Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURUSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to ________
Commission File Number: 0-25918
-------
EVERLAST WORLDWIDE INC.
-----------------------
(Exact name of registrant as specified in Its Charter)
Delaware 13-3672716
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1350 BROADWAY, SUITE 2300, NEW YORK, NEW YORK 10018
- ---------------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
Registrant's telephone number (212) 239-0990
--------------
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class On Which Registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.002 Par Value
------------------------------
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ ------
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Exchange Act Rule 12b-2).
YES NO X
------ ------
On March 18, 2005, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $19,396,000 based upon the
average of the highest and lowest bid quotations for such Common Stock as
obtained from the Nasdaq Stock Market on that date. Solely for the purpose of
this calculation, shares held by directors and officers of the registrant have
been excluded. Such exclusion should not be deemed a determination or an
admission by registrant that such individuals are, in fact, affiliates of the
registrant.
The number of shares outstanding on March 18, 2005 was 3,125,859 shares of
Common Stock, $.002 par value, and 100,000 shares of Class A Common Stock, $.01
par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10 through 14 of this Annual Report on
Form 10-K is incorporated by reference from the issuer's definitive proxy
materials for its 2005 Annual Meeting of Stockholders, which proxy materials are
to be filed with the Securities and Exchange Commission not later than April 29,
2005.
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business............................................................1
Item 2 Properties.........................................................11
Item 3 Legal Proceedings..................................................11
Item 4 Submission of Matters to a Vote of Security Holders................12
PART II
Item 5 Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities..... 12
Item 6 Selected Financial Data............................................14
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................15
Item 7A Quantitative and Qualitative Disclosures About Market Risk.........21
Item 8 Financial Statements and Supplementary Data........................21
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................21
Item 9A Controls and Procedures............................................21
PART III
Item 10 Directors and Executive Officers of the Registrant.................22
Item 11 Executive Compensation.............................................22
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters ....................22
Item 13 Certain Relationships and Related Transactions.....................22
Item 14 Principal Accountant Fees and Services.............................22
PART IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K....22
Signatures...................................................................24
PLEASE NOTE THAT THE COMPANY HAS USED SOME TERMS IN THIS ANNUAL REPORT WHICH MAY
BE REGISTERED TRADEMARKS WHICH IT DOES NOT OWN. THE COMPANY HAS MARKED THESE
TERMS WITH AN ASTERISK (`*') AND HAS USED THEM WITHOUT THE PERMISSION OF THE
HOLDERS OF SUCH REGISTERED TRADEMARKS.
PART I
ITEM 1. BUSINESS
Note Regarding Forward Looking Information
Certain statements contained in this annual report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Sections 21E of the Exchange Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, levels of activity, performance or achievements of the
Company, or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, the ability of the Company
to implement its business strategy; the ability of the Company to obtain
financing for general corporate purposes; competition; availability of key
personnel, and changes in, or the failure to comply with, government's
regulations. As a result of the foregoing and other factors, no assurance can be
given as to the future results, levels of activity and achievements and neither
the Company nor any person assumes responsibility for the accuracy and
completeness of these statements.
GENERAL
Everlast Worldwide Inc., a Delaware corporation and its subsidiaries
(collectively, the "Company" and herein referred to as "we", "us" and "our"),
was organized on July 6, 1992. We are currently engaged in 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, both domestic and
international, 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, fine jewelry, batteries,
nutritional products and other accessories. The Company is a member of the U.S.
Sporting Goods Manufacturers Association, the U.S. National Sporting Goods
Association, and the Canadian Sporting Goods Association.
THE MERGER
On October 24, 2000 the Company completed a merger whereby Everlast Holding
Corp., the parent company of Everlast World's Boxing Headquarters Corp.
("Everlast"), was merged with and into Active Apparel New Corp. ("AANC"), a
wholly-owned subsidiary of the Company (the "Merger"). As a result of the
Merger, Everlast became a wholly-owned subsidiary of the Company. The Merger
involved (i) payment of $10 million in cash; (ii) the issuance of an aggregate
of 505,000 shares of common stock, $.002 par value of the Company (the "Common
Stock") and an aggregate of 45,000 shares of redeemable participating preferred
stock, stated value $1,000 per share (the "Preferred Stock"), to the former
stockholders of Everlast Holding Corp.; and (iii) payment of approximately $1.4
million in transaction costs, for an aggregate purchase price of $61.9 million.
Pursuant to the terms of that certain Agreement and Plan of Merger by and
between Everlast Holding Corp., Everlast, the Company and AANC, as amended, if
the fair market value of the Common Stock is not $13.00 by October 24, 2007, as
amended, the Company will be required to issue additional shares of Common Stock
or, at its option, pay such amount in cash.
1
EVERLAST WORLD'S BOXING HEADQUARTERS CORP.
Everlast was founded in 1910 as a manufacturer of men's swimwear under the
name "Everlast." Soon thereafter, Everlast began to manufacture boxing gloves,
protective headgear, and related items. As the owner of the registered trademark
Everlast(R), Everlast also licensed its brand name worldwide.
Everlast(R) is a leading brand name in boxing and a widely-recognized brand
name in boxing related sporting goods. Everlast is the market leader in several
of its product categories, including boxing gloves, heavy bags, protective
headgear and speed bags (the "Sports Products"). Sports Products have been used
or endorsed by boxers such as Jack Dempsey, Joe Louis, "Sugar" Ray Robinson,
Jake LaMotta, Muhammad Ali, Joe Frazier, George Foreman, Larry Holmes, "Sugar"
Ray Leonard, Evander Holyfield, Mike Tyson, Felix "Tito" Trinidad "Sugar" Shane
Mosley, Jeff Lacy and Jermaine Taylor.
PRODUCTS
The Company sells a diverse collection of consumer products which
encompasses apparel, footwear and sports products, and licenses the Everlast(R)
trademark to numerous companies which source or manufacture ancillary products
such as women's and children's apparel, footwear, fitness exercise equipment,
back to school supplies, eyewear, sports bags, hats, fragrances, batteries, fine
jewelry, nutritional products and other products. All business activities and
decisions as it relates to these licensed products are made by the Company's
executive management.
APPAREL PRODUCTS
The Company sells a diverse collection of Apparel Products consisting of
men's activewear, and sportswear, all under the Everlast trademark and logo. The
Apparel Products consist of approximately 200 separate products with varying
styles and functions. These include fitness apparel and sportswear made of
nylon, fleece, cotton, Lycra spandex, and other technical polyester fabrics with
moisture management properties. The Apparel Products are designed to feature the
Everlast trademark and logo and to focus on the use of appropriate fabric blends
to maximize comfort and performance. The retail prices for the Apparel Products
generally range from $15 to $200.
SPORTS PRODUCTS
The Company manufactures, imports and markets a line of boxing related
sporting goods which consist primarily of the following:
(1) Boxing Gloves: These are Everlast's most recognizable product and are
made for professional, amateur, and home gym use. Everlast's
professional gloves are certified throughout the United States and by
the World Boxing Council*, World Boxing Association*, International
Boxing Federation*, World Boxing Organization* and the Nevada State
Athletic Commission for all of their professional fights;
(2) Heavy Bags: Everlast's heavy bags are punching bags weighing between
25 and 150 lbs.;
(3) Speed Bags: Speed bags are small, air-filled bags which are mounted on
swivels and platforms (at eye level);
(4) Platforms: Platforms are the wall mountings used in suspending speed
or heavy bags;
2
(5) Boxing Trunks and Robes; and
(6) Miscellaneous Gym Equipment: In addition to the aforementioned core
offerings, Everlast also manufactures, imports and markets the
following products to complement its product line: protective
headgear, protection cups, mouthpieces, hand wraps, boxing rings;
martial arts equipment, gym mats (assorted), and medicine balls.
LICENSED PRODUCTS
The Company owns and utilizes the Everlast(R) trademark worldwide and is
registered with the United States Patent and Trademark Office and in many
foreign jurisdictions as well. The Company regards its Everlast(R) trademark as
its most valuable asset based on the evaluation of an independent consulting
firm. The Company believes the Everlast(R) trademark has significant value in
the marketing of the Company's products. The Company actively protects its
trademarks against infringement.
The Company licenses the Everlast(R) trademark to numerous companies which
source or manufacture ancillary products such as children's wear, footwear,
cardiovascular equipment, back to school stationery, eyewear, sports bags, hats
and other accessories ( the "Licenses Products".) Licensing the Everlast(R)
trademark has enabled the Company to expand product offerings into arenas
outside of its core manufacturing arenas, to strengthen its brand image, and to
increase profitability, while at the same time minimizing inventory risk. On
December 17, 2004, Everlast announced the signing of the largest licensing
agreement in the Company's history, whereby it licensed its United States
women's apparel category to Jaques Moret, Inc. effective January 1, 2005.
The Company utilizes a network of licensees for worldwide brand
distribution in the U.S. and over 80 foreign countries. In return for exclusive
rights to market Sports Products, certain Apparel Products and accessories in
certain regions, the licensees pay Everlast a fixed royalty rate upon the net
revenues, among other criteria, of the licensees.
MARKETING, ADVERTISING, AND PROMOTIONS
APPAREL PRODUCTS
The Company's advertising and promotional efforts are directed towards the
demographic customer profile for the Company's Apparel Products which aim to
heighten its visibility. The Company maintains its own marketing and advertising
staff which conceives and oversees implementation of most aspects of the
Company's advertising and sales promotions. In addition, the Company has a
graphic arts department that works with the marketing and sales staff to develop
advertising campaigns, brand management, packaging solutions, POS, retail
advertising and catalogs for all of the Company's product lines.
The Company advertises and promotes its Apparel Products to different
consumer segments through a variety of trade and consumer print advertising
campaigns, generally in selected magazines and other publications. The Company
also takes part in various cooperative advertising programs such as national
advertising, in-store signage, point-of-purchase promotional giveaways and
cooperative advertising arrangements with several of its retail customers, which
the Company believes assists in raising consumer awareness and increasing retail
floor space for its products. The Company has received continued exposure in
both the print, television and movie media from famous celebrities and athletes
wearing the Apparel Products as well as product placement on the Academy Award
winning movie "Million Dollar Baby" to the Mark Burnett's reality drama
television show "The Contender", which premiered on NBC network and its
affiliates in March 2005 to the EA Sports Franchise Fight Night boxing videogame
3
series along with the much anticipated summer blockbuster "Cinderella Man"
starring Russell Crowe.
The Company also believes that grass roots promotional programs, such as
the limited distribution of samples of its Apparel Products to local gyms,
athletic clubs, and fitness professionals, help to advance the recognition and
reputation of its products.
To further supplement the growth of the sport and provide a positive outlet
for today's youth, Everlast is the proud supplier and supporter of USA boxing,
Police Athletic League Boxing, The Daily News Golden Gloves and countless other
amateur tournaments and grassroots programs across the country. Additionally, we
are a proud sponsor of PE4LIFE, a non-profit Sporting Goods manufacturing
Association backed organization, to promote boxing fitness to schools across the
country.
The Company attends and participates in the Sporting Goods Manufacturers
Association Supershow*, and MAGIC International* annual national trade shows,
and other appropriate trade shows.
SPORTS PRODUCTS
The Company's Sports Products have received continued exposure through
coverage in movies, print media and television because of its association with
the history of boxing and its distribution of the Sports Products to amateur and
professional boxers for use in nationally televised events. The Company has
focused on bringing the brand back into the boxing ring with multiple sponsored
events, such as HBO Latino Boxeo de Oro*, ESPN 2 Friday Night Fights*, Broadway
Boxing Series, a monthly tri-state boxing series televised on MSG* network and
SRL Boxing Series*along with show by show sponsorships featured on Telemundo,
Telefutura, HBO, Showtime and PPV events.
The Company has promotional and consulting contracts with noted boxing
champions, trainers, and spokespersons, such as Oscar De La Hoya, Felix "Tito"
Trinidad, Sugar Shane Mosley, Fres Oquendo, Chris Byrd, Zab Judah, Mickey Ward,
Sugar Ray Leonard and Larry Holmes. The Company uses the boxing industry
expertise and the relationships of these individuals to assist it in various
promotional activities designed to generate interest of the consumers in the
Sports Products.
The Company employs six full-time sales persons to promote the Sports
Products to professional and amateur boxers. Additionally, the Company
continually evaluates and redesigns its professional line of boxing equipment
and the product packaging of its retail Sports Products. Finally, the Company's
graphic arts department has produced two new catalogs, one focusing on
wholesalers for the consumer retail market, and the other directed at
professional and amateur boxers.
The Company has developed a comprehensive website to leverage key
e-commerce sales in both our equipment and apparel business.
LICENSED PRODUCTS
The Company employs an executive, who reports to Mr. George Horowitz,
President and Chief Executive Officer (CEO). Such executive and Mr. Horowitz are
jointly responsible for developing a marketing plan for expansion of the
Licensed Products. The executive attends sporting goods trade shows to promote
the Everlast(R) brand name. Part of the executive's other duties is to generate
leads and to meet with potential licensees. The executive in concert with the
CEO are also responsible for renegotiating terms and possibly expanding the
scope of existing licensing agreements.
4
MANUFACTURING AND SUPPLIERS
APPAREL PRODUCTS
The Company does not manufacture any of its Apparel Products, relying
instead on independent contractors. Manufacturers in the United States supply
approximately 60% of the Apparel Products while the remaining 40% are imported
from manufacturers abroad, principally in Asia. Currently, the Company uses over
ten separate manufacturers. While the Company has no long-term agreements with
any of its contractors, the Company believes that it has good relationships with
each of them. The Company does not believe that the loss of any particular
contractor would have a material adverse effect on its business, financial
condition, or operations. The Company believes that alternative sources of
products would be readily available.
