<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 September 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 of 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 and 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 November 10, 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 3-4
December 31, 1999 and September 30, 2000
Statements of Operations 5
For the Three and Nine Months Ended September 30, 1999 and 2000
Statements of Cash Flows 6-7
For the Nine Months Ended September 30, 1999 and 2000
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-18
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 19
Signatures 20
</TABLE>
2
<PAGE>
Part I Financial Information
Item 1 Financial Statements
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
=====================================
<S> <C> <C>
Assets
Current Assets
Cash $445,849 $334,847
Restricted Cash 36,410 -
Accounts Receivable - less allowance for doubtful
accounts of $334,000 and $500,000 for 1999 and 2000,
respectively 5,330,484 7,340,620
Accounts Receivable - Related Party - less allowance for
doubtful accounts of $0 and $390,715 for 1999 and
2000, respectively 247,658 -
Current Maturities of Notes Receivable - less allowance
for doubtful accounts of $75,000 and $74,000 for 1999
and 2000, respectively 124,910 50,982
Inventory 8,618,944 9,099,747
Deferred Tax Asset 1,456,000 1,227,000
Deferred Franchising Costs 58,400 64,400
Prepaid Expenses and Other Current Assets 443,565 818,961
------------- -----------
16,762,220 18,936,557
------------- -----------
Fixed Assets 1,224,699 2,328,509
------------- -----------
Other Assets
Notes Receivable - Net of Current Maturities 42,414 110,200
Deferred Tax Asset 510,000 343,000
Intangible Assets - 300,474
Other Assets 16,118 83,891
------------- -----------
568,532 837,565
------------- -----------
$18,555,451 $22,102,631
============= ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
=====================================
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $8,744,554 $9,044,279
Accrued Expenses and Sundry Liabilities 812,930 1,736,360
Unearned Franchise Fees 240,000 197,500
Income Taxes Payable 35,740 85,386
Current Maturities of Long-Term Debt 258,250 240,000
Current Maturities of Loans Payable - Officers 174,272 116,501
------------- ------------
10,265,746 11,420,026
------------- ------------
Other Liabilities
Loan Payable 5,839,175 5,632,934
Long-Tern Debt - Net of Current Maturities 680,000 1,315,500
Loans Payable - Officers - Net of Current Maturities 110,323 98,628
------------- ------------
6,629,498 7,047,062
------------- ------------
Commitments and Contingencies
Stockholders' Equity
Common Stock 39,576 45,462
Additional Paid-In Capital 6,978,728 7,855,052
Accumulated (Deficit) (5,054,063) (3,960,937)
------------- ------------
1,964,241 3,939,577
Less: Treasury Stock 304,034 304,034
------------- ------------
1,660,207 3,635,543
------------- ------------
$18,555,451 $22,102,631
============= ============
</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 Nine Months Ended
September 30, September 30,
----------------------------------- -----------------------------------
1999 2000 1999 2000
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Revenue $10,770,512 $15,903,426 $33,833,067 $47,050,419
Cost of Revenue 7,340,673 11,520,387 23,560,724 33,889,245
--------------- ---------------- ---------------- ----------------
3,429,839 4,383,039 10,272,343 13,161,174
Selling, General and Administrative Expenses 2,766,469 3,992,860 7,889,762 11,907,814
--------------- ---------------- ---------------- ----------------
Income Before Other Income (Expenses) 663,370 390,179 2,382,581 1,253,360
--------------- ---------------- ---------------- ----------------
Other Income (Expenses)
Interest (Expense) (163,332) (229,253) (494,204) (638,364)
Other Income - - - 1,295,630
--------------- ---------------- ---------------- ----------------
(163,332) (229,253) (494,204) 657,266
--------------- ---------------- ---------------- ----------------
Income Before Provision For Income Taxes 500,038 160,926 1,888,377 1,910,626
--------------- ---------------- ---------------- ----------------
Provision for Income Taxes
Current - 144,250 - 421,500
Deferred - - - 396,000
--------------- ---------------- ---------------- ----------------
- 144,250 - 817,500
--------------- ---------------- ---------------- ----------------
Net Income $500,038 $16,676 $1,888,377 $1,093,126
=============== ================ ================ ================
Basic and Diluted Net Income per Share $ 0.13 $ 0.00 $ 0.49 $ 0.25
=============== ================ ================ ================
Weighted Shares Used in Computation 3,887,368 4,475,957 3,887,368 4,312,460
=============== ================ ================ ================
</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 Nine Months Ended
September 30,
------------------------------------
1999 2000
------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $1,888,377 $1,093,126
-------------- --------------
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 160,457 368,627
Stock issued for consulting fees - 684,821
Increase (decrease) in allowance for doubtful
accounts and notes receivable (37,878) 555,715
Write-off of accounts receivable and notes receivable - 72,235
(Gain) on sale of machinery and equipment - (8,000)
