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 March 31, 1999
/ / 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 May 13, 1999 was
2,492,581 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
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheets 3
Statements of Income 4
Statements of Changes in Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8-10
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
- 2 -
<PAGE>
ACTIVE APPAREL GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1 9 9 9 1 9 9 8
----------- -----------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 188,655 $ 192,870
Refundable income taxes 214,087 284,478
Due from factor 2,135,753 1,887,245
Inventory 3,257,492 3,026,241
Prepaid expenses and other current assets 422,071 354,822
Deferred tax asset 106,130 106,130
----------- -----------
Total current assets 6,324,188 5,851,786
Note receivable, officer 120,000 120,000
Property and equipment, net 348,942 360,233
Security deposits and other assets 371,710 270,343
----------- -----------
Total Assets $ 7,164,840 $ 6,602,362
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 801,137 $ 822,119
Accrued expenses and other current liabilities 386,421 35,667
----------- -----------
Total current liabilities 1,187,558 857,786
----------- -----------
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 561,827 329,121
----------- -----------
6,704,501 6,471,795
Less treasury stock, at cost (174,000 common shares) (727,219) (727,219)
----------- -----------
Total Stockholders' Equity 5,977,282 5,744,576
----------- -----------
Total Liabilities and Stockholders' Equity $ 7,164,840 $ 6,602,362
=========== ===========
</TABLE>
-3-
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1 9 9 9 1 9 9 8
------------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $5,534,448 $4,260,860
Cost of goods sold 3,279,086 2,639,856
---------- ----------
Gross profit 2,255,362 1,621,004
---------- ----------
Operating expenses:
Selling and shipping 1,289,987 847,389
General and administrative 458,691 487,618
Financial expenses, including interest
expense of $38,046 and $42,566 for the
three months ended March 31, 1999 and
1998 97,978 101,286
---------- ----------
1,846,656 1,436,293
---------- ----------
Income before provision for income taxes 408,706 184,711
Provision for income taxes 176,000 72,935
---------- ----------
Net income $ 232,706 $ 111,776
========== ==========
Basic earnings per share $.09 $.04
==== ====
</TABLE>
- 4 -
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 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>
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 - three months
ended March 31, 1998 - - - - - 111,776
--------- ------ ------- ------ ---------- --------
Balance, March 31, 1998 2,494,081 $5,333 100,000 $1,000 $6,136,341 $681,532
========= ====== ======= ====== ========== ========
Balance, December 31, 1998 2,492,581 $5,333 100,000 $1,000 $6,136,341 $329,121
Stock options exercised - - - - - -
Net income - three months
ended March 31, 1999 - - - - - 232,706
--------- ------ ------- ------ ---------- --------
Balance, March 31, 1999 2,492,581 $5,333 100,000 $1,000 $6,136,341 $561,827
========= ====== ======= ====== ========== ========
</TABLE>
<TABLE>
<CAPTION>
TREASURY STOCK
SHARES AMOUNT TOTAL
------ ------ -----
<S> <C> <C> <C>
December 31, 1997 172,500 $(725,625) $5,975,305
Stock options exercised - - 11,500
Net income - three months
ended March 31, 1998 - - 111,776
------- ---------- ----------
Balance, March 31, 1998 172,500 $(725,625) $6,098,581
======= ========== ==========
Balance, December 31, 1998 174,000 $(727,219) $5,744,576
Stock options exercised - - -
Net income - three months
ended March 31, 1999 - - 232,706
------- ---------- ----------
Balance, March 31, 1999 174,000 $(727,219) $5,977,282
======= ========== ==========
</TABLE>
-5-
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1 9 9 9 1 9 9 8
-------- --------
(Unaudited) (Unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 232,706 $ 111,776
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 32,244 30,364
Amortization 1,429 1,627
Changes in assets (increase) decrease:
Refundable income taxes 70,391 110,000
Due from factor (248,508) (672,156)
Inventory (231,251) 925,959
Prepaid expenses and other current assets (67,249) (276,311)
Deferred tax asset - 17,441
Security deposits and other assets (102,796) (25,541)
Changes in liabilities increase (decrease):
Accrued expenses and other current liabilities 350,754 28,477
Accounts payable (20,982) (224,417)
--------- ---------
Net cash provided by operating activities 16,738 27,219
--------- ---------
Cash flows used by investing activities:
Acquisition of property and equipment (20,953) (16,479)
--------- ---------
Cash flows from financing activities:
Proceeds from stock options exercised - 11,500
--------- ---------
Net increase (decrease) in cash and cash equivalents (4,215) 22,240
Cash and cash equivalents, beginning of period 192,870 59,441
--------- ---------
Cash and cash equivalents, end of period $ 188,655 $ 81,681
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 38,046 $ 42,566
Income taxes - 1,804
</TABLE>
- 6 -
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
1. The Company and basis of presentation:
The financial statements presented herein as of March 31, 1999 and for
the three months ended March 31, 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 three
month period ended March 31, 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 March 31, 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 2,494,081 at March 31, 1999 and 1998
respectively.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MAY CAUSE SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THE COMPANY'S
EXPANSION INTO NEW MARKETS, COMPETITION, TECHNOLOGICAL ADVANCES AND AVAILABILITY
OF MANAGERIAL PERSONNEL.