The supply of the Company's foreign made Apparel Products is subject to
constraints imposed by bilateral textile agreements between the United States
and foreign nations. Quotas are used to determine the amount and types of goods
which can be imported into the United States. Effective January 1, 2005, such
quotas were removed for imports from China. Some of the Company's manufacturers
may be adversely affected by political instability in their respective countries
resulting in the disruption of trade, and the imposition of additional
regulations relating to imports or duties and taxes and other charges on
imports. In order to ensure quality control and timely delivery, the Company (or
its agents), conducts on-site inspections at manufacturers' facilities. See
"Quality Control." The Company's strategy is to find manufacturers with specific
product category expertise, such as with fitness apparel, tee shirts, or
outerwear, with extensive experience in the major athletic brand name apparel
industry. The Company has no long-term agreements with any of its manufacturers
and competes with other apparel companies for production capacity.
SPORTS PRODUCTS
Effective December 2003, we manufacture solely out of one company-owned
facility, which produces most of our Sports Products. This facility, located in
Moberly, Missouri has 304,000 square feet and is used to produce products such
as heavy bag and speed bag platforms, heavy bags, and boxing rings, as well as a
"cut and sew" production department where boxing gloves, speed bags, boxing
trunks, and other related items are produced. Certain of these products were
formerly produced in our Bronx, New York facility which was closed in December
2003.
Raw materials used to manufacture Sports Products are top-grain leather,
synthetic fabrics, canvas, assorted wood and steel tubing, as well as various
other materials used in stuffing gloves and heavy bags. These raw materials are
basic commodities, which the Company buys from several independent suppliers. No
one supplier accounts for more than ten percent (10%) of the Company's purchases
of raw materials. The majority of raw materials are obtained domestically, with
the exception of Nevatear(R), the material used in moderately priced gloves,
bags, and gym mats. Nevatear(R) is a vinyl coated fabric with tire-cord nylon
content designed to withstand years of usage. The primary supplier for
Nevatear(R) is Erez, an Israeli company. Alternate sources for Nevatear(R) are
widely available.
An interruption in, or the loss of operations, at the Moberly facility, or
the failure to maintain our labor force at this facility could delay or postpone
production of our products, which could have a material effect on our business,
results of operations and financial condition until we could secure an alternate
source of supply.
The Company also imports sub-assemblies and parts used in the production of
its finished Sports Products such as shells for heavy bags, hardware, components
for speed bags and finished products. The Company imports approximately 60% of
its purchased raw material, sub assemblies, and finished goods with which one
supplier of these purchases accounted for over 10% of all purchases made.
5
INVENTORY MANAGEMENT
As of December 31, 2004, the Company's inventory for both Apparel Products
and Sports Products was $11.8 million. Net sales was approximately $36 million
for the year then ended.
As of December 31, 2004, the Company's backlog of unfilled orders for its
Apparel Products and Sports Products was approximately $3 million and $2
million, respectively. The Company expects that substantially all of its current
orders will be shipped within 120 days of the receipt of such orders. The
Company's backlog can be affected by a variety of factors, including scheduling
of manufacturing, shipment of products, and customer preferences.
APPAREL PRODUCTS
The Company has an Electronic Data Interchange (EDI) Quick Response
Replenishment System for its Apparel Products to facilitate its effort to fill
customer orders in seven working days. The EDI Quick Response Replenishment
System requires a higher level of inventory to facilitate shipment. The Company
also practices a "just in time" manufacturing and purchasing program for its
customers who don't have access to the EDI Quick Response Replenishment System.
The Company makes arrangements with its manufacturers for delivery approximately
30 days before the scheduled shipment of products to the Company's customers.
The objectives of the"just-in-time" system are twofold. One is to decrease the
Company's inventory risk. The other is to allow the Company flexibility in
reaction to consumer responses to its products as well as changing consumer
preferences. The Company also schedules shipments from its manufacturers in a
manner that accounts for possible manufacturing lateness and transport time from
manufacturers to the Company's warehouse facilities. At present, manufacturing
delays have not been a material factor in the Company's inventory management.
However, the inability or unwillingness of a manufacturer to ship orders of
Apparel Products in a timely manner could adversely affect the Company's ability
to deliver Apparel Products to its customers on time. Delays in delivery could
result in missing certain retailing seasons with respect to all or some of the
Apparel Products and could adversely affect the Company's relationship with its
customers, which could have a material adverse effect on the Company's business.
SPORTS PRODUCTS
The Company uses a fully integrated inventory management system for
finished goods and the products manufactured by its factory. The Company has an
automated perpetual inventory for finished goods, raw materials and work in
progress merchandise. If required by major retailers, the Company has also
incorporated its Sports Products into an EDI Quick Response Replenishment System
to fill sales orders.
SALES AND DISTRIBUTION
For each of the fiscal years ended 2004, 2003 and 2002, The Sports
Authority Inc. ("Sports Authority") , including Gart's Sports, which was merged
into Sports Authority in October 2003, accounted for approximately 13% of sales
of the Company, respectively. Sports Authority has been a customer of the
Company since its inception in 1992. There is no long-term contract between the
Company and Sports Authority. The Company believes that its business
relationship with Sports Authority is satisfactory.
The Company's strategy is to expand its network of retailers carrying the
Company's products. The Company plans to focus on department stores, specialty
stores, sporting goods stores, catalog operations, and better mass merchandisers
for its Apparel Products and sporting goods stores, mass merchandisers,
gymnasiums and martial arts studios for its Sports Products. In addition to a
wholesale catalog for the retailers, the Company published a Professional and
Amateur Boxing Equipment catalog. Recent developments in technology led the
Company to re-engineer some of its professional and amateur boxing equipment.
Professional and amateur boxers, promoters and trainers can order products
through the catalog with a fax order form, a toll-free number or by visiting the
Company's web site @ www.everlastboxing.com.
6
APPAREL PRODUCTS
Apparel Products are distributed through department stores, specialty
stores, sporting goods stores, catalog operations and better mass merchandisers,
encompassing over 20,000 retail locations throughout the United States and
Canada. The retailers selling Apparel Products include Federated Department
Stores*, Champs Sports*, Modell's*, Acadamy*, The Sports Authority* Sports
Chalet* and the Army Air Force Exchange*. Apparel Products are also sold through
the Internet at the Company's web site.
The Company currently has five in-house sales representatives and four
non-employee sales representatives for its Apparel Products. Mr. George
Horowitz, the Company's President and Chief Executive Officer, and other Company
senior executives coordinate sales and manage the representatives to ensure that
each sales representative projects a consistent and unified image of the Company
to its customers.
The Company cooperates with major retailers to gauge promptly which of the
styles of its Apparel Products are the most popular, and tracks consumer
preferences regarding its Apparel Products. Based upon its market data, as well
as information gained from trade shows, the Company attempts to shift its
production orders toward styles that are most popular. This shift may take up to
a maximum of eight weeks. Many of the retail stores offering the Company's
products rely upon the Company's market information and solicit the Company's
advice regarding the products and quantities to order. Since most of the
Company's products are manufactured in the United States, the amount of time
between orders placed with its manufacturers and orders shipped by them is
generally reduced. The Company believes that the information it gathers from the
market, together with its efforts in shifting to production towards more popular
styles, will help reduce inventory risk.
Consistent with industry practice, the Company accepts returns of Apparel
Products and Sports Products within 30 days. Returns are allowed due to poor
quality, defects in materials or workmanship. The Company believes that its
return levels are better than industry norms. In addition to returns, customers
deduct chargebacks from the purchase price for sales allowances, new store
opening discounts and other marketing development funds, which in the opinion of
management promotes brand awareness. Chargebacks have a dilutive effect on the
Company's business and results of operations since they reduce overall gross
profit margins on sales. The Company experienced rates of chargebacks of
approximately 7%, 5% and 6% during fiscal years 2004, 2003 and 2002,
respectively, which are consistent with the industry norms of 3% to 7% for both
Apparel Products and Sports Products. The Company believes that sales of the
Apparel Products are not seasonal.
SPORTS PRODUCTS
The Company's Sports Products are distributed through sporting goods
stores, mass merchandisers, catalog operations, gymnasiums, and martial arts
studios. The Company distributes its Sports Products to over 7,000 retail
locations throughout the United States and Canada. The Sports Products are sold
by retailers such as Modell's*, The Sports Authority*, Big 5* and Academy*.
The Company has a national sales manager who oversees sales and marketing
for Sports Products. The Company also has nine sales representatives who are
assigned different territories in the United States. The Company has focused its
marketing efforts for its Sports Products in the following areas:
o Trade Shows: The Company participates in more than ten trade shows
annually, which are attended by most major sporting goods retailers
and manufacturers;
o Product Catalogs: The Company publishes a retail and a professional
catalog which features all products manufactured by the Company.
7
The Company believes that the sales of Sports Products are not seasonal.
LICENSED PRODUCTS
The Company employs an executive who is responsible for worldwide licensing
of the Everlast brand name. The Company also had a non-exclusive agreement with
a license consultant whose remuneration was determined by license revenues
received from certain licensees. Although such nonexclusive agreement terminated
on February 10, 2003 commissions were paid to the consultant for two years
thereafter, pursuant to the termination provisions of such agreement. Such
payments terminated in February 2005.
There are over 70 licenses worldwide that are held by 53 licensees.
Licensed Products, such as men's, women's, and children's apparel, sleepwear,
underwear, hosiery, footwear, eyewear, hats, sports bags, cardiovascular
equipment, fragrances, nutritional products and batteries are sold in over 80
countries by these licenses. The Company believes that the Everlast name has
tremendous brand equity that is universally accepted in a diverse category of
consumer products and it can expand its licensing base to new geographic
locations and in new product categories such as sports drinks, bottled water,
infant apparel, and cosmetics. On December 17, 2004, Everlast announced the
signing of the largest licensing agreement in the Company's history, whereby the
Company licensed its United States women's apparel category to Jacques Moret,
Inc. effective January 1, 2005.
The Company believes that sales of Licensed Products are not seasonal.
Reference is made to page 19-f of the Consolidated Financial Statements of the
Company for the net revenues from License Products for the fiscal years ended
December 31, 2004, 2003 and 2002.
QUALITY CONTROL
APPAREL PRODUCTS
Because the Company emphasizes fit, performance and quality of its Apparel
Products, the Company places a high priority on quality control. The Company has
established stringent procedures both domestically and internationally.
Inspections of independent manufacturers are made regularly to ensure compliance
with the Company's quality control specifications, delivery requirements, and
shipping needs. Prior to manufacturing in large quantities, the Company receives
samples of its Apparel Products for inspection and comments. The Company
performs various tests, including fit tests on live models. This ensures that
the product meets specifications prior to shipping. In addition, senior
employees of the Company periodically inspect the manufacturing process and
quality of Apparel Products.
The Company believes that its relationship with its public warehouse,
customs brokers and international consolidators are an important part of its
quality control program. The Company views these service organizations as
important resources in maintaining high standards for its Apparel Products and
assisting in the reliable and timely delivery of its Apparel Products to its
retail customers.
SPORTS PRODUCTS
The Company has quality control procedures in effect at its manufacturing
facility in Moberly, Missouri. Manufacturing supervisors inspect Sports Products
for defects throughout both the manufacturing process and the finishing stages,
including imported products.
LICENSED PRODUCTS
The Company requires its licensees to submit samples of products that are
to be sold under exclusive license agreements. These sample Licensed Products
are inspected by the Company's management for quality and proper placement of
the Company's Everlast(R) trademark. Licensees that do not comply with the
Company's quality or trademark standards are notified that they are in breach of
their license agreement.
8
COMPETITION
APPAREL PRODUCTS
The apparel industry is highly competitive. The Company's competitors for
its Apparel Products include apparel manufacturers of all sizes, many of which
have greater financial and manufacturing resources than the Company.
Accordingly, the Company believed that it was in its best interest to license
its women's apparel business effective January 1, 2005 as previously mentioned.
This decision was the result of the licensee's ability to source products
cheaper, due to its larger buying power, and expanded distribution available for
its presence in certain channels of distribution. The Company believes that it
has been able to compete in the men's activewear and sportswear market because
of high brand name recognition, along with a natural extension associated with
its sporting goods business. The Company's products also compete with
lower-priced men's, women's, and girls' activewear and sportswear products,
which may or may not be brand name products. The Company believes that its
principal competitors in the brand name men's activewear and sportswear industry
are Nike*, Reebok*, Adidas* and Fila*. Competition in the activewear and
sportswear segment of the apparel industry is based on price, design, quality,
name recognition, and the ability to respond quickly to changing consumer
preferences.
SPORTS PRODUCTS
The sporting goods industry is also highly competitive. However, the
Company believes that it is the preeminent name in boxing equipment and as such
is able to compete in this segment of the sporting goods industry. The Company's
competitors for its Sports Products at the retail level are Technical
Knockout/TKO* and Century Sporting Goods*. At the professional and amateur
boxing level the Company's competitors are Ringside*, Grant*, and Reyes*.
LICENSED PRODUCTS
Aggressive competition is also found in the licensing of sporting goods
brands and trademarks. The Company believes that the Everlast(R) trademark,
however, is the most recognized brand associated with the sport of boxing. The
Company believes that none of its competitors in the boxing segment of the
sporting goods industry have significant licensing programs.
9
EMPLOYEES
As of February 28, 2005, the Company had 188 employees who are employed on
a full-time basis. These include 50 executive, managerial, clerical,
administrative and sales employees at its New York City headquarters and 138
employees at its manufacturing facility in Moberly, Missouri. 105 employees of
the Company at its manufacturing facility in Moberly, Missouri are covered under
a collective bargaining agreement that expires on June 5, 2005. The Company
believes it has satisfactory relationships with its employees under the
collective bargaining agreement and expects to enter into a new collective
bargaining agreement. Failure to enter into a new collective bargaining
agreement with it union employees could have an adverse effect on its sporting
goods operations and business, including reduced sales levels due to inventory
manufacturing production problems.
