SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 9, 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/
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
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURE 13
- 2 -
<PAGE>
PART 1
FINANCIAL INFORMATION
Item 1: Financial statements
ACTIVE APPAREL GROUP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1 9 9 9 1 9 9 8
------- -------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 187,577 $ 192,870
Refundable income taxes -- 284,478
Due from factor 1,815,835 1,887,245
Inventory 4,191,123 3,026,241
Prepaid expenses and other current assets 540,516 354,822
Deferred tax asset 237,000 106,130
----------- -----------
Total current assets 6,972,051 5,851,786
Note receivable, officer 120,000 120,000
Property and equipment, net 377,105 360,233
Security deposits and other assets 301,594 270,343
----------- -----------
Total assets $ 7,770,750 $ 6,602,362
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,106,877 $ 822,119
Accrued expenses and other current liabilities 456,131 35,667
----------- -----------
Total current liabilities 1,563,008 857,786
----------- -----------
Commitments and contingencies
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 792,287 329,121
----------- -----------
6,934,961 6,471,795
Less treasury stock, at cost (174,000 common shares) (727,219) (727,219)
----------- -----------
Total stockholders' equity 6,207,742 5,744,576
----------- -----------
Total liabilities and stockholders' equity $ 7,770,750 $ 6,602,362
=========== ===========
</TABLE>
- 3 -
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1 9 9 9 1 9 9 8 1 9 9 9 1 9 9 8
------- ------- ------- -------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $11,148,223 $ 8,287,856 $ 5,613,775 $ 4,026,996
Cost of goods sold 6,493,991 5,118,156 3,214,905 2,478,300
----------- ----------- ----------- -----------
Gross profit 4,654,232 3,169,700 2,398,870 1,548,696
----------- ----------- ----------- -----------
Operating expenses:
Selling and shipping 2,639,989 1,752,166 1,350,002 904,777
General and administrative 988,711 983,694 530,020 496,076
Financial expenses, including interest
expense of $100,349 and $74,533 for
the six months ended June 30, 1999 and
1998 212,718 186,935 114,740 85,649
----------- ----------- ----------- -----------
3,814,418 2,922,795 1,994,762 1,486,502
----------- ----------- ----------- -----------
Income before provision for income taxes 812,814 246,905 404,108 62,194
Provision for income taxes 349,648 94,204 173,648 21,269
----------- ----------- ----------- -----------
Net income $ 463,166 $ 152,701 $ 230,460 $ 40,925
=========== =========== =========== ===========
Basic earnings per share $ .18 $ .06 $ .09 $ .02
=========== =========== =========== ===========
</TABLE>
- 4 -
See accompanying notes to financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 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 - six months
ended June 30, 1999 - - - - - 152,701
--------- ------ ------- ------ ---------- --------
Balance, June 30, 1998 2,494,081 $5,333 100,000 $1,000 $6,136,341 $722,457
========= ====== ======= ====== ========== ========
Balance, December 31, 1998 2,492,581 $5,333 100,000 $1,000 $6,136,341 $329,121
Stock options exercised - - - - - -
Net income - six months
ended June 30, 1999 - - - - - 463,166
--------- ------ ------- ------ ---------- --------
Balance, June 30, 1999 2,492,581 $5,333 100,000 $1,000 $6,136,341 $792,287
========= ====== ======= ====== ========== ========
</TABLE>
Treasury Stock
Shares Amount Total
------ ------ -------
Balance, December 31, 1997 172,500 $(725,625) $5,975,305
Stock options exercised - - 11,500
Net income - six months
ended June 30, 1999 - - 152,701
--------- --------- ----------
Balance, June 30, 1998 172,500 $(725,625) $6,139,506
======= ========== ==========
Balance, December 31, 1998 174,000 $(727,219) $5,744,576
Stock options exercised - - -
Net income - six months
ended June 30, 1999 - - 463,166
------- --------- ----------
Balance, June 30, 1999 174,000 $(727,219) $6,207,742
======= ========== ==========
-5-
See accompanying notes to financial statements.financial statements.