GENERAL
The Company is a designer, marketer and supplier of women's and men's
activewear, sportswear, swimwear and accessories. The Company sells its
principal product collections under the EVERLAST brand name in addition to
others 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 MARCH 31, 1999 COMPARED TO QUARTER ENDED MARCH 31, 1998
Net sales increased to $5,534,448 for the three months ended March 31,
1999 from $4,260,860 for the three months ended March 31, 1998, an increase of
$1,273,588 or 29.9%. This increase in sales was principally attributable to
increased sales volume of the Company's women's products through continued
market penetration and the additional sales volume realized from the
introduction of the Everlast men's product line.
Gross profit increased to $2,255,362 for the three months ended March
31, 1999 from $1,621,004 for the three months ended March 31, 1998, an increase
of $634,358 or 39.1%. Gross profit increased as a percentage of net sales to
40.8% from 38.0%. This increase as a percentage of net sales was primarily due
to the higher prices received for the Company's products.
Selling and shipping expenses increased to $1,289,987 for the three
months ended March 31, 1999 from $847,389 for the three months ended March 31,
1998, an increase of $442,598 or 52.2%. Selling and shipping expenses as a
percentage of net sales increased to 23.3% from 19.9%. The increase as a
percentage of net sales was primarily attributable to an increase in sales
commission expenses, trade show expenses and advertising expenses.
General and administrative expenses decreased to $458,691 for the three
months ended March 31, 1999 from $487,618 for the three months ended March 31,
1998, a decrease of $28,927, or 5.9%. General and administrative expenses as a
percentage of net sales decreased to 8.3% from 11.4%. The decrease as a
percentage of net sales was primarily attributable to a decrease in
administrative salaries and the increase in net sales.
Financial expenses decreased to $97,978 for the three months ended
March 31, 1999 from $101,286 for the three months ended March 31, 1997, a
decrease of $3,308, or 3.3%. Financial expenses as a percentage of net sales
decreased to 1.8% from 2.4%. This decrease was attributable to a decrease in the
Company's net borrowings for the three months ended March 31, 1999 versus the
comparable period in 1998.
-8-
<PAGE>
Operating income increased to $408,706 for the three months ended March
31, 1999 from $184,711 for the three months ended March 31, 1998, an increase of
$223,995, or 121.3% for the reasons stated in the preceding paragraphs.
Operating income as a percentage of net sales was 7.4% for the three months
ended March 31, 1999 as compared to 4.3% for the three months ended March 31,
1998.
The Company incurred a tax provision of $176,000 for the three months
ended March 31, 1999 as compared to $72,935 for the three months ended March 31,
1998, an increase of $103,065. This income tax increase is in proportion to the
increase in the Company's income.
The Company had net income of $232,706 for the three months ended March
31, 1999 as compared to $111,776 for the three months ended March 31, 1998, an
increase of $120,930, or 108.2% for the reasons stated in the preceding
paragraphs.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the three months ended
March 31, 1999 was $16,738 compared to $27,219 for the three months ended March
31, 1998. This decrease was primarily attributable to an increase in inventory.
Net cash used for investing activities for the three months ended March 31, 1999
was $20,953 compared to $16,479 for the three months ended March 31, 1998. The
increase was attributable to the purchase of fixed assets. Net cash provided by
financing activities was $ 0 for the three months ended March 31, 1999 compared
to $11,500 for the three months ended March 31, 1998. The decrease was
attributable to a decrease in the proceeds from the exercise of stock options.