(Increase) decrease in:
Accounts receivable (1,676,153) (2,247,373)
Accounts receivable - related party (178,227) (143,057)
Inventory (367,382) (480,803)
Deferred franchising costs 5,540 (6,000)
Prepaid expenses and other current assets 8,202 (375,396)
Notes receivable 65,890 6,142
Deferred tax assets - 396,000
Other assets 4,324 (67,773)
Increase (decrease) in:
Accounts payable (71,301) 299,725
Accrued expenses and sundry liabilities 169,059 923,430
Unearned franchise fees (31,250) (42,500)
Income taxes payable - 49,646
-------------- --------------
(1,948,719) (14,561)
-------------- --------------
(60,342) 1,078,565
-------------- --------------
Cash Flow from Investing Activities
Purchase of fixed assets (499,675) (1,458,020)
Acquisition of a franchise store - (117,500)
Proceeds from sale of machinery and equipment - 8,000
Restricted cash as security for equipment lease - 36,410
-------------- --------------
(499,675) (1,531,110)
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Page 2 of 2
================================================================================
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
------------------------------------
1999 2000
------------------------------------
<S> <C> <C>
Cash Flow from Financing Activities
Increase (decrease) in loan payable 846,458 (206,241)
Increase (decrease) of notes payable (219,761) 617,250
Decrease of officers' loans (81,093) (69,466)
-------------- --------------
545,604 341,543
-------------- --------------
Increase (Decrease) in Cash (14,413) (111,002)
Cash - beginning 751,664 445,849
-------------- --------------
Cash - end $737,251 $334,847
============== ==============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 nine months ended September 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 thereof included in the Company's
Registration Statement on Form 10, filed on May 25, 2000 and as amended on
October 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, 1999 September 30, 2000
----------------- ------------------
Raw Materials $4,078,344 $3,837,708
Work-in-Process 1,180,092 1,702,929
Finished Goods 3,360,508 3,559,110
---------- ----------
$8,618,944 $9,099,747
========== ==========
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 revenue 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 revenue 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, and from a franchise store acquired during the year 2000, which
is owned 100% by the Company. The brand development segment obtains revenue
from the wholesale and retail sale of vitamins and nutritional supplements
under its own nationally advertised brand name.
Segment information for the three and nine months ended September 30, 1999
and 2000 was as follows:
<TABLE>
<CAPTION>
Brand
Manufacturing Franchising Development Corporate Total
------------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
Three Months Ended
September 30, 1999
Net revenue from
external customers $ 5,478,000 $3,736,000 $1,557,000 $ - $10,771,000
Intersegment net sales 3,698,000 20,000 - - 3,718,000
Operating income (loss) 516,000 171,000 (22,000) (2,000) 663,000
Total assets 8,849,000 5,251,000 2,624,000 308,000 17,032,000
Brand
Manufacturing Franchising Development Corporate Total
------------- ----------- ----------- --------- -----
Three Months Ended
September 30, 2000
Net revenue from
external customers $11,408,000 $3,038,000 $1,457,000 $ - $15,903,000
Intersegment net sales 1,980,000 32,000 - - 2,012,000
Operating income (loss) 1,549,000 (506,000) (659,000) 6,000 390,000
Total assets 13,509,000 4,924,000 2,428,000 1,242,000 22,103,000
</TABLE>
Continued 9
<PAGE>
<TABLE>
<CAPTION>
Brand
Manufacturing Franchising Development Corporate Total
------------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
Nine Months Ended
September 30, 1999
Net revenue from
external customers $18,478,000 $11,098,000 $ 4,257,000 $ - $33,833,000
Intersegment net sales 8,771,000 49,000 - - 8,820,000
Operating income (loss) 1,866,000 1,003,000 (487,000) - 2,382,000
Total assets 8,849,000 5,251,000 2,624,000 308,000 17,032,000
<CAPTION>
Brand
Manufacturing Franchising Development Corporate Total
------------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C>
Nine Months Ended
September 30, 2000
Net revenue from
external customers $33,080,000 $ 9,372,000 $ 4,598,000 $ - $47,050,000
Intersegment net sales 7,373,000 142,000 - - 7,515,000
Operating income (loss) 3,719,000 (672,000) (1,043,000) (751,000) 1,253,000
Total assets 13,509,000 4,924,000 2,428,000 1,242,000 22,103,000
</TABLE>
Revenue from the franchising segment is comprised of the following:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
-------------------------- ---------------------------
September 30, September 30,
-------------------------- ---------------------------
1999 2000 1999 2000
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Sale of Products $ 3,140,000 $ 2,614,000 $ 9,284,000 $ 8,029,000
Royalties 496,000 394,000 1,467,000 1,183,000
Sale of Franchises 100,000 30,000 348,000 160,000
----------- ----------- ------------ -----------
$ 3,736,000 $ 3,038,000 $ 11,099,000 $ 9,372,000
=========== =========== ============ ===========
</TABLE>
Product sales include $146,000 of sales for the current three and nine month
periods from a Company-owned franchise store, which was acquired during the year
2000.
