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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
Commission File Number 333-29291
ACTIVE ANKLE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
KENTUCKY 61-1163669
(State or other jurisdiction of (I.R.S. Employer
incorporation) Identification No.)
509 Barret Ave.
Louisville, KY 40204
502 582-2655
(Address, including zip code, and telephone number,
including area code of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past
90 days. Yes X No
----- -----
The number of shares of common stock outstanding on March 31, 1998 was
68,517
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To: SEC
Attached is the 10QSB filing for Active Ankle Systems, Inc. (#333-29291)
for the quarter ended March 31, 1998.
INDEX
ACTIVE ANKLE SYSTEMS, INC.
509 BARRET AVE.
LOUISVILLE, KY 40204
<TABLE>
<CAPTION>
<S> <C>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed balance sheets- March 31, 1998 and June 30, 1997
Condensed statements of operations - Three and Nine months
ended March 31, 1998 and 1997
Condensed statements of cash flows - Nine months
ended March 31, 1998 and 1997
Notes to condensed consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART 2. OTHER INFORMATION
</TABLE>
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ACTIVE ANKLE SYSTEMS, INC.
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1998 JUNE 30, 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,753 $ 336,099
Trade accounts receivable 204,939 199,006
Inventories 253,289 204,586
Prepaid expenses 238,903 137,017
Total current assets 700,884 876,708
Machinery and equipment, net 165,092 122,689
Patent, net 57,829 51,219
Other intangible assets 24,288 15,324
Total assets 948,093 1,065,940
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilites:
Accounts payable and accrued expenses 284,838 342,685
Current portion of long term debt 121,652 21,652
Total current liabilities 406,490 364,337
Long term debt 37,005 52,829
Stockholders' equity:
Preferred stock, $40 par and liquidation
value per share:
Authorized shares - 100,000
Issued and outstanding shares - 4,125 165,000 165,000
Common stock, no par value:
Authorized shares - 2,000,000
Issued and outstanding shares 68,517 in 1998 and 68267 in 1997 1,059,565 1,049,565
Accumulated deficit (719,967) (565,791)
Total stockholders' equity 1,944,532 1,780,356
Total liabilities and stockholders' equity $2,388,027 $2,197,522
</TABLE>
See notes to unaudited condensed financial statements.
<PAGE> 4
ACTIVE ANKLE SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
Unaudited
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31 MARCH 31
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 659,369 $629,290 $ 1,880,046 $1,952,132
Cost of sales 266,206 251,138 758,304 781,892
--------- -------- ----------- ----------
Gross profit 393,163 378,152 1,121,742 1,170,240
Selling, general and administrative 497,771 350,824 1,276,220 1,058,623
--------- -------- ----------- ----------
Operating (loss) income (104,608) 27,328 (154,478) 111,617
Interest expense (income) 1,680 2,219 (1,438) 9,358
--------- -------- ----------- ----------
Income (loss) before income tax expense (106,288) 25,108 (153,040) 102,259
Income tax expense 700 1,137 2,100
--------- -------- ----------- ----------
Net (loss) income $(106,288) $ 24,408 $ (154,177) $ 100,159
========= ======== =========== ==========
Earnings (loss) per common share $ (1.55) $ 0.36 $ (2.26) $ 1.47
========= ======== =========== ==========
Diluted earnings (loss) per common share $ (1.55) $ 0.36 $ (2.26) $ 1.47
========= ======== =========== ==========
Weighted average number of common shares outstanding 68,517 68,447 68,350 68,163
--------- -------- ----------- ----------
</TABLE>
See notes to unaudited condensed financial statements
<PAGE> 5
ACTIVE ANKLE SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(154,177) $ 100,159
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation 37,851 35,155
Amortization 5,250 5,531
Changes in operating assets and liabilities:
Trade accounts receivable (5,933) (25,240)
Inventories (48,703) (53,379)
Prepaid expenses (101,886) 40,083
Accounts payable and accrued liabilities (57,847) (33,871)
--------- ---------
Net cash (used in) provided by operating activities (325,445) 68,438
INVESTING ACTIVITIES
Payments for machinery and equipment (80,254) (19,313)
Other assets (20,824) (6,172)
--------- ---------
Net cash used in investing activities (101,078) (25,485)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 10,000 --
Proceeds from issuance of notes payable 100,000 --
Payments on bank notes and other notes payable (15,823) (48,550)
--------- ---------
Net cash provided by (used in) financing activities 94,177 (48,550)
(Decrease) Increase in cash and cash equivalents (332,346) (5,597)
Cash and cash equivalents at beginning of period 336,099 90,263
--------- ---------
Cash and cash equivalents at end of period $ 3,753 $ 84,666
</TABLE>
See notes to unaudited condensed financial statements.
<PAGE> 6
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) The accompanied unaudited condensed financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial statements and with instructions to Form 10-QSB. Accordingly , they do
not include all the information and foot notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consistent with normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the year ended
June 30, 1998. For further information, refer to the financial statements and
footnotes thereto included in the Company's form SB-1A filed on October 24th,
1997 with the Securities and Exchange Commission for the year ended June 30,
1997.
(2.) Inventories consists of the following:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30
-------- -------
<S> <C> <C>
Goods held for resale $ 71,142 $--0--
Raw material 182,147 204,586
-------- --------
$253,289 $204,586
======== ========
</TABLE>
<PAGE> 7
(3.) Company directors loaned the Company $150,000 at 9% annual rate of interest
in April , 1998 to support the catalog and service center investments until
additional equity funding can be raised. The Company borrowed $100,000 from its
line of credit during the fiscal third quarter and an additional $57,000 in
April, 1998.