During the three months ended March 31, 1999, 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 March 31, 1999, working capital was $5,136,630
compared to $5,300,519 at March 31, 1998 a decrease of $163,888.
Due from factor represents the amount owed to the Company for factored
receivables less the amount of outstanding advances made by the factor to the
Company. At March 31, 1999, due from factor was $2,135,753 as compared to
$2,328,439 at March 31, 1998. This decrease is the result of an increase in
borrowings for the acquisition of inventory. The Company's inventory increased
to $3,257,492 at March 31, 1999 as compared to $2,921,597 at March 31, 1998 due
to an increase in booked and anticipated orders.
Management anticipates it will retain a net receivable position with
the factor, 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 1999. If a positive cash flow does not occur, borrowings with the factor
will increase.
As amended, the term of the Company's license with Converse, Inc. (the
"Converse License") ended on March 31, 1999. The Company believes that not
renewing the license will not have a material adverse effect on the Company's
business, financial condition or results of operations. Under the Converse
License, the Company was required to make royalty payments to Converse of 7% of
net sales through March 31, 1999.
As amended, the term of the Company's license with MTV Networks,
Inc.(the "MTV License") ends on June 30, 1999. The Company is evaluating the MTV
License for renewal, although management does not anticipate that the Company
will achieve sufficient net sales to automatically renew the MTV License. If the
MTV License is canceled at the end of the extended license period, the Company
believes it will not have a material adverse effect on the
-9-
<PAGE>
Company's business. The Company did not design or produce a MTV line of clothing
for 1999. Under the MTV License, the Company is required to make royalty
payments to MTV of 2% of net sales through June 30, 1999.
YEAR 2000 COMPLIANCE
The Company began a Year 2000 compliance project in June 1995 and believes
it 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.
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 not be affected.
Total expenditures for the Year 2000 project were approximately $200,000
in fiscal year 1997. There were no Year 2000 related costs in the current fiscal
year.
The Company is currently formulating contingency plans in the event of a
Year 2000 failure. The Company expects that a contingency plan will be in place
by September 30, 1999.
-10-
<PAGE>
PART II. OTHER INFORMATION
Item 2. Changes in Securities
The following unregistered securities were issued by the Company during the
three months ended March 31, 1999:
<TABLE>
<CAPTION>
Number of Shares
Date of Sale Description of Sold/Issued/Subject Exercise Purchaser
/Issuance Securities Issued to Options or Warrants Price Per Share or Class
-------------- ------------------ ---------------------- --------------- --------------
<S> <C> <C> <C> <C>
March 22, 1999 Common Stock 18,500 $3.97 Employees
Options
March 22, 1999 Common Stock 32,500 $3.97 Employee Directors
Options
January 1, 1999 Common Stock 9,500 $9.38 Non employee Directors
Options
</TABLE>
The issuance of these securities are claimed to be exempt from registration
pursuant to section 4(2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection with the issuance of
any of these securities.
All of the above options were granted to certain key employees pursuant to the
1993 Stock Option Plan and to non-employee directors pursuant to the 1995
Non-employee director stock Option Plan. The options for employees and directors
have a vesting period of three years and a life of ten years. The options for
non employee directors have a vesting period of three years and a life of seven
years.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
-11-
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTIVE APPAREL GROUP, INC.
Date: May 14, 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
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-QSB for the quarter ended March 31, 1999 and is qualified in
its entirety by reference to such Financial Statements and Notes, thereto.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 188,655
<SECURITIES> 0
<RECEIVABLES> 2,135,753
<ALLOWANCES> 0
<INVENTORY> 3,257,492
<CURRENT-ASSETS> 6,324,188
<PP&E> 728,869
<DEPRECIATION> 379,927
<TOTAL-ASSETS> 7,164,840
<CURRENT-LIABILITIES> 1,187,558
<BONDS> 0
0
0
<COMMON> 5,333
<OTHER-SE> 1,000
<TOTAL-LIABILITY-AND-EQUITY> 7,164,840
<SALES> 5,534,448
<TOTAL-REVENUES> 5,534,448
<CGS> 3,279,086
<TOTAL-COSTS> 3,279,086
<OTHER-EXPENSES> 1,846,656
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,046
<INCOME-PRETAX> 408,706
<INCOME-TAX> 176,000
<INCOME-CONTINUING> 408,706
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 232,706
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
