SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1996
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File number: 0-25918
ACTIVE APPAREL GROUP, INC.
(Name of small business issuer in Its Charter)
Delaware 13-3672716
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1350 Broadway, Suite 2300, New York, New York 10018
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(Address of principal executive offices) Zip
Code
Issuer's Telephone Number (212) 239-0990
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Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title Of Each Class On Which Registered
------------------- -------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.002 par value
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(Title of Class)
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 requirement for the past 90 days. YES /X/ NO / /
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of registrant's knowledge in definitive proxy or
information statement incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB / /
State issuer's revenue for its most recent fiscal year: $16,377,529
On March 6, 1997 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $24,094,000 based upon the
average of the highest and lowest bid quotations for such Common Stock as
obtained from the Nasdaq National Market on March 6, 1997.
The number of shares outstanding on March 6, 1997 was 2,452,287 shares of Common
Stock, $.002 par value and 100,000 shares of Class A Common Stock, $.01 par
value..
Documents Incorporated by Reference - None
Transitional Small Business Disclosure Format (Check one): YES / / NO /X/
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TABLE OF CONTENTS
Page
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PART I
Item 1 Business..........................................................1
Item 2 Properties.......................................................10
Item 3 Legal Proceedings................................................10
Item 4 Submission of Matters to a Vote of Security Holders..............10
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters............................................11
Item 6 Management's Discussion and Analysis or Plan of Operation........12
Item 7 Financial Statements.............................................14
Item 8 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................15
PART III
Item 9 Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...........15
Item 10 Executive Compensation...........................................17
Item 11 Security Ownership of Certain Beneficial Owners
and Management .............................................22
Item 12 Certain Relationships and Related Transactions...................24
Item 13 Exhibits and Reports on Form 8-K.................................26
Signatures..................................................................30
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PART I
ITEM 1. BUSINESS
GENERAL
Active Apparel Group, Inc. (the "Company"), a Delaware corporation
organized on July 6, 1992, is engaged in the design, manufacture, marketing and
sale of women's activewear and sportswear featuring the widely-recognized
Everlast7 trademark ("Everlast Products"), in the design, manufacture, marketing
and sale of women's and girls' activewear and sportswear (excluding footwear)
featuring the widely-recognized Converse(R) and Converse All Star(R) trademarks
(the "Converse Products") and the design, manufacture, marketing and sales of
unisex activewear and accessories featuring the widely- recognized "MTV's THE
GRIND" and/or "THE GRIND" trademarks (the "MTV Products"). Generally, the
Company has the exclusive right to use and distribute women's activewear and
sportswear featuring the Everlast(R) trademark (constituting the Everlast
Products) in the United States, its territories and possessions (collectively,
the "United States") and Canada, its provinces, territories and possessions
(collectively, "Canada"), the exclusive right to use and distribute women's and
girls' activewear and sportswear (excluding footwear) featuring the Converse(R)
trademarks (constituting the Converse Products) in the United States and the
exclusive right to use and distribute unisex activewear and accessories
featuring the MTV(R) trademarks (constituting the MTV Products) in the United
States and Canada. SEE "PRODUCTS" AND "LICENSES." The Company is a member of the
Sporting Goods Manufacturers Association, the National Sporting Goods
Association and the Canadian Sporting Goods Association.
The Company's strategy is to expand the Company's operations and to
become a leading brand name supplier of women's activewear and sportswear and
unisex activewear. Key elements of this strategy include:
. emphasizing the Company's products by establishing balanced and
diversified collections with various products, styles and price ranges.
. maintaining a focused advertising and marketing program that seeks to
maximize the visibility of the Company's products.
. expanding the distribution system for the Company's products through
relationships with a broad network of retailers in the United States,
Canada and (subject to expanding the territories in which the Everlast
Products, Converse Products and MTV Products are permitted to be sold)
elsewhere.
All of the Company's products are manufactured in the United States and
in foreign countries by third party, independent manufacturing contractors, and
are distributed through a variety of department stores, specialty stores,
sporting goods stores, catalog operations, and better mass merchandisers
representing approximately 500 separate customers in approximately 20,000 retail
locations throughout the United States and Canada. SEE "SALES AND DISTRIBUTION."
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PRODUCTS
The Company's products consist of the Everlast Products, Converse
Products, and the MTV Products, which are designed and marketed with a goal of a
high level of brand name recognition and consumer preference by combining
performance, market appeal and value. The Company performs extensive market
research in attempting to provide its retail customers and consumers with
functionality along with the most desirable styles, color schemes and fabrics.
The Company has actively pursued a strategy of developing a balanced and
diversified mix of products in order to maximize the brand name recognition and
appeal to various demographic groups and geographic areas. The Company's product
collections include:
THE EVERLAST WOMAN COLLECTION. The Company sells a diverse collection
of Everlast Products consisting of women's activewear and sportswear under the
Everlast(R) trademark and logo. Since 1910, Everlast has gained wide recognition
in professional and amateur boxing. The Company believes that the Everlast(R)
name has become synonymous with quality athletic products. The Everlast Products
seek to continue this tradition, while recognizing that the active woman has
particular demands regarding quality, comfort and style in activewear and
sportswear. The Everlast Products consist of approximately 40 separate products
with varying styles and functions. These include fitness apparel and sportswear
made of nylon, fleece, cotton, Lycra spandex, and other technical polyester
fabrics with moisture management properties. The Everlast Products are designed
to feature the Everlast(R) trademark and logo, and to focus on the use of
appropriate fabric blends to maximize comfort and performance. The retail prices
for the Everlast Products generally range from $15 to $70.
THE CONVERSE FOR WOMEN COLLECTION. The Company sells a diverse
collection of Converse Products consisting of women's and girls' activewear and
sportswear under the Converse(R) and Converse All Star(R) trademarks and logos.
Since 1908, Converse has gained wide recognition in men's and women's
professional and amateur basketball. The Company believes that the Converse
Products continue the Converse tradition of quality, style and performance. The
Converse All Star for Women collection offers active lifestyle apparel with a
fashion oriented approach. The collection includes: sports bras, shorts,
leggings, tee shirts, sweatshirts, and jackets. The collection is designed to
feature the Converse All Star trademark and to focus on the use of appropriate
fabric blends to maximize comfort. The retail prices for the Converse Products
generally range from $15 to $90.
MTV'S THE GRIND COLLECTION. Since September 30, 1996 the Company has
been selling a diverse collection of MTV Products consisting of unisex and
women's and girls' activewear and accessories under the "MTV's THE GRIND"(R) and
"THE GRIND" name, trademark and logo. Since August 1992 "The Grind" has been a
popular dance series on MTV. MTV has developed a successful line of exercise
home videos based on "The Grind", including "THE GRIND WORKOUT! HIP HOP
AEROBICS" and "THE GRIND WORKOUT! FITNESS WITH FLAVA". The Company understands
that both videos are platinum sellers and are consistently among the top three
sellers on the BILLBOARD exercise video charts. Presently, "THE GRIND WORKOUT!
STRENGTH AND FITNESS" exercise home video features products from the Company's
Grind collection. Additionally, a forthcoming "Grind" exercise video expected to
be released in the fall of 1997 will feature products from the Company's Grind
collection. The MTV Products seek to tap into consumers' passions for music,
fitness and fashion. The products include tank tops, unitards, leggings, loose
fitting baggy shorts and pants and double mesh shorts that are fashion forward
yet performance driven. The collection is designed to feature The Grind(R)
trademark and to focus on the use of appropriate fabric blends to maximize
comfort. The retail prices for the MTV Products generally range from $16 to $50.
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PRODUCT DEVELOPMENT. The Company's merchandising and design staff
analyzes demographic, market, style, fashion and fabric and technical
developments and attempts to make the necessary adjustments in product mix,
construction, design, styles, fabrics and colors in response to these
developments. Members of the merchandising and design staff also coordinate
their activities with the Company's production and sales staff, consult with
buyers, visit retail outlets and attend fashion and trade shows to gather
additional information during the design process. Sources of design and prints
include, for example, industry fashion analyses, the Company's products from
previous years and freelance artwork (which, if purchased by the Company, is
typically copyrighted).
After a particular product concept has been designed, members of the
design staff prepare schematics containing the proposed styles, patterns and
fabrics, which are reviewed by senior members of the Company's management prior
to prototype construction. Prototypes of a potential new product are then
constructed and subjected to numerous tests for fit, comfort, quality,
functionality and consumer acceptance. New designs are previewed to buyers and
certain retail accounts for input as to which styles are likely to be the most
popular. In addition, the Company's performance products are given to fitness
professionals for use and evaluation. The Company's goal is to minimize the risk
of changing fashion trends or consumer preferences, although no assurance can be
given that this objective can be achieved.
LICENSES
EVERLAST LICENSE. The Company obtained the Everlast license ("Everlast
License") of June 1, 1992 pursuant to assignment dated July 7, 1992. Generally,
the Everlast License grants to the Company the exclusive right and license to
use the Everlast(R) trademark in connection with the manufacture, advertisement
and promotion, packaging, sale and distribution of women's activewear and
sportswear in the United States and Canada during the term of the Everlast
License. Everlast World's Boxing Headquarters ("Everlast") reserved the right to
use or license the Everlast(R) trademark on products other than women's
activewear and sportswear within the United States and Canada, and the right to
use or license such trademark outside the United States or Canada. Everlast has
also reserved the right to sell, in the United States or Canada, women's
activewear and sportswear in Everlast's product catalogs or flyers, but may not
sell such products for less than the lowest price offered by the Company.
The term of the Everlast License ends on December 31, 2002, but is
renewable at the option of the Company for up to two successive five year
periods commencing January 1, 2003 and January 1, 2008, assuming the Company is
not then in default under the Everlast License and assuming that the Company
achieves net sales in the United States of Everlast Products of at least
$10,500,000, and in Canada, of at least $2,500,000 (assuming an exchange ratio
of $.746) for the exercise of the first option and achieves net sales in the
United States of at least $14,250,000 and in Canada of at least $3,700,000
(assuming an exchange ratio of $.746) for the exercise of the second option. The
Everlast License may be terminated in whole, or only as to certain Everlast
Products, if the Company fails to fulfill its material obligations thereunder
(including payments of royalties or other amounts due), fails (beyond the cure
period) to use diligent efforts to promote, advertise, manufacture, sell or ship
any Everlast Product, or to fill accepted orders for Everlast Products to
financially secure purchasers. See "MANUFACTURING AND SUPPLIERS." The Everlast
License may also be terminated if net sales of Everlast Products do not exceed
certain minimum levels, or if the Company voluntarily or involuntarily enters
into a bankruptcy or similar proceeding. To date, the Company has been in
compliance with the Everlast License.
Under the Everlast License, the Company is required to make royalty
payments to Everlast of 6% of net sales (as defined therein), subject to minimum
annual payments, which increase over the term (as
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extended) of the Everlast License. The Company is also required to make
advertising expenditures of at least 2.5% of net sales of Everlast Products,
subject to annual minimum expenditure levels. The minimum annual royalty
payments under the Everlast License for sales in the United States are $240,000
and $450,000 for 1996 and 1997 ($90,000 and $98,500 with respect to sales in
Canada), respectively. The minimum annual advertising expenditures required
under the Everlast License for sales in the United States are $100,000 and
$187,500 for 1996 and 1997 ($37,500 and $41,000 with respect to sales in
Canada), respectively. (The foregoing amounts in US dollars assume an exchange
ratio of $.746). To date, all required levels have been met or exceeded. Royalty
payments and advertising expenditures are not required with respect to sales of
Everlast Products to Everlast, as discussed above. The Company is also obligated
to maintain product quality control, obtain prior approval of designs and
standards, and marketing, advertising and distribution programs, and may be
required to indemnify Everlast against any losses resulting from alleged defects
in the Everlast Products arising out of the Company's performance under the
Everlast License or the manufacture, promotion or sale of such products in
violation of applicable laws or third-party rights. The Everlast License
requires that the Company secure and maintain product liability insurance, which
the Company has done. Under and subject to the terms of the Everlast License,
Everlast is required to indemnify the Company against any losses arising out of
the use of the Everlast(R) trademark or the exercise by the Company of its
rights under the Everlast License. Everlast is also required, generally, to
defend the Company's rights to use the Everlast(R) trademark pursuant to the
Everlast License.
The Everlast License also requires the Company to maintain, during the
term thereof, letters of credit in favor of Everlast for an amount equal to the
minimum annual amounts due to Everlast under the Everlast License from time to
time. The Company is in compliance with this requirement.
CONVERSE LICENSE. The Company and Converse Inc. entered into a
Trademark License Agreement on May 20, 1994 (the "Converse License"). Generally,
the Converse License grants to the Company the exclusive right to use the
Converse(R) and Converse All Star(R) trademarks described therein in connection
with the manufacture, import, advertisement and promotion, sale and distribution
of women's and girls' activewear and sportswear in the United States during the
term of the Converse License.
The term of the Converse License ends on September 30, 1998, but is
automatically renewable, at the option of the Company, for an additional
two-year period (through September 30, 2000) if the Company sells $5,000,000 of
Converse Products from October 1, 1997 to September 30, 1998. The Converse
License may be terminated due to, among other reasons, a change in more than 20%
of the ownership or control of the Company (other than as a result of a public
offering), an uncured failure by the Company materially to perform any of its
obligations thereunder (including payments of royalties and other amounts due),
or the Company voluntarily or involuntarily entering into a bankruptcy or
similar proceeding.
