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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------
Commission File Number: 0-25918
--------
EVERLAST WORLDWIDE INC.
-----------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 13-3672716
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1350 BROADWAY, SUITE 2300
NEW YORK, NY 10018
(Address of Principal Executive Offices)
(212) 239-0990
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year if changed since last report)
Indicate by check whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ----
Indicate by check whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange act)
Yes No X
----- -----
The number of common equity shares outstanding as of May 10, 2005 was
3,159,359 shares of Common Stock, $.002 par value, and 100,000 shares of Class A
Common Stock, $.01 par value.
INDEX
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
March 31, 2005 (Unaudited) and December 31, 2004 3
Consolidated Statements of Operations -
Three Months ended March 31, 2005 and 2004 (Unaudited) 4
Consolidated Statements of Cash Flows -
Three Months ended March 31, 2005 and 2004 (Unaudited) 5
Notes to Consolidated Financial Statements -
Three Months ended March 31, 2005 - (Unaudited) 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Items 1,3,4 and 5 not applicable
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 6. Exhibits and Current Reports on Form 8-K 16
SIGNATURES 17
2
EVERLAST WORLDWIDE INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2005 2004
--------------- ---------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 201,000 $ 649,000
Accounts receivable - net 7,016,000 9,781,000
Inventories 10,551,000 11,762,000
Inventories of discontinued component - 1,020,000
Prepaid expenses and other current assets 1,699,000 921,000
----------- -----------
Total current assets 19,467,000 24,133,000
Restricted cash 1,034,000 1,028,000
Property and equipment, net 6,101,000 6,182,000
Goodwill 6,718,000 6,718,000
Trademarks, net 23,348,000 23,576,000
Other assets 3,078,000 3,119,000
----------- -----------
$59,746,000 $64,756,000
=========== ===========
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 7,986,000 11,316,000
Current maturities of long term debt 234,000 249,000
Accounts payable 3,632,000 6,530,000
Accrued expenses and other current liabilities 675,000 1,062,000
Deferred licensing revenues 1,525,000 -
------------ ------------
Total current liabilities 17,052,000 22,157,000
License deposits payable 445,000 440,000
Series A Redeemable participating preferred stock 22,000,000 22,000,000
Notes payable 4,000,000 4,000,000
Other liabilities - 190,000
Long term debt, net of current maturities 2,609,000 2,643,000
------------ ------------
Total liabilities 46,106,000 51,430,000
------------ ------------
Stockholders' equity:
Common stock, par value $.002; 19,000,000 shares
authorized; 3,333,359 issued, 3,159,359 outstanding,
3,070,359 in 2004 8,000 7,000
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000 1,000
Paid-in capital 12,226,000 11,821,000
Retained earnings 2,132,000 2,224,000
------------ ------------
14,367,000 14,053,000
Less treasury stock, at cost (174,000 common shares) (727,000) (727,000)
------------ ------------
13,640,000 13,326,000
------------ ------------
$ 59,746,000 $ 64,756,000
============ ============
See accompanying notes to the financial statements.
Note: The balance sheet at December 31, 2004 has been derived from the audited
financial statements at that date.
