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, 1997
/ / 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 (IRS Employer Identification No.)
of 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
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: $16,687,271
On March 27, 1998 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $5,037,000 based upon the
average of the highest and lowest bid quotations for such Common Stock as
obtained from the Nasdaq National Market on March 27, 1998.
The number of shares outstanding on March 27, 1998 was 2,469,375 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 ............................................21
Item 12 Certain Relationships and Related Transactions..................23
Item 13 Exhibits and Reports on Form 8-K................................24
Signatures...................................................................28
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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, sportswear and as of May 1, 1997, swimwear and coverups
featuring the widely-recognized Everlast(R) 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 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 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:
o emphasizing the Company's products by establishing balanced and
diversified collections with various products, styles and price ranges.
o maintaining a focused advertising and marketing program that seeks to
maximize the visibility of the Company's products.
o 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, sportswear and as of May 1,
1997, swimwear and coverups under the Everlast trademark and logo. Since 1910,
Everlast has gained wide recognition in professional and amateur boxing. The
Company believes that the Everlast 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 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 and Converse All Star 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 girl's activewear and accessories under the "MTV's THE GRIND" 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", "THE GRIND WORKOUT! FITNESS WITH FLAVA" and "THE GRIND WORKOUT!
STRENGTH AND FITNESS. The Company understands that all three videos are platinum
sellers and are consistently among the top three sellers on the Billboard
exercise video charts. Presently, "THE GRIND WORKOUT! FAT BURNING GROOVES"
exercise video features products from the Company's GRIND Collection.
Additionally, a forthcoming "GRIND" exercise video expected to be released in
the fall of 1998 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, rave pants, boy shorts and bra tops
that are fashion forward yet performance driven. The collection is designed to
feature The GRIND 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 trademark in connection with the manufacture, advertisement and
promotion, packaging, sale and distribution of women's activewear, sportswear,
swimwear and coverups 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 trademark on products other than women's
activewear, sportswear, swimwear and coverups 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 $.69) 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 CN$3,500,000 (assuming an exchange
ratio of $.69) 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 (including
swimwear sales) are $450,000 and $555,000 for 1997 and 1998 ($98,500 and
$112,000 with respect to sales in Canada), respectively. The minimum annual
advertising expenditures required under the Everlast License for sales in the
United States (including swimwear sales) are $187,500 and $231,250 for 1997 and
1998 ($41,000 and $46,600 with respect to sales in Canada), respectively. (The
foregoing amounts in US dollars assume an exchange ratio of $.69). 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 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 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 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,
decreasing to $210,000 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 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 ("MTVN") 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" and/or
"THE GRIND" 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 MTVN's 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" and/or "THE GRIND" 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 royalty payment would equal $320,000. The Company is also
required to make advertising expenditures of at least 2% of net sales.
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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 Sportstyle, Women's Wear Daily, Sporting Goods
Business and Conde'Nast Sports For Women), 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 "The 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
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contractors for the manufacture of all such products. Since mid-1993,
approximately 75% of the 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, tee 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, 1996, the Company's inventory was $2,757,700 on net sales
during the year ended December 31, 1996 (Fiscal 1996) of $16,377,529, with a
backlog of orders for future delivery of $3,117,892. At December 31, 1997, the
Company's inventory was $3,847,556 on net sales during the year ended December
31, 1997 (Fiscal 1997) of $16,687,271 with a backlog of orders for future
delivery of $3,290,333. 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 "just-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, 1997, the Company's backlog of unfilled orders was
$3,290,333 as compared to $3,117,892 as of December 31, 1996. 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
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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.
The Company began a Year 2000 compliance project in June of 1995 and
currently is Year 2000 compliant. The project encompassed upgrading the server
and all proprietary software and non-proprietary software. The project was
completed September 1997.
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 and MTV Products, Canada. The Company's
products are sold by retailers such as J.C. Penney, Sears, Burdines,
Bloomingdale's, 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, Sears-Canada and Genesis
Direct. In Canada, the Company's products are sold by such retailers as The Bay,
Sears-Canada, Superstar Group and Champs. For the year ended December 31, 1996,
two customers accounted for approximately 24% of sales, and for the year ended
December 31, 1997 four customers accounted for approximately 47% 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 1996, foreign sales accounted for 7.7% of the Company's net
sales, all of which were in Canada, and during Fiscal 1997, foreign sales
accounted for 8.0% 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, although no assurance can be given that such
levels can be sustained. In addition to returns, customers deduct chargebacks
from the purchase price with or without the Company's consent. Chargebacks have
an adverse effect on the Company's business and results of operations since
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they reduce overall gross profit margins on sales of the Company's products. The
Company experienced chargeback levels of approximately 4.1% during 1997, which
is consistent with the industry norms of 3% to 5%. In 1996, the Company
experienced chargeback levels of approximately 3.3%. No assurance can be given
that such levels can be maintained.
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 and MTV 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
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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 1996, net sales from operations in Canada aggregated U.S.
$1,273,286, and during Fiscal 1997 such net sales aggregated U.S. $1,328,319.
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 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 10, 1998, 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 provided an annual base rent of $98,529 through January 31, 1997,
and for an annual base rent of $93,672 which started February 1, 1997 and
expires 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 2000.
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
The Company is not a party to any material litigation. No legal proceedings
were terminated during the fiscal year ended December 31, 1997.
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 1997.
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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.
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 15 3/4 14 3/4
2nd Quarter 15 3/4 8 7/8
3rd Quarter 6 1/4 3 5/8
4th Quarter 4 1/8 2 1/16
1998
High Low
---- ---
1st Quarter(1) 3 1/2 2 3/8
(1) Through March 20, 1998.
