SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number: 0-25918
ACTIVE APPAREL GROUP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3672716
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1350 BROADWAY
SUITE 2300
NEW YORK, NY 10018
(Address of Principal Executive Offices)
(212) 239-0990
(Issuer's telephone number)
Not Applicable
(Former name, former address and former
fiscal year if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
The number of common equity shares outstanding as of August 13, 1998
was 2,494,081 shares of Common Stock, $.002 par value, and 100,000 shares of
Class A Common Stock, $.01 par value.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
Form 10-QSB
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets 3
Statements of Income 4
Statements of Changes in Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8-10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
- 2 -
<PAGE>
ACTIVE APPAREL GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1 9 9 8 1 9 9 7
----------- -----------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 141,891 $ 59,441
Refundable income taxes 43,500 153,500
Accounts receivable 191,218 130,097
Due from factor 2,947,095 1,656,283
Inventory 2,594,372 3,847,556
Prepaid royalties 26,250 52,746
Prepaid expenses and other current assets 309,589 168,130
Deferred tax asset 70,612 88,053
----------- -------------
Total current assets 6,324,527 6,155,806
Note receivable, officer 120,000 120,000
Property and equipment, net 380,534 406,692
Security deposits and other assets 426,573 261,341
----------- ------------
Total Assets $7,251,634 $6,943,839
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 932,963 $ 768,960
Accrued expenses and other current liabilities 179,165 199,574
----------- ------------
Total current liabilities 1,112,128 968,534
----------- ------------
Stockholders' equity:
Common stock, par value $.002; 10,000,000 shares
authorized; 2,666,581 issued, 2,494,081 outstanding
(1998); 2,641,875 issued, 2,469,375 outstanding (1997) 5,332 5,283
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000 1,000
Paid-in capital 6,136,342 6,124,891
Retained earnings 722,457 569,756
----------- -----------
6,865,131 6,700,930
Less treasury stock, at cost (172,500 common shares) (725,625) (725,625)
----------- -----------
Total Stockholders' Equity 6,139,506 5,975,305
----------- ----------
Total Liabilities and Stockholders' Equity $7,251,634 $6,943,839
========== ==========
</TABLE>
-3-
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
----------- ----------- ------------ -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $8,287,856 $8,002,699 $4,026,996 $3,981,678
Cost of goods sold 5,118,156 4,842,665 2,478,300 2,445,364
--------- --------- --------- ---------
Gross profit 3,169,700 3,160,034 1,548,696 1,536,314
--------- --------- --------- ---------
Operating expenses:
Selling and shipping 1,752,166 1,583,992 904,777 804,366
General and administrative 983,694 935,558 496,076 437,307
Financial expenses, including interest
expense of $74,533 and $40,180 for
the six months ended June 30, 1998 and
1997 186,935 180,777 85,649 94,043
---------- ---------- ---------- ----------
2,922,795 2,700,327 1,486,502 1,335,716
---------- --------- --------- ---------
Income before provision for income taxes 246,905 459,707 62,194 200,598
Provision for income taxes 94,204 195,868 21,269 85,949
---------- ---------- ---------- ----------
Net income $ 152,701 $ 263,839 $ 40,925 $ 114,649
=========== =========== ========== ==========
Basic and diluted earnings per share $.06 $.10 $.02 $.04
==== ==== ==== ====
</TABLE>
See accompanying notes to financial statements.
