<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 June 30, 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 June 30, 2000 3-4
Statements of Operations
For the Three and Six Months Ended June 30, 1999 and 2000 5
Statements of Cash Flows
For the Six Months Ended June 30, 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 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1. Consolidated Financial Statements
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
===========================
<S> <C> <C>
Assets
Current Assets
Cash $ 445,849 $ 338,799
Restricted cash 36,410 -
Accounts receivable 5,330,484 8,029,144
Accounts receivable - related party 247,658 394,678
Current maturities of notes receivable 124,910 9,454
Inventory 8,618,944 9,181,164
Deferred tax asset 1,456,000 1,237,000
Deferred franchising costs 58,400 56,400
Prepaid taxes - 33,597
Prepaid expenses and other current assets 443,565 592,848
----------- -----------
16,762,220 19,873,084
----------- -----------
Fixed Assets 1,224,699 1,948,507
----------- -----------
Other Assets
Notes receivable - net of current maturities 42,414 84,362
Deferred tax asset 510,000 333,000
Intangible assets - 194,098
Other assets 16,118 197,118
----------- -----------
568,532 808,578
----------- -----------
$18,555,451 $22,630,169
=========== ===========
</TABLE>
See notes to consolidated financial statements. 3
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
====================================================================================
December 31, June 30,
1999 2000
===========================
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 8,744,554 $10,244,147
Accrued expenses 718,476 1,456,721
Unearned franchise fees 240,000 187,500
Sundry liabilities 94,454 39,649
Income taxes payable 35,740 -
Current maturities of long-term debt 258,250 240,000
Current maturities of loans payable - officers 174,272 146,588
----------- -----------
10,265,746 12,314,605
----------- -----------
Other Liabilities
Loan payable 5,839,175 6,038,069
Long-term debt - net of current maturities 680,000 560,000
Loans payable - officers - net of current maturities 110,323 98,628
----------- -----------
6,629,498 6,696,697
----------- -----------
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) (3,977,613)
----------- -----------
1,964,241 3,922,901
Less: Treasury stock 304,034 304,034
----------- -----------
1,660,207 3,618,867
----------- -----------
$18,555,451 $22,630,169
=========== ===========
</TABLE>
See notes to consolidated financial statements. 4
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 2000 1999 2000
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net Revenues $12,105,388 $15,897,614 $23,062,555 $31,146,993
Cost of Revenues 8,488,852 11,398,786 16,220,051 22,368,858
----------- ----------- ----------- -----------
3,616,536 4,498,828 6,842,504 8,778,135
Selling, General and
Administrative Expenses 2,567,562 3,768,056 5,123,293 7,914,954
----------- ----------- ----------- -----------
Income Before Other Income
(Expenses) 1,048,974 730,772 1,719,211 863,181
----------- ----------- ----------- -----------
Other Income (Expenses)
Interest (expense) (157,503) (203,105) (330,872) (409,111)
Other income - - - 1,295,630
----------- ----------- ----------- -----------
(157,503) (203,105) (330,872) 886,519
----------- ----------- ----------- -----------
Income Before Provision for
Income Taxes 891,471 527,667 1,388,339 1,749,700
----------- ----------- ----------- -----------
Provision for Income Taxes
Current - 23,125 - 277,250
Deferred - 178,000 - 396,000
----------- ----------- ----------- -----------
- 201,125 - 673,250
----------- ----------- ----------- -----------
Net Income $ 891,471 $ 326,542 $ 1,388,339 $ 1,076,450
=========== =========== =========== ===========
Basic and Diluted Net Income
Per Share $ .23 $ .07 $ .36 $ .25
=========== =========== =========== ===========
Weighted Shares Used in
Computation 3,887,368 4,475,956 3,887,368 4,230,712
=========== =========== =========== ===========
</TABLE>
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 Six Months Ended
June 30,
-------------------------
1999 2000
-------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,388,339 $ 1,076,450
----------- -----------
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 104,797 155,799
Increase (decrease) in allowance for doubtful
accounts and notes receivable (4,172) 127,000