HOLDERS
As of March 20, 1998 there were 106 record holders of the Company's
Common Stock 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 600
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,
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
YEAR END 1997 COMPARED TO YEAR END 1996
Net sales increased to $16,687,271 for the year ended December 31, 1997
from $16,377,529 for the year ended December 31, 1996, an increase of $309,742
or 1.9%. 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.
Gross profit increased to $6,355,284 for the year ended December 31,
1997 from $6,186,613 for the year ended December 31, 1996, an increase of
$168,671 or 2.7%. Gross profit was virtually the same percentage of net sales
during each period.
Selling and shipping expenses increased to $3,743,862 for the year ended
December 31, 1997 from $3,089,749 for the year ended December 31, 1996, an
increase of $654,113 or 21.2%. Selling and shipping expenses as a percentage of
net sales increased to 22.4% from 18.9%. This increase was attributable to
greater advertising and promotional expenses, as well as increased minimum
royalties on one of the company's licensing arrangements. Management believes
its marketing efforts have helped create stronger brand awareness, increased
market penetration of its products, and accelerated the acceptance of new
products being introduced.
General and administrative expenses increased to $1,819,992 for the year
ended December 31, 1997 from $1,723,258 for the year ended December 31, 1996, an
increase of $96,734 or 5.6%. General and administrative expenses as a percentage
of net sales increased to 10.9% from 10.5%. The increase was primarily
attributable to depreciation on new information systems and increased insurance
costs.
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Financial expenses increased to $456,983 for the year ended December 31,
1997 from $291,880 for the year ended December 31, 1996, an increase of $165,106
or 56.6%. This increase was primarily attributable to the increase in the
Company's net borrowings from its factor for the year ended December 31, 1997
versus the year ended December 31, 1996. Of the total financial expenses,
interest expense increased to $171,318 for the year ended December 31, 1997 from
$27,767 for the year ended December 31, 1996. Such increase reflects the
increased level of borrowings to support higher inventory levels.
Operating income decreased to $334,447 for the year ended December 31,
1997 from $1,081,726 for the year ended December 31, 1996, a decrease of
$747,279 or 69.1% for the reasons stated above. Operating income as a percentage
of net sales was 2.0% for the year ended December 31, 1997 as compared to 6.6%
for the year ended December 31, 1996.
The Company earned $9,613 in other income for the year ended December
31, 1997 compared to $21,367 for the year ended December 31, 1996, a decrease of
$11,754.
The Company incurred a tax provision of $132,575 for the year ended
December 31, 1997 as compared to a tax provision of $391,845 for the year ended
December 31, 1996. This income tax reduction is in proportion to the decline in
the Company's income.
The Company thus had net income of $211,485 for the year ended December
31, 1997 as compared to $711,248 for the year ended December 31, 1996, a
decrease of $499,763 or 70.3%.
1998 OUTLOOK
The retail environment, as it relates to women's active apparel, in the
United States and Canada continues to be quite difficult. 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.
Management will continue its practice of reviewing on an ongoing basis, its
brands and the product mix of these brands.
1998 will include the launching of the Company's new swimwear line and
the Company expects further market penetration and growth in the Everlast brand.
Additionally a new independent representative sales team has been
assembled throughout the country, and a new vice president of sales with 15
years of industry experience has been hired to manage them. We believe this will
increase our penetration to the retailers, particularly specialty stores,
nationwide.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended December
31, 1997 was $49,058 compared to $360,249 for the year ended December 31, 1996.
This decrease was primarily attributable to a decrease in net income and prepaid
expenses which were partially offset by a decrease in funds held at the factor
at December 31, 1997. Net cash used for investing activities for the year ended
December 31, 1997 was $223,757 compared to $326,639 for the year ended December
31, 1996. Net cash provided by (used for) financing activities was $70,899 for
the year ended December 31, 1997 compared to ($4,713) for the year ended
December 31, 1996. This increase was primarily attributable to proceeds from
stock options exercised.
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During the year ended December 31, 1997, 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, 1997, working capital
was $5,187,272 compared to $4,940,176 at December 31, 1996, an increase of
$247,096. This increase was primarily attributable to the Company's net income
for the year ended December 31, 1997.
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, 1997 due from factor was
$1,656,283 as compared to $2,896,273 at December 31, 1996. The Company's
inventory increased 39.5% to $3,847,556 at December 31, 1997 from $2,757,700 at
December 31, 1996.
1998 Outlook
Management anticipates it will retain a net receivable position under
the Century Facility, its factoring arrangement, although no assurance to that
effect can be given. Positive cash flow, if it occurs, will provide for a
reduction in net borrowings, thereby creating working capital 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
None.
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 47 President; Chief Executive Officer; Chairman of
the Board; Treasurer; Director(1)
James Anderson 61 Vice Chairman of the Board; Director(1)(2)
Rita Cinque 32 Executive Vice President; Secretary of the
Company; Director(3)
Larry Kring 57 Director(2)(3)
Edward Epstein 58 Director(2)(3)
Angelo Giusti 47 Director(2)
(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. ("Golden 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. 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. Since July 1987 he has been 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.
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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.
Since August 1993, Mr. Kring has been a Group 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 30 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. He has been
Vice President of Operations at the Company since June 1997. From 1984 until
June 1997, 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 he 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) Beneficial Ownership Reporting Compliance. Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's
directors and executive officers, and persons who beneficially own more than ten
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") reports of ownership of Common Stock and other equity
securities of the Company. Officers, directors and more 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, 1997 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, and on February 16, 1998
each of James Anderson, Rita Cinque, Edward Epstein, Angelo Giusti and George
Horowitz filed Form 5s relating to the aquisition by each of such persons of
2,000, 1,000, 1,000, 1,000 and 2,000 shares, respectively, of Common Stock on
December 17, 1997.
