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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________
FORM 10/A
Amendment No. 2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
Evergood Products Corporation
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(Exact Name of Registrant as Specified in its Charter
Delaware 13-2640515
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
140 Lauman Lane, Hicksville, New York 11801
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (516) 822-1230
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Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------- ------------------------------
None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
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ITEM 1. BUSINESS
General
Evergood Products Corporation, together with its subsidiaries, related and
affiliated entities (collectively, "Evergood"), is a manufacturer, franchisor,
marketer, and retailer of a wide line of high quality, value priced, branded and
non-branded vitamins and nutritional supplements in the United States, Canada,
Europe and the Far East. Evergood currently manufactures, markets and retails
more than 1,500 different vitamin and nutritional supplements including,
vitamins, minerals, herbs, amino acids, sports nutrition products, diet aids and
other nutritional supplements. Evergood markets its products primarily through
the following channels of distribution:
. 143 franchised Great Earth vitamin stores located throughout the United
States and in Canada as of December 31, 1999;
. wholesale distribution through boutique vitamin and nutritional supplements
stores, chain vitamin and nutritional supplements stores and independent
health food stores;
. through Livingston Healthcare Services, Inc., or LHSI, a contract
warehousemen with facilities currently in Rancho Cucomonga, California; and
. Evergood's facility located in Hicksville, New York.
Through its wholly-owned subsidiary Phoenix Laboratories, Inc., Evergood
manufactures substantially all of the vitamins and nutritional supplements which
are sold and marketed under its Great Earth(R) and Bodyonics(R) brands. There
are currently more than 400 products marketed at retail under the Great Earth
brand in Great Earth's 143 franchise stores and through mail order. Evergood
markets and sells more than 20 products under its Bodyonics brand in various
retail outlets including at GNC stores, Great Earth stores, The Vitamin Shoppe
stores, Vitamin World stores, independent health stores, various gyms and
fitness centers and through direct response and mail order. Phoenix also
manufactures vitamin and nutritional supplements on a contract basis for several
well known vitamin and nutritional supplement companies.
Evergood's business strategy is:
. to continue to expand the Great Earth franchise systems through marketing
and advertising in order to increase the number of franchised stores and
locations;
. to increase retail sales by franchisees of the Great Earth proprietary
brand of vitamin and nutritional supplements through in-store marketing,
regional advertising, local advertising, cable television advertising and
internet sales;
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. to continue to manufacture, market and sell, at wholesale and retail,
innovative vitamins and nutritional supplements under both the Great Earth
and the Bodyonics brands;
. to enhance Bodyonics reputation as a premiere brand for sports nutrition,
vitamin and nutritional supplements through national advertising through
newspapers, magazines, event sponsorship, direct response advertising,
radio advertising, and endorsements by well-known fitness and bodybuilder
personalities; and
. to continue to increase the amount of Phoenix's private label contract
manufacturing.
Evergood is a Delaware domestic corporation which was formed more than 30
years ago in June 1969.
Products
Phoenix maintains a state of the art laboratory where it currently employs
approximately 10 chemists who, under the supervision of Evergood's President,
formulate the products it manufactures for Great Earth, Bodyonics and other
contract manufacturers. Currently, Phoenix manufactures over 1,500 products
including minerals, herbs and amino acids. Phoenix manufactures products in
various potency levels, sizes, formulations, and delivery forms including
tablets, soft gel and hard shell capsules, chewables, powders and liquids.
Products are packaged in single vitamins and through multi-vitamin packets.
Great Earth(TM) products are sold only through the Great Earth vitamins
franchise chain in the United States and Canada. Bodyonics(TM) products are sold
through various distribution channels including, Great Earth, GNC, The Vitamin
Shoppe and Vitamin World stores, independent health stores, gyms and fitness
centers and through direct response advertising throughout the United States.
The contract manufacturing which Phoenix engages in permits Phoenix manufactured
products to be marketed through numerous other distribution channels as well.
Product Formulation
Evergood's products are formulated through the efforts of its staff of
professionals, several of whom hold doctorate degrees, with specialities in
biochemistry, nutrition, dietetics, pharmacy, food science, natural products
chemistry and naturopathy. The core strategy employed by Evergood in formulating
new products is to identify emerging market demand and to develop effective,
science-based formulas and technologies to increase its market share. New
product ideas are generated from a variety of sources, including independent and
company-sponsored scientific and market research, affiliation with fully
accredited institutions of higher learning located in the United States, reports
in scientific and medical periodicals, and information and suggestions received
from vendors and others.
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In order to determine the feasibility of developing, producing and selling
a new product, under the supervision of Evergood's President, Mel Rich,
Evergood's personnel submit new product ideas to representatives of Evergood's
sales, marketing, purchasing, manufacturing and finance departments and to
members of senior management. As part of this overall feasibility analysis,
Evergood's quality control and regulatory departments also conduct a thorough
investigation of the safety and efficacy of each proposed new product as well as
an analysis of potential patent, trademark and other legal and regulatory
issues. Evergood's purchasing department then obtains the raw materials
necessary to produce the new product. After quality testing, Evergood begins
production of an initial pilot sample to determine various product
characteristics and ensure that the product will meet all applicable regulatory
and internal quality standards. Based on these tests, final labels and product
specifications, including any substantiated statements of nutritional support,
such as structure and function claims for the new product, are developed.
Evergood has typically been able to complete the cycle from product concept to
final production in a period ranging from several weeks to several months.
Manufacturing
Evergood believes it has a reputation for being a highly efficient
manufacturing facility that is registered as a drug establishment by the Food
and Drug Administration, or FDA. Its manufacturing facility has been operating
for more than 30 years and began as a manufacturer of pharmaceuticals. Evergood
continues to maintain the same high standards and quality controls that were
initially needed to obtain FDA registration in its manufacturing of vitamin and
nutritional supplements, as well as in its significantly smaller pharmaceutical
manufacturing business.
Evergood believes that because it is a full service manufacturer which
performs its own studies, testing and manufacturing, it has and maintains
efficient and cost effective production. Evergood believes that its FDA
registration is an indication of the quality of its manufacturing processes and
that such approval is a competitive advantage as most other vitamin and
nutritional supplements manufacturers are not FDA registered.
In addition to its science-based manufacturing, Evergood has a
manufacturing process which includes the following:
. effective and cost efficient purchase of high quality bulk raw materials;
. mix, blend and granulate measured ingredients into a mixture of a
homogenous consistency in state of the art machinery;
. encapsulate or tablet the blended mixture according to the most effective
dosage, in state of the art equipment; and
. coat the completed tablet.
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After the manufacturing process is completed and the product is ready for
bottling, Evergood's automated equipment and production line counts the tablets,
inserts them into specially designed recyclable product bottles, add a specially
designed tamper evident hinged cap with an inner safety seal and affixes a label
identifying the bottle contents. Phoenix affixes a label to each package
which leaves its manufacturing facility which is designed to enable consumers to
readily identify the product name and the specific content of each product.
Raw Materials
The principal raw materials used in the manufacturing process are natural
and synthetic vitamins, purchased from bulk manufacturers in the United States,
Japan and Europe. Evergood purchases its raw materials from multiple sources
including some of the largest pharmaceutical and chemical companies in the
world. Although Evergood's raw materials and packaging supplies are readily
available from multiple suppliers, one supplier currently provides approximately
19% of Evergood's purchases. Evergood believes that the loss of its largest
supplier would not have a significant adverse effect upon its operations as
Evergood would be able to replace such source of supply. No other supplier
accounts for 10% or more of Evergood's raw material purchases.
Quality Control
Evergood's manufacturing process places significant emphasis on quality
control. Raw materials used in production are initially held in quarantine
during which time Evergood's laboratory employees assay the product against the
manufacturer's certificate of analysis, when applicable. Once cleared, a lot
number is assigned, samples are retained and the material is processed by
formulating, mixing and granulating, compression and sometimes coating
operations. Such manufacturing operations are conducted in accordance with the
good manufacturing practices of the FDA and other applicable regulatory
standards. After the product is manufactured, laboratory employees test its
weight, purity, potency, dissolution and stability.
Customers
Evergood has numerous retail and wholesale customers. Except for Cytodyne
(23%) in fiscal 1999, Vitamin Shoppe (14%) and Cytodyne (11%) in fiscal 1998 and
GNC (13%) and Vitamin Shoppe (10%) in fiscal 1997, no one customer accounted for
more than 10% of Evergood's net sales.
Sales and Customer Service
Evergood has established customer relationships at retail and wholesale
levels, as well as through mail order and direct response and through a newly
launched science and education oriented website from Great Earth. Evergood
believes its long standing commitment to science and education has resulted in
an extremely high level of customer satisfaction.
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Retail
Through its wholly owned subsidiaries Great Earth Companies, Inc. and Great
Earth International Franchising Corp., Evergood has established a franchise
system in the United States and Canada.
As of September 1, 2000, Evergood had 147 franchises with stores located as
follows:
Location Number of Stores
-------- ----------------
California 71
Texas 16
Canada 10
Oregon 6
Nevada 5
New York 5
North Carolina 5
Pennsylvania 4
Delaware 2
Florida 2
Georgia 2
Kentucky 2
Maryland 2
New Jersey 2
Ohio 2
Virginia 2
Alabama 1
Colorado 1
Idaho 1
Illinois 1
Nebraska 1
New Mexico 1
Oklahoma 1
Tennessee 1
Washington 1
For the balance of the fiscal year 2000, Evergood plans to open 6 new stores.
During the last two and one-half years, Evergood has opened 59 franchise stores
and closed 26 franchise stores. The stores closings were due to various factors,
including: poor market conditions, strong competition from discounters and large
national vitamin chains and decisions by Franchisees to pursue other endeavors.
There were approximately 143 franchised locations as of December 31, 1999. The
average retail location is 800 to 1,200 square feet and maintains an inventory
of more than 1,000 products designed to satisfy customers' needs. Franchisees
are required to execute a standard franchise agreement prior to opening each
Great Earth unit. Evergood's current standard franchise agreement provides for,
among other things, a one-time $20,000 franchise fee payable upon execution of
the agreement, an opening fee of $10,000, an initial product order which is
generally about $25,000, a monthly payment based on 3% of store sales for the
first six months and 6% thereafter and the expenditure of $1,000 on advertising.
Franchisees are also require to build-out their stores, which generally includes
fixtures, computers, carpeting and cash registers, the cost of which can
typically total approximately $25,000. Franchisees are given two payment options
for the franchise and opening fee:
. one-half of the franchise fee on the signing of the franchise agreement,
and the opening fee and balance of the franchise fee at the store opening;
or
. one-half of the franchise fee on the signing of the franchise agreement,
the opening fee at the store opening and the balance of the franchise fee
payable by delivery of a two-year promissory note which provides for 24
monthly payments of $452.28 and bears interest at eight percent per annum.
In addition, franchisees are given three payment options for their initial
product order:
. a five percent discount for payment with the submission of the order;
. one-third with the order, one-third within 60 days of the order and the
balance within 90 days of the order; and
. payable in full within 60 days of the order.
Franchisees are approved on the basis of their business background,
evidence of management experience, net worth and capital available for
investment. Except as set forth above, generally Evergood does not offer any
financing arrangements or extended payment terms to its franchisees. Before a
franchise location is permitted to open, the prospective franchisee undergoes
three to four weeks of rigorous training. Each franchisee is required to set up
and operate its Great Earth store in accordance with the procedures and
specifications set forth in the Great Earth Store Operations Manual so that
there is uniformity and consistency among Great Earth stores. Franchisees are
also responsible for recruiting and hiring store personnel. Store personnel are
generally compensated on a salary plus commission basis and are required to wear
the Great Earth uniform which includes a Great Earth logo shirt. Great Earth
seeks to have its franchisees accommodate the specific needs of retail customers
by interfacing with them and then providing them with customized or tailored
vitamin and nutritional supplement regimens.