3
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2005 2004
-------------------------------------
(Unaudited)
Net sales $9,121,000 $7,864,000
Net license revenues 3,100,000 2,076,000
---------- ---------
Net revenues 12,221,000 9,940,000
---------- ---------
Cost of goods sold 7,538,000 5,796,000
---------- ---------
Gross profit 4,683,000 4,144,000
---------- ---------
Operating expenses:
Selling and shipping 2,173,000 1,683,000
Costs in connection with warrant issuance 182,000 -
General and administrative 1,596,000 1,658,000
Amortization 228,000 228,000
---------- ---------
4,179,000 3,569,000
---------- ---------
Income from continuing operations 504,000 575,000
---------- ---------
Other income (expense):
Interest expense and financing costs (554,000) (315,000)
Interest expense on redeemable participating preferred
stock - (150,000)
Investment income 6,000 4,000
---------- ---------
(548,000) (461,000)
---------- ---------
Income (loss) before provision (benefit) for income taxes (44,000) 114,000
from continuing operations
Provision (benefit) for income taxes (23,000) 128,000
---------- ---------
Net loss from continuing operations ($21,000) ($14,000)
Income (loss) from discontinued component, net of tax (72,000) 202,000
---------- ---------
Net income (loss) available to common shareholders ($93,000) $188,000
========== =========
Basic loss per share from continuing operations ($0.01) ($0.00)
Diluted loss per share from continuing operations ($0.01) ($0.00)
Basic income (loss) per share from discontinued component ($0.02) $0.06
Diluted income (loss) per share from discontinued component ($0.02) $0.04
Net basic earnings (loss) per share ($0.03) $0.06
Net diluted earnings (loss) per share ($0.03) $0.04
4
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
-----------------------------------
2005 2004
-----------------------------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) ($93,000) $ 188,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 257,000 300,000
Amortization 228,000 228,000
Non-cash cost in connection with warrant issuance 182,000 -
Interest income on restricted cash (6,000) (2,000)
Changes in assets (increase) decrease:
Accounts receivable 2,765,000 1,640,000
Inventories 2,230,000 605,000
Prepaid expenses and other current assets (777,000) (41,000)
Other assets (89,000) 6,000
Changes in liabilities increase (decrease):
Accounts payable, accrued expenses
and other current liabilities (3,476,000) (1,164,000)
Deferred licensing revenues 1,525,000 -
License deposits payable 5,000 30,000
------------ -----------
Net cash provided by operating activities 2,751,000 1,790,000
------------ -----------
Cash flows used by investing activities:
Purchases of property and equipment (45,000) (187,000)
------------ -----------
Cash flows from financing activities:
Repayments to factor (3,330,000) (2,766,000)
Proceeds from exercises of stock options 224,000 -
Payment of financing costs - (100,000)
Repayments of debt instruments (48,000) (80,000)
------------ -----------
Net cash used by financing activities: (3,154,000) (2,946,000)
Net decrease in cash and cash equivalents (448,000) (1,343,000)
Cash and cash equivalents, beginning of period 649,000 1,937,000
------------ -----------
Cash and cash equivalents, end of period $ 201,000 $ 594,000
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $319,000 $ 280,000
Income taxes 7,000 -
See accompanying notes to financial statements.
5
EVERLAST WORLDWIDE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. THE COMPANY AND BASIS OF PRESENTATION:
Everlast Worldwide, Inc. (herein referred to as "the Company", "we", "us",
and "our") is a manufacturer, marketer and licensor of sporting goods and
apparel under the Everlast brand name. The consolidated financial
statements of the Company are presented herein as of March 31, 2005 and for
the three months ended March 31, 2005 and 2004 are unaudited and, in the
opinion of management, include all adjustments (consisting only of normal
and recurring adjustments) necessary for a fair presentation of financial
position and results of operations. Such financial statements do not
include all of the information and footnote disclosures normally included
in audited financial statements prepared in accordance with generally
accepted accounting principles. The accompanying unaudited consolidated
financial statements have been prepared in accordance with the instructions
to Form 10-Q. The results of operations for the three month period ended
March 31, 2005 are not necessarily indicative of the results that may be
expected for any other interim periods or the full year ending December 31,
2005. The Company has reviewed the status of its legal contingencies and
has disclosed an update below from that disclosed on Form 10-K for the year
ended December 31, 2004.
2. EARNINGS PER SHARE:
We report basic and diluted earnings per share in accordance with SFAS
Statement No. 128 "Earnings Per Share" ("SFAS No. 128"). Basic earnings per
share amounts are computed based on the weighted average number of shares
actually outstanding during the period. Diluted earnings per share amounts
are based on an increased number of shares that would be outstanding
assuming the exercise of dilutive stock options, warrants and contingent
consideration pursuant to the Merger Agreement dated October 24, 2000.
