SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1996 Commission File No. 1-9502
STAGE II APPAREL CORP.
(Exact name of registrant as specified in its charter)
New York 13-3016967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Fifth Avenue
New York, New York 10118
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (212) 564-5865
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock as of the latest practicable date.
Title of Class Outstanding at November 11, 1996
Common Stock, par value $.01 per share 4,196,462
<PAGE>
STAGE II APPAREL CORP.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Condensed Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 ........................................ 2
Condensed Consolidated Statements of Operations - Three and Nine Months Ended September 30,
1996 and 1995 ...................................................................................................... 3
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1996
and 1995 ........................................................................................................... 4
Notes to Condensed Consolidated Financial Statements .................................................................... 5
Management's Discussion and Analysis of the Financial Condition and Results of Operations ............................... 6
Part II. Other Information .................................................................................................. 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STAGE II APPAREL CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
($ in thousands) Sept. 30, Dec. 31,
Assets 1996 1995*
------ -------- --------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 201 $ 151
Accounts receivable 645 2,063
Finished goods inventory 8,866 12,507
Prepaid expenses 516 928
Prepaid income taxes and refunds receivable 740 743
-------- --------
Total current assets 10,968 16,392
Property and equipment - at cost, less accumulated
depreciation 616 772
Marketable securities 9,903 11,123
Goodwill, less accumulated
amortization 7,701 9,230
Covenant not to compete, less accumulated
amortization 661 732
Other assets 1,151 1,287
-------- --------
$ 31,000 $ 39,536
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Due to factor $ 10,900 $ 11,658
Due to bank -- 1,011
Accounts payable 1,465 2,645
Notes payable - current 170 171
Income taxes payable 19 51
Accrued royalties 390 648
Other current liabilities 305 379
Current liabilities net of current assets of discontuinued subsidary 287 --
-------- --------
Total current liabilities 13,536 16,563
Notes payable - long term 300 384
Notes payable to shareholder - subordinated 911 911
Stockholders' equity
Preferred stock, $.01 par value, 1,000,000
shares authorized; none issued and outstanding
Common stock, $.01 par value, 9,000,000
shares authorized; 4,993,425 issued and 4,196,462 outstanding 50 50
Additional paid in capital 7,502 7,502
Retained earnings 11,332 16,308
-------- --------
18,884 23,860
Less treasury stock at cost, 796,963 shares at
Sept. 30, 1996 and December 31, 1995 (2,092) (2,092)
Cumulative translation adjustment (90) (90)
Allowance for decline in market value of securities
available for sale (449) --
-------- --------
Total stockholders' equity 16,253 21,678
Commitments and contingencies -- --
-------- --------
$ 31,000 $ 39,536
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
* Condensed from audited financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
STAGE II APPAREL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
($ in thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 10,397 $ 21,623 $ 25,427 $ 49,006
Cost of goods sold 8,271 16,874 20,580 38,509
-------- -------- -------- --------
Gross profit 2,126 4,749 4,847 10,497
Commission and other income 355 746 715 1,444
-------- -------- -------- --------
Income before operating expenses 2,481 5,495 5,562 11,941
Selling, general and administrative expenses 2,116 4,050 7,752 11,723
Other expenses:
Interest and factoring expenses, net 428 834 1,313 1,865
Minority interest in loss of subsidiary -- (18) -- (52)
-------- -------- -------- --------
Income (loss) before income tax benefit (63) 629 (3,503) (1,595)
Income tax (benefit) (75) 202 (55) (640)
-------- -------- -------- --------
Net income (loss) from continuing operations 12 427 (3,448) (955)
Discontinued operations:
Loss on disposal of discontinued subsidary, including a provision
of $160,000 for operating losses during the phase-out period -- -- 1,528 --
-------- -------- -------- --------
Net income (loss) $ 12 $ 427 ($ 4,976) ($ 955)
======== ======== ======== ========
Earnings (loss) per share $ 0.00 $ 0.10 ($ 1.19) ($ 0.23)
======== ======== ======== ========
Weighted average number of shares
outstanding 4,196 4,196 4,196 4,195
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
<TABLE>
<CAPTION>
STAGE II APPAREL CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
($ in thousands)
(Unaudited)
Nine Months Ended
-------------------------------
Sept. 30, Sept. 30,
1996 1995
------- -------
<S> <C> <C>
Net cash provided by (used in) operating activities $ 325 ($6,191)
Cash flows from investing activities:
Purchases of property and equipment - net (8) (199)
Proceeds from sales or redemption's of
marketable securities - net 771 66
------- -------
Net cash provided by (used in) investing activities 763 (133)
------- -------
Cash flows from financing activities:
Factor financing - net (758) 5,282
Bank financing - net (196) 797
Treasury stock transactions -- 22
Repayment of notes payable (84) (78)
------- -------
Net cash (used in) provided by financing activities (1,038) 6,023
------- -------
Effect of exchange rate changes on cash -- (26)
------- -------
Net increase (decrease) in cash and cash equivalents 50 (327)
Cash and cash equivalents at beginning of period 151 365
------- -------
Cash and cash equivalents at end of period $ 201 $ 38
======= =======
Supplemental disclosures of cash flows information:
Cash paid during the period for:
Income taxes $ 17 $ 4
======= =======
Interest $ 1,265 $ 2,242
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
STAGE II APPAREL CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation - - The accompanying unaudited condensed consolidated
financial statements of Stage II Apparel Corp. (the "Company") have been
prepared in accordance with generally accepted accounting principles and,
in the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary to fairly present the Company's financial
position at September 30, 1996, and its results of operations and cash
flows for the interim periods presented. The accounting policies followed
by the Company are set forth in Note 1 to the Consolidated Financial
Statements included in its Annual Report on Form 10-K for the year ended
December 31, 1995.
2. Inventories - - The interim period inventories were computed using the
gross profit method.
3. Disposal of Discontinued Subsidiary - - In May 1996, the Company decided to
explore alternatives for disposing of its interest in Woody Sports Apparel,
Inc., a Canadian distributor of activewear in which the Company acquired
80% of the common stock and all the preferred stock in 1993 for
approximately $1.6 million. In July 1996, the Company finalized its plan to
liquidate the operations of the Canadian subsidiary and has provided for a
loss on disposal of $1.5 million, including a provision of $160,000 for
operating losses during the phase-out period and a noncash impairment
charge of $1,089,000 against goodwill of the subsidiary. See Note 4 -- New
Accounting Standards.
4. New Accounting Standards - - The Company has implemented the Financial
Accounting Standards Board's Statement No. 121, Accounting for the
Impairment of Long-Lived Assets to be Disposed Of ("FAS 121"). Under FAS
121, certain assets are required to be reviewed periodically for impairment
whenever circumstances indicate their carrying amount exceeds their fair
value and may not be recoverable. In July 1996, the Company finalized its
plan to liquidate the operations of its Canadian subsidiary. As part of the
plan of liquidation, the Company took a noncash impairment charge of
$1,089,000 against the carrying value of goodwill of the Canadian
subsidiary. See Note 3 -- Disposal of Discontinued Subsidiary. In addition,
as a result of a management realignment and related lawsuit involving the
termination of the Company's former president, the Company recognized a
noncash impairment charge of $125,000 in the second quarter of 1996 against
the carrying value of prepaid salary advanced to the former president.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("FAS 123"), which established financial accounting and
reporting standards for stock-based employee compensation plans and for
transactions in which an entity issues its equity instruments to acquire
goods and services from nonemployees. FAS 123 requires, among other things,
that compensation costs be calculated for fixed stock options at the grant
date by determining fair value using an option pricing model. The Company
has the option of recognizing the compensation cost over the vesting period
as an expense in the consolidated statement of operations or making pro
forma disclosures in the notes to financial statements reflecting the
effects on net earnings as if the compensation cost had been recognized in
the consolidated statement of operations. The Company adopted FAS 123 in
1996 and will make the required pro forma disclosures in the notes to its
annual financial statements.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Stage II Apparel Corp. (the "Company" or "Stage II") designs and arranges
for the manufacture of an extensive range of casual apparel and activewear,
primarily for men and boys. Stage II markets its apparel to mass merchandisers,
department stores and sporting goods and specialty stores. The Company's apparel
lines are sold under licenses for a number of nationally recognized brand names
and to a lesser extent under private and proprietary labels. Stage II's licensed
brand name apparel generally sells at a higher price and with greater gross
profit margins than its comparable private and proprietary label apparel. The
higher prices are partially offset by the additional costs of royalty and
advertising expenses incurred in accordance with the Company's license
agreements.