<PAGE>
ACTIVE APPAREL GROUP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
Cash flow from operating activity:
<S> <C> <C>
Net income $ 463,166 $ 152,701
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 64,488 60,962
Amortization 2,857 3,254
Changes in assets(increase) decrease:
Refundable income taxes 284,478 110,000
Due from factor 71,410 (1,290,812)
Inventory (1,164,882) 1,253,184
Prepaid expenses and other current assets (185,694) (114,963)
Deferred tax asset (130,870) 17,441
Security deposits and other assets (34,108) (229,607)
Changes in liabilities increase (decrease):
Accrued expenses and other current liabilities 420,464 (20,409)
Accounts payable 284,758 164,003
----------- -----------
Net cash provided by operating activities $ 76,067 $ 105,754
----------- -----------
Cash flows used in investing activities:
Acquisition of property and equipment (81,360) (34,804)
----------- -----------
Cash flows provided by financing activities:
Proceeds from stock options exercised -- 11,500
---------- -----------
Net increase(decrease) in cash and cash equivalents (5,293) 82,450
Cash and cash equivalents, beginning of period 192,870 59,441
----------- -----------
Cash and cash equivalents ,end of period $ 187,577 $ 141,891
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 100,349 $ 74,533
Income taxes -- 31,804
</TABLE>
- 6 -
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1997
1. Active Apparel Group, Inc. (the "Company") and basis of presentation:
The financial statements presented herein as of June 30, 1999 and for
the six months and the three months ended June 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 six and three month periods ended June 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 June 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 2,590,395 at June 30, 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 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 June 30, 1999 compared to quarter ended June 30, 1998
Net sales increased to $5,613,775 for the three months ended June 30,
1999 from $4,026,996 for the three months ended June 30, 1998, an increase of
$1,586,779, or 39.4%. 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 $2,398,870 for the three months ended June
30, 1999 from $1,548,696 for the three months ended June 30, 1998, an increase
of $850,174, or 54.9%. Gross profit increased as a percentage of net sales to
42.7% 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 $1,350,002 for the three
months ended June 30, 1999 from $904,777 for the three months ended June 30,
1998, an increase of $445,225 or 49.2%. Selling and shipping expenses as a
percentage of net sales increased to 24.0% from 22.5%. 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 $530,020 for the three
months ended June 30, 1999 from $496,076 for the three months ended June 30,
1998, an increase of $33,944, or 6.8%. General and administrative expenses as a
percentage of net sales decreased to 9.4% from 12.3%. The decrease as a
percentage of net sales was primarily attributed to the relative fixed nature of
general and administrative expenses.
Financial expenses increased to $114,740 for the three months ended
June 30, 1999 from $85,649 for the three months ended June 30, 1998, an increase
of $29,091, or 34.0%. 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 June 30, 1999 versus the comparable period in 1998, to
finance growth.
Operating income increased to $404,108 for the three months ended June
30, 1999 from $62,194 for the three months ended June 30, 1998, an increase of
$341,914, or 549.8%, because of the reasons stated in the
- 8 -
<PAGE>
preceding paragraphs. Operating income as a percentage of net sales was 7.2% for
the three months ended June 30, 1999 as compared to 1.5% for the three months
ended June 30, 1998.
The Company incurred a tax provision of $173,648 for the three months
ended June 30, 1999 as compared to $21,269 for the three months ended June 30,
1998, an increase of $152,379.
The Company had net income of $230,460 for the three months ended June
30, 1999 as compared to $40,925 for the three months ended June 30, 1998, an
increase of $189,535, or 463.1%, because of the reasons stated in the preceding
paragraphs.
Six months ended June 30, 1999 compared to six months ended June 30, 1998
Net sales increased to $11,148,223 for the six months ended June 30,
1999 from $8,287,856 for the six months ended June 30, 1998, an increase of
$2,860,367, or 34.5%. The increase is primarily attributed to increased sales
volume of the Company's women's products through continued market penetration,
introduction of the Company's men's products, acceptance of the Company's
products and increased orders from established accounts.
Gross profit increased to $4,654,232 for the six months ended June 30,
1999 from $3,169,700 for the six months ended June 30, 1998, an increase of
$1,484,532, or 46.8%. Gross profit increased as a percentage of net sales to
41.7% from 38.2%. 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 $2,639,989 for the six
months ended June 30, 1999 from $1,752,166 for the six months ended June 30,
1998, an increase of $887,823, or 50.7%. Selling and shipping expenses as a
percentage of net sales increased to 23.7% from 21.1%. 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 $988,711 for the six
months ended June 30, 1999 from $983,694 for the six months ended June 30, 1998,
an increase of $5,017, or .5%. General and administrative expenses as a
percentage of net sales decreased to 8.9% from 11.9%. 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 $212,718 for the six months ended June
30, 1999 from $186,935 for the six months ended June 30, 1998, an increase of
$25,783, or 13.8%. The increase is attributed to the increase in the Company's
net borrowings, for the six months ended June 30, 1999 versus the comparable
period in 1998, to finance growth.