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128:
6
Three Months Ended
March 31,
------------------------
2005 2004
------------------------
Numerator:
Numerator for basic and diluted
earnings per common share --
Net income (loss) available to common
stockholders ($93,000) $ 188,000
--------- ---------
Denominator:
Denominator for basic earnings per
common share --
Weighted average shares
outstanding during the period 3,172,337 3,128,904
--------- ---------
Effect of diluted securities: -
Stock options and warrants (a) 36,619
Contingent stock consideration related to the
Merger(a) - 1,550,811
--------- ---------
- 1,587,430
Denominator for diluted earnings per
common share --
adjusted weighted average shares
and assumed conversions 3,172,337 4,716,334
--------- ---------
Basic net income (loss) per common share ($ 0.03) $ 0.06
======================
Diluted net income (loss) per common share ($ 0.03) $ 0.04
======================
As a result of the net loss in the first quarter of fiscal 2005, the
dilutive effect of options, warrants and contingent consideration
(aggregating 456,346 equivalent shares) are not shown as the results would
be anti-dilutive.
3. 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 was 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 its 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 for the three months ended March 31, 2004:
7
March 31,
2004
----------
Net sales $6,231,000
Costs and expenses 5,883,000
----------
Income before income taxes 348,000
==========
Income taxes 146,000
----------
Income from discontinued component $ 202,000
==========
During the three months ended March 31, 2005, the Company incurred
duplicative warehousing and logistics costs aggregating $72,000, net of
tax, associated with this discontinued component.
4. CONTINGENCIES:
On December 20, 2000, a lawsuit 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 those claims.
On December 23, 2002, the balance of the lawsuit against the Company was
dismissed by summary judgment. Plaintiff 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 Plaintiff'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. Hearings in the arbitration
commenced November 2004. In April 2005, the Company was notified that the
arbitrator's award held that Everlast's termination of Hansen's
representation agreement was void and declared not to be terminated. The
arbitrator's award may not be enforced until it is confirmed by the Supreme
Court upon application made within one year. As of May 6, 2005, the Supreme
Court had not confirmed the award. The Company plans to file a motion in
the Supreme Court, New York County seeking an order to vacate the award.
Management and corporate counsel believe that the award should be vacated
on the grounds of arbitrator misconduct and that the arbitrators exceeded
their authority in rendering their award and that said award was in
violation of public policy, and upon grounds. If the Company's motion to
vacate the award is not granted, it would be required to pay Hansen
approximately $375,000 in back commissions. The Company believes it has a
good chance in prevailing on its motion.
5. REDEEMABLE PARTICIPATING PREFERRED STOCK AND NOTES PAYABLE:
The percentage of net income, as defined in the Company's October 24, 2000
Merger Agreement, to be paid to holders of the Preferred Stock for the
annual dividend on after tax profits is as follows:
8
Twelve months ending December 31, 2005 37.0%
2006 29.6%
2007 22.2%
2008 14.8%
2009 7.4%
On January 13, 2004 we announced that we had entered into an Agreement on
December 14, 2003 with the Principal Preferred Stockholder, modifying its
annual minimum redemptions. Under the terms of the Agreement, in lieu of a
cash payment for the redemption of a portion of their Series A Preferred
Stock, $2,000,000 for each of the four years commencing December 14, 2003,
through December 14, 2006, will be converted into four term loans
("Notes"), which $4,000,000 have been so-converted as of March 31, 2005.
The Notes are evidenced by four promissory notes from the Company which
shall provide for the payment of interest and deferred finance costs.