Recent Developments
Disposal of Discontinued Subsidiary. In May 1996, the Company decided to
explore alternatives for disposing of its interest in Woody Sports Apparel, Inc.
("Woody Sports"), a Canadian distributor of activewear in which Stage II
acquired 80% of the common stock and all the preferred stock in 1993 for
approximately $1.6 million. In July 1996, the Company finalized its plan to
liquidate the operations of Woody Sports and has provided for a loss on disposal
of $1.5 million, including a provision of $160,000 for operating losses during
the phase-out period and a noncash impairment charge of $1,089,000. See "Asset
Impairment under FAS 121" below.
Asset Impairment under FAS 121. In the first half of 1996, the Company
implemented the Financial Accounting Standards Board's Statement No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed Of ("FAS
121"). Under FAS 121, certain assets are required to be reviewed periodically
for impairment whenever circumstances indicate their carrying amount exceeds
their fair value and may not be recoverable. In July 1996, the Company finalized
its plan to liquidate the operations of its Canadian subsidiary. In addition to
the impairment charge for Woody Sports, as a result of a management realignment
and related lawsuit involving the termination of the Company's former president,
the Company recognized a noncash impairment charge of $125,000 in the second
quarter of 1996 against the carrying value of prepaid salary advanced to the
former president. See "Legal Proceedings."
Employee Stock Options. In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("FAS 123"), which established financial accounting and
reporting standards for stock-based employee compensation plans and for
transactions in which an entity issues its equity instruments to acquire goods
and services from nonemployees. FAS 123 requires, among other things, that
compensation costs be calculated for fixed stock options at the grant date by
determining fair value using an option pricing model. The Company has the option
of recognizing the compensation cost over the vesting period as an expense in
the consolidated statement of operations or making pro forma disclosures in the
notes to financial statements reflecting the effects on net earnings as if the
compensations cost had been recognized in the consolidated statements reflecting
the effects on net earnings as if the compensation cost had been recognized in
the consolidated statement of operations. The Company adopted FAS 123 in 1996
and will make the required pro forma disclosures in the notes to its annual
financial statements
Results of Operations
Seasonality. The Company experiences some seasonal business fluctuations
due primarily to its product mix. While sales of the Company's products are made
throughout the year, Stage II's largest sales volume in 1995 and 1994 occurred
in the third quarter. The following table reflects these quarterly fluctuations,
which should not be construed as indicative of future sales volumes.
6
<PAGE>
<TABLE>
<CAPTION>
Quarterly Net Sales
-----------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
1996 $ 8,955 $ 6,075 $ 10,397 $ -- $ --
1995 14,358 13,025 21,623 14,815 63,821
1994 14,296 11,116 21,736 18,045 65,193
1993 17,096 12,878 18,211 18,188 66,373
</TABLE>
Three Months Ended September 30, 1996 and 1995. Net sales of $10,397,000
for the third quarter of 1996 decreased by 51.9% from $21,623,000 in the
corresponding quarter of 1995. The decrease reflects the general downturn in the
retail trade, the termination of certain brand name apparel licenses and a
planned redirection of the Company's business by its management.
Cost of goods sold as a percentage of sales increased by 1.5% from the
corresponding quarter last year. The increase resulted from higher levels of
promotional sales in response to the continuing weak retail trade and the
selloff of merchandise under discontinued licenses.
Selling, general and administrative expenses for the third quarter of 1996
decreased by 47.8% to $2,116,000 compared to $4,050,000 for the same quarter of
1995, primarily from a reduction in variable costs associated with lower sales
volumes and a cost reduction plan adopted in the second quarter of the year as
part of the Company's redirection of its business. Selling, general and
administrative expenses as a percentage of sales increased to 20.4% for the
third quarter of 1996 compared to 18.7% in the same quarter last year.
Interest expense, net of interest income, decreased by $406,000 or 48.7%
for the current quarter compared to the third quarter of 1995, reflecting
decreased levels of financing.
