<PAGE>
UNITED STATES
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 March 31, 1997 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 for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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 April 30, 1997
Common Stock 4,196,462
<PAGE>
STAGE II APPAREL CORP.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Condensed Consolidated Balance Sheets--March 31, 1997
(unaudited) and December 31, 1996....................... 2
Condensed Consolidated Statements of Operations--Three Months
Ended March 31, 1997 and 1996 (unaudited)............... 3
Condensed Consolidated Statements of Cash Flows--Three Months
Ended March 31, 1997 and 1996 (unaudited)............... 4
Notes to Condensed Consolidated Financial Statements...... 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 7
Part II. Other Information................................ 9
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash......................................... $ 822 $ 429
Accounts receivable.......................... 777 1,334
Finished goods inventory..................... 3,316 5,130
Prepaid expenses............................. 401 374
Prepaid income taxes and refunds receivable.. 112 130
--------- ------------
Total current assets....................... 5,428 7,397
Property and equipment, at cost, less
accumulated depreciation................... 551 585
Marketable securities........................ 7,254 8,655
Goodwill, less accumulated amortization...... 7,416 7,558
Covenant not to compete, less accumulated
amortization............................... 289 300
Other assets................................. 1,371 1,314
--------- ------------
TOTAL ASSETS............................... $22,309 $25,809
--------- ------------
--------- ------------
LIABILITIES:
Due to factor................................ $ 6,195 $ 7,174
Due to bank.................................. -- 434
Accounts payable............................. 721 1,838
Notes payable--current....................... 184 185
Notes payable to shareholder--current........ 411 411
Income taxes payable......................... 32 8
Accrued royalties............................ 240 182
Other current liabilities.................... 786 488
--------- ------------
Total current liabilities.................. 8,569 10,720
Notes payable--long term..................... 199 199
Notes payable to shareholder--long term...... 500 500
--------- ------------
TOTAL LIABILITIES.......................... 9,268 11,419
--------- ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000 shares
authorized; none issued and outstanding.... -- --
Common stock, $.01 par value, 9,000 shares
authorized; 4,993 shares issued and 4,196
shares outstanding at March 31, 1997 and
December 31, 1996, respectively............ 50 50
Additional paid-in capital................... 7,502 7,502
Retained earnings............................ 8,222 9,346
--------- ------------
15,774 16,898
Less treasury stock, at cost; 797 shares at
March 31, 1997 and December 31, 1996....... (2,092) (2,092)
Allowance for decline in market value of
securities available for sale.............. (511) (329)
Cumulative translation adjustment............ (130) (87)
--------- ------------
TOTAL SHAREHOLDERS' EQUITY................. 13,041 14,390
--------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY... $22,309 $25,809
--------- ------------
--------- ------------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net sales............................................ $ 4,067 $ 8,437
Cost of goods sold................................... 3,390 6,790
------- -------
Gross profit......................................... 677 1,647
Commission and other income.......................... 85 113
------- -------
762 1,760
Selling, general and administrative expenses......... 1,659 2,526
Provision for litigation costs....................... -- 30
------- -------
Operating loss....................................... (897) (796)
Other income (expenses):
Loss on sale of securities......................... (33) --
Interest income.................................... 77 214
Interest and factoring expenses.................... (224) (775)
------- -------
Loss from continuing operations before income tax
benefit............................................ (1,077) (1,357)
Income taxes (benefit)............................... (9) 20
------- -------
Loss from continuing operations...................... (1,068) (1,377)
Loss from discontinued operations.................... -- (141)
------- -------
Net loss............................................. $(1,068) $(1,518)
------- -------
------- -------
Net loss per common share:
Loss from continuing operations.................... $ (.26) $ (.33)
Loss from discontinued operations.................. -- (.03)
------- -------
$ (.26) $ (.36)
------- -------
------- -------
Weighted average common shares outstanding........... 4,196 4,196
------- -------
------- -------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Net cash provided by (used in) operating
activities........................................ $ 665 $(449)
Investing Activities:
Purchase and sale of property and equipment, net.. (2) (4)
Sale or redemption of available for sale
marketable securities........................... 1,219 378
Loss on sale of securities........................ (33) --
------- -----
Net cash provided by (used in) investing activities. 1,184 374
------- -----
Financing Activities:
Factor financing, net............................. (979) 316
Bank financing, net............................... (434) (146)
------- -----
Net cash provided by (used in) financing activities. (1,413) 170
------- -----
Effects of exchange rate changes on cash............ (43) --
------- -----
Net increase (decrease) in cash..................... 393 95
Cash at beginning of year........................... 429 151
------- -----
Cash at end of period............................... $ 822 $ 246
------- -----
------- -----
Supplemental disclosure of cash flows information:
Cash paid for income taxes........................ $ 10 $ 17
------- -----
------- -----
Cash paid for interest, excluding factoring fees.... $ 167 $ 444
------- -----
------- -----
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
STAGE II APPAREL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 March 31,
1997 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, 1996 and are incorporated herein
by reference.