Write-off of accounts receivable and notes receivable - 72,235
Stock issued for consulting fees - 684,821
(Gain) on sale of machinery and equipment - (8,000)
(Increase) decrease in:
Accounts receivable (1,385,793) (2,788,369)
Accounts receivable - related party - (147,020)
Inventory 288,920 (562,220)
Deferred franchising costs 1,875 2,000
Prepaid taxes (8,306) (33,597)
Prepaid expenses and other current assets 195,019 (149,283)
Notes receivable 19,254 (36,018)
Deferred tax asset - 396,000
Other assets (176) (181,000)
Increase (decrease) in:
Accounts payable 262,900 1,499,592
Accrued expenses and sundry liabilities 162,232 683,441
Unearned franchise fees 28,750 (52,500)
Income taxes payable - (35,740)
----------- -----------
(334,700) (372,859)
----------- -----------
1,053,639 703,591
----------- -----------
Cash Flows from Investing Activities
Purchase of fixed assets (204,589) (876,316)
Proceeds from sale of machinery and equipment - 8,000
Restricted cash as security for equipment returned
pursuant to capital lease - 36,410
----------- -----------
(204,589) (831,906)
----------- -----------
</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 Six Months Ended
June 30,
------------------------
1999 2000
------------------------
Cash Flows from Financing Activities
Increase (decrease) in loan payable $ (654,403) $ 198,894
Payment of notes payable (147,583) (138,250)
Payments of officers' loan (51,333) (39,379)
---------- ---------
(853,319) 21,265
---------- ---------
Increase (Decrease) in Cash (4,269) (107,050)
Cash - beginning 751,664 445,849
---------- ---------
Cash - end $ 747,395 $ 338,799
========== =========
See notes to consolidated financial statements. 7
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 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 six months ended June 30, 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, June 30,
1999 2000
==========================
Raw Materials $4,078,344 $4,087,698
Work-in-Process 1,180,092 1,182,118
Finished Goods 3,360,508 3,911,348
---------- ----------
$8,618,944 $9,181,164
========== ==========
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 and six months ended June 30, 1999 and
2000 was as follows:
<TABLE>
<CAPTION>
Brand
Manufacturing Franchising Development Corporate Total
======================================================================
<S> <C> <C> <C> <C> <C>
Three Months Ended
June 30, 1999
Net revenues from
external customers $ 6,767,707 $3,727,719 $1,609,962 $ - $12,105,388
Intersegment net sales 2,956,009 11,765 - - 2,967,774
Operating income (loss) 690,848 393,529 (36,500) 1,097 1,048,974
Total assets 7,942,754 4,943,239 2,326,363 307,868 15,520,224
Three Months Ended
June 30, 2000
Net revenues from
external customers $11,247,546 $3,092,083 $1,557,985 $ - $15,897,614
Intersegment net sales 2,785,339 21,546 - - 2,806,885
Operating income (loss) 1,050,281 (141,839) (133,041) (44,629) 730,772
Total assets 13,112,623 5,409,294 2,840,655 1,267,597 22,630,169
</TABLE>
Continued 9
<PAGE>
<TABLE>
<CAPTION>
Brand
Manufacturing Franchising Development Corporate Total
====================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended
June 30, 1999
Net revenues from
external customers $13,000,128 $7,362,104 $2,700,323 $ - $23,062,555
Intersegment net sales 5,073,069 28,441 - - 5,101,510
Operating income (loss) 1,350,444 832,094 (464,968) 1,641 1,719,211
Total assets 7,942,754 4,943,239 2,326,363 307,868 15,520,224
Six Months Ended
June 30, 2000
Net revenues from
external customers $21,672,057 $6,334,567 $3,140,369 $ - $31,146,993
Intersegment net sales 5,392,673 41,853 - - 5,434,526
Operating income (loss) 2,170,074 (166,498) (383,813) (756,582) 863,181
Total assets 13,112,623 5,409,294 2,840,655 1,267,597 22,630,169
</TABLE>
Revenues from the franchising segment are comprised of the following:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
------------------------ --------------------------
1999 2000 1999 2000
====================================================
<S> <C> <C> <C> <C>
Sale of Products $3,101,769 $2,645,341 $6,143,913 $5,414,974
Royalties 475,450 378,742 970,441 789,093
Sale of Franchises 150,500 68,000 247,750 130,500
---------- ---------- ---------- ----------
$3,727,719 $3,092,083 $7,362,104 $6,334,567
========== ========== ========== ==========
</TABLE>
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.