The Company recognized net income of $12,000 in the third quarter of 1996
compared to $427,000 for the corresponding quarter last year, reflecting the
forgoing trends.
Nine months Ended September 30, 1996 and 1995. Net sales of $25,427,000 for
the first nine months of 1996 decreased by 48.1% from $49,006,000 in the
corresponding period of 1995. The decrease reflects the general downturn in the
retail trade, the termination of certain brand name apparel licenses and a
planned redirection of the Company's business by its management.
Cost of goods sold as a percentage of sales increased by 2.4% from the
corresponding period last year. The increase resulted from higher levels of
promotional sales in response to the continuing weak retail trade and the sell
off of discontinued lines.
Selling, general and administrative expenses for the first nine months of
1996 decreased by 33.9% to $7,752,000 compared to $11,723,000 for the same
period of 1995, primarily from a reduction in variable costs associated with
lower sales volumes and a cost reduction plan adopted in the second quarter of
the year as part of the Company's redirection of its business. Selling, general
and administrative expenses as a percentage of sales increased to 30.5% for the
first nine months of 1996 compared to 23.9% in the same period last year.
Interest expense, net of interest income, decreased by $552,000 or 29.6%
for the first nine months of 1996 compared to the corresponding period of 1995,
reflecting decreased levels of financing.
The Company recognized a loss from operations of $3,503,000 before income
taxes in the first nine months of 1996, compared to a loss before taxes of
$1,595,000 for the corresponding period last year, reflecting the forgoing
trends and, for the current period, an impairment charge of $125,000 recognized
in the second quarter against the carrying value of prepaid salary under FAS
121. See "Recent Developments --Asset Impairment under FAS 121" above.
7
<PAGE>
In the second quarter of 1996, the Company provided for the liquidation of
Woody Sports. The provision totaled $1,528,000, including $160,000 for operating
losses during the phase-out period and a noncash impairment charge of $1,089,000
against the carrying value of goodwill of the Canadian subsidiary. See "Recent
Developments-- Disposal of Discontinued Subsidiary" and "--Asset Impairment
under FAS 121" above. After accounting for the nonrecurring charge for the
disposal of the discontinued subsidiary, the loss per share was $1.19 for the
current period versus $.23 for the first nine months of 1995.
The results of operations for the quarter and nine months ended September
30, 1996 are not necessarily indicative of operating results to be expected for
the full year.
Liquidity and Capital Resources
Liquidity. Net cash provided by Stage II's operating activities during the
nine months of 1996 aggregated $325,000. The Company's cash position during the
period was increased by the sale of marketable securities netting $771,000.
During the period, $8,000 was expended on purchases of equipment, $84,000 was
paid to note holders, $758,000 was repaid to the Company's factor and $246,000
was repaid on bank borrowings by Woody Sports. As a result of these activities,
the Company's cash and cash equivalents increased from $151,000 at December 31,
1995 to $201,000 at September 30, 1996, while its working capital deficit
increased from $171,000 to $2,568,000. The deficit was reduced in October 1996
by the repatriation of $1,188,000 in foreign earnings and the application of
these funds to reduce the Company's short term debt to its factor. See "Capital
Resources" below.
Capital Resources. The Company had retained earnings of $11,322,000 at
September 30, 1996, including unremitted earnings of it's Hong Kong subsidiary
("Stage II HK") in the amount of $13,345,000, of which $10,003,000 was invested
in marketable fixed-income securities. Stage II HK has paid only local (i.e.,
foreign) taxes associated with its unremitted earnings, which would be subject
to the current U.S. tax rate on those funds (less the amount previously paid in
local taxes) if they were to be repatriated and made available for domestic use.
There are no restrictions on the repatriation of these unremitted earnings,
other than their being subject to domestic taxation upon repatriation. The
Company repatriated $1,188,000 of Stage II HK's retained earnings in October
1996 to reduce short term debt to its factor and may repatriate up to an
additional $1,300,000 for the same purpose without incurring domestic taxes due
to the availability of net operating losses to offset the taxable income. Except
for these remissions, Stage II has no present intention of repatriating
additional foreign earnings or disposing of Stage II HK's remaining marketable
fixed-income securities before their scheduled maturities. Because these
investments are primarily in long-term fixed-income securities, they have been
classified as long-term assets. To the extent it elects to sell these securities
or to make current use of the funds, the Company will recognize a gain or loss
equal to the difference between their market value and its investment in the
securities.