Under the Converse License as currently in effect, the Company is
required to make royalty payments to Converse of 7% of net sales (as defined
therein), subject to guaranteed minimum annual payments, irrespective of net
sales, of $280,000 with respect to the contract period from May 20, 1994 to
September 30, 1996 and the contract period from October 1, 1996 to September 30,
1997, increasing to $350,000 with respect to the contract year from October 1,
1997 to September 30, 1998. If the Converse License is renewed beyond September
30, 1998 (through September 30, 2000), the guaranteed minimum annual royalty
payment would equal the greater of (i) 75% of the actual royalties payable for
the prior contract year or (ii) an amount equal to the guaranteed royalty
payment for the prior contract year plus 10% of such minimum payment. The
Company is also required to make advertising expenditures of at least 2% of net
sales and to provide Converse, at no charge, Converse Products valued at 1% of
net sales, for promotional purposes. Generally, the Company is also obligated to
sell to Converse, at a price equal to
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the lower of the Company's lowest U.S. wholesale price (less the royalties
payable to Converse) or the Company's cost plus 15%, such quantities of Converse
Products as Converse orders, which products may be resold by Converse owned
retail stores. Converse may also license third parties to provide
Converse-branded women's and girls' activewear and sportswear in connection with
premiums, "giveaways" or promotional arrangements (with the approval of the
Company). Converse is also permitted to grant a license to any third party to
manufacture, in or outside the United States, women's and girls' activewear and
sportswear for distribution outside the United States.
The Converse License requires Converse to indemnify the Company against
any losses arising out of the Company's use of the Converse(R) trademarks or
Converse's wrongful conduct, although Converse is not required to take any
action relating to any infringements or counterfeits of, or any unfair
competition affecting the Converse(R) trademarks covered by the Converse License
(nor is the Company permitted to take any such action without the prior approval
of Converse). The Converse License also provides for the indemnification of
Converse by the Company against all losses arising from product liability
claims, but excluding claims based on alleged design defects. The Converse
License requires the Company to secure and maintain product liability insurance,
which the Company has done. To date, the Company has been in compliance with the
Converse License.
MTV LICENSE. The Company and MTV Networks entered into a License
Agreement on March 28, 1996 (the MTV License). Generally, the MTV License grants
to the Company the exclusive right and license to use "MTV's THE GRIND"(R)
and/or "THE GRIND"(R) trademarks, names and logos in connection with the
manufacture, advertisement and promotion, packaging, sale and distribution of
unisex and women's activewear and accessories in the United States and Canada
during the term of the MTV License. The license is non-exclusive with respect to
the licensed products known as t-shirts and caps until such time as MTV
Network's ("MTVN") existing license agreement with another licensee for such
licensed products expires, and at such time, it will be exclusive. MTVN has
reserved the right to use or license the "MTV's THE GRIND"(R) and/or "THE
GRIND"(R) trademarks on products other than unisex and women's activewear and
accessories in the United States and Canada and the right to use or license such
trademarks outside the United States or Canada. MTVN has also reserved the right
to sell the licensed products in the United States or Canada through premium
offers, combination and giveaway sales, direct response, direct mail, home
shopping type of networks, sales clubs, incentive programs and any MTVN or
affiliated companies' retail outlets. MTVN is permitted to grant a license to
any third party to manufacture, in or outside the United States, unisex and
women's activewear and accessories for distribution outside the United States.
The term of the MTV License is from April 30, 1996 through January 31, 1999 but
is automatically renewable, at the option of the Company, for an additional
two-year period (February 1, 1999 through January 31, 2001) if the Company sells
$3,500,000 of MTV Products during the License Term and provided that the Company
has satisfactorily performed its obligations under the License. The MTV License
may be terminated if, among other reasons, the Company disposes of all or
substantially all of its business or assets to a third party, George Horowitz is
no longer President of the Company, there is an uncured failure by the Company
materially to perform any of its obligations thereunder (including payments of
royalties) or the Company voluntarily or involuntarily enters into a bankruptcy
or similar proceeding.
Under the MTV License, the Company is required to make royalty payments to
MTVN of 8% of net sales (as defined therein), subject to guaranteed minimum
annual payments, irrespective of net sales, of $200,000 with respect to the
contract term. If the MTV License is renewed beyond January 31, 1999, the
guaranteed minimum annual royalty payment would equal $320,000. The Company is
also required to
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make advertising expenditures of at least 2% of net sales.
The MTV License requires MTVN to indemnify the Company against any
losses arising out of the Company's use of the MTV trademarks or MTVN's wrongful
conduct, although MTVN is not required to take any action relating to any
infringements or counterfeits of, or any unfair competition affecting the MTV
trademarks covered by the MTV License (nor is the Company permitted to take any
such action without the prior approval of MTVN). The MTV License also provides
for the indemnification of MTVN by the Company against all losses arising from
product liability claims, but excluding claims based on alleged design defects.
The MTV License requires the Company to secure and maintain product liability
insurance, which the Company has done. To date, the Company has been in
compliance with the MTV License.
MARKETING, ADVERTISING AND PROMOTIONS
The Company advertises and promotes the Everlast Products, Converse
Products and MTV Products (as required under the Everlast License, Converse
License and MTV License, respectively) to different consumer segments through a
variety of trade and consumer print advertising campaigns, generally in selected
magazines and other publications (including VOGUE, SPORTSTYLE and WOMEN'S WEAR
DAILY), designed and focused to provide high visibility for such products. The
Company's advertising and promotional efforts are designed to appeal to the
demographic customer profile for the Company's products. The Company maintains
its own marketing and advertising staff that oversees the conception,
development and implementation of most aspects of the Company's advertising and
sales promotions. The Company's in-house staff also develops catalogs for all of
its product lines.
The Company uses several methods to advertise and promote its products.
The Everlast Products, Converse Products and MTV Products and the Company have
received exposure through coverage in both the print and television media.
Additionally, the Company takes part in various cooperative advertising programs
such as national advertising, in-store signage, point-of-purchase promotional
giveaways and cooperative advertising arrangements with several of its retail
customers. In 1994, the Company established cooperative advertising programs
with DuPont Inc. and Cotton Inc. The Company believes that its cooperative
advertising programs assist in raising consumer awareness and increasing retail
floor space for its products.
The Company also believes that grass roots promotion programs, such as
the limited distribution of samples of its products to local gyms, athletic
clubs and fitness professionals, help to advance the recognition and reputation
of its products. In addition, the Company has focused many of its promotional
programs on charitable and community events, such as AThe New York Race for the
Cure@ of breast cancer, "The City of Hope Workout For Hope" for AIDS related
research, "Share-A-Walk" New York Fundraiser to raise awareness in the fight
against cancer, and "The J-Cap Dream Team" performance group that travels into
city schools promoting anti-drug messages. The Company has also sponsored high
school and college women's basketball teams and cheerleading squads.
The Company also attends and participates in the Atlanta Supershow,
National Sporting Goods Association Show and other appropriate trade shows.
MANUFACTURING AND SUPPLIERS
The Company does not itself manufacture any of its products, but uses
third-party, independent contractors for the manufacture of all such products.
Since mid-1993, approximately 75% of the
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Company's products have been supplied by manufacturers in the United States
while the remaining 25% has been imported from manufacturers located in foreign
nations, principally in Asia. Currently, the Company uses over ten separate
manufacturers. While the Company has no written agreements with any of its
contractors, the Company believes that its relationships with such contractors
are good. The Company does not believe that the loss of any particular
contractor would have a material adverse effect on its business. If necessary,
the Company believes that alternative sources of products would be readily
available, although no assurance can be given. The supply of the Company's
foreign-sourced products is subject to constraints imposed by bilateral textile
agreements between the United States and foreign nations, which impose quotas on
the amounts and types of goods which can be imported into the United States.
Consequently, some of the Company's source of products may be adversely affected
by political instability resulting in the disruption of trade from foreign
nations in which the manufacturers are located, the imposition of additional
regulations relating to imports or duties and taxes and other charges on
imports. In order to ensure quality control and timely delivery, the Company (or
its agents) conducts on-site inspections at manufacturers' facilities, as more
fully described herein. See "QUALITY CONTROL." The Company's strategy is to find
manufacturers with specific product category expertise (such as fitness apparel,
T-shirts or outerwear) and extensive experience in the major athletic brand name
apparel industry. The Company has no long-term agreements with any of its
manufacturers and competes with other apparel companies for production capacity.
At December 31, 1995, the Company's inventory was $1,776,583 on net
sales during Fiscal 1995 of $14,781,208, with a backlog of orders for future
delivery of $2,819,472. At December 31, 1996, the Company's inventory was
$2,757,700 on net sales during Fiscal 1996 of $16,377,529 with a backlog of
orders for future delivery of $3,117,892. The Company has implemented an
Electronic Data Interchange (EDI) Quick Response Replenishment System by which
customer orders are facilitated in seven working days. This system requires an
inventory of basic items that are excluded from the "just in time" inventory
program. Higher levels of inventory are required to operate a quick response
replenishment program. Such levels of inventory are needed as sales orders are
generally received and shipped within a seven day period. Other than the above
EDI Quick Response Replenishment System, the Company practices a "just in time"
manufacturing and purchasing program. The Company makes arrangements with its
manufacturers for delivery approximately 30 days before the scheduled shipment
of products to the Company's customers. The objectives of the Ajust-in-time@
system are to decrease the Company's inventory risk and to allow the Company
flexibility to react to consumer responses to its products and changing consumer
preferences. The Company believes that these objectives are currently being
achieved, although no assurance can be given that such objectives will continue
to be partially or fully achieved in the future. The Company schedules shipments
from its manufacturers in a manner that accounts for possible manufacturing
lateness and transport time from manufacturers to the Company's warehouse
facilities. Although manufacturing lateness has not been a material factor
through the present date, the inability or unwillingness of a manufacturer to
ship orders of the Company's products in a timely manner could adversely affect
the Company's ability to deliver products to its customers on time. Delay in
delivery could result in missing certain retailing seasons with respect to all
or some of the Company's products, or could adversely affect the Company's
relationship with its customers, which could have a material adverse effect on
the Company's business.
At December 31, 1996, the Company's backlog of unfilled orders was
$3,117,892 as compared to $2,819,472 as of December 31, 1995. The Company
expects that substantially all of its current orders will be shipped within 120
days of the receipt of such orders. The Company's backlog can be affected by a
variety of factors, including scheduling of manufacturing, shipment of products
and customer preferences. The Company has an on-line computerized order-entry
system which allows the Company to receive orders by computer and to follow
daily the status of orders received, shipped and unfilled.
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SALES AND DISTRIBUTION
The Company's products are distributed through department stores,
specialty stores, sporting goods stores, catalog operations and better mass
merchandisers. The Company distributes its products to approximately 500
separate customers in approximately 20,000 retail locations throughout the
United States and, with respect to the Everlast Products, Canada. The Company's
products are sold by retailers such as J.C. Penney, Sears, Burdines, Mervyn's,
Bloomingdale's, Macy's, Lord & Taylor, Nordstrom, Robinson's May, Dillards,
Oshmans, Sportmart, Sports Chalet, The Sports Authority and the Army Air Force
Exchange and through catalog operations such as Victoria's Secret, Proactive and
Sears-Canada. In Canada, the Company's products are sold by such retailers as
The Bay, Sears- Canada, Eaton's, Sports Experts and Champs. For the year ended
December 31, 1995, two customers accounted for approximately 28% of sales, and
for the year ended December 31, 1996 two customers accounted for approximately
24% of sales. The Company's strategy is to expand its network of retailers
carrying the Company's products, and is focused on department stores, specialty
stores, sporting goods stores, catalog operations and better mass merchandisers.
The Company currently has five in-house sales representatives. George
Horowitz, President and Chief Executive Officer, and Rita Cinque, Executive Vice
President, of the Company, manage these representatives and coordinate sales to
customers. The Company works closely with its sales representatives to ensure
that a consistent and unified image of the Company is projected to its
customers.
The Company cooperates with major retailers to gauge promptly which
styles are the most popular and to track consumer preferences regarding the
Company's products. Based upon its market data, as well as information gained
from trade shows, the Company attempts to shift its production orders towards
styles that are most popular, which shift may take up to a maximum of eight
weeks. Many of the retail stores offering the Company's products rely upon the
Company's market information and solicit the Company's advice regarding the
products and quantities to order. Additionally, most of the Company's products
are manufactured in the United States, reducing, in many instances, the amount
of time between orders placed by the Company with its manufacturers and
shipments by such manufacturers. The Company believes that its market
information gathering and shifting in production efforts toward more popular
styles also reduces inventory risk.
During Fiscal 1995, foreign sales accounted for 9.1% of the Company's
net sales, all of which were in Canada, and during 1996, foreign sales accounted
for 7.7% of the Company's net sales, all of which were also in Canada.
Consistent with industry practice, the Company generally accepts
returns of any products with defects in materials or workmanship or which do not
otherwise meet the quality standards of the Company or its customers for up to
30 days. The Company believes that it has experienced historical return levels
that are better than the industry norms of 3% to 5%, although no assurance can
be given that such levels can be sustained. Chargebacks are deductions from the
purchase price with or without the Company's consent, taken by customers which
may or may not be justified or which may be taken pending the receipt from the
Company of additional information concerning the order. Chargebacks have an
adverse effect on the Company's business and results of operations since they
reduce overall gross profit margins on sales of the Company's products. The
Company experienced chargeback levels of approximately 3.3% during 1996, which
is consistent with the industry norms of 3% to 5%. In 1995, the Company
experienced chargeback levels of approximately 3.9%. No assurance can be given
that such levels can be maintained.