NOTE 2. FINISHED GOODS INVENTORY
Finished goods inventories for the interim periods presented were
computed using the gross profit method.
NOTE 3. DISCONTINUED OPERATIONS
In July 1996, the Company finalized its plan to liquidate the operations
of Woody Sports Apparel, Inc., its 80% owned Canadian subsidiary ("Woody
Sports"). The operations of Woody Sports have been accounted for as
discontinued operations because the subsidiary dealt with a separate and
distinct class of customers from those of the Company's continuing
operations. As of a result, the Company provided for an estimated loss on
disposal of $1.5 million at December 31, 1996, consisting of a provision of
$326,000 for operating losses during the phase-out period and a noncash
impairment charge of $1.2 million against goodwill of the subsidiary. The
Company's consolidated statements of operations for the three months ended
March 31, 1996 have been restated to account for the operations of the
discontinued subsidiary separately from continuing operations. The Company's
consolidated balance sheets have not been reclassified. Assets and
liabilities of Woody Sports included in the consolidated balance sheets at
March 31, 1997 and December 31, 1996 were as follows:
(In thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
<S> <C> <C>
Current assets ................................. $ 152 $ 769
Current liabilities............................. (337) (996)
Noncurrent assets............................... -- --
Noncurrent liabilities.......................... -- --
</TABLE>
NOTE 4. NEW CREDIT AGREEMENT
In April 1997, the Company replaced its factoring arrangement (the "Prior
Agreement") with a new facility under a factoring agreement (the "Credit
Agreement") with Milberg Factors Corp. (the "Factor"). In connection with the
refinancing, Stage II repaid $6 million of its borrowings under the Prior
Agreement with repatriated earnings of its Hong Kong subsidiary ("Stage II
HK") and refinanced the balance of net direct borrowings aggregating $1.8
million under the Credit Agreement.
5
<PAGE>
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
prime. 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 remaining 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
to fund the Company's foreign manufacturing orders. The aggregate amount of
letters of credit and borrowings 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 $17 million. The
Credit Agreement is scheduled to expire on December 31, 1997, subject to
automatic one-year renewal terms unless terminated at the option of either
party.
NOTE 5. PROPOSED SETTLEMENT
In April 1996, the Company and Stage II HK commenced a lawsuit in the
Supreme Court of the State of New York against Stuart Goldman, Townsley, Ltd.
("Townsley") and related parties to recoup damages incurred in connection
with their October 1994 acquisition of substantially all the assets and
related liabilities of Townsley, the purchase of all the capital stock of
Townsley's Hong Kong subsidiary and the related employment and subsequent
termination of Mr. Goldman as President of Stage II and Stage II HK. In June
1996, Mr. Goldman and his co-defendants filed an answer denying Stage II's
claims in the lawsuit and asserting various counterclaims. During the fourth
quarter of 1996, the parties to the lawsuit agreed to submit their claims to
nonbinding mediation, which led to an agreement in principle for a settlement
of the lawsuit. The proposed settlement contemplates a payment from the
Company of approximately $1.2 million, partially offset by the relinquishment
of 292,135 shares of the Company's common stock issued as part of the
purchase price for the Townsley assets.