Wholesale
Evergood manufactures vitamin and nutritional supplements for over 40
contract manufacturers worldwide. Evergood's staff of approximately 10 chemists
allows it to meet the needs of its contract manufacturing customers.
Customer Service
Evergood operates an in-house customer service and information department
which responds to information requests about products it manufactures, as well
as a toll-free customer service line for retail consumers. Evergood does not
sell merchandise with the right of return other than the normal commercial
practice of allowing for the return of damaged or non-conforming merchandise.
Evergood also provides a satisfaction guaranteed right which allows for the
return of product that the customer is not happy with. In the event that a
customer is dissatisfied with an Evergood product for any reason, Evergood will
replace the product or may issue a credit in the amount of a purchase price
paid. Evergood's historical returns have been small, averaging approximately
2%, or less, of sales.
Marketing
Evergood's marketing strategies are well supported by extensive print,
point of purchase, radio, newsletter and other advertising and promotional
programs which range from in-store sales promotions on the franchise level to
national advertising for the Bodyonics and Great Earth brands, as well as event
sponsorship by Bodyonics.
Evergood's growth objective for Great Earth is to expand the size of the
franchise system and increase franchise revenue from increased sales by new and
existing franchisees and through the introduction of new products. Evergood
recently hired a second franchise sales director to step up and increase the
efforts to expand the Great Earth franchise system with the goal of doubling the
number of franchises in the next three years. To augment the efforts of Great
Earth's franchise sales directors, Evergood has started an advertising campaign
which includes franchise advertising in USA Today, The Wall Street Journal,
Success
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magazine, Entrepreneur magazine and others, as well as advertising with various
Internet sites dedicated to the sale of franchises.
Great Earth's retail outlets are generally supported through regional and
local advertising. The main objective in the retail advertising campaign is to
educate the consumer in an effort to build strong traffic and sales and to
increase brand awareness.
Evergood seeks to increase brand awareness for its Bodyonics brand among
consumers and to introduce and promote the use of new products within the brand.
Evergood has implemented a direct response program for Bodyonics which seeks to
attract new customers through direct response marketing. Bodyonics has also
been engaged in an advertising campaign on radio in the New York tri-state
metropolitan area.
Evergood's advertising campaign includes consumer print advertising in
nationally distributed magazines such as Muscle & Fitness, Flex, Let's Live,
Ironman, Power, Muscle Media 2000 and Natural Food Merchandiser. Additional
advertising is placed in regionally distributed magazines and newsletters, in-
store promotions, point of purchase advertising, ad slicks, cable television and
radio advertising. Much of this advertising copy is produced by Evergood's in-
house graphic arts, marketing, and advertising departments; however, the
majority of this advertising copy is produced by Evergood's outside advertising
agency. Evergood's use of an in-house staff permits a hands on approach and
provides rapid turn around time for its marketing, merchandising, advertising
and promotional needs.
Furthermore, Great Earth has developed an innovative website
(www.greatearthvitamins.com) to provide another source of sales of product and
----------------------------
generation of sales of franchises. The objective of the website is not only to
sell product but, in keeping with Evergood's science and education philosophy,
to provide the consumer with extensive information regarding all types of
ailments and remedies and suggest to consumers what vitamin and nutritional
supplement categories might best assist them to achieve their goals.
Warehousing and Distribution
Evergood's Great Earth and Bodyonics products are distributed by LHSI,
contract warehousemen with facilities in Rancho Cucomonga, California, pursuant
to a contract with Great Earth Distribution, Inc., a wholly owned subsidiary of
Evergood. LHSI provides dedicated space in its warehouses for Great Earth and
Bodyonics products, as well as dedicated employees familiar with those products
who pick the product for distribution to its final destination. Evergood and
LHSI have jointly developed extensive procedures, systems and technology
designed to make the warehouse and distribution process more efficient and cost
effective.
Evergood also maintains a warehouse in its facility in Hicksville, New
York, for raw materials, work in process and finished inventory. By maintaining
finished inventory in Hicksville, as well as with LHSI in California, Evergood
is able to timely ship most mail orders and direct
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response requests. The distribution computer system enables orders to be
prepared, picked, packed and shipped continually throughout the day while all
necessary distribution and shipping documents are printed. Completed orders are
bar coded and scanned and the merchandise and shipping date are verified and
entered automatically into the customer order file prior to being shipped. A
system of conveyors automatically routs boxes carrying merchandise throughout
LHSI's California distribution center for the fulfillment of orders.
Trademarks and Patents
Evergood owns numerous trademarks and service marks, including marks in
design and word form. The rights for Great Earth and Bodyonics and certain other
trademarks are registered with the United States Patent and Trademark Office and
certain other countries. Evergood also has common law and other rights to use
other names material to its businesses. Federally registered trademarks have
perpetual life, as long as they are renewed on a timely basis and used properly
as trademarks. Evergood regards its trademarks and other proprietary rights as
valuable assets and believes they have significant value in the marketing of its
products. Evergood vigorously protects its trademarks against infringement.
Product Liability Insurance
Evergood, like other manufacturers, wholesalers, distributors and retailers
of products that are ingested, faces an inherent risk of exposure to product
liability claims if, among other things, the use of its products results in
injury. Evergood currently has $10 million in product liability insurance which
Evergood believes is adequate for its operations. There can be no assurance,
however, that such insurance will continue to be available at a reasonable cost,
or if available, will be adequate to cover liabilities. Evergood requires that
each of its suppliers certify that it carries adequate product liability
insurance covering Evergood.
Government Regulation
United States. The manufacturing, packaging, labeling, advertising,
distribution and sale of Evergood's products are subject to regulation by
Federal, state and local agencies, the most active of which is the U.S. Food and
Drug Administration, or FDA. The FDA regulates Evergood's dietary supplements,
principally under amendments to the Federal Food, Drug and Cosmetic Act embodied
in the Dietary Supplement Health and Education Act, or DSHEA. Under DSHEA,
dietary ingredients that were not used in dietary supplements marketed before
October 15, 1994 require premarket submission to the FDA of evidence of a
history of their safe use, or other evidence establishing that they are
reasonably expected to be safe. There can be no assurance that the FDA will
accept the evidence of safety for any new dietary ingredient that Evergood may
decide to use, and the FDA's refusal to accept such evidence could result in
regulation of such dietary ingredients as food additives, requiring the FDA pre-
approval based on newly conducted, costly safety testing. Also, while DSHEA
authorizes the use of statements of nutritional support in the labeling of
dietary supplements, the FDA is required to be notified of such statements, and
there can be no assurance
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that the FDA will not consider particular labeling statements used by Evergood
to be drug claims rather than acceptable statements of nutritional support,
necessitating approval of a costly new drug application, or relabeling to delete
such statements.
DSHEA also authorizes the FDA to promulgate good manufacturing practice, or
GMP, regulations for dietary supplements, which would require special quality
controls for the manufacture, packaging, storage and distribution of
supplements. There can be no assurance, if such GMP rules are issued, that
Evergood will be able to comply with them without incurring material expense to
do so. DSHEA further authorizes the FDA to promulgate regulations governing the
labeling of dietary supplements, including claims for supplements pursuant to
recommendations made by the Presidential Commission on Dietary Supplement
Labels. Such rules are expected to be issued, which will require relabeling of
Evergood's dietary supplements, and may require additional record keeping and
claim substantiation testing, and even reformulation, recall or discontinuance
of certain of Evergood's supplements, and there can be no assurance that such
requirements will not involve material expenses to Evergood. Moreover, there can
be no assurance that new laws or regulations imposing more stringent regulatory
requirements on the dietary supplement industry will not be enacted or issued.
Foreign. Evergood's products are also subject to regulation by foreign
countries where they are sold. Governmental regulations in Canada or in other
foreign countries where Evergood plans to expand or commence sales may prevent
or delay the introduction, or require the reformulation or relabeling, of
certain of Evergood's products or prevent or delay entry into a market.
Currently, Evergood is engaged in ongoing discussions with Health Canada
regarding the importation of certain of Evergood's products into Canada, which
has delayed or prevented the shipment of these products into Canada. These
delays are expected to continue until the issues being discussed have been
resolved.
Evergood is subject to regulation under various international, Federal,
state and local laws which include provisions regulating, among other things,
the operation of direct sales programs. In addition, many countries currently
have laws that would restrict or prohibit direct sales companies, such as
Evergood, from conducting business there.
In addition, Evergood cannot predict whether new domestic or foreign
legislation regulating its activities will be enacted. Such new legislation
could have a material adverse effect on Evergood.
Competition
The market for vitamins and other nutritional supplements is highly
competitive. Numerous companies compete with Evergood in the development,
manufacture and marketing of vitamins and nutritional supplements.
United States. In the U.S., Evergood's Great Earth and Bodyonics brands
compete for sales to consumers with heavily advertised national brands
manufactured by large companies, such as Sundown sold by Rexall, Nature Made
sold by Pharmavite Corp., Your Life sold by Leiner Health Products and Nature's
Bounty sold by NBTY. Evergood's Great Earth franchise stores compete on some
levels with specialty vitamin stores, such as GNC, the Vitamin Shoppe and
Vitamin World, as well as health food stores and other retail stores. Evergood
also competes with companies which
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distribute products through the Internet. Increased competition from companies
that distribute on the Internet and through the wholesale channels could have a
material adverse effect on Evergood as they may have greater financial and other
resources available to them and possess extensive manufacturing, distribution
and marketing capabilities far greater than those of Evergood.
Canada. The market for sales of vitamins, minerals and other nutritional
supplements in Canada is also highly competitive. Evergood's principal
competitors are large pharmacy chains, including GNC, the Vitamin Shoppe and
Vitamin World, as well as retail stores and major supermarket chains. There are
also approximately 1,300 independent retailers of health foods and nutritional
supplements in the Canadian market. Great Earth's master franchisee in Canada
has opened several free standing Great Earth Vitamin franchise stores and has
recently entered into a written agreement with The Bay Company, the oldest
department store chain in North America with over 150 locations in all of the
provinces of Canada.
Employees
As of December 31, 1999, Evergood employed more than 120 full-time
employees. Approximately, 85 of these employees are involved in manufacturing,
10-12 in product formulation, 9 in sales and marketing, and 16 in finance and
general administration. To date, Evergood believes it has been successful in
attracting and retaining skilled and motivated individuals. Competition for
qualified management and technical employees is intense. Evergood's success
will depend in large part upon its continued ability to attract and retain
qualified employees. Approximately 70% of Evergood's employees are covered by a
collective bargaining agreement. Evergood has not experienced a work stoppage in
the past 9 years. Evergood believes that it has good relations with its
employees.
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ITEM 2. FINANCIAL INFORMATION
Selected Financial Data
The following selected consolidated financial data for the five fiscal
years ended December 31, 1995, 1996, 1997, 1998 and 1999 are derived from
Evergood's audited financial statements. The following selected consolidated
financial data for the quarters ended March 31, 1999 and 2000 has been derived
from Evergood's unaudited financial statements, but includes all adjustments
which, in the opinion of management, are necessary for a fair presentation of
Evergood's financial position and results of operations for such periods. The
results of operations for the quarter ended March 31, 2000 are not necessarily
indicative of the results of operations to be expected for the year ended
December 31, 2000. All such data should be read in conjunction with management's
discussion and analysis of financial condition, Evergood's consolidated
financial statements, related notes, and other financial information included
elsewhere herein.