- 4 -
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT PAID IN CAPITAL RETAINED EARNINGS
------ ------ ------ ------ --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 2,447,737 $5,240 100,000 $1,000 $6,054,035 $358,271
Stock options exercised 21,638 43 - - 70,856 -
Net income - six months
ended June 30, 1997 - - - - 263,839
--------- ------ ------- ------ ---------- --------
Balance June 30, 1997 2,469,375 $5,283 100,000 $1,000 $6,124,891 $622,110
========= ====== ======= ====== ========== ========
Balance, December 31, 1997 2,469,375 $5,283 100,000 $1,000 $6,124,891 $569,756
Stock options exercised 24,706 49 - - 11,451 -
Net income - six months - - - - - 152,701
ended June 30, 1998
--------- ------ ------- ------ ---------- --------
Balance, June 30, 1998 2,494,081 $5,332 100,000 $1,000 $6,136,342 $722,457
========= ====== ======= ====== ========== ========
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
SHARES AMOUNT TOTAL
------ ------ -----
<S> <C> <C> <C>
Balance, December 31, 1996 172,500 $(725,625) $5,692,921
Stock options exercised - - 70,899
Net income - six months
ended June 30, 1997 - - 263,839
-------- --------- ----------
Balance June 30, 1997 172,500 $(725,625) $6,027,659
======= ========== ==========
Balance, December 31, 1997 172,500 $(725,625) $5,975,305
Stock options exercised - - 11,500
Net income - six months - - 152,701
ended June 30, 1998
-------- --------- ----------
Balance, June 30, 1998 172,500 $(725,625) $6,139,506
======= ========== ==========
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1 9 9 8 1 9 9 7
--------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $152,701 $ 263,839
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 60,962 56,539
Amortization 3,254 -
Changes in assets (increase) decrease:
Refundable income taxes 110,000 -
Accounts receivable (61,121) (22,276)
Due from factor (1,290,812) 1,417,275
Inventory 1,253,184 (1,217,979)
Prepaid expenses and other current assets (141,459) (190,651)
Prepaid royalties 26,496 16,250
Deferred tax asset 17,441 -
Security deposits and other assets (168,486) (134,909)
Changes in liabilities increase (decrease):
Accrued expenses and other current liabilities (20,409) (290,218)
Accounts payable 164,003 212,034
------- ----------
Net cash provided by operating activities 105,754 109,904
------- ----------
Cash flows used by investing activities:
Acquisition of property and equipment (34,804) (133,757)
-------- ----------
Cash flows from financing activities:
Proceeds from stock options exercised 11,500 70,899
-------- ----------
Net increase (decrease) in cash and cash equivalents 82,450 47,046
Cash and cash equivalents, beginning of period 59,441 163,241
-------- ----------
Cash and cash equivalents, end of period $141,891 $ 210,287
======== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 74,533 $ 40,180
Income taxes 31,804 505,192
</TABLE>
See accompanying notes to financial statements.
- 6 -
<PAGE>
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
1. The Company and basis of presentation:
The financial statements presented herein as of June 30, 1998 and for
the six months and the three months ended June 30, 1998 and 1997 are
unaudited and, in the opinion of management, include all adjustments
(consisting only of normal and recurring adjustments) necessary for a
fair presentation of financial position and results of operations. Such
financial statements do not include all of the information and footnote
disclosures normally included in audited financial statements prepared
in accordance with generally accepted accounting principles. The
accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB. The results of
operations for the six and three month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for any
other interim period or the full year ending December 31, 1998.
2. Earnings per share:
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding during the period.
Diluted earnings per share amounts are based on an increased number of
shares that would be outstanding assuming conversion of convertible
preferred stock and the exercise of dilutive stock options. For
purposes of the 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 average market price of the Company's stock on June 30, 1998 and
1997.
The number of shares used in the computation of basic earnings per
share was 2,590,395 and 2,558,714 at June 30, 1998 and 1997
respectively. The number of shares used in the computation of diluted
earnings per share was 2,620,933 and 2,678,483 at June 30, 1998 and
1997 respectively.
- 7 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-QSB 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, sportswear, swimwear 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.
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
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
Net sales increased to $4,026,996 for the three months ended June 30,
1998 from $3,981,678 for the three months ended June 30, 1997, an increase of
$45,318, or 1.1%. This increase in sales was principally attributable to
increased sales volume of the Company's products through continued market
penetration.
Gross profit increased to $1,548,696 for the three months ended June
30, 1998 from $1,536,314 for the three months ended June 30, 1997, an increase
of $12,382, or .8%. Gross profit decreased as a percentage of net sales to 38.5%
from 38.6%.
Selling and shipping expenses increased to $904,777 for the three
months ended June 30, 1998 from $804,366 for the three months ended June 30,
1997, an increase of $100,411 or 12.5%. Selling and shipping expenses as a
percentage of net sales increased to 22.5% from 20.2%. The increase as a
percentage of net sales was primarily attributable to an increase in advertising
and promotions to facilitate the Company's continued and anticipated growth, and
an increase in sales, shipping, and design salaries.