10
<PAGE>
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.
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
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. All statements other than statements of
historical fact 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
11
<PAGE>
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 the 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.
Results of Operations
Six months ended June 30, 2000 compared with six months ended June 30, 1999.
Revenues
--------
Revenues for the six months ended June 30, 1999 and 2000 are as follows:
For the Six Months Ended
June 30,
----------------------------------------
1999 2000
------------------- ----------------
Amount Percent Amount Percent
========================================
Segment:
Manufacturing $13,000,000 56.0% $21,672,000 70.0%
Franchising 7,362,000 32.0 6,335,000 20.0
Brand Development 2,700,000 12.0 3,140,000 10.0
----------- ----- ----------- -----
Consolidated $23,062,000 100.0% $31,147,000 100.0%
=========== ===== =========== =====
Consolidated revenue for the six months ended June 30, 2000 increased by
approximately $8,085,000 from $23,062,000 in 1999 to $31,147,000 in 2000 or
35%.
12
<PAGE>
Revenue from product sales by all segments increased by approximately
$8,383,000 from $21,844,000 in 1999 to $30,227,000 in 2000 or 38%. Company-
wide sales to the franchise system decreased by approximately $834,000 from
$6,388,000 in 1999 to $5,554,000 in 2000 or 13%. Company-wide sales to
unaffiliated customers increased by approximately $9,217,000 from $15,456,000
in 1999 to $24,673,000 in 2000 or 60%. Consolidated revenues also include
royalties and franchise fees earned by the franchising segment. Royalties
decreased approximately $181,000 for the six months ended June 30, 2000 from
$970,000 in 1999 to approximately $789,000 in 2000. For the six months ended
June 30, 2000, franchise fee revenue decreased by approximately $117,000 from
approximately $248,000 in 1999 to $131,000 in 2000.
Manufacturing segment sales increases of approximately $8,700,000 for the six
months ended June 30, 2000 were primarily due to increased sales to the
Company's four largest customers. There were no significant changes in
selling prices during these periods. Selling prices are based on the cost of
manufacturing plus a margin which varies based on the brand and, in some
cases, a particular product.
The decrease in franchising segment revenue of approximately $1,000,000 for
the six months ended June 30, 2000, primarily reflects a decrease in sales of
products to franchisees, lower royalties and lower franchise fees. 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 $440,000 in the six months
ended June 30, 2000. The increase in this segment's sales was primarily due
to increased advertising and promotional expenditures.
The Company continued to experience substantial sales growth during the first
six months of 2000 and it believes that this trend will continue for the
balance of this fiscal year.
Operating Income
----------------
Operating income for the six months ended June 30, 1999 and 2000 are as
follows:
For the Six Months Ended
June 30,
-----------------------------------------
1999 2000
------------------- -----------------
Percent Percent
of of
Segment Segment
Amount Revenues Amount Amount
=========================================
Segment
Manufacturing $1,350,000 10.4% $2,170,000 10.0%
Franchising 832,000 11.2 (166,000) (2.6)
Brand Development (465,000) 17.0 (385,000) (12.4)
Corporate 2,000 - (756,000) -
---------- ----------
Consolidated $1,719,000 7.5% $ 863,000 2.7%
========== ==========
13
<PAGE>
Consolidated operating income for the six months ended June 30, 2000
decreased by $856,000. For the six months ended June 30, 2000, consolidated
gross margin increased by approximately $1,936,000, and was offset by an
increase in selling, general and administrative expenses in the amount of
$2,792,000. The increase in gross margin resulted from higher revenues and
lower raw material costs, offset by higher labor costs.
Company-wide gross profit from the franchise system for the six months ended
June 30, 2000 decreased by $627,000. This decrease was primarily due to a
decrease in sales to franchisees and decreases in royalties and franchise
fees. Company-wide gross profit from unaffiliated parties for the six months
ended June 30, 2000 increased by $2,563,000.
The increases in consolidated selling, general and administrative expenses
for the six months ended June 30, 2000 of approximately $2,792,000 were due
to increases in advertising and promotional expenses, professional and
consulting fees, officers' salaries and bad debt expense. Also included in
the 2000 period is a non-cash expense of approximately $685,000 related to
stock issued to a consultant.