<TABLE>
<CAPTION>
Quarter Ended
Years Ended December 31, March 31,
---------------------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data(1)(2):
Net revenues $18,350,135 $22,086,706 $30,868,804 $38,601,509 $44,599,133 $10,957,167 $15,249,379
Cost of revenues 14,285,542 16,795,551 21,782,066 27,867,831 31,144,799 7,731,199 10,970,072
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit 4,064,593 5,291,155 9,086,738 10,733,678 13,454,334 3,225,968 4,279,307
Operating Costs:
Selling, general and
administrative costs 3,337,574 4,187,790 8,442,461 11,476,266 11,044,884 2,555,731 4,146,898
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss) 727,019 1,103,365 644,277 (742,588) 2,409,450 670,237 132,409
Other expense (income):
Interest expense 503,161 465,528 612,008 732,642 683,113 (173,369) (206,006)
Other expense - - - - - - 1,295,630
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from continuing
operations before income taxes 223,858 637,837 32,269 (1,475,230) 1,726,337 496,868 1,222,033
Provision (benefit) for
income taxes - (222,270) 23,000 4,000 (1,278,000) - 472,125
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before minority interest
and extraordinary item 223,858 860,107 9,269 (1,479,230) 3,004,337 496,868 749,908
Minority interest - (25,665) 25,665 - - - -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item 223,858 834,442 34,934 (1,479,230) 3,004,337 496,868 749,908
Extraordinary gain on debt forgiveness - - 98,000 - - - -
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ 223,858 $ 834,442 $ 132,934 $(1,479,230) $ 3,004,337 $ 476,868 $ 749,908
=========== =========== =========== =========== =========== =========== ===========
Net income (loss) per common share
Basic: $ .12 $ .34 $ .03 $ (.38) $ .77 $ .13 $ .19
Diluted: $ .12 $ .34 $ .03 $ (.38) $ .77 $ .13 $ .19
Weighted average number of
common shares outstanding: 1,934,105 2,422,420 3,887,368 3,887,368 3,887,368 3,887,368 3,985,465
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, Quarter Ended
------------------------ March 31,
1995 1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data(1)(2):
Cash and cash equivalents $ 35,444 $ 158,319 $ 219,489 $ 751,664 $ 482,259 $ 394,304
Working capital 1,915,075 1,633,317 4,131,068 3,418,927 6,496,474 6,501,143
Total assets 8,405,798 9,833,116 13,906,934 14,531,322 18,555,451 21,265,719
Total liabilities 8,477,010 9,830,950 13,771,834 15,875,452 16,895,244 17,973,394
Stockholders equity (deficit) (71,212) 2,166 135,100 (1,344,130) 1,660,207 3,292,325
</TABLE>
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(1) Franchise operations are reflected from September 1996, the date of the
Great Earth Company acquisition.
(2) Brand development operations commenced in September 1996 with the formation
of Bodyonics.
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
Evergood 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 Evergood'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
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
------------------- -----------------
% of % of
$ Total $ Total
In thousands Revenue In thousands Revenue
-------------------------------------------
Segment:
Manufacturing $ 6,233 57.0% $10,424 68.4%
Franchising 3,634 33.0 3,242 21.2
Brand Development 1,090 10.0 1,583 10.4
------- ----- ------- -----
Consolidated $10,957 100.0% $15,249 100.0%
======= ===== ======= =====
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 Evergood'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.
Operating Income
----------------
Operating income for the three months ended March 31, 1999 and 2000 is comprised
as follows:
March 31,
------------------------------------------
1999 2000
------------------- --------------------
% %
of of
$ Segment $ Segment
In Thousands Revenue In Thousands Revenue
==========================================
Segment:
Manufacturing $ 659 10.6% $1,120 10.7%
Franchising 439 12.1 (24) (.7)
Brand Development (428) (39.3) (251) (15.9)
Corporate - (712) -
----- ------
Consolidated $ 670 6.1% $ 133 .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.
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.
Fiscal 1999 Compared to Fiscal 1998
Revenues:
---------
Revenue to outside customers for 1998 and 1999 is comprised as follows:
<TABLE>
<CAPTION>
1998 1999
--------------------------- ---------------------------
$ % of $ % of
Segment In Thousands Total Revenue In Thousands Total Revenue
------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Manufacturing $18,450 47.8% $24,705 55.4%
Franchising 14,738 38.2 14,577 32.7
Brand Development 5,414 14.0 5,317 11.9
------- ----- ------- -----
Consolidated $38,602 100.0% $44,599 100.0%
======= ===== ======= =====
</TABLE>
Consolidated revenue for 1999 rose by approximately $6 million, an increase
of 15.5% over 1998.
Revenue from product sales by all segments increased $5.9 million from $36.4
million in 1998 to $42.3 million in 1999. Company-wide sales to the franchise
system decreased $235,000 from $12.9 million in 1998 to $12.6 million in 1999.
Company-wide sales to unaffiliated customers increased $6.2 million from $23.5
million in 1998 to $29.7 million in 1999. Consolidated revenues also include
royalties and franchise fees earned by the franchising segment. Royalties
decreased $100,000 from $1.9 million 1998 to $1.8 million in 1999. Franchise fee
revenue increased $147,000 from $321,000 in 1998 to $468,000 in 1999.
Manufacturing segment sales increases of approximately $6.3 million reflect
additional sales of approximately $6.1 million to a single private label
customer. This customer began purchasing from Evergood in February 1998 at an
average monthly rate of approximately $100,000 increasing to approximately
$700,000 by the end of 1998. Sales to this customer in 1999 have averaged
approximately $800,000 per month. 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 $161,000
primarily reflects a decrease in sales of products to franchisees of
approximately $220,000 and lower royalties of $88,000, offset by higher
franchise fee revenue of $147,000. The decrease is primarily due to reduced
sales to existing franchises.
Brand development sales decreased by approximately $100,000 primarily as
the result of a significant decrease in this segment's advertising and
promotional budget. This segment began operation in 1996, with the intention of
creating a recognizable national brand name. Since the inception of this
segment, management has attempted to balance the high cost of advertising and
promotion, required to establish a national brand, with available resources. In
1998, advertising and promotion for this segment approximated $3.4 million
whereas in 1999, advertising and promotion for the segment was reduced to $1.7
million.
12
<PAGE>
Operating Income:
-----------------
Operating revenue for 1998 and 1999 is comprised as follows:
<TABLE>
<CAPTION>
1998 1999
------------------------------ ------------------------------
$ % of $ % of
Segment In Thousands Segment Revenue In Thousands Segment Revenue
------- ------------ --------------- ------------ ---------------
<S> <C> <C> <C> <C>
Manufacturing $ 1,797 9.7% $ 2,719 11.0%
Franchising 1,827 12.4% 778 5.3
Brand Development (4,370) (80.7)% (1,062) (19.9)
Corporate 3 - (26) -
------- -------
Consolidated $ (743) (1.9)% $ 2,409 5.5%
======= =======
</TABLE>
Consolidated operating income for 1999 rose by $3.2 million, increasing
from a loss of approximately $743,000 in 1998 to income of approximately
$2,409,000 in 1999. This was comprised of an increase in consolidated gross
profit of $2.7 million and a net decrease in selling, general and administrative
expenses of $431,000.
The gross profit increase resulted from a combination of higher volumes and
improved margins. Company-wide gross profit from the franchise system
(inclusive of gross profit from the sale of Great Earth product and Bodyonics
branded product, franchise fees and royalties) decreased $173,000 from $5.1
million in 1998 to $4.9 million in 1999. Company-wide gross profit from
unaffiliated customers (inclusive of gross profit from sales to third party
wholesalers and sales of Bodyonics brand products to third party resellers)
increased $2.9 million from $5.6 million in 1998 to $8.5 million in 1999.
The decrease in consolidated selling, general and administrative expenses
was comprised principally of a decrease of $1.6 million in advertising and
promotional activities, offset by increase of $174,000 in warehousing expense,
$330,000 in office salaries, $263,000 in bad debt expense and $140,000 in
outside services. Management believes that consolidated selling, general and
administrative expenses will increase in 2000 largely due to increased efforts
to advertise the sale of franchises, business' advertising expenses and
increased legal and accounting fees.
Manufacturing segment operating income increased by approximately $900,000
in 1999 as compared to 1998. An increase in manufacturing segment gross profits
of approximately $1.8 million was reduced by increases in manufacturing segment
selling, general and administrative expenses of approximately $.9 million. The
increase in manufacturing segment gross profit was caused in part by increases
in sales which at the historical gross profit percent resulted in an increase in
gross profit of approximately $.8 million. Gross profit also increased as a
result of decreases in cost of raw materials which accounted for the remaining
increase of approximately $1.0 million in gross profits. Labor and overhead
rates remained constant from 1998 to 1999. The $.9 million increase in
manufacturing segment selling, general and administrative expenses primarily
reflect increases in selling and marketing expenses including advertising,
travel and entertainment. Legal and accounting fees also increased in part in
preparation for the filing of a registration statement.
Franchising segment operating income decreased by approximately $1.0
million in 1999 as compared to 1998. This change is primarily the result of
increases in the following selling, general and administrative expense:
Charges from the outside warehouse used to
distribute product to Evergood's franchises $150,000
Bad debt 150,000
Marketing personnel and the related recruitment
cost and sales material 400,000
13
<PAGE>
The increase in warehousing expense resulted primarily from costs related
to a new computer system installed by the warehouse service which were passed
through to Evergood and an increase in more costly cross-country sales.
Additionally, 1998 reflected credits issued by the warehouse service related to
prior year billing errors. Bad debt expense increased as a result of Evergood
determining the need for additional reserves as a result of store closings.
Marketing expenses increased primarily due to the addition of a sales manager
and a salesman, as well as salary increases. Additional increases were due to
the production of a motivational tape, as well as increased expense allocations
from the manufacturing segment.
Brand development operating loss decreased by approximately $3.3 million in
1999 as compared to 1998. The largest factor in this improvement was a decrease
in advertising and promotion expenses of approximately $1.8 million. This
resulted from management's efforts to balance such costs with available capital
as it attempts to establish this segments Bodyonics and Pinnacle products as
national brands. In addition, there was an increase in this segment's gross
profit of approximately $1.0 million which resulted from a decrease in price
concessions and sales returns compared to 1998. The decrease in concessions and
returns is attributed to managements decision in 1999 to focus the product lines
to those products which had sold more successfully and to control the size of
new product lines until market sources was determinable. The remaining $.5
million is primarily the result of reductions in sales, salaries and travel
expenses.
Net Income (Loss):
-----------------
Consolidated net income (loss) increased from a net loss of $1.5 million in
1998 to net income of $3.0 million in 1999 primarily as a result of the factors
indicated above and the recording in 1999 of a tax benefit of $1.3 million. The
tax benefit is primarily the result of Evergood recognizing previously
unrecognized deferred tax assets as a result of eliminating recorded valuation
allowances based on a determination that such valuation allowances are no longer
needed.
Fiscal 1998 Compared to Fiscal 1997
Revenues:
--------
Revenue to outside customers for 1997 and 1998 is comprised as follows:
<TABLE>
<CAPTION>
1997 1998
--------------------------- ---------------------------
$ % of $ % of
Segment In Thousands Total Revenue In Thousands Total Revenue
------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Manufacturing $10,246 33.2% $18,450 47.8%
Franchising 15,122 49.0 14,738 38.2
Brand Development 5,501 17.8 5,414 14.0
------- ----- ------- -----
Consolidated $30,869 100.0% $38,602 100.0%
======= ===== ======= =====
</TABLE>
Consolidated revenue for 1998 rose by approximately $7.7 million, an
increase of 25.1% over 1997. Revenue from product sales by all segments
increased $7.6 million from $28.8 million in 1997 to $36.4 million in 1998.
Company-wide sales to the franchise system remained unchanged at $12.9 million,
while company-wide sales to unaffiliated customers increased $7.6 million from
$15.9 million in 1997 to $23.5 million in 1998. Consolidated revenues also
include royalties and franchise fees earned by the franchising segment.