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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 1997, 1996, and 1995.
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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>
George Horowitz(1) 1997 265,000 18,000 17,257(3) 595(6)
(President; Chief Executive Officer; 1996 250,000 24,000(2) 18,635(4) 560(6)
Treasurer) 1995 165,000 15,000 20,336(5) 469(6)
Rita Cinque(1) 1997 140,000 12,000 9,565(7) 0
(Executive Vice President; Secretary) 1996 125,000 16,000(2) 12,155(8) 0
1995 98,077 10,000 11,364(9) 0
</TABLE>
(1) Other than George Horowitz and Rita Cinque no officer of the Company
was paid more than $100,000 in total salary and bonus for Fiscal 1997,
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 $17,257 paid to or on behalf of Mr.
Horowitz by the Company in Fiscal 1997 in connection with automobile
lease installment payments ($13,660), related insurance premiums
($1,088) and parking expenses ($2,509).
(4) 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).
(5) 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).
(6) Represents premiums paid by the Company in Fiscal 1997, 1996 and 1995
on term life insurance policies for the benefit of Mr. Horowitz.
(7) Consists of an aggregate of $9,565 paid to or on behalf of Ms. Cinque
by the Company in Fiscal 1997 in connection with automobile lease
installment payments ($5,601), related insurance premiums ($1,846) and
parking expenses ($2118).
(8) 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).
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(9) 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).
LONG-TERM INCENTIVE AND PENSION PLANS
The Company currently has no long-term incentive or defined pension
plans. The Company is the beneficiary of "key-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
There were no option grants to the Named Executive Officers during the
year ended December 31, 1997.
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 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
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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 "for 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 expired on July 31, 1997 but was renewed for
additional one-year periods unless either Ms. Cinque 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 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.
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<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 10, 1998 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:
<TABLE>
<CAPTION>
Beneficial Ownership
Common, and
Class A Common (1)
NAME AND ADDRESS OF PERCENTAGE OF
BENEFICIAL OWNER NUMBER (2) OUTSTANDING STOCK
---------- -----------------
<S> <C> <C>
George Q. Horowitz 606,961(3) 23.4%
c/o Active Apparel Group, Inc.
1350 Broadway, Suite 2300
New York, NY 10018
Donald J. Horowitz 259,792(4) 9.8%
2000 43rd Avenue East
No. 503
Seattle, WA 98112
James K. Anderson 165,008(5) 6.3%
4903 163rd Ave., N.E.
Redmond, WA 98052
Rita Cinque 95,200(6) 3.7%
c/o Active Apparel Group, Inc.
1350 Broadway, Suite 2300
New York, NY 10018
Larry Kring 29,037(7) 1.1%
3265 126th Ave., N.E.
Bellevue, WA 98005
Edward R. Epstein 4,000(8) *
915 Middle River Drive
Suite 419
Fort Lauderdale, FL 33304
Angelo Giusti 3,400(9) *
19 Deer Park
Holmdel, NJ 07733
All directors and 902,606(3)(5) 33.7%
executive officers as a group (6 persons) (6)(7)(8)(9)
</TABLE>
(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.
21
<PAGE>
(2) As of March 10, 1998, there were outstanding 2,469,375 shares of Common
Stock and 100,000 shares of 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. Thus, while there
are 2,569,375 total shares outstanding (not including any unexercised
options) this represents 2,969,375 votes.
(3) Consists of (i) 481,628 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 and (iii) 25,333 shares of Common Stock
issuable upon exercise of options exercisable currently or within 60
days, including (A) options to purchase 2,000 shares at an exercise price
of $6.25 per share granted by Donald Horowitz, George Horowitz=s brother,
which expire on December 31, 1999, and (B) options to purchase 10,000
shares granted by the Company at the exercise price of 11.75 per share,
which expire on November 3, 2005, and (C) options to purchase 8,333
shares at an exercise price $ 14.25 per share, which expire on November
7, 2006.
(4) Consists of (i) 204,756 shares of Common Stock, of which Mr. Horowitz
owns 39,400 shares of Common Stock with his wife, as joint tenants, and
(ii) 55,036 shares of Common Stock, issuable upon the exercise of options
exercisable currently or within 60 days, including (A) options to
purchase 839 shares of Common Stock at an exercise price of $ 1.75 per
share, which expire on December 31, 2004, (B) options to purchase 839
shares of Common Stock at an exercise price of $3.00 per share, which
expire on December 31, 2004, (C) options to purchase 839 shares of Common
Stock at an exercise price of $5.00 per share, which expire on December
31, 2004, (D) options to purchase 8,725 shares of Common Stock at an
exercise price of $3.30 per share, which expire on June 30, 1999, (E)
options to purchase 1060 shares of Common Stock at an exercise price of
$5.50 per share, which expire on December 31, 1999, (F) options to
purchase 30,000 shares of Common Stock at an exercise price of $6.25 and
(G) options to purchase 12,734 shares of Common Stock at an exercise
price of $5.43 per share, which expire on August 15, 2007. Of the 39,400
shares of Common Stock owned by Mr. and Mrs. Horowitz, as joint tenants,
22,500 shares are subject to options granted to the children of Mr. and
Mrs. Horowitz, at an exercise price of $6.25 per share, which expire on
December 31, 1999 and 2,000 shares are subject to options granted to
George Horowitz, the brother of Mr. Horowitz and the Company's President
and Chief Executive Officer, at an exercise price of $6.25 per share,
which expire on December 31, 1999.