Operating income increased to $812,814 for the six months ended June
30, 1999 from $246,905 for the six months ended June 30, 1998, an increase of
$565,909, or 229.2%, because of the reasons stated in the preceding paragraphs.
Operating income as a percentage of net sales was 7.3% for the six months ended
June 30, 1999 as compared to 3.0% for the six months ended June 30, 1998.
The Company incurred a tax provision of $349,648 for the six months
ended June 30, 1999 as compared to $94,204 for the six months ended June 30,
1998, an increase of $255,444, or 271.2%.
The Company had net income of $463,166 for the six months ended June
30, 1999 as compared to $152,701 for the six months ended June 30, 1998, an
increase of $310,465, or 203.3%, because of the reasons stated in the preceding
paragraphs.
- 9 -
<PAGE>
Liquidity and Capital Resources
Net cash provided by operating activities for the six months ended June
30, 1999 was $76,067 compared to $105,754 for the six months ended June 30,
1998. This decrease was primarily attributable to an increase in inventory. Net
cash used for investing activities for the six months ended June 30, 1999 was
$81,360 compared to $34,804 for the six months ended June 30, 1998. The increase
was attributable to capital expenditures for updated computer equipment. No cash
was provided by financing activities for the six months ended June 30, 1999
compared to $11,500 for the six months ended June 30, 1998. The decrease was
attributable to a decrease in the proceeds from the exercise of stock options.
During the six months ended June 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 June 30, 1999, working capital was $5,409,043
compared to $5,212,399 at June 30, 1998 an increase of $196,644.
Due from factor represents the amount owed to the Company for factored
receivables less the amount of outstanding advances made by the factor. At June
30, 1999 due from factor was $1,815,835 as compared to $2,947,095 at June 30,
1998, a decrease of $1,131,260. 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 $4,191,123 at June 30, 1999
as compared to $2,594,372 at June 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, 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 MTV Networks,
Inc. (the "MTV License") ended on June 30, 1999. The Company believes that not
renewing the MTV License will not have a material adverse effect on the
Company's business, financial condition or results of operations. Under the MTV
License, the Company was required to make royalty payments to MTV Networks, Inc.
of 8% 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 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.
- 10 -
<PAGE>
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.
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.
- 11 -
<PAGE>
PART II.
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
On June 11, 1999, the Company held its annual meeting of stockholders,
whereby the stockholders elected directors and approved a proposal to ratify the
appointment of Berenson & Company, LLP as the Company's independent auditors for
the fiscal year ending December 31, 1999. The votes on such matters were as
follows:
1. Election of directors:
For Against
--- -------
George Horowitz 2,666,341 13,856
Rita Cinque 2,666,741 13,456
James Anderson 2,666,736 13,461
Edward Epstein 2,666,741 13,456
Angelo Giusti 2,666,541 13,656
Larry Kring 2,666,541 13,656
2. Ratification of appointment of auditors: To ratify the appointment of
Berenson & Company, LLP as the Company's auditors for the fiscal year ending
December 31,1999.
For Against Abstain
--- ------- -------
2,668,040 9,326 2,831
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
- 12 -
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACTIVE APPAREL GROUP, INC.
Date: August 12, 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Form 10-QSB for the quarter ended June 30, 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> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 187,577
<SECURITIES> 0
<RECEIVABLES> 1,815,835
<ALLOWANCES> 0
<INVENTORY> 4,191,123
<CURRENT-ASSETS> 6,972,051
<PP&E> 789,275
<DEPRECIATION> 412,170
<TOTAL-ASSETS> 7,770,750
<CURRENT-LIABILITIES> 1,563,008
<BONDS> 0
0
0
<COMMON> 5,333
<OTHER-SE> 1,000
<TOTAL-LIABILITY-AND-EQUITY> 7,770,750
<SALES> 11,148,223
<TOTAL-REVENUES> 11,148,223
<CGS> 6,493,991
<TOTAL-COSTS> 6,493,991
<OTHER-EXPENSES> 3,814,418
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 100,349
<INCOME-PRETAX> 812,814
<INCOME-TAX> 349,648
<INCOME-CONTINUING> 812,814
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 463,166
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