6
<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
distributes an extensive range of men's and boy's casual apparel and
activewear. The Company markets its apparel to mass merchandisers under
nationally recognized brand names as well as proprietary and private labels.
The Company's products are produced to its specifications by various
independent manufacturers in the Far East, United States, Africa and Europe.
Stage II also acts as purchasing agent for various major retailing customers.
The Company has historically developed its product lines primarily
through the acquisition of exclusive and non-exclusive license rights to
nationally recognized brand names for sales of its apparel in the United
States. In 1996, the Company streamlined its operations to focus on its most
popular labels, relinquishing its license rights for four brand name lines,
renewing its Spalding license and adding a new exclusive license for the
Dunlop brand. Stage II also increased its emphasis on proprietary and private
label sales in 1996, including its own Timber Run label, and entered into
manufacturing arrangements with Unique Sports Generation ("Unique Sports")
for NBA brand apparel. In April 1997, Stage II expanded its arrangements with
Unique Sports to add NFL brand sportswear. Sales of the Company's new product
lines are not expected to add significant revenues until the second half of
1997.
In general, the Company's established brand name apparel sells at a
higher price and with greater gross profit margins than its comparable
non-branded apparel. These advantages are partially offset by royalty and
advertising expenses incurred in accordance with the Company's license
agreements for its brand name apparel. These expenses are included in
selling, general and administrative ("SG&A") expenses. Difficulties in
reducing fixed SG&A costs and maintaining strong profit margins in the face
of intensified competition, consolidation and overall weakness in the retail
apparel market have contributed significantly to the Company's net losses in
the last three years and the first quarter of 1997. As part of its strategy
for returning to profitability, in addition to consolidating its licensing
arrangements, the Company has systematically reduced the scope of its
operations to concentrate on its most successful products, eliminated highly
promotional merchandise, trimmed SG&A expenses, added new commission sales
personnel and realigned management to focus on its core product lines.
RECENT DEVELOPMENTS
DISCONTINUED OPERATIONS. 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 Stage II acquired 80% of the
common stock and all the preferred stock in 1993 for approximately $1.6
million. During the third quarter of 1996, the Company finalized its plan to
liquidate the operations of Woody Sports and provided for a loss on disposal
of $1.5 million, comprised of a provision of $326,000 for operating losses
during the phase-out period and a noncash impairment charge of $1.2 million
against goodwill of the subsidiary. The Company's consolidated statements of
operations for the quarter ended March 31, 1996 been restated to account for
the operations of Woody Sports as discontinued operations in view of the
Company's decision to dispose of its interest in the subsidiary. The
liquidation of Woody Sports is expected to be completed by the end of June
1997.
PROPOSED LITIGATION SETTLEMENT. In April 1996, the Company and its Hong
Kong subsidiary "(Stage II HK") commenced a lawsuit in the Supreme Court of
the State of New York against Stuart Goldman, Townsley, Ltd. ("Townsley") and
related parties to recoup damages incurred in connection with their October
1994 acquisition of substantially all the assets and related liabilities of
Townsley, the purchase of all the capital stock of Townsley's Hong Kong
subsidiary and the related employment and subsequent termination of Mr.
Goldman as President of Stage II and Stage II HK. In June 1996, Mr. Goldman
and his co-defendants filed an answer denying Stage II's claims in the
lawsuit and asserting various counterclaims. During the fourth quarter of
1996, the parties to the lawsuit agreed to submit their claims to nonbinding
mediation, which led to an agreement in principle for a settlement of the
lawsuit.
7
<PAGE>
The proposed settlement contemplates a payment from the Company of
approximately $1.2 million, partially offset by the relinquishment of 292,135
shares of the Company's common stock issued as part of the purchase price for
the Townsley assets. Stage II expects to implement the proposed settlement in
the near future.
