<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period of _________________________ to ______________________
Commission file number: 000-10981
EVERGOOD PRODUCTS CORPORATION
Delaware 13-2640515
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
140 Lauman Lane, Hicksville, NY 11801
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 822-1230
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 [_]
As of September 6, 2000, the registrant had 4,475,957 shares outstanding of
its Common Stock, $.01 par value.
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Index
================================================================================
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Unaudited Consolidated Financial Statements
Balance Sheets
December 31, 1999 and March 31, 2000 3-4
Statements of Operations
For the Three Months Ended March 31, 1999 and 2000 5
Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 2000 6-7
Notes to Consolidated Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
=============================================================================
December 31, March 31,
1999 2000
=========================
Assets
Current Assets
Cash $ 445,849 $ 394,304
Restricted cash 36,410 -
Accounts receivable 5,330,484 7,905,527
Accounts receivable - related party 247,658 345,332
Current maturities of notes receivable 124,910 84,745
Inventory 8,618,944 8,315,778
Deferred tax asset 1,456,000 1,148,000
Deferred franchising costs 58,400 68,400
Prepaid expenses and other current assets 443,565 596,502
----------- -----------
16,762,220 18,858,588
----------- -----------
Fixed Assets 1,224,699 1,351,766
----------- -----------
Other Assets
Notes receivable - net of current maturities 42,414 17,443
Deferred tax asset 510,000 600,000
Intangible assets - 197,389
Other assets 16,118 240,533
----------- -----------
568,532 1,055,365
----------- -----------
$18,555,451 $21,265,719
=========== ===========
See notes to consolidated financial statements. 3
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
===============================================================================
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
==========================
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 8,744,554 $10,491,297
Accrued expenses 718,476 978,645
Unearned franchise fees 240,000 182,500
Sundry liabilities 94,454 49,640
Income taxes payable 35,740 252,502
Current maturities of long-term debt 258,250 240,000
Current maturities of loans payable - officers 174,272 162,861
----------- -----------
10,265,746 12,357,445
----------- -----------
Other Liabilities
Loan payable 5,839,175 4,885,626
Long-term debt - net of current maturities 680,000 620,000
Loans payable - officers - net of current maturities 110,323 110,323
----------- -----------
6,629,498 5,615,949
----------- -----------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock 39,576 45,462
Additional paid-in capital 6,978,728 7,855,052
Accumulated (deficit) (5,054,063) (4,304,155)
----------- -----------
1,964,241 3,596,359
Less: Treasury stock 304,034 304,034
----------- -----------
1,660,207 3,292,325
----------- -----------
$18,555,451 $21,265,719
=========== ===========
</TABLE>
See notes to consolidated financial statements. 4
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
=========================================================================
For the Three Months Ended
March 31,
--------------------------
1999 2000
==========================
Net Revenues $10,957,167 $15,249,379
Cost of Revenues 7,731,199 10,970,072
----------- -----------
3,225,968 4,279,307
Selling, General and Administrative Expenses 2,555,731 4,146,898
----------- -----------
Income Before Other Income (Expenses) 670,237 132,409
----------- -----------
Other Income (Expenses)
Interest (expense) (173,369) (206,006)
Other income - 1,295,630
----------- -----------
(173,369) 1,089,624
----------- -----------
Income Before Provision for Income Taxes 496,868 1,222,033
----------- -----------
Provision for Income Taxes
Current - 254,125
Deferred - 218,000
----------- -----------
- 472,125
----------- -----------
Net Income $ 496,868 $ 749,908
=========== ===========
Basic and Diluted Net Income Per Share $ .13 $ .19
=========== ===========
Weighted Shares Used in Computation 3,887,368 3,985,465
=========== ===========
See notes to consolidated financial statements. 5
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited) Page 1 of 2
================================================================================
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
--------------------------
1999 2000
==========================
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 496,868 $ 749,908
--------- -----------
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 51,032 68,969
Stock issued for consulting fees - 684,821
Increase (decrease) in allowance for doubtful
accounts and notes receivable (172) 65,000