(5) Consists of (i) 106,350 shares of Common Stock of which Mr. Anderson owns
100,000 shares of Common Stock with his wife, as joint tenants, and (ii)
58,658 shares of Common Stock issuable upon exercise of options
excercisable currently or within 60 days, including
(A) 839 shares @ $ 1.75 expires December 31, 2004
(B) 839 shares @ $ 3.00 expires December 31, 2004
(C) 839 shares @ $ 5.00 expires December 31, 2004
(D) 839 shares @ $ 6.25 expires December 31, 2004
(E) 4,706 shares @ $ .85 expires December 31, 2003
(F) 28,400 shares @ $ .375 expires June 30, 1998
(G) 11,630 shares @ $ 3.30 expires June 30, 1999
(H) 4,200 shares @ $ 5.50 expires December 31, 1999
(I) 3,200 shares @ $ 11.75 expires November 3, 2002
(J) 2,133 shares @ $ 12.50 expires January 2, 2003
(K) 1,033 shares @ $14.75 expires January 3, 2004
22
<PAGE>
(6) Consists of (i) 79,700 shares of Common Stock and (ii) 15,500 shares of
Common Stock issuable upon exercise of options exercisable currently or
within 60 days including (A) options to purchase 10,500 shares of Common
Stock at an exercise price of $11.75 per share, which expire on November
3, 2005 and (B) 5,000 shares of Common Stock at an exercise price of
$14.75 per share, which expire on December 13, 2006.
(7) Consists of (i) 22,838 shares of Common Stock and (ii) 6,199 shares of
Common Stock issuable upon the exercise of options currently exercisable
or within 60 days, including (A) 3,100 shares of Common Stock at an
exercise price of $11.75 per share, which expire on November 3, 2002, (B)
2,066 sharers of Common Stock at $12.50 per share, which expire on
January 2, 2003, and (C) options to purchase 1,033 shares at an exercise
price of $14.75 per share, which expire on January 3, 2004.
(8) Consists of (i) 1,000 shares of Common Stock and (ii) 3,000 shares of
Common Stock issuable upon exercise of options exercisable currently or
within 60 days, including (A) options to purchase 2,000 shares of Common
Stock at an exercise price of $ 12.50 per share, which expire on January
2, 2003 and (B) options to purchase 1,000 shares of Common Stock at an
exercise price of $14.75 per share, which expire on January 3, 2004.
(9) Consists of (i) 1,400 shares of Common Stock and (ii) 1,000 shares of
Common Stock issuable upon exercise of options exercisable currently or
within 60 days at an exercise price of $14.75 per share which expire on
January 3, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Donald Horowitz Employment Agreement. The Company and Donald Horowitz (a
former director of the Company) were parties to a one year Agreement, effective
September 1, 1996 pursuant to which Mr. Horowitz served as Legal Counsel to the
Company, for which he was 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. The Company and
Donald Horowitz terminated this relationship on August 31, 1997. 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 to
the Company, for which he was paid or granted, over the two years 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.
23
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT FILED INCORPORATED BY
INDEX DESCRIPTION OF DOCUMENT HEREWITH REFERENCE TO:
- ----- ----------------------- -------- -------------
<S> <C> <C>
3(i) Certificate of Incorporation of the Company Exhibit 3.(i) of Registration Statement
("Certificate of Incorporation"). File No.33-87954 (the "1995 Registration
Statement."
3(ii) Bylaws of the Company. Exhibit 3.(ii) of the 1995 Registration
Statement
10.1 Trademark License Agreement, dated as of May 20, 1994, Exhibit 10.1 of the 1995 Registration
between Converse Inc. and the Company. Statement
10.2 License Agreement, dated as of June 1, 1992 ("Everlast Exhibit 10.2 of the 1995 Registration
License"), between Everlast World's Boxing Statement
Headquarters Corp. ("Everlast") and Total Impact, Inc.
("Total Impact").
10.3 First Amendment Agreement to Everlast License, dated as Exhibit 10.3 of the 1995 Registration
of June 1, 1992, between Everlast and Total Impact. Statement
10.4 Assignment of Everlast License, dated as of July 7, Exhibit 10.4 of the 1995 Registration
1992, between Everlast and the Company. Statement
10.5 Consent to Assignment of Everlast License, dated as of Exhibit 10.5 of the 1995 Registration
August 18, 1992, by Everlast to Total Impact. Statement
10.6 Second Amendment Agreement to Everlast License, dated as Exhibit 10.6 of the 1995 Registration
of January 1, 1993 between Everlast and the Company. Statement
10.7 Third Amendment Agreement to Everlast License, dated as Exhibit 10.7 of the 1995 Registration
of November 15, 1993 between Everlast and the Company. Statement
10.8 License Agreement (Canada), dated as of January 1, 1993, Exhibit 10.8 of the 1995 Registration
("Canada Everlast License") between Everlast and the Statement
Company.
10.9 First Amendment Agreement to Canada Everlast License, Exhibit 10.9 of the 1995 Registration
dated as of November 5, 1993, between Everlast and the Statement
Company.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED INCORPORATED BY
INDEX DESCRIPTION OF DOCUMENT HEREWITH REFERENCE TO:
- ----- ----------------------- -------- -------------
<S> <C> <C>
10.10 Consulting Agreement, dated as of September 1, 1993, Exhibit 10.10 of the 1995 Registration
between the Company and Michael Bick. Statement
10.11 Buying Agency Agreement, dated as of December 1, 1992, Exhibit 10.11 of the 1995 Registration
between the Company and D&P Fashion Collections Ltd. Statement
10.12 Services Agreement, dated as of July 7, 1992, between Exhibit 10.12 of the 1995 Registration
the Company and Total Impact. Statement
10.13 Factoring Agreement, dated as of August 21, 1992 and as Exhibit 10.13 of the 1995 Registration
subsequently amended, between the Company and Century Statement
Business Credit Corporation.