RESULTS OF OPERATIONS
SEASONALITY. Stage II experiences some seasonal business fluctuations due
primarily to seasonal buying patterns for its product mix of casual apparel
and activewear. While sales of the Company's products are made throughout the
year, the largest sales volume has historically occurred in the third
quarter. The following table reflects these quarterly fluctuations, which
have been restated to account for the operations of Woody Sports as
discontinued operations and should not be construed as indicative of future
net sales.
Quarterly Net Sales
(In thousands)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
1997........... $ 4,067 $ -- $ -- $ -- $ --
1996........... 8,437 5,693 10,397 8,901 33,428
1995........... 14,015 12,233 20,387 13,542 60,177
1994........... 13,150 10,040 20,124 16,246 59,560
</TABLE>
QUARTER ENDED MARCH 31, 1997 AND 1996. Net sales from continuing
operations of $4.1 million for the first quarter of 1997 decreased by 51.2%
from $8.4 million in the corresponding quarter of 1996. The decrease reflects
intensified competition, consolidation and overall weakness in the retail
apparel trade, the termination of certain brand name apparel licenses in 1996
and a planned reduction in the scope of the Company's operations.
Approximately $1.6 million or 36.5% of the sales decline was attributable to
the relinquishment of four brand name apparel licenses in 1996. Sales of
replacement brand name and proprietary lines are not expected to add
significant revenues until the second half of 1997.
Cost of goods sold as a percentage of sales increased to 83.4% in the
first quarter of 1997 compared to 80.5% in the same quarter last year. The
increase reflects lower gross profit margins primarily resulting from higher
levels of promotional sales in response to the continuing weak retail trade
and the sell off of discontinued lines.
Commission and other income decreased by $28,000 or 24.8% during the
first quarter of 1997 compared to the corresponding prior quarter, reflecting
a decline in the Company's sales agency business.
SG&A expenses for the first quarter of 1997 decreased by 32.0% to $1.7
million compared to $2.5 million for the first quarter of 1996, primarily
from a reduction in variable costs associated with lower sales volumes and a
cost reduction plan adopted in the second quarter of 1996 as part of the
Company's redirection of its business. SG&A expenses as a percentage of sales
increased to 40.8% for the first quarter of 1997 compared to 29.9% in the
corresponding prior quarter, reflecting a faster decline in sales than the
Company's ability to reduce fixed SG&A expenses.
Interest and factoring expenses, net of interest income, aggregated
$147,000 or 3.6% of sales in the first quarter of 1997 compared to $561,000
or 6.7% of sales in the corresponding quarter last year, representing a
decrease of $414,000 or 73.8%. The decrease reflects lower interest rates and
reduced levels of borrowing.
8
<PAGE>
The Company recognized losses from continuing operations before benefits
or provisions for income taxes in the first quarters of 1997 and 1996
aggregating $1.1 million and $1.4 million, respectively, reflecting the
foregoing trends. In the first quarter of 1997, the Company's net loss was
$1.1 million or $.26 per share based on 4,196,000 average common shares
outstanding. In the first quarter of 1996, after accounting for a loss of
$141,000 from discontinued operations of Woody Sports, the Company's net loss
was $1.5 million or $.36 per share based on 4,196,000 average common shares
outstanding. See "Recent Developments--Discontinued Operations" above.
The results of operations for the quarter ended March 31, 1997 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 first quarter of 1997 aggregated $665,000. The Company's cash position
during the quarter was further increased by the sale of marketable securities
held by Stage II HK netting $1.2 million. During the first quarter of 1997,
$1.0 million was repaid to the Company's factor and $434,000 was repaid on
bank borrowings by Woody Sports. As a result of these activities, the
Company's cash position increased from $429,000 at December 31, 1996 to
$822,000 at March 31, 1997.