Write-off of accounts receivable and notes receivable 250 40,903
(Increase) decrease in:
Accounts receivable (965,775) (2,620,675)
Accounts receivable - related party - (97,674)
Inventory 342,416 323,166
Deferred franchising costs (125) (10,000)
Prepaid taxes (1,891) -
Prepaid expenses and other current assets 74,860 (152,937)
Notes receivable (89,240) (15,136)
Deferred tax asset - 218,000
Other assets 1,456 (224,415)
Increase (decrease) in:
Accounts payable 514,145 1,746,743
Accrued expenses and sundry liabilities (211,391) 215,355
Unearned franchise fees 26,250 (57,500)
Income taxes payable - 216,762
--------- -----------
(258,185) 401,382
--------- -----------
238,683 1,151,290
--------- -----------
Cash Flows from Investing Activities
Purchase of fixed assets (165,834) (196,035)
Restricted cash as security for equipment lease - 36,410
--------- -----------
(165,834) (159,625)
--------- -----------
</TABLE>
See notes to consolidated financial statements. 6
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited) Page 2 of 2
================================================================================
For the Three Months Ended
March 31,
--------------------------
1999 2000
==========================
Cash Flows from Financing Activities
Increase (decrease) in loan payable $ 22,984 $ (953,549)
Payments of notes payable (71,988) (78,250)
Payments of officers' loans (25,009) (11,411)
-------- -----------
(74,013) (1,043,210)
-------- -----------
Increase (Decrease) in Cash (1,164) (51,545)
Cash - beginning 751,664 445,849
-------- -----------
Cash - end $750,500 $ 394,304
======== ===========
See notes to consolidated financial statements. 7
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 (Unaudited)
================================================================================
1 - Unaudited Interim Statements
The accompanying unaudited consolidated financial statements of Evergood
Products Corporation and Subsidiaries (the "Company") have been prepared in
accordance with the instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (which consist only of normal recurring adjustments)
necessary for a fair presentation have been included. All significant
intercompany transactions and balances have been eliminated. Operating
results for the three months ended March 31, 2000, are not necessarily
indicative of the results to be expected for the year ending December 31,
2000. These financial statements and notes should be read in conjunction
with the financial statements and notes thereto included in the Company's
Registration Statement on Form 10 filed on May 25, 2000.
2 - Earnings Per Share
The accompanying financial statements include earnings per share calculated
as required by Financial Accounting Standard No. 128 Earnings Per Share.
Basic earnings per share is calculated by dividing net income (loss) by the
weighted average number of shares of common stock outstanding. Diluted
earnings per share include the effects of securities convertible into
common stock to the extent such conversion would be dilutive.
Weighted average shares presented in the accompanying financial statements
have been adjusted for all periods presented to give retroactive effect to
140,993 shares issued March, 2000 to the Company's controlling stockholder
in exchange for his minority ownership interests in two of the Company's
subsidiaries.
3 - Inventory
Inventory is comprised of the following:
December 31, March 31,
1999 2000
=======================
Raw Materials $4,078,344 $3,929,856
Work-in-Process 1,180,092 1,136,472
Finished Goods 3,360,508 3,249,450
---------- ----------
$8,618,944 $8,315,778
========== ==========
Continued 8
<PAGE>
4 - Segment Disclosure
The Company produces and sells vitamins and mineral products and other
nutritional supplements. The Company sells its products under its
customers' private labels, under a brand developed by one of its
subsidiaries and, pursuant to a license and supply agreement, through the
Great Earth franchise system under the Great Earth label.
The Company has three reportable segments determined primarily by the
nature of the revenue producing activity and the market to which it is
directed: manufacturing, franchising and brand development. The
manufacturing segment obtains revenues from the manufacture and sale of
vitamins and nutritional supplements to wholesalers who, in turn,
distribute these products under their own private labels. This segment also
manufactures products for the Company's Great Earth (franchising) and
Bodyonics (brand development) segments. The franchising segment obtains
revenues from the franchising of Great Earth vitamin stores, the collection
of royalties and the sale of Great Earth brand vitamins and nutritional
supplements to Great Earth franchisees. The brand development segment
obtains revenues from the wholesale and retail sale of vitamins and
nutritional supplements under its own nationally advertised brand name.