Royalties increased $100,000 from $1.8 million in 1997 to $1.9 million in 1998.
Franchise fee revenue increased $58,000 from $263,000 in 1997 to $321,000 in
1998.
Manufacturing segment sales increase of approximately $8.2 million reflects
sales to a new private label customer of approximately $4.3 million. This
customer began purchasing from Evergood in February 1998 at an average monthly
rate of approximately $100,000 increasing to approximately $700,000 by the end
of 1998. Sales to another major customer increased by approximately $2.4
million, while sales increases to the remaining customers accounted for the
remaining $1.5 million increase.
The decrease in franchising segment revenue of approximately $384,000, is
the result of an increase of approximately $90,000 in royalties and $58,000 in
franchise fees and other income, combined with a decrease in sales volume of
product to franchisees of approximately $532,000 or 4% to the franchisees.
14
<PAGE>
Brand development sales decreased by approximately $87,000 in 1998 compared
to 1997. This was the result of a decrease in sales from three (3) significant
customers of approximately $855,000 in total, combined with a new customers'
sales of approximately $280,000 and an increase of approximately $488,000 in
sales to other customers.
All of the changes in sales were volume related as there were no
significant price changes.
Operating Income
----------------
Operating revenue for 1997 and 1998 is comprised as follows:
<TABLE>
<CAPTION>
1997 1998
------------------------------ ------------------------------
$ % of $ % of
Segment In Thousands Segment Revenue In Thousands Segment Revenue
------- ------------ --------------- ------------ ----------------
<S> <C> <C> <C> <C>
Manufacturing $ 43 .4% $ 1,797 9.7%
Franchising 2,045 13.5% 1,827 12.4%
Brand Development (1,432) (26.0)% (4,370) (80.7)%
Corporate (12) - 3 -
------- -------
Consolidated $ 644 2.0% $ (743) (1.9)%
======= =======
</TABLE>
Consolidated operating income for 1998 declined by approximately $1.4
million, decreasing from income of approximately $644,000 in 1997 to a loss of
approximately $743,000 in 1998. This was comprised of an increase in
consolidated gross profit of $1.6 million, offset by an increase in consolidated
selling, general and administrative expenses of $3.0 million.
The gross profit increase was primarily the result of higher sales volumes.
Company-wide gross profit from the franchise system (inclusive of gross profit
from the sale of Great Earth product and Bodyonics branded product, franchise
fees and royalties) decreased $482,000 from $5.6 million in 1997 to $5.1 million
in 1998. Company-wide gross profit from unaffiliated customers (inclusive of
gross profit from sales to third party wholesalers and sales of Bodyonics brand
product to third party resellers) increased $2.1 million from $3.5 million in
1997 to $5.6 million in 1998.
The increase in consolidated selling, general and administrative expenses
was comprised principally of a $2.4 million increase in advertising and
promotional activities connected with Evergood's branded products. Other
significant changes were increases in officers' salaries of $322,000 and
warehousing expense of $111,000.
Manufacturing segment operating income increased by approximately $1.8
million in 1998 as compared to 1997. An increase in manufacturing segment gross
profits of approximately $2.2 million was reduced by increases in manufacturing
segment selling, general and administrative expenses of approximately $.4
million. The increase in gross profit was primarily due to significant
decreases in the cost of materials.
Franchising segment operating income decreased by approximately $.2 million
in 1998 as compared to 1997. The net decrease was attributed to a $.5 million
decrease in gross profit and a $.3 million decrease in franchising segment
selling, general and administrative expenses. The decrease in selling, general
and administrative expenses was primarily due to a reduction in charges from an
outside warehouse to distribute product to Evergood's franchises.
Brand development operating loss increased approximately $3.0 million due
to an increase in selling, general and administrative expenses. The increase in
selling, general and administrative expenses was primarily an increase of $2.6
million in its advertising and promotional budget as well as $.4 million for
charges from an outside warehouse to distribute product to Evergood's
franchises.
Net Income (Loss):
-----------------
Consolidated net income (loss) decreased from net income of $133,000 in
1997 to a net loss of $1.5 million in 1998 primarily as a result of the factors
indicated above, and the realization in 1997 of an extraordinary gain on debt
forgiveness of $98,000 and a minority interest benefit of $26,000.
15
<PAGE>
Liquidity and Capital Resources
Evergood'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. Evergood 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, Evergood had available approximately $3,127,000
under this facility.
Evergood's balance sheet reflects working capital of $6.5 million at
December 31, 1999 compared to working capital of $3.4 million at December 31,
1998. The increase of $3.1 million is mainly comprised of an increase in net
inventory levels of $1.6 million to $8.6 million from $7.0 million, an increase
in net trade accounts receivable of $1.2 million to $5.6 million from $4.4
million and an increase in current deferred tax assets of $1.1 million to $1.5
million from $352,000. These increases in current assets are offset by an
aggregate increase in accounts payable and accrued expenses of $582,000 to $9.6
million from $9.0 million. Cash decreased by $306,000 to $446,000 from $752,000.
Cash flows utilized by operations were $216,000 during 1999, a small
increase over the $140,000 cash deficit resulting from operations in 1998.
While net income for 1999 was $3.0 million, increased operating levels resulted
in increases to trade accounts receivable of $1.4 million and inventories of
$1.6 million. Additionally, 1999 net income reflects an increase of $1.4
million of recognized deferred tax assets. Evergood has total tax assets of
$2.0 million recorded at December 31, 1999 compared to $600,000 in 1998. The
increase results from management's decision to eliminate previously recorded
valuation allowances based on a determination that present conditions indicate
that it is more likely than not that the benefit of such assets will be realized
in the future. Fiscal 1999 cash flow from operations is also benefitted by an
increase of $582,000 in trade accounts payable and accrued expenses.
Future operating cash flows will be impacted by officers' salary
commitments entered into in March 2000. These contracts will increase executive
salaries by approximately $400,000 annually over historical levels. Other
factors that could effect future operating cash flows are management decisions
regarding levels of advertising and marketing for brand development. At this
time, Evergood is committed to, or has plans for marketing programs which are
estimated to require an increase in expenditures of approximately $1,000,000
over 1999 levels.
Investing activities consist mainly of fixed asset acquisitions.
Acquisitions during 1999 totaled $568,000 compared to $265,000 for 1998,
representing increased expenditures of $304,000. Capital expenditures are
principally connected with Evergood's manufacturing segment and generally
consist of equipment purchased to enhance productive capability or to replace
existing equipment. Management sees a continuing need for such expenditures, and
furthermore, anticipates a need to expand production capacity in the short term
to provide for continued growth. In this regard, Evergood entered into a two
year lease in April 2000 for 9,000 square feet of manufacturing space. Over the
coming year, Evergood anticipates expenditures of approximately $1,000,000 to
outfit these premises for production capability. Evergood expects to finance
these expenditures, in part, through borrowing arrangements with its present
lender.
16
<PAGE>
In March 2000, Evergood received $977,000 from a former supplier and agreed
to accept $318,000 from another former supplier in connection with the
settlement of its position in a class action litigation.
Market Risk
Evergood is exposed to market risk related to changes in interest rates
since its debt is at a variable rate of interest based on the prime rate. The
debt is not hedged by an interest rate swap. If market interest rates increase
by 10 percent from levels at December 31, 1999, the effect on Evergood's net
income would be a reduction of approximately $75,000. Although Evergood sells
products in foreign countries, it does so under dollar denominated letters of
credit. Accordingly, it is not exposed to market risk related to foreign
currency exchange rates.
Inflation
Inflation has not had a significant impact on Evergood's operations.
Subsequent Periods
Evergood hereby incorporates by reference the discussion contained under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in its Form 10-Q for its fiscal quarter ended June 30, 2000.
Credit Line
Evergood renegotiated its credit agreement as of September 2000. As
amended, the agreement provides for a credit line of $9.5 million, bearing
interest at the lender's prime rate plus 1% and maturing in August 2004.
Evergood believes that internally generated funds and its available line of
credit will be sufficient for its financing requirements for at least the next
twelve months.
ITEM 3. PROPERTIES
Evergood maintains approximately 65,000 square feet of space in Hicksville,
New York at a monthly rental of approximately $23,000 where Evergood's
manufacturing and corporate headquarters for administrative and financial
functions are currently located. Evergood believes that its present and
proposed facilities are adequate to meet its current business requirements and
that suitable facilities for expansion will be available, if necessary, to
accommodate further physical expansion of corporate operations and for
additional sales and support offices.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Evergood's
common stock as of May 1, 2000 of (i) each person known by Evergood to
beneficially own 5% or more of Evergood's
17
<PAGE>
outstanding common stock, (ii) each of Evergood executive officers, directors
and director nominees, and (iii) all of Evergood's executive officers and
directors as a group. Except as otherwise indicated, all shares of common stock
are beneficially owned, and investment and voting power is held, by the persons
named as owners.
<TABLE>
<CAPTION>
Name and Address of Amount of Shares
Beneficial Owner Beneficially Owned Percentage Ownership
-------------------- ------------------ ---------------------
<S> <C> <C>
Mel Rich 1,562,612 34.9%
Stephen R. Stern 594,061 13.3
Charlotte Rich 791,400 17.7
All directors and officers
as a group (3 persons) 2,948,073 65.9%
----------------------------
</TABLE>
* less than one percent (1%) unless otherwise indicated.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
Evergood's directors and executive officers as of May 1, 2000 and their
ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Mel Rich 55 President and
Chief Executive Officer, Director
Stephen R. Stern 52 Executive Vice President, Treasurer, Assistant
Secretary, Chief Operating Officer, Chief
Financial Officer and Director
Charlotte Rich 78 Secretary and Director
----------------------------
</TABLE>
Mel Rich has been President and Chief Executive Officer of Evergood since 1997
and a director since 1969. Prior to becoming President and Chief Executive
Officer, Mr. Rich was Executive Vice President of Evergood from 1969. Mr. Rich
is the son of Charlotte Rich.
Stephen R. Stern has been Executive Vice President, Treasurer, Assistant
Secretary, Chief Operating Officer, Chief Financial Officer and a director since
1994. Mr. Stern has been a practicing attorney in the State of New York since
1972 and is a partner at Hoffinger Friedland Dobrish & Stern, P.C.
18
<PAGE>
Charlotte Rich has been Secretary and a director since 1969 and is the mother of
Mel Rich.
Employment Agreements
Evergood currently is a party to employment agreements with each of Mel
Rich, Stephen R. Stern and Charlotte Rich. The agreements between Evergood and
each of Messrs. Rich and Stern provides for an initial term of ten years and
five automatic renewal terms of five years each. The agreement between Evergood
and Mrs. Rich provides for an initial term of five years and five automatic
renewal terms of five years each. Pursuant to these agreements:
. Mel Rich is employed as the President and Chief Executive Officer and
receives a base salary of $750,000, subject to annual cost of living
increases. The agreement also provides for an automobile allowance,
various health and life insurance benefits and for the continuation of
certain benefits following his disability.
. Mr. Stern is employed as the Executive Vice President, Treasurer, Assistant
Secretary, and Chief Operating Officer and receives a base salary of
$495,000 per annum, subject to annual cost of living increases. The
agreement also provides for an automobile allowance, various health and
life insurance benefits and for the continuation of certain benefits
following his disability.
. Mrs. Rich receives a base salary of $150,000 per annum, subject to annual
cost of living increases. The agreement also provides for an automobile
allowance, various health and life insurance benefits, for the continuation
of certain benefits following her disability and, upon any retirement
during the term, the execution and delivery of a Consulting Agreement which
provides for consulting fees of $120,000 per annum.