Interest and deferred finance costs are to be paid at the combined annual
rate of 9.5% per annum on the aggregate $8 million of notes during each of
the years 2004 through 2007, and 10% during 2008 payable each December 14th
until maturity on December 14, 2008. The Company shall have the right to
pre-pay the promissory notes in full, with no prepayment fees, prior to
December 14, 2008 together with all unpaid interest and deferred financing
costs due at the time of pre-payment. There are no changes to the existing
preferred dividend formula currently being used on the outstanding
redeemable percentage of the Series A Preferred Stock, mentioned above. As
a further condition of this refinance, the Company paid financing costs
aggregating $800,000 of which $700,000 was paid by December 2003 and
$100,000 was paid in January 2004.
The minimum redemption amounts, as amended for the aforementioned
refinance, including the repayment of the notes payable requirements are as
follows:
December 2005 3,000,000
2006 3,000,000
2007 5,000,000
2008 13,000,000
2009 5,000,000
6. INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
March 31, 2005 December 31, 2004
-------------- -----------------
Raw materials $ 1,914,000 $ 2,657,000
Work-in-process 760,000 688,000
Finished goods 7,877,000 8,417,000
----------- -----------
$10,551,000 $11,762,000
=========== ===========
9
7. ACCOUNTING FOR STOCK BASED COMPENSATION:
The Company accounts for its stock-based compensation plans using the
intrinsic value method under APB Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25") and related Interpretations. Under APB 25,
when the exercise price of our employee stock options are at least equal to
the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
As of December 2002, the Company adopted SFAS No. 148, "Accounting for
Stock-Based Compensation-Transaction and Disclosure, an Amendment of FASB
No. 123." SFAS No. 148 revises the methods permitted by SFAS No. 123 of
measuring compensation expense for stock-based employee compensation plans.
The Company uses the intrinsic value method prescribed in Accounting
Principles Board Option No. 25, as permitted under SFAS No. 123. Therefore,
this change did not have a material effect on the financial statements.
SFAS No. 148 requires the Company to disclose pro forma information related
to stock-based compensation, in accordance with SFAS No. 123, on a
quarterly basis in addition to the annual disclosure.
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the date of grant consistent
with the method prescribed by Statement of Financial Accounting Standard
No. 123, "Accounting For Stock-Based Compensation", net earnings and
earnings per share for the three month periods ended March 31, 2004 and
2003 would have been the pro forma amounts that follow
Three Months Ended
March 31,
----------------------
2005 2004
----------------------
Net income (loss), as reported ($93,000) $ 188,000
Stock-based employee compensation
expense determined under fair value
method net of related tax effects (28,000) (8,000)
--------- ---------
Pro-forma net income (loss) ($121,000) $ 188,000
========= =========
Basic net income (loss) per common
share:
As reported ($0.03) $ 0.06
========= =========
Pro-forma ($0.04) $ 0.06
========= =========
Diluted net income (loss) per common
share:
As reported ($0.03) $ 0.04
========= =========
Pro-forma ($0.04) $ 0.04
========= =========
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.
10
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. Currently, Statement 123(R) must be adopted no later than
January 1, 2006. We expect to adopt Statement 123 (R) in our fiscal year
commencing January 1, 2006.
8. RECENT ACCOUNTING PRONOUNCEMENTS:
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.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this quarterly report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Sections 21E of the Exchange Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, levels of activity, performance or achievements of the
Company, or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions, the ability of the Company
to implement its business strategy; the ability of the Company to obtain
financing for general corporate purposes; competition; availability of key
personnel, and changes in, or the failure to comply with, government's
regulations. As a result of the foregoing and other factors, no assurance can be
given as to the future results, levels of activity and achievements and neither
the Company nor any person assumes responsibility for the accuracy and
completeness of these statements.
