,757) (9,082) (34,918) (27,246)
------------ ---------- --------- -------------
Pro-forma net (loss) income $ (268,356) $ 95,126 $ (17,503) $ 204,101
============ ========== ========= =============
Basic net (loss) income per common share:
As reported $ (0.08) $ 0.03 $ 0.01 $ 0.07
============ ========== ========= =============
Pro-forma $ (0.09) $ 0.03 $ (0.01) $ 0.07
============ ========== ========= =============
Diluted net (loss) income per common share:
As reported $ (0.08) $ 0.02 $ 0.00 $ 0.05
============ ========== ========= =============
Pro-forma $ (0.08) $ 0.02 $ 0.00 $ 0.05
============ ========== ========= =============
8. RECENT ACCOUNTING PRONOUNCEMENTS:
On October 13, 2004, the FASB concluded and issued Statement 123,
Share-Based Payment, which is an amendment to FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123R 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, and would be effective for interim or annual reporting periods
beginning after June 15, 2005. Retroactive application of the requirements
of Statement 123R to the beginning of our fiscal year (January 2005) is not
required so we will be adopting Statement 123R effective in our third
quarter ending September 30, 2005
10
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.
11
INVENTORY. Our inventory is valued at the lower of cost or market.
Cost has been derived principally on the standard cost methodology,
where we utilize a first-in-first-out method. We provide for reserve
allowances on finished goods and specifically identify and reserve for
slow moving or obsolete raw materials and packaging.
DEFERRED TAXES. Deferred taxes are determined based on the differences
between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized. In assessing the need for a valuation
allowance management considers estimates of future taxable income and
ongoing prudent and feasible tax planning strategies. In accordance
with APB Opinion 23, "Accounting for Income Taxes - Special Areas," we
do not accrue income taxes on the undistributed earnings of a
subsidiary which is a "DISC" since the repayment of the earnings of
the DISC is not expected in the foreseeable future. If circumstances
change and it becomes apparent that some or all of the undistributed
earnings of the DISC will be remitted in the foreseeable future, then
taxes will be accrued.
VALUATION OF GOODWILL, LONG-LIVED ASSETS AND INTANGIBLE ASSETS. We
periodically evaluate goodwill, long-lived assets and intangible
assets for potential impairment indicators. Judgements regarding the
existence of impairment indicators are based on estimated future cash
flows, market conditions, and legal factors. Future events could cause
management to conclude that impairment indicators exist and that the
net book value of goodwill, long-lived assets and intangible assets is
impaired. Any resulting impairment loss could have a material adverse
impact on our financial condition and results of operations.
CONTINGENCIES AND LITIGATION. We evaluate contingent liabilities
including threatened or pending litigation in accordance with SFAS No.
5, "Accounting for Contingencies" and record accruals when the outcome
of these matters is deemed probable and the liability could be
reasonably estimated. Management makes these assessments based on the
facts and circumstances and in some instances based in part on the
advice of outside legal counsel.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004
Net revenues were $15.8 million for the three month ended September 30,
2004 as compared to $17.7 million during the three months ended September 30,
2003, a decrease of $1.9 million or 10.5%. Net revenues in the third quarter
ended September 30, 2004 would have declined 6% compared to 2003 reported net
revenues after reflecting a change in revenues sources in 2004, as certain
customers became licensees during the first half of fiscal 2004. The adjusted
$0.9 million decrease in net revenues was primarily due to (i) the unfavorable
impact of regional truck shortages that limited our ability to ship outstanding
orders existing within our backlog and (ii) certain merger integration issues
affecting our larger customers resulted in delays in placing forecasted third
quarter orders that are now being shipped in the fourth quarter, both favorably
offset by an increase in licensing revenues.
Gross profit decreased to $4.8 million (30.5% of net revenues) for the
three months ended September 30, 2004 from $5.6 million (31.8%) for the three
months ended September 30, 2003. The decrease in gross profit dollars and gross
profit percentage was a result of the aforementioned decrease in higher margin
net sales, offset by higher net licensing revenues.
Selling and shipping expenses was $3.3 million (20.6% of net revenues) for
the three months ended September 30, 2004 as compared to $3.2 million (18.3% of
net revenues) for the three months ended September 30, 2003. The increase was a
result of television and print media advertising and promotional spending
12
associated with our launch of the Heritage apparel line which will be showcased
on "The Contender" reality television show premiering in January 2005, as well
as higher logistical and warehousing costs associated with higher freight costs
due to increases in fuel.
General and administrative expenses increased to $1.8 million for the three
months ended September 30, 2004 from $1.5 million for the three months ended
September 30, 2003, an increase of $0.3 million. The increase is due to
additional and higher 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 September 30, 2004 and 2003.
We incurred an operating loss of $0.5 million for the three months ended
September 30, 2004 as opposed to an operating income $0.7 million for the three
months ended September 30, 2003. The $1.2 million decrease was primarily a
result of lower gross margin dollars along with higher selling and shipping
costs and general and administrative expenses as described above.
Interest expense and finance costs, net of interest income, decreased from
$0.3 million in the three month period ending September 30, 2003 to $0.2 million
during the September 30, 2004 period. The decrease was a result of (i) $0.3
million in savings resulting from our operating loss for the three months ended
September 30, 2004 which eliminated the need for us to accrue a dividend
(classified as interest expense) on our redeemable preferred stock as opposed to
the same period in 2003 where our operating income resulted in a dividend to be
accrued, and (ii) offset by an increase in 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.