In the event that Evergood terminates any of these employment agreements
without cause, the terminated employee has the right to receive as a lump sum
payment in an amount equal to the greater of 2.49 times his or her base salary
as then in effect, on the then effective base salary factored over the remaining
term. The employment agreements also provide that in the event that there is a
change of control of Evergood, as defined therein, the employee has the right to
receive as a lump sum payment an amount equal to 2.99 times his or her base
salary as then in effect.
19
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the annual compensation with regard to the
Chief Executive Officer and the other two most highly compensated officers other
than the Chief Executive Officer for fiscal years ended December 31, 1999,
December 31, 1998 and December 31, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
----------------------------------------
Name and Fiscal Other Annual
Principal Position Year Salary Compensation(1)
------------------ ------- -------- ------------
<S> <C> <C> <C>
Mel Rich....................... 1999 $509,000 $ 50,381 (2)
President and 1998 490,000 45,309 (2)
Chief Executive Officer 1997 440,303 40,050 (2)
Stephen R. Stern............... 1999 $434,000 -
Executive Vice President 1998 380,000 -
Assistant Secretary, Chief 1997 212,000 -
Operating Officer and Chief
Financial Officer
Charlotte Rich................. 1999 $123,000 -
Secretary 1998 127,500 -
1997 114,327 -
-----------
</TABLE>
(1) Other annual compensation does not include amounts of certain perquisites
and other non-cash benefits which Evergood provides since those amounts do not
exceed the lesser of (a) $50,000 or (b) 10% of the total annual base salary and
bonus disclosed for the officer.
(2) Includes: life and disability insurance premiums of $4,328 for 1999, $4,273
for 1998 and $3,970 for 1997 and automobile allowance of $46,053 for 1999,
$41,036 for 1998 and $36,080 for 1997.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a stock exchange agreement dated as of March 1, 2000, among
Evergood, Mel Rich and Stephen R. Stern, each of Messrs. Rich and Stern
exchanged certain shares of stock of Great Earth Companies, Inc. and Bodyonics,
Ltd. owned by them for shares of Evergood so that, after the exchange, each of
Great Earth Companies and Bodyonics became wholly-owned subsidiaries of
Evergood. Pursuant to the exchange agreement, Evergood issued an additional
140,993 shares of common stock to each of Mr. Rich and Mr. Stern.
During its last fiscal year, Evergood paid Hoffinger Friedland Dobrish &
Stern, P.C., a law firm in which Mr. Stern is a partner, an aggregate $517,786
in legal fees.
In August 1999, a corporation owned by Messrs. Rich and Stern acquired two
Great Earth Franchise stores located in Long Island, NY. At December 31, 1999,
this corporation owed Evergood a total of $247,658, $110,915 of which is
receivables for products sold since the acquisition date and the balance of
which is primarily receivables due as of the date of acquisition.
20
<PAGE>
ITEM 8. LEGAL PROCEEDINGS
In March 1999 and May 1999, Frank Hillebrand and Jonathan Aube,
respectively, each commenced an action against Evergood in the Superior Court of
California, County of Riverside, Indio Branch. Each suit arises from allegations
by the respective plaintiff that Evergood used his images in, among other
things, advertisements and product packaging without his 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. Both suits are currently in a discovery stage, accordingly, Evergood is
currently unable to predict the likely outcome. Although certain causes of
action under these lawsuits are not covered under Evergood's insurance policies,
management believes that any potential liability in excess of that which is
covered by insurance will not have a material financial impact on Evergood.
Except as described above, there are no material legal proceedings pending
against Evergood or any of its subsidiaries or to which any of their property is
the subject.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
There is no established public trading market for Evergood's common stock.
As of May 4, 2000, there were approximately 260 holders of record of the
common stock and 4,475,957 shares issued and outstanding, 4,028,361 of which are
freely tradeable pursuant to Rule 144 under the Securities Act.
Evergood has not paid any cash dividends on its common stock and does not
presently intend to do so. Future dividend policy will be determined by its
Board of Directors on the basis of Evergood's earnings, capital requirements,
financial condition and other factors deemed relevant. In addition, Evergood's
line of credit with CIT restricts the payment of dividends.
The transfer agent and registrar of Evergood's common stock is Registrar &
Transfer Company, 10 Commerce Drive, Cranford, New Jersey 07016.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Evergood issued an additional 140,993 shares of common stock to each of Mr.
Rich and Mr. Stern pursuant to a stock exchange agreement dated as of March 1,
2000. The issuance of the shares was exempt from registration pursuant to
Section 4(2) of the Securities Act.
Evergood issued 447,596 shares pursuant to a consulting agreement dated as
of March 15, 2000 between Evergood and Aegis Capital Corp. The issuance of the
shares was exempt from registration pursuant to Section 4(2) of the Securities
Act.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
Evergood's authorized capital stock consists of 10,000,000 shares of common
stock, $0.01 par value per share.
Holders of the common stock do not have subscription, redemption,
conversion or preemptive rights. The shares of common stock when issued and
paid for, are fully paid and non-assessable. Each share of common stock is
entitled to participate pro rata in distribution upon liquidation and to one
vote on all matters submitted to a vote of shareholders. The holders of common
stock may receive cash dividends as declared by the Board of Directors out of
funds legally available therefor. Holders of the common stock are entitled to
elect all directors. At each annual meeting of the shareholders all of the
directors will be elected. The holders of the common stock
21
<PAGE>
do not have cumulative voting rights, which means that the holders of more than
half of the shares voting for the election of a class of directors can elect all
of the directors of such class and in such event the holders of the remaining
shares will not be able to elect any of such directors.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Evergood's certificate of incorporation and by-laws contain provisions
which reduce the potential personal liability of directors for certain monetary
damages and provide for indemnity of directors and other persons. Evergood is
unaware of any pending or threatened litigation against Evergood or its
directors that would result in any liability for which such director would seek
indemnification or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase Evergood's ability to attract and retain
qualified persons to serve as directors. Evergood has applied for a liability
insurance policy for the benefit of its directors. There can be no assurance
that Evergood will be able to obtain a liability policy on commercially
reasonable terms, if at all.
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to Evergood and its shareholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction which involves a conflict between the interests of Evergood and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions including grossly negligent business decisions relating to
attempts to change control of Evergood.
The provisions regarding indemnification provide, in essence, that Evergood
will indemnify its directors against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding arising out of the director's
status as a director of Evergood, including actions brought by or on behalf of
Evergood, (shareholder derivative actions). The provisions do not require a
showing of good faith. Moreover, they do not provide indemnification for
liability arising out of willful misconduct, fraud, or dishonesty, for "short-
swing" profits violations under the federal securities laws, or for the receipt
of illegal remuneration. The provisions also do not provide indemnification for
any liability to the extent such liability is covered by insurance. One purpose
of the provisions is to supplement the coverage provided by such insurance.
22
<PAGE>
These provisions diminish the potential rights of action which might
otherwise be available to shareholders by limiting the liability of officers and
directors to the maximum extent allowable under Delaware law and by affording
indemnification against most damages and settlement amounts paid by a director
of Evergood in connection with any shareholders derivative action. However, the
provisions do not have the effect of limiting the right of a shareholder to
enjoin a director from taking actions in breach of his fiduciary duty, or to
cause Evergood to rescind actions already taken, although as a practical matter
courts may be unwilling to grant such equitable remedies in circumstances in
which such actions have already been taken.
Evergood has also entered into indemnification agreements with its officers
and directors. The indemnification agreements provide for reimbursement for all
direct and indirect costs of any type or nature whatsoever (including attorneys'
fees and related disbursements) actually and reasonably incurred in connection
with either the investigation, defense or appeal of a proceeding, (as defined)
including amounts paid in settlement by or on behalf of an indemnitee
thereunder.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See attached statements.
In addition Evergood hereby incorporates by reference the financial
statements contained in its Form 10-Q for its fiscal quarter ended June 30,
2000.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) See Index to Financial Statements at beginning of attached financial
statements.
(b) Exhibits
--------
3.1 Certificate of Incorporation, as amended.*
3.2 By-Laws.*
4.1 Specimen common stock certificate.*
10.1 Employment Agreement between Evergood Corporation and Mel Rich dated
as of January 1, 2000.*
10.2 Employment Agreement between Evergood Corporation and Stephen R.
Stern dated February 1, 2000.*
10.3 Employment Agreement between Evergood Corporation and Charlotte Rich
dated January 1, 2000.*
10.4 Form of Indemnification Agreement.*
10.5 Agreement with Livingston Healthcare Services, Inc., as amended.*
10.6 Credit Agreement with the CIT Group/Credit Finance, Inc.*
-----------------
* previously filed
23
<PAGE>
10.7 Voting Trust Agreement dated as of September 30, 1996 among Evergood
Corporation, Stephen R. Stern and Mel Rich.*
10.8 Stock Exchange Agreement dated as of March 1, 2000*
10.9 Form of Franchise Agreement*
22 The following is a list of Evergood's subsidiaries
Name State of Incorporation
---- ----------------------
Great Earth Distribution Inc. California
Phoenix Laboratories Inc. New York
Great Earth Companies Inc. Delaware
Bodyonics, Ltd. Delaware
27 Financial Data Schedule.*
-----------------
* previously filed
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
EVERGOOD PRODUCTS CORPORATION
/s/ Melvin Rich
By: ________________________________
Melvin Rich
President
Dated: December , 2000
25
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Table of Contents
================================================================================
Page
Independent Auditors' Report F-2
Audited Consolidated Financial Statements
Balance Sheets
December 31, 1998 and 1999 F-3 - F-4
Statements of Operations
For the Years Ended December 31, 1997, 1998 and 1999 F-5
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1997, 1998 and 1999 F-6
Statements of Cash Flows
For the Years Ended December 31, 1997, 1998 and 1999 F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-23
Unaudited Consolidated Financial Statements
Balance Sheet
March 31, 2000 F-24 - F-25
Statements of Operations
For the Three Months Ended March 31, 1999 and 2000 F-26
Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 2000 F-27 - F-28
Notes to Consolidated Financial Statements F-29 - F-31
F-1
<PAGE>
Independent Auditors' Report
To the Board of Directors
Evergood Products Corporation and Subsidiaries
Hicksville, New York
We have audited the accompanying consolidated balance sheets of Evergood
Products Corporation and Subsidiaries as of December 31, 1998 and 1999 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 1997, 1998 and 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Evergood Products Corporation and Subsidiaries as of December 31, 1998 and 1999
and the results of its operations and cash flows for the years ended December
31, 1997, 1998 and 1999, in conformity with generally accepted accounting
principles.
/s/ RAICH ENDE MALTER LERNER & CO.
RAICH ENDE MALTER LERNER & CO.