CAPITAL RESOURCES. The Company had retained earnings of $9.3 million at
December 31, 1996, including unremitted earnings of Stage II HK in the amount
of $11.7 million, of which $8.6 million 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. During 1996, the Company repatriated $3.4 million of Stage II
HK's retained earnings and applied the funds primarily to reduce short term
debt to its factor. The repatriation did not trigger domestic taxes due to
the availability of net operating losses to offset the taxable income.
During the first four months of 1997, the Company decided to repatriate
an additional $6.3 million of Stage II HK's retained earnings to
substantially reduce short term debt. The repatriation is not expected to
trigger domestic taxes due to the availability of net operating losses to
offset any taxable income created. Stage II does not expect to repatriate
additional retained earnings without available net operating losses to offset
the taxable income. To the extent it decides 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 at the time of the decision to liquidate. A loss of $33,000 was
incurred from the sale of securities in the first quarter of 1997.
During the first quarter of 1997, Stage II maintained a factoring
agreement with Republic Factors Corp. (the "Prior Facility"). As of March 31,
1997, the Company's net direct borrowings under the Prior Agreement
aggregated $6.2 million. As of that date, the Company had no material
commitments for capital expenditures
In April 1997, the Company replaced the Prior Facility with a new
facility under a factoring agreement (the "Credit Agreement") with Milberg
Factors Corp. (the "Factor"). In connection with the refinancing, Stage II
repaid $6 million of its borrowings under the Prior Agreement with
repatriated earnings of Stage II HK and refinanced the balance of net direct
borrowings aggregating $1.8 million under the Credit Agreement.
The Credit Agreement provides a revolving credit facility for short term
borrowings by Stage II at a floating interest rate equal to 1/2% above the
prime rate. 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
9
<PAGE>
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
to fund the Company's foreign manufacturing orders. The aggregate amount of
letters of credit and borrowings 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 $17 million. The
Credit Agreement is scheduled to expire on December 31, 1997, subject to
automatic one-year renewal terms unless terminated at the option of either
party.
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 December 31, 1996, the subsidiary's net
direct borrowings under its line of credit aggregated $434,000. As of that
date, the subsidiary had no material commitments for capital expenditures. In
March 1997, Woody Sports repaid all outstanding obligations under its credit
facility and elected to terminate the facility in connection with its planned
liquidation.
The Company believes that its internally generated funds and borrowings
available under its 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 its
operations in the future.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
During the first quarter of 1997, the Company entered into settlement
negotiations for a pending lawsuit involving its Townsley acquisition. See
"Management's Discussion and Analysis of Financial Position and Results of
Operations--Recent Developments-Proposed Litigation Settlement."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8--K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number: Exhibit
------- -------
<S> <C>
10.1 Factoring Agreement dated April 29, 1997 between the Company
and Milberg Factors Corp.
</TABLE>
(b) Reports on Form 8-K. None.
10
<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: May 23, 1997 By: /S/ ANTHONY M. PISANO
--------------------------------
Anthony M. Pisano
Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
11
<PAGE>
SEC EXHIBIT 10.1
FACTORING AGREEMENT
MILBERG FACTORS, INC.
99 Park Avenue
New York, NY 10016
Gentlemen:
We propose the following agreement with you, effective as of April 29, 1997
wherein we agree to retain you as our sole factor in accordance with the terms,
provisions and conditions as hereinafter stated:
1. The undersigned, hereby sells, assigns, transfers and sets over to you as
absolute owner and you hereby agree to purchase from the undersigned, without
recourse to the undersigned to the extent expressly set forth below, all
Receivables now or hereafter owned by us which are acceptable to you. You
hereby agree to assume the risk of loss resulting from a customer's nonpayment
of an approved Receivable due to the customer's financial inability at maturity
to pay such Receivable. You shall not be responsible, however, for nonpayment
due to any reason other than such inability to pay. The term "Receivables"
means and includes all accounts receivable, notes, bills, acceptances and any
and all other forms of obligations owing to us, whether secured or unsecured,
all proceeds thereof and all of our rights to any merchandise which is
represented thereby (delivered or undelivered), including all of our rights of
stoppage in transit, replevin and reclamation as an unpaid vendor or lienor.