8
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QUALITY CONTROL
Because the Company emphasizes the fit, performance and quality of its
products, the Company places high priority on quality control. The Company has
established stringent quality control procedures under which domestic and
international production of the Company's products at independent manufacturing
locations is inspected by agents of the Company who visit each independent
manufacturing contractor at such frequency as is necessary to ensure compliance
with the Company's specifications and delivery requirements and in order to meet
the Company's shipping schedules. Prior to manufacture in large quantities, the
Company receives samples of its products for investigation, and if necessary,
alteration. The Company performs various tests, including fit tests on live
models, to ensure that the product meets specifications prior to the shipping of
product by the Company. In addition, senior employees of the Company
periodically personally inspect the manufacturing process and quality of
products.
The Company believes that its relationships with its warehouses,
customs brokers and international consolidators are an important part of its
quality control program. The Company views its service organizations as
important resources in maintaining high standards for its products and assisting
in the reliable and timely delivery of its products to its retail customers.
COMPETITION
The apparel industry is highly competitive. The Company's competitors
include apparel manufacturers of all sizes, many of whom have greater financial
and manufacturing resources than the Company. The Company believes that it has
been able to compete in the brand name women's activewear and sportswear market
because of the high brand name recognition, high quality and affordability of
its products. The Company's products may also compete with lower-priced women's
and girls' activewear and sportswear products which may or may not be brand name
products. The Company believes that its principal competitors in the brand name
women's activewear and sportswear industry are Nike, Reebok, Adidas, Fila, The
Weekend Exercise Company and Danskin. Competition in the activewear and
sportswear segment of the apparel industry is based on price, design, quality,
name recognition and the ability to respond quickly to changing consumer
preferences.
CANADIAN BRANCH
The Company has a Canadian branch (A.A.G. Vetements-Amerique Inc.) that
markets the Everlast Products in Canada. In September 1993, the Company engaged
a consultant ("Canadian Consultant") pursuant to a consulting agreement (the
"Consulting Agreement") to assist the Company in the sale, distribution and
marketing of the Everlast Products in Canada through such branch. The initial
term of the Consulting Agreement expired on December 31, 1996, but was renewed
for a one-year period pursuant to a provision in the Consulting Agreement
providing for automatic renewal for successive one-year periods unless the
Company gives notice of termination or if the Everlast License relating to
Canada is terminated or otherwise ceases to be in effect. The Consulting
Agreement provides for the payment to the Canadian Consultant of an annual fee
of U.S. $60,000, plus designated commissions based, generally, on the Company's
net sales and pre-tax profits in Canada, and reimbursement of expenses.
During Fiscal 1995, net sales from operations in Canada aggregated U.S.
$1,352,266, and during fiscal 1996 such net sales aggregated U.S. $1,273,286.
With the exception of exchange rate fluctuations, the Company does not believe
that the Canadian operations are subject to risks which are significantly
different from domestic operations. The Company does not believe that exchange
rate fluctuations have
9
<PAGE>
had a material adverse effect on the Company's results of operations, although
there can be no assurance that such fluctuations, with respect to its Canadian
operations, will not have a material adverse effect on the Company's results of
operations in the future.
EMPLOYEES
As of March 6, 1997, the Company had 24 employees, all of whom were
employed by the Company on a full-time basis. In addition, the Company may
employ additional full-time and part-time employees in connection with the
design, marketing and sale of its products as and if the need arises. The
Company currently hires temporary employees from time to time as needed. None of
the Company's employees is covered by a collective bargaining agreement, and the
Company considers its relations with its employees to be satisfactory.
ITEM 2. PROPERTIES
The Company leases its principal executive offices in New York City.
The original lease provides for an annual base rent of $98,529 through January
31, 1997, and for an annual base rent of $93,672 starting February 1, 1997 and
expiring January 31, 2000. This space, which occupies approximately 3,981 square
feet, also includes a showroom for the Everlast Products. In July 1994, the
Company increased the space it leases at its offices in New York City by 2,523
square feet to establish a showroom for its Converse Products and to accommodate
additional employees. Such lease provides for an annual base rent of $57,902,
became effective October 1, 1994 and expires January 31, 2000. In January 1996,
the Company increased the space it leases at its offices in New York City by 656
square feet to accommodate additional employees. Such lease provides for an
annual base rent of $15,055, became effective January 1, 1996 and expires
January 31, 2000. The Company leases approximately 1,200 square feet of office
and showroom space in Montreal, Canada at an annual base rent of $18,000
Canadian Dollars. The lease expires in April 1997. The Company expects the lease
to be renewed on similar terms.
The Company believes that its existing facilities will be adequate to
meet its needs for the foreseeable future. In the event the Company requires
additional facilities in the future, the Company believes additional facilities
would be available at commercially reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
(a) The Company is not a party to any material litigation.
(b) No legal proceedings were terminated during the fiscal year ended
December 31, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the last
quarter of 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock has been quoted on the Nasdaq National
Market since August 14, 1996 under the symbol "AAGP". Previously, the Company's
common stock had been quoted on the Nasdaq Small Cap Market (since May 4, 1995)
under the same symbol. The following table sets forth, for the period indicated,
the highest and lowest bid quotations for the common stock, $.002 par value (the
"Common Stock"), as reported by the Nasdaq system.
1995
HIGH LOW
---- ---
1st Quarter N/A N/A
2nd Quarter(1) 10 1/2 7 1/4
3rd Quarter 11 1/4 9 3/4
4th Quarter 13 1/4 11 1/4
1996
HIGH LOW
---- ---
1st Quarter 15 1/4 12 1/2
2nd Quarter 15 1/4 13 13/16
3rd Quarter 14 3/4 13 3/4
4th Quarter 15 1/2 14
1997
HIGH LOW
---- ---
1st Quarter(2) 15 9/16 14 3/4
(1) Starting from May 4, 1995
(2) Through March 6, 1997.
HOLDERS
As of February 25, 1997 there were 110 record holders of the Company's
Common Stock (this number does not include an indeterminate number of
stockholders whose shares are held by brokers in "street name"), and one record
holder of the Company's Class A Common Stock, $.01 par value (the "Class A
Common Stock"). Based upon information received from some of these record
holders, the Company believes there are more than 400 beneficial holders of the
Company's Common Stock.
DIVIDENDS
The Company has never paid dividends on its Common Stock or its Class A
Common Stock. The Company anticipates that, for the foreseeable future, earnings
will be retained for use in its business and does not anticipate the payment of
dividends.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S
EXPANSION INTO NEW MARKETS, COMPETITION, TECHNOLOGICAL ADVANCES AND AVAILABILITY
OF MANAGERIAL PERSONNEL.
GENERAL
The Company is a designer, marketer and supplier of women's activewear
and sportswear, and unisex activewear and accessories. The Company sells its
principal product collections under the EVERLAST, CONVERSE and MTV brand names
through exclusive licensing arrangements. The Company's products are
manufactured by third party independent manufacturing contractors and are sold
to approximately 500 separate accounts, representing approximately 20,000 retail
locations throughout the United States and Canada, including a variety of
department stores, specialty stores, sporting goods stores, catalog operations
and better mass merchandisers.
On May 4, 1995 the Company completed an initial public offering of
640,000 shares of Common Stock at $6.25 per share. Proceeds to the Company,
after deducting initial public offering costs of $319,180, were $3,680,820.
The financial statements of the Company and the notes thereto contain
detailed information that should be referred to in conjunction with this
discussion.
RESULTS OF OPERATIONS
YEAR END 1996 COMPARED TO YEAR END 1995
Net sales increased to $16,377,529 for the year ended December 31, 1996
from $14,781,208 for the year ended December 31, 1995, an increase of $1,596,321
or 10.8%. This increase was principally attributable to increased sales volume
of the Company's products, continued market penetration and acceptance of the
Company's products and increased orders from established accounts. In 1996 the
Company experienced an increase in net sales in each of the four quarters versus
comparable 1995 periods.
Gross profit increased to $6,186,613 for the year ended December 31,
1996 from $4,895,597 for the year ended December 31, 1995, an increase of
$1,291,016 or 26.4%. Gross profit increased as a percentage of net sales to
37.8% from 33.1%. This increase as a percentage of net sales was primarily due
to the Company's ability to maintain normal gross profit margins on sales of its
products.
Selling and shipping expenses increased to $3,089,749 for the year
ended December 31, 1996 from $2,255,884 for the year ended December 31, 1995, an
increase of $833,865 or 37.0%. Selling and shipping expenses as a percentage of
net sales increased to 18.9% from 15.2%. This increase as a percentage of net
sales was primarily attributable to an increase in advertising and promotional
expenditures and additional employees. Management believes its marketing efforts
have helped create a stronger brand awareness and increased the market
penetration of its products.
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General and administrative expenses increased to $1,723,258 for the
year ended December 31, 1996 from $1,473,381 for the year ended December 31,
1995, an increase of $249,877 or 17.0%. General and administrative expenses as a
percentage of net sales increased to 10.5% from 9.9%. The increase as a
percentage of net sales was primarily attributable to an increased number of
employees for the year ended December 31, 1996 versus the year ended December
31, 1995 in order to facilitate the Company's continued growth.
Financial expenses decreased to $291,880 for the year ended December
31, 1996 from $480,663 for the year ended December 31, 1995, a decrease of
$188,783 or 39.3%. This decrease was primarily attributable to the decrease in
the Company's net borrowings for the year ended December 31, 1996 versus the
year ended December 31, 1995. Of the total financial expenses, interest expense
decreased to $27,767 for the year ended December 31, 1996 from $255,964 for the
year ended December 31, 1995. Such decrease is due to reduced borrowings under
the credit facility (the "Century Facility") with Century Business Credit
Corporation ("Century") primarily due to proceeds from the initial public
offering.
Operating income increased to $1,081,726 for the year ended December
31, 1996 from $685,669 for the year ended December 31, 1995, an increase of
$396,057 or 57.8% for the reasons stated above. Operating income as a percentage
of net sales was 6.6% for the year ended December 31, 1996 as compared to 4.6%
for the year ended December 31, 1995.
The Company earned $21,367 in other income for the year ended December
31, 1996 compared to $135,139 for the year ended December 31, 1995, a decrease
of $113,772. In 1995, $94,924 of other income represents an insurance recovery
relating to the theft of certain merchandise at its Canadian branch.
The Company incurred a tax provision of $391,845 for the year ended
December 31, 1996 as compared to a tax recovery of $24,271 for the year ended
December 31, 1995. In 1996 the Company had remaining only $338,000 of its net
operating loss carryforward to offset taxable income, compared to 1995 when the
Company was able to completely offset income before taxes by use of the net
operating loss carryforward.
The Company thus had net income of $711,248 for the year ended December
31, 1996 as compared to $845,079 for the year ended December 31, 1995, a
decrease of $133,831 or 15.8% for the reasons stated above.
1997 OUTLOOK
The retail environment, particularly as it relates to apparel, in both
the United States and Canada is expected to continue to be weak. Speculation
remains that further consolidation will continue. Additionally, competition from
other branded companies is expected to intensify. Despite these factors,
management believes significant opportunities exist to allow for continued
growth over the next year, although no assurance can be given that such growth
will occur. The addition of the MTV Products to the Company's product mix has
been well received to date and both the Converse and Everlast Products have
continued to increase market penetration.
LIQUIDITY AND CAPITAL RESOURCES
On May 4, 1995, the Company completed an initial public offering of
640,000 shares of Common Stock at $6.25 per share. Proceeds to the Company,
after deducting initial public offering costs of
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<PAGE>
$319,180, were $3,680,820. Upon completion of the offering, the Company applied
$3,600,000 of the net proceeds towards its loan balance under the Century
Facility while the balance was applied to general working capital.
Net cash provided by (used for) operating activities for the year ended
December 31, 1996 was $360,249 compared to ($2,864,839) for the year ended
December 31, 1995. This increase was primarily attributable to an increase in
the funds held at the factor at December 31, 1995 as the result of the initial
public offering. Net cash used for investing activities for the year ended
December 31, 1996 was $206,639 compared to $59,363 for the year ended December
31, 1995. Net cash provided by (used for) financing activities was ($124,713)
for the year ended December 31, 1996 compared to $3,036,520 for the year ended
December 31, 1995. This decrease was primarily attributable to the Company's
initial public offering in 1995.
During the year ended December 31, 1996, the Company's primary need for
funds was to finance working capital, including inventory, for the anticipated
growth in net sales of the Company's products. The Company has relied primarily
upon cash flow from operations and advances drawn against factored receivables
to finance its operations and expansion. At December 31, 1996, working capital
was $4,940,176 compared to $4,755,255 at December 31, 1995, an increase of
$184,921. This increase was primarily attributable to profitability.
Due from factor represents the amount receivable to the Company for
factored receivables less the amount of outstanding advances made by Century to
the Company under the Century Facility. At December 31, 1996 due from factor was
$2,896,273 as compared to $3,287,499 at December 31, 1995. The Company's
inventory increased 55.2% to $2,757,700 at December 31, 1996 from $1,776,583 at
December 31, 1995.
In June 1994, the Company issued Convertible Notes (the "Convertible
Notes") in an aggregate principal amount of $200,000. Noteholders had until May
31, 1995 to elect conversion, subject to a 15 day grace period. As of December
31, 1995 $50,000 of principal and all accrued interest was repaid to the
noteholders. The remaining $150,000 was converted to Common Stock. The number of
shares of Common Stock issued upon the conversion of the Convertible Notes was
based upon an average of the highest and lowest bid quotations of the Common
Stock over a specified period of ten trading days.
1997 OUTLOOK
Management anticipates it will retain a net receivable position under
the Century Facility, although no assurance to that effect can be given.
Positive cash flow, if it occurs, will provide for a further reduction in net
borrowings, and excess working capital will be sufficient to fund the Company's
anticipated growth over the next 12 months.