General and administrative expenses increased to $496,076 for the three
months ended June 30, 1998 from $437,307 for the three months ended June 30,
1997, an increase of $58,769, or 13.4%. General and administrative expenses as a
percentage of net sales increased to 12.3% from 11.0%. The increase was
primarily attributable to an increase in Company employee salaries and outside
consulting fees.
Financial expenses decreased to $85,649 for the three months ended June
30, 1998 from $94,043 for the three months ended June 30, 1997, a decrease of
$8,394, or 8.9%. The decrease was primarily attributable to a decrease in
interest expense. Such decrease was due to the reduction in the Company's net
borrowings from the factor for the three months ended June 30, 1998 versus the
comparable period in 1997.
Operating income decreased to $62,194 for the three months ended June
30, 1998 from $200,598 for the three months ended June 30, 1997, a decrease of
$138,404, or 69.0%, for the reasons stated in the preceding paragraphs.
Operating income as a percentage of net sales was 1.5% for the three months
ended June 30, 1998 as compared to 5.0% for the three months ended June 30,
1997.
- 8 -
<PAGE>
The Company incurred a tax provision of $21,269 for the three months
ended June 30, 1998 as compared to $85,949 for the three months ended June 30,
1997, a decrease of $64,680.
The Company had net income of $40,925 for the three months ended June
30, 1998 as compared to $114,649 for the three months ended June 30, 1997, a
decrease of $73,724, or 64.3%, for the reasons stated in the preceding
paragraphs.
SIX MONTHS JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales increased to $8,287,856 for the six months ended June 30,
1998 from $8,002,699 for the six months ended June 30, 1997, an increase of
$285,157, or 3.6%. This increase was principally attributable to increased sales
volume of the Company's products through continued market penetration,
acceptance of the Company's products and increased orders from established
accounts.
Gross profit increased to $3,169,700 for the six months ended June 30,
1998 from $3,160,034 for the six months ended June 30, 1997, an increase of
$9,666, or .3%. Gross profit decreased as a percentage of net sales to 38.2%
from 39.5%. The decrease as a percentage of net sales was primarily due to the
company's efforts in reducing inventory levels.
Selling and shipping expenses increased to $1,752,166 for the six
months ended June 30, 1998 from $1,583,992 for the six months ended June 30,
1997, an increase of $168,174, or 10.6%. Selling and shipping expenses as a
percentage of net sales increased to 21.1% from 19.8%. The increase as a
percentage of net sales was primarily attributable to an increase in advertising
and promotions to facilitate the Company's continued and anticipated growth, and
an increase in sales, shipping, and design salaries.
General and administrative expenses increased to $983,694 for the six
months ended June 30, 1998 from $935,558 for the six months ended June 30, 1997,
an increase of $48,136, or 5.1%. General and administrative expenses as a
percentage of net sales increased to 11.9% from 11.7%. The increase was
primarily attributable to an increase in Company employee salaries and outside
consulting fees.
Financial expenses increased to $186,934 for the six months ended June
30, 1998 from $180,777 for the six months ended June 30, 1997, an increase of
$6,157, or 3.4%. The increase was attributable to the increase in the Company's
net borrowings for the six months ended June 30, 1998 versus the comparable
period in 1997.
Operating income decreased to $246,905 for the six months ended June
30, 1998 from $459,707 for the six months ended June 30, 1997, a decrease of
$212,802, or 46.3%, for the reasons stated in the preceding paragraphs.
Operating income as a percentage of net sales was 3.0% for the six months ended
June 30, 1998 as compared to 5.7% for the six months ended June 30, 1997.
The Company incurred a tax provision of $94,204 for the six months
ended June 30, 1998 as compared to $195,868 for the six months ended June 30,
1997, a decrease of $101,664, or 51.9%.
The Company had net income of $152,701 for the six months ended June
30, 1998 as compared to $263,839 for the six months ended June 30, 1997, a
decrease of $111,138, or 42.1%, for the reasons stated in the preceding
paragraphs.
- 9 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June
30, 1998 was $105,754 compared to $109,904 for the six months ended June 30,
1997. This decrease was primarily attributable to a decrease in operating
income. Net cash used for investing activities for the six months ended June 30,
1998 was $34,804 compared to $133,757 for the six months ended June 30, 1997.
