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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
/ / 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
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EVERLAST WORLDWIDE INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3672716
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1350 Broadway
Suite 2300
New York, NY 10018
(Address of Principal Executive Offices)
(212) 239-0990
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year if changed since last report)
Indicate by check whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange act)
Yes / / No /X/
The number of common equity shares outstanding as of August 11, 2003 was
3,008,236 shares of Common Stock, $.002 par value, and 100,000 shares of Class A
Common Stock, $.01 par value.
1
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Items 1, 3 and 5 not applicable
Item 4. Submission of matters to vote of Security Holders 15
Item 6. Exhibits and Current Reports on Form 8-K 16
SIGNATURES 17
2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
EVERLAST WORLDWIDE INC.
CONSOLIDATED BALANCE SHEETS
June 30 December 31
2003 2002
-------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,429,302 $ 2,530,452
Marketable equity securities 340,264 308,841
Accounts receivable - net 5,135,677 7,697,847
Inventories 13,031,741 11,460,160
Prepaid expenses and other current assets 876,958 819,053
------------ ------------
Total current assets 21,813,942 22,816,353
Restricted cash 1,009,986 1,003,701
Property and equipment, net 6,369,898 6,487,830
Goodwill 6,718,492 6,718,492
Trademarks, net 24,945,357 25,401,693
Other assets 1,414,897 1,418,683
------------ ------------
$ 62,272,572 $ 63,846,752
============ ============
LIABILITIES, REDEEMABLE PARTICIPATING PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Due to factor $ 3,696,056 $ 3,351,997
Current maturities of long term debt 366,018 363,028
Accounts payable 3,055,317 3,391,334
Income taxes payable 185,521 553,850
Accrued expenses and other current liabilities 910,945 794,543
Preferred stock dividend payable 136,805 1,450,808
------------ ------------
Total current liabilities 8,350,662 9,905,560
License deposits payable 568,833 563,526
Long term debt, net of current maturities 3,044,275 3,227,324
------------ ------------
Total liabilities 11,963,770 13,696,410
------------ ------------
Series A redeemable participating preferred stock 35,000,000 35,000,000
------------ ------------
Stockholders' equity:
Common stock, par value $.002; 19,000,000 shares
authorized; 3,182,236 issued, 3,008,236 outstanding 6,364 6,364
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000 1,000
Paid-in capital 11,662,825 11,662,825
Retained earnings 4,332,215 4,205,179
Accumulated other comprehensive income 33,617 2,193
------------ ------------
16,036,021 15,877,561
Less treasury stock, at cost (174,000 common shares) (727,219) (727,219)
------------ ------------
15,308,802 15,150,342
------------ ------------
$ 62,272,572 $ 63,846,752
============ ============
See accompanying notes to financial statements.
3
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
----------- ------------ ----------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net sales $ 12,939,061 $ 14,725,911 $ 25,294,344 $ 30,460,507
Cost of goods sold 9,386,797 10,144,052 18,306,839 20,604,882
------------ ------------ ------------ ------------
Gross profit 3,552,264 4,581,859 6,987,505 9,855,625
Net license revenues 1,586,415 1,418,950 3,235,251 2,803,617
------------ ------------ ------------ ------------
5,138,679 6,000,809 10,222,756 12,659,242
------------ ------------ ------------ ------------
Operating expenses:
Selling and shipping 2,795,667 3,079,581 5,832,111 5,882,041
General and administrative 1,550,477 1,354,123 2,937,341 3,081,265
Amortization 228,168 228,168 456,336 456,336
------------ ------------ ------------ ------------
4,574,312 4,661,872 9,225,788 9,419,642
------------ ------------ ------------ ------------
Income from operations 564,367 1,338,937 996,968 3,239,600
------------ ------------ ------------ ------------
Other income (expense):
Interest expense (238,297) (168,478) (475,209) (319,580)
Investment income 15,259 7,047 27,906 13,658
------------ ------------ ------------ ------------
(223,038) (161,431) (447,303) (305,922)
------------ ------------ ------------ ------------
Income before provision for income taxes 341,329 1,177,506 549,665 2,933,678
Provision for income taxes 110,465 588,242 285,825 1,400,432
------------ ------------ ------------ ------------
Net income $ 230,864 $ 589,264 $ 263,840 $ 1,533,246
============ ============ ============ ============
Redeemable preferred stock dividend 119,705 349,191 136,805 908,586
------------ ------------ ------------ ------------
Net income available to common shareholders $ 111,159 $ 240,073 $ 127,035 $ 624,660
============ ============ ============ ============
Basic earnings per common share $ 0.04 $ 0.08 $ 0.04 $ 0.20
============ ============ ============ ============
Diluted earnings per common share $ 0.02 $ 0.06 $ 0.03 $ 0.16
============ ============ ============ ============
See accompanying notes to financial statements.
