Everlast Worldwide Inc – ‘10KSB’ for 12/31/97

As of:  Tuesday, 3/31/98   ·   For:  12/31/97   ·   Accession #:  921895-98-255   ·   File #:  0-25918

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Annual Report — Small Business   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB       Quarterly Report                                      50    236K 
 2: EX-27       Financial Data Schedule                                1      8K 

10KSB   —   Quarterly Report
Document Table of Contents

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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     
----------------------------------            --------------------------------- 
(State or other  jurisdiction                 (IRS Employer Identification No.) 
of incorporation or organization)                                             

1350 BROADWAY, SUITE 2300,  NEW YORK, NEW YORK           10018                  
----------------------------------------------          --------                
(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
------------------------------
(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
                                                                            ----

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

                                                        [Enlarge/Download Table]


                                                      ANNUAL COMPENSATION                                    
                                         --------------------------------------------------                  
                  NAME AND                                                   OTHER ANNUAL      ALL OTHER     
             PRINCIPAL POSITIONS         YEAR    SALARY ($)    BONUS ($)    COMPENSATION ($)  COMPENSATION($)
             -------------------         ----    ----------    ---------    ----------------  ---------------
                                                                                                             
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       

(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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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:                                    

                                                                [Download Table]


                                                  Beneficial Ownership            
                                                       Common, and                
                                                   Class A Common (1)             

NAME AND ADDRESS OF                                               PERCENTAGE OF   
BENEFICIAL OWNER                           NUMBER (2)            OUTSTANDING STOCK
                                           ----------            -----------------

                                                                                  
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)                           


(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.                                        

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(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 

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(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.                                                                 

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ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K                                    

(a)    EXHIBITS                                                                 

                                                        [Enlarge/Download Table]


EXHIBIT                                                            FILED             INCORPORATED BY                 
INDEX    DESCRIPTION OF DOCUMENT                                   HEREWITH           REFERENCE TO:                  
-----    -----------------------                                   --------           -------------                  

                                                                                                                     
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.                                                                                                    

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EXHIBIT                                                            FILED             INCORPORATED BY               
INDEX    DESCRIPTION OF DOCUMENT                                   HEREWITH           REFERENCE TO:                
-----    -----------------------                                   --------           -------------                

                                                                                                                   
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                             

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EXHIBIT                                                           FILED             INCORPORATED BY               
INDEX    DESCRIPTION OF DOCUMENT                                  HEREWITH           REFERENCE TO:                
-----    -----------------------                                  --------           -------------                

                                                                                                                  
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.                                                                                         

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EXHIBIT                                                         FILED             INCORPORATED BY              
INDEX    DESCRIPTION OF DOCUMENT                                HEREWITH           REFERENCE TO:               
-----    -----------------------                                --------           -------------               

                                                                                                               
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                                            

(b) REPORTS ON FORM 8-K                                                         

                No Current  Reports on Form 8-K were filed by the Company during
the last quarter of 1997.                                                       

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       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)

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ITEM 7:  FINANCIAL STATEMENTS                                                   

ACTIVE APPAREL GROUP, INC.

FINANCIAL STATEMENTS

DECEMBER 31, 1997 

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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 

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                                                                         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                                                                

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                                                                         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.

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                                                                         Page 3f

ACTIVE APPAREL GROUP, INC.

STATEMENTS OF INCOME

                                                        [Enlarge/Download Table]


                                                               YEARS ENDED            
                                                               DECEMBER 31,           
                                                        ----------------------------- 
                                                           1 9 9 7          1 9 9 6   
                                                       ------------       ----------- 

                                                                                      
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 
                                                               ====              ==== 

The accompanying notes are an integral part of the financial statements.

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                                                                         Page 4f

ACTIVE APPAREL GROUP, INC.

 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997 AND 1996

                                                        [Enlarge/Download Table]


                                                 9% CUMULATIVE                                   
                                                  CONVERTIBLE                                    
                                                 PREFERRED STOCK               COMMON STOCK      
                                              ---------------------     -------------------------
                                              SHARES         AMOUNT      SHARES           AMOUNT 
                                              ------         ------      ------           ------ 

                                                                                                 
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 
                                          ===========        ========  =========          ====== 

The accompanying notes are an integral part of the financial statements.

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                                       RETAINED                                                
       CLASS A                         EARNINGS                                                
     COMMON STOCK        PAID-IN     (ACCUMULATED       TREASURY STOCK                         
 SHARES        AMOUNT    CAPITAL       DEFICIT)     SHARES          AMOUNT         TOTAL       
--------       ------  -----------   ------------  --------     ---------------  ---------     

                                                                                               
 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 
 =======       ======   ==========    =========       =======       =========       ========== 

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                                                                         Page 5f

ACTIVE APPAREL GROUP, INC.

STATEMENTS OF CASH FLOWS

                                                        [Enlarge/Download Table]


                                                                                YEARS ENDED            
                                                                                DECEMBER 31,           
                                                                           ---------------------       
                                                                      1  9 9 7               1 9 9 6   
                                                                   ------------            ----------- 
Cash flows from operating activities:                                                                  
                                                                                                       
    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 

The accompanying notes are an integral part of the financial statements.

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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.                                

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                                                                         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
                                                        ========      ========

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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.                                            

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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:                                   

                                                                [Download Table]


                            UNITED STATES                CANADA           
                            -------------                ------           
                       ROYALTY      ADVERTISING   ROYALTY      ADVERTISING
                       -------      -----------   -------      -----------
Twelve months ending                                                      
                                                                          
  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   

          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.

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                                                                        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.          

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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.                                

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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.                                                 

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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.                                                                

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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:                                                            

                                                        [Enlarge/Download Table]


                                                 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      
-------------------         --------    -------  --------------    --------    --------------- 

                                                                                               
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
                           =======     =======       ======        =======                     

                                                        [Enlarge/Download Table]


                                                 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      
-------------------         --------    -------  --------------    --------    --------------- 

                                                                                               

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
                           =======     =======      =======        =======                     

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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%
                                                          ===            ===

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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      
                                       ==========         ==========

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                                                                        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.                                                        

Dates Referenced Herein   and   Documents Incorporated by Reference

				Referenced-On Page
This ‘10KSB’ Filing		Date		First		Last			Other Filings
		1/1/08		5
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		11/7/06		24					4
		11/3/05		24		25			8-K
		12/31/04		24					10-K/A
		1/3/04		24		25
		12/31/03		24					10-K,  4
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		12/31/02		5		42			10-K
		11/3/02		24		25
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		9/30/00		6		42			10QSB
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Filed on:		3/31/98							10QSB
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For Period End:		12/31/97		1		50
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		9/30/97		6		42			10QSB
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		1/17/97		28					8-K
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