10.14 Lease Agreement, dated as of May 16, 1991 ("Lease Exhibit 10.14 of the 1995 Registration
Agreement"), between Total Impact and 1350 Broadway Statement
Associates.
10.15 Assignment of Lease Agreement, dated as of September 23, Exhibit 10.15 of the 1995 Registration
1992, by Total Impact to the Company. Statement
10.16 Memorandum of Agreement of Lease, dated as of September Exhibit 10.16 of the 1995 Registration
27, 1993, between the Company and 433 Building Statement
Corporation.
10.17 Lease, dated as of July 20, 1994, between the Company Exhibit 10.17 of the 1995 Registration
and 1350 Broadway Associates. Statement
10.18 Lease, dated as of July 21, 1994, between the Company Exhibit 10.18 of the 1995 Registration
and 1350 Broadway Associates. Statement
10.19 Form of Registration Rights Agreement, dated as of Exhibit 10.19 of the 1995 Registration
August 20, 1992, between the Company and the holders of Statement
Preferred Stock.
10.20 Form of Registration Rights Agreement, dated as of Exhibit 10.20 of the 1995 Registration
August 20, 1992, between the Company and the holders of Statement
Common Stock.
10.21 Form of Senior Subordinated Notes of the Company due Exhibit 10.21 of the 1995 Registration
December 31, 1994. Statement
10.22 Form of Non-Negotiable Convertible Promissory Notes of Exhibit 10.22 of the 1995 Registration
the Company due May 31, 1995. Statement
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED INCORPORATED BY
INDEX DESCRIPTION OF DOCUMENT HEREWITH REFERENCE TO:
- ----- ----------------------- -------- -------------
<S> <C> <C>
10.23 Employment Agreement, dated as of August 1, 1994, Exhibit 10.23 of the 1995 Registration
between the Company and George Horowitz. Statement
10.24 Employment Agreement, dated as of September 1, 1994, Exhibit 10.24 of the 1995 Registration
between the Company and Donald J Horowitz. Statement
10.25 Employment Agreement, dated as of August 1, 1994, Exhibit 10.25 of the 1995 Registration
between the Company and Rita Cinque. Statement
10.26 Employment Agreement, dated as of September 1, 1994, Exhibit 10.26 of the 1995 Registration
between the Company and Rita Cinque. Statement
10.27 Option Agreement, dated as of November 23, 1994, Exhibit 10.27 of the 1995 Registration
between Century Business Credit Corporation and the Statement
Company.
10.28 1993 Stock Option Plan of the Company. Exhibit 10.28 of the 1995 Registration
Statement
10.29 1995 Non-Employee Director Stock Option Plan of the Exhibit 10.29 of the 1996 Form 10-KSB
Company, adopted on October 6, 1995. for the year ended December 31, 1995
10.30 Amendment to 1993 Stock Option Plan of the Company, Exhibit 10.30 of the 1996 Form 10-KSB
adopted on October 6, 1995. for the year ended December 31, 1995
10.31 Amendment dated October 3, 1995 of Trademark License Exhibit 10.31 of the 1996 Form 10-KSB
Agreement dated May 20, 1994 between the Company and for the year ended December 31, 1995
Converse Inc.
10.32 Amendment dated April 28, 1995 to amend Lease dated Exhibit 10.32 of the 1996 Form 10-KSB
September, 1993 between the Company and 433 Building for the year ended December 31, 1995
Corporation.
10.33 Amendment of Lease, made as of November 1, 1995 between Exhibit 10.33 of the 1996 Form 10-KSB
the Company and 1350 Broadway Associates. for the year ended December 31, 1995
10.34 Consolidated Amendment Agreement to Everlast License, Exhibit 10.1 of the Form 8-K filed on
dated as of January 1, 1997 between Everlast and the January 17, 1997
Company.
10.35 Consolidated Amendment Agreement to Canada Everlast Exhibit 10.2 of the Form 8-K filed on
License, dated as of January 1, 1997 between Everlast January 17, 1997
and the Company.
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT FILED INCORPORATED BY
INDEX DESCRIPTION OF DOCUMENT HEREWITH REFERENCE TO:
- ----- ----------------------- -------- -------------
<S> <C> <C>
10.36 Third Amendment to the Trademark License Agreement, Exhibit 10.36 of the 1997 Form 10-KSB
dated as of January 7, 1997 between the Company and for the year ended December 31, 1996
Converse Inc.
10.37 Fourth Amendment to the Trademark License Agreement, Exhibit 10.37 of the 1997 Form 10-KSB
dated as of January 22, 1997 between the Company and for the year ended December 31, 1996
Converse Inc.
10.38 Employment Agreement, dated as of September 1, 1996 Exhibit 10.38 of the 1997 Form 10-KSB
between the Company and Donald Horowitz for the year ended December 31, 1996
10.39 Amendment to Employment Agreement, dated as of August Exhibit 10.39 of the 1997 Form 10-KSB
9, 1996 between the Company and George Horowitz for the year ended December 31, 1996
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 1997.