ITEM 7. FINANCIAL STATEMENTS.
See page 1f.
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ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On and effective as of May 24, 1995, the Company informed Morgenstern &
Alexander ("Morgenstern & Alexander"), certified public accountants, that the
Board of Directors of the Company (including the Audit Committee thereof) had
decided not to continue the engagement of Morgenstern & Alexander and had
approved the engagement of Berenson & Company LLP as the Company's new
independent certified public accountants ("Berenson") to audit the Company's
financial statements (beginning with the fiscal year ending December 31, 1995)
and to assist the Company in the preparation of its annual, quarterly and other
reports under the Securities Exchange Act of 1934, as amended.
Morgenstern & Alexander's reports on the financial statements for each
of the past two fiscal years of the Company ended December 31, 1994 and December
31, 1993, respectively ("Applicable Fiscal Years"), did not contain an adverse
opinion or disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles. During the Applicable Fiscal
Years and during the interim period since December 31, 1994, there was no
disagreement between the Company and Morgenstern & Alexander on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreement, if not resolved to the satisfaction of
Morgenstern & Alexander, would have caused it to make a reference to the subject
matter of the disagreement in connection with its reports.
In connection with a Form 8-K filed by the Company with the SEC on May
24, 1995, Morgenstern & Alexander agreed with the Company's statements that
there were no other reportable events or disagreements to report in response to
Item 304(a) of Regulation S-B, while noting that it had not performed any
accounting functions or assisted the Company for any financial statements for
any periods subsequent to December 31, 1994.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The Company's executive officers and directors are as follows:
NAME Age Position
George Horowitz 46 President; Chief Executive Officer; Chairman of
the Board; Treasurer; Director(1)
James Anderson 60 Vice Chairman of the Board; Director(1)(2)
Donald J Horowitz 61 Legal Counsel; Director; Secretary of the
Board(1)
Rita Cinque 31 Executive Vice President; Secretary of the
Company; Director(3)
Larry Kring 56 Director(2)(3)
Edward Epstein 57 Director(2)(3)
Angelo Giusti 46 Director(2)
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(1) Member of the Executive Committee of the Board of Directors
(2) Member of the Compensation Committee of the Board of Directors
(3) Member of the Audit Committee of the Board of Directors
MR. GEORGE HOROWITZ has been the President, Chief Executive Officer,
Treasurer and a director of the Company since its inception in July 1992. Since
January, 1996 he has been Chairman of the Board. From October 1990 to January
1993, Mr. Horowitz was President and a director of Total Impact, Inc., an
activewear apparel company in New York City. From March 1976 to March 1990, Mr.
Horowitz was employed by Golden Touch Imports, Inc. (AGolden Touch@), an apparel
company in New York City, where he served as Vice President-Operations and was a
shareholder of that company. He is currently serving on the Fitness Apparel
Council as an industry advisor of the Sporting Goods Manufacturers Association.
Mr. Horowitz is the brother of Donald Horowitz, the Legal Counsel and a director
of the Company, and the uncle of Russell Horowitz, Director of Investor
Relations of the Company.
MR. ANDERSON has been a director of the Company since August 1992 and
was Chairman of the Board from January 1994 through December 1995. Since
January, 1996 he has been Vice-Chairman of the Board. Since August 1996, he has
been Managing Partner of Millenium Venture Management LLC, and CEO of Compucolor
LLC, an anti-graffiti company. From July 1987 he was a management consultant in
restructuring businesses. From 1981 to 1987, he was President of Pacific First
Financial Corp. and Pacific First Federal Savings Bank, and in 1984, also became
chairman of the board and CEO of each company. He has served on the boards of
directors of numerous business, civic, arts and educational organizations and is
a member of the Whitman College Board of Overseers. He is currently a member of
the Board of Directors of HERS Interactive, Inc. a software publishing company,
the Washington Hospital Insurance Fund and the Washington Casualty Company.
MR. DONALD J HOROWITZ has been a director of the Company since August
1992, General Counsel of the Company from September 1994 through August 1996,
and Legal Counsel of the Company since September 1996. Mr. Horowitz has been a
Superior Court Judge of the State of Washington, a Senior Assistant Attorney
General of the State of Washington and a law school adjunct professor. From
January 1977 to June 1990, Mr. Horowitz was a partner in the law firm of
Levinson, Friedman, Vhugen, Duggan, Bland & Horowitz, and since July 1990, has
been Of Counsel to the law firm of DeFunis & Balint. Mr. Horowitz also serves as
a mediator and arbitrator. He has served on numerous governmental, business and
civic boards and commissions.
MS. CINQUE has been Executive Vice President and a director of the
Company since May 1994. From April 1993 to May 1994, she was Vice President -
Operations, of the Company, and from August 1992 to April 1993, she served as a
consultant to the Company in operations management. From November 1990 to August
1992, Ms. Cinque was the President of ITEW, Ltd., a management consulting
company in the apparel industry. In 1986, she was a founding member of Women in
International Trade, an organization to promote international trade, where she
served as a director from January 1990 to January 1993.
MR. KRING has been a director of the Company since January 1993 and has
served as Vice-Chairman of the Board of Directors since January 1994. Since
August 1993, Mr. Kring has been a Group
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Vice President of Esterline Technologies, a diversified instrumentation,
equipment and component manufacturing company listed on the New York Stock
Exchange and located in Bellevue, Washington. From July 1978 to July 1993, Mr.
Kring was the President and Chief Executive Officer of Heath Tecna Aerospace
Company, a manufacturer of aircraft interior and aerospace components and a
division of Ciba-Geigy Corporation.
MR. EPSTEIN has been a director since January 1, 1996. Mr. Epstein is
an attorney admitted to practice law in both New York and Florida. He is an
experienced litigator, and has represented clients in all aspects of the garment
industry for 29 years. He is a member of the bars of the Supreme Court of the
State of Florida, the Supreme Court of the State of New York, various United
States District Courts and the United States Court of Appeals for the Second
Circuit. He is a member of the Commercial Panel of Arbitrators, American
Arbitration Association, the New York State Trial Lawyers Association,
Association of Trial Lawyers of America and the Florida Academy of Trial
Lawyers.
MR. GIUSTI has been a director since January 3, 1997. Since 1984 Mr.
Giusti has been President of Universal Business Forms, a printing concern in New
York City. From 1978 to 1984, Mr. Giusti was Sales Manager in New York for
Uarco, a national printing company. Mr. Giusti has served on many community
boards and activities. He was a New York City Public School teacher, and has
remained active in local education and in youth sports activities. He currently
is President of the Holmdel (Jersey shore) Pop Warner Football League.
SECTION 16(A) REPORTING. Section 16(a) of the Securities Exchange Act
of 1934 as amended, requires the Company's directors and executive officers, and
persons who own more than ten percent of the Company's Common Stock, to file
with the Securities and Exchange Commission (the ASEC@) initial reports of
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than ten percent stockholders are required by SEC
regulation to furnish the Company' with copies of all Section 16(a) reports they
file. To the Company's knowledge, based solely on review of the copies of such
reports furnished to the Company during the fiscal year ended December 31, 1996
all required Section 16(a) filings by beneficial owners were complied with,
except that on February 10, 1997 James Anderson filed a Form 5 relating to the
conversion of 3,000 shares of preferred stock to 3,000 shares of common stock in
July 1996.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning total annual compensation paid to George Horowitz, the Company's
President, Chief Executive Officer and Treasurer and Rita Cinque, the Company's
Executive Vice President and Secretary (the "Named Executive Officers"), for
services rendered in all capacities by them to the Company during fiscal years
1996, 1995, and 1994.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------
Name and Other Annual All Other
--------
Principal Positions Year Salary ($) Bonus ($) Compensation ($) Compensation ($)
-------------------- ---- ---------- --------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
George Horowitz(1) 1996 250,000 24,000(2) 18,635(3) 560(6)
(President; Chief 1995 165,000 15,000 20,336(4) 469(6)
Executive Officer; 1994 112,500 0 12,940(5) 384(6)
Treasurer)
Rita Cinque(1) 1996 125,000 16,000(2) 12,155(7) 0
(Executive Vice President; 1995 98,077 10,000 11,364(8) 0
Secretary) 1994 56,812 0 9,266(9) 0
</TABLE>
- ----------------------
(1) Other than Mr. George Horowitz and Rita Cinque no officer of the Company
was paid more than $100,000 in total salary and bonus for the year ended
December 31, 1996, and accordingly, no other officers are included in
the table above.
(2) The Company has agreed to pay the amount of tax owed on the bonus
payment noted in the column above.
(3) Consists of an aggregate of $18,635 paid to or on behalf of Mr. Horowitz
by the Company in Fiscal 1996 in connection with automobile lease
installment payments ($13,659), related insurance premiums ($2,176) and
parking expenses ($2,800).
(4) Consists of an aggregate of $20,336 paid to or on behalf of Mr. Horowitz
by the Company in Fiscal 1995 in connection with automobile lease
installment payments ($13,659), related insurance premiums ($1,184) and
parking expenses ($2,800).
(5) Consists of an aggregate of $12,940 paid to or on behalf of Mr. Horowitz
by the Company in Fiscal 1994 in connection with automobile lease
installment payments ($8,416), related insurance premiums ($504) and
parking expenses ($4,020).
(6) Represents premiums paid by the Company in Fiscal 1996, 1995 and 1994 on
term life insurance policies for the benefit of Mr. Horowitz.
(7) Consists of an aggregate of $12,155 paid to or on behalf of Ms. Cinque
by the Company in Fiscal 1996 in connection with automobile lease
installment payments ($5,134), related insurance premiums ($4,216) and
parking expenses ($2,805).
(8) Consists of an aggregate of $11,364 paid to or on behalf of Ms. Cinque
by the Company in Fiscal 1995 in connection with automobile lease
installment payments ($5,624), related insurance premiums ($1,775) and
parking expenses ($3,965).
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(9) Consists of an aggregate of $9,266 paid to or on behalf of Ms. Cinque by
the Company in Fiscal 1994 in connection with automobile lease
installment payments ($4,395), related insurance premiums ($972) and
parking expenses ($3,900).
LONG-TERM INCENTIVE AND PENSION PLANS
The Company currently has no long-term incentive or defined pension
plans. The Company is the beneficiary of Akey-executive@ life insurance policies
on George Horowitz and Rita Cinque in the amounts of $12,000,000 and $4,500,000,
respectively.
OPTION GRANTS IN LAST FISCAL YEAR
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price - Expiration
Name Granted Fiscal Year $/Share Date
- ---- ------- ----------- ------- ----
George Horowitz 25,000(1) 46% $14.25 November 7, 2006
CEO, President
Rita Cinque 15,000(2) 27% $14.75 December 13, 2006
Executive Vice
President
(1) The options set forth herein were granted on November 7, 1996. One third of
the options vest on November 7, 1997, one third vests on November 7, 1998
and the balance vests on November 7, 1999.
(2) The options set forth herein were granted on December 13, 1996. One third of
the options vest on December 13, 1997, one third vests on December 13, 1998
and the balance vests on December 13, 1999.
COMPENSATION OF DIRECTORS
As compensation for their services as directors of the Company,
effective January 1, 1995 non-employee directors of the Company receive options
to purchase the Company's common stock pursuant to the Company's 1995
Non-Employee Director Stock Option Plan. The plan provides for annual automatic
grants of options to purchase 3,000 shares of common stock to each director
serving at the time of the grant who is not an officer or employee of the
Company. The Chairman and Secretary of the Board (provided they are not officers
or employees of the Company) also receive an automatic grant of options to
purchase an additional 200 shares, and the chair of a Board committee (provided
he or she is not an officer or employee of the Company) also receives an
automatic grant of options to purchase an additional 100 shares. The exercise
price per share for all such options is the fair market value of the shares of
common stock covered by the option on the date of grant of such option. The term
of each option is seven years from the date of grant, and the options vest in
three equal installments on the first, second and third anniversaries of the
date of grant. Directors also receive reimbursement of expenses incurred by them
in performing their duties and in attending Board meetings, provided such
expenses are reasonable
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and evidenced by appropriate documentation.
EMPLOYMENT CONTRACTS
GEORGE HOROWITZ. The Company and George Horowitz are parties to an employment
agreement, dated as of August 1, 1994 (the "Agreement") pursuant to which Mr.
Horowitz serves as the President and Chief Executive Officer of the Company, for
which Mr. Horowitz was paid an annual base salary of $125,000 from August 1,
1994 through December 31, 1994, $165,000 from January 1, 1995 through December
31, 1995, $250,000 from January 1, 1996 through December 31, 1996 and is paid an
annual base salary of $265,000 commencing January 1, 1997 and continuing
thereafter through the Term (as defined below) of the Agreement, unless
increased by the Board of Directors on an annual basis during the Term. The
initial term of the Agreement expires on July 31, 2000 but continues thereafter
for additional one-year periods unless either Mr. Horowitz or the Company gives
the other ninety days' prior written notice of non-renewal (as and if so
extended, the "Term"). At the discretion of the Board of Directors, the Company
may also pay Mr. Horowitz a cash bonus on or before December 31 of any year
during the Term. In addition to such base salary and contingent cash bonuses,
Mr. Horowitz is entitled to receive an automobile allowance which on August 12,
1996 was modified from $12,000 annually to reimbursement for an automobile
commensurate with his position and duties with the Company (to include
appropriate insurance), reimbursement for parking expenses which was modified
from a limit of $6,000 annually to such amount as is reasonably and customarily
charged in the area of the Company's principal offices, health and medical
insurance and is entitled to participate in any retirement, life and disability
insurance, dental insurance and any bonus, incentive or profit-sharing plans
which the Company makes available from time to time to its executives. Mr.