Our loss before benefit for income taxes was $.7 million for the three
months ended September 30, 2004 as compared to $.3 million of income before
income taxes during the three month period ended September 30, 2003. The $1
million decrease is largely a result of the aforementioned decrease in operating
income.
We recognized a tax benefit of $0.4 million for the three months ended
September 30, 2004 as compared to a tax provision of $0.2 million for the three
months ended September 30, 2003. We expect our effective tax rate to be
approximately 55% this year after adding the dividends associated with our
preferred stock to pretax profits that have been classified as interest expense
in conformity with SFAS No. 150, as well as the non-deductibility of the
amortization of intangible assets.
The Company had a net loss available to common stockholders of
approximately $.2 million for the three months ended September 30, 2004 as
compared to net income available to common stockholders of approximately $.1
million for the three months ended September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004
Net revenues were $46.5 million for the nine months ended September 30,
2004 as compared to $46.2 million for the nine months ended September 30, 2003,
an increase of $.3 million or 1%. Net revenues in the third quarter ended
September 30, 2004 would have been 4% 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 by
$2.1 million, or 44.0%.
Gross profit increased to $16.2 million (34.9% of net revenues) for the
nine months ended September 30, 2004 from $15.8 million (34.3%) for the nine
months ended September 30, 2003. The increase in gross profit dollars and gross
profit percentage was primarily a result of the aforementioned increase in net
licensing revenues.
13
Selling and shipping expenses was $9.0 million (approximately 19.5% of net
revenues) for each of the nine month periods ended September 30, 2004 and 2003.
General and administrative expenses increased to $5.3 million for the nine
months ended September 30, 2004 from $4.4 million for the nine months ended
September 30, 2003, an increase of $0.9 million. The increase is due to
additional and higher infrastructure costs such as rent, insurance and employee
costs required for our diversified and expanding organization.
Amortization expense remained approximately $0.7 million for each of the
nine month periods ended September 30, 2004 and 2003.
Operating income decreased to $1.2 million for the nine months ended
September 30, 2004 from $1.7 million for the nine months ended September 30,
2003. Operating income as a percentage of net revenues was 2.6% for the nine
months ended September 30, 2004 as compared to 3.6% for the nine months ended
September 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
general and administrative costs as described above.
Interest expense and finance costs, net of interest income, increased from
$0.8 million in the nine month period ended September 30, 2003 to $1.2 million
during the September 30, 2004 period. An increase of $0.1 million 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 ended 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, $0.2 million of the 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 $0.1 million for the nine months ended
September 30, 2004 as compared to $0.5 million for the nine months ended
September 30, 2003. The decrease was a result of lower operating income along
with higher borrowing costs as more fully explained above.
We incurred a tax provision of $0.03 million for the nine months ended
September 30, 2004 as compared to $0.5 million for the nine months ended
September 30, 2003. We expect our effective tax rate to be approximately 55%
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 $0.01 million for the nine months ended September 30, 2004 as
compared to $0.2 million for the nine months ended September 30, 2003. The
decrease was a result of lower pre-tax profits offset by lower 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 nine months ended September 30, 2004
is approximately $14,000 as compared to $249,000 for the nine months ended
September 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 September 2003 period has been classified
as both interest expense and redeemable preferred dividends in accordance with
SFAS No. 150. Restatement of prior periods is prohibited in accordance with SFAS
No. 150
14
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 nine months ended September 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 nine months ended
September 30, 2004 was $0.3 million as compared to $0.9 million for the nine
months ended September 30, 2003. This decrease was primarily attributable to a
decrease in net income along with changes in certain working capital items,
principally inventory and accounts receivable. Net cash used for investing
activities for the nine months ended September 30, 2004 was $0.5 million
compared to $0.2 million for the nine months ended September 30, 2003.
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 our annual minimum redemptions. Under the terms of such 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
(the "Notes") 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. As a further condition of
this refinance, the Company paid financing costs to the principal Preferred
Stockholder, aggregating $800,000 of which $700,000 was paid by December 2003
and $100,000 was paid in January 2004.
During the nine months ended September 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 nine months ended September 30, 2004, we
repaid the Factor $0.9 million, reducing our outstanding obligation to $5.9
million at September 30, 2004.
Net cash used in financing activities was $1.3 million for the nine month
period ended September 30, 2004 as compared to $1.1 million for the nine month
period ended September 30, 2003. This increase in financing uses is primarily
due to the 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.
15
At September 30, 2004, cash and cash equivalents was $0.5 million compared
to $1.9 million and $2.5 million at December 31, 2003 and September 30, 2003,
respectively. Working capital was $6.2 million at September 30, 2004 compared to
$6.0 million at December 31, 2003.
Management anticipates it will generate and maintain sufficient cash and
cash equivalent balances, and a net availability 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 and payment
of interest and financing costs of $760,000 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.
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
Z1.2 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 July 1, 2004 the Company filed a Current Report on Form 8-K reporting to the
appointment of Gary J. Dailey as its Chief Financial Officer.
On August 3, 2004, the Company filed a Current Report on Form 8-K reporting a
strategic licensing and business alliance with Contender Partners LLC, a venture
between Mark Burnett Productions and DreamWorks LLC, and the associated press
release thereto.
On August 6, 2004, the Company filed a Current Report on Form 8-K announcing its
results of operations and financial condition for its fiscal 2004 second quarter
ended June 30, 2004, and the associated press release thereto.
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: November 15, 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