(4.) In 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Statement 128
replaces the previous reported primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
(5.) The Company received correspondence in October 1991 which implies that the
Company may have infringed on a patent held by a competitor. In view of the
facts that the competitor has known about the Company and its products since
1984, and the competitor has been wholly non-responsive to the Company's
positions of non-infringement since December of 1992, management is of the view
that the probability that the competitor will actually assert a claim against
the Company is low. However, the cost of defending any claim is not estimable
and, if asserted, could have a material adverse impact on the Company's
financial statements. Based on these facts, and further based on the advice of
outside legal counsel that the Company's products do not infringe on the
competitor's patent, it is management's opinion that the ultimate resolution to
this matter will not have a material adverse effect on the Company's financial
statements.
<PAGE> 8
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Net sales of $659,369 in the third fiscal quarter ending March 31,1998 were
$30,000 or 5% above the same period last year. For the nine months, net sales of
$1,880,046 were 4% below last year. Weakness continued in the retail sector as
sales for the quarter were down 21% for the quarter and 15% for the nine months.
As reported last quarter, large sporting goods retailers are closing stores and
consolidating. These problems are expected to continue. Medical sales were up
64% for the quarter and up 22% for nine months. Advance orders continue strong
for the fourth quarter. International sales were up 25% for the quarter and down
33% for the nine month period. International sales are expected to remain even
with last year's fourth quarter. The Company's consumer service center opened
November 26,1997 is providing valuable information regarding size, staffing,
inventory items and quantities, computer systems, and pricing levels, prior to
expanding to other locations and cities. Sales have been below expectations as
the time required to build the doctor and school referral base is longer than
anticipated. The Company's sports medicine catalog is scheduled for release in
late-May, which will provide additional sales support for the consumer center.
The Catalog is operational in a warehouse in northwest Indianapolis and is
soliciting orders. Mass mailing of the catalog to schools will begin in May and
bid requests from schools are being received.
Gross margin percentages for the quarter and year to date are comparable to
previous periods.
Sales and administrative expenses continued to increase in the quarter and nine
month period compared to last year due to continued investment in staffing and
start up expenses for the Professional Catalog and Consumer Service Center
business components. Expenses allocated to these start up businesses are
estimated to be $154,000 for the quarter ($2.54 per share) and $400,000 year to
date ($4.44 per share).
Prototype tools and parts are complete and ready for testing for a new model of
Active Ankle designed for the medical market. Samples of a recently licensed
neck support system for football have been shipped to various sponsorship
schools and advisory board members for evaluation. Initial responses are
extremely positive. Sales are expected in the fourth quarter.
The provision for income taxes reflects local income taxes. No income tax
benefits are being recognized currently for operating losses.
<PAGE> 9
The net loss for the third fiscal quarter was ($106,288) or ($1.55) per share
compared with net income of $24,4098 or $.36 per share last year. For the nine
months, a net loss of ($154,177) or ($2.26) per share was incurred compared with
a net income of $100,158, $1.47 per share for the nine months last year.
Resources allocated to the Jefferson Mall service center totaled $122, 000
during the quarter, and has amounted to $333,000 for the year. Stock offering
costs included in current assets total $201,000, all of which has been paid. The
Company has borrowed $100,000 from its $300,000 Bank One line of credit and an
additional $57,000 in April, 1998. Company directors loaned the Company $150,000
at 9% annual rate of interest in April to support the catalog and service center
investments until additional equity is raised. The Company closed the public
offering of common stock April 30, 1998 as the targeted minimum of $1,800,000 or
45,000 shares was not achieved. Funds raised to date will be returned to
investors in early May. The Company will require additional financing to
continue to implement its business plan.
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Issue of 5450 five year options at $40.00 per share to key employees
and management.
Issue of 250 shares at $40.00 in payment for marketing work.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security - Holders
None
Item 5. Other Events
None
Item 6. Exhibits and Reports on From 8-K
A) Exhibits
B) The Company did not file any reports on From 8-K during the
six months ending December 31, 1997.
Signatures:
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Registrant has caused this quarterly report to be signed on its behalf by the
undersigned thereunto duly authorized.
-----------------------------
Gary G. Herzberg
Chief Executive Officer
-----------------------------
Ronald W. Schultz
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,753
<SECURITIES> 0
<RECEIVABLES> 204,939
<ALLOWANCES> 0
<INVENTORY> 253,289
<CURRENT-ASSETS> 700,884
<PP&E> 328,667
<DEPRECIATION> 163,574
<TOTAL-ASSETS> 948,093
<CURRENT-LIABILITIES> 406,490
<BONDS> 37,005
0
165,000
<COMMON> 1,059,565
<OTHER-SE> 719,967
<TOTAL-LIABILITY-AND-EQUITY> 948,093
<SALES> 1,880,046
<TOTAL-REVENUES> 1,880,046
<CGS> 758,304
<TOTAL-COSTS> 758,304
<OTHER-EXPENSES> 1,276,220
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,438
<INCOME-PRETAX> (153,040)
<INCOME-TAX> 1,137
<INCOME-CONTINUING> (154,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (154,177)
<EPS-PRIMARY> (2.26)
<EPS-DILUTED> (2.26)
</TABLE>