Manufacturing segment operating income increased for the six months ended
June 30, 2000 by approximately $820,000. Increases in manufacturing gross
profit of approximately $1,932,000, were reduced by increases in selling,
general and administrative expenses of approximately $1,112,000. These
increases reflect additional expenditures in officers' salaries, professional
fees and travel and entertainment expenses.
Franchising segment operating income for the six months ended June 30, 2000
decreased by approximately $998,000. This decrease was due to a decrease in
gross margin of $615,000 and higher selling, general and administrative
expenses of approximately $383,000. The decrease in gross margin resulted
from lower sales, royalties and franchise fees. The increases in selling,
general and administrative expenses were due primarily to bad debt expense,
convention and seminar costs, and office salaries.
Brand development operating losses for the six months ended June 30, 2000
decreased by approximately $81,000. Increases in gross margin of $619,000
resulted from higher volume and better margins. These were offset by higher
selling, general and administrative expenses, primarily for advertising and
promotion.
Net Income
----------
Consolidated net income decreased by $312,000 from $1,388,000 in 1999 to
$1,076,000 in 2000. The decrease was primarily due to the decreases in
operating income and also because of the provision for income taxes in 2000,
while no provision for taxes was needed in 1999 because of the availability
of net operating loss carryforwards. The six months ended June 30, 2000 also
reflects approximately $1,295,000 in litigation recoveries.
14
<PAGE>
Three months ended June 30, 2000 compared to three months ended June 30,
1999.
Revenues
--------
Revenues for the three months ended June 30, 1999 and 2000 are as follows:
For the Three Months Ended
June 30,
---------------------------------------
1999 2000
------------------- -------------------
Amount Percent Amount Percent
=======================================
Segment:
Manufacturing $ 6,768,000 56.0% $11,248,000 71.0%
Franchising 3,727,000 31.0 3,092,000 19.0
Brand Development 1,610,000 13.0 1,558,000 10.0
----------- ----- ----------- -----
Consolidated $12,105,000 100.0% $15,898,000 100.0%
=========== ===== =========== =====
Consolidated revenue for the three months ended June 30, 2000 increased by
approximately $3,793,000, an increase of approximately 31%.
Revenue from product sales by all segments increased by approximately
$3,972,000 from $11,479,000 in 1999 to $15,451,000 in 2000 or 35%. Company-
wide sales to the franchise system decreased by $502,000 from $3,246,000 in
1999 to $2,744,000 in 2000 or 15%. Company-wide sales to unaffiliated
customers increased by approximately $4,474,000 from $8,233,000 in 1999 to
$12,707,000 in 2000 or 54%. Consolidated revenues also include royalties and
franchise fees earned by the franchising segment. Royalties decreased
approximately $96,000 to $379,000 in the three months ended June 30, 2000
from $475,000 in 1999. Franchise fees for the three months ended June 30,
2000 decreased by approximately $83,000 from $151,000 in 1999 to $68,000
in 2000.
Manufacturing segment sales increases of approximately $4,500,000 for the
three months ended June 30, 2000 were primarily due to increased sales to the
Company's four largest customers. There were no significant changes in
selling prices during these periods. Selling prices are based on the cost of
manufacturing plus a margin which varies based on the brand and, in some
cases, a particular product.
The decrease in the franchising segment revenue of approximately $600,000 in
the three months ended June 30, 2000 primarily reflects a decrease in sales
of products to franchisees, lower royalties and lower franchise fees.
Franchise revenue was directly affected by a decrease in sale of products to
franchisees, lower royalties and franchise fees. The decline in sales was
primarily due to increased competition from national vitamin chains, vitamin
discounters and internet sales.
Brand development sales were approximately the same for both periods.
15
<PAGE>
Operating Income
----------------
Operating income for the three months ended June 30, 1999 and 2000 is as
follows:
For the Three Months Ended
June 30,
-----------------------------------------
1999 2000
-------------------- ------------------
Percent Percent
of of
Segment Segment
Amount Revenues Amount Revenues
=========================================
Segment
Manufacturing $ 691,000 10.2% $1,050,000 9.3%
Franchising 394,000 10.6 (142,000) (4.6)
Brand Development (36,000) (2.2) (133,000) (8.5)
Corporate - - (45,000) -
---------- ----------
Consolidated $1,049,000 8.7% $ 730,000 4.6%
========== ==========
Consolidated operating income for the three months ended June 30, 2000
decreased by approximately $319,000. For the three months ended June 30,
2000, consolidated gross margin increased by approximately $881,000 and was
offset by an increase in selling, general and administrative expenses in the
amount of $1,200,000. The increase in gross margin resulted from higher
revenues and lower raw material costs, offset by higher labor costs.