Segment information for the three months ended March 31, 1999 and 2000 was
as follows:
<TABLE>
<CAPTION>
Brand
Manufacturing Franchising Development Corporate Total
=========================================================================
<S> <C> <C> <C> <C> <C>
Three Months Ended
March 31, 1999
Net revenues from
external customers $ 6,232,421 $ 3,634,385 $ 1,090,361 $ - $ 10,957,167
Intersegment net sales 2,117,060 16,676 - - 2,133,736
Operating income (loss) 659,596 438,565 (428,468) 544 670,237
Total assets 8,247,324 5,021,838 1,712,566 301,453 15,283,181
Three Months Ended
March 31, 2000
Net revenues from
external customers $ 10,424,511 $ 3,242,484 $ 1,582,384 $ - $ 15,249,379
Intersegment net sales 2,607,334 20,307 - - 2,627,641
Operating income (loss) 1,119,793 (24,659) (250,772) (711,953) 132,409
Total assets 12,014,182 5,071,557 2,733,980 1,446,000 21,265,719
</TABLE>
Continued 9
<PAGE>
Revenues from the franchising segment are comprised of the following:
March 31,
----------------------
1999 2000
======================
Sale of Products $3,042,144 $2,769,633
Royalties 494,991 410,351
Sale of Franchises 97,250 62,500
---------- ----------
$3,634,385 $3,242,484
========== ==========
5 - Litigation
The Company is a defendant in two lawsuits instituted during 1999 in State
Court in California. Each suit arises from allegations by the respective
plaintiff that the Company used their images in, among other things,
advertisements and product packaging without their authorization. Each suit
claims damages for invasion of privacy, invasion of the right to privacy,
conversion and loss of future earnings. Additionally, each suit seeks
injunctive relief. The suits are currently in a discovery stage,
accordingly, the Company is unable to predict what the likely outcome will
be at this time. Certain causes of action under these lawsuits are not
covered under the Company's insurance policies, however, management
believes that any potential liability over and above that which is covered
by insurance will not have a material financial impact on the Company.
6 - Share Exchange Agreement
In March, 2000, the Company consummated a share exchange agreement whereby
it acquired the 20% minority interests held in two of its subsidiaries: GEC
and Bodyonics. The minority interests were acquired from two individuals,
both of whom serve as officers and directors of the Company, and one of
whom is the Company's controlling stockholder and the other is a
significant stockholder. The individuals owned equal interests in the
subsidiaries and each were issued 140,993 shares of the Company's common
stock.
The acquisition of the controlling stockholder's interest is accounted for
in a manner similar to a pooling of interests because it represents a
transfer of ownership interests between companies under common control and,
accordingly, is given retroactive effect in the financial statements for
all historical periods.
The acquisition of the non-controlling stockholder's interest is accounted
for under the purchase method based on the fair value of the Company shares
issued as consideration for the exchange. The resulting goodwill upon
acquisition of these shares was approximately $197,000.
10
<PAGE>
7 - Shares Issued to Consultant
In May, 2000, the Company entered into a consulting agreement effective for
a term of one year commencing March 1, 2000. Additionally, the Company
issued 447,596 shares of common stock to the consulting firm as
compensation for services rendered to date. The fair value of the shares
issued is approximately $685,000, which is reflected as a compensation
charge in March, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. All statements other than statements of
historical fact included in this Report are forward-looking statements.
Such forward-looking statements are based on the current beliefs of
management and involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: the Company's history of
losses; the need to obtain additional financing and the ability to obtain
such financing; outstanding indebtedness; the ability to hire and retain
key personnel; relationships with and dependence on third-party equipment
manufacturers and suppliers; uncertainties relating to business and
economic conditions in markets in which the Company operates; uncertainties
relating to government and regulatory policies and other political risks;
uncertainties relating to customer plans and commitments; cost of and
availability of component materials and inventories; effect of governmental
export and import policies; the highly competitive environment in which the
Company operates; potential entry of new well-capitalized competitors into
the Company's markets; and the uncertainty regarding the Company's
continued ability, through sales growth, to absorb increasing costs
incurred and expected to be incurred in connection with its business
activities. The words believe, expect, anticipate, intend and plan and
similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date the statement was made.