East Meadow, New York
March 4, 2000, except for Notes 17 and
19, for which the date is May 11, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
====================================================================================
December 31,
------------------------
1998 1999
------------------------
<S> <C> <C>
Assets
Current Assets
Cash $ 751,664 $ 445,849
Restricted cash - 36,410
Accounts receivable - less allowance for doubtful
accounts of $244,000 and $334,000 for 1998
and 1999, respectively 4,355,069 5,330,484
Accounts receivable - related party - 247,658
Current maturities of notes receivable - less
allowance for doubtful accounts of $25,172 and
$75,000 for 1998 and 1999, respectively 105,955 124,910
Inventory 7,034,644 8,618,944
Deferred tax asset 352,000 1,456,000
Deferred franchising costs 81,275 58,400
Prepaid taxes 44,562 -
Prepaid expenses and other current assets 471,671 443,565
----------- -----------
13,196,840 16,762,220
----------- -----------
Fixed Assets - net 883,419 1,224,699
----------- -----------
Other Assets
Notes receivable - net of current maturities 144,579 42,414
Deferred tax asset 248,000 510,000
Restricted cash 36,410 -
Other assets 22,074 16,118
----------- -----------
451,063 568,532
----------- -----------
$14,531,322 $18,555,451
=========== ===========
</TABLE>
See notes to consolidated financial statements. F-3
<PAGE>
<TABLE>
<CAPTION>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
=====================================================================================
December 31,
------------------------
1998 1999
------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 8,059,017 $ 8,744,554
Accrued expenses 787,019 718,476
Unearned franchise fees 316,250 240,000
Sundry liabilities 129,767 94,454
Income taxes payable - 35,740
Current maturities of long-term debt 288,115 258,250
Current maturities of loans payable - officers 197,745 174,272
----------- -----------
9,777,913 10,265,746
----------- -----------
Other Liabilities
Loan payable 4,961,470 5,839,175
Long-term debt - net of current maturities 938,250 680,000
Loans payable - officers - net of current maturities 197,819 110,323
----------- -----------
6,097,539 6,629,498
----------- -----------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock - par value $.01 - authorized 10,000,000
shares; issued 3,816,564 shares and outstanding
3,746,375 shares for 1998 and 1999 38,166 38,166
Additional paid-in capital 6,980,138 6,980,138
Accumulated (deficit) (8,058,400) (5,054,063)
----------- -----------
(1,040,096) 1,964,241
Less: Treasury stock - 70,189 shares - at cost 304,034 304,034
----------- -----------
(1,344,130) 1,660,207
----------- -----------
$14,531,322 $18,555,451
=========== ===========
</TABLE>
See notes to consolidated financial statements. F-4
<PAGE>
<TABLE>
<CAPTION>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
==========================================================================================
For the Years Ended
December 31,
--------------------------------------
1997 1998 1999
--------------------------------------
<S> <C> <C> <C>
Net Revenues $30,868,804 $38,601,509 $44,599,133
Cost of Revenues 21,782,066 27,867,831 31,144,799
----------- ----------- -----------
9,086,738 10,733,678 13,454,334
Selling, General and Administrative Expenses 8,442,461 11,476,266 11,044,884
----------- ----------- -----------
Income (Loss) Before Other Expense 644,277 (742,588) 2,409,450
Other Expense - interest 612,008 732,642 683,113
----------- ----------- -----------
Income (Loss) Before Provision for Income Taxes 32,269 (1,475,230) 1,726,337
Provision (Benefit) for Income Taxes 23,000 4,000 (1,278,000)
----------- ----------- -----------
Income (Loss) Before Minority Interest and
Extraordinary Item 9,269 (1,479,230) 3,004,337
Minority Interest 25,665 - -
----------- ----------- -----------
Income (Loss) Before Extraordinary Item 34,934 (1,479,230) 3,004,337
Extraordinary Gain on Debt Forgiveness -
net of income taxes of $2,000 98,000 - -
----------- ----------- -----------
Net Income (Loss) $ 132,934 $(1,479,230) $ 3,004,337
=========== =========== ===========
Basic and Diluted Income (Loss) Per Share
Income (loss) before extraordinary item $ .01 $ (.38) $ .77
Extraordinary item .02 - -
----------- ----------- -----------
Net Income (Loss) Per Share $ .03 $ (.38) $ .77
=========== =========== ===========
Weighted Average Shares Outstanding 3,887,368 3,887,368 3,887,368
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements. F-5
<PAGE>
<TABLE>
<CAPTION>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
===========================================================================================
Treasury
Paid-In Accumulated Stock
Shares Amount Capital (Deficit) At Cost Total
=====================================================================
<S> <C> <C> <C> <C> <C> <C>
Balance -
January 1, 1997 3,816,564 $38,166 $6,980,138 $(6,712,104) $(304,034) $ 2,166
Net income - - - 132,934 - 132,934
--------- ------- ---------- ----------- --------- -----------
Balance -
December 31, 1997 3,816,564 38,166 6,980,138 (6,579,170) (304,034) 135,100
Net (loss) - - - (1,479,230) - (1,479,230)
--------- ------- ---------- ----------- --------- -----------
Balance -
December 31, 1998 3,816,564 38,166 6,980,138 (8,058,400) (304,034) (1,344,130)
Net income - - - 3,004,337 - 3,004,337
--------- ------- ---------- ----------- --------- -----------
Balance -
December 31, 1999 3,816,564 $38,166 $6,980,138 $(5,054,063) $(304,034) $ 1,660,207
========= ======= ========== =========== ========= ===========
</TABLE>
See notes to consolidated financial statements. F-6
<PAGE>
<TABLE>
<CAPTION>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 1 of 2
==============================================================================================
For the Years Ended
December 31,
---------------------------------------
1997 1998 1999
=======================================
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 132,934 $(1,479,230) $ 3,004,337
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 403,229 307,210 227,322
Increase (decrease) in allowance for doubtful
accounts and notes receivable 56,533 (1,662) 139,828
Write-off of accounts receivable and notes
receivable 58,090 5,988 101,067
Increase in inventory obsolescence write downs 82,000 225,000 22,000
Loss on sale of machinery and equipment 1,316 - -
Cancellation of debt (100,000) (92,826) -
(Increase) decrease in:
Accounts receivable (956,880) (762,801) (1,152,028)
Accounts receivable - related party - - (247,658)
Inventory (2,761,276) 181,910 (1,606,300)
Deferred franchising costs (41,586) (11,352) 22,875
Prepaid taxes - (44,562) 44,562
Prepaid expenses and other current assets (495,991) 191,950 28,106
Notes receivable 121,034 57,696 18,928
Deferred tax asset - - (1,366,000)
Other assets (20,371) 22,995 5,956
Increase (decrease) in:
Accounts payable 1,580,887 1,326,773 685,537
Accrued expenses (34,094) (117,994) (68,543)
Unearned franchise fees 107,500 31,250 (76,250)
Sundry liabilities 75,125 24,462 (35,313)
Income taxes payable (19,880) (4,865) 35,740
Minority interest (25,665) - -
----------- ----------- -----------
(1,970,029) 1,339,172 (3,220,171)
----------- ----------- -----------
(1,837,095) (140,058) (215,834)
----------- ----------- -----------
Cash Flows from Investing Activities
Purchase of fixed assets (282,339) (264,585) (568,602)
Restricted cash as security for equipment
acquired pursuant to capital lease (36,410) - -
----------- ----------- -----------
(318,749) (264,585) (568,602)
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements. F-7
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows Page 2 of 2
================================================================================
For the Years Ended
December 31,
----------------------------------
1997 1998 1999
==================================
Cash Flows from Financing Activities
Increase in loan payable $2,445,571 $ 828,884 $ 877,705
Payment of notes payable - vendors (149,886) - -
Proceeds of notes payable 314,780 340,000 -
Payments of notes payable (251,803) (225,773) (288,115)
Payments of officers' loans (141,648) (6,293) (110,969)
---------- --------- ---------
2,217,014 936,818 478,621
---------- --------- ---------
Increase (Decrease) in Cash 61,170 532,175 (305,815)
Cash - beginning 158,319 219,489 751,664
---------- --------- ---------
Cash - end $ 219,489 $ 751,664 $ 445,849
========== ========= =========
Supplemental Disclosures
Cash paid:
Interest $ 612,009 $ 716,597 $ 669,333
========== ========= =========
Taxes $ 20,134 $ 53,430 $ 8,306
========== ========= =========
Non-cash investing and financing
activities:
Accounts receivable converted
to notes receivable $ 31,370 $ 197,260 $ 86,613
========== ========= =========
Acquisition of equipment
under capital lease $ 140,000 $ - $ -
========== ========= =========
See notes to consolidated financial statements. F-8
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997, 1998 and 1999
================================================================================
1 - The Company
Evergood Products Corporation and Subsidiaries (the "Company") produce and
sell 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 sales to the Great Earth franchisees constituted
approximately 42%, 31% and 28% of the Company's total sales volume for
1997, 1998 and 1999, respectively. Amounts receivable from these
franchisees amounted to approximately $1,573,000 and $1,704,000 at December
31, 1998 and 1999, respectively.
2 - Summary of Significant Accounting Policies
The summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial
statements. These policies are in conformity with generally accepted
accounting principles and have been applied consistently in all material
respects.
a. Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Evergood Products Corporation and
its subsidiaries. All significant intercompany items and transactions
have been eliminated.
b. Cash and Cash Equivalents - Cash and cash equivalents include liquid
investments with maturities of three months or less at the time of
purchase.
c. Inventories - Inventories are stated at the lower of cost (first-in,
first-out basis) or market.
The company evaluates the items comprising the inventory for impairment
quarterly on the basis of anticipated usage in relation to stocks on
hand. Where such evaluation indicates a loss of utility, the cost basis
of the impaired items is written down to estimated realizable value.
d. Fixed Assets - Fixed assets are stated at cost. Depreciation is
provided for by use of the straight-line method over the estimated
useful lives of the assets, which range from two to ten years.
e. Fair Value of Financial Statements - The Company's debt instruments
payable to financial institutions bear floating interest rates
referenced to prevailing market rates. Accordingly, the carrying
amounts of such instruments approximate fair value at each reporting
date. Other debt instruments, consisting of loans due to officers,
approximate fair value at December 31, 1998 and 1999.
Continued F-9
<PAGE>
The carrying amount of notes receivable approximates fair value at both
December 31, 1998 and 1999 based on their yield and their relatively
short maturities, with fair value estimated by discounting cash flows
using current rates for similar loans.
f. Income Taxes - Federal and state income taxes have been provided in the
financial statements at statutory rates. In a prior year, the Company
adopted the provisions of Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes ("FASB 109"). FASB 109 requires a
company to recognize deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in a
company's financial statements or tax returns. Under this method,
deferred tax assets and liabilities (adjusted for valuation allowances)
are determined based on the difference between the financial statement
carrying amounts and tax bases of assets and liabilities using enacted
tax rates in effect in the years in which the differences are expected to
reverse.
g. Earnings Per Share - The accompanying financial statements include
earnings per share calculated as required by Financial Accounting
Standards No. 128 Earnings Per Share which replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
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 in March, 2000 to the
Company's controlling stockholder in exchange for his minority ownership
interests in two of the Company's subsidiaries.
h. Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
i. Revenue Recognition - The Company derives revenues from the sale of
product manufactured to customer orders, from distribution of product to
franchisee and third party retailers, from the sale of franchise rights
and from royalties on sales by franchisee retailers.
Revenue from the sale of product manufactured to customer orders, and
from the sale of product to franchisee and third party retailers, is
recognized when the product is shipped. Provision is made for returns as
needed.
Continued F-10
<PAGE>
The Company earns royalties on retail product sales made by franchisees.
Royalty revenue is recognized at the time such sales are made. The
Company records royalty revenue on the basis of the monthly sales report
provided to the Company by the franchisees.
Revenues from the sale of franchise rights are recognized when the
Company has fulfilled its obligations of assisting the franchisee in
opening a retail store. Such obligations are deemed fulfilled upon
opening of the store.
j. Advertising Costs - Advertising costs are expensed the first time the
advertisement takes place and amounted to approximately $2,459,000,
$3,724,000 and $2,542,000 in 1997, 1998 and 1999, respectively. Such
costs are included in Selling, General and Administrative Expenses.
Prepaid advertising included in the accompanying financial statements
totaled $243,859 and $241,308 at December 31, 1998 and 1999,
respectively.
k. Stock-Based Compensation - The Company accounts for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion ("APBO") No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, compensation cost
is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay
to acquire the stock.
l. New Accounting Pronouncement - In June, 1998, the FASB issued SFAS No.
133 Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value, with the potential effect on
operations dependent upon certain conditions being met. The statement is
effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Management does not believe there will be a significant impact
on the Company upon adopting this standard.