5 - Litigation
The Company is a defendant in two lawsuits instituted during 1999 in State
Court of 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 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.
Continued 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.
8 - Loan Agreement
As of August 30, 2000, the Company renegotiated its loan agreement with its
present lender. As Amended, the agreement provides borrowings to a maximum
of $9,500,000. The loan is collateralized by the Company's Accounts
Receivable, Inventory, and certain Fixed Assets, and expires on August 17,
2004. As amended, the agreement also provides that the Company shall pay an
interest rate of 1% higher than the rate of interest publicly announced by
the Chase Manhattan Bank (Chase Prime). In addition, if the Company's Net
Income, exclusive of any extraordinary items, is at least $850,000 in any
year, commencing with the fiscal year ending December 31, 2001 (a
"Qualifying Fiscal Year"), the interest rate shall be reduced by one quarter
of one percent (.25%) per annum, if no event of default has occurred under
the terms of the agreement; provided, the interest rate per annum shall not
be lower than one half of one percent (.5%) in excess of the Chase Prime. In
the event that the Company has a net loss in any fiscal year following a
Qualifying Fiscal Year, the interest rate shall increase by one quarter of
one percent (.25%) per annum.
9 - Accounts Receivable - Related Party
In August, 1999, HSSB Holdings Corp. ("HSSB"), an entity owned by two
individuals who serve as officers and directors of the Company (one of whom
is the Company's controlling stockholder) acquired two troubled franchise
locations located in Long Island, New York, from the prior owner who had
fallen significantly behind in payments to the Company. The stores were
acquired for HSSB's assumption of liabilities owed to the Company (amounting
to $110,915) and certain obligations related to the leased premises. Since
acquisition, HSSB has expended significant amounts to renovate and refurbish
the acquired stores and for advertising and promotion to reestablish market
presence. However, it has been unable to generate adequate cash flows from
the acquired stores to make any payments on amounts owed to the Company,
including additional amounts of
Continued 11
<PAGE>
approximately $268,800 for product purchased subsequent to the acquisition
and $11,000 of non-interest bearing advances.
The owners of HSSB are presently evaluating what steps can be taken to
bring these stores to profitability. However, due to the uncertainty of
HSSB's ability to generate adequate future cash flows, the Company has
deemed it necessary to fully reserve against the receivable totaling
$390,715 at September 30, 2000. Furthermore, due to the uncertainty of the
Company realizing payment for any future sales made on account to HSSB, the
Company has determined that, until such time as conditions warrant
otherwise, future sales to HSSB should be recorded on a cash receipts
basis.
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
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-
capitalized competitors into the Company's markets; and the uncertainty
regarding the Company's continued ability, through the 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.
General
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 revenue 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
revenue 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.
Continued 12
<PAGE>
Results of Operations
Nine months ended September 30, 2000 compared with nine months ended
September 30, 1999.
