<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 September 30, 1996
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to________
Commission File Number 33-47567-NY
HEADSTRONG GROUP, INC.
(Name of Small Business Issuer in its Charter)
Delaware 22-3663311
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5 Lexington Avenue, East Brunswick, N.J. 08816
(Address of Principal Executive Offices) (Zip Code)
(908) 254-3433
(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 |_|
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 |_|
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. 14,087,394
Transitional Small Business Disclosure Format- (Check one):
Yes |_| No |X|
<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 September 30, 1996;
(b) Statements of Operations for the three and nine months ended September
30, 1996 and 1995;
(c) Statements of Cash Flows for the nine months ended September 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 September 30, 1996 of $1,487,872
increased from $709,625 for the same period of 1995 principally as a result of
sales in 1996 of new helmets which command a higher selling price, and an
increase in our customer base.
Cost of sales for the nine months decreased from $4,418,033 in 1995 to
$3,977,420 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 76.2%
in 1995 to 63.1% in 1996.
Gross profit, as a result of the change in product mix described above,
increased from 23.8% in 1995 to 36.9% in 1996.
Selling, general and administrative expenses decreased from $902,201 for
the three months ended September 30, 1995 to $508,464 for the same period of
1996. The decrease was largely attributed to a decrease in legal fees. During
the third quarter of 1995 these expenses were abnormally high due to the fees
incurred as a result of settlement negotiations and agreements with creditors.
Net income for the three months ended September 30, increased from a loss
of $985,876 in 1995 to a profit of $74,943 for the same period of 1996 as a
result of the increases in sales and gross profit percentage, plus the decrease
in selling, general and administrative expenses described above.
Liquidity and Capital Resources:
The Company's Statements of Cash Flows for the three months ended September
30, 1996 shows the impact of the issuance of convertible debentures 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 to make substantial reductions
to many of its past-due obligations, and to fund an increase in Accounts
Receivable allowing the company to sell products with extended and bill and hold
terms. With this capital raise along with the estimated sales growth and
profitable operations, the Company believes it will be able to conduct its
operations in the ordinary course of business.
<PAGE> 3
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 $600,000 through mid 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
ITEM 6. EXHIBITS AND OTHER REPORTS ON FORM 8-K
The following documents are filed as part of this report:
(a) Financial Statements
<PAGE> 4
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.
- --------------------------------------------------------------------------------
(Company)
By /S/ Jerry Orodenker
--------------------------------------------------
Printed Jerry Orodenker, CFO
--------------------------------------------------
Date November 12, 1996
--------------------------------------------------
By /S/ Dale M. Friedman
--------------------------------------------------
Printed Dale M. Friedman, Director, President and CEO
--------------------------------------------------
Date November 12, 1996
--------------------------------------------------
<PAGE> 5
HEADSTRONG GROUP, INC.
Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
ASSETS September 30, 1996
------------------
<S> <C>
CURRENT ASSETS:
Cash $ 858
Accounts Receivable 5,080,831
Inventory 1,385,989
Accounts Receivable-Stockholders 391,643
Prepaid Expenses 358,606
Other Current Assets 92,587
------------
Total Current Assets 7,310,514
OTHER ASSETS 253,899
PROPERTY AND EQUIPMENT:
Tooling and Equipment 1,198,013
Transportation Equipment 17,874
------------
Total 1,215,887
Less-Accumulated Depreciation (415,644)
------------
Property and Equipment-Net 800,243
------------
$ 8,364,656
============
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES
Accounts Payable 1,520,412
Accrued Expenses 1,190,632
Litigation Reserve 138,654
Loans From Factor 242,906
Subordinated Notes Payable 814,267
Payroll Taxes Payable 199,911
------------
Total Current Liabilities 4,106,782
CONVERTIBLE NOTES PAYABLE 283,668
CONVERTIBLE DEBENTURES 1,500,000
------------
STOCKHOLDERS DEFICIT
Common Stock, Class A, par value $.0001, 20,000,000
shares authorized, 14,087,397 shares issued and outstanding 1,409
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 10,295,473
Accumulated Deficit (7,822,762)
------------
2,474,206
------------
$ 8,364,656
============
</TABLE>
The accompanying notes to financial statements are an integral part of this
balance sheet.