The Company also employs additional full-time and part-time employees in
connection with the design, marketing, and sale of its products on an as needed
basis. The Company hires temporary employees from time to time. The Company
considers its relations with its employees to be satisfactory.
ENVIRONMENTAL CONSIDERATIONS
The Company's manufacturing facility is subject to various federal, state
and local environmental laws and regulations limiting the discharge, storage,
handling and disposal of a variety of substances set by the Environmental
Protection Agency, particularly the federal Water Pollution Control Act, the
Clean Air Act of 1970 (as amended in 1990), the Resource Conservation and
Recovery Act (including amendments relating to underground tanks) and the
federal "Superfund" program.
The Company also is subject to federal, state and local laws and
regulations relating to workplace safety and worker health, including those
promulgated under the Occupational Safety and Health Act ("OSHA"). As part of
its OSHA compliance efforts, the Company requires all personnel working in high
noise areas and those working in certain areas with high concentrations of dust
to wear protective equipment.
To the best of the Company's knowledge, its manufacturing facility is
currently in compliance with all material respects with existing OSHA standards
and environmental laws and regulations. The Company does not believe that there
is a substantial likelihood that further OSHA or environmental compliance will
require substantial expenditures or materially affect its operations or
competitive position. The Company currently has no capital expenditures relating
to satisfying environmental standards.
AVAILABLE INFORMATION
The following information can be found on our website at
http://www.everlast.com:
o Our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports as
soon as reasonably practicable after such material is electronically
filed with the Securities and Exchange Commission (SEC);
o Our policies related to corporate governance, including our Code of
Business Conduct and Ethics applying to our directors, officers and
employees (including our principal executive officer, and principal
financial and accounting officer) that we have adopted to meet the
requirements set forth in the rules and regulations of the SEC.
10
ITEM 2. PROPERTIES
PRINCIPAL PLACE OF BUSINESS
The Company renewed its real property leases at its principal office at
1350 Broadway, New York, New York effective December 2003. The lease is for
12,087 square feet with an annual base rent of $407,728 through November 2008.
MANUFACTURING FACILITY
The Company owns a manufacturing facility in Moberly, Missouri of
approximately 304,000 square feet. The Company believes that its existing
facility will be adequate to meet its needs for the foreseeable future. The
Company further believes that additional manufacturing space will be available
at its Moberly, Missouri manufacturing plant in the event the Company requires
additional capacity.
Through December 31, 2003, the Company operated a leased manufacturing
facility in the Bronx, New York. On December 31, 2003, the Company closed the
Bronx facility and consolidated its manufacturing operations into its Moberly,
Missouri manufacturing facility. For details concerning the closure and
relocation of the Bronx, New York facility, please see the section "Results of
Operations--2003 Restructuring and Non-recurring Charges."
ITEM 3. LEGAL PROCEEDINGS
JOAN HANSEN & CO.
On December 20, 2000, Joan Hansen & Co., a non-exclusive licensing agent of
the Company (the "Agent"), filed a lawsuit in the Supreme Court of the State of
New York against the Company, Everlast, George Horowitz, President and Chief
Executive Officer of the Company, and Ben Nadorf, a former principal stockholder
of Everlast and a Director of the Company, individually. The Agent alleged a
breach of contract on the basis that, after the Merger, the Company stopped
paying royalties to Everlast, which had become its wholly-owned subsidiary, and
accordingly the Company discontinued the payment of remuneration to the Agent.
The Agent further alleged that the Merger was a sham transaction; that the
Company intended to default on its obligations to the former Everlast
stockholders and that the Everlast(R) trademark and licenses would then revert
to those stockholders. There were three other causes of action allegedly
predicated on the theories of tortious interference with contractual relations
and tortious interference with prospective business relations. Damages were
alleged in varying amounts, up to an aggregate of $55,500,000.
On November 30, 2001, the Supreme Court of the State of New York dismissed
the causes of action alleging tortious interference with contractual relations
and tortious interference with prospective business relations, made against
George Horowitz and Ben Nadorf. The court also denied a cross-motion, made by
the Agent, seeking partial summary judgment for breach of contract against the
Company. The decisions were appealed by the Agent. The Appellate Court affirmed
the dismissal and the denial of the Agent's cross-motion.
Thereafter the Company filed a motion for summary judgment against the
Agent seeking dismissal of the balance of the Agent's claims. That motion was
decided in the Company's favor on December 23, 2002. The Agent's appeal of that
portion of the decision dismissing its claim for a breach of contract, was
unanimously affirmed by the Appellate Division on December 16, 2003. The Agent
has subsequently filed a motion seeking permission to further appeal to the
Court of Appeals as well as reasserting its breach of contract claims in a
separate demand for arbitration. Hearings in the arbitration commenced November
2004, and were ongoing as of December 31, 2004. Everlast expects to prevail in
the arbitration.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of fiscal year 2004.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's shares of common stock, par value $.002 per share (the
"Common Stock") are quoted on the Nasdaq SmallCap Market under the symbol
"EVST." The following table sets forth, for the period indicated, the highest
and lowest bid quotations for the Common Stock, as reported by the NASDAQ
system. Quotations reflect prices between dealers, do not reflect retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
2004
HIGH LOW
---- ---
1st Quarter $3.58 $2.54
2nd Quarter $3.10 $2.46
3rd Quarter $4.63 $2.75
4th Quarter $8.44 $2.80
2003
HIGH LOW
---- ---
1st Quarter $4.20 $2.79
2nd Quarter $3.15 $2.20
3rd Quarter $3.30 $2.54
4th Quarter $3.45 $2.46
HOLDERS
The closing bid price of each share of Common Stock as of March 18, 2005
was $10.40. There were 368 record holders of the shares of Common Stock and one
record holder of the Company's Class A Common Stock, $.01 par value (the "Class
A Common Stock"). Based upon information received from some of these record
holders, the Company believes there are approximately 2,400 beneficial holders
of the shares of Common Stock.
DIVIDENDS
The Company has never paid dividends on its Common Stock or its Class A
Common Stock. The Company anticipates that, for the foreseeable future, earnings
will be retained for use in its business and does not anticipate the payment of
dividends on its Common Stock or its Class A Common Stock.
The Company continues to pay dividends to the holders of its shares of its
Series A Redeemable Participating Preferred Stock, $.01 par value (the
"Preferred Stock"). The shares of Preferred Stock are entitled to a dividend
equal to two-thirds (2/3) of the net after tax profits after adding back
goodwill amortization and stock based compensation. In 2002 and years
thereafter, the dividend is reduced by the proportion to the redeemed Preferred
Stock. The percentage of net income (as defined) to be paid to holders of
Preferred Stock is as follows:
12
Twelve months ended Percentage
December 31 (%)
2004 44.4
2005 37.0
2006 29.6
2007 22.2
2008 14.8
2009 7.4
DISCLOSURE OF EQUITY COMPENSATION PLAN INFORMATION (AS OF DECEMBER 31, 2004)
Plan Category Number of securities to be Weighted-average Number of securities remaining
to be issued upon exercise price of available for future issuance
exercise of outstanding outstanding options, under equity compensation
options, warrants and warrants and rights plans (excluding securities
rights (a) reflected in column (a))
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation 687,500 $8.65 259,500
plans approved by
security holders
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation 266,100 3.03 -
plans not approved by
security holders
- ----------------------------------------------------------------------------------------------------------------------------
Total 953,600 7.08 259,500
- ----------------------------------------------------------------------------------------------------------------------------
13
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial information has been taken or
derived from the Company's audited consolidated financial statements. The
information set forth below is not necessarily indicative of the Company's
results of future operations and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and related
notes included elsewhere in this Form 10-K. See "Item 8. Consolidated Financial
Statements and Supplementary Data."
On December 17, 2004, Everlast announced the signing of the largest
licensing agreement in the Company's history, whereby it licensed its United
States women's apparel category to Jacques Moret, Inc. effective January 1,
2005. Accordingly, Everlast has reported its results of operations on a GAAP
basis, which includes the application of SFAS No. 144 "Accounting for the
Disposal of Long-Lived Assets" which requires us to report our results of
operations of our women's apparel business as a discontinued component for all
current and prior periods presented.
For the year ended
---------------------------------------------------------------------------
December 31 December 31 December 31 December 31 December 31
2004 2003 (a) 2002 2001 2000
---------------------------------------------------------------------------
Net Sales $ 35,940,000 $ 33,119,000 $ 36,670,000 $ 31,531,000 $ 13,391,000
Net License Revenues 9,059,000 6,669,000 5,501,000 5,141,000 537,000
Net Income (Loss) from Continuing Operations (1,240,000) (2,143,000) 341,000 675,000 (1,069,000)
Income from Discontinued Component 213,000 1,188,000 2,107,000 1,664,000 2,495,000
Net Income (Loss) (a) (1,027,000) (955,000) 2,448,000 2,339,000 1,426,000
Preferred Stock Dividend -- -- 1,451,000 1,675,000 27,000
Basic Per Share Data (b):
Net Income from Continuing Operations ($0.40) ($0.69) $0.11 $0.22 ($0.40)
Net Income from Discontinued Component $0.07 $0.38 $0.68 $0.54 $0.93
Diluted Per Share Data (b):
Net Income from Continuing Operations ($0.40) ($0.69) $0.08 $0.14 ($0.40)
Net Income from Discontinued Component $0.07 $0.38 $0.51 $0.34 $0.79
Total Assets 64,756,000 64,257,000 63,847,000 63,953,000 66,878,000
Long Term Debt 6,643,000 4,866,000 3,227,000 141,000 3,125,000
Redeemable Preferred Stock 25,000,000 30,000,000 35,000,000 40,000,000 45,000,000
(a) During fiscal 2003, the Company incurred restructuring and non-recurring
duplicative manufacturing costs aggregating $3.3 million, pretax, related
to the relocation and consolidation of its Bronx, New York manufacturing
facility which closed in December 2003. These costs are included in the net
loss from continuing operations
(b) Excludes the effect of the preferred stock dividends' impact of earnings
per share for the years ended December 31, 2002 and 2001 as follows: Basic
- $0.47 and $0.54; Diluted - $0.35 and $0.35.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The accounting
principles we use require us to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and amounts of income and expenses during the reporting periods
presented. We believe in the quality and reasonableness of our critical
accounting policies, however it is likely that materially different amounts
would be reported under different conditions or using different assumptions that
we have consistently applied. We believe our critical accounting policies are as
follows, including our methodology for estimates made and assumptions used.
o REVENUE RECOGNITION POLICY. Revenues from royalty and finders
agreements are recognized when earned by applying contractual royalty
rates to quarterly point of sale data, among other criteria, received
from the Company's licensees. The Company's royalty recognition policy
provides for recognition of royalties in the quarter earned, although
a large portion of such royalty payments are actually received during
the month following the end of a quarter. Revenues are not recognized
unless collectibility is reasonably assured.
o TRADE RECEIVABLES. We perform ongoing credit evaluations on existing
and new customers daily. We apply reserves for delinquent or
uncollectible trade receivables based on specific identification
methodology and also apply a general reserve based on our trade
receivable aging categories. Credit losses have been within our
estimates over the last few years.
o DEFERRED TAXES. Deferred taxes are determined, based on the
differences between the financial statement and tax bases of assets
and liabilities, as well as the future benefit of any net operating
loss carryforward, using enacted tax rates in effect for the year in
which the differences are expected to reverse. Valuation allowances
are established when necessary to reduce deferred tax assets to the
amounts expected to be realized. In assessing the need for a valuation
allowance management considers estimates of future taxable income and
ongoing prudent and feasible tax planning strategies. In accordance
with APB Opinion 23, the Company does not accrue income taxes on the
undistributed earnings of a subsidiary which is a "DISC" since the
repayment of the earnings of the DISC is not expected in the
foreseeable future. If circumstances change and it becomes apparent
that some or all of the undistributed earnings of the DISC will be
remitted in the foreseeable future, then taxes will be accrued.
o INVENTORY. Our inventory is valued at the lower of cost or market.
Cost has been derived principally on standard cost methodology, where
we utilize a first-in-first-out method. We provide for allowances on
finished goods and specifically identify and reserve for slow moving
or obsolete raw materials and packaging.
o VALUATION OF GOODWILL, LONG-LIVED ASSETS AND INTANGIBLE ASSETS. The
Company periodically evaluates goodwill, long-lived assets and
intangible assets for potential impairment indicators. Judgements
regarding the existence of impairment indicators are based on
estimated future cash flows, market conditions, and legal factors.
Future events could cause the Company to conclude that impairment
indicators exist and that the net book value of goodwill, long-lived
assets and intangible assets is impaired. Any resulting impairment
loss could have a material adverse impact on the Company's financial
condition and results of operations.
o CONTINGENCIES AND LITIGATION. Management evaluates contingent
liabilities including threatened or pending litigation in accordance
15
with SFAS No. 5, "Accounting for Contingencies" and records accruals
when the outcome of these matters is deemed probable and the liability
could be reasonably estimated. Management makes these assessments
based on the facts and circumstances and in some instances based in
part on the advice of outside legal counsel.
RESULTS OF OPERATIONS
2004 DISPOSAL OF BUSINESS COMPONENT
On December 17, 2004, the Company entered into its largest licensing
agreement in its history, whereby it licensed its United States women's apparel
business to Jacques Moret, Inc. effective January 1, 2005. The Company believes
that its decision to license its women's apparel business was in its best
interests as a result of the licensee's ability to source product cheaper, due
to the licensee's buying power, along with the licensee's expanded distribution
available from its presence in certain channels of distribution. Accordingly,
the Company has reported its results of operations on a GAAP basis, which
includes the application of SFAS No. 144 "Accounting for the Disposal of
Long-Lived Assets" which requires us to report our results of operations of our
women's apparel business as a discontinued component for all current and prior
periods presented.