Revenue
-------
Revenue for the nine months ended September 30, 1999 and 2000 is as
follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-----------------------------------------
1999 2000
-----------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Segment:
Manufacturing $18,478,000 54.6% $33,080,000 70.3%
Franchising 11,098,000 32.8% 9,372,000 19.9%
Brand Development 4,257,000 12.6% 4,598,000 9.8%
----------- ----- ----------- -----
Consolidated $33,833,000 100.0% $47,050,000 100.0%
----------- ----- ----------- -----
</TABLE>
Consolidated revenue for the nine months ended September 30, 2000 increased by
approximately $13,217,000 from $33,833,000 in 1999 to $47,050,000 in 2000 or
39.1%.
Revenue from product sales by all segments increased by approximately
$13,688,000 from $32,019,000 in 1999 to $45,707,000 in 2000 or 42.8%. Company-
wide sales through the franchise system decreased by approximately $1,418,000
from $9,582,000 in 1999 to $8,164,000 in 2000 or 14.8%. The current year's
revenue includes $146,000 of sales by a franchise store acquired during the year
2000, which is 100% owned by the Company. Company-wide sales to unaffiliated
customers increased by approximately $15,107,000 from $22,436,000 in 1999 to
$37,543,000 in 2000 or 67.3%. Consolidated revenue also include royalties and
franchise fees earned by the franchising segment. Royalties decreased
approximately $284,000 for the nine months ended September 30, 2000 from
$1,467,000 in 1999 to approximately $1,183,000 in 2000. For the nine months
ended September 30, 2000, franchise fee revenue decreased by approximately
$187,000 from approximately $348,000 in 1999 to $161,000 in 2000.
Manufacturing segment sales increases of approximately $14,602,000 for the nine
months ended September 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 that varies based on the brand and, in some cases, a
particular product.
The decrease in franchising segment revenue of approximately $1,726,000 for the
nine months ended September 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 users. The current year's revenue also
includes $146,000 of sales by a franchise store acquired during the year 2000,
which is 100% owned by the Company.
Brand development sales increased by approximately $341,000 in the nine months
ended September 30,
Continued 13
<PAGE>
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
nine months of 2000 and it believes that this trend will continue for the
balance of the fiscal year.
Operating Income
----------------
Operating income for the nine months ended September 30, 1999 and 2000 is as
follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
---------------------------------------------------------------------
1999 2000
---------------------------------------------------------------------
Amount Percent Amount Percent
------ of ------ of
Segment Segment
Revenues Revenues
-------- --------
<S> <C> <C> <C> <C>
Segment:
Manufacturing $ 1,866,000 10.1% $3,719,000 11.2%
Franchising 1,003,000 9.0% (672,000) (7.2)%
Brand Development (487,000) (11.4)% (1,043,000) (22.6)%
Corporate - (751,000) -
------------ ----------
Consolidated $ 2,382,000 7.0% $1,253,000 2.7%
============ ==========
</TABLE>
Consolidated operating income for the nine months ended September 30, 2000
decreased by $1,129,000. For the nine months ended September 30, 2000,
consolidated gross margin increased by approximately $2,889,000, and was offset
by an increase in selling, general and administrative expenses in the amount of
$4,018,000. The increase in gross margin resulted from higher revenue, lower raw
material costs and lower labor costs.
Company-wide gross profit from the franchise system for the nine months ended
September 30, 2000 decreased by $887,000. This decreased 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 nine months ended
September 30, 2000 increased by $3,776,000.
The increase in consolidated selling, general and administrative expenses for
the nine months ended September 30, 2000 of approximately $4,018,000 was due to
increases in advertising and promotional expenses, salaries, professional and
consulting fees and bad debt expense, including $391,000 of reserves recorded
against related party receivables. Also reflected 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 nine months ended
September 30, 2000 by approximately $1,853,000. Increases in manufacturing gross
profit of approximately $3,230,000 were reduced by increases in selling, general
and administrative expenses of approximately $1,377,000. These increases reflect
additional expenditures in salaries, professional fees and travel and
entertainment.
Franchising segment operating income for the nine months ended September 30,
2000 decreased by approximately $1,675,000. This decrease was due to a decrease
in gross margin of $771,000 and higher selling, general and administrative
expenses of approximately $904,000. The decrease in gross margin
Continued 14
<PAGE>
resulted from lower sales, royalties and franchise fees. The increase in
selling, general and administrative expenses was due primarily to bad debt
expense (including approximately $374,000 of reserves recorded against related
party receivables), conventions and seminars and salaries. The current year's
operating income includes an operating loss of approximately $24,000 from a
franchise store acquired in 2000.