27
<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 30, 1998
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 30, 1998 /S/ GEORGE HOROWITZ
-----------------------------------
George Horowitz (Chairman; Chief
Executive Officer; Chief Financial
Officer; principal executive
officer, and principal accounting officer)
March 30, 1998 /S/ JAMES ANDERSON
-----------------------------------
James Anderson (Director)
March 30, 1998 /S/ RITA CINQUE
-----------------------------------
Rita Cinque (Director)
March 30, 1998 /S/ LARRY KRING
-----------------------------------
Larry Kring (Director)
March 30, 1998 /S/ EDWARD EPSTEIN
-----------------------------------
Edward Epstein (Director)
March 30, 1998 /S/ ANGELO GIUSTI
-----------------------------------
Angelo Giusti (Director)
28
<PAGE>
ITEM 7: FINANCIAL STATEMENTS
ACTIVE APPAREL GROUP, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<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-17f
<PAGE>
Page 1f
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, 1997, and the related statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1997 and
1996. 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, 1997 and the results of its operations and its cash flows for
the years ended December 31, 1997 and 1996 in conformity with generally accepted
accounting principles.
/s/ BERENSON & COMPANY LLP
New York, NY
February 2, 1998
<PAGE>
Page 2f
ACTIVE APPAREL GROUP, INC.
BALANCE SHEET
DECEMBER 31, 1997
A S S E T S
Current assets:
Cash and cash equivalents $ 59,441
Refundable income taxes 153,500
Due from factor 1,656,283
Inventory 3,847,556
Prepaid expenses and other current assets 350,973
Deferred tax asset 88,053
----------
Total current assets 6,155,806
Note receivable, officer 120,000
Property and equipment, net 406,692
Security deposits and other assets 261,341
----------
$6,943,839
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 768,960
Accrued expenses and other current liabilities 199,574
----------
Total liabilities, all current 968,534
----------
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.002;
10,000,000 shares authorized; 2,641,875 issued;
2,469,375 outstanding 5,283
Class A common stock, par value $.01;
100,000 shares authorized; 100,000 shares
issued and outstanding 1,000
Paid-in capital 6,124,891
Retained earnings 569,756
----------
6,700,930
Less treasury stock, at cost (172,500 common shares) 725,625
----------
5,975,305
$6,943,839
==========
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 3f
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------
1 9 9 7 1 9 9 6
------------ -----------
<S> <C> <C>
Net sales $16,687,271 $16,377,529
Cost of goods sold 10,331,987 10,190,916
----------- ------------
Gross profit 6,355,284 6,186,613
------------ ------------
Operating expenses:
Selling and shipping 3,743,862 3,089,749
General and administrative 1,819,992 1,723,258
Financial expenses, including interest expense of
$171,318; $27,767-1996 456,983 291,880
------------ -----------
6,020,837 5,104,887
------------ -----------
Income from operations 334,447 1,081,726
Other income 9,613 21,367
------------ -----------
Income before provision for income taxes 344,060 1,103,093
Provision for income taxes 132,575 391,845
------------ -----------
Net income $ 211,485 $ 711,248
============ ===========
Basic earnings per share $.08 $.28
==== ====
Diluted earnings per share $.08 $.26
==== ====
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Page 4f
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
9% CUMULATIVE
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 4,000 $1,000 2,439,437 $5,224
Stock options exercised - - 5,300 10
Public offering costs - - - -
Redemption of preferred stock (1,000) (250) - -
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
Stock options exercised - - 21,638 43
Net income, year ended December 31, 1997 - - - -
---------- ------- --------- ------
Balance, December 31, 1997 - $ - 2,469,375 $5,283
=========== ======== ========= ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
RETAINED
CLASS A EARNINGS
COMMON STOCK PAID-IN (ACCUMULATED TREASURY STOCK
SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT TOTAL
-------- ------ ----------- ------------ -------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
100,000 $1,000 $6,057,764 $(352,977) 172,500 $(725,625) $4,986,386
- - 1,977 - - - 1,987
- - (4,200) - - - (4,200)
- - (2,250) - - - (2,500)
- - 744 - - - -
- - - 711,248 - - 711,248
-------- --------- ----------- ---------- -------- ---------- ---------
100,000 1,000 6,054,035 358,271 172,500 (725,625) 5,692,921
- - 70,856 - - - 70,899
- - - 211,485 - - 211,485
------- --------- ---------- ---------- ------- --------- ----------
100,000 $1,000 $6,124,891 $ 569,756 172,500 $(725,625) $5,975,305
======= ====== ========== ========= ======= ========= ==========
</TABLE>
<PAGE>
Page 5f
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1 9 9 7 1 9 9 6
------------ -----------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 211,485 $ 711,248
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 109,842 54,191
Provision for bad debts -- 14,442
Deferred tax (benefit) expense (57,000) 33,664
Loss on disposal of property and equipment -- 252
Changes in assets (increase) decrease:
Refundable income taxes (153,500) --
Due from factor 1,239,990 391,226
Inventory (1,089,856) (981,117)
Prepaid expenses and other current assets (206,706) 71,932
Other assets 78,627 (249,418)
Changes in liabilities increase (decrease):
Accounts payable and accrued expenses and
other current liabilities (83,824) 313,829
----------- -----------
Net cash provided by operating activities 49,058 360,249
----------- -----------
Cash flows used by investing activities:
Acquisition of property and equipment (223,757) (206,639)
Note receivable, officer -- (120,000)
----------- -----------
Net cash used by investing activities (223,757) (326,639)
----------- -----------
Cash flows from financing activities:
Initial public offering costs -- (4,200)
Redemption of preferred stock -- (2,500)
Proceeds from stock options exercised 70,899 1,987
----------- -----------
Net cash provided (used) by financing activities 70,899 (4,713)
----------- -----------
Net increase (decrease) in cash and cash equivalents (103,800) 28,897
Cash and cash equivalents, beginning of year 163,241 134,344
----------- -----------
Cash and cash equivalents, end of year $ 59,441 $ 163,241
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 171,318 $ 27,767
Income taxes 653,761 43,514
Supplemental disclosure of noncash financing activity:
Preferred stock converted to common stock $ -- $ 750
</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, 1997 AND 1996
1. Nature of business:
Active Apparel Group, Inc. (the "Company") is a distributor of licensed
women's and girls' sportswear and activewear, as well as unisex activewear
and accessories, throughout the United States and Canada.