Horowitz is also entitled to receive reimbursement of all reasonable
out-of-pocket expenses that he actually incurs relating to his services under
the Agreement.
The Agreement also restricts, generally, Mr. Horowitz from disclosing
certain confidential information obtained by Mr. Horowitz during the Term for a
period of three years following the termination or expiration of the Term, and
further restricts Mr. Horowitz from competing with the Company (including
soliciting the Company's employees or agents) for a period of one year following
the expiration or termination of the Term. The Agreement may be terminated by
the Company "for cause" (as defined in the Agreement), and in the event of such
termination, or in the event of the voluntary resignation by Mr. Horowitz, the
obligations of the Company under the Agreement will terminate (except with
respect to certain indemnification, confidentiality and "non-compete"
provisions). In the event of the termination of the Agreement by reason of Mr.
Horowitz's death, his estate is entitled to receive an amount equal to twice his
then-current base salary (which, in the case of Mr. Horowitz's death, may be
funded, wholly or partially, by a life insurance policy paid for by the Company,
at its option). If the Agreement is terminated for reasons other than Mr.
Horowitz's death, voluntary resignation or Afor cause,@ Mr. Horowitz will be
entitled to receive an amount equal to twice his then-current base salary, plus
all other amounts due to him under the Agreement through the date of such
termination.
RITA CINQUE. The Company and Rita Cinque are parties to an employment agreement,
dated as of August 1, 1994, pursuant to which Ms. Cinque serves as Executive
Vice President of the Company, for which Ms. Cinque was paid an annual base
salary of $70,000 from August 1, 1994 through December 31, 1994, $90,000 from
January 1, 1995 through June 30, 1995, $105,000 from July 1, 1995 through
December 31, 1995, $125,000 from January 1, 1996 through December 31, 1996, and
is paid an annual base salary of $140,000 commencing January 1, 1997 and
continuing thereafter through the Term (as defined below) of the agreement,
unless increased by the Board of Directors on an annual basis during the Term.
The initial term of such agreement expires on July 31, 1997 but continues
thereafter for additional one-year periods unless either Ms. Cinque or the
Company gives the other ninety days' prior written
20
<PAGE>
notice of non-renewal (as and if so extended, the "Term"). At the discretion of
the Board of Directors, the Company may also pay Ms. Cinque a cash bonus on or
before December 31 of any year during the Term. In addition to such base salary
and contingent cash bonuses, Ms. Cinque is entitled to receive an automobile
allowance of $9,000 annually, reimbursement for parking expenses up to $4,800
annually, health and medical insurance, and is also entitled to participate in
any retirement, life and disability insurance, dental insurance and any bonus,
incentive or profit-sharing plans which the Company makes available from time to
time to its executives. Ms. Cinque is also entitled to receive reimbursement for
all reasonable out-of-pocket expenses that she incurs relating to her services
under such agreement.
21
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 6, 1997 for (i)
each of the Company's directors (ii) each of the Company=s executive officers
(iii) each stockholder known to be the beneficial owner of more than five
percent of any class of the Company's voting securities and (iv) all directors
and executive officers as a group:
Beneficial Ownership
Common, and
Class A Common (1)
Percentage of
Name and Address of Number (2) Outstanding
Beneficial Owner ---------- Stock
- ---------------- -----
George Q. Horowitz 591,628(3) 21.09%
c/o Active Apparel Group, Inc.
1350 Broadway, Suite 2300
New York, NY 10018
Donald J. Horowitz 253,058(4) 9.02%
800 United Airlines Bldg.
2033 Sixth Ave.
Seattle, WA 98121
James K. Anderson 158,724(5) 5.66%
4903 163rd Ave., N.E.
Redmond, WA 98052
Rita Cinque 85,700(6) 3.06%
c/o Active Apparel Group, Inc.
1350 Broadway, Suite 2300
New York, NY 10018
Larry Kring 35,904(7) 1.28%
3265 126th Ave., N.E.
Bellevue, WA 98005
Edward R. Epstein 1,000(8) *
915 Middle River Drive
Suite 419
Fort Lauderdale, FL 33304
Angelo Giusti 400(9) *
19 Deer Park
Holmdel, NJ 07733
All directors and 1,126,414 40.16%
executive officers as a group (7
persons)
- -----------------
(1) Under rules adopted by the Securities and Exchange Commission, a person is
deemed to be a beneficial owner of securities with respect to which such
person has or shares: (i) voting power, which includes the power to vote or
direct the vote of the security, or (ii) investment power, which includes
the power to dispose of or to direct the disposition of the security.
Unless otherwise indicated below, the persons named in the table above have
sole voting and investment power with respect to all shares beneficially
owned.
22
<PAGE>
(2) As of March 6, 1997, there were outstanding 2,452,287 shares of Common
Stock and 100,000 Class A Common Stock. The Class A Common stock, while
held by George Horowitz, as they currently are, entitle George Horowitz to
five (5) votes for each share held. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS - Issuance of Shares of Class A Common Stock". Thus, while
there are 2,552,287 shares outstanding (not including any unexercised
options) this represents 2,952,287 votes.
(3) Consists of (i) 479,628 shares of Common Stock (1,000 of which are owned by
minor children) (ii) 100,000 shares of super-voting Class A Common Stock
issued to Mr. George Q. Horowitz in July 1995 in exchange for 112,500
shares of Common Stock. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- Issuance of Shares of Class A Common Stock," and (iii) 12,000 shares of
Common Stock issuable upon exercise of options exercisable currently or
within 60 days, including an option to purchase 2,000 shares at $6.25 per
share granted by Donald Horowitz, George Horowitz's brother, which expires
on December 31, 1999, and an option to purchase 10,000 shares granted by
the Company for $11.75 per share, which expires on November 3, 2005.
(4) Consists of (i) 180,050 shares of Common Stock and (ii) 73,008 shares of
Common Stock issuable upon the exercise of currently exercisable Options
("Option Shares"), consisting of: 2,517 Option Shares purchasable at
exercise prices of $1.75, $3.00 and $5.00 per share and having an
expiration date of December 31, 2004; 4,706 Option Shares purchasable at an
exercise price of $0.85 per share and having an expiration date of December
31, 2003; 20,000 Option Shares purchasable at an exercise price of
approximately $0.37 per share and having an expiration date of June 30,
1998; 9,785 Option Shares purchasable at exercise prices of $3.30 and $5.50
with expiration dates of June 30, 1999 or December 31, 1999, respectively;
30,000 Option Shares purchasable upon the exercise of Options granted to
Mr. Horowitz pursuant to the 1994 Donald Horowitz Employment Agreement,
which Options have an exercise price of $6.25 and an expiration date of
October 1, 1998; and an option to purchase 6,000 shares for $11.75 per
share, which expire on November 3, 2005. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS - Donald Horowitz Employment Agreement". Mr. Horowitz
shares voting and investment power with Lynda Horowitz, his wife, only with
respect to 39,400 shares of Common Stock held. Of the 180,050 shares of
Common Stock, 22,500 shares are subject to options granted by Mr. Horowitz
and his wife during 1995 and 1996 to his children, and as to 2,000 shares,
to George Horowitz, Donald Horowitz's brother and the Chief Executive
Officer of the Company. These options are at $6.25 per share, and expire on
December 31, 1999.
(5) Consists of (i) 104,300 shares of Common Stock and (ii) 54,424 shares of
Common Stock issuable upon the exercise of currently exercisable Options,
consisting of: 3,356 Option Shares purchasable at exercise prices of $1.75,
$3.00 $5.00 and $6.25 per share and having an expiration date of December
31, 2004; 4,706 Option Shares purchasable at an exercise price of $0.85 per
share and having an expiration date of December 31, 2003; 28,400 Option
Shares purchasable at an exercise price of approximately $0.37 per share
and having an expiration date of June 30, 1998; and 15,830 Option Shares
purchasable at exercise prices of $3.30 and $5.50 with expiration dates of
June 30, 1999 or December 31, 1999, respectively; an option to purchase
1,066 shares of Common Stock granted by the Company on November 3, 1995
exercisable at $11.75 per share and which expires on November 3, 2002; and
an option to purchase 1,066 shares of Common Stock granted by the Company
on January 2, 1996 exercisable at $12.50 per share and which expires on
January 2, 2003. Mr. Anderson shares voting and investment power with
Sandra Anderson, his wife, only with respect to the 100,000 shares of
Common Stock held.
23
<PAGE>
(6) Consists of 78,700 shares of Common Stock and an option to purchase 7,000
shares of Common Stock granted by the Company on November 3, 1995
exercisable at $11.75 per share and which expires on November 3, 2005.
(7) Consists of (i) 22,750 shares of Common Stock and (ii) 13,154 shares of
Common Stock issuable upon the exercise of currently exercisable Options,
consisting of: 3,356 Option Shares purchasable at exercise prices of $1.75,
$3.00, $5.00 and $6.25 per share and having an expiration date of December
31, 2004; 3,762 Option Shares purchasable at an exercise price of $0.85 per
share and having an expiration date of December 31, 2003; and 3,970 Option
Shares at exercise prices of $3.30 with $5.50 and expiration dates of June
30, 1999 or December 31, 1999, respectively; an option to purchase 1,033
shares of Common Stock granted by the Company on November 3, 1995
exercisable at $11.75 per share and which expires on November 3, 2002; and
an option to purchase 1,033 shares of Common Stock granted by the Company
on January 2, 1996 exercisable at $12.50 per share and which expires on
January 2, 2003.
(8) Consists solely of 1,000 shares of Common Stock issuable upon the exercise
of currently exercisable Options granted by the Company on January 2, 1996,
exercisable at $12.50 per share and which expires on January 2, 2003.
(9) Consists solely of 400 shares of Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DONALD HOROWITZ EMPLOYMENT AGREEMENT. The Company and Donald Horowitz
(a director of the Company) are parties to a one year agreement, effective
September 1, 1996 pursuant to which Mr. Horowitz serves as Legal Counsel and
advisor to the Company, for which he is paid, a total base salary of $36,000 in
cash, payable on a quarterly basis and Options to purchase 3,200 Option Shares
exercisable at an amount equal to the exercise price of options granted to
non-employee members of the Board of Directors for their service for the year
1997. Mr. Horowitz is also entitled to receive reimbursement for all reasonable
out-of-pocket expenses that he incurs relating to his services.
The 1996 Agreement replaced a previous Agreement of September 1, 1994
which expired on September 1, 1996, pursuant to which Mr. Horowitz served as
General Counsel of the Company, for which he was paid or granted, over the
two-year of such agreement, an annual base salary of $45,000 in cash, payable on
a quarterly basis and Options to purchase 30,000 Option Shares exercisable at an
exercise price of $6.25 (which was the public offering price of the Shares).
RUSSELL HOROWITZ AGREEMENT. The Company and Russell Horowitz have an
agreement, whereby Mr. Horowitz (who is the son of Donald Horowitz, Counsel and
a director, and the nephew of George Horowitz, President, Chief Executive
Officer, and a director) as an independent contractor, provides services to the
Company on a less than full time basis as the Director of Investor Relations (a
non- executive officer position). Mr. Horowitz is paid $60,000 per annum plus
reimbursement for all reasonable out-of-pocket expenses he incurs relating to
his services, and is entitled to participate in such bonus, option plan,
medical, dental, life and disability insurance, as the Company may make
available. From September 1, 1995 to September 1, 1996 (when the current
arrangement became effective), Mr. Horowitz had the same arrangement with the
Company, but as a Company employee. Previously, from September 1, 1994 to
September 1, 1995, Mr. Horowitz, as a full time employee of the Company in the
same position, was paid $90,000 per annum plus reimbursement and benefits as set
forth above.
24
<PAGE>
1994 BRIDGE FINANCING. In connection with the 1994 bridge financing and
the issuance by the Company of the unsecured Convertible Notes, which were due
May 31, 1995 (with a 15 day grace period to June 15, 1995), with interest at the
prime rate plus 2% and were convertible into common stock, during 1995, George
Horowitz acquired from a holder of $15,000 of Convertible Notes such holder's
rights to $7,500 of such Notes and converted such Notes into 953 shares of
Common Stock based on the applicable formula.
ISSUANCE OF SHARES OF CLASS A COMMON STOCK. On May 17, 1995, pursuant
to provisions of the corporate charter, the Board of Directors (without the
participation of George Horowitz) decided to issue 100,000 shares of Class A
Common Stock to George Horowitz, the Chief Executive Officer and President of
the Company in exchange for 112,500 shares of Common Stock. Mr. Horowitz is the
only holder of Class A Common Stock. While held by Mr. Horowitz, each share of
Class A Common Stock will vote with the Common Stock and is entitled to five
votes on all matters upon which holders of Common Stock are entitled to vote. If
Mr. Horowitz sells, transfers or otherwise disposes of any shares of Class A
Common Stock (voluntarily or involuntarily), or if Mr. Horowitz dies or is
terminated by, or resigns from, the Company, from and after the date of such
sale, transfer, disposition, death, termination or resignation, all of the
shares of Class A Common Stock so sold, transferred or disposed of or held by
Mr. Horowitz on the date of his death, termination or resignation will
automatically be converted into that number of shares of Common Stock equal to
112.5% of the number of shares of Class A Common Stock so sold or existing on
such date.