Brand development operating losses for the nine months ended September 30, 2000
increased by approximately $556,000. Increases in gross margin of $429,000
resulted from higher volume and better margins. These were offset by higher
selling, general and administrative expenses, of approximately $985,000,
primarily for advertising and promotion.
Net Income
----------
Consolidated net income decreased by $ 795,000 from $1,888,000 in 1999 to
$1,093,000 in 2000. The decrease was primarily due to the decrease in operating
income and 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 nine months ended September 30, 2000 also reflects
approximately $1,296,000 in litigation recoveries.
Three months ended September 30, 2000 compared to three months ended September
30, 1999.
Revenue
-------
Revenue for the three months ended September 30, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
-----------------------------------------------------
1999 2000
-----------------------------------------------------
Amount Percent Amount Percent
------ of ------ of
Segment Segment
Revenues Revenues
-------- --------
<S> <C> <C> <C> <C>
Segment:
Manufacturing $ 5,478,000 50.9% $11,408,000 71.7%
Franchising 3,736,000 34.7% 3,038,000 19.1%
Brand Development 1,557,000 14.4% 1,457,000 9.2%
----------- ----- ----------- -----
Consolidated $10,771,000 100.0% $15,903,000 100.0%
----------- ----- ----------- -----
</TABLE>
Consolidated revenue for the three months ended September 30, 2000 increased by
approximately $5,132,000, an increase of approximately 47.6%.
Revenue from product sales by all segments increased by approximately $5,306,000
from $10,174,000 in 1999 to $15,480,000 in 2000 or 52.2%. The current year's
revenue includes $146,000 of sales by a franchise store acquired during the year
2000, which is 100% owned by the Company. Company-wide sales through the
franchise system decreased by $584,000 from $3,194,000 in 1999 to $2,610,000 in
2000 or 18.3%. Company-wide sales to unaffiliated customers increased by
approximately $5,890,000 from $6,980,000 in 1999 to $12,870,000 in 2000 or
84.4%. Consolidated revenue also include royalties and franchise fees earned by
the franchising segment. Royalties decreased approximately $102,000 to $394,000
in the three months ended September 30, 2000 from $496,000 in 1999. Franchise
fees for the
Continued 15
<PAGE>
three months ended September 30, 2000 decreased by approximately $70,000 from
$100,000 in 1999 to $30,000 in 2000.
Manufacturing segment sales increases of approximately $5,930,000 for the three
months ended September 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 that varies based on the brand and, in some cases, a
particular product.
The decrease in the franchising segment revenue of approximately $698,000 in the
three months ended September 30, 2000 primarily reflects a decrease in sales of
products to franchisees, lower royalties and lower franchise fees. The revenue
also includes $146,000 of sales by a franchise store, acquired during the year
2000, which is 100% owned by the Company. 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 chains, vitamin discounters and internet users.
Brand development sales decreased by approximately $100,000 to $1,457,000.
Operating Income
----------------
Operating income for the three months ended September 30, 1999 and 2000 is as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended
September 30,
---------------------------------------------------
1999 2000
---------------------------------------------------
Amount Percent Amount Percent
------ of ------ of
Segment Segment
Revenues Revenues
-------- --------
<S> <C> <C> <C> <C>
Segment:
Manufacturing $ 516,000 9.4% $ 1,549,000 13.6%
Franchising 171,000 4.6% (506,000) (16.7)%
Brand Development (22,000) (1.4)% (659,000) (45.2)%
Corporate (2,000) - 6,000 -
--------- -----------
Consolidated $ 663,000 6.2% $ 390,000 2.5%
========= ===========
</TABLE>
Consolidated operating income for the three months ended September 30, 2000
decreased by $273,000. For the three months ended September 30, 2000,
consolidated gross margin increased by approximately $953,000 and was offset by
an increase in selling, general and administrative expenses in the amount of
$1,226,000. The increase in gross margin resulted from higher revenue and lower
raw material costs, offset by higher labor costs.
Company-wide gross profit from the franchise system for the three months ended
September 30, 2000 decreased by $259,000. This decreased 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
September 30, 2000 increased by $1,214,000.
