SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
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Commission File Number: 0-25918
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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
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The number of common equity shares outstanding as of November 3,
1999 was 2,492,581 shares of Common Stock, $.002 par value, and 100,000 shares
of Class A Common Stock, $.01 par value.
Transitional Small Business Disclosure Format (check one):
Yes No X
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Form 10-QSB
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Changes in Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8-11
PART II. OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
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<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1: Financial statements
ACTIVE APPAREL GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 December 31,
1999 1998
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(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 156,522 $ 192,870
Refundable income taxes -- 284,478
Due from factor 1,080,983 1,887,245
Inventory 5,129,926 3,026,241
Prepaid expenses and other current assets 579,508 354,822
Deferred tax asset 237,000 106,130
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Total current assets 7,183,939 5,851,786
Note receivable, officer 120,000 120,000
Property and equipment, net 405,687 360,233
Security deposits and other assets 282,848 270,343
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Total Assets $ 7,992,474 $ 6,602,362
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,192,664 $ 822,119
Accrued expenses and other current liabilities 358,894 35,667
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Total current liabilities 1,551,558 857,786
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Stockholders' equity:
Common stock, par value $.002; 10,000,000 shares
authorized, 2,666,581 issued, 2,492,581 outstanding 5,333 5,333
Class A common stock, par value $.01; 100,000 shares
authorized; 100,000 shares issued and outstanding 1,000 1,000
Paid-in capital 6,136,341 6,136,341
Retained earnings 1,025,461 329,121
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7,168,135 6,471,795
Less treasury stock, at cost (174,000 common shares) (727,219) (727,219)
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Total Stockholders' Equity 6,440,916 5,744,576
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Total Liabilities and Stockholders' Equity $ 7,992,474 $ 6,602,362
=========== ===========
</TABLE>
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See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------ --------------------------
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $17,407,797 $11,975,117 $ 6,259,574 $ 3,687,261
Cost of goods sold 10,140,216 7,359,224 3,646,225 2,241,068
----------- ----------- ----------- -----------
Gross profit 7,267,581 4,615,893 2,613,349 1,446,193
----------- ----------- ----------- -----------
Operating expenses:
Selling and shipping 4,175,954 2,789,559 1,535,965 1,037,393
General and administrative 1,502,851 1,394,564 514,140 410,870
Financial expenses, including interest
expense of $184,421 and $91,717
for the nine months ended September 30,
1999 and 1998 365,863 261,860 153,145 74,925
----------- ----------- ----------- -----------
6,044,668 4,445,983 2,203,250 1,523,188
----------- ----------- ----------- -----------
Income (loss) before provision for (recovery of)income taxes 1,222,913 169,910 410,099 (76,995)
Provision for (recovery of) income taxes 526,573 70,060 176,925 (24,144)
----------- ----------- ----------- -----------
Net income (loss) $ 696,340 $ 99,850 $ 233,174 $ (52,851)
=========== =========== =========== ===========
Basic earnings per share $ .27 $ .04 $ .09 $ (.02)
=========== =========== =========== ===========
</TABLE>
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See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999 and 1998
<TABLE>
<CAPTION>
Class A
Common Stock Common Stock
Shares Amount Shares Amount Paid in Capital Retained Earnings
------ ------ ------ ------ --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 2,469,375 $ 5,283 100,000 $ 1,000 $6,124,891 $ 569,756
Stock options exercised 24,706 50 -- -- 11,450 --
Net income - nine months
ended September 30, 1998 -- -- -- -- -- 99,850
--------- ---------- ------- ---------- ---------- ----------
Balance, September 30, 1998 2,494,081 $ 5,333 100,000 $ 1,000 $6,136,341 $ 669,606
========= ========== ========== ========== ========== ==========
Balance, December 31, 19998 2,492,581 $ 5,333 100,000 $ 1,000 $6,136,341 $ 329,121
Stock options exercised -- -- -- -- -- --
Net income - nine months
ended September 30, 1999 -- -- -- -- -- 696,340
--------- ---------- ------- ---------- ---------- ----------
Balance, September 30, 1999 2,492,581 $ 5,333 100,000 $ 1,000 $6,136,341 $1,025,461
========= ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Treasury Stock
Shares Amount Total
------ ------ -----
<S> <C> <C> <C>