GENERAL
Everlast Worldwide Inc. is a Delaware corporation organized on July 6,
1992. We are engaged in the design, manufacture, marketing and of sale men's
activewear, sportswear and outerwear (the "Apparel Products") each featuring the
widely-recognized Everlast(R) trademark. We also manufacture sporting goods
related to the sport of boxing such as boxing gloves, heavy bags, speed bags,
boxing trunks, and miscellaneous gym equipment that are sold through sporting
goods stores, mass merchandisers, catalog operations, gymnasiums, and martial
arts studios. In addition, we license the Everlast(R) trademark to numerous
companies that source and manufacture products such as men's, women's and
children's apparel, footwear, cardiovascular equipment, back to school
stationery, eyewear, sports bags, hats, fragrances, batteries, nutritional
products and other accessories.
Our financial statements and the notes thereto contain detailed information
that should be referred to in conjunction with this discussion.
CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGEMENTS
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The accounting principles we
use require us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
amounts of income and expenses during the reporting periods presented. We
believe in the quality and reasonableness of our critical accounting policies,
however it is likely that materially different amounts would be reported under
different conditions or using different assumptions that we have consistently
applied. We believe our critical accounting policies are as follows, including
our methodology for estimates made and assumptions used.
REVENUE RECOGNITION POLICY. Revenues from royalty and finders
agreements are recognized when earned by applying contractual royalty
rates to quarterly point of sale data, among other criteria, received
from our licensees. Our royalty recognition policy provides for
recognition of royalties in the quarter earned, although a large
portion of such royalty payments are actually received during the
month following the end of a quarter. Revenues are not recognized
unless collectibility is reasonably assured. Product revenues are
recognized upon shipment of inventory to customers.
TRADE RECEIVABLES. We perform ongoing credit evaluations on existing
and new customers daily. We apply reserves for delinquent or
uncollectible trade receivables based on a specific identification
methodology and also apply a general reserve based on our trade
receivables aging categories. Credit losses have been within our
estimates over the last few years.
12
INVENTORIES. Our inventories are valued at the lower of cost or
market. Cost has been derived principally on the standard cost
methodology, where we utilize a first-in-first-out method. We provide
for reserve allowances on finished goods and specifically identify and
reserve for slow moving or obsolete raw materials and packaging.
DEFERRED TAXES. Deferred taxes are determined based on the differences
between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amounts expected to be realized. In assessing the need for a valuation
allowance management considers estimates of future taxable income and
ongoing prudent and feasible tax planning strategies. In accordance
with APB Opinion 23, "Accounting for Income Taxes - Special Areas," we
do not accrue income taxes on the undistributed earnings of a
subsidiary which is a "DISC" since the repayment of the earnings of
the DISC is not expected in the foreseeable future. If circumstances
change and it becomes apparent that some or all of the undistributed
earnings of the DISC will be remitted in the foreseeable future, then
taxes will be accrued.
VALUATION OF GOODWILL, LONG-LIVED ASSETS AND INTANGIBLE ASSETS. We
periodically evaluate goodwill, long-lived assets and intangible
assets for potential impairment indicators. Judgements regarding the
existence of impairment indicators are based on estimated future cash
flows, market conditions, and legal factors. Future events could cause
management to conclude that impairment indicators exist and that the
net book value of goodwill, long-lived assets and intangible assets is
impaired. Any resulting impairment loss could have a material adverse
impact on our financial condition and results of operations.
CONTINGENCIES AND LITIGATION. We evaluate contingent liabilities
including threatened or pending litigation in accordance with SFAS No.
5, "Accounting for Contingencies" and record accruals when the outcome
of these matters is deemed probable and the liability could be
reasonably estimated. Management makes these assessments based on the
facts and circumstances and in some instances based in part on the
advice of outside legal counsel.
RESULTS OF OPERATIONS
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.
THREE MONTHS ENDED MARCH 31, 2005
Net revenues increased to $12.2 million for the three months ended March
31, 2005 from $9.9 million for the three months ended March 31, 2004, an
increase of $2.3 million, or 23%. This increase was a result of increases in
sales of apparel and sporting goods equipment of $1.3 million (16% increase),
and licensing revenues of $1.0 million (49% increase) compared to the same
period last year. The increase in licensing revenues was a result of new license
agreements, including the aforementioned Jacques Moret, Inc. license, and
increased revenues on existing licenses.