You shall be privileged to enjoy all of the rights and remedies of the seller of
such goods and shall be and become subrogated to all guaranties, collateral and
other rights possessed by us or due to come into our hands, but you shall not be
liable in any manner for exercising or refusing to exercise any rights thereby
bestowed. From time to time we shall provide you with schedules describing all
Receivables created or acquired by us and shall execute and deliver to you at
your offices in the City of New York written assignments of such Receivables to
you and shall furnish at the same time copies of customers' invoices or the
equivalent, together with original shipping or delivery receipts for all
merchandise sold and/or all notes, bills, acceptances or other evidences of
customer indebtedness duly endorsed in blank by us, and any other information or
documents you may call upon us from time to time to submit, all in form
satisfactory to you. Receivables not approved by you as provided below in whole
or in part (including any Receivables outstanding on the date hereof) shall bear
the factoring charge described below, and are hereby assigned to you with full
recourse to the undersigned to the extent and in the respects not so approved.
2. The amounts and terms of each sale to our customers shall be submitted to
you for your credit approval in writing and no sales or deliveries shall be made
without such written approval, which may be withdrawn at any time before
delivery, but in no event shall you have any credit risk on any Receivable,
whether or not approved by you, if the net face amount of such Receivable is
less than $150.00, or the invoice evidences charges for samples supplied to our
customer. Your factoring charge, due and payable at time of purchase, shall be
sixty-two+one-half one hundreds
<PAGE>
of one Percent (.625%) of the gross amount of said Receivables, and an
additional one percent (1%) of Receivables from customers who are debtors-in
possession less any trade and cash discounts to customers (which shall be
computed on the shortest terms where optional terms are given). In the event
that the terms of any of our sales exceeds 90 days, you shall receive as to such
sales an additional 1/4 of one percent for each additional 30 days, or portion
thereof, of extended terms or additional dating. The purchase price of
Receivables accepted by you is to be the net fact amount thereof less your
factoring charge. The term "net face amount" means the gross amount of
Receivables, less trade and cash discounts to customers (which shall be computed
on the shortest terms where optional terms are given) and credits and allowances
to customers of any nature. After purchase of Receivables by you, a discount,
credit or allowance may be claimed solely by the customer and the undersigned
will not issue or grant any discounts, credits or allowances to a customer
without your prior consent. AT the time of purchase of Receivables and
periodically thereafter, you may in your sole and absolute discretion make
advances to us and to Stage II Apparel Corp. of Hong Kong Ltd., which, in the
aggregate and at anytime outstanding will not exceed the lesser of (i)
$17,000,000.00 including Letters of Credit (the "Maximum Revolving Amount"), or
(ii) eighty-five percent (85%) of the purchase price, and you will credit to our
account the balance of said purchase rice less any moneys remitted, paid or
otherwise advanced by you for our account and less returns, trade and cash
discounts, credits or allowances of any nature at anytime issued, owed, granted
our outstanding, upon the respective collection of such Receivables, after
adding thereto five(5) banking days to cover mailing time, delays in remittances
and clearance of checks, or, in the case of approved Receivables, upon their
respective uncollectability because of the customer's financial inability at
maturity to pay same. Notwithstanding the foregoing, it is understood that you
may, at our request, from time to time advance a sum that is more or less than
the sum determined by the application of the above percentage of the purchase
price and may, in fact, make advances in excess of the Maximum Revolving Amount
but you are under no obligation to do so; all advances in excess of the
aforesaid percentage, less all applicable deductions, charges, chargebacks and
reserves, and all advances in excess of the Maximum Revolving Amount, are
repayable on demand. Amounts taken by customers for anticipation at an annual
rate in excess of two percent (2%) below the Prime rate (as defined in paragraph
3 hereof) or for excessive periods of time shall be charged to our account by
you. The minimum aggregate factoring charges payable under this Agreement for
each contract year hereof shall be one hundred thousand dollars ($100,000.00),
which , to the extent of any deficiency, shall be chargeable to our account with
you on a monthly basis. You shall be entitled to hold all sums and all property
of the undersigned at any time to our credit or in your possession, or upon or
in which you have a lien or security interest, as security for all of our
