SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB/A
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number: 0-25918
ACTIVE APPAREL GROUP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3672716
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1350 BROADWAY
SUITE 2300
NEW YORK, NY 10018
(Address of Principal Executive Offices)
(212) 239-0990
(Issuer's telephone number)
Not Applicable
(Former name, former address and former
fiscal year if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
The number of common equity shares outstanding as of August 13, 1998
was 2,494,081 shares of Common Stock, $.002 par value, and 100,00 shares of
Class A Common Stock, $.01 par value.
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
Form 10-QSB
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EXPLANATORY NOTE
This Amendment No. 1 on Form 10-QSB/A (this "Amendment") is being filed
in order to amend Item 2 of Part I and Item 6 of Part II of the Registrant's
Quarterly Report on Form 10-QSB filed with the Securities and Exchange
Commission on August 13, 1998. The purpose of this Amendment is to add certain
disclosure set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in respect of (i) an amendment to the
Converse license agreement (a copy of which has been filed herewith) and (ii)
the Company's year 2000 program. Except as specifically identified above, the
disclosures set forth herein do not differ from those in Item 2 of the original
filing. Item 6 of Part II is also hereby amended solely to add the filing of
such amendment to the Converse license agreement.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S
EXPANSION INTO NEW MARKETS, COMPETITION, TECHNOLOGICAL ADVANCES AND AVAILABILITY
OF MANAGERIAL PERSONNEL.
GENERAL
The Company is a designer, marketer and supplier of women's
activewear, sportswear, swimwear and unisex activewear and accessories. The
Company sells its principal product collections under the EVERLAST, CONVERSE and
MTV brand names through exclusive licensing arrangements. The Company's products
are manufactured by third party independent manufacturing contractors and are
sold to approximately 500 separate accounts, representing approximately 20,000
retail locations throughout the United States and Canada, including a variety of
department stores, specialty stores, sporting goods stores, catalog operations
and better mass merchandisers.
The financial statements of the Company and the notes thereto contain
detailed information that should be referred to in conjunction with this
discussion.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1998 COMPARED TO QUARTER ENDED JUNE 30, 1997
Net sales increased to $4,026,996 for the three months ended June 30,
1998 from $3,981,678 for the three months ended June 30, 1997, an increase of
$45,318, or 1.1%. This increase in sales was principally attributable to
increased sales volume of the Company's products through continued market
penetration.
Gross profit increased to $1,548,696 for the three months ended June
30, 1998 from $1,536,314 for the three months ended June 30, 1997, an increase
of $12,382, or .8%. Gross profit decreased as a percentage of net sales to 38.5%
from 38.6%.
Selling and shipping expenses increased to $904,777 for the three
months ended June 30, 1998 from $804,366 for the three months ended June 30,
1997, an increase of $100,411 or 12.5%. Selling and shipping expenses as a
percentage of net sales increased to 22.5% from 20.2%. The increase as a
percentage of net sales was primarily attributable to an increase in advertising
and promotions to facilitate the Company's continued and anticipated growth, and
an increase in sales, shipping, and design salaries.
General and administrative expenses increased to $496,076 for the three
months ended June 30, 1998 from $437,307 for the three months ended June 30,
1997, an increase of $58,769, or 13.4%. General and administrative expenses as a
percentage of net sales increased to 12.3% from 11.0%. The increase was
primarily attributable to an increase in Company employee salaries and outside
consulting fees.
Financial expenses decreased to $85,649 for the three months ended June
30, 1998 from $94,043 for the three months ended June 30, 1997, a decrease of
$8,394, or 8.9%. The decrease was primarily attributable to a decrease in
interest expense. Such decrease was due to the reduction in the Company's net
borrowings from the factor for the three months ended June 30, 1998 versus the
comparable period in 1997.
Operating income decreased to $62,194 for the three months ended June
30, 1998 from $200,598 for the three months ended June 30, 1997, a decrease of
$138,404, or 69.0%, for the reasons stated in the preceding paragraphs.
Operating income as a percentage of net sales was 1.5% for the three months
ended June 30, 1998 as compared to 5.0% for the three months ended June 30,
1997.
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The Company incurred a tax provision of $21,269 for the three months
ended June 30, 1998 as compared to $85,949 for the three months ended June 30,
1997, a decrease of $64,680.