<PAGE> 6
HEADSTRONG GROUP, INC.
Statements of Operations
For The Three Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
NET SALES $ 1,487,872 $ 709,625
COST OF SALES 904,465 793,300
----------- -----------
Gross Profit 583,407 (83,675)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 508,464 902,201
----------- -----------
Operating Profit 74,943 (985,876)
Income Tax Expense 0 0
----------- -----------
NET INCOME / LOSS $ 74,943 ($ 985,876)
=========== ===========
NET INCOME PER SHARE $ 0.01 ($ 0.19)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 13,458,495 5,130,900
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 7
HEADSTRONG GROUP, INC.
Statements of Operations
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
NET SALES $ 6,300,108 $ 5,794,633
COST OF SALES 3,977,420 4,418,033
----------- -----------
Gross Profit 2,322,688 1,376,600
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,776,290 2,003,302
----------- -----------
Operating Profit 546,398 (626,702)
Income Tax Expense 0 0
----------- -----------
NET INCOME / LOSS $ 546,398 ($ 626,702)
=========== ===========
NET INCOME PER SHARE $ 0.05 ($ 0.12)
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 10,973,931 5,064,233
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 8
HEADSTRONG GROUP, INC.
Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income / Loss $ 546,398 ($ 626,702)
Adjustments to reconcile net income to net cash
(used) provided in/by operating activities-
Depreciation 135,000 100,000
Changes in operating assets and liabilities-
(Increase) in accounts receivable (4,408,166) 535,910
(Increase) in accounts receivable-stockholders (181,578) (17,063)
(Increase)Decrease in inventories (424,032) 174,241
(Increase) in prepaid expenses (181,815) (401,576)
Decrease (Increase) in other assets 203,062 (696,404)
Increase (Decrease) in bank overdraft 0 (31,523)
(Decrease) in accounts payable (593,031) (578,650)
(Decrease) in accrued expenses (408,851) (47,317)
(Decrease) in loans from factor (41,779) (1,847.433)
(Decrease) in litigation reserve (329,346) 0
(Decrease) in payroll taxes payable (362,958) (75,277)
----------- -----------
Net cash (used in) operating
activities (6,047,096) (3,511,794)
----------- -----------
CASH FLOW USED IN INVESTING ACTIVITIES-
Purchase of property and equipment (180,317) (311,629)
CASH FLOWS FROM FINANCING ACTIVITIES-
Proceeds from the sale of common stock 4,985,740 0
Proceeds from the sale of preferred stock 3,823,849
Proceeds form the issuance of convertible debt 91,332 0
Proceeds from the issuance of convertible debentures 1,500,000 0
Proceeds (Repayment) of Debt ( 305,000) 0
----------- -----------
Net cash provided by financing activities 6,272,072 3,823,849
Increase (Decrease) in cash (44,659) 426
CASH, Beginning of period 45,517 450
----------- -----------
Cash, End of period $ 858 $ 876
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE> 9
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 September 30,
1995 and 1996 as a result of the utilization of net operating loss carry
forwards.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 858
<SECURITIES> 0
<RECEIVABLES> 5,871,771
<ALLOWANCES> (790,940)
<INVENTORY> 1,385,989
<CURRENT-ASSETS> 7,310,514
<PP&E> 1,215,887
<DEPRECIATION> (415,644)
<TOTAL-ASSETS> 8,364,656
<CURRENT-LIABILITIES> 4,106,782
<BONDS> 0
0
86
<COMMON> 1,409
<OTHER-SE> 2,475,711
<TOTAL-LIABILITY-AND-EQUITY> 8,364,656
<SALES> 6,300,108
<TOTAL-REVENUES> 6,300,108
<CGS> 3,977,420
<TOTAL-COSTS> 3,977,420
<OTHER-EXPENSES> 1,716,278
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,012
<INCOME-PRETAX> 546,398
<INCOME-TAX> 0
<INCOME-CONTINUING> 546,398
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 546,398
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