Continued 16
<PAGE>
The increase in consolidated selling, general and administrative expenses for
the three months ended September 30, 2000 of approximately $1,226,000 were due
to increases in advertising and promotional expenses, salaries, professional and
consulting fees and bad debt expense, including $391,000 of reserves recorded
against related party receivables.
Manufacturing segment operating income increased for the three months ended
September 30, 2000 by approximately $1,033,000. Increases in manufacturing gross
profit of approximately $1,299,000 were reduced by increases in selling, general
and administrative expenses of approximately $266,000. These increases reflect
additional expenditures in salaries, professional fees and travel and
entertainment.
Franchising segment operating income for the three months ended September 30,
2000 decreased by approximately $677,000. This decrease was due to a decrease in
gross margin of $155,000 and higher selling, general and administrative expenses
of approximately $522,000. The decrease in gross margin resulted from lower
sales, royalties and franchise fees. The increase in selling, general and
administrative expenses was due primarily to bad debt expense (including
approximately $374,000 of reserves against related party receivables),
conventions and seminars, and salaries. The current year's operating income
includes an operating loss of approximately $24,000 from a franchise store
acquired in 2000.
Brand development operating losses for the three months ended September 30, 2000
increased by approximately $681,000. This resulted from a decrease in gross
margin of $190,000 and higher selling, general and administrative expenses of
approximately $491,000, primarily for advertising and promotion costs.
Net Income
----------
Consolidated net income decreased for the three months ended September 30, 2000
by $483,000 from $500,000 in 1999 to $17,000 in 2000. The decrease was primarily
due to the decrease in operating income and 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 $7,517,000
at September 30, 2000. The increase of $1,021,000 from December 31, 1999
reflects increases in accounts receivable, inventory and prepaid expenses offset
by increases in accounts payable and accrued expenses. Cash flow generated from
operations was approximately $1,079,000, an increase of approximately $1,139,000
from the nine months ended September 30, 1999. Although net income of
approximately $1,093,000 provided cash inflow, increased operating levels
resulted in increases in accounts receivable, inventories and prepaid expenses.
These increases were primarily offset by increases in accounts payable and
accrued expenses. Also, approximately $685,000 of expenses were non-cash since
they resulted from the issuance of stock for consulting fees.
Cash used by investing activities in the aggregate amount of approximately
$1,531,000 consists primarily of acquisitions of machinery and equipment. The
Company is continuing to expand its productive capacity to meet anticipated
increases in demand. In addition, approximately $118,000 was expended for the
acquisition of a franchise store in California.
The Company finances these activities through internally generated cash flows,
and borrowings from its loan facility. At September 30, 2000, the Company had
approximately $1,658,000 available under this facility.
Continued 17
<PAGE>
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 the
next twelve months.
During the first quarter of the year, the Company settled two class action suits
and received the aggregate amount of $1,296,000 which is shown in the
Consolidated Statements of Operations as other income.
Cash decreased by approximately $111,000 from December 31, 1999.
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.
As of August 30, 2000, the Company renegotiated its loan agreement with its
present lender. As amended, the agreement provides for borrowings to a maximum
of $9,500,000. The loan is collateralized by the Company's Accounts Receivable,
Inventory, and certain Fixed Assets, and expires on August 17, 2004. The
agreement also provides that the Company shall pay an interest rate of 1% higher
than the rate of interest publicly announced by the Chase Manhattan Bank (Chase
Prime). In addition, if the Company's Net Income, exclusive of any extraordinary
items, is at least $850,000 in any year, commencing with the fiscal year ending
December 31, 2001 (a "Qualifying Fiscal Year"), the interest rate shall be
reduced by on quarter of one percent (.25%) per annum, if no event of default
has occurred under the terms of the agreement; provided, the interest rate per
annum shall not be lower than one half of one percent (.5%) in excess of the
Chase Prime. In the event that the Company has a net loss in any fiscal year
following a Qualifying Fiscal Year, the interest rate shall increase by one
quarter of one percent (.25%) per annum.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
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 Hillenbrand 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.
Continued 18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
(b) Reports on Form 8-K
None
19
<PAGE>
Signatures
Pursuant to the requirements of Section 13 and 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
November 14, 2000 EVERGOOD PRODUCTS CORPORATION
By: /s/ Stephen R. Stern
-------------------------------
Stephen R. Stern
Chief Financial Officer and
Principal Accounting Officer
20