2. 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 amount reflected in the balance sheet for cash and
cash equivalents, none of which are held for trading purposes,
approximates fair value due to the short maturity of these
instruments.
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.
<PAGE>
Page 7f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. Significant accounting policies: (Continued)
e. Advertising expense:
The Company expenses advertising costs as they are incurred.
As of December 31, 1997 and 1996, the Company had incurred advertising
and promotion expense of $905,918 and $508,689, 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 year. Actual results could differ
from those estimates.
g. Accounting for stock based compensation:
The Company applies APB Opinion 25 to account for employee stock
option plans (note 8). Accordingly, no compensation cost has been
recognized in 1997 and 1996. 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 7 1 9 9 6
-------- ---------
Net income:
As reported $211,485 $711,248
======== ========
Pro forma $156,713 $662,470
======== ========
Basic earnings per share:
As reported $ .08 $ .28
======== ========
Pro forma $ .06 $ .26
======== ========
Diluted earnings per share:
As reported $ .08 $ .26
======== ========
Pro forma $ .06 $ .24
======== ========
<PAGE>
Page 8f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
2. 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:
o the exercise price and expected life of the option
o the current price of the stock and its expected volatility
o expected dividends, if any
o 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
3. 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
$125,000 at December 31, 1997. Interest is charged at 1 1/2% above prime
on advances. This factoring arrangement is collateralized by the Company's
accounts receivable.
4. Property and equipment:
Furniture and fixtures $128,030
Machinery and equipment 447,909
Leasehold improvements 52,563
--------
628,502
Less accumulated depreciation
and amortization 221,810
--------
$406,692
========
5. 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.
<PAGE>
Page 9f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
6. 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:
<TABLE>
<CAPTION>
UNITED STATES CANADA
------------- ------
ROYALTY ADVERTISING ROYALTY ADVERTISING
------- ----------- ------- -----------
Twelve months ending
<S> <C> <C> <C> <C> <C>
December 31, 1998 $555,000 $231,000 $112,000 $47,000
1999 630,000 263,000 125,000 52,000
2000 680,000 283,000 139,000 58,000
2001 729,000 304,000 152,000 63,000
2002 779,000 325,000 166,000 69,000
</TABLE>
The amounts for Canada are presented in U.S. dollars assuming an
exchange rate of $.69. 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, 1997 is $450,000, based on minimum royalties due for
1997.
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). Pursuant to this license, net sales for contract year two
(October 1, 1996 to September 30, 1997) amounted to approximately
$1,861,000. The license fee is 7% of net sales. The Company is
required to spend 2% of net sales on advertising. Pursuant to the
fifth amendment to the agreement, future minimum guaranteed payments
through the expiration date of September 30, 1998 are $157,500.
<PAGE>
Page 10f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
6. Commitments and contingencies: (Continued)
a. License agreements: (Continued)
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 term of the agreement
exceed $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, 1998 $65,000
1999 16,250
Royalty expense for the years ended December 31, 1997 and 1996 was
approximately $1,028,000 and $1,005,000, 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, 2000.
At December 31, 1997, future minimum rental payments required under
the noncancelable leases are approximately as follows:
Twelve months ending December 31, 1998 $180,000
1999 180,000
2000 18,000
Rent expense for the years ended December 31, 1997 and 1996 was
approximately $201,000 and $213,000, respectively.
<PAGE>
Page 11f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
6. 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 $265,000
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.
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 $140,000.
The agreement with the Executive Vice-President has restrictive
covenants similar to those of the President and Chief Executive
Officer.
iii. The Company's employment agreement with a Director and Legal
Counsel of the Company, who is a brother of the President and
Chief Executive Officer, expired and was not renewed as of August
31, 1997. On August 22, 1997, the Company granted this Director
16,200 stock options with an exercise price of one dollar higher
than the market price of the Company's stock on the grant date.
Simultaneous with the grant, the Director cancelled and annulled
previous options granted pursuant to the 1993 stock option plan
(note 8).
d. Consulting agreement:
The Company entered into a consulting 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 automatically
renews for one year periods.
<PAGE>
Page 12f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
6. Commitments and contingencies: (Continued)
d. Consulting agreement: (Continued)
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 year ended December 31, 1997 and 1996 was
approximately $86,000 and $96,000, respectively.
7. 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.
During 1996, 599,000 preferred shares were converted to common stock
and the remaining 1,000 shares were 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, 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, 1997 AND 1996
8. 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.
Effective August 22, 1997, the Company granted 23,199 nonqualified options
pursuant to the 1993 stock option plan to certain key employees. The options
were granted in exchange for the employees' cancelling the same number of
previously granted options which had a higher exercise price. The options
granted have an effective exercise price of $5.38 (one dollar above the stock
price on August 22, 1997).
The exercise price for options granted (except for the August, 1997 grant
noted above) 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.