Balance, December 31, 1997 172,500 $ (725,625) $5,975,305
Stock options exercised -- -- 11,500
Net income - nine months
ended September 30, 1998 -- -- 99,850
---------- ---------- ----------
Balance, September 30, 1998 172,500 $ (725,625) $6,086,655
========== ========== ==========
Balance, December 31, 19998 174,000 $ (727,219) $5,744,576
Stock options exercised -- -- --
Net income - nine months
ended September 30, 1999 -- -- 696,340
---------- ---------- ----------
Balance, September 30, 1999 174,000 $ (727,219) $6,440,916
========== ========== ==========
</TABLE>
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See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------------------
1999 1998
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(Unaudited) (Unaudited)
<S> <C> <C>
Cash flow from operating activity:
Net income $ 696,340 $ 99,850
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 104,832 93,386
Amortization 4,286 5,889
Changes in assets(increase) decrease:
Refundable income taxes 284,478 153,500
Due from factor 806,262 (875,425)
Inventory (2,103,685) 884,916
Prepaid expenses and other current assets (224,686) (117,727)
Deferred tax assets (130,870) 17,441
Security deposits and other assets (16,791) (115,376)
Changes in liabilities increase (decrease):
Accrued expenses and other current liabilities 323,227 (66,616)
Accounts payable 370,545 76,232
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Net cash provided by operating activities 113,938 156,070
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Cash flows used by investing activities:
Acquisition of property and equipment (150,286) (59,641)
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Cash flows from financing activities:
Proceeds from stock options exercised -- 11,500
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Net increase(decrease) in cash and cash equivalents (36,348) 107,929
Cash and cash equivalents, beginning of period 192,870 59,441
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Cash and cash equivalents, end of period $ 156,522 $ 167,370
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 184,421 $ 91,717
Income Taxes 320,915 83,288
</TABLE>
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See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
1. The Company and basis of presentation:
The financial statements presented herein as of September 30, 1999 and
for the nine months and the three months ended September 30, 1999 and
1998 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal and recurring adjustments)
necessary for a fair presentation of financial position and results of
operations. Such financial statements do not include all of the
information and footnote disclosures normally included in audited
financial statements prepared in accordance with generally accepted
accounting principles. The accompanying unaudited financial statements
have been prepared in accordance with the instructions to Form 10-QSB.
The results of operations for the nine and three month periods ended
September 30, 1999 are not necessarily indicative of the results that
may be expected for any other interim period or the full year ending
December 31, 1999.
2. Earnings per share:
Basic earnings per share amounts are computed based on the weighted
average number of shares actually outstanding during the period.
Diluted earnings per share amounts are not presented for September 30,
1999 and 1998 because they are not materially dilutive.
The number of shares used in the computation of basic earnings per
share was 2,592,581 and 2,591,638 at September 30, 1999 and 1998
respectively.
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Report on Form 10-QSB contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements. Factors
that may cause such differences include, but are not limited to, the Company's
expansion into new markets, competition, technological advances and availability
of managerial personnel.
General
The Company is a designer, marketer and supplier of women's and men's
activewear, sportswear and swimwear. The Company sells its principal product
collections under the Everlast brand name through exclusive licensing
arrangements. The Company's products are manufactured by third party independent
manufacturing contractors and are sold to over 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 September 30, 1999 compared to quarter ended September 30, 1998
Net sales increased to $6,259,574 for the three months ended September
30, 1999 from $3,687,261 for the three months ended September 30, 1998, an
increase of $2,572,313, or 69.8%. The increase in net sales is primarily
attributed to increased sales volume of the Company's women's products through
continued market penetration and introduction of the Company's men's products.
Gross profit increased to $2,613,349 for the three months ended
September 30, 1999 from $1,446,193 for the three months ended September 30,
1998, an increase of $1,167,156, or 80.7%. Gross profit increased as a
percentage of net sales to 41.7% from 39.2%. The increase as a percentage of net
sales is primarily attributed to higher prices received for the Company's
products.