The decrease was attributable to the significant investment in the technological
infrastructure of the Company in 1997. Net cash provided by financing activities
was $11,500 for the six months ended June 30, 1998 compared to $70,899 for the
six months ended June 30, 1997. The decrease was primarily attributable to a
decrease in the proceeds from the exercise of stock options.
During the six months ended June 30, 1998, the Company's primary need
for funds was to finance working capital 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 June 30, 1998, working capital was $5,212,399
compared to $5,187,272 at June 30, 1997 an increase of $25,127.
Due from factor represents the amount owed to the Company for factored
receivables less the amount of outstanding advances made by Century Business
Credit Corporation to the Company under a credit agreement (the "Century
Agreement"). At June 30, 1998 due from factor was $2,947,095 as compared to
$1,656,283 at June 30, 1997. This increase is primarily a result of less factor
borrowings being required due to a lowering of inventory. The Company's
inventory decreased to $2,594,372 at June 30, 1998 as compared to $3,847,556 at
June 30, 1997 due to the application of better management controls and automated
systems. The Company had in-house receivables of $191,218 at June 30, 1998 as
compared to $130,097 at June 30, 1997. This increase is due to certain
receivables not assigned to Century.
Management anticipates it will retain a net receivable position under
the Century Agreement, although no assurance to that effect can be given.
Positive cash flow, if it occurs, will provide for a further reduction in
advances, and excess working capital will be sufficient to fund the Company's
anticipated growth through 1998.
- 10 -
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On June 5, 1998, the Company held its Annual Meeting of stockholders,
whereby the stockholders elected Directors and approved a proposal to ratify the
appointment of Berenson & Company, LLP as the Company's independent auditors for
the fiscal year ending December 31, 1998. The vote on such matters was as
follows:
1. ELECTION OF DIRECTORS:
FOR AGAINST
--- -------
George Horowitz 2,584,496 36,445
Rita Cinque 2,585,036 35,905
James Anderson 2,589,036 31,905
Edward Epstein 2,588,736 32,205
Angelo Giusti 2,584,936 36,005
Larry Kring 2,589,336 31,605
2. RATIFICATION OF APPOINTMENT OF AUDITORS: To ratify the appointment of
Berenson & Company, LLP as the Company's auditors for the fiscal year ending
December 31,1998.
FOR AGAINST ABSTAIN
--------- ------- -------
2,592,837 20,105 7,999
Item 5. Other information
Pursuant to recent amendments to the proxy rules under the Securities
Exchange Act of 1934, as amended, the Company's stockholders are notified that
the deadline for providing the Company timely notice of any stockholder proposal
to be submitted outside of the Rule 14a-8 process for consideration at the
Company's 1999 Annual Meeting of Stockholders (the "Annual Meeting") will be
March 14, 1999. As to all such matters which the Company does not have notice on
or prior to March 14, 1999, discretionary authority shall be granted to the
designated persons in the company's proxy statement for the Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
- 11 -
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTIVE APPAREL GROUP, INC.
Date: AUGUST 13, 1998 By: /S/ GEORGE Q. HOROWITZ
----------------- -----------------------
George Q. Horowitz
Chief Executive Officer, President,
Treasurer and Director
Signing on behalf of the
registrant and as Chief
Financial Officer
- 12 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-QSB for the quarter ended June 30, 1998 and is qualified in
its entirety by reference to such Financial Statements and Notes, thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 141,891
<SECURITIES> 0
<RECEIVABLES> 3,138,313
<ALLOWANCES> 0
<INVENTORY> 2,594,372
<CURRENT-ASSETS> 6,324,527
<PP&E> 663,306
<DEPRECIATION> 282,772
<TOTAL-ASSETS> 7,251,634
<CURRENT-LIABILITIES> 1,112,128
<BONDS> 0
0
0
<COMMON> 5,332
<OTHER-SE> 1,000
<TOTAL-LIABILITY-AND-EQUITY> 7,251,634
<SALES> 8,287,856
<TOTAL-REVENUES> 8,287,856
<CGS> 5,118,156
<TOTAL-COSTS> 5,118,156
<OTHER-EXPENSES> 2,922,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,533
<INCOME-PRETAX> 246,906
<INCOME-TAX> 94,204
<INCOME-CONTINUING> 246,906
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,701
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
