<PAGE> 1
U.S SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 33-47567-NY
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HEADSTRONG GROUP, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 22-3663311
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Lexington Avenue, East Brunswick, N.J. 08816
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(Address of Principal Executive Offices) (Zip Code)
(908) 254-3433
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required
to be filed by Section 12,13 or 15(D) of the Exchange Act after the distribution
of securities under a plan confirmed by a court. Yes No
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. 13,308,134
--------------------------
Transitional Small Business Disclosure Format- (Check one):
Yes No X
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<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited financial statements for the Company are
attached hereto:
(a) Balance Sheet as of June 30, 1996;
(b) Statements of Operations for the three and six months ended
June 30, 1996 and 1995;
(c) Statements of Cash Flows for the six months ended June 30, 1996
and 1995
(d) Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Results of Operations:
Revenue for the three months ended March 31, 1996 of $2,501,004
increased from $2,357,544 for the same period of 1995 principally as a result of
sale in 1996 of new helmets which command a higher selling price.
Cost of sales decreased from $1,714,960 in 1995 to $1,631,374 in 1996
principally as a result of a change in product mix. The new helmets referred to
above are produced at a cost only slightly higher than the Company's opening
price point helmets. As a result, cost of sales of these new products is
substantially less as a percentage of sales, decreasing from 72.8% in 1995 to
65.2% in 1996.
Gross profit, as a result of the change in product mix described
above, increased from 27% in 1995 to 34% in 1996.
Selling, general and administrative expenses increased from $509,843
for the three months ended March 31, 1995 to $638,722 for the same period of
1996. The increase results from increased sales-related costs due to more
customer visits, higher legal costs due to settlement negotiation and agreements
with creditors and increased borrowing costs in 1996 as compared with 1995.
Net income for the three months ended March 31, increased from
$132,741 in 1995 to $230,907 for the same period of 1996 as a result of the
increase in gross profit, offset by the increase in selling, general and
administrative expenses described above.
<PAGE> 3
Liquidity and Capital Resources:
The Company's Statements of Cash Flows for the three months ended
March 31, 1996 shows the impact of the first of two capital raises and the use
of those proceeds in meeting the accumulated obligations of the Company. The
receipt of the proceeds aided the Company significantly in being able to
purchase needed components for sales orders and meet some of its past-due
obligations. With the second capital raise, which was completed in May, 1996,
estimated sales growth and profitable operations, the Company believes it will
be able to conduct its operations in the ordinary course of business.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As a result of a severe liquidity shortage during 1995, the Company
was unable to make timely payments to some of its vendors. Thirty one of these
vendors commenced legal action against the Company for delinquent payments. All
of these actions have been settled pursuant to individual agreements by the
Company to make periodic payments to these vendors. The Company has fully
satisfied its obligations under thirteen of these payment agreements. The
Company's obligations under the remaining eighteen settlement agreements total
approximately $682,000 between May 1996 and January 1997. The Company has funded
its obligations under these settlement agreements through a combination of
capital raises and cash flow in the ordinary course of business.
During 1995, Richard Berman, a former officer and director of the
Company, commenced a legal action against the Company alleging breach of
employment contract and wrongful termination. Certain officers and directors of
the Company were also named as defendants on claims of breach of fiduciary duty
to Mr. Berman in his capacities as officer, director and Stockholder of the
Company. In March, 1996, the Company and Mr. Berman executed a settlement
agreement pursuant to which the Company is obligated to pay an aggregate of
approximately $449,000 to Mr. Berman. The Company is current on its obligations
to Mr. Berman pursuant to the settlement agreement.
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
ITEM 5. OTHER INFORMATION
<PAGE> 4
ITEM 6. EXHIBITS AND OTHER REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) Financial Statements
<PAGE> 5
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
HEADSTRONG GROUP, INC.
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(Company)
By /S/ John J. Willis
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Printed John J. Willis, Treasurer and CFO
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Date August 14, 1996
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By /S/ Dale M. Friedman
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Printed Dale M. Friedman, Director, President and CEO
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Date August 14, 1996
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<PAGE> 6
HEADSTRONG GROUP, INC.
Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
ASSETS June 30, 1996
-------------
<S> <C>
CURRENT ASSETS:
Cash $ 118,058
Accounts Receivable 3,911,104
Inventory 1,081,362
Accounts Receivable-Stockholders 310,474
Prepaid Expenses 459,081
Other Current Assets 75,470
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Total Current Assets 5,955,549
Other Assets 396,600
PROPERTY AND EQUIPMENT:
Tooling and Equipment 1,171,503
Transportation Equipment 17,874
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Total 1,189,377
Less-Accumulated Depreciation (370,644)
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Property and Equipment-Net 818,733
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$ 7,170,882
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LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable 1,592,014
Accrued Expenses 1,100,382
Litigation Reserve 174,615
Loans From Factor 597,405
Subordinated Notes Payable 863,582
Payroll Taxes Payable 300,197
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Total Current Liabilities 4,628,195
CONVERTIBLE NOTES PAYABLE 316,668
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STOCKHOLDERS DEFICIT
Common Stock, Class A, par value $.0001, 20,000,000
shares authorized, 13,308,134 shares issued and outstanding 1,331
Common Stock, Class B, par value $.0001, 5,000,000
shares authorized, none issued and outstanding 0
Preferred Stock, par value $.001, 1,000,000 shares
authorized, 86,325 shares issued and outstanding 86
Additional Paid-in Capital 10,122,308
Accumulated Deficit (7,897,706)
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2,226,019
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$ 7,170,882
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</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
<PAGE> 7
HEADSTRONG GROUP, INC.
Statements of Operations
For The Three Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
NET SALES $ 2,311,234 $2,727,464
COST OF SALES 1,441,582 1,909,773
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Gross Profit 869,652 817,691
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 629,105 591,258
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Operating Profit 240,547 226,433
Income Tax Expense 0 0
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NET INCOME $ 240,547 $ 226,433
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NET INCOME PER SHARE $ 0.02 $ 0.05
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WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 12,084,680 5,030,900
=========== ==========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 8
HEADSTRONG GROUP, INC.
Statements of Operations
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
NET SALES $ 4,812,236 $5,085,008
COST OF SALES 3,072,955 3,624,733
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Gross Profit 1,739,281 1,460,275
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,267,826 1,101,101
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Operating Profit 471,455 359,174
Income Tax Expense 0 0
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NET INCOME $ 471,455 $ 359,174
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NET INCOME PER SHARE $ 0.05 $ 0.07
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,255,060 5,030,900
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 9
HEADSTRONG GROUP, INC.
Statements of Cash Flows
For the six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 471,455 $ 359,174
Adjustments to reconcile net income to net cash
(used) provided in/by operating activities-
Depreciation 90,000 50,000
Changes in operating assets and liabilities-
(Increase) in accounts receivable (3,238,439) (1,159,004)
(Increase) in accounts receivable-stockholders (100,409) (16,583)
(Increase)Decrease in inventories 204,269 222,192
(Increase) in prepaid expenses (282,290) (388,094)
Decrease (Increase) in other assets 109,371 (209,987)
Increase (Decrease) in bank overdraft 0 (17,595)
(Decrease) in accounts payable (521,429) (713,497)
(Decrease) in accrued expenses (499,101) (53,419)
(Decrease) in loans from factor 312,720 (1,011,554)
(Decrease) in litigation reserve (293,385) 0
(Decrease) in payroll taxes payable (262,672) (69,696)
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Net cash (used in) operating
activities (4,009,910) (2,901,225)
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CASH FLOW USED IN INVESTING ACTIVITIES-
Purchase of property and equipment (179,062) (191,016)
CASH FLOWS FROM FINANCING ACTIVITIES-
Proceeds from the sale of common stock 4,957,555 0
Proceeds form the issuance of convertible debt 58,332 150,000
Proceeds (Repayment) of Debt (255,685) 2,942,567
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Net cash provided by financing activities 4,760,202 3,092,567
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(Decrease) in cash (44,641) 326
CASH, Beginning of period 45,517 450
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Cash, End of period $ 876 $ 776
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 10
HEADSTRONG GROUP, INC
Notes to Financial Statements
1. Basis of presentation
The unaudited financial statements are subject to year-end
adjustments and audit, but the Company believes all adjustments, consisting only
of normal and recurring adjustments, necessary to present fairly the financial
position, results of operations and changes in cash flows for the interim
periods presented have been made. The results of operations for the interim
periods are not necessarily indicative of the operating results for the full
year.
Footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted in accordance with the published rules and regulations of the Securities
and Exchange Commission. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the most recent fiscal year.
2. Income Taxes
No income tax expense is recorded for the three months ended March
31, 1995 and 1996 as a result of the utilization of net operating loss carry
forwards.
<PAGE> 11
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 118,058
<SECURITIES> 0
<RECEIVABLES> 4,702,044
<ALLOWANCES> 790,940
<INVENTORY> 1,081,362
<CURRENT-ASSETS> 5,955,549
<PP&E> 1,189,377
<DEPRECIATION> 370,644
<TOTAL-ASSETS> 7,170,882
<CURRENT-LIABILITIES> 4,628,195
<BONDS> 0
86
0
<COMMON> 1,331
<OTHER-SE> 2,224,602
<TOTAL-LIABILITY-AND-EQUITY> 7,170,882
<SALES> 2,311,234
<TOTAL-REVENUES> 2,311,234
<CGS> 1,441,580
<TOTAL-COSTS> 629,105
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 240,547
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> .02
<EPS-DILUTED> 0
</TABLE>