Stage II has a factoring agreement (the "Credit Agreement") with Republic
Factors Corp. (the "Factor"). The Credit Agreement provides a revolving credit
facility for short-term borrowings by the Company at a floating interest rate
equal to 1/2% above the prime rate of Republic National Bank. Borrowings under
the Credit Agreement are payable upon demand and secured by the Company's
inventory, accounts receivable, cash surrender value of officers life insurance
and the marketable securities of Stage II HK. The Factor purchases the Company's
accounts receivable that it has preapproved, without recourse except in cases
where there are merchandise returns or billing or merchandise disputes in the
normal course of business. In addition, the Factor is responsible for the
accounting and collection of all accounts receivable sold to it by the Company.
The Factor receives a commission under the Credit Agreement in an amount less
than 1% of net receivables purchased by the Factor. The Credit Agreement also
provides for the issuance of letters of credit by a banking affiliate of the
Factor to fund the Company's foreign manufacturing orders. The aggregate amount
of borrowings and letters of credit available under the Credit Agreement are
determined from time to time based upon the requirements of the Company, with a
borrowing and letter of credit limit up to approximately $18,000,000. The Factor
may terminate the Credit Agreement for any reason at any time, without penalty,
upon 30 days' prior written notice. Although the Credit Agreement is scheduled
to expire on December 31, 1996, the Company expects to renew the arrangement for
1997.
8
<PAGE>
At September 30, 1996, the Company's net direct borrowings under the Credit
Agreement aggregated $10,900,000. As of that date, the Company had no material
commitments for capital expenditures. In October 1996, the Company repaid
$1,188,000 of its Credit Agreement borrowings with repatriated earnings of Stage
II HK.
Woody Sports has established a line of credit secured by an assignment of
its accounts receivable and inventories, a general security agreement and an
assignment and postponement of inter-company notes and receivables. The credit
facility provides for borrowings at a floating interest rate equal to 1/2% above
the lender's prime. At September 30, 1996, the subsidiary's net direct
borrowings under its line of credit aggregated $815,000. As of that date, the
subsidiary had no material commitments for capital expenditures.
The Company believes that its internally generated funds and funds
available under the Credit Agreement will be sufficient to meet its foreseeable
working capital requirements. Stage II may reborrow amounts repaid under its
Credit Agreement or seek other external means to finance in the future.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
In its Quarterly Reports on Form 10-Q for the first two quarters of 1996,
the Company reported developments in its lawsuit against its former president
and related counterclaims involving a 1994 acquisition of the apparel business
owned by the former president. During the third quarter of 1996, the parties
agreed to submit the matter to nonbinding arbitration.
Item 6. Exhibits and Reports on Form 8 - K.
(a) Exhibits. None.
(b) Reports on Form 8 - K. None.
9
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAGE II APPAREL CORP.
Date: November 14, 1996 BY: /s/ Jack Clark
----------------------------------------
Jack Clark
Chairman of the Board
(Duly Authorized Officer)
Date: November 14, 1996 BY: /s/ Thomas S. Hammill
----------------------------------------
Thomas S. Hammill
Treasurer
(Duly Authorized Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1996
<CASH> 201
<SECURITIES> 9,903
<RECEIVABLES> 645
<ALLOWANCES> 0
<INVENTORY> 8,866
<CURRENT-ASSETS> 10,968
<PP&E> 616
<DEPRECIATION> 0
<TOTAL-ASSETS> 31,000
<CURRENT-LIABILITIES> 13,536
<BONDS> 0
0
0
<COMMON> 50
<OTHER-SE> 7,502
<TOTAL-LIABILITY-AND-EQUITY> 31,000
<SALES> 25,427
<TOTAL-REVENUES> 0
<CGS> 20,580
<TOTAL-COSTS> 7,752
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,313
<INCOME-PRETAX> (3,503)
<INCOME-TAX> (55)
<INCOME-CONTINUING> (3,448)
<DISCONTINUED> (1,528)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,976)
<EPS-PRIMARY> (1.19)
<EPS-DILUTED> 0
</TABLE>