2003 RESTRUCTURING AND NON-RECURRING CHARGES
During the fourth quarter of fiscal 2003 we recorded charges aggregating
$2.1 million, before taxes, related to the relocation and consolidation of our
Bronx, New York manufacturing facility into our Moberly, Missouri facility.
Approximately $1.2 million of these charges were non-cash nature.
Commencing July 2003, we decided to pursue and execute a plan to close the
Bronx, New York facility. Our decision to close this facility was largely the
result of significant lease escalation costs expected at the end of our existing
lease term in April 2004 and our inability to reach practical capacity at both
the Bronx, New York and Moberly, Missouri facilities. Accordingly, during the
fourth quarter of fiscal 2003, we completed the relocation and consolidation of
the facilities.
The restructuring charge includes $2.1 million of costs associated with the
discontinuance of certain products, factory labor and related overhead costs
resulting from the idle capacity in the Bronx, New York facility, severance,
lease exit and other disposal costs. Because of this $2.1 million of charges,
our 2003 gross profit was reduced by $1.1 million charged to cost of sales as
required by accounting rules. At December 31, 2003, approximately $0.5 million
was accrued principally related to lease exit costs. In addition, we wrote off
and disposed of approximately $0.1 million of fixed assets. Additional
restructuring charges of $0.4 million were incurred during the year ended
December 31, 2003 related to severance liabilities and related employee costs
and other disposal and lease exit costs.
YEAR END 2004 COMPARED TO YEAR END 2003
Net sales were $35.9 million for the year ended December 31, 2004 as
compared to $33.1 million in 2003, an increase of $2.8 million or 8.5%. The
increase was primarily the result of increases in men's apparel sales which grew
40% in 2004 as compared to 2003.
Net licensing revenues were $9.1 million for the year ended 2004 as
compared to $6.7 million for the year ended December 31, 2003. The increase of
$2.4 million or 35.8% was the result of new licenses entered into in 2004 as
well as an increase in revenues generated from existing licenses.
Total net revenues in 2004 amounted to $45 million compared to $39.8
million in 2003. The $5.2 million increase was due to increases in men's apparel
sales and license revenues as explained above.
16
Gross profit in 2004 increased to $16.6 million, 36.9% of net revenues, as
compared to the gross profit in 2003 of $14.7 million, 37% of net revenues, an
increase of $1.9 million. Gross profit in 2003 adjusted for the restructuring
costs included in cost of sales was $15.8 million or 39.7% of net revenue. The
increase in gross profit dollars was largely a result of the increase in net
license revenues. The decrease in gross profit as a percentage of net revenues,
as compared to the 2003 adjusted gross profit as a percentage of net revenues
was 39.7% was due to lower margin dollars achieved in our men's apparel sales.
Selling and shipping costs were approximately $8.8 million for each of the
years ended 2004 (20% of net revenues) and 2003 (22% of net revenues). The
decrease in selling and shipping costs as a percentage of net revenues was a
result of the fixed nature of certain of these expenses.
General and administrative expenses were $6.8 million in 2004 as compared
to $6.2 million in 2003, an increase of $.6 million. The increase was due to
increases in salaries, taxes, insurance, rent and other overhead costs.
Restructuring and non-recurring costs were $1.1 million in 2003 compared to
none in 2004.
Amortization expense remained $0.9 million for each of the years ended
December 31, 2004 and 2003.
Operating income from continuing operations was $25,000 for the year ended
December 31, 2004 compared to an operating loss of $2.3 million for the year
ended December 31, 2003. The $2.3 million improvement in operating income for
2004 was primarily due to the $1.1 million in restructuring and non-recurring
costs incurred as mentioned above.
Other expenses (principally interest expense and finance costs) were $1.4
million in 2004 as compared to $.6 million in 2003, an increase of $.8 million.
The increase was due to our refinance in January 2004 of our obligations to
redeem our preferred stock ("Preferred Stock Refinance",) which contributed $.8
million in interest and finance costs during 2004.
Loss before benefit for income taxes from continuing operations was ($1.3)
million in 2004 as compared to a loss in 2003 of ($3.0) million. The decrease in
the loss before benefit of income taxes from continuing operations of $1.7
million was due to the reduced operating loss in 2004 vs. 2003 offset by higher
interest and financing costs.
We received a tax benefit in 2004 of $88,000 vs. a tax benefit of $825,000
in 2003. Our tax benefit in both 2004 and 2003 was reduced by non-deductible
permanent items, principally amortization, as well as an additional tax
assessment of approximately $95,000 incurred during the fourth quarter of 2004.
Net loss from continuing operations was $1.2 million in 2004 as compared to
a net loss of $2.1 million in 2003. Income, net of tax, from the discontinued
component was $.2 million in 2004 as compared to $1.2 million in 2003.
Accordingly, our net loss for both 2004 and 2003 was approximately $1.0 million.
There were no dividends payable to the holders of Preferred Stock for
fiscal years ended December 31, 2004 and 2003 due to our net loss.
YEAR END 2003 COMPARED TO YEAR END 2002
Net sales were $33.1 million for the year ended December 31, 2003 as
compared to $36.7 million for the year ended December 31, 2002, a decrease of
$3.6 million or 9.7%. This $3.6 million decrease was principally due to a
decrease in sporting goods sales as well as sales to certain customers in 2002
who became licensees in 2003.
Net license revenues were $6.7 million for the year ended December 31, 2003
as compared to $5.5 million for the year ended December 31, 2002, an increase of
17
$1.2 million or 21%. The increase in license revenues was primarily due to new
license agreements and increased revenues on existing licenses.
Total net revenues were $39.8 million in 2003 as compared to $42.2 million
in 2002. The $2.4 million decrease was primarily due to a decrease in net sales
as explained above.
Gross profit in 2003 decreased to $14.7 million, 37% of net revenues, as
compared to $15.9 million, or 37.7% of net revenues in 2002. Gross profit
adjusted for the restructuring and non-recurring costs, included within cost of
sales, were $15.8 million or 39.7% of net sales. The decrease in dollar amounts
was related to reduced sales volume and mix of sales mentioned above and in
addition, $1.2 million of duplicative manufacturing costs incurred in the second
half of fiscal 2003 related to the facility relocation and consolidation.
Selling and shipping expenses increased to $8.8 million for the year ended
December 31, 2003 from $8.1 million for the year ended December 31, 2002.
Selling and shipping expenses as a percentage of net revenues increased to 22.1%
from 19.2%. This increase in both dollar amounts and percentage of net revenues
was primarily attributable to increased marketing and advertising costs across
all business lines as well as the decrease in net sales as it relates to the
fixed portion of selling and shipping expenses.
General and administrative expenses increased to $6.2 million for the year
ended December 31, 2003 as compared to $5.7 million in the 2002 period. The
increase was due to higher infrastructure costs required to support our
diversified organization.
As discussed above, during the fourth quarter of 2003, we recorded
approximately $1.1 million of restructuring and non-recurring charges. There
were no such charges in 2002. These charges are related to certain asset
write-offs, lease exit and disposed costs, and severance liabilities and related
employee costs.
Amortization expense remained $0.9 million for the years ended December 31,
2003 and 2002.
We incurred an operating loss from continuing operations of $2.3 million
for the year ended December 31, 2003 as compared to income from continuing
operations of $1.2 million for the year ended December 31, 2002. The $3.5
million decrease was a result of the aforementioned restructuring and
non-recurring charges, lower gross margins and higher selling, general and
administrative costs as described above.
Interest expense, net of interest income, increased to $0.6 million for the
year ended December 31, 2003 from $0.3 million for the year ended December 31,
2002. The increase is attributable to the increase in our net borrowings from
our factor to fund the annual mandatory preferred stock redemption.
Income (loss) before income taxes from continuing operations for the year
ended December 31, 2003 was ($3.0) million as compared to $0.8 million in the
2002 period. The decrease of $3.8 million was a result of lower operating
profits in the 2003 period as well as the increase in interest expense.
We incurred a tax benefit of $.8 million for the year ended December 31,
2003 as compared to a tax provision of $0.5 million for the year ended December
31, 2002. The decrease in taxes is a result of lower pre-tax earnings as
compared to the prior year.
Our net loss from continuing operations was ($2.1) million in 2003 as
compared to net income from continuing operations of $0.3 million in 2002. This
$2.4 million unfavorable swing was due to a higher pretax loss from continuing
operations in 2003 as explained above.
18
Income from discontinued component, net of tax, was $1.2 million in 2003 as
compared to $2.1 million in 2002. Net loss in 2003 was $1 million as compared to
net income in 2002 of $2.4 million.
Preferred stock dividends payable for the year ended December 31, 2002 was
$1.4 million as compared to no dividends payable for our 2003 net loss. The $1.4
million 2002 dividend was paid March 2003.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations and growth primarily with our cash flows we
generate from our operations and from borrowings with our Factor.
Net cash used by operating activities for the year ended December 31, 2004
was $1.9 million compared to net cash provided from operations of $1.3 million
for the year ended December 31, 2003. This decrease was primarily due to the
decrease in net income, as adjusted for the add back of non-cash restructuring
and non-recurring charges in 2003, along with changes in working capital items,
principally accounts receivable, inventory and accounts payable.
Net cash used by investing activities for the years ended December 31, 2004
was $.5 million compared to net cash provided by investing activities of $40,000
for the year ended December 31, 2003. This increase was due to increases in
capital expenditures for manufacturing equipment, while in 2003, proceeds from
the sale of marketable securities provided us additional cash.
Net cash provided by financing activities for the year ended December 31,
2004 was $1.1 million as compared to net cash used by financing activities of
$2.0 million in 2003. The primary difference is the payment of a preferred stock
dividend of $1.5 million , and payment of deferred financing costs of $700,000
during 2003, along with additional borrowings from our Factor of $900,000.
During the year ended December 31, 2004, the Company's primary need for funds
was to finance working capital and the annual mandatory redemption of its
Preferred Stock and interest and financing costs. The Company has relied
primarily upon its cash flow from operations and its asset based borrowings from
the Factor to finance its operations, expansion and payments under its Preferred
Stock Redemptions and interest. Cash and cash equivalents were approximately $.6
million at December 31, 2004 compared to $1.9 million at December 31, 2003, a
decrease of $1.3 million. Working capital was $2.0 million at December 31, 2004
compared to $6.0 million at December 31, 2003. The decrease in working capital
was due to increased borrowings from our factor aggregating $4.4 million,
primarily to fund our preferred stock payments made of $3.0 million and interest
financing costs of $0.8 million.
The balance of the amount due to factor represents accounts receivable
assigned to the factor by the Company net of outstanding advances made by the
factor to the Company under the factoring agreement. At December 31, 2004 the
amount due to factor was $11.3 million as compared to $6.9 million at December
31, 2003.
2005 LIQUIDITY OUTLOOK
On January 13, 2004, we announced that we had entered into our Agreement
with our principal preferred stockholder (the "Principal Preferred
Stockholder"), modifying its annual minimum redemptions.
Under the terms of the Agreement, in lieu of a cash payment for redeeming
$2,000,000 of our Preferred Stock, for each of the four years commencing
December 14, 2003, through December 14, 2006, we will convert such obligations
into four term loans ("Loans"). The Loans are evidenced by four promissory notes
from us 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.
19
Our borrowings from our Factor have been used to fund working capital needs
and to make payments in accordance with our mandatory preferred stock
redemptions. The borrowings from our Factor are deemed current liabilities as
there are no repayment terms and are collateralized by inventory, accounts
receivable and our trademark. We currently have a $20 million line of credit
with our Factor.
During 2004, we signed 25 new licensees, including the largest license
agreement in the Company's history, previously announced on December 17, 2004.
As of March 11, 2005 we signed 10 additional licensees, bringing the total
licensees to over 90. At the beginning of 2005, we obtained a valuation on our
trademark. An independent valuation on our trademark valued the Everlast brand
using the discounted cash flow methodology and other comparative analyses at
$67.6 million (book value of $23.5 million). Accordingly, management believes,
although no assurance can be given, that it will be able to leverage off its
trademark, with various financing vehicles currently offered, to obtain
additional financing along with existing cash and cash equivalent balances, and
expected positive cash flows generated from our operations, to create sufficient
cash flows to fund our Preferred Stock Redemptions, debt instruments and other
contractual obligations due throughout 2005 although no assurance to that effect
can be given. If positive cash flow does not occur there will be a decrease in
cash and cash equivalents and additional borrowings may be required by our
Factor and/or other lenders.
Obligations for all Preferred Stock Redemptions, debt instruments, capital
and operating leases and other contractual obligations are as follows:
Payments Due by Period (In 000's)
--------------------------------------------------------------------
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 years
--------------------------------------------------------------------
Preferred Stock redemptions
and notes payable $29,000 $ 3,000 $21,000 $ 5,000 --
Debt instruments and capital lease
obligations 2,893 249 2,644 -- --
Operating leases 1,616 422 1,194 -- --
--------------------------------------------------------------------
Total contractual cash obligations $33,509 $ 3,671 $24,838 $ 5,000 --
====================================================================
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk generally represents the risk that losses may occur in the
values of financial instruments as a result of movements in interest rates,
foreign currency exchange rates and commodity prices. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes.
Interest: From time to time the Company invests its excess cash in
interest-bearing temporary investments of high-quality issuers. Due to the short
time the investments are outstanding and their general liquidity, these
instruments are classified as cash equivalents in the Company's consolidated
balance sheet and the Company believes that these investments do not represent a
material interest rate risk to it. The Company's long-term debt obligations are
the mortgage loan on its Moberly facility and its equipment finance obligations.