The Company had net income of $40,925 for the three months ended June
30, 1998 as compared to $114,649 for the three months ended June 30, 1997, a
decrease of $73,724, or 64.3%, for the reasons stated in the preceding
paragraphs.
SIX MONTHS JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Net sales increased to $8,287,856 for the six months ended June 30,
1998 from $8,002,699 for the six months ended June 30, 1997, an increase of
$285,157, or 3.6%. This increase was principally attributable to increased sales
volume of the Company's products through continued market penetration,
acceptance of the Company's products and increased orders from established
accounts.
Gross profit increased to $3,169,700 for the six months ended June 30,
1998 from $3,160,034 for the six months ended June 30, 1997, an increase of
$9,666, or .3%. Gross profit decreased as a percentage of net sales to 38.2%
from 39.5%. The decrease as a percentage of net sales was primarily due to the
company's efforts in reducing inventory levels.
Selling and shipping expenses increased to $1,752,166 for the six
months ended June 30, 1998 from $1,583,992 for the six months ended June 30,
1997, an increase of $168,174, or 10.6%. Selling and shipping expenses as a
percentage of net sales increased to 21.1% from 19.8%. The increase as a
percentage of net sales was primarily attributable to an increase in advertising
and promotions to facilitate the Company's continued and anticipated growth, and
an increase in sales, shipping, and design salaries.
General and administrative expenses increased to $983,694 for the six
months ended June 30, 1998 from $935,558 for the six months ended June 30, 1997,
an increase of $48,136, or 5.1%. General and administrative expenses as a
percentage of net sales increased to 11.9% from 11.7%. The increase was
primarily attributable to an increase in Company employee salaries and outside
consulting fees.
Financial expenses increased to $186,934 for the six months ended June
30, 1998 from $180,777 for the six months ended June 30, 1997, an increase of
$6,157, or 3.4%. The increase was attributable to the increase in the Company's
net borrowings for the six months ended June 30, 1998 versus the comparable
period in 1997.
Operating income decreased to $246,905 for the six months ended June
30, 1998 from $459,707 for the six months ended June 30, 1997, a decrease of
$212,802, or 46.3%, for the reasons stated in the preceding paragraphs.
Operating income as a percentage of net sales was 3.0% for the six months ended
June 30, 1998 as compared to 5.7% for the six months ended June 30, 1997.
The Company incurred a tax provision of $94,204 for the six months
ended June 30, 1998 as compared to $195,868 for the six months ended June 30,
1997, a decrease of $101,664, or 51.9%.
The Company had net income of $152,701 for the six months ended June
30, 1998 as compared to $263,839 for the six months ended June 30, 1997, a
decrease of $111,138, or 42.1%, for the reasons stated in the preceding
paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended June
30, 1998 was $105,754 compared
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to $109,904 for the six months ended June 30, 1997. This decrease was primarily
attributable to a decrease in operating income. Net cash used for investing
activities for the six months ended June 30, 1998 was $34,804 compared to
$133,757 for the six months ended June 30, 1997. The decrease was attributable
to the significant investment in the technological infrastructure of the Company
in 1997. Net cash provided by financing activities was $11,500 for the six
months ended June 30, 1998 compared to $70,899 for the six months ended June 30,
1997. The decrease was primarily attributable to a decrease in the proceeds from
the exercise of stock options.
During the six months ended June 30, 1998, the Company's primary need
for funds was to finance working capital for the anticipated growth in net sales
of the Company's products. The Company has relied primarily upon cash flow from
operations and advances drawn against factored receivables to finance its
operations and expansion. At June 30, 1998, working capital was $5,212,399
compared to $5,187,272 at June 30, 1997 an increase of $25,127.
Due from factor represents the amount owed to the Company for factored
receivables less the amount of outstanding advances made by Century Business
Credit Corporation to the Company under a credit agreement (the "Century
Agreement"). At June 30, 1998 due from factor was $2,947,095 as compared to
$1,656,283 at June 30, 1997. This increase is primarily a result of less factor
borrowings being required due to a lowering of inventory. The Company's
inventory decreased to $2,594,372 at June 30, 1998 as compared to $3,847,556 at
June 30, 1997 due to the application of better management controls and automated
systems. The Company had in-house receivables of $191,218 at June 30, 1998 as
compared to $130,097 at June 30, 1997. This increase is due to certain
receivables not assigned to Century.