3 - Inventory
Inventory is comprised of the following:
December 31,
======================
1998 1999
======================
Raw Materials $2,866,259 $4,078,344
Work-in-Process 673,231 1,180,092
Finished Goods 3,495,154 3,360,508
---------- ----------
$7,034,644 $8,618,944
========== ==========
Continued F-11
<PAGE>
4 - Notes Receivable
Notes receivable consist of trade notes bearing interest at 8%. The notes,
net of an allowance for doubtful accounts of $25,172 and $75,000 at
December 31, 1998 and 1999, respectively, mature through 2002:
December 31,
==================
1998 1999
==================
Total notes receivable $250,534 $167,324
Less: Current maturities 105,955 124,910
-------- --------
$144,579 $ 42,414
======== ========
The following is a schedule of maturities of notes receivable by year:
Year ending December 31, 2000 $199,910
2001 41,966
2002 448
--------
242,324
Less: Allowance for doubtful accounts 75,000
--------
$167,324
========
5 - Fixed Assets
Fixed assets is comprised of the following:
December 31, Estimated
---------------------- Useful Life
1998 1999 Range
-------------------------------------
Machinery and equipment $5,005,438 $5,525,638 2 to 10 years
Office equipment and fixtures 399,103 447,506 5 to 10 years
---------- ----------
5,404,541 5,973,144
Less: Accumulated depreciation
and amortization 4,521,122 4,748,445
---------- ----------
$ 883,419 $1,224,699
========== ==========
The weighted average estimated useful lives of the fixed assets at December
31, 1999 were approximately 9.3 years for the machinery and equipment and 6.2
years for the office equipment and fixtures. Depreciation expense totaled
$163,236, $200,139 and $227,322 for 1997, 1998 and 1999, respectively.
Continued F-12
<PAGE>
6 - Loan Payable
The Company has an aggregate credit line of $7,500,000 with The CIT
Group/Credit Finance, Inc. ("CIT") which has been amended and extended
through August, 2001, with interest at 2% above the prime rate. The weighted
average effective rate was 13%, 11% and 11% for 1997, 1998 and 1999,
respectively. The aggregate credit line includes the amounts due as long-
term debt, as described in Note 7. Loan advances are provided under a
formula that is based on allowable inventory and accounts receivable. Such
advances are collateralized by accounts receivable, inventory and other
property of the Company and include various sublimits. Excess availability
under this line was approximately $486,000 at December 31, 1999. This debt
is partially guaranteed by the Company's president.
The loan agreement prohibits the Company from paying dividends and includes
certain restrictions on the repayment of officers' debt.
7 - Long-Term Debt
Long-term debt consists primarily of a note due to CIT. The note is secured
by substantially all machinery and equipment of the Company and cross-
collateralized by the assets securing the credit line. During August of
1998, this note was amended and restated to reflect an additional $340,000
of indebtedness incurred by the Company. The note is payable in monthly
installments of $20,000 plus interest through August, 2001, at which time
the final balance is due. This debt includes interest at prime plus 2%. The
weighted average effective rate was 13%, 11% and 11% for 1997, 1998 and
1999, respectively.
In addition, included within current maturities of long-term debt is a
capital lease obligation used to acquire equipment with a cost of
approximately $153,000 and a net book value of approximately $114,000 at
December 31, 1999. The balance of the obligation at December 31, 1999
consists of the final month's payment of $4,461 (inclusive of imputed
interest of $211) and the purchase obligation of $14,000 both of which were
paid in January, 2000. The balance at December 31, 1998 was $65,613. Cash
collateral held in a restricted certificate of deposit was released upon the
settlement.
At December 31, 1999, future maturities of long-term debt are as follows:
December 31, 2000 $258,250
2001 240,000
2002 240,000
2003 200,000
--------
$938,250
========
Continued F-13
<PAGE>
8 - Notes and Loan Payable - Officer
The Company has two notes payable to one officer. One note, in the amount of
$100,000, is payable on demand with 4% per annum interest payable monthly in
the amount of $333. The balance of this note includes accrued interest of
$5,328 and $10,323 at December 31, 1998 and 1999. The second note, which has
an unpaid principal balance of $168,374 and $52,410 at December 31, 1998 and
1999, respectively, matures in September, 2000 with principal and interest
of 6% per annum payable monthly in the amount of approximately $10,000.
Interest expense incurred on these two notes is $24,000, $18,587 and $6,636
for 1997, 1998 and 1999, respectively.
The Company has two loans payable to a second officer. The balance of these
loans is $121,862 for December 31, 1998 and 1999. These notes are non-
interest bearing and no repayment terms exist at this time.
9 - Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities recognized for
financial reporting and the amounts recognized for income tax purposes. The
significant components of deferred tax assets and liabilities are as
follows:
December 31,
=======================
1998 1999
=======================
Net operating loss carryforwards $1,634,000 $ 906,000
Amortization 303,000 269,000
Allowance for doubtful accounts 99,000 153,000
Inventory obsolescence writedowns 203,000 212,000
Unearned franchise fees 117,000 91,000
Unicap (263A adjustment) 128,000 175,000
New York State investment tax credits 273,000 277,000
Accrued vacation pay 49,000 59,000
Federal AMT credits - 42,000
Miscellaneous (74,000) (64,000)
---------- ----------
2,732,000 2,120,000
Less: Valuation allowance 2,132,000 154,000
---------- ----------
$ 600,000 $1,966,000
========== ==========
Continued F-14
<PAGE>
At December 31, 1999, the Company has net operating loss carryforwards
available as follows:
Loss
Carryforward Expirations
============================
Federal $1,797,000 2008 to 2013
New York State 3,273,000* 2004 to 2013
California 376,000 2003
*Based on estimated allocated utilization.
Federal and New York State net operating losses can be carried forward for 15
years while California allows a 5 year carryforward. Net operating loss
carryforwards are subject to certain limitations on annual utilization in the
event of ownership changes or equity structure shifts.
Additionally, the Company has New York State investment tax credits which
will be available as a direct offset to tax after the New York State net
operating loss is exhausted. Such credits can be carried forward for 15
years and expire variously, from 2000 to 2014. The Company has provided a
valuation allowance in the amount of $154,000 against the portion of such
credits expiring in earlier years prior to when the Company expects to be
able to utilize them.
Management of the Company has determined that it is more likely than not that
the deferred tax assets, other than the investment credits mentioned above,
will be realized on the basis of a continuation of current operating
performance. Accordingly, no additional valuation allowance is deemed
necessary at December 31, 1999.
The provision (benefit) for income taxes is comprised of the following:
December 31,
----------------------------------
1997 1998 1999
==================================
Current
Federal $ 2,000 $ - $ 42,000
State 21,000 4,000 46,000
---------- --------- -----------
23,000 4,000 88,000
---------- --------- -----------
Deferred
Federal - - (95,000)
State - - (82,000)
---------- --------- -----------
- - (177,000)
---------- --------- -----------
Change in the beginning of the
year valuation allowance resulting
from a change in circumstances
affecting the estimated realization
of deferred tax assets - - (1,189,000)
---------- --------- -----------
$ 23,000 $ 4,000 $(1,278,000)
========== ========= ===========
Continued F-15
<PAGE>
The tax effect of net operating loss carryforwards not previously recognized
is a reduction of the current federal provision by $707,000 and the current
state provision by $82,000 in 1999 and the current federal provision by
$203,000 and the current state provision by $52,000 in 1997.
The provision (benefit) for income taxes differs from the amount using the
statutory federal income tax rate (34%) as follows:
December 31,
===================================
1997 1998 1999
-----------------------------------
At statutory rates $ 46,000 $(503,000) $ 587,000
Effect of state taxes 21,000 4,000 30,000
Effect of permanent differences 51,000 58,000 83,000
Loss for which no benefit was
recorded - 445,000 -
Current benefit of net operating loss
carryforward not previously
recognized (255,000) - (789,000)
Change in valuation allowance 155,000 - (1,189,000)
Other 7,000 - -
--------- --------- -----------
25,000 4,000 (1,278,000)
Less: Allocated to extraordinary
item 2,000 - -
--------- --------- -----------
$ 23,000 $ 4,000 $(1,278,000)
========= ========- ===========
10 - Major Customers and Foreign Sales
a. For the years ended December 31, 1997, 1998 and 1999, the Company had
significant sales and receivable balances from major customers in the
pharmaceutical and nutritional business as follows:
<TABLE>
<CAPTION>
For the Year Ended As of
December 31, 1997 December 31, 1997
------------------------------------- -------------------------------------
Approximate Approximate
Approximate Percentage of Approximate Percentage of
Year To-Date Sales Total Net Revenues Trade Receivable Total Receivables
============================================================================
<S> <C> <C> <C> <C>
Customer A $4,076,000 13% $428,000 11%
Customer B 3,204,000 10 514,000 14
Customer C - - - -
---------- ---- -------- ----
$7,280,000 23% $942,000 25%
========== ==== ======== ====
</TABLE>
Continued F-16
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended As of
December 31, 1998 December 31, 1998
------------------------------------- -------------------------------------
Approximate Approximate
Approximate Percentage of Approximate Percentage of
Year To-Date Sales Total Net Revenues Trade Receivable Total Receivables
============================================================================
<S> <C> <C> <C> <C>
Customer A $ 3,246,000 8% $216,000 5%
Customer B 5,555,000 14 879,000 20
Customer C 4,271,000 11 112,000 3
----------- ---------- ---------- --
$13,072,000 33% $1,207,000 28%
=========== ========== ========== ===
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended As of
December 31, 1999 December 31, 1999
------------------------------------- -------------------------------------
Approximate Approximate
Approximate Percentage of Approximate Percentage of
Year To-Date Sales Total Net Revenues Trade Receivable Total Receivables
============================================================================
<S> <C> <C> <C> <C>
Customer A $ 2,436,000 6% $237,000 4%
Customer B 3,668,000 8 674,000 13
Customer C 10,441,000 23 435,000 8
----------- --- ---------- ---
$16,545,000 37% $1,346,000 25%
=========== === ========== ===
</TABLE>
The above amounts relate to the following segments:
Customer A - brand development segment.
Customer B - manufacturing segment.
Customer C - manufacturing segment.
b. Sales to customers located in Canada, Europe and the Far East totaled
approximately $1,190,000, $1,220,000 and $1,040,000 for the years 1997,
1998 and 1999, respectively. Substantially all of the Company's sales to
foreign customers are denominated in U.S. dollars.
11 - Employee Benefit Plans
a. Pension Plan - The Company participates in a multi-employer pension plan
for all union employees meeting certain age and length of service
requirements. Pension expense was $39,670, $45,760 and $50,215 for 1997,
1998 and 1999, respectively. The union plan is a defined contribution
plan.
b. 401(k) Plan - The Company maintains a 401(k) Plan covering all employees
who meet certain eligibility requirements. Employees may defer a
percentage of their salary, currently capped at $10,000. Commencing in
1998, the Company provides matching contributions equal to 50% of
employee contributions, up to a maximum benefit of $25 per employee, per
week. Such matching contributions totaled $26,286 in 1998 and $49,533 in
1999.
Continued F-17
<PAGE>
12 - Commitments and Contingencies
a. The Company has operated from the same location since 1978, however, it
has historically rented on a non-lease basis. Rent expense for the
premises was $237,028, $246,398 and $254,820 for 1997, 1998 and 1999,
respectively. In addition, the Company leases certain vehicles and
equipment under leases which expire on various dates through 2004. Rent
expense under such leases was $2,841, $1,415 and $39,319 for 1997, 1998
and 1999, respectively.
Future minimum lease payments to be made under these operating leases as
of December 31, 1999 are as follows:
December 31, 2000 $128,620
2001 85,519
2002 60,189
2003 24,576
2004 5,919
--------
$304,823
========
b. 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.