4
EVERLAST WORLDWIDE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended
June, 30,
---------------------------
2 0 0 3 2 0 0 2
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 263,840 $ 1,533,246
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 307,742 272,733
Amortization of trademarks 456,336 456,336
Interest income on restricted cash (6,285) --
Changes in assets (increase) decrease:
Accounts receivable 2,562,170 2,196,544
Inventories (1,571,581) (1,284,132)
Prepaid expenses and other current assets (57,905) (272,983)
Other assets (68,782) (366,882)
Changes in liabilities increase (decrease):
Accounts payable, accrued expenses
and other current liabilities (587,942) (697,225)
License deposits payable 5,307 106,152
----------- -----------
Net cash provided by operating activities 1,302,900 1,943,789
----------- -----------
Cash flows used by investing activities:
Acquisition of property and equipment (117,242) (193,476)
----------- -----------
Cash flows from financing activities:
Payment of preferred stock dividend (1,450,808) (1,702,164)
Due to (from) factor 344,059 (1,073,538)
(Repayments) proceeds of debt instruments (180,059) 122,945
----------- -----------
Net cash used by financing activities: (1,286,808) (2,652,757)
----------- -----------
Net increase (decrease) in cash and cash equivalents (101,150) (902,444)
Cash and cash equivalents, beginning of period 2,530,452 3,100,026
----------- -----------
Cash and cash equivalents, end of period $ 2,429,302 $ 2,197,582
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 475,209 $ 289,580
Income taxes 580,348 1,292,660
See accompanying notes to financial statements.
5
EVERLAST WORLDWIDE INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003 AND 2002
1. The Company and Basis of Presentation:
The consolidated financial statements of Everlast Worldwide Inc. (herein
referred to as "we", "us, "our" and "the Company") presented herein as of
June 30, 2003 and for the three and six months ended June 30, 2003 and 2002
are unaudited and, in the opinion of management, include all adjustments
(consisting only of normal and recurring adjustments) necessary for a fair
presentation of financial position and results of operations. Such
financial statements do not include all of the information and footnote
disclosures normally included in audited financial statements prepared in
accordance with generally accepted accounting principles. The accompanying
unaudited consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q. The results of operations
for the three and six month periods ended June 30, 2003 are not necessarily
indicative of the results that may be expected for any other interim
periods or the full year ending December 31, 2003. The Company has reviewed
the status of its legal contingencies and believes that there are no
material changes from that disclosed on Form 10-K for the year ended
December 31, 2002.
2. Earnings Per Share:
We report basic and diluted earnings per share in accordance with SFAS
Statement No. 128 "Earnings Per Share" ("SFAS No. 128"). Basic earnings per
share amounts are computed based on the weighted average number of shares
actually outstanding during the period. Diluted earnings per share amounts
are based on an increased number of shares that would be outstanding
assuming the exercise of dilutive stock options and contingent
consideration pursuant to the merger agreement dated October 24, 2000.
The following table sets forth the computation of basic and diluted
earnings per share pursuant to SFAS No. 128:
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
2003 2002 2003 2002
-----------------------------------------------
Numerator:
Numerator for basic and diluted
earnings per common share --
Net income available to common stockholders $ 111,159 $ 240,073 $ 127,035 $ 624,660
---------- ---------- ---------- ----------
Denominator:
Denominator for basic earnings per common share
weighted average shares
outstanding during the period 3,108,236 3,098,936 3,108,236 3,098,936
---------- ---------- ---------- ----------
Effect of diluted securities:
Stock options 40,500 63,947 54,865 63,947
Contingent stock consideration related to a Merger 1,535,709 864,332 1,448,935 864,332
---------- ---------- ---------- ----------
1,576,209 928,279 1,503,800 928,279
Denominator for diluted earnings per common share --
adjusted weighted average shares and assumed conversions 4,684,445 4,027,215 4,612,036 4,027,215
---------- ---------- ---------- ----------
Basic net income per common share $ 0.04 $ 0.08 $ 0.04 $ 0.20
========== ========== ========== ==========
Diluted net income per common share $ 0.02 $ 0.06 $ 0.03 $ 0.16
========== ========== ========== ==========
6
3. Inventories:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
June 30, 2003 December 31, 2002
-------------- -----------------
Raw materials $ 2,003,335 $ 2,067,637
Work-in-process 2,274,134 2,181,506
Finished goods 8,754,272 7,211,017
----------- -----------
$13,031,741 $11,460,160
=========== ===========
4. Reclassification:
Certain items on the 2002 financial statements have been reclassified to
conform to 2003 presentations.