The Company has three reportable segments determined primarily by the
nature of the revenue producing activity and the market to which it is
directed: manufacturing, franchising and brand development. The
manufacturing segment obtains revenues from the manufacture and sale of
vitamins and nutritional supplements to wholesalers who, in turn,
distribute these products under their own private labels. This segment also
manufactures products for the Company's Great Earth (franchising) and
Bodyonics (brand development) segments. The franchising segment obtains
revenues from the franchising of Great Earth vitamin stores, the collection
of royalties and the sale of Great Earth brand vitamins and nutritional
supplements to Great Earth franchisees. The brand development segment
obtains revenues from the wholesale and retail sale of vitamins and
nutritional supplements under its own nationally advertised brand name.
11
<PAGE>
Results of Operations
Three months ended March 31, 1999 compared with three months ended March 31,
2000.
Revenues
--------
Consolidated revenues for the three months ended March 31, 1999 and 2000 were
as follows:
March 31,
----------------------------------------
1999 2000
------------------- -----------------
Amount Percent Amount Percent
----------------------------------------
Segment:
Manufacturing $ 6,233,000 57.0% $10,424,000 68.4%
Franchising 3,634,000 33.0 3,242,000 21.2
Brand Development 1,090,000 10.0 1,583,000 10.4
----------- ----- ----------- -----
Consolidated $10,957,000 100.0% $15,249,000 100.0%
=========== ===== =========== =====
Consolidated revenue for the three months ended March 31, 2000 rose by
approximately $4,300,000, an increase of 39% over the three months ended
March 31, 1999.
Revenue from product sales by all segments increased by approximately
$4,412,000 from $10,365,000 in 1999 to $14,777,000 in 2000 or 43%. Company-
wide sales to the franchise system decreased $331,000 from $3,142,000 in 1999
to $2,811,000 in 2000. Company-wide sales to unaffiliated customers increased
by approximately $4,743,000 or 66% from $7,223,000 in 1999 to $11,966,000 in
2000. Consolidated revenues also include royalties and franchise fees earned
by the franchising segment. Royalties decreased by approximately $85,000 from
$495,000 to $410,000 in 2000. Franchise fee revenue decreased by
approximately $35,000 from $97,000 to $62,000 in 2000.
Manufacturing segment sales increased approximately $4,200,000, reflecting
additional sales to the Company's four largest customers. There were no
significant changes in selling prices during this period. Selling prices are
based on the cost of manufacture, plus a margin which varies based on the
brand and, in some cases, the particular product.
The decrease in franchising segment revenue of approximately $400,000
primarily reflects a decrease in sale of products to franchises, lower
royalties, and a decrease in franchise fee revenue. The decline in sales was
primarily due to increased competition from national vitamin chains, vitamin
discounters and internet sales.
Brand development sales increased by approximately $493,000 primarily as a
result of increases in advertising and promotional expenses. Advertising for
this segment was approximately $726,000 in 2000 compared with $466,000 in
1999 an increase of $260,000.
12
<PAGE>
Operating Income
----------------
Operating income for the three months ended March 31, 1999 and 2000 is
comprised as follows:
March 31,
----------------------------------------
1999 2000
------------------- ------------------
Percent Percent
of of
Segment Segment
Amount Revenue Amount Revenue
========================================
Segment:
Manufacturing $ 659,000 10.6% $1,120,000 10.7%
Franchising 439,000 12.1 (24,000) (.7)
Brand Development (428,000) (39.3) (251,000) (15.9)
Corporate - - (712,000) -
--------- ----------
Consolidated $ 670,000 6.1% $ 133,000 .8%
========= ==========
Consolidated operating income for the three months ended March 31, 2000
decreased by approximately $537,000. The increase in gross margin of
approximately $1,055,000 resulted from a combination of higher sales and
improved margins. This increase was offset by increases in selling, general
and administrative expenses, primarily a non-cash charge of $685,000 related
to stock issued to a consultant, officers' salaries and professional fees.
Manufacturing segment operating income increased by approximately $461,000 in
the three months ended March 31, 2000. Manufacturing gross profit increased
approximately $1,000,000, offset by increases in manufacturing segment
selling, general and administrative expenses of approximately $500,000. The
increase in gross profit was caused primarily by increases in sales and
decreases in raw material and labor costs. The $500,000 increase in
manufacturing segment selling, general and administrative expenses reflects
increases in officers' salaries, professional fees, and travel and
entertainment expenses.