The Company believes that these long-term debt obligations do not represent a
material interest rate risk to the Company. The Company's notes payable to its
Principal Preferred Stockholder has been set at a fixed rate of interest.
Foreign Currency: The Company conducts business in Canada and the Licensed
Products are sold in various parts of the world. Revenues from the Company's
licensees and sales from its Canadian and other international customers are
denominated in US Dollars and do not expose the Company to risks due to currency
exchange rate fluctuations.
ITEM 8. FINANCIAL STATEMENTS.
CONSOLIDATED FINANCIAL STATEMENTS
PLEASE SEE PAGE 2-F THROUGH 6-F.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have reviewed our
disclosure controls and procedures as of the end of the period covered by this
Report. Based upon this review, these officers concluded that, as of the end of
the period covered by this Report, our disclosure controls and procedures are
adequately designed to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
applicable rules and forms.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls during the quarter
covered by this report or from the end of the reporting period to the date of
this Form 10-K.
21
PART III
Item 10, "Directors and Executive Officers of the Registrant", Item 11,
"Executive Compensation", Item 12, "Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters", Item 13, "Certain
Relationships and Related Transactions", and Item 14, "Principal Accountant Fees
and Services" have been omitted from this report inasmuch as the Company will
file with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the fiscal year covered by this report a
definitive Proxy Statement for the Annual Meeting of Stockholders of the Company
to be held on June 3, 2005, at which meeting the stockholders will vote upon
selection of the directors. This information in such Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a)(1)List of Financial statements
Report of Independent Auditors
Consolidated Balance Sheets - December 31, 2004 and 2003
Consolidated Statements of Operations - Years ended December 31, 2004, 2003
and 2002
Consolidated Statements of Stockholders' Equity - Years ended December 31,
2004, 2003 and 2002
Consolidated Statements of Cash Flows - Years ended December 31, 2004, 2003
and 2002
Notes to Consolidated Financial Statements
(b)(1) List of Financial Statement Schedule
Valuation and Qualifying Accounts (Schedule II)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at
Beginning of Costs and End of
Period Expenses Deductions Period
------------ ------------ ----------- -----------
Allowance for Doubtful Accounts:
Year ended December 31, 2004 $412,000 $402,000 $ 10,000
Year ended December 31, 2003 276,000 $136,000 412,000
Year ended December 31, 2002 257,000 52,496 33,496 276,000
22
(b) Exhibits
EXHIBIT FILED
INDEX DESCRIPTION OF DOCUMENT HEREWITH INCORPORATED BY REFERENCE TO:
----- ----------------------- -------- -----------------------------
3.1(a) Certificate of Incorporation of the Company, as amended Exhibit 3.(i) of Registration Statement
("Certificate of Incorporation"). File No.33-87954 (the "1995
Registration Statement")
3.1(b) Certificate of Amendment of the Certificate of Incorporation. Exhibit 3.1(b) of the 2000 Form 10-KSB
for the year ended December 31, 2000
3.1(c) Certificate of Designations, Powers, Preferences and Rights of the Exhibit 4.1 of the Current Report on
Series A Redeemable Participating Preferred Stock. Form 8-K filed on October 24, 2002.
3.2 Bylaws of the Company. Exhibit 3. (ii) of the 1995
Registration Statement.
10.1 1995 Non-Employee Director Stock Option Plan of the Company, Exhibit 10.29 of the 1996 Form 10-KSB
adopted on October 6, 1995. for the year ended December 31, 1995.
10.2 Lease, dated as of December 1, 2003, between the Company and 1350 Exhibit 10.2 of the 2003 Form 10-K for
Broadway Associates. the year ended December 31, 2003.
10.3 Agreement and Plan of Merger dated August 21, 2000 by and among Exhibit 99.1 of the Current Report on
Everlast Worldwide Inc. (f/k/a Active Apparel Group, Inc.), Form 8-K filed November 7, 2000.
Everlast Holding Corp., a Delaware corporation, and the
stockholders of Everlast Holding.
10.4 2000 Stock Option Plan of the Company. Appendix B of Schedule 14A filed on
October 3, 2000.
10.5 Form of Registration Rights Agreement. Appendix D of Schedule 14A filed on
October 3, 2000.
10.6 Agreement made by and between Everlast Worldwide Inc., and Ben Exhibit 99.2 of the Current Report on
Nadorf ("Nadorf"). dated December 16, 2003 Form 8-K filed January 15, 2004
10.7 Promissory Note issued by Everlast Worldwide Inc., on behalf of Ben Exhibit 99.3 of the Current Report on
Nadorf ("Nadorf"). dated December 16, 2003 Form 8-K filed January 15, 2004
10.8 Promissory Note issued by Everlast Worldwide Inc., on behalf of Ben X
Nadorf ("Nadorf"). dated December 14, 2004
21 List of Subsidiaries X
23.1 Consent of Independent Auditors X
31.1a Certification of Chief Executive Officer pursuant to Rule 13a-14(a) X
and Rule 15d-14(a) of the Securities Exchange Act, as amended.
31.2a Certification of Chief Financial Officer pursuant to Rule 13a-14(a) X
and Rule 15d-14(a) of the Securities Exchange Act, as amended.
32.1a Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted X
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2a Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted X
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
23
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Everlast Worldwide Inc.
By: /s/ George Horowitz
-----------------------------------
George Horowitz
Chairman and Chief Executive Officer
By: /s/ Gary J. Dailey
-----------------------------------
Gary J. Dailey
Chief Financial Officer
Dated: March 28, 2005
In accordance with the Exchange Act this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.
March 28, 2005 /s/ George Horowitz
-----------------------------
George Horowitz (Chairman; Chief Executive
Officer; and Principal Executive Officer)
March 28, 2005 /s/ Gary J. Dailey
-------------------------------
Gary J. Dailey (Chief Financial Officer;
and Chief Accounting Officer)
March 28, 2005 /s/ James Anderson
-----------------------------
James Anderson (Director)
March 28, 2005 /S/ RITA CINQUE KRISS
-------------------------------
Rita Cinque Kriss (Director)
March 28, 2005 /S/ LARRY KRING
------------------------------
Larry Kring (Director)
March 28, 2005 /s/ Edward Epstein
------------------------------
Edward Epstein (Director)
------------------------------
Ben Nadorf (Director)
March 28, 2005 /s/ Wayne Nadrof
------------------------------
Wayne Nadorf (Director)
March 28, 2005 /s/ Teddy Atlas
-------------------------------
Teddy Atlas (Director)
24
March 28, 2005 /s/ Mark Ackereizen
-------------------------------
Mark Ackereizen (Director)
March 28, 2005 /s/ James Mcguire, Jr.
--------------------------------
James Mcguire, Jr. (Director)
March 28, 2005 /s/ Jeffrey Schwartz
--------------------------------
Jeffrey Schwartz (Director)
25
EXHIBIT 21
LIST OF SUBSIDIARIES
Active Apparel New Corp.
Everlast World's Boxing Headquarters Corp.
Everlast Sports Mfg. Corp.
Everlast Sports International, Inc.
Everlast Fitness Mfg. Corp.
American Fitness Products, Inc.
26
EVERLAST WORLDWIDE INC.
AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 2004
ITEM 8: FINANCIAL STATEMENTS
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
Independent Auditors' Report 1f
Consolidated Balance Sheets 2f
Consolidated Statements of Operations 3f
Consolidated Statements of Changes in Stockholders' Equity 4-5f
Consolidated Statements of Cash Flows 6f
Notes to Consolidated Financial Statements 7f-27f
INDEPENDENT AUDITORS' REPORT
Board of Directors
Everlast Worldwide Inc. and Subsidiaries
New York, NY
We have audited the accompanying consolidated balance sheets of Everlast
Worldwide Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
2004. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Everlast Worldwide
Inc. and subsidiaries as of December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.
Our audits of the consolidated financial statements referred to above also
included an audit of the financial statement schedule listed in the index
appearing under Item 15(b)(1). In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
New York, NY /s/ Berenson LLP
February 18, 2005
1-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
ASSETS 2004 2003
------------ ------------
Current assets:
Cash and cash equivalents $ 649,000 $ 1,937,000
Accounts receivable, net 9,781,000 8,406,000
Inventory of discontinued component 1,020,000 --
Inventories 11,762,000 11,012,000
Prepaid expenses and other current assets 921,000 1,107,000
------------ ------------
Total current assets 24,133,000 22,462,000
Property and equipment, net 6,182,000 6,188,000
Goodwill 6,718,000 6,718,000
Trademarks, net 23,576,000 24,489,000
Restricted cash 1,028,000 1,015,000
Other assets 3,119,000 3,385,000
------------ ------------
$ 64,756,000 $ 64,257,000
============ ============
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 11,316,000 6,898,000
Current maturities of long-term debt 249,000 335,000
Accounts payable 6,530,000 5,176,000
Accrued expenses and other current liabilities 1,062,000 1,019,000
------------ ------------
Total current liabilities 22,157,000 16,428,000
License deposits payable 440,000 569,000
Series A redeemable participating preferred stock 22,000,000 27,000,000
Note payable 4,000,000 2,000,000
Other liabilities 190,000 1,166,000
Long-term debt, net of current maturities 2,643,000 2,866,000
------------ ------------
51,430,000 50,029,000
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.002; 19,000,000 shares authorized;
3,244,359 issued, 3,070,359 outstanding, 3,028,904-2003 7,000 6,000
Class A common stock, par value $.01; 100,000 shares authorized, issued
and outstanding 1,000 1,000
Paid-in capital 11,821,000 11,697,000
Retained earnings 2,224,000 3,251,000
------------ ------------
14,053,000 14,955,000
Less: treasury stock, at cost (174,000 common shares) (727,000) (727,000)
------------ ------------
13,326,000 14,228,000
------------ ------------
$ 64,756,000 $ 64,257,000
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
2-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------
Years ended December 31,
--------------------------------------------
2004 2003 2002
------------ ------------ ------------
Net sales $ 35,940,000 $ 33,119,000 $ 36,670,000
Net license revenues 9,059,000 6,669,000 5,501,000
------------ ------------ ------------
Net revenues 44,999,000 39,788,000 42,171,000
------------ ------------ ------------
Cost of goods sold 28,400,000 25,062,000 26,266,000
------------ ------------ ------------
Gross profit 16,599,000 14,726,000 15,905,000
Operating expenses:
Selling and shipping 8,849,000 8,815,000 8,143,000
General and administrative 6,812,000 6,236,000 5,691,000
Restructuring and non-recurring costs -- 1,095,000 --
Amortization expense 913,000 913,000 913,000
------------ ------------ ------------
16,574,000 17,059,000 14,747,000
------------ ------------ ------------
Income (loss) from continuing operations 25,000 (2,333,000) 1,158,000
------------ ------------ ------------
Other expense (income):
Interest expense and financing costs 1,370,000 683,000 435,000
Investment income (17,000) (48,000) (96,000)
------------ ------------ ------------
1,353,000 635,000 339,000
------------ ------------ ------------
Income (loss) before provision (benefit) for income taxes
from continuing operations (1,328,000) (2,968,000) 819,000
(Benefit) provision for income taxes (88,000) (825,000) 478,000
------------ ------------ ------------
Net income (loss) from continuing operations ( 1,240,000) ( 2,143,000) 341,000
Income from discontinued component (net of loss
on disposal of assets in 2004 of $155,000), net of tax 213,000 1,188,000 2,107,000
------------ ------------ ------------
Net income (loss) ( 1,027,000) ( 955,000) 2,448,000
============ ============ ============
Redeemable preferred stock dividend -- -- 1,451,000
------------ ------------ ------------
Net income (loss) available to common stockholders ($ 1,027,000) ($ 955,000) $ 997,000
Basic earnings (loss) per share from continuing operations ($ 0.40) ($ 0.69) $ 0.05
============ ============ ============
Diluted earnings (loss) per share from continuing operations ($ 0.40) ($ 0.69) $ 0.03
============ ============ ============
Basic income per share from discontinued component $ 0.07 $ 0.38 $ 0.28
------------ ------------ ------------
Diluted income per share from discontinued component $ 0.05 $ 0.26 $ 0.21
============ ============ ============
Net basic earnings (loss) per share ($ 0.33) ($ 0.31) $ 0.32
============ ============ ============
Net diluted earnings (loss) per share ($ 0.33) ($ 0.31) $ 0.24
============ ============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
3-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Class A
Total Common stock common stock
comprehensive --------------------------- ------------------------
Income (loss) Shares Amount Shares Amount
------------- --------- ---------- ------- -------
Balance, December 31, 2001 2,998,936 $6,000 100,000 $1,000
Comprehensive income:
Net income $2,448,000
Unrealized holding loss (148,000)
----------
Comprehensive income $2,300,000
===========
Exercise of stock options 9,300 - - -
Redeemable preferred dividends - - - -
--------- ------ ------- ------
Balance, December 31, 2002 3,008,236 6,000 100,000 1,000
========= ====== ======= ======
Comprehensive loss:
Net loss $ (955,000)
Unrealized holding loss (3,000)
----------
Comprehensive loss $ (958,000)
===========
Exercise of stock options 20,668 - - -
--------- ------ ------- ------
Balance, December 31, 2003 3,028,904 6,000 100,000 1,000
========= ====== ======= ======
Comprehensive loss:
Net loss ($1,027,000)
Unrealized holding loss -
----------
Comprehensive loss ($1,027,000)
===========
Exercise of stock options 41,455 1,000
--------- ------ ------- ------
Balance, December 31, 2004 3,070,359 $7,000 100,000 $1,000
========= ====== ======= ======
The accompanying notes are an integral part of
the consolidated financial statements.