5. Redeemable Participating Preferred Stock Dividend:
The percentage of net income, as defined in the Company's October 24, 2000
Merger Agreement, to be paid to holders of Series A Redeemable
Participating Preferred Stock ("the Preferred Stock") for the annual
dividend is as follows:
Twelve months ending December 31, 2003 51.9%
2004 44.4%
2005 37.0%
2006 29.6%
2007 22.2%
2008 14.8%
2009 7.4%
The mandatory redemption requirements are as follows:
Twelve months ending December 31, 2003 $5,000,000
2004 5,000,000
2005 5,000,000
2006 5,000,000
2007 5,000,000
2008 5,000,000
2009 5,000,000
6. 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.
If compensation cost for the Company's stock-based compensation plans had
been determined based on the fair value at the date of grant consistent
with the method prescribed by Statement of Financial Accounting Standard
No. 123, "Accounting For Stock-Based Compensation", net earnings and
earnings per share for the three and six month periods ended June 30, 2003
would have been the pro forma amounts that follow:
7
Three Months Ended Six Months Ended
June 30, June 30,
==========================================================
2003 2002 2003 2002
==========================================================
Net income, as reported $ 230,864 $ 589,264 $ 263,840 $ 1,533,246
Stock-based employee
compensation expense
determined under fair value
method net of
related tax effects (9,082) (8,347) (18,163) (16,694)
----------- ---------- ---------- -------------
Proforma net income $ 221,782 $ 580,917 $ 245,677 $ 1,516,552
=========== ========== ========== =============
Basic net income per common share:
As reported $ 0.04 $ 0.08 $ 0.04 $ 0.20
=========== ========== ========== =============
Proforma $ 0.03 $ 0.07 $ 0.04 $ 0.20
=========== ========== ========== =============
Diluted not income per common share:
As reported $ 0.02 $ 0.06 $ 0.03 $ 0.16
=========== ========== ========== =============
Pro forma $ 0.02 $ 0.06 $ 0.02 $ 0.15
=========== ========== ========== =============
7. Recent Pronouncements:
In June 2002, the FASB approved SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 is effective
after December 31, 2002, and 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. The primary difference
between SFAS No. 146 and EITF 94-3 concerns the timing of liability
recognition.
As of December 2002, the Company adopted SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition 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 current annual basis disclosure.
In November 2002, the FASB issued interpretation No. 45 (FIN 45), which
expands previously issued accounting guidance and disclosure requirements
for certain guarantees. FIN 45 requires the Company to recognize an initial
liability for the fair value of an obligation assumed by issuing a
guarantee. The provision for initial recognition and measurement of the
liability will be applied on a prospective basis to guarantees issued or
modified after December 31, 2002.
In May 2003, the 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 will be adopting
this in the report for the third quarter ending September 30, 2003 on Form
8
10-Q. 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 Preferred Stock meets this definition, and thus will be recorded
as a liability. In addition, the Company will record the cumulative effect
of a change in accounting principles in accordance with SFAS No. 150.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements contained in this quarterly report constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Sections 21E of the Exchange Act. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, levels of activity, performance or achievements of the
Company, or industry results, to be materially different from any future
results, levels of activity, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, among others, the
following: general economic and business conditions; the ability of the Company
to implement its business strategy; the ability of the Company to obtain
financing for general corporate purposes; competition; availability of key
personnel; and changes in, or the failure to comply with, governments
regulations. As a result of the foregoing and other factors, no assurance can be
given as to the future results, levels of activity and achievements and neither
the Company nor any person assumes responsibility for the accuracy and
completeness of these statements.
GENERAL
Everlast Worldwide Inc. is a Delaware corporation organized on July 6,
1992. We are engaged in the design, manufacture, marketing and sale of women's
activewear and sportswear; and the design, manufacture, marketing and sale of
men's activewear, sportswear and outerwear (the "Apparel Products") each
featuring the widely-recognized Everlast(R) trademark. As a result of the merger
(the "Merger") of Everlast Holding Corp., the parent company of Everlast World's
Boxing Headquarters Corp. ("Everlast Corp."), into Active Apparel New Corp., a
wholly-owned subsidiary of the Company, we became a manufacturer of 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. Our wholly-owned subsidiary, Everlast Corp., licenses 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.