Franchising segment operating income decreased by approximately $463,000 for
the three months ended March 31, 2000 compared with the three months ended
March 31, 1999. The change is primarily due to lower sales and lower margins
of approximately $298,000 and increases in selling, general and
administrative expenses, primarily bad debt, marketing and advertising
expenses, convention and seminar costs and warehouse charges.
Brand development operating loss decreased by approximately $180,000 for the
three months ended March 31, 2000 from March 31, 1999. This resulted
primarily from increased revenue and higher gross profit of approximately
$335,000. Selling, general and administrative expenses increased by $173,000
due to an increase in advertising and promotion expenses of $260,000, offset
by decreases in the allotted amount of officers' salaries, professional fees,
and show and seminar costs aggregating approximately $87,000.
13
<PAGE>
Net Income
----------
Consolidated net income increased by approximately $253,000 in the three
months ended March 31, 2000 compared with the three months ended March 31,
1999. This increase included income from the proceeds of the settlement of
two class action suits in the aggregate amount of $1,296,000, which is
shown as Other Income in the Consolidated Statement of Operations. Net
income for the three months ended March 31, 2000 was reduced by a provision
for income taxes of approximately $472,000. In the three months ended March
31, 1999, there was no income tax provision because of the availability of
net operating loss carryforwards.
Liquidity and Capital Resources
-------------------------------
The Company's balance sheet reflects working capital of approximately
$6,500,000 at March 31, 2000, approximately the same as its working capital
at December 31, 1999.
Accounts receivable increased by approximately $2,575,000 from December 31,
1999. This increase was offset by increases in accounts payable and accrued
expenses in the aggregate amount of approximately $2,000,000. Cash
decreased by approximately $52,000 from December 31, 1999.
Cash flows generated from operations for the three months ended March
31, 2000 were approximately $1,150,000. Net income of $750,000 contributed
to this result. Increases in trade receivables of approximately $2,600,000
were offset by decreases in inventories of approximately $300,000,
increases in accounts payable of approximately $1,745,000, increases in
accrued liabilities of approximately $215,000 and a non-cash charge of
approximately $685,000 related to stock issued to a consultant.
Cash used for financing activities in the amount of approximately
$1,040,000 was for the repayment of loans. The Company uses its loan
facility, which is collateralized by its accounts receivable, inventories
and fixed assets, together with working capital generated from operations,
to fund its cash needs. At March 31, 2000, the Company had available
approximately $3,127,000 under this facility.
Management of the Company believes that internally generated funds and its
available line of credit will be sufficient for its working capital needs
and the servicing of its debt for at least the next 12 months.
The Company is in the process of renegotiating its loan facility to provide
additional funds at lower interest rates.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
14
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
The Company is from time-to-time involved in ordinary and routine
litigation. It is also involved in the following litigation:
In March 1999 and May 1999, Frank Hillebrand and Jonathan Aube,
respectively, each commenced an action against the Company in the Superior
Court of California, County of Riverside, Indio Branch.
Each suit arises from allegations by the respective plaintiff that the
Company used their images in, among other things, advertisements and
product packaging without their authorization. Each suit claims damages for
invasion of privacy, invasion of the right to privacy, conversion and loss
of future earnings. Additionally, each suit seeks injunctive relief. The
suits are currently in a discovery stage. Accordingly, the Company is
unable to predict what the likely outcome will be at this time. Certain
causes of action under these lawsuits are not covered under the Company's
insurance policies; however, management believes that any potential
liability over and above that which is covered by insurance will not have a
material financial impact on the Company.
Item 2. Changes in Securities and Use of Proceeds
During the three months ended March 31, 2000, the Company issued 281,986
additional shares of its common stock to acquire certain minority interests
from two officers who are significant shareholders and directors of the
Company. In addition, it issued additional shares of common stock to a
financial consultant.
In May, 2000, the Company entered into a consulting agreement effective for
a term of one year commencing March 1, 2000. Additionally, the Company
issued 447,596 shares of common stock to the consulting firm as
compensation for services rendered to date. The fair value of the shares
issued is approximately $685,000, which is reflected as a compensation
charge in March, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
15
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
September 8, 2000 EVERGOOD PRODUCTS CORPORATION
By:
/s/ Stephen R. Stern
---------------------------------
Chief Financial Officer and
Principal Accounting Officer
16