Selling and shipping expenses increased to $1,535,965 for the three
months ended September 30, 1999 from $1,037,393 for the three months ended
September 30, 1998, an increase of $498,572 or 48.1%. Selling and shipping
expenses as a percentage of net sales decreased to 24.5% from 28.1%. The
decrease as a percentage of net sales is primarily attributed to the increase in
sales as it relates to the fixed portion of the selling and shipping expenses.
General and administrative expenses increased to $514,140 for the three
months ended September 30, 1999 from $410,870 for the three months ended
September 30, 1998, an increase of $103,270, or 25.1%. General and
administrative expenses as a percentage of net sales decreased to 8.2% from
11.1%. The decrease as a percentage of net sales is primarily attributed to the
relative fixed nature of general and administrative expenses.
Financial expenses increased to $153,145 for the three months ended
September 30, 1999 from $74,925 for the three months ended September 30, 1998,
an increase of $78,220, or 104.4%. The increase is primarily attributed to an
increase in interest expense as a result of higher net borrowings from the
factor, for the three months ended September 30, 1999 versus the comparable
period in 1998, to finance growth.
Operating income increased to $410,099 for the three months ended
September 30, 1999 from a loss of $76,995 for the three months ended September
30, 1998, an increase of $487,094, because of the reasons
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<PAGE>
stated in the preceding paragraphs. Operating income as a percentage of net
sales was 6.6% for the three months ended September 30, 1999 as compared to a
loss of 2.1% for the three months ended September 30, 1998.
The Company incurred a tax provision of $176,925 for the three months
ended September 30, 1999 as compared to a tax benefit of $24,144 for the three
months ended September 30, 1998, an increase of $201,069.
The Company had net income of $233,174 for the three months ended
September 30, 1999 as compared to a loss of $52,851 for the three months ended
September 30, 1998, an increase of $286,025, because of the reasons stated in
the preceding paragraphs.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Net sales increased to $17,407,797 for the nine months ended September
30, 1999 from $11,975,117 for the nine months ended September 30, 1998, an
increase of $5,432,680, or 45.4%. The increase is primarily attributed to
increased sales volume of the Company's women's products through continued
market penetration and the introduction of the Company's men's products.
Gross profit increased to $7,267,581 for the nine months ended
September 30, 1999 from $4,615,893 for the nine months ended September 30, 1998,
an increase of $2,651,688, or 57.4%. Gross profit increased as a percentage of
net sales to 41.7% from 38.5%. The increase as a percentage of net sales is
primarily attributed to higher prices received for the Company's products.
Selling and shipping expenses increased to $4,175,954 for the nine
months ended September 30, 1999 from $2,789,559 for the nine months ended
September 30, 1998, an increase of $1,386,395, or 49.7%. Selling and shipping
expenses as a percentage of net sales increased to 24.0% from 23.3%. The
increase as a percentage of net sales is primarily attributed to an increase in
sample, advertising, promotions and trade show expenses to facilitate the
Company's growth.
General and administrative expenses increased to $1,502,851 for the
nine months ended September 30, 1999 from $1,394,564 for the nine months ended
September 30, 1998, an increase of $108,287, or 7.8%. General and administrative
expenses as a percentage of net sales decreased to 8.6% from 11.6%. The decrease
as a percentage of net sales is primarily attributed to the relative fixed
nature of general and administrative expenses.
Financial expenses increased to $365,863 for the nine months ended
September 30, 1999 from $261,860 for the nine months ended September 30, 1998,
an increase of $104,003, or 39.7%. The increase is attributed to the increase in
the Company's net borrowings from the factor and the factor commissions paid on
increased sales, for the nine months ended September 30, 1999 versus the
comparable period in 1998, to finance growth.
Operating income increased to $1,222,913 for the nine months ended
September 30, 1999 from $169,910 for the nine months ended September 30, 1998,
an increase of $1,053,003, or 619.7%, because of the reasons stated in the
preceding paragraphs. Operating income as a percentage of net sales was 7.0% for
the nine months ended September 30, 1999 as compared to 1.4% for the nine months
ended September 30, 1998.