Mr. Horowitz, as holder of the Class A Common Stock, is entitled to
receive ratably (among other holders of Common Stock) such dividends as may be
declared by the Board of Directors, in its discretion, out of funds legally
available therefore, and is further entitled to share ratably (among other
holders of Common Stock) in any distribution of the Company's assets, after
payment of all debts and other liabilities of the Company, upon any liquidation,
dissolution or winding up of the affairs of the Company. Mr. Horowitz has no
preemptive rights, rights to cumulative voting, rights to redeem such shares and
no rights to convert such shares into any other securities of the Company. All
shares of Class A Common Stock, upon issuance and delivery to Mr. Horowitz, were
validly issued, fully paid and non-assessable.
The Board of Directors decided to issue the 100,000 shares of the Class
A Common Stock to Mr. Horowitz in order to permit him to maintain approximately
the same voting power after the Company's initial public offering of securities,
which occurred in April and May 1995, that he held before such offering. The
Board of Directors determined, for various business reasons (in light of the
Company's relationships with Converse, Everlast, its suppliers, and Century),
that it was in the best interests of the Company for Mr. Horowitz to maintain
the voting power and flexibility that he held before such offering with respect
to the day-to-day management of the Company. In exchange for the shares of Class
A Common Stock issued to Mr. Horowitz, Mr. Horowitz surrendered 112,500 shares
of Common Stock, an exchange ratio determined to be fair and reasonable by the
Board of Directors after an analysis of various factors, including without
limitation, other companies with dual classes of outstanding common stock. The
Company believes that Mr. Horowitz did not gain any direct economic benefits
solely from his receipt of the Class A Common Stock since he gave up equivalent
value consisting of the requisite number of shares of Common Stock.
25
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
<TABLE>
<CAPTION>
Exhibit Filed Incorporated By
Index Description of Document Herewith Reference to:
- ----- ----------------------- -------- -------------
<S> <C> <C>
3(i) Certificate of Incorporation of the Exhibit 3.(i) of Registration
Company ("Certificate of Statement File No.33-87954 (the
Incorporation"). "1995 Registration Statement."
3(ii) Bylaws of the Company. Exhibit 3.(ii) of the 1995
Registration Statement
10.1 Trademark License Agreement, dated as Exhibit 10.1 of the 1995
of May 20, 1994, between Converse Registration Statement
Inc. and the Company.
10.2 License Agreement, dated as of June 1, Exhibit 10.2 of the 1995
1992 ("Everlast License"), between Registration Statement
Everlast World's Boxing
Headquarters Corp. ("Everlast") and
Total Impact, Inc. ("Total Impact").
10.3 First Amendment Agreement to Exhibit 10.3 of the 1995
Everlast License, dated as of June 1, Registration Statement
1992, between Everlast and Total
Impact.
10.4 Assignment of Everlast License, dated Exhibit 10.4 of the 1995
as of July 7, 1992, between Everlast Registration Statement
and the Company.
10.5 Consent to Assignment of Everlast Exhibit 10.5 of the 1995
License, dated as of August 18, 1992, Registration Statement
by Everlast to Total Impact.
10.6 Second Amendment Agreement to Exhibit 10.6 of the 1995
Everlast License, dated as of January 1, Registration Statement
1993 between Everlast and the
Company.
10.7 Third Amendment Agreement to Exhibit 10.7 of the 1995
Everlast License, dated as of November Registration Statement
15, 1993 between Everlast and the
Company.
10.8 License Agreement (Canada), dated as Exhibit 10.8 of the 1995
of January 1, 1993, ("Canada Everlast Registration Statement
License") between Everlast and the
Company.
10.9 First Amendment Agreement to Canada Exhibit 10.9 of the 1995
Everlast License, dated as of November Registration Statement
5, 1993, between Everlast and the
Company.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed Incorporated By
Index Description of Document Herewith Reference to:
- ----- ----------------------- -------- -------------
<S> <C> <C>
10.10 Consulting Agreement, dated as of Exhibit 10.10 of the 1995
September 1, 1993, between the Registration Statement
Company and Michael Bick.
10.11 Buying Agency Agreement, dated as of Exhibit 10.11 of the 1995
December 1, 1992, between the Registration Statement
Company and D&P Fashion Collections
Ltd.
10.12 Services Agreement, dated as of July 7, Exhibit 10.12 of the 1995
1992, between the Company and Total Registration Statement
Impact.
10.13 Factoring Agreement, dated as of Exhibit 10.13 of the 1995
August 21, 1992 and as subsequently Registration Statement
amended, between the Company and
Century Business Credit Corporation.
10.14 Lease Agreement, dated as of May 16, Exhibit 10.14 of the 1995
1991 ("Lease Agreement"), between Registration Statement
Total Impact and 1350 Broadway
Associates.
10.15 Assignment of Lease Agreement, dated Exhibit 10.15 of the 1995
as of September 23, 1992, by Total Registration Statement
Impact to the Company.
10.16 Memorandum of Agreement of Lease, Exhibit 10.16 of the 1995
dated as of September 27, 1993, Registration Statement
between the Company and 433 Building
Corporation.
10.17 Lease, dated as of July 20, 1994, Exhibit 10.17 of the 1995
between the Company and 1350 Registration Statement
Broadway Associates.
10.18 Lease, dated as of July 21, 1994, Exhibit 10.18 of the 1995
between the Company and 1350 Registration Statement
Broadway Associates.
10.19 Form of Registration Rights Exhibit 10.19 of the 1995
Agreement, dated as of August 20, Registration Statement
1992, between the Company and the
holders of Preferred Stock.
10.20 Form of Registration Rights Exhibit 10.20 of the 1995
Agreement, dated as of August 20, Registration Statement
1992, between the Company and the
holders of Common Stock.
10.21 Form of Senior Subordinated Notes of Exhibit 10.21 of the 1995
the Company due December 31, 1994. Registration Statement
10.22 Form of Non-Negotiable Convertible Exhibit 10.22 of the 1995
Promissory Notes of the Company due Registration Statement
May 31, 1995.
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed Incorporated By
Index Description of Document Herewith Reference to:
- ----- ----------------------- -------- -------------
<S> <C> <C>
10.23 Employment Agreement, dated as of Exhibit 10.23 of the 1995
August 1, 1994, between the Company Registration Statement
and George Horowitz.
10.24 Employment Agreement, dated as of Exhibit 10.24 of the 1995
September 1, 1994, between the Registration Statement
Company and Donald J Horowitz.
10.25 Employment Agreement, dated as of Exhibit 10.25 of the 1995
August 1, 1994, between the Company Registration Statement
and Rita Cinque.
10.26 Employment Agreement, dated as of Exhibit 10.26 of the 1995
September 1, 1994, between the Registration Statement
Company and Rita Cinque.
10.27 Option Agreement, dated as of Exhibit 10.27 of the 1995
November 23, 1994, between Century Registration Statement
Business Credit Corporation and the
Company.
10.28 1993 Stock Option Plan of the Exhibit 10.28 of the 1995
Company. Registration Statement
10.29 1995 Non-Employee Director Stock Exhibit 10.29 of the 1996 Form
Option Plan of the Company, adopted 10-KSB for the year ended
on October 6, 1995. December 31, 1995
10.30 Amendment to 1993 Stock Option Plan Exhibit 10.30 of the 1996 Form
of the Company, adopted on October 6, 10-KSB for the year ended
1995. December 31, 1995
10.31 Amendment dated October 3, 1995 of Exhibit 10.31 of the 1996 Form
Trademark License Agreement dated 10-KSB for the year ended
May 20, 1994 between the Company December 31, 1995
and Converse Inc.
10.32 Amendment dated April 28, 1995 to Exhibit 10.32 of the 1996 Form
amend Lease dated September, 1993 10-KSB for the year ended
between the Company and 433 Building December 31, 1995
Corporation.
10.33 Amendment of Lease, made as of Exhibit 10.33 of the 1996 Form
November 1, 1995 between the 10-KSB for the year ended
Company and 1350 Broadway December 31, 1995
Associates.
10.34 Consolidated Amendment Agreement to Exhibit 10.1 of the Form 8-K
Everlast License, dated as of January 1, filed on January 17, 1997
1997 between Everlast and the
Company.
10.35 Consolidated Amendment Agreement to Exhibit 10.2 of the Form 8-K
Canada Everlast License, dated as of filed on January 17, 1997
January 1, 1997 between Everlast and
the Company.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit Filed Incorporated By
Index Description of Document Herewith Reference to:
- ----- ----------------------- -------- -------------
<S> <C> <C>
10.36 Third Amendment to the Trademark X
License Agreement, dated as of January
7, 1997 between the Company and
Converse Inc.
10.37 Fourth Amendment to the Trademark X
License Agreement, dated as of January
22, 1997 between the Company and
Converse Inc.
10.38 Employment Agreement, dated as of X
September 1, 1996 between the Company
and Donald Horowitz
10.39 Amendment to Employment X
Agreement, dated as of August 9, 1996
between the Company and George
Horowitz
27 Financial Data Schedule X
</TABLE>
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed by the Company during the
last quarter of 1996.
29
<PAGE>
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACTIVE APPAREL GROUP, INC.
By:/s/ George Horowitz
-------------------
George Horowitz
Chairman and
Chief Executive Officer
Dated: March 31, 1997
Pursuant to the requirement of the Securities Exchange Act of 1934 this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
March 31, 1997 /s/ George Horowitz
---------------------------------
George Horowitz (Chairman; Chief
Executive Officer; Chief Financial Officer;
and principal accounting officer)
March 31, 1997 /s/ James Anderson
---------------------------------
James Anderson (Director)
March 31, 1997 /s/ Donald J. Horowitz
----------------------------------
Donald J. Horowitz (Director)
March 31, 1997 /s/ Rita Cinque
----------------------------------
Rita Cinque (Director)
March 31, 1997 /s/ Larry Kring
----------------------------------
Larry Kring (Director)
---------------------------------
Edward Epstein (Director)
---------------------------------
Angelo Giusti (Director)
30
<PAGE>
ACTIVE APPAREL GROUP, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1996
<PAGE>
ACTIVE APPAREL GROUP, INC.
TABLE OF CONTENTS
Page
----
Independent Auditors' Report 1f
Balance Sheet 2f
Statements of Income 3f
Statements of Changes in Stockholders' Equity 4f
Statements of Cash Flows 5f
Notes to Financial Statements 6f-15f
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Active Apparel Group, Inc.
New York, NY
We have audited the accompanying balance sheet of Active Apparel Group, Inc. as
of December 31, 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 audit 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 financial statements referred to above present fairly, in
all material respects, the financial position of Active Apparel Group, Inc. as
of December 31, 1996 and the results of its operations and its cash flows for
the years ended December 31, 1996 and 1995 in conformity with generally accepted
accounting principles.
/s/ BERENSON & COMPANY LLP
- --------------------------
BERENSON & COMPANY LLP
New York, NY
January 30, 1997
<PAGE>
ACTIVE APPAREL GROUP, INC. Page 2f
BALANCE SHEET
DECEMBER 31, 1996
A S S E T S
Current assets:
Cash and cash equivalents $ 163,241
Due from factor 2,896,273
Inventory 2,757,700
Prepaid royalties 52,513
Prepaid expenses and other current assets 122,807
----------
Total current assets 5,992,534
Note receivable, officer 120,000
Property and equipment, net 292,777
Security deposits and other assets 339,968
----------
$6,745,279
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 552,858
Accrued expenses and other current liabilities 499,500
----------
Total liabilities, all current 1,052,358
----------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.002; 10,000,000 shares
authorized; 2,620,237 issued; 2,447,737 outstanding 5,240
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000
Paid-in capital 6,054,035
Retained earnings 358,271
----------
6,418,546
Less treasury stock, at cost (172,500 common shares) (725,625)
----------
5,692,921
$6,745,279
==========
The accompanying notes are an integral
part of the financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
Page 3f
STATEMENTS OF INCOME
Years ended
December 31,
---------------------------
1 9 9 6 1 9 9 5
----------- ---------
Net sales $16,377,529 $14,781,208
Cost of goods sold 10,190,916 9,885,611
----------- -----------
Gross profit 6,186,613 4,895,597
----------- -----------
Operating expenses:
Selling and shipping 3,089,749 2,255,884
General and administrative 1,723,258 1,473,381
Financial expenses, including interest
expense of $27,767; $255,964-1995 291,880 480,663
----------- -----------
5,104,887 4,209,928
----------- -----------
Income from operations 1,081,726 685,669
Other income 21,367 135,139
----------- -----------
Income before provision (recovery)
for income taxes 1,103,093 820,808
Provision (recovery) for income taxes 391,845 (24,271)
----------- -----------
Net income $ 711,248 $ 845,079
=========== ===========
Primary earnings per share $.26 $.37
==== ====
Fully diluted earnings per share $.26 $.34
==== ====
The accompanying notes are an integral
part of the financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
9% cumulative
convertible
preferred stock Common Stock
--------------- ------------
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 600,000 $150,000 1,296,875 $2,714
Initial public offering - - 640,000 1,280
Public offering costs - - - -
Issuance of Class A common stock
in exchange for common stock - - (112,500) -
Conversion of notes payable - - 19,062 38
Conversion of preferred stock (596,000) (149,000) 596,000 1,192
Net income, year ended December 31, 1995 - - - -
-------- -------- --------- ------
Balance, December 31, 1995 4,000 1,000 2,439,437 5,224
Stock options exercised - - 5,300 10
Redemption of preferred stock (1,000) (250) - -
Public offering costs - - - -
Conversion of preferred stock (3,000) (750) 3,000 6
Net income, year ended December 31, 1996 - - - -
-------- -------- --------- ------
Balance, December 31, 1996 - $ - 2,447,737 $5,240
======== ======== ========= ======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
Page 4f
<TABLE>
<CAPTION>
Class A Retained
Common Stock earnings Treasury Stock
-------------------- Paid-in (accumulated -----------------------
Shares Amount Capital Deficit) Shares Amount Total
------- ------ ---------- --------------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
- $ - $1,374,129 $(1,198,056) 60,000 $ (22,500) $ 306,287
- - 3,998,720 - - - 4,000,000
- - (314,980) - - - (314,980)
100,000 1,000 702,125 - 112,500 (703,125) -
- - 149,962 - - - 150,000
- - 147,808 - - - -
- - - 845,079 - - 845,079
------- ------ ---------- ----------- ------- --------- ----------
100,000 1,000 6,057,764 (352,977) 172,500 (725,625) 4,986,386
- - 1,977 - - - 1,987
- - (2,250) - - - (2,500)
- - (4,200) - - - (4,200)
- - 744 - - - -
- - - 711,248 - - 711,248
------- ------ ---------- ----------- ------- --------- ----------
100,000 $1,000 $6,054,035 $ 358,271 172,500 $(725,625) $5,692,921
======= ====== ========== =========== ======= ========= ==========
</TABLE>
<PAGE>
Page 5f
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------------
1 9 9 6 1 9 9 5
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 711,248 $ 845,079
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 54,191 30,459
Provision for bad debts 14,442 65,395
Deferred tax (benefit) expense 33,664 (63,664)
Loss on disposal of property and equipment 252 -
Changes in assets (increase) decrease:
Due from factor 391,226 (3,287,499)
Inventory (981,117) 79,572
Prepaid expenses and other current assets 26,770 18,679
Prepaid royalties 45,162 55,308
Other assets (249,418) (48,168)
Changes in liabilities increase (decrease):
Accounts payable and accrued expenses
and other current liabilities 313,829 (560,000)
---------- ----------
Net cash provided (used) by operating activities 360,249 (2,864,839)
---------- ----------
Cash flows used by investing activities:
Acquisition of property and equipment (206,639) (59,363)
---------- ----------
Cash flows from financing activities:
Proceeds from initial public offering - 4,000,000
Initial public offering costs (4,200) (174,905)
Repayment of convertible notes - (50,000)
Due to factor - (738,575)
Note receivable, officer (120,000) -
Redemption of preferred stock (2,500) -
Proceeds from stock options exercised 1,987 -
---------- ----------
Net cash provided (used) by financing activities (124,713) 3,036,520
---------- ----------
Net increase in cash and cash equivalents 28,897 112,318
Cash and cash equivalents, beginning of year 134,344 22,026
---------- ----------
Cash and cash equivalents, end of year $ 163,241 $ 134,344
========== ==========
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 27,767 $ 268,116
Income taxes 43,514 16,818
Supplemental disclosures of noncash financing activity:
Class A common stock issued in exchange for common stock $ - $ 703,125
Notes payable converted to common stock - 150,000
Preferred stock converted to common stock 750 149,000
</TABLE>
The accompanying notes are an integral
part of the financial statements.