<PAGE>
Page 14f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
8. Stock options: (Continued)
Outstanding options pursuant to these three plans are summarized as
follows:
<TABLE>
<CAPTION>
S H A R E S
-------------------------------------------------------------------
1993 1995
STOCK STOCK NON-EMPLOYEE
OPTION OPTION DIRECTOR STOCK OPTION EXERCISE
1 9 9 7 PLAN PLAN OPTION PLAN TOTAL PRICES
- ------------------- -------- ------- -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 54,700 271,705 21,700 348,105 $ .375 - $14.75
Granted - 26,399 12,200 38,599 $ 5.38 - $14.75
Cancelled - 43,829 1,550 45,379 $11.750 - $14.75
Exercised 6,000 11,088 4,550 21,638 $ .375 - $12.50
------- ------- ------ -------
Outstanding at
December 31 48,700 243,187 27,800 319,687 $ .375 - $14.75
======= ======= ====== =======
Exercisable at
December 31 48,700 196,657 7,304 252,661 $ .375 - $12.50
======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
S H A R E S
-------------------------------------------------------------------
1993 1995
STOCK STOCK NON-EMPLOYEE
OPTION OPTION DIRECTOR STOCK OPTION EXERCISE
1 9 9 7 PLAN PLAN OPTION PLAN TOTAL PRICES
- ------------------- -------- ------- -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1, 60,000 209,505 9,400 278,905 $ .375 - $11.75
Granted - 62,200 12,300 74,500 $12.50 - $14.75
Exercised 5,300 - - 5,300 $ .375
------- ------- ------- -------
Outstanding at
December 31 54,700 271,705 21,700 348,105 $ .375 - $14.75
======= ======= ======= =======
Exercisable at
December 31 54,700 176,172 3,133 234,005 $ .375 - $11.75
======= ======= ======= =======
</TABLE>
<PAGE>
Page 15f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
9. Income taxes:
For the year ended December 31, 1997 and 1996, the Company had a provision
for income taxes consisting of the following:
1 9 9 7 1 9 9 6
--------- --------
Current tax provision:
Federal $136,580 $376,201
State and local 46,723 127,782
Foreign 6,272 8,996
Utilization of net operating
loss carryforward - (154,798)
-------- ---------
189,575 358,181
Deferred tax provision (benefit):
Federal (42,544) 31,614
State and local (14,456) 2,050
-------- ---------
Income tax provision $132,575 $391,845
======== =========
The difference between the statutory Federal income tax rate of 34% and
effective income tax rates of 39% and 36% for the years ended December 31,
1997 and 1996, respectively, is presented below as a percentage of pre-tax
income: 1997 1996
Federal statutory rate 34% 34%
Increases (reductions) in taxes
resulting from:
State and local income tax (net
of federal tax benefit) 10 6
Foreign tax 2 1
Temporary differences (11) 6
Permanent differences 4 1
Utilization of net operating loss - (12)
---- ---
Effective rate 39% 36%
=== ===
<PAGE>
Page 16f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
10. Major customers:
For the year ended December 31, 1997 four customers accounted for
approximately 47% of sales. For the year ended December 31, 1996, two
customers accounted for approximately 24% of sales.
11. Earnings per share:
Earnings per share amounts have been presented and restated in accordance
with Statement of Financial Accounting Standards No. 128, Earnings per
Share. The restatement resulted in a $.02 increase in basic earnings per
share previously reported in 1996. Diluted earnings per share did not
material change due to the restatement.
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding during the year. 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 December 31, 1997 and 1996. Net income has been
adjusted for dividends on convertible preferred stock.
1 9 9 7 1 9 9 6
-------- ----------
Basic earnings per share:
Net income $ 211,485 $ 711,248
Less convertible preferred stock
dividends -- 356
---------- ----------
Net income available for common stock $ 211,485 $ 710,892
========== ==========
Weighted average common stock outstanding 2,564,106 2,545,230
========== ==========
Basic earnings per share $ .08 $ .28
========== ==========
<PAGE>
Page 17f
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
11. Earnings per share: (Continued)
1 9 9 7 1 9 9 6
----------- ----------
Diluted earnings per share:
Net income $ 211,485 $ 710,892
Increase if convertible preferred stock
were converted to common stock -- 356
---------- ----------
Net income available for common stock and
dilutive securities $ 211,485 $ 711,248
Weighted average common stock outstanding 2,564,106 2,545,230
Additional common stock resulting from
dilutive securities:
Convertible preferred stock -- 1,583
Stock options 122,798 181,530
---------- ----------
Weighted average common stock and dilutive
securities outstanding 2,686,904 2,728,343
========== ==========
Diluted earnings per share $ .08 $ .26
========== ==========
Options to purchase 93,300 shares of common stock ranging from $11.75 -
$14.75 per share were outstanding during 1997 but were not included in the
computation of diluted earning per share because the options' exercise
price was greater than the average market price of the common shares. The
options, which expire through January 2007, were still outstanding at the
end of year.
<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, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-30-1997
<CASH> 59,441
<SECURITIES> 0
<RECEIVABLES> 1,656,283
<ALLOWANCES> 0
<INVENTORY> 3,847,556
<CURRENT-ASSETS> 6,155,806
<PP&E> 628,502
<DEPRECIATION> 221,810
<TOTAL-ASSETS> 6,943,839
<CURRENT-LIABILITIES> 968,534
<BONDS> 0
0
0
<COMMON> 5,283
<OTHER-SE> 1,000
<TOTAL-LIABILITY-AND-EQUITY> 6,943,839
<SALES> 16,687,271
<TOTAL-REVENUES> 16,687,271
<CGS> 10,331,987
<TOTAL-COSTS> 10,331,987
<OTHER-EXPENSES> 6,020,837
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171,318
<INCOME-PRETAX> 344,060
<INCOME-TAX> 132,575
<INCOME-CONTINUING> 334,447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 211,485
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