The Company is party to various other legal proceedings incident to the
ordinary course of its business. Management believes that the probable
resolution of any such matters will not materially affect the financial
position, results of operations or cash flows of the Company.
13 - Related Party Transactions
The Company obtains legal services from a firm having a partner who is an
officer, director and significant stockholder of the Company. Such legal
fees amounted to $409,991, $232,731 and $628,433 for the years ended 1997,
1998 and 1999, respectively. Payments were $396,504, $348,458 and $517,786,
respectively, for such years. Amounts due to this firm which are included in
accounts payable total $190,226 at December 31, 1998 and $300,873 at December
31, 1999.
Two Great Earth franchise stores located in Long Island, New York were
acquired in August, 1999 by a corporation owned by two individuals who serve
as officers and directors, one of whom is also the Company's controlling
stockholder. At December 31, 1999, amounts due from this corporation totaled
$247,658, consisting of $110,915 in receivables for sale of product since the
date of acquisition and $136,743 which consists primarily of receivables due
as of the date of acquisition. Sales to this corporation during the period
subsequent to the acquisition amounted to $110,915, with no collections on
receivables through December 31, 1999.
Continued F-18
<PAGE>
14 - Operating Segments
The Company follows SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information, in reporting information about its operating
segments.
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.
The accounting policies of the segments are the same as those for the Company
as a whole. The Company evaluates the financial performance of the segments
based on their respective operating income. Income taxes are not allocated
to segments, however, tax assets are included with segment assets to the
extent that the taxable entities giving rise to the assets are constituents
of such segments. The manufacturing segment produces product for both third
parties and for other segments. Intersegment sales are priced to provide
manufacturing with its normal rate of gross profit.
Revenues from the franchising segment are comprised of the following:
December 31,
-------------------------------------
1997 1998 1999
=====================================
Sale of product $13,012,920 $12,480,713 $12,261,051
Royalties 1,845,748 1,935,992 1,848,306
Sale of franchises 262,800 321,000 467,750
----------- ----------- -----------
$15,121,468 $14,737,705 $14,577,107
=========== =========== ===========
Number of franchise outlets
open at year end 118 131 143
=========== =========== ===========
Continued F-19
<PAGE>
Segment information for the years ended December 31, 1997, 1998 and 1999 was
as follows:
<TABLE>
<CAPTION>
Brand
Manufacturing Franchising Development Corporate Total
==============================================================================================
<S> <C> <C> <C> <C> <C>
1997
Net revenues from external
customers $10,246,193 $15,121,468 $ 5,501,143 $ - $30,868,804
Intersegment net sales 14,005,242 60,358 1,173,199 - 15,238,799
Operating income (loss) 42,597 2,045,045 (1,431,587) (11,778) 644,277
Interest expense 409,929 146,906 55,000 173 612,008
Total assets 6,936,025 5,382,021 1,333,888 255,000 13,906,934
Capital expenditures 176,817 - 105,522 - 282,339
Depreciation and
amortization 160,707 232,000 10,522 - 403,229
1998
Net revenues from external
customers $18,449,544 $14,737,705 $ 5,414,260 $ - $38,601,509
Intersegment net sales 13,587,992 71,397 - - 13,659,389
Operating income (loss) 1,797,149 1,826,779 (4,369,893) 3,377 (742,588)
Interest expense 484,911 152,403 90,000 5,328 732,642
Total assets 6,901,012 5,575,888 1,754,860 299,562 14,531,322
Capital expenditures 243,938 10,416 10,231 - 264,585
Depreciation and
amortization 147,635 123,425 36,150 - 307,210
1999
Net revenues from external
customers $24,705,125 $14,577,107 $ 5,316,901 $ - $44,599,133
Intersegment net sales 11,769,984 67,608 - - 11,837,592
Operating income (loss) 2,719,225 778,780 (1,062,382) (26,173) 2,409,450
Interest expense (436,442) (156,671) (90,000) - (683,113)
Total assets 9,896,930 5,051,879 1,978,642 1,628,000 18,555,451
Capital expenditures 568,602 - - - 568,602
Depreciation and
amortization 176,426 12,889 38,007 - 227,322
</TABLE>
Continued F-20
<PAGE>
15 - Valuation and Qualifying Accounts
Valuation and qualifying accounts for the years ended December 31, 1997, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
Charged to
Balance at Costs and * Balance at
Beginning of Period Expenses Other Accounts Deductions End of Period
=========================================================================================
<S> <C> <C> <C> <C> <C>
1997
Allowance for bad debts $150,000 $ 94,000 $ - $ - $244,000
======== ======== ========== ========= ========
Reserve for doubtful notes
receivable $ 47,648 $ - $ - $ (7,467) $ 40,181
======== ======== ========== ========= ========
1998
Allowance for bad debts $244,000 $ - $ - $ - $244,000
======== ======== ========== ========= ========
Reserve for doubtful notes
receivable $ 40,181 $ - $ - $ (15,009) $ 25,172
======== ======== ========== ========= ========
1999
Allowance for bad debts $244,000 $276,000 $ - $(186,000) $334,000
======== ======== ========== ========= ========
Reserve for doubtful notes
receivable $ 25,172 $ 54,159 $ - $ (4,331) $ 75,000
======== ======== ========== ========= ========
</TABLE>
*Reserved amounts written off.
16 - Concentrations
a. The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and trade accounts receivable. The
Company places its cash with high credit quality institutions. At times,
balances may be in excess of the FDIC insurance limit. The Company
routinely assesses the financial strength of its customers and, as a
consequence, believes that its trade accounts receivable credit risk
exposure is limited.
b. During 1999, the Company purchased approximately 19% of its raw materials
from a single vendor. However, management believes that the Company's
reliance on this source of supply is minimal as many alternative sources
for the material purchased exist.
Continued F-21
<PAGE>
17 - Collective Bargaining Agreement
Approximately 70% of the Company's labor force is subject to a collective
bargaining agreement which expires on May 14, 2000. The Company is in the
process of negotiating a new agreement.
18 - Extraordinary Gain on Debt Forgiveness
In October, 1997, the Company reached a settlement with a vendor pursuant to
which the Company recognized $100,000 of income on the forgiveness of a
portion of notes payable owed to this vendor.
19 - Subsequent Events
- In February, 2000, the Company elected to settle out of the plaintiff
class in a lawsuit claiming damages resulting from price-fixing actions
by a group of vitamin suppliers during the years 1990 through 1998.
Subsequently, the Company received a payment of $977,000 from one of the
defendant companies from whom it had purchased products over this period.
In March, 2000, the Company settled with a second defendant company for
approximately $318,000. These settlements will result in a pre-tax gain
that the Company will recognize in its first quarter 2000 financial
statements.
- 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 being a significant stockholder. The individuals owned equal
interests in the subsidiaries and each were issued 140,993 shares of the
Company's common stock, with the exchange ratio determined through an
independent appraisal.
In accordance with generally accepted accounting principles, the
acquisition of the controlling stockholder's interest will be accounted
for in a manner similar to a pooling of interests because it represents a
transfer of ownership interests between companies under common control.
Accordingly, upon consummation, the transaction will be given retroactive
effect in the financial statements for all historical periods, and there
will be no adjustments to fair value for the interests exchanged.
Furthermore, in accordance with SEC accounting regulations, the shares
issued in the transaction are included in earnings per share for all
periods presented in the accompanying financial statements.
The restatement of historical financial statements to reflect this
transaction will have a minimal impact because the financial statement
value attributable to minority interests had been eliminated by the end
of fiscal 1997 as a result of subsidiary losses. The pro forma impact on
fiscal 1997 would be a reduction of approximately $12,000 in both income
before extraordinary item and net income, and no impact on per share
amounts presented.
Continued F-22
<PAGE>
The acquisition of the non-controlling stockholder's interest will be
accounted for under the purchase method based on the fair value of the
Company shares issued as consideration for the exchange. The fair value
of such shares is approximately $197,000.
- In January and February, 2000, the Company entered into employment
agreements with three individuals who are presently executive officers of
the Company.
The terms of the agreements for two of the individuals run from February,
2000 to January, 2010. Aggregate annual compensation under these
agreements will total $1,245,000, with such amounts increased annually at
the rate of 5% plus inflation related increases. Annual bonuses will be
at the discretion of the board of directors.
For the third individual, the agreement term runs from February, 2000 to
January, 2005. Annual compensation under this agreement will be $150,000,
with such amounts increased annually at the rate of 3%, plus inflation
related increases. Annual bonuses will be at the discretion of the board
of directors. The employment agreement states that if the employee
retires during the term of the agreement, at the discretion of the Board
of Directors, the Company will enter into a consulting agreement with the
employee. Under such consulting agreement, the employee will continue to
render services to the Company over the term that had been remaining on
the employment agreement, for annual compensation of $120,000.
Each of these employment agreements provide for an automobile allowance,
various health and life insurance benefits and for the continuation of
certain benefits following disability.
In the event that the Company terminates any of these employment
agreements without cause, the terminated employee has the right to
receive as a lump sum payment an amount equal to the greater of 2.49
times their then effective base salary (including most recent bonus) or,
the then effective base salary factored over the remaining term. The
employment agreements also provide that in the event that there is a
change of control of the Company, the employee has the right to receive
as a lump sum payment an amount equal to 2.99 times their then effective
base salary.
- In May, 2000, the Company entered into an agreement with a firm that will
provide strategic financial consulting and advisory services to the
Company. The agreement is effective for a term of one year commencing
March 1, 2000. Compensation for these services, if any, is to be
negotiated. At the same time the Company agreed to issue 447,596 shares
of common stock to this firm as compensation for services rendered to
date. The fair value of the shares issued is approximately $700,000. This
amount will be recorded as a compensation charge in the Company's
financial statements in the first quarter of fiscal year 2000.
F-23
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
(Unaudited)
=============================================================================
March 31,
2000
===========
Assets
Current Assets
Cash $ 394,304
Restricted cash -
Accounts receivable 7,905,527
Accounts receivable - related party 345,332
Current maturities of notes receivable 84,745
Inventory 8,315,778
Deferred tax asset 1,148,000
Deferred franchising costs 68,400
Prepaid expenses and other current assets 596,502
-----------
18,858,588
-----------
Fixed Assets 1,351,766
-----------
Other Assets
Notes receivable - net of current maturities 17,443
Deferred tax asset 600,000
Intangible assets 197,389
Other assets 240,533
-----------
1,055,365
-----------
$21,265,719
===========
See notes to consolidated financial statements.
F-24
<PAGE>
EVERGOOD PRODUCTS CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
(Unaudited)
===============================================================================
<TABLE>
<CAPTION>
March 31,
2000
===========
<S> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $10,491,297
Accrued expenses 978,645
Unearned franchise fees 182,500
Sundry liabilities 49,640
Income taxes payable 252,502
Current maturities of long-term debt 240,000
Current maturities of loans payable - officers 162,861
-----------
12,357,445
-----------
Other Liabilities
Loan payable 4,885,626
Long-term debt - net of current maturities 620,000
Loans payable - officers - net of current maturities 110,323
-----------
5,615,949
-----------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock 45,462
Additional paid-in capital 7,855,052
Accumulated (deficit) (4,304,155)
-----------
3,596,359
Less: Treasury stock 304,034
-----------
3,292,325
-----------
$21,265,719
===========
</TABLE>
See notes to consolidated financial statements.
F-25
<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.
F-26
<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.
F-27
<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.
F-28
<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.
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:
March 31,
2000
==========
Raw Materials $3,929,856
Work-in-Process 1,136,472
Finished Goods 3,249,450
----------
$8,315,778
==========
Continued
F-29
<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
F-30
<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, will be given retroactive effect in all subsequently issued
comparative financial statements.
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.
F-31