<PAGE>
Page 6f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. Nature of business:
Active Apparel Group, Inc. (the "Company") is a distributor of licensed
women's and girls sportswear and activewear throughout the United States
and Canada and unisex activewear and accessories throughout the United
States and Canada.
2. Initial public offering:
On May 4, 1995, the Company completed an initial public offering of
640,000 shares of common stock at $6.25 per share. Proceeds to the
Company, after deducting initial public offering costs of $319,180, were
$3,680,820.
3. Significant accounting policies:
a. Inventory:
Inventory, consisting solely of finished goods, is stated at the
lower of cost (first-in, first-out basis) or market.
b. Property and equipment:
Property and equipment are stated at cost. Depreciation is
computed by the straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the
terms of the respective leases or estimated life of the assets,
whichever is shorter. Expenditures for maintenance and repairs are
charged to operations as incurred.
c. Cash and cash equivalents:
The Company maintains its cash and cash equivalents accounts at
various commercial banks. The cash balances are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000, at
each bank.
For purposes of the statements of cash flows, the Company
considers all short-term investments with an original maturity of
three months or less to be cash equivalents.
d. Fair value of financial instruments:
i. Cash and cash equivalents:
The carrying amounts reflected in the balance sheets for
cash and cash equivalents, none of which are held for
trading purposes, approximate the respective fair values
due to the short maturities of those instruments.
<PAGE>
Page 7f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
3. Significant accounting policies: (Continued)
d. Fair value of financial instruments: (Continued)
ii. Due from factor and accounts payable:
The carrying amounts of due from factor and accounts
payable approximates its fair values because of the short
maturities of these instruments.
e. Advertising expense:
The Company expenses advertising costs as they are incurred.
As of December 31, 1996 and 1995, the Company had incurred
advertising and promotions expense of $508,689 and $326,977,
respectively.
f. 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.
g. Accounting for stock based compensation:
The Company applies APB Opinion 25 in accounting for employee
stock option plans (note 10). Accordingly, no compensation cost
has been recognized in 1996 and 1995. Had compensation cost been
determined on the basis of FASB Statement 123, net income and
earnings per share would have been reduced as follows:
1 9 9 6 1 9 9 5
---------- --------
Net income:
As reported $711,248 $845,079
======== ========
Pro forma $662,470 $812,417
======== ========
Primary earnings per share:
As reported $ .26 $ .37
======== ========
Pro forma $ .25 $ .35
======== ========
Fully diluted earnings per share:
As reported $ .26 $ .34
======== ========
Pro forma $ .24 $ .33
======== ========
<PAGE>
Page 8f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
3. Significant accounting policies: (Continued)
g. Accounting for stock based compensation: (Continued)
The fair value of compensation was computed using an option-
pricing model which took into account the following factors as of
the grant date:
- the exercise price and expected life of the option
- the current price of the stock and its expected volatility
- expected dividends, if any
- the risk-free interest rate for the expected term of the option
using Treasury Note rates with a remaining term equal to the
expected life of the options
4. Due from factor:
Substantially all of the Company's accounts receivable are assigned
without recourse to a commercial factor. The amount due from the factor
represents net sales assigned in excess of advances received. The amount
due from the factor is net of a provision for future chargebacks of
$75,000 at December 31, 1996. Interest is charged at 1-1/2% above prime
on advances. This factoring arrangement is collateralized by the
Company's accounts receivable.
5. Property and equipment:
Furniture and fixtures $106,147
Machinery and equipment 271,855
Leasehold improvements 26,743
--------
404,745
Less accumulated depreciation
and amortization 111,968
--------
$292,777
========
6. Note receivable, officer:
The Company has a promissory note dated December 23, 1996 with the
President and Chief Executive Officer in the amount of $120,000. The
unpaid principal bears interest at prime plus 1-1/2%. The note is due on
or before July 31, 2000.
7. Notes payable converted:
The Company had issued $200,000 of unsecured convertible notes which
were due May 31, 1995 (with a 15 day grace period to June 15, 1995),
with interest at the prime rate plus 2% and were convertible into common
stock at the option of the noteholder.
<PAGE>
Page 9f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
7. Notes payable converted: (Continued)
As of June 30, 1995, $50,000 of principal and all accrued interest was
repaid to the noteholders. The remaining note holders exercised their
option to convert the outstanding amount of $150,000 to common stock.
The notes were converted to common stock based on its fair market value
for a specified period after a minimum of 100 days from the initial
public offering date (see note 2). The Company issued 19,062 shares in
connection with the conversion.
8. Commitments and contingencies:
a. License agreements:
Revenues are generated principally from the sale of licensed
merchandise. The Company is the licensee on four agreements which
provide for certain royalty payments and charges. Pursuant to two
of the agreements (with the same licensor), the Company is
required to pay a royalty of 6% of net sales, on licensed
merchandise sold in the U.S. and Canada, and to spend 2-1/2% of
annual net sales on advertising. The original agreements with this
licensor expired December 31, 1996. Effective January 1, 1997, the
agreements were amended to reflect a new expiration date of
December 31, 2002 with two five year renewal options, subject to
minimum sales requirements, available to the Company. The
agreements provide for minimum guaranteed payments annually.
Future minimum guaranteed payments are approximately as follows:
UNITED STATES CANADA
---------------------- ---------------------
ROYALTY ADVERTISING ROYALTY ADVERTISING
------- ----------- ------- -----------
Twelve months ending
December 31, 1997 $450,000 $187,500 $ 98,500 $41,000
1998 495,000 206,250 112,000 46,600
1999 540,000 225,000 125,400 52,200
2000 585,000 243,750 138,800 57,800
2001 630,000 262,500 152,200 63,400
2002 675,000 281,250 165,700 69,000
The amounts for Canada are presented in U.S. dollars assuming an
exchange rate of $.746. The Company is required to maintain a
standby letter of credit equal to the annual minimum royalties due
per the licensing agreements. The standby letter of credit
outstanding as of December 31, 1996 is $330,000, based on minimum
royalties due for 1996.
<PAGE>
Page 10f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
8. Commitments and contingencies: (Continued)
a. License agreements: (Continued)
The third license agreement expires September 30, 1998. It is
automatically extended for two years to September 30, 2000, if net
sales exceed $5,000,000 in contract year three (ending September
30, 1998). The license fee is 7% of net sales. The Company is
required to spend 2% of net sales on advertising. Pursuant to the
third amendment to the agreement, future minimum guaranteed
payments are as follows:
Twelve months ending December 31, 1997 $297,500
1998 262,500
The fourth license agreement is effective April 30, 1996 to
January 31, 1999. The Company has the option to renew the
agreement for an additional two years if net sales during the
initial term of the agreement exceeds $3.5 million. The Company is
required to pay a royalty of 8% of net sales on licensed
merchandise sold in the U.S. and Canada, and to spend 2% of annual
net sales on advertising. The agreement provides for minimum
guaranteed payments annually.
Future minimum guaranteed payments are as follows:
Twelve months ending December 31, 1997 $65,000
1998 65,000
1999 16,250
Royalty expense for the years ended December 31, 1996 and 1995 was
approximately $1,005,000 and $731,000, respectively.
b. Lease commitments:
The Company has four leases for office and showroom space, three
of which expire January 31, 2000 and the fourth expires April 30,
1997.
At December 31, 1996, future minimum rental payments required
under the noncancelable leases are approximately as follows:
Twelve months ending December 31, 1997 $172,000
1998 167,000
1999 167,000
2000 14,000
Rent expense for the years ended December 31, 1996 and 1995 was
approximately $213,000 and $224,000, respectively.
<PAGE>
Page 11f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
8. Commitments and contingencies: (Continued)
c. Employment agreements:
i. The Company has an employment agreement with its President
and Chief Executive Officer at an annual base salary of
$250,000 ($265,000 effective January 1, 1997) through the
term (as defined) of the agreement. The initial term of
the agreement expires on July 31, 2000 but continues
thereafter for additional one-year periods unless either
the President and Chief Executive Officer of the Company
or the Board of Directors gives the other ninety days
prior written notice of nonrenewal. At the discretion of
the Board of Directors, the Company may pay the President
and Chief Executive Officer a bonus on or before December
31, of any year during the term. On November 7, 1996,
25,000 options were granted to the President and Chief
Executive Officer by the Board of Directors pursuant to
the 1993 stock option plan (note 10)
The agreement also includes a noncompete clause for a
period of one year following its expiration or
termination.
ii. The Company has an employment agreement with a Director of
the Company, whereby the Company has agreed to employ her
as the Executive Vice-President at an annual compensation
of $125,000 ($140,000 effective January 1, 1997).
The agreement with the Executive Vice-President has
restrictive covenants similar to those of the President
and Chief Executive Officer.
iii. The Company executed an employment agreement with a Direc-
tor of the Company who is a brother of the President and
Chief Executive Officer whereby the Company has agreed to
employ him as Legal Counsel to the Company through August
31, 1997 with a total salary of $36,000. Effective January
1997, the Director is eligible to receive a grant of 3,200
stock options equal to the exercise price of options gran-
ted to non-employee members of the Board of Directors
(note 10). On August 9, 1996, the Board of Directors
approved the new employment agreement and granted the
Director an additional 4,000 stock options exercisable at
$14 for past services rendered through August 31, 1996.
All stock options were granted pursuant to the 1993
stock option plan (note 10).
<PAGE>
Page 12f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
8. Commitments and contingencies: (Continued)
d. Consultant agreement:
The Company entered into a consultant agreement with an individual
(the "Consultant") effective September 1, 1993 through December
31, 1996, to direct the Company to sell, distribute and market its
licensed products in Canada through its Canadian office. Pursuant
to a provision in the consulting agreement, the contract was
automatically renewed for a one year period at December 31, 1996.
Pursuant to the agreement, the Company pays the Consultant $60,000
a year plus business expenses and a commission in U.S. dollars
equal to the sum of 5% of the Company's Canadian net sales in
excess of $850,000 plus 5% of the Company's Canadian pre-tax
profit. Consulting expense for the years ended December 31, 1996
and 1995 was approximately $86,000 and $88,000, respectively.
9. Stockholders' equity:
The Company's Certificate of Incorporation, was amended by a vote of the
Company's stockholders on June 7, 1996 for the following:
a. To eliminate authorization for the issuance of 9% cumulative
redeemable convertible preferred stock, par value $.25.
As of December 31, 1996, 599,000 preferred shares had been
converted to common stock and the remaining 1,000 shares had been
redeemed at the Company's option. All the preferred shares were
canceled and stockholders who converted their preferred shares
relinquished their claim to accumulated and unpaid dividends on
the preferred stock.
b. Increase common stock, par value $.002 from 3,750,000 shares
authorized to 10,000,000 shares authorized.
The holder of the Class A common stock is entitled to five votes on all
matters upon which each holder of common stock is entitled to vote.