10
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.
INVENTORY. Our inventory is valued at the lower of cost or market. Cost
has been derived principally on the standard cost methodology, where we
utilize a first-in-first-out method. We provide for reserve allowances
on finished goods and specifically identify and reserve for slow moving
or obsolete raw materials and packaging.
DEFERRED TAXES. Deferred taxes are determined based on the differences
between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which
the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts
expected to be realized. In assessing the need for a valuation
allowance management considers estimates of future taxable income and
ongoing prudent and feasible tax planning strategies. In accordance
with APB Opinion 23, "Accounting for Income Taxes - Special Areas," we
do not accrue income taxes on the undistributed earnings of a
subsidiary which is a "DISC" since the repayment of the earnings of the
DISC is not expected in the foreseeable future. If circumstances change
and it becomes apparent that some or all of the undistributed earnings
of the DISC will be remitted in the foreseeable future, then taxes will
be accrued.
VALUATION OF GOODWILL, LONG-LIVED ASSETS AND INTANGIBLE ASSETS. We
periodically evaluate goodwill, long-lived assets and intangible assets
for potential impairment indicators. Judgements regarding the existence
of impairment indicators are based on estimated future cash flows,
market conditions, and legal factors. Future events could cause
management to conclude that impairment indicators exist and that the
net book value of goodwill, long-lived assets and intangible assets is
impaired. Any resulting impairment loss could have a material adverse
impact on our financial condition and results of operations.
CONTINGENCIES AND LITIGATION. We evaluate contingent liabilities
including threatened or pending litigation in accordance with SFAS No.
5, "Accounting for Contingencies" and record accruals when the outcome
of these matters is deemed probable and the liability could be
reasonably estimated. Management makes these assessments based on the
facts and circumstances and in some instances based in part on the
advice of outside legal counsel.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003
Net sales decreased to $12.9 million for the three months ended June 30,
2003 from $14.7 million for the three months ended June 30, 2002, a decrease of
$1.8 million or 12.1%. This decrease in sales was principally attributable to
lower sales order volumes from retailers on both the apparel and sporting goods
products. Retailers, in response to general economic and weather conditions,
reduced inventory levels to preserve working capital.
Gross profit decreased to $3.6 million for the three months ended June
30, 2003 from $4.6 million for the three months ended June 30, 2002. Gross
profit decreased as a percentage of net sales to 27.5% from 31.1%. The decreases
in both dollar amount and as a percentage of net sales were primarily due to
reduced sales volumes, unfavorable change in sales mix and the decrease in net
sales as it relates to the fixed portion of manufacturing expenses compared to
the three months ended June 30, 2002.
11
Net license revenues were $1.6 million for the three months ended June
30, 2003 as compared to $1.4 million for the three months ended June 30, 2002,
an increase of 11.8%. The increase in license revenues was primarily due to new
license agreements and increased revenues on existing licenses.
Selling and shipping expenses decreased to $2.8 million for the three
months ended June 30, 2003 from $3.1 million for the three months ended June 30,
2002. Selling and shipping expenses as a percentage of net sales increased to
21.6% from 20.9%. This increase as a percentage of net sales was primarily
attributable to the decrease in net sales as it relates to the fixed portion of
selling and shipping expenses.
General and administrative expenses increased to $1.6 million for the
three months ended June 30, 2003 from $1.4 million for the three months ended
June 30, 2002, an increase of $0.2 million or 15%. This increase in general and
administrative costs primarily relates to additional infrastructure costs to
help manage our diversified and expanding organization.
Amortization expense remained approximately $0.2 million for both three
month periods ended June 30, 2003 and 2002.
Operating income decreased to $0.6 million for the three months ended
June 30, 2003 from $1.3 million for the three months ended June 30, 2002.
Operating income as a percentage of net sales was 4.4% for the three months
ended June 30, 2003 as compared to 9.1% for the three months ended June 30,
2002. The dollar and percentage decrease was primarily a result of lower gross
margins and higher selling and shipping costs as described above.
Interest expense remained approximately $0.2 million for both the three
months periods ended June 30, 2003 and 2002.
Income before income taxes for the three months ended June 30, 2003 was
$0.3 million compared to $1.2 million for the three months period ended June 30,
2002, a decrease of $0.8 million. The decrease was a result of lower operating
profits in the 2003 period.