13
Gross profit increased to $4.7 million for the three months ended March 31,
2005 from $4.1 million for the three months ended March 31, 2004. Gross profit
decreased as a percentage of net revenues to 38.3% from 41.7%. The increase in
gross profit dollars was primarily a result of the aforementioned increase in
net licensing revenues. The decrease in gross profit percentage was a result of
an unfavorable change in sales mix.
Selling and shipping expenses increased to approximately $2.2 million
(17.8% of net revenues) for the three months ended March 31, 2005 from
approximately $1.7 million (16.9% of net revenues) for the three months ended
March 31, 2004. The increase in dollars and as a percentage of net revenues was
primarily a result of increased marketing and selling programs associated and in
conjunction with The Contender reality television drama which premiered in March
2005. In addition, during the quarter, the Company incurred a non-cash charge in
connection with the issuance of warrants to purchase 149,000 shares of our
common stock, $0.02 par value (the "Warrants") to Contender Partners LLC,
aggregating to $182,000. The issuance of 149,000 warrants were valued using the
Black Scholes option pricing model, and were in exchange for product placement
of men's apparel and sporting goods appearing on The Contender.
General and administrative expenses and amortization expense remained at
$1.6 million and $0.2 million, respectively, for both the three months ended
March 31, 2005 and 2004 periods.
Operating income remained approximately $.5 million for both the three
months ended March 31, 2005 and 2004 periods. Operating income as a percentage
of net revenues was 4.1% for the three months ended March 31, 2005 as compared
to 5.8% for the three months ended March 31, 2004. The decrease in operating
income as a percentage of net revenues for the 2005 period was primarily a
result of higher selling and shipping costs and the non-cash charge associated
with the issuance of the Warrants.
Interest expense and finance costs, net of interest income, increased from
$0.5 million in the three month period ending March 31, 2004 to approximately
$0.6 million during the March 31, 2005 period. $.2 million of the increase was
due to higher borrowing costs associated with our average outstanding factor
balance as compared to the prior period, and borrowings associated with our
outstanding $4 million notes payable and amortization of deferred finance costs
associated with our preferred stock refinance completed in January 2004. During
the three months ended March 31, 2005, we did not incur any interest expense
associated with our redeemable participating preferred stock due to our net loss
for the quarter. In the March 2004 period, our after tax profits required us to
incur a recorded interest charge of $150,000, as defined in our Series A
Preferred Stock Agreement with those stockholders.
Loss before income taxes from continuing operations for the three months
ended March 31, 2005 was $44,000 compared to approximately $0.1 million pre-tax
profit for the three month period ended March 31, 2004. The decrease was a
result of higher interest costs as explained above.
We recognized a tax benefit of $23,000 for the three months ended March 31,
2005 as compared to a tax provision of approximately $0.1 million for the three
months ended March 31, 2004. We expect our effective tax rate to be
approximately 52% this year.
Net loss from continuing operations was $21,000 in 2005 as compared to a
net loss of $14,000 in 2004. Income, net of tax, from the discontinued component
was $.2 million during the three months ended March 31, 2004 as compared to a
loss from our discontinued component, net of tax of $72,000 in 2005.
Accordingly, our net loss for the three months ended March 31, 2005 from
continuing and discontinued operations was $93,000 as compared to net income in
the three months ended March 31, 2004 of $188,000.
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We are required to pay a dividend (presented as interest expense on our
statement of operations in accordance with SFAS No. 150,) equal to the product
of 2/3 of the sum of the net after tax profits reduced in proportion to the
redeemed preferred stock and are payable on the March of the following year. The
accrued dividend payable for the three months ended March 31, 2004 is $150,000
as compared to $ nil for the three months ended March 31, 2005. The 2004
dividend is equal to 44.4% of net after tax profits.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations and growth primarily with cash flows generated
from operations and from borrowings with our Factor from a $20 million
discretionary demand line of credit.