obligations at any time owing to you and to each corporation which is at any
time your parent, affiliate, subsidiary or a co-subsidiary of your parent. Such
obligations shall include, without limitation, all obligations to you hereunder
and all obligations for purchases made by the undersigned from any other client
factored or financed by your or by any such parent, affiliate, subsidiary or co-
subsidiary, whether under this agreement or otherwise, no mater how or when
arising and whether due or to become due, and you shall have the right to charge
to our account the amount of all such obligations and pay over such amounts to
such parent, affiliate, subsidiary or co-subsidiary. Recourse to security shall
not at any time be required, and we shall at all times remain liable to you and
such parent, affiliate, subsidiary or co-subsidiary on demand for all loans and
advances (including any advances in excess of the net face amount of
Receivables) to
<PAGE>
or for our account and for all of our other obligations to you. You may at your
option reserve an amount of past sales (the "Reserve"), and revise said Reserve
from time to time, if in your sole judgment it is necessary to cover possible
returns of merchandise, deductions or other claims or setoffs made by customers.
3. Subject to the provisions of this Agreement, upon our request, you shall
remit (and at any time in your sole discretion you may remit) any money standing
to our credit on your books in excess of the Reserve. You may charge to our
account interest on any moneys remitted or otherwise advanced by you or charged
to our account hereunder (the "Advances") before the collection of Receivables
or in the case of approved Receivables, before their respective uncollectibility
because of the customer's financial inability at maturity to pay same as above
described, at a rate one-half of one percent (.5%) per annum above the highest
publicly announced "reference", "prime" or "base" interest rate of The Chase
Manhattan Bank, N.A., or The Bank of New York (the "Prime Rate"), (which is not
eight and one-half percent per annum ) computed on the basis of a 360 day year
(the "Effective Rate"). Said Effective Rate shall be increased or decreased
effective the first day of the month following any month in which there is an
increase or decrease in the Prime Rate, such increase or decrease to be in an
amount equal to the increase or decrease in such Prime Rate. Such interest is
due and payable at the close of each month. You will account to us monthly and
each monthly accounting will be fully binding upon us unless we give you written
notice of exceptions within sixty (60) days from its date.
4. We warrant and agree as to each such Receivable that at the time of the sale
or assignment thereof to you hereunder and at all times thereafter: it will be
a bona fide existing obligations created by the absolute sale and delivery of
merchandise or the rendition of services to customers in the ordinary course of
business and will be paid and performed according to the terms provided therein;
all documents delivered to you in connection therewith are genuine; it will be
enforceable against all parties thereto without credit, defense, offset or
counterclaim, real or claimed, whether arising out of the transaction creating
such Receivable or otherwise; and it will be free and clear of liens and
encumbrances. We further warrant and agree as to each such Receivable that at
the time of the sale or assignment thereof to you hereunder we will have good
title thereto and good right to sell, assign, transfer and set over such
Receivable to you. All invoices to customers shall state plainly on the face
thereof that the accounts receivable represented by such invoices have been
assigned and are payable only to you. You may prepare and mail all customers'
invoices, and billings of such customers' invoices by whomsoever done shall
constitute an assignment to you of the Receivables represented thereby whether
or not the undersigned executes any other specific instrument of assignment. We
hereby further warrant and agree that the customer in each instance has received
and will accept the merchandise sold or the services rendered and the invoice
therefor without dispute or claim in any respect whatsoever, including, without
limitation, disputes as to price, terms or quality and defenses based on force
majeure. We will notify you promptly of and shall at our own cost and expense
settle all disputes and claims and will pay you promptly the amount of the
Receivables affected thereby, as well as the amount of any unapproved Receivable
if unpaid at its due date. If you so elect you are to have and are hereby
granted the right and option at all times to settle, compromise, adjust or
litigate al disputes or claims directly with the customer or other complainant
upon such terms and conditions as you deem advisable, and also the right to take
possession of and to sell or cause
<PAGE>
to be sold without notice any returned merchandise, at such prices, to such
purchasers and upon such terms as you deem advisable, and in any case to charge
the deficiencies, costs and expenses thereof (including attorneys' fees) to us.