4-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(continued)
Accumulated
Other Treasury stock
Paid-in Retained comprehensive ------------------------
capital earnings Income (loss) Shares Amount Total
---------- --------- ------- ------- -------- ----------
Balance, December 31, 2001 11,642,000 3,209,000 151,000 174,000 (727,000) 14,282,000
Comprehensive income:
Net income - 2,448,000 - - - 2,448,000
Unrealized holding loss - - (148,000) - - (148,000)
Comprehensive income
Exercise of stock options 21,000 - - - - 21,000
Redeemable preferred dividends - (1,451,000) - - - (1,451,000)
---------- --------- ------- ------- -------- ----------
Balance, December 31, 2002 11,663,000 4,206,000 3,000 174,000 (727,000) 15,152,000
========== ========= ======= ======= ======== ==========
Comprehensive loss: (955,000) (955,000)
Net loss (3,000) ( 3,000)
Unrealized holding loss
Comprehensive loss
Exercise of stock options 34,000 34,000
------------ ------------ ------- ------- ------------ ------------
Balance, December 31, 2003 11,697,000 3,251,000 - 174,000 (727,000) 14,228,000
============ ============ ======= ======= ============ ============
Comprehensive loss:
Net loss
Unrealized holding loss
Comprehensive loss (1,027,000) (1,027,000)
Exercise of stock options 124,000 125,000
------------ ------------ ------- ------- ------------ ------------
Balance, December 31, 2004 $ 11,821,000 $ 2,224,000 $ - 174,000 $ (727,000) $ 13,326,000
============ ============ ======= ======= ============ ============
5-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
-------------------------------------------------
2004 2003 2002
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $(1,027,000) $ (955,000) $ 2,448,000
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Bad debts -- 136,000 52,000
Depreciation 537,000 534,000 559,000
Amortization 1,389,000 1,062,000 913,000
(Increase) decrease in cash surrender value of
life insurance policies -- -- (93,000)
Interest income on restricted cash (13,000) (11,000) (4,000)
Deferred income taxes -- -- (84,000)
Non-cash restructuring and non-recurring charges,
including related inventory charge -- 1,157,000 --
Changes in assets (increase) decrease:
Accounts receivable (1,375,000) (844,000) (1,303,000)
Inventories (1,770,000) (584,000) 1,201,000
Prepaid expenses and other current assets 186,000 (338,000) 151,000
Other assets (111,000) (74,000) (277,000)
Changes in liabilities increase (decrease):
Accounts payable, income taxes payable and
accrued expenses and other liabilities 423,000 1,238,000 (1,641,000)
License deposits payable (129,000) 5,000 (124,000)
--------- --------- ---------
Net cash (used) provided by operating activities (1,890,000) 1,326,000 1,798,000
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of marketable securities -- 309,000 --
Acquisition of property and equipment (531,000) (268,000) (729,000)
--------- --------- ---------
Net cash (used) provided by investing activities (531,000) 41,000 (729,000)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt -- -- 3,516,000
Repayment of long-term debt (310,000) (389,000) (146,000)
Increase in due to factor 4,418,000 3,546,000 2,672,000
Redemption of participating preferred stock (3,000,000) (3,000,000) (5,000,000)
Issuance of common stock in connection with exercise
of options 125,000 34,000 21,000
Financing costs in connection with preferred stock refinance (100,000) (700,000) --
Payment of preferred stock dividend -- (1,451,000) (1,702,000)
Restricted cash -- -- (1,000,000)
--------- --------- ---------
Net cash provided (used) by financing activities 1,133,000 (1,960,000) (1,639,000)
--------- --------- ---------
Net decrease in cash and cash equivalents (1,288,000) (593,000) (570,000)
Cash and cash equivalents, beginning of year 1,937,000 2,530,000 3,100,000
--------- --------- ---------
Cash and cash equivalents, end of year $ 649,000 $ 1,937,000 $ 2,530,000
=========== =========== ===========
The accompanying notes are an integral part of
the consolidated financial statements.
6-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
1. Nature of business:
Everlast Worldwide Inc., a Delaware corporation and its subsidiaries
(collectively, the Company and herein referred to as "we", "us" and "our")
was organized on July 6, 1992. We are engaged in the design, manufacture,
marketing and sale of men's activewear, sportswear and outerwear (the
"Apparel Products") each featuring the widely-recognized Everlast(R)
trademark. Through December 31, 2004, we were also engaged in the design,
manufacture, marketing and sale of women's activewear. On December 17,
2004, Everlast announced the signing of the largest license agreement in
the Company's history whereby it licensed its United States women's apparel
category to Jacques Moret, Inc. effective January 1, 2005. We also
manufacture sporting goods related to the sport of boxing such as boxing
gloves, heavy bags, speed bags, boxing trunks, and miscellaneous gym
equipment that are sold through sporting goods stores, mass merchandisers,
catalog operations, gymnasiums, and martial arts studios. In addition, we
license the Everlast(R) trademark to numerous companies that source and
manufacture products such as men's, women's and children's apparel,
footwear, cardiovascular equipment, back to school stationery, eyewear,
sports bags, hats, fragrances, batteries, nutritional products and other
accessories. The Company is a member of the U.S. Sporting Goods
Manufacturers Association, the U.S. National Sporting Goods Association,
and the Canadian Sporting Goods Association.
2. Significant accounting policies:
a. Principles of consolidation:
Our accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
b. Cash and cash equivalents:
The Company considers all short-term investments with an original
maturity of three months or less to be cash equivalents. Cash equivalents
include commercial paper, money market funds and certain certificates of
deposit.
c. Cash concentration:
The Company maintains its cash and cash equivalents accounts at
various commercial banks. The cash balances are insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000 at each bank. At
December 31, 2004, the amount of bank balances in excess of the FDIC limit
is approximately $375,000.
d. Inventories:
Our inventories are valued at the lower of cost or market. Cost has
been derived principally using standard costs utilizing the first-in,
first-out method. We provide write-downs for finished goods when the net
realizable value has fallen below cost, and provide for slow moving or
obsolete raw materials and packaging.
e. Accounts receivable:
The accounts receivable arise in the normal course of business. It is
the policy of management to review the outstanding accounts receivable at
year end, as well as the bad debt write-offs experienced in the past, and
7-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
establish an allowance for doubtful accounts for uncollectible amounts. An
allowance for doubtful accounts of $10,000 and $412,000 has been
established as of December 31, 2004 and 2003, respectively.
f. Property and equipment:
Property and equipment are stated at cost. Depreciation is computed by
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the terms of the respective
leases or estimated life of the assets, whichever is shorter. Expenditures
for maintenance and repairs are charged to operations as incurred.
g. Fair value of financial instruments:
i. Cash and cash equivalents:
The carrying amounts reflected in the balance sheets for cash and
cash equivalents, none of which are held for trading purposes,
approximates fair value due to the short maturity of these
instruments.
ii. Accounts receivable, due to factor and accounts payable:
The carrying amounts of accounts receivable, due to factor and
accounts payable approximate their fair values because of the short
maturities of these instruments.
h. Intangible assets:
i. Goodwill:
Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangibles. SFAS 142 addresses the financial accounting and reporting
for acquired goodwill and other intangible assets. As a result of
adopting SFAS 142, goodwill is no longer amortized. Rather, goodwill
is subject to a periodic impairment test based upon its fair value.
During the years ended December 31, 2004, 2003 and 2002 the Company
completed its annual impairment review of goodwill, which indicated
that there was no impairment.
ii. Trademarks:
At December 31, 2004, the Company has trademarks acquired from a
merger in 2000 deemed to have a finite life. These costs are amortized
over 30 years. For the years ended December 31, 2004, 2003 and 2002,
trademark amortization expense was $913,000 for each year,
respectively.
Trademarks are as follows:
2004 2003
------------ -------------
Gross carrying amount of
trademarks, at cost $27,380,000 $27,380,000
Accumulated amortization 3,804,000 2,891,000
----------- -----------
Trademarks - net $23,576,000 $24,489,000
=========== ===========
8-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
The estimated aggregate amortization expense for each of the five
successive years is $913,000 per year.
i. Concentration of credit risk:
The Company routinely extends credit to companies for the sale of its
merchandise. This credit risk may be affected by changes in economic or
other conditions and may, accordingly, impact the Company's overall credit
risk. Management believes that the credit risk is mitigated by the strict
credit evaluation of those customers to which it extends credit. Reserves
for potential credit losses are maintained and such losses have been
immaterial to the Company's financial position and within management's
expectations.
j. Income taxes:
The Company and its wholly-owned subsidiaries, with the exception of
Everlast Sports International, Inc. ("ESI"), files a consolidated federal
income tax return. ESI qualifies as a Domestic International Sales
Corporation (DISC), which results in a deferral of tax on its income. No
deferred tax liability has been recorded, since the Company does not
anticipate the repatriation of earnings in the foreseeable future. ESI is
authorized to operate in Canada and files a separate Canadian income tax
return reporting only the income from that country. The provision, or
benefit, for income tax is based upon the consolidated taxable income
including that portion of ESI's Canadian income. Various state and local
income tax returns are filed pursuant to reporting requirements in those
locales.
k. Advertising expense:
The Company expenses advertising costs as they are incurred. As of
December 31, 2004, 2003 and 2002, the Company had incurred advertising and
promotional expenses of approximately $2.7 million, $2.4 million and $3.2
million, respectively.
l. Estimates:
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. The
accounting principles we use require us to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and amounts of income and expenses during the
reporting periods presented. We believe in the quality and reasonableness
of our critical accounting policies; however, it is likely that materially
different amounts would be reported under different conditions or using
assumptions different from those that we have consistently applied.
m. Shipping and handling costs:
Shipping and handling costs totaling approximately $1.9 million, $1.6
million and $1.6 million for the years ended December 31, 2004, 2003 and
2002, respectively, are included in selling and shipping expenses on the
statement of operations.
9-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
n. Accounting for stock based compensation:
On December 16, 2004, the FASB issued FASB Statement No. 123 (revised
2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. Generally, the approach in
Statement 123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an
alternative. Statement 123(R) must be adopted no later than July 1, 2005.
We expect to adopt Statement 123 (R ) in our third quarter commencing July
1, 2005.
As permitted by Statement 123, we currently accounts for share-based
payments to employees using APB Opinion 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options.
Accordingly, the adoption of Statement 123(R)'s fair value method will have
an impact on our result of operations, although it will have no impact on
our overall financial position. The impact of adoption of Statement 123(R)
cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we adopted
Statement 123(R) in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in the disclosure of
pro forma net loss and loss per share below.
Pro forma information regarding earnings and earnings per share is
required by SFAS No. 123, and has been determined as if we have accounted
for our stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest rates ranging from 1% to 2%; no dividend
yield; volatility factors of the expected market price of our common stock
of approximately 6% for fiscal years 2004 through 2002; and a
weighted-average expected life of the options of five years in each year.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because our stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of our
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Our pro
forma information is as follows:
2004 2003 2002
----------- ----------- -----------
Net income (loss) as reported $(1,027,000) $ (955,000) $ 2,448,000
Deduct: total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects 57,000 35,000 33,000
----------- ----------- -----------
Pro forma net income (loss) $(1,084,000) $ (990,000) $ 2,415,000
=========== =========== ===========
10-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
Earnings (loss) per share:
Basic - as reported $ (0.33) $ (0.31) $ .32
======== ======== =======
Basic - pro forma $ (0.35) $ (0.32) $ .32
======== ======== =======
Diluted - as reported $ (0.33) $ (0.31) $ .24
======== ======== =======
Diluted - pro forma $ (0.35) $ (0.32) $ .24
======== ======== =======
o. Foreign currency exchange rate gains and losses:
Foreign currency transactions are based on the functional currency of
the United States dollar. Translation gains and losses, if any, of such
transactions are included in the consolidated statements of operations.
p. Impairment of long-lived assets:
Long-lived assets such as property, plant and equipment and
trademarks, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If
the total of the expected future undiscounted cash flows is less than the
carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset.
q. Revenue recognition:
Product revenues are recognized upon shipment of inventory to the
customers. License revenues are recognized based upon the terms of the
underlying license agreements, when the amounts are reliably measurable and
collectability reasonably assured.
r. Deferred financing costs:
Eligible costs associated with obtaining debt financing are
capitalized and amortized over the related term of the applicable debt
instruments, which approximates the effective interest method.
s. Recent pronouncements:
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities", addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies EITF Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The principal difference between SFAS No. 146 and Issue
94-3 relates to SFAS No. 146's requirements for recognition of a liability
for a cost associated with an exit or disposal activity. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost as generally defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan.
Therefore, SFAS No. 146 eliminates the definition and requirements for
recognition of exit costs in Issue 94-3. SFAS No. 146 also establishes that
fair value is the objective for initial measurement of the liability. The
provisions of SFAS No. 146 are effective for exit or disposal activities
that we may initiate after December 31, 2002. Refer to Note 5,
Restructuring and Non-recurring Charges for our disposal and exit
activities related to our Bronx, New York facility.
11-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
3. Adoption of SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity"
In May 2003, FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 is effective for all financial instruments, in existence prior
to May 31, 2003, meeting this definition, at the beginning of the first
interim period beginning after June 15, 2003. The Company has adopted the
provisions of SFAS No. 150, effective July 1, 2003 for the third quarter
ending September 30, 2003. The Statement establishes standards for
classifying and measuring as liabilities certain financial instruments that
embody obligations of the issuer and have characteristics of both
liabilities and equity. The Company's Series A Redeemable Participating
Preferred Stock ("Preferred Stock") meets this definition, and thus has
been reclassified as a liability (current and long-term) on our
Consolidated Balance Sheets as of December 31, 2004 and 2003.