The Company incurred a tax provision of $526,573 for the nine months
ended September 30, 1999 as compared to $70,060 for the nine months ended
September 30, 1998, an increase of $456,513, or 651.6%.
The Company had net income of $696,340 for the nine months ended
September 30, 1999 as compared to
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<PAGE>
$99,850 for the nine months ended September 30, 1998, an increase of $596,490,
or 597.4%, because of the reasons stated in the preceding paragraphs.
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months
ended September 30, 1999 was $113,938 compared to $156,070 for the nine months
ended September 30, 1998. This decrease was primarily attributable to an
increase in inventory. Net cash used for investing activities for the nine
months ended September 30, 1999 was $150,286 compared to $59,641 for the nine
months ended September 30, 1998. The increase was attributable to capital
expenditures for updated computer equipment. No cash was provided by financing
activities, such as proceeds from the exercise of stock options, for the nine
months ended September 30, 1999 compared to $11,500 for the nine months ended
September 30, 1998.
During the nine months ended September 30, 1999, the Company's primary
need for funds was to finance working capital for the 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 September 30, 1999, working capital was $5,632,381
compared to $5,228,880 at September 30, 1998 an increase of $403,501.
Due from factor represents the amount owed to the Company for factored
receivables less the amount of outstanding advances made by the factor. At
September 30, 1999 due from factor was $1,080,983 as compared to $2,531,708 at
September 30, 1998, a decrease of $1,450,725. This decrease is primarily the
result of greater factor borrowings to finance increased inventory levels
necessary to support sales growth. The Company's inventory increased to
$5,129,926 at September 30, 1999 as compared to $2,962,640 at September 30, 1998
due to an increase in booked and anticipated orders.
Management anticipates it will retain a net receivable position with
its factor, although no assurance to that effect can be given. Positive cash
flow, if it occurs, will provide for a further reduction in advances from the
factor, and excess working capital will be sufficient to fund the Company's
anticipated growth through the next 12 months. If a positive cash flow does not
occur, borrowings with the factor will increase.
Year 2000 Compliance
The Company began a Year 2000 compliance project in June 1995 and
believes it currently is Year 2000 compliant. The project upgraded the server
and all proprietary software 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 suppliers and customers and
warehouse communications. Due to the general uncertainty of the Year 2000
readiness of 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 be minimal.
Total expenditures for the Year 2000 compliance project were
approximately $200,000 in fiscal year 1997. There are no Year 2000 related costs
in the current fiscal year. However, the Company will continue to upgrade its
computer hardware and software as new technologies become available.
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<PAGE>
The Company has a contingency plan in place to deal with potential
systems interruptions related to Year 2000 issues.
- 11 -
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
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<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ACTIVE APPAREL GROUP, INC.
Date: November 3, 1999 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
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-QSB for the quarter ended September 30, 1999 and is qualified
in its entirety by reference to such Financial Statements and Notes, thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 156,522
<SECURITIES> 0
<RECEIVABLES> 1,080,983
<ALLOWANCES> 0
<INVENTORY> 5,129,926
<CURRENT-ASSETS> 7,183,939
<PP&E> 858,201
<DEPRECIATION> 452,514
<TOTAL-ASSETS> 7,992,474
<CURRENT-LIABILITIES> 1,551,558
<BONDS> 0
0
0
<COMMON> 5,333
<OTHER-SE> 1,000
<TOTAL-LIABILITY-AND-EQUITY> 7,992,474
<SALES> 17,407,797
<TOTAL-REVENUES> 17,407,797
<CGS> 10,140,216
<TOTAL-COSTS> 10,140,216
<OTHER-EXPENSES> 6,044,668
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 184,421
<INCOME-PRETAX> 1,222,913
<INCOME-TAX> 526,573
<INCOME-CONTINUING> 696,340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 696,340
<EPS-BASIC> .27
<EPS-DILUTED> .27
</TABLE>