Management anticipates it will retain a net receivable position under
the Century Agreement, although no assurance to that effect can be given.
Positive cash flow, if it occurs, will provide for a further reduction in
advances, and excess working capital will be sufficient to fund the Company's
anticipated growth through 1998.
On April 15, 1998 the Company and Converse Inc. amended the exclusive
license agreement to produce and market certain apparel in the United States.
The amendment extended the license and option period from September 30, 1998 to
March 31, 1999. Management does not anticipate that the Company will achieve
sufficient net sales to automatically renew the license agreement. If the
license agreement is canceled at the end of the extended license period, the
Company believes it will not have a material adverse effect on the Company's
business. A copy of the amendment is annexed hereto and incorporated by
reference as Exhibit 10.1.
YEAR 2000
The Company began a year 2000 compliance project in June 1995 and is
currently year 2000 compliant. The project encompassed upgrading the server and
all proprietary and non-proprietary software. The project was completed
September 1997.
The Company is in the process of assessing year 2000 issues not related
to its internal systems, including issues with third-party suppliers and
customers and warehouse communications. Due to the general uncertainty of the
year 2000 readiness of third-party suppliers and customers, the Company is
unable to determine at this time whether the consequences of year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Company believes that interruptions of normal
operations will not be affected.
The total expenditures for the Year 2000 project were approximately
$200,00 in fiscal year 1997. There are no anticipated year 2000 related costs in
the current fiscal year.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 - Amendment dated April 15, 1998 of Trademark License
Agreement dated May 20, 1994 between the Company and
Converse Inc.
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ACTIVE APPAREL GROUP, INC.
Date: SEPTEMBER 15, 1998 By: /S/ GEORGE Q. HOROWITZ
-------------------- -----------------------
George Q Horowitz
Chief Executive Officer, President,
Treasurer, and Director
Signing on behalf of the
registrant and as Chief
Financial Officer
-9-
SIXTH AMENDMENT
THIS SIXTH AMENDMENT, made as of this 15th day of April, 1998 by and
between CONVERSE INC., a corporation organized and existing under the laws of
the State of Delaware, having its principal place of business at One Fordham
Road, North Reading, Massachusetts 01864 (hereinafter called "Converse" or
"Licensor");
AND
ACTIVE APPAREL GROUP, INC., a corporation organized and existing under the laws
of the State of New York, having its principal place of business at 1350
Broadway, Suite 2300, New York, New York, 10018 (hereinafter called "Licensor").
WITNESSETH
WHEREAS, the Licensor and the Licensee entered into a Trademark License
Agreement dated May 20, 1994, as amended on October 3, 1995, June 1, 1996,
January 7, 1997, January 22, 1997 and September 19, 1997, with respect to the
license of certain of the Licensor's trademarks in the United States (the
"Agreement"); and
WHEREAS, Converse and Licensee desire to further amend the Agreement.
NOW THEREFORE, the parties agree as follows:
1. Accounting Year 3 shall be revised to commence October 1, 1997
and end March 31, 1999.
2. Paragraph 5.1(b) shall be revised to read as follows:
"(b) The Licensee will pay to Licensor a guaranteed minimum
annual license fee commencing May 20, 1994, regardless of its Net Sales of
Finished Articles sold under this Agreement for each Accounting Year commencing
with the year 1994 (the "Guaranteed Minimum Fee"), in the amount set forth
herein:
================================================================================
ACCOUNTING YEAR GUARANTEED MINIMUM LICENSE FEE
- --------------------------------------------------------------------------------
1 May 20, 1994 to September 30, 1996 $280,000.00
- --------------------------------------------------------------------------------
2 October 1, 1996 to September 30, 1997 $280,000.00
- --------------------------------------------------------------------------------
3 October 1, 1997 to March 31, 1999 $ 52,500.00"
================================================================================
3. As amended hereby, the Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Sixth Amendment as
of the date first above written.
WITNESS: CONVERSE INC.
/s/ Illegible By: /s/ Illegible
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WITNESS: ACTIVE APPAREL GROUP, INC.
/s/ Ronnie Kornblum By: /s/ George Horowitz, Pres.
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