Application of SFAS No. 150 requires our Preferred Stock instruments
to be reclassified at its current carrying amount with no cumulative
adjustment recognized. In addition, dividends associated with our Preferred
Stock instrument are to be classified as interest expense commencing from
the three months ended September 30, 2003 onward. During the years ended
December 31, 2004 and 2003, no dividends have been classified as interest
expense due to our net loss. Dividends and other amounts paid or accrued
prior to reclassification of the instrument to a liability are not
reclassified as interest cost upon transition in accordance with SFAS No.
150.
12-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
4. Disposal of a component:
On December 17, 2004, we announced the signing of the largest license
agreement in our history whereby we licensed our United States women's
apparel category to Jacques Moret, Inc., effective January 1, 2005. We
believe that it is in our best interest to license our women's apparel
business as a result of the licensees' ability to source product cheaper,
due to its buying power, along with its expanded distribution available
from it presence in certain channels of distribution.
The following results of our women's apparel component have been
presented as income from a discontinued component in the accompanying
consolidated statements of operations:
2004 2003 2002
----------- ----------- -----------
Net sales $21,163,000 $24,916,000 $28,943,000
Costs and expenses 20,718,000 22,868,000 25,309,000
----------- ----------- -----------
Income before income taxes 445,000 2,048,000 3,634,000
=========== =========== ===========
Income taxes 232,000 860,000 1,527,000
----------- ----------- -----------
Income from discontinued
component $ 213,000 $ 1,188,000 $ 2,107,000
=========== =========== ===========
At December 31, 2004 inventory available for sale of approximately $1
million represents inventory of our women's apparel component that was
acquired by the licensee in January 2005. Payment for the inventory is
scheduled to be received during 2005.
5. Restructuring and non-recurring charges:
During the fourth quarter of fiscal 2003 we recorded charges
aggregating $2.1 million, before taxes, related to the relocation and
consolidation of our Bronx, New York manufacturing facility into our
Moberly, Missouri facility. Approximately $1.2 million of these charges
were non-cash in nature.
Commencing July 2003, we decided to pursue and execute a plan to close
the Bronx, New York facility. Our decision to close this facility was
largely the result of significant lease escalation costs expected at the
end of our existing lease term in April 2004 and our inability to reach
practical capacity at both the Bronx, New York and Moberly, Missouri
facilities. Accordingly, during the fourth quarter of fiscal 2003, we
completed the relocation and consolidation of the facilities.
The restructuring charge includes $2.1 million of costs associated
with the discontinuance of certain products, factory labor and related
overhead costs resulting from the idle capacity in the Bronx, New York
facility, severance, lease exit and other disposal costs. Of this $2.1
million of charges, our 2003 gross profit was reduced by $1.1 million
charged to cost of sales as required by accounting rules. At December 31,
2003, approximately $.5 million was accrued principally related to lease
exit costs which were paid in full during 2004. In addition, we wrote off
and disposed of approximately $.1 million of fixed assets. Additional
restructuring charges of $.4 million were incurred during the year ended
December 31, 2003 related to severance liabilities and related employee
costs and other disposal and lease exit costs.
13-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
6. Marketable equity securities:
The Company had marketable equity securities that are classified as
available-for-sale securities. These securities had been recorded at their
fair market value of $308,841 at December 31, 2002. A net unrealized
holding gain, amounting to $2,193 has been included in stockholders' equity
as of December 31, 2002. The securities were sold during 2003.
7. Due to factor:
Certain of the Company's accounts receivable are assigned without
recourse to a commercial factor. The amount due to the factor represents
advances received in excess of net sales assigned. The amount due to the
factor is net of a provision for future chargebacks of approximately
$275,000 and $215,000 at December 31, 2004 and 2003, respectively. Interest
is charged at 1% above prime on advances. This factoring arrangement is
collateralized by the Company's factored and non-factored accounts
receivable and certain finished goods, as defined.
8. Inventories:
Inventories consist of:
2004 2003
----------- -----------
Raw materials $ 2,657,000 $ 1,461,000
Work-in-process 688,000 1,706,000
Finished goods 8,417,000 7,845,000
----------- -----------
$11,762,000 $11,012,000
=========== ===========
9. Property and equipment:
2004 2003
----------- -----------
Land $ 309,000 $ 309,000
Buildings and building improvements 5,380,000 5,349,000
Furniture and fixtures 470,000 558,000
Machinery and equipment 4,041,000 3,679,000
Vehicles 95,000 265,000
----------- -----------
10,295,000 10,160,000
Less: accumulated depreciation 4,113,000 3,972,000
----------- -----------
$ 6,182,000 $ 6,188,000
=========== ===========
10. Cash surrender value, life insurance:
The Company is the owner of cash surrender value life insurance
policies on the life of a current stockholder and director. The face value
of these policies approximates $1.6 million. At December 31, 2004, the cash
value, net of outstanding loans of $1,073,000, is $308,000 and is included
in other assets. At December 31, 2003, the cash value, net of outstanding
loans of $957,000, was $261,000 and is included in other assets.
14-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
11. Long-term debt:
Long-term debt consists of the following:
2004 2003
---------- ----------
Term loan of $3,350,000 due in sixty monthly payments of principal and
interest, based on an amortization of 180 months, with a balloon payment
due on the sixtieth month. The interest rate is equal to the thirty day
LIBOR yield plus 4% (6.4% at December 31, 2004). The term loan is secured
by property and equipment having a net book value of $3,506,000. The term
loan requires maintenance of minimum cash flow coverage, as defined. A
letter of credit of $1,000,000 must be in place during the entire term of
this loan, or until no longer required. The Company's factor has issued
this letter of credit on behalf of the Company. As collateral for the
letter of credit, the Company has cash restricted as to withdrawal of
$1,028,000. 2,867,000 $3,088,000
Various equipment loans due in monthly installments of principal and
interest through 2005. The interest rates on these loans range from 7.50%
to 8.77% 25,000 113,000
---------- ----------
2,892,000 3,201,000
Less current maturities 249,000 335,000
---------- ----------
$2,643,000 $2,866,000
========== ==========
Annual maturities of long-term debt are approximately as follows:
Twelve months ending December 31, 2005 $ 249,000
2006 223,000
2007 2,420,000
12. Series A Redeemable Participating Preferred Stock and Note Payable:
On October 24, 2000, the Board of Directors designated the issuance of
45,000 shares (1,000,000 total preferred shares authorized) $.01 par value
of Series A Redeemable Preferred Stock (the "preferred shares"). These
preferred shares were issued pursuant to the merger agreement among the
Company, Everlast Holding Corp. and Active Apparel New Corp., a
wholly-owned subsidiary of the Company, and are recorded at their fair
value. The preferred shares have priority liquidation and dividend rights
over other securities issued.
As part of the merger agreement, the Company is to redeem 5,000 shares
($5,000,000 redemption value) on every December 31 until all of the shares
have been redeemed. The Company has the option to redeem all of the
preferred shares at the end of any quarter or an additional amount greater
than the mandatory redemption at the end of any year (December 31st). The
Company is required to pay 105% of the redemption value for any optional
redemption that is made.
15-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
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 below. As a further
condition of this refinance, the Company incurred financing costs
aggregating $800,000 of which $700,000 was paid in December 2003, $100,000
in January 2004.
If the Company fails to make a mandatory redemption payment within
thirty days after it is due, all licenses and trademarks obtained pursuant
to the merger will be assigned back to the former stockholders of Everlast,
effective 60 days following the assignment, if not remedied.
Commencing on the date of issue, the preferred shares accrue dividends
equal to two-thirds (2/3) of the "net after tax profits" multiplied by the
"outstanding redeemable percentage." Net after tax profits is defined in
the agreement as net income after taxes (pursuant to generally accepted
accounting principles) plus goodwill amortization as it relates to the
merger, plus compensation from the granting and the exercise of the
Company's employee stock options. Outstanding redeemable percentage is
defined in the agreement as the aggregate redemption value of the preferred
shares outstanding as of January 1st divided by $45 million.
The percentage of net income (as defined) to be paid to holders of
preferred stock is as follows:
Twelve months ending December 31, 2005 37.0%
2006 29.6%
2007 22.2%
2008 14.8%
2009 7.4%
Dividends are due on March 31st of each succeeding fiscal year. As of
December 31, 2004, the Company did not have accrued dividends on these
preferred shares due to its net loss.
If a dividend payment is not made when scheduled, the Company will be
subject to the same terms and conditions as a default on a mandatory
redemption payment.
Minimum redemption amounts, as amended for the aforementioned
refinance, including the repayment of the notes payable are as follows:
16-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
Twelve months ending December 31, 2005 $ 3,000,000
2006 3,000,000
2007 5,000,000
2008 13,000,000
2009 5,000,000
13. Commitments and contingencies:
a. Lease commitments:
The Company has a lease for office and showroom space, which expires
on November 30, 2008.
At December 31, 2004, future minimum rental payments required under
the noncancellable leases are approximately as follows:
Twelve months ending December 31, 2005 $ 408,000
2006 408,000
2007 408,000
2008 374,000
----------
Total $1,598,000
==========
Rent expense for the three years ended December 31, 2004, 2003 and 2002 was
$419,000, $746,000 and $818,000, respectively.
b. Employment agreements:
i. The Company has an employment agreement with its President and
Chief Executive Officer through the term of the agreement. The
initial term of the agreement expires on December 31, 2005, but
continues thereafter for additional one-year periods unless
either the President and Chief Executive Officer of the Company
or the Board of Directors gives the other ninety days prior
written notice of non-renewal.
The agreement also includes a noncompete clause for a period of
one year following its expiration or termination.
ii. The Company has an employment agreement with a senior vice
president with an initial term of five years, expiring September
24, 2005. The agreement will automatically renew for successive
one-year terms unless terminated by either party upon 60 days
prior written notice.
The minimum payments for base salaries pursuant to the employment
agreements are approximately as follows:
Twelve months ending December 31, 2005 $ 782,000
17-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
c. Consulting agreement:
The Company has a consulting agreement with an individual to provide
services with respect to the redeemable participating preferred stock (note
12). The term of the agreement is effective until all shares of the
redeemable preferred stock have been redeemed by the Company. The
consultant will receive $60,000 annually throughout the duration of the
agreement.
d. Contingencies:
i. On December 20, 2000, a claim was brought against the Company,
its subsidiary (EWBH), and two officers of the Company. The
complaint was initiated by the EWBH's licensing representative
(the "plaintiff") in the Supreme Court of the State of New York
(the "Court"). The plaintiff alleged breach of contract, tortuous
interference with contractual relations, tortuous interference
with prospective business relations and unjust enrichment
stemming from the merger of the Company completed on October 24,
2000.
On November 30, 2001, the claims against the officers were
dismissed by the Supreme Court. On June 27, 2002, the Appellate
Divisions unanimously affirmed the order dismissing the
plaintiff's claims.
On December 23, 2002, the case against the Company was dismissed.
Plaintiff's subsequently filed a motion seeking permission to
further appeal its claims to the Court of Appeals as well as
reasserting its breach of contract claims in a separate demand
for arbitration. The Plantiff's appeal of that portion of the
decision dismissing its claim for a breach ofcontract, was
unanimously affirmed by the Appellate Division on December 16,
2003. Hearings in the arbitration commenced November 2004 and
were ongoing as of the date of this report.
After reviewing this case with the Company's legal counsel,
management believes that there is no merit to plaintiff's motion
seeking to further appeal the dismissal of its lawsuit or to the
breach of contract claims asserted in its demand for arbitration
and intends to continue to contest the matter vigorously and
expects to prevail in arbitration.
ii. On October 17, 2000, a former heavyweight boxing champion and a
corporation claimed $2.0 million of damages against the Company
and one of its subsidiaries for alleged unauthorized use of his
name and image. The Company's insurance carrier assumed the
defense of the case.
This case was settled on February 4, 2002 for $300,000, of which
$50,000 was paid by the insurance carrier, $137,500 was paid by
the former stockholder of the Company's subsidiary and $112,500
was paid by the Company.
iii. There are product liability claims that arise against the Company
from time to time. Such actions are usually for amounts greatly
in excess of the payments, if any, which may be required to be
made. It is the opinion of management, after reviewing such
actions with legal counsel to the Company, that the ultimate
liability, which might result from such actions, would not have a
material adverse effect on the Company's financial position.
18-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
e. Pension plan:
The Company formerly belonged to a union sponsored multi-employer
pension plan which covered its union employees in the Bronx, New York. The
Company's contributions to the Plan, incurred during the years ended
December 31, 2004, 2003 and 2002 were $0, $74,327 and $102,258,
respectively. As part of the relocation and consolidation of this facility,
together with the expiration of the union contract, the Company is no
longer required to sponsor this multi-employer pension plan due to the
termination of these employees.
Information as to the Company's portion of accumulated plan
benefits and plan assets is not reported separately by the pension plan. A
contingent liability may exist because an employer under the Employee
Retirement Income Security Act, upon withdrawal from a multi-employer
benefit plan, is required to continue to pay its proportionate share of the
plan's unfunded vested benefits, if any. In November 2004 we were notified
by the Plan's Trustee that a minimum withdrawal liability exists
aggregating $425,000. In January 2005, we filed an objection to this claim
based upon the information provided by the Trustee's attorney and actuarial
information supplied. In our opinion, we believe a possible withdrawal
liability exists between $0 and $200,000. At December 31, 2004 no provision
for this contingency has been recorded.
f. Profit-sharing plans:
We maintain two 401(k) profit-sharing plans for all qualified
full-time employees. The plans contain a profit sharing component with tax
deferred contributions to each employee based upon certain criteria and
also permits employees to make contributions up to the maximum limits
allowed by Internal Revenue Code Section 401(k). Prior to January 1, 2004,
we matched 40% of the first 5% of each employee's contributions on one of
the plans. We no longer match contributions in this plan and have never
matched contributions on our other plan. The Company's contributions were
approximately $40,000 for each of the years ended December 31, 2003 and
2002.