Net cash provided by operating activities for the three months ended March
31, 2005 was $2.8 million as compared to $1.8 million for the three months ended
March 31, 2004. This increase was primarily attributable to an increase in our
deferred licensing revenues of $1.5 million and a $.2 million non-cash charge
incurred with our warrant issuance. Net cash used for investing activities for
the three months ended March 31, 2005 was $45,000 as compared to $0.2 million
for the three months ended March 31, 2004.
During the three months ended March 31, 2005, the Company's primary need
for funds was to finance working capital and for the repayment of the borrowings
from its Factor. Borrowings from our Factor during the year ended December 31,
2004 were used to pay the $3 million preferred stock redemption along with
interest and finance costs of $.8 million. During the three months ended March
31, 2005, we repaid the Factor $3.3 million reducing our outstanding obligation
to $8.0 million at March 31, 2005.
Net cash used in financing activities was $3.1 million for the three month
period ended March 31, 2005 as compared to $2.9 million for the three month
period ended March 31, 2004. This increase in financing sources is primarily due
to aforementioned repayment of borrowings from our Factor, offset by proceeds
from exercises of stock options of $.2 million during the period March 31, 2005.
At March 31, 2005, cash and cash equivalents was $0.2 million compared to
$.6 million at December 31, 2004. Working capital was $2.4 million at March 31,
2005 compared to $2.0 million at December 31, 2004.
Management anticipates it will generate and maintain sufficient cash and
cash equivalent balances, along with availability under our $20 million
discretionary demand line of credit from our Factor, although no assurance to
that effect can be given, to fund our contractual obligations and working
capital needs. Positive cash flow, if it occurs, will create working capital to
fund the Company's anticipated growth over the next 12 months, the mandatory
redemption requirements of our preferred stock and interest on the notes payable
due in December 2005. If a positive cash flow does not occur, there will be a
decrease in cash, cash equivalent balances and short term investments and/or
borrowings with the factor and/or other lenders will increase.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There have been no changes in financial market risk as originally discussed
in the Company's Annual Report on Form 10-K for the year ended December 31,
2004.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this
report, the Company's Chief Executive Officer and Chief Financial Officer have
concluded the Company's disclosure controls and procedures (as defined in Rules
13a-14 and 15d-14 under the Securities Exchange Act of 1934) are effective.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Contenders Partners LLC exercised the Warrants as of March 8, 2005 using a
"cashless exercise." We issued 115,977 shares of common stock as of March 8,
2005 based on a fair market value of $12.13 (the average closing price for the
five trading days immediately prior to March 8, 2005) and an exercise price of
$2.75 per share. No underwriters or brokers were used in the transaction. Since
it was a cashless exercise there was no cash proceeds to us. The shares of our
common stock we issued were exempt from registration under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to Section 4(2) of the
Securities Act.
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Current Reports on Form 8-K
On January 26, 2005, the Company filed an 8-K/A amending a Form 8-K filed
on December 22, 2004 related to in connection with its execution of a
license agreement with Jacques Moret, Inc. (the "License Agreement"). The
License Agreement has been effective as of January 1, 2005.
On March 17, 2005, the Company filed an 8-K related to its press release
dated March 9, 2005 announcing its results of operations and financial
condition for its fiscal 2004 fourth quarter and fiscal year ended December
31, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERLAST WORLDWIDE INC.
Date: May 10, 2005 By: /s/ George Q Horowitz
---------------------
Name: George Q Horowitz
Title: Chief Executive Officer,
President and Treasurer
By: /s/ Gary J. Dailey
--------------------
Name: Gary J. Dailey
Title: Chief Financial Officer,
Chief Accounting Officer
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