We incurred a tax provision of $0.1 million for the three months ended
June 30, 2003 as compared to $0.6 million for the three months ended June 30,
2002. We expect our tax rate to be approximately 52% during the remainder of
fiscal year 2003.
The Company had net income of $0.2 million for the three months ended
June 30, 2003 as compared to $0.6 million for the three months ended June 30,
2002, a decrease of $0.4 million. The decrease was primarily attributable to the
aforementioned decrease in income before income taxes offset by lower tax
expense in the current period.
As a result of the Merger, we are required to pay a dividend equal to
the product of 2/3 of the sum of the net after tax profits (as defined in the
transaction documents relating to the Merger) reduced in proportion to the
redeemed Preferred Stock. The dividend payable for the three months ended June
30, 2003 is $0.1 million as compared to $0.3 million for the three months ended
June 30, 2002. The 2003 dividend will be equal to 51.9% of net after tax
profits.
SIX MONTHS ENDED JUNE 30, 2003
Net sales decreased to $25.3 million for the six months ended June 30,
2003 from $30.4 million for the six months ended June 30, 2002, a decrease of
$5.1 million or 17%. This decrease in sales was principally attributable to
lower sales order volumes from retailers on both the apparel and sporting goods
products. Retailers, in response to general economic and weather conditions,
reduced inventory levels to preserve working capital.
12
Gross profit decreased to $7.0 million for the six months ended June 30,
2003 from $9.9 million for the six months ended June 30, 2002. Gross profit
decreased as a percentage of net sales to 27.6% from 32.4%. This decrease in
both dollars and as a percentage of net sales was primarily due to reduced sales
volumes, unfavorable change in sales mix and the decrease in net sales as it
relates to the fixed portion of manufacturing expenses compared to the six
months ended June 30, 2002.
Net license revenues were $3.2 million for the six months ended June 30,
2003 as compared to $2.8 million for the six months ended June 30, 2002, an
increase of 15.3%. The increase in license revenues was primarily due to new
license agreements and increased revenues on existing licenses.
Selling and shipping expenses decreased to $5.8 million for the six
months ended June 30, 2003 from $5.9 million for the six months ended June 30,
2002. Selling and shipping expenses as a percentage of net sales increased to
23.1% from 19.3%. This increase as a percentage of net sales was primarily
attributable to the decrease in sales as it relates to the fixed portion of
selling and shipping expenses.
General and administrative expenses remained approximately $3.0 million
for both the six months ended June 30, 2003 and 2002.
Amortization expense remained $0.5 million for both the six months ended
June 30, 2003 and 2002 periods.
Operating income decreased to $1.0 million for the six months ended June
30, 2003 from $3.2 million for the six months ended June 30, 2002. Operating
income as a percentage of net sales was 3.9% for the six months ended June 30,
2003 as compared to 10.6% for the six months ended June 30, 2002. The dollar and
percentage decrease was primarily a result of lower gross margins and higher
selling and shipping costs as a percentage of net sales as described above.
Interest expense increased slightly to $0.5 million for the six months
ended June 30, 2003 from $0.3 million for the six months ended June 30, 2002.
The increase is attributable to the increase in our net borrowings from our
factor to fund the preferred stock redemption.
Income before income taxes for the six months ended June 30, 2003 was
$0.6 million, a decrease of $2.4 million as compared to the June 30, 2002
period. The decrease was a result of lower operating profits in the 2003 period
as well as the increase in interest expense.
We incurred a tax provision of $0.3 million for the six months ended
June 30, 2003 as compared to $1.4 million for the six months ended June 30,
2002. We expect our tax rate to be approximately 52% during the remainder of
fiscal year 2003.
The Company had net income of $0.3 million for the six months ended June
30, 2003 as compared to $1.5 million for the six months ended June 30, 2002, a
decrease of $1.2 million. The decrease was primarily attributable to the
aforementioned decrease in income before income taxes offset by lower tax
expense in the current period.
As a result of the Merger, we are required to pay a dividend equal to
the product of 2/3 of the sum of the net after tax profits (as defined in the
transaction documents relating to the Merger), reduced in proportion to the
redeemed Preferred Stock. The dividend payable for the six months ended June 30,
2003 is $0.1 million as compared to $0.9 million for the six months ended June
30, 2002. The 2003 dividend will be equal to 51.9% of net after tax profits.