14. Licensing revenues:
i. The Company, as licensor, has numerous licensing and distribution
agreements with varying expiration dates. Pursuant to the terms
of the licensing agreements, the Company is scheduled to receive
approximate minimum royalty payments, exclusive of renewal option
provisions which would trigger additional minimum royalty
payments, as follows:
Twelve months ending December 31, 2005 $10,116,000
2006 7,972,000
2007 7,514,000
2008 5,867,000
2009 3,810,000
2010 and thereafter 7,532,000
19-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
Net licensing revenue generated for the years ended December 31, 2004,
2003 and 2002 amounted to $9,059,000, $6,669,000 and $5,501,000,
respectively. These licensing revenues are reflected net of related
expenses of $679,000, $845,000 and $711,000.
ii. In connection with the license agreements, certain licensees are
required to make a specified minimum cash deposit to the Company. The
deposit is refundable to the licensee upon expiration of the license
agreement. At December 31, 2004 and 2003, the amounts on deposit
totaled $440,000 and $569,000, respectively. These amounts are
reflected as liabilities to licensees on the balance sheet.
15. Stock option plans:
i. 1993 Stock Option Plan:
A maximum of 443,900 options were available to be granted pursuant to
this plan, which terminated in November 2003. Accordingly, no further
stock options grants can be made under this plan going forward.
Options previously granted prior to November 2003 vest in three years
and have a term of ten years. Options granted pursuant to this plan
were designated by the Board of Directors as either non-qualified or
incentive.
The option price of shares designated as nonqualified were determined
by the Board of Directors each year for the following year at 85% of
fair market value and in the case of incentive stock options were no
less than the fair market value of the shares on the date of the
grant.
ii. 1995 Non-employee Director Stock Option Plan:
The 1995 non-employee director stock option plan provides for
automatic grants of options to purchase 3,000 shares and thereafter
yearly grants to purchase 3,000 shares of common stock to each active
director serving on the Board at the time of the grant who is not an
officer or employee of the Company. The Director Plan provides
additional grants of options to non-employee directors of 100 shares
to the Chairman of a board committee and 200 shares to the Chairman
and Secretary of the Board of Directors. Options granted vest in three
years and have a term of seven years.
iii. 2000 Stock Option Plan:
The Board of Directors will designate options granted pursuant to this
plan as incentive or nonqualified. The number of the Company's common
stock, par value $.002 per share, subject to this plan is 1,000,000.
The maximum allowable grant to any individual in any one year is
600,000 shares. In the case of incentive options, the exercise price
20-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
shall be at minimum equal to the fair market value of the Company's
common stock on the day the option is granted. In the case of
non-qualified options, the exercise price shall be 80% or more of the
fair market value of the Company's common stock on the day the option
is granted. Options granted to a stockholder holding more than 10% of
the combined voting power, shall have exercise prices equal to or
greater than 100% and 110% of the fair market value of the Company's
common stock on the date the option is granted for incentive and
non-qualified options, respectively. The Board of Directors can make
an appropriate and equitable adjustment in the number and kind of
shares reserved for issuance under this plan and in the number and
option price of shares for outstanding options in the event of a
capital change in the Company. The options granted vest immediately
and have a ten-year term.
Pursuant to the merger of Everlast Worldwide, Inc. on October 24, 2000
the Board of Directors granted the President and CEO of the Company,
125,000 non-qualified stock options with an exercise price of $4.00
and an additional 380,000 non-qualified stock options with an exercise
price of $13.00. These options vested immediately and expire five
years from the grant date.
SHARES
-----------------------------------------------------------------
1995 Weighted
2000 1993 Non-employee average
Stock Stock director stock exercise
2004 option plan option plan option plan Total price
---- ----------- ----------- ----------- ----- -----
Outstanding at January 1 505,000 320,211 55,400 880,611 $7.73
Granted 185,000 - 13,800 198,800 $2.77
Cancelled (2,500) (78,500) (3,356) (84,356) $5.70
Exercised - (38,855) (2,600) (41,455) $3.00
----------- ----------- ----------- ------
Outstanding at December 31 687,500 202,856 63,244 953,600 $7.08
=========== =========== ========== =======
Exercisable at December 31 505,000 199,500 43,802 748,302 $8.26
=========== =========== ========== =======
21-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
SHARES
-----------------------------------------------------------------
1995 Weighted
2000 1993 Non-employee average
Stock Stock director stock exercise
2003 option plan option plan option plan Total price
---- ----------- ----------- ----------- ----- -----
Outstanding at January 1 505,000 328,679 58,100 891,779 $7.63
Granted - - 9,500 9,500 $3.83
Cancelled - - - - -
Exercised - (8,468) (12,200) (20,668) $1.66
Outstanding at December 31 505,000 320,211 55,400 880,611 $7.73
=========== =========== ========== =======
Exercisable at December 31 505,000 246,678 42,600 844,778 $7.92
=========== =========== ========== =======
SHARES
-----------------------------------------------------------------
1995 Weighted
2000 1993 Non-employee average
Stock Stock director stock exercise
2002 option plan option plan option plan Total price
---- ----------- ----------- ----------- ----- -----
Outstanding at January 1 505,000 341,679 64,200 910,879 $7.52
Granted 50,500 9,500 60,000 $2.61
Cancelled - (63,500) (6,300) (69,800) $2.69
Exercised - - (9,300) (9,300) $2.23
----------- ----------- ----------- ------
Outstanding at December 31 505,000 328,679 58,100 891,779 $7.63
=========== =========== ========== =======
Exercisable at December 31 505,000 244,512 42,267 842,279 $7.92
=========== =========== ========== =======
22-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
Outstanding Exercisable
Weighted- Weighted- Weighted-
average average average
Exercise price contractual life exercise exercise
range Shares remaining price Shares price
$ .85 - $ 2.35 135,000 4.13 years $ 2.22 132,000 $2.21
$ 2.36 - $ 2.99 185,000 9.56 years 2.75 - -
$ 3.00 - $ 3.97 120,000 5.27 years 3.51 107,000 3.57
$ 4.00 - $ 6.25 126,000 5.77 years 3.51 121,000 4.01
$ 9.38 - $13.00 388,000 5.70 years 12.91 388,000 12.91
------- -------
Total 954,000 4.33 years 6.55 748,000 8.23
======= =======
The weighted-average grant-date fair value for options granted during
the years ended December 31, 2004, 2003 and 2002 was $2.77, $4.01 and
$2.80, respectively.
23-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
16. Income taxes:
For the years ended December 31, 2004, 2003 and 2002, the Company's
provision (benefit) for income taxes consisted of the following:
2004 2003 2002
----------- ----------- -----------
Current tax provision (benefit):
Federal $ (153,000) $ (63,000) $ 1,590,000
State and local (70,000) 20,000 410,000
Foreign - 120,000 89,000
----------- ----------- -----------
(223,000) 77,000 2,089,000
----------- ----------- -----------
Deferred tax benefit:
Federal 344,000 (42,000) $ (29,000)
State and local 21,000 - (15,000)
Foreign - - (40,000)
----------- ----------- -----------
365,000 (42,000) (84,000)
----------- ----------- -----------
Total $ 142,000 $ 35,000 $ 2,005,000
=========== =========== ===========
Income tax provision relating to discontinued operation was $230,000,
$860,000 and $1,527,000 for the years ended December 31, 2004, 2003 and
2002, respectively.
Included in prepaid expenses and other current assets is a deferred
tax asset of $197,000 at December 31, 2003 and a net deferred tax liability
of $86,000 at December 31, 2004, included in accrued expenses and other
liabilities, which primarily consists of the temporary difference between
the book and tax basis of inventory, provision for bad debts, and the
future benefit of a net operating loss carryforward.
The following is a reconciliation of the reported amount of income tax
expense to the amount of income tax expense that would result from applying
domestic federal statutory rates to income before income taxes:
Years ended December 31,
2004 2003 2002
------- ------- -----
Federal income tax rate (34.0%) (34.0%) 34.0%
State taxes, net of federal income tax benefit (5.5) 2.2 6.1
Nondeductible amortization of
intangible assets and other items 45.0 27.6 7.9
Foreign income taxes - 11.1 2.0
Work credit and other credits - (4.9) (4.4)
Other 10.7 1.8 (.6)
------- ------- -----
16.2% 3.8% 45.0%
======= ======= =====
17. Economic dependency:
For each of the years ended December 31, 2004, 2003 and 2002, one
customer accounted for approximately 13% of sales, respectively.
24-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
18. Earnings per share:
We report basic and diluted earnings (loss) per share in accordance
with SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). Basic earnings
(loss) per share excludes the dilutive effects of options and other
contingent consideration that was given as part of the merger in October
2000 of Everlast Worldwide, Inc. Diluted earnings per share includes only
the dilutive effects of common stock equivalents such as stock options and
contingent stock consideration.
The following table sets forth the computation of basic and diluted
earnings (loss) per share pursuant to SFAS No. 128:
2004 2003 2002
----------- ----------- -----------
Net income (loss) available to common stockholders:
Net income (loss) $(1,027,000) $ (955,000) $ 2,448,000
Redeemable participating
preferred stock dividends - - (1,451,000)
----------- ----------- -----------
$(1,027,000) $ (955,000) $ 997,000
=========== =========== ===========
2004 2003 2002
----------- ----------- -----------
Basic weighted average
common stock outstanding 3,132,000 3,108,000 3,101,000
Effect of dilutive securities:
Stock options - - 48,000
Contingent consideration - - 990,000
----------- ----------- -----------
Diluted weighted average
common stock outstanding 3,132,000 3,108,000 4,139,000
=========== =========== ===========
Basic earnings (loss) per common share $ (0.33) $ (0.31) $ 0.32
=========== =========== ===========
Diluted earnings (loss) per common share (a) $ (0.33) $ (0.31) $ 0.24
=========== =========== ===========
(a) As a result of the net loss in 2004 and 2003, the dilutive effect of
options and contingent consideration (1,091,000 and 1,434,000,
respectively) are not shown as the results would be anti-dilutive.
As part of the Company's October 2000 acquisition of Everlast Holding Corp
(EHC), contingent consideration may be required to be paid to the former owners
of EHC. This consideration may be in the form of cash, or at the Company's
option, payable in common shares. The consideration will be paid if the
Company's stock does not meet a guaranteed share price of $13.00. This guarantee
pertains to 380,000 outstanding shares, of which 38,000 shares are subject to an
October 2005 payment or issuance date and the remaining 342,000 shares are
subject to an October 2007 payment or issuance date.
25-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
19. Stockholders' Equity:
The holder of the Class A common stock is entitled to five votes per share
on all matters upon which each holder of common stock is entitled to vote.
20. Cash flow information:
a. Supplemental disclosures of cash flow information:
2004 2003 2002
---------- ---------- ----------
Cash paid during the year for:
Interest $1,266,000 $1,000,000 $ 756,000
Income taxes 3,000 600,000 1,576,000
21. Recently issued accounting standards:
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No.43, Chapter 4." SFAS amends Accounting Research Bulletin
("ARB") No.43, Chapter 4, to clarify that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials (spoilage) should be
recognized as current-period charges. In addition, SFAS No.151 requires that
allocation of fixed production overhead to inventory be based on the normal
capacity of the production facilities. SFAS No.151 is effective for inventory
costs incurred during the fiscal years beginning after June 15, 2005. The
Company is currently assessing the impact SFAS No.151 will have on the results
of operations, financial position or cash flows.
22. Quarterly financial data (unaudited):
As previously noted in our financial statements, in the fourth quarter
of fiscal 2004, we entered into a license agreement with a licensee whereby
effective January 1, 2005, this licensee will source, market and distribute our
United States women's apparel business. In accordance with FASB 144, we have
selected to treat the women's apparel business as a discontinued component and
as such, all prior periods herein have been adjusted to exclude the operations
of our women's apparel business and shown as a discontinued component, net of
tax, in our statements of operations and unaudited quarterly financial date for
fiscal 2004 and 2003 as summarized as follows:
2004
----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ -----------
Net revenues $ 9,939,000 $ 9,166,000 $ 11,101,000 $ 14,793,000
Gross profit 4,914,000 4,355,000 3,782,000 3,548,000
Discontinued component (279,000) 347,000 95,000 50,000
Net income (loss) available to common
stockholder's 188,000 79,000 (250,000) (1,045,000)
Earnings (loss) per share - basic (b) $ 0.06 $ 0.03 ($ 0.08) ($ 0.33)
Earnings (loss) per share - diluted $ 0.04 $ 0.02 ($ 0.08) ($ 0.33)
26-f
EVERLAST WORLDWIDE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 AND 2002
2003
---------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------- ------------- ------------- ------------
Net Revenues $ 7,280,000 $ 8,658,000 $ 11,591,000 $ 12,259,000
Gross profit 3,628,000 3,613,000 4,045,000 3,440,000
Restructuring and non-recurring
charges -- -- -- 1,095,000
Discontinued component 253,000 229,000 239,000 468,000
Net income (loss) available to
common stockholder's 16,000 111,000 104,000 (1,186,000)
Earnings per share - basic $ 0.01 $ 0.04 $ 0.03 $ (0.38)
Earnings per share - diluted $ 0.00 $ 0.02 $ 0.02 $ (0.38)
(a) Included within gross profit in the fourth quarter of fiscal 2003 are
restructuring charges aggregating $1.1 million related to inventory
write-downs, which for accounting purposes must be classified as a
reduction of gross profit.
(b) As a result of the net loss in certain of the periods presented in fiscal
2004 and 2003, the dilutive effect of options and contingent stock
consideration are not shown, as the results would be anti-dilutive.
27-f