After the effective date of the initial public offering (see note 2),
the Board of Directors issued 100,000 shares of the Class A common stock
exclusively to the President and Chief Executive Officer in order to
permit him to maintain approximately the same voting power after the
initial public offering as held prior to the offering. In exchange for
the shares of Class A common stock issued to him, he surrendered 112,500
shares of common stock.
<PAGE>
Page 13f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
10. Stock options:
The Company has three stock option plans; the stock option plan, the
1993 stock option plan and the 1995 non-employee director stock option
plan. Pursuant to the stock option plan, grants were awarded in 1993 to
four individuals for services performed regarding the private offering
of preferred stock. These options are exercisable at $.375 for a term of
five years through September 30, 1998. Under the 1993 stock option plan,
a maximum of 443,900 shares may be granted by the Company. The option
price of shares designated as nonqualified shall be determined by the
Board of Directors each year for the following year at 85% of fair
market value and in the case of incentive stock options will be no less
than the fair market value of the shares on the date of the grant.
On October 6, 1995, the stockholders approved the 1995 non-employee
director stock option plan. The plan provides for automatic grants of
options to purchase 3,000 shares and thereafter yearly grants to
purchase 3,000 shares of common stock to each active director serving on
the Board at the time of the grant who is not an officer or employee of
the Company. The Director Plan provides additional grants of options to
non-employee directors of 100 shares to the Chairman of a committee and
200 shares to the Chairman and Secretary of the Board of Directors.
The exercise price for options granted is the fair market value of the
shares of common stock on the date of the grant. The term of each option
is seven years from the date of the grant.
Outstanding options pursuant to these three plans are summarized as
follows:
<TABLE>
<CAPTION>
S H A R E S
---------------------------
1995
1993 Non-employee
Stock stock director Option
option option stock option exercise
1996 plan plan plan total prices
---- ------ ------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Granted - 62,200 12,300 74,500 $12.50 - $14.75
Exercised 5,300 - - 5,300 $0.375
Outstanding at
December 31, 54,700 271,705 21,700 348,105 $0.375 - $14.75
====== ======= ====== =======
Exercisable at
December 31, 54,700 176,172 3,133 234,005 $0.375 - $11.75
====== ======= ====== =======
</TABLE>
<PAGE>
Page 14f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
10. Stock options: (Continued)
<TABLE>
<CAPTION>
S H A R E S
---------------------------------------
1995
1993 Non-employee
Stock stock director Option
option option stock option exercise
1995 plan plan plan Total prices
---- ------ ------ ------------ ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
January 1, 60,000 159,505 - 219,505 $0.375 - $ 6.25
Granted - 50,000 9,400 59,400 $11.75
Exercised - - - - -
Outstanding at
December 31, 60,000 209,505 9,400 278,905 $0.375 - $11.75
====== ======= ===== =======
Exercisable at
December 31, 60,000 84,505 - 144,505 $0.375 - $ 6.25
====== ====== ===== =======
</TABLE>
11. Other income:
Other income is comprised of the following items for the years ended
December 31, 1996 and 1995:
1 9 9 6 1 9 9 5
------- -------
Insurance claim on stolen merchandise $ - $ 94,924
Interest income 21,367 16,241
Other - 23,974
------- --------
$21,367 $135,139
======= ========
12. Income taxes:
For the years ended December 31, 1996 and 1995, the Company had a
provision for income taxes consisting of the following:
1 9 9 6 1 9 9 5
-------- -------
Current tax provision:
Federal $376,201 $289,000
State and local 127,782 93,393
Foreign 8,996 -
Utilization of net operating
loss carryforward (154,798) (343,000)
-------- --------
358,181 39,393
Deferred tax provision (recovery):
Federal 31,614 (54,114)
State and local 2,050 (9,550)
-------- --------
Income tax provision (recovery) $391,845 $(24,271)
======== ========
<PAGE>
Page 15f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
12. Income taxes: (Continued)
The difference between the statutory Federal income tax rate of 34% and
effective income tax rates of 36% and (3%) for the years ended December
31, 1996 and 1995, respectively is due to state and local income taxes,
net of applicable Federal tax benefits, temporary differences and
utilization of net operating loss carryforwards.
13. Major customers:
For the years ended December 31, 1996 and 1995, two customers accounted
for approximately 24% and 28% of sales.
14. Primary earnings per share:
Primary earnings per share amounts are computed based on the weighted
average number of shares actually outstanding plus the shares that would
be outstanding assuming the exercise of dilutive stock options, all of
which are considered to be common stock equivalents. The number of
shares that would be issued from the exercise of stock options has been
reduced by the number of shares that could have been purchased from the
proceeds at the average market price of the convertible preferred stock.
The number of shares used in the computation were 2,703,310 and
2,032,789 at December 31, 1996 and 1995, respectively.
15. Fully diluted earnings per share:
Fully diluted earnings per share amounts are based on an increased
number of shares that would be outstanding assuming conversion of
convertible preferred stock and convertible notes payable. For purposes
of the fully diluted computation, the number of shares that would be
issued from the exercise of stock options has been reduced by the number
of shares which could have been purchased from the proceeds at the
market price of the Company's stock on December 31, 1996 and 1995
because those prices were higher than the average market prices during
the period. Net income has been adjusted for dividends on convertible
preferred stock and interest expense on convertible debt. The number of
shares used in the computation of fully diluted earnings per share was
2,710,679 and 2,490,016 at December 31, 1996 and 1995, respectively.
Exhibit 10.36
THIRD AMENDMENT
THIS THIRD AMENDMENT, made as of this 7th day of January, 1997 by and
between CONVERSE INC., a corporation organized and existing under the laws of
the State of Delaware, having its principal place of business at One Fordham
Road, North Reading, Massachusetts 01864 (hereinafter called "Converse" or
"Licensor");
AND
ACTIVE APPAREL GROUP, INC., a corporation organized and existing under the laws
of the State of New York, having its principal place of business at 1350
Broadway, Suite 2300, New York, New York 10018 (hereinafter called "Licensee").
WITNESSETH
WHEREAS, the Licensor and the Licensee entered into a Trademark License
Agreement dated May 20, 1994, as amended on October 3, 1995 and June 1, 1996,
with respect to the license of certain of the Licensor's trademarks in the
United States (the "Agreement"); and
WHEREAS, Converse and Licensee desire to further amend the Agreement.
NOW THEREFORE, the parties agree as follows:
1. Paragraph 5.1(b) shall be revised to read as follows:
"(b) The Licensee will pay to Licensor a guaranteed minimum annual
license fee commencing May 20, 1994, regardless of its Net Sales of Finished
Articles sold under this Agreement for each Accounting Year commencing with the
year 1994 (the "Guaranteed Minimum Fee"), in the amount set forth herein:
<PAGE>
ACCOUNTING YEAR GUARANTEED MINIMUM LICENSE FEE
1 May 20, 1994 to September 30, 1996 $280,000
2 October 1, 1996 to September 30, 1997 $280,000.00
3 October 1, 1997 to September 30, 1998 $350,000.00"
2. As amended hereby, the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Third Amendment as
of the date first above written.
WITNESS: CONVERSE INC.
/s/ [ILLEGIBLE] By /s/ [ILLEGIBLE]
- --------------- ------------------------------
WITNESS: ACTIVE APPAREL GROUP, INC.
/s/ [ILLEGIBLE] By /s/ GEORGE HOROWITZ, PRESIDENT
- ----------------- ------------------------------
-2-
Exhibit 10.37
FOURTH AMENDMENT
THIS FOURTH AMENDMENT, made as of this 22nd day of January, 1997 by and
between CONVERSE INC., a corporation organized and existing under the laws of
the State of Delaware, having its principal place of business at One Fordham
Road, North Reading, Massachusetts 01864 (hereinafter called "Converse" or
"Licensor");
AND
ACTIVE APPAREL GROUP, INC., a corporation organized and existing under the laws
of the State of New York, having its principal place of business at 1350
Broadway, Suite 2300, New York, New York 10018 (hereinafter called "Licensee").
WITNESSETH
WHEREAS, the Licensor and the Licensee entered into a Trademark License
Agreement dated May 20, 1994, as amended on October 3, 1995 and June 1, 1996 and
January 7, 1997, with respect to the license of certain of the Licensor's
trademarks in the United States (the "Agreement"); and
WHEREAS, Converse and Licensee desire to further amend the Agreement.
NOW THEREFORE, the parties agree as follows:
1. Paragraph 6.2 shall be revised to read as follows:
"6.2 In the event that Licensee sells $5,000,000.00 of Finished
Articles in Account Year 3, this Agreement shall be automatically renewed for an
additional two (2) years. The Guaranteed Minimum License Fee for each of the
Accounting Years in such renewal period shall be the greater of (i) seventy-five
percent (75%) of the actual royalties payable for the prior Contract Year in
accordance with Article 5.1 hereof or (ii) an amount equal to the
<PAGE>
Guaranteed Minimum License Fee for the prior Contract Year plus ten percent
(10%) of such Guaranteed Minimum License Fee."
2. As amended hereby, the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Fourth Amendment as
of the date first above written.
/S/ [ILLEGIBLE] By /S/ [ILLEGIBLE]
- --------------- -- ---------------
WITNESS: ACTIVE APPAREL GROUP, INC.
/S/ RITA CINQUE By /S/ GEORGE HOROWITZ, PRESIDENT
- --------------- -- ------------------------------
-2-
Exhibit 10.38
July 23, 1996
Mr. Donald J Horowitz
3457 East Alder
Seattle, Washington 98122
Dear Don:
This letter sets forth the agreement pursuant to which you will provide
services as an employee of Active Apparel Group, Inc. ("AAG"), effective
September 1, 1996.
1. The term of this agreement is one year.
2. You will provide services as counsel and advisor to AAG solely
pursuant to the direction of the President and Chief Executive Officer.
3. As consideration for services performed pursuant to this agreement,
AAG will compensate you as follows:
(a) Pay you a salary of Thirty-six thousand dollars ($36,000) per
year, payable in equal payments made quarterly beginning at the end of the
fourth month of employment (by the 5th of the following month) unless a
different frequency of payment is agreed to.
(b) In January 1997 grant you options to purchase 3,200 shares of
the Company's common stock exercisable at an amount equal to the exercise price
of options granted to non-employee members of the Board of Directors for their
service for the year 1997, and for the same term as such directors' options.
4. In addition, AAG will reimburse you for reasonable expenses incurred
by you in performing your services, provided such expenses are evidenced by
appropriate documentation.
/S/DJH /S/GH
- ------ -----
DJH For AAG
<PAGE>
If the foregoing is acceptable to you, on both enclosed copies of
letter please initial page one where indicated, sign page two, and then mail one
copy to my attention at Active Apparel Group, Inc.
Sincerely,
/s/
----------------------
George Horowitz
CEO/President
Agreed to and Accepted
this 23rd day of July, 1996.
/S/
- -----------------------------
Donald J Horowitz
Employee
-2-
Exhibit 10.39
AMENDMENT OF EMPLOYMENT AGREEMENT
This AMENDMENT OF EMPLOYMENT AGREEMENT is dated as of August 9, 1996,
between Active Apparel Group, Inc., a Delaware corporation (the "Company"), and
George Horowitz (the
"Executive").
WITNESSETH
WHEREAS, the Company and the Executive entered into an Employment
Agreement dated August 1, 1994, and both the Company and the Executive now
desire to amend that Agreement;
NOW, Therefore, in consideration of the premises and other good and
valuable consideration received by both the Company and the Executive, the
sufficiency of which is hereby acknowledged, it is hereby agreed as follows:
1. Section 4(d) of the Employment Agreement between the Company and the
Executive dated August 1, 1994 is hereby amended to read as follows:
Section 4(d):
"The Executive shall be entitled to an allowance, payable monthly,
for an automobile commensurate with the Executive's position and
duties with the Company, which allowance shall include appropriate
insurance, and which allowance shall be reviewed by the Compensation
Committee of the Board of Directors.
2. Section 4(e) of the Agreement between the Company and the Executive
dated August 1, 1994 is hereby amended to read as follows:
Section 4(e):
"The Executive shall be entitled to reimbursement for garage parking
in New York City for one automobile, in such amount as is then
reasonably and customarily charged for monthly or annual parking in
the area of the Company's principal offices."
3. Except as hereinabove specifically modified, the Employment
Agreement between the Company and the Executive dated August 1, 1994 shall
remain in full force and effect as originally executed.
-1-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment of
Employment Agreement as of the date first written above.
ACTIVE APPAREL GROUP, INC. EXECUTIVE
By: /S/___________________ /S/_____________________
James K. Anderson George Horowitz
Vice Chairman of the Board
of Directors
Date: 8/12/96 Date: 8/20/96
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FOR 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 163,241
<SECURITIES> 0
<RECEIVABLES> 2,896,273
<ALLOWANCES> 0
<INVENTORY> 2,757,700
<CURRENT-ASSETS> 5,992,534
<PP&E> 404,745
<DEPRECIATION> 111,968
<TOTAL-ASSETS> 6,745,279
<CURRENT-LIABILITIES> 1,052,358
<BONDS> 0
0
0
<COMMON> 5,240
<OTHER-SE> 1,000
<TOTAL-LIABILITY-AND-EQUITY> 6,745,279
<SALES> 16,377,529
<TOTAL-REVENUES> 16,377,529
<CGS> 10,190,916
<TOTAL-COSTS> 10,190,916
<OTHER-EXPENSES> 5,104,887
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,767
<INCOME-PRETAX> 1,103,093
<INCOME-TAX> 391,845
<INCOME-CONTINUING> 1,103,093
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 711,248
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