13
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 provided by operating activities for the six months ended June
30, 2003 was $1.3 million compared to $1.9 million for the six months ended June
30, 2002. This decrease was primarily attributable to a decrease in net income
offset by decreases in accounts receivable. Net cash used for investing
activities for the six months ended June 30, 2003 was $0.1 million compared to
$0.2 million for the six months ended June 30, 2002.
During the six months ended June 30, 2003, the Company's primary need
for funds was to finance working capital and for the payment of the dividend to
the Preferred Stock. We have relied primarily upon cash and cash equivalents on
hand, cash flow from operations and advances drawn against factored receivables
and accounts receivable to finance our operations and obligations. At June 30,
2003, cash and cash equivalents was $2.4 million compared to $2.5 million and
$2.2 million at December 31, 2002 and June 30, 2002, respectively. Working
capital was $13.5 million at June 30, 2003 compared to $12.9 million and $15.5
million at December 31, 2002 and June 30, 2002, respectively. The decrease in
working capital from June 30, 2002 to June 30, 2003 was a result of the
preferred stock redemption.
Net cash used by financing activities was $1.3 million for the six month
period ended June 30, 2003 as compared to $2.7 million for the six month period
ended June 30, 2002. This decrease in financing sources is primarily due to a
lower level of borrowing from our factor to fund working capital needs and by
reduced payments on the dividends to the Preferred Stock.
Obligations for all debt instruments, capital and operating leases and
other contractual obligations are as follows in thousands:
Payments Due by Period (in Thousands)
---------------------------------------------------
Less than 1 - 3 4 - 6
Total 1 year years years
---------------------------------------------------
Redeemable Preferred Stock $35,000 $ 5,000 $15,000 $15,000
Debt instruments 3,182 223 670 2,289
Capital lease obligations 235 159 76
Operating leases 885 568 317
---------------------------------------------------
Total contractual cash
Obligations $39,302 $ 5,950 $16,063 $17,289
---------------------------------------------------
Management anticipates it will maintain sufficient cash and cash
equivalent balances, short term investments and a net surplus position with the
factor, although no assurance to that effect can be given to fund our
contractual obligations and working capital needs. Positive cash flow, if it
occurs, will create working capital to fund the Company's anticipated growth
over the next 12 months, the mandatory redemption requirements of the Preferred
Stock due on December 31, 2003 and the Preferred Stock dividend due on March 31,
14
2004. 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, 2002.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation, as of a date within 90 days of the filing of
this Form 10-Q, the Company's Chief Executive Officer and Chief Financial
Officer have concluded the Company's disclosure controls and procedures (as
defined in Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934)
are effective. There have been no significant changes in internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 13, 2003, the Company held its annual meeting of stockholders,
whereby the stockholders elected directors and approved a proposal to ratify the
appointment of Berenson & Company, LLP as the Company's independent auditors for
the fiscal year ending December 31, 2003. The votes on such matters were as
follows:
1. Election of directors:
For Withheld Against
--- -------- -------
George Horowitz 3,387,014 13,815 -0-
Rita Cinque Kriss 3,386,969 13,860 -0-
James Anderson 3,387,479 13,350 -0-
Edward Epstein 3,387,469 13,360 -0-
Larry Kring 3,391,479 9,350 -0-
2. Ratification of appointment of auditors: To ratify the appointment of
Berenson & Company, LLP as the Company's auditors for the fiscal year ending
December 31, 2003.
For Against Abstain
------------ ------- --------
3,390,310 9,595 924
Messrs. Ben Nadorf and Wayne Nadorf are continuing directors who were
separately elected by the holders of the Preferred Stock. Their terms as
directors expire concurrent with the terms of other directors elected at this
annual meeting.
15
ITEM 6. EXHIBITS AND CURRENT REPORTS ON FORM 8-K
(a) Exhibits
31.1 Control and Procedures Certificate of the Chief Executive
Officer dated August 14, 2003*
31.2 Control and Procedures Certificate of the Chief Financial
Officer dated August 14, 2003*
32.1 Statement under oath of Chief Executive Officer dated
August 14, 2003*
32.2 Statement under oath of Chief Financial Officer dated
August 14, 2003*
-----------------
*Filed herewith
(b) Current Reports on Form 8-K
None
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EVERLAST WORLDWIDE INC.
Date: August 14, 2003 By: /s/ George Q Horowitz
---------------- --------------------------
Name: George Q Horowitz
Title: Chief Executive Officer,
President, and Treasurer
By:/s/ Matthew F. Mark
---------------------------
Name: Matthew F. Mark
Title: Chief Financial Officer,
Chief Accounting Officer
17