Company-wide gross profit from the franchise system for the three months
ended June 30, 2000 decreased by $383,000. This decrease was primarily due to
a decrease in sales to franchisees and decreases in royalties and franchise
fees. Company-wide gross profit from unaffiliated parties for the three
months ended June 30, 2000 increased by $1,264,000.
The increases in consolidated selling, general and administrative expenses
for the three months ended June 30, 2000 of approximately $1,200,000 were due
to increases in advertising and promotional expenses, consulting fees,
officers' salaries and bad debt expense.
Manufacturing segment operating income increased for the three months ended
June 30, 2000 by approximately $359,000. Increases in manufacturing gross
profit of approximately $993,000 were reduced by increases in selling,
general and administrative expenses of approximately $634,000. These
increases reflect additional expenditures in officers' salaries, professional
fees, and travel and entertainment expenses.
Franchising segment operating income for the three months ended June 30, 2000
decreased by approximately $536,000. This decrease was due to a decrease in
gross margin of $415,000 and higher selling, general and administrative
expenses of approximately $121,000. The decrease in gross margin resulted
from lower sales, royalties and franchise fees. The increases in selling,
general and administrative expenses were due primarily to increase in bad
debt expense, convention and seminar costs, and marketing expenses.
16
<PAGE>
Brand development operating losses for the three months ended June 30, 2000,
increased by approximately $97,000. Increases in gross margin of $284,000 for
the three months were exceeded by higher selling, general and administrative
expenses, primarily advertising and promotion costs.
Net Income
----------
Consolidated net income decreased for the three months ended June 30, 2000 by
$565,000 from $891,000 in 1999 to $326,000 in 2000. The decrease was
primarily due to the decreases in operating income and because of the
provision for income taxes in 2000, while no provision for taxes was needed
in 1999 because of the availability of net operating loss carryforwards.
Liquidity and Capital Resources
-------------------------------
The Company's balance sheet reflects working capital of approximately
$7,558,000 at June 30, 2000. The increase of $1,060,000 from December 31,
1999 reflects increases in accounts receivable, inventory, prepaid taxes and
expenses offset by increases in accounts payable and accrued expenses. Cash
flow generated from operations was approximately $704,000, a decrease of
approximately $350,000 from June 30, 1999. Although net income of
approximately $1,076,000 provided cash inflow, increased operating levels
resulted in increases in accounts receivable, inventories, prepaid taxes and
prepaid expenses. These increases were partially offset by increases in
accounts payable, accrued liabilities and the issuance of stock for
consulting fees.
Cash used by investing activities in the aggregate amount of approximately
$832,000 consists primarily of acquisitions of machinery and equipment. The
Company is continuing to expand its productive capacity to meet anticipated
increases in demand.
The Company finances these activities through internally generated cash
flows, and borrowings from its loan facility. At June 30, 2000, the Company
had approximately $2,135,000 available 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
requirements, capital expenditure needs and the servicing of its debt for at
least the next twelve months.
The Company is in the process of renegotiating its loan agreement to increase
borrowing capacity at lower interest rates.
During the first quarter of this year, the Company settled two class actions
suits in the aggregate amount of $1,295,000 which is shown in the
Consolidated Statements of Operations as other income.
Cash decreased by $107,050 from December 31, 1999.
17
<PAGE>
Collective Bargaining Agreement
-------------------------------
As of May 15, 2000, the Company entered into a collective bargaining
agreement with the Teamsters Union, Local 202. The agreement is for a three
year term and expires on May 15, 2003. The Company estimates that this
agreement will result in an increase in labor costs of approximately
$2,200,000 over its term, assuming that the labor force stays at its present
levels, together with approximately the same number of overtime hours.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Part II - Financial Information - 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 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
18
<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
19