In addition to all other rights hereunder, you may charge against our account he
full net face amount of any Receivable where there is such dispute, defense,
offset, claim and/or counterclaim (regardless of the extent or nature thereof or
whether arising out of the transaction creating such Receivable or otherwise) or
where the customer fails or refuses to pay the amount due for any reason other
than the customer's financial inability at maturity to pay, or if any unapproved
Receivable is unpaid at its due date, but such chargeback shall not be deemed a
re-assignment thereof, and title to such Receivable shall remain in you until
such Receivable is fully paid, settled or discharged. We hereby agree to
indemnify and hold you harmless against and in respect of any and all liability,
loss or expense (including attorneys' fees) arising out of or relating to any
breach of warranty or covenant on our part. Any merchandise which is returned
by customers or otherwise recovered shall be set aside, marked in your name and
held by us as y our trustee. We exonerate you from any liability for any loss,
depreciation or other damage to Receivables unless caused by your willful and
malicious act. We agree to execute such further instruments as may be required
or permitted by any law relating to notices of or affidavits in connection with
assignments of accounts receivable and to cooperate with you in the filing or
recording and renewal thereof. As additional security for all of our
obligations to you, as hereinabove defined, the undersigned hereby grants you a
continuing security interest in all Accounts, General Intangibles and Contract
Rights (as said terms are defined in Article 9 of the Uniform Commercial Code)
now existing or hereafter acquired by us and all proceeds thereof. Each sale of
Receivables hereunder shall constitute and be a transaction separate from and
independent of each other, but all such transactions shall be subject to and
governed by each and every of the terms, provisions and conditions of this
agreement. During the term of this agreement we shall not sell, negotiate,
pledge or assign or grant any security interest in any Receivables, Accounts,
General Intangibles, Contract Rights or inventory to any one other than you
without your prior consent, nor shall we grant or permit to exist without your
prior consent any mortgage, pledge, security interest, encumbrance or lien of
any kind upon any of our property, except liens for taxes not yet due, liens
incidental to our business which were not incurred in connection with the
borrowing of money or obtaining of advances or credit and which do not in the
aggregate materially detract from the value of our assets or impair the use
thereof in the operation of our business. We authorize you to sign our name and
file in the public office any Financing Statements or other instruments which
may be required to perfect your interest hereunder. We appoint Stephen R.
Murphy or any other person whom you may designate as our attorney with power:
to endorse our name on any checks, notes, acceptances, money orders, drafts or
other forms of payment or security that may come in your possession; to sign our
name on any invoice or bill of lading relating to any Receivable, on drafts
against customers, on schedules of assignment of Receivables, on notices of
assignment and public records, on verification of accounts and on notice to
customers; to notify the post office authorities to change the address for
delivery of our mail to an address designated by you; to receive, open and
dispose of all mail addressed to us; to send requests for verification of
accounts to customers; and to do all other things you deem necessary to carry
out this Agreement. We hereby ratify and approve all acts of the attorney and
neither you nor the attorney will be liable for any acts of commission or
omission, nor for any error of judgment or mistake of fact or law. This power,
being coupled with an interest, is irrevocable so long as any Receivable sold to
you
<PAGE>
remains unpaid or any money remains due to you from us. We shall immediately
place notations upon our books of account to disclose the assignment of all
Receivables, accounts, general intangibles and contract rights to you.
5. In the event of any breach by us of any provision and/or upon the
termination of this agreement, the undersigned will repay upon demand all our
obligations to you and in addition thereto all costs and expenses incurred to
obtain or enforce payment of any obligation of the undersigned to you, or in the
prosecution or defense of any action or proceeding either against you or us
concerning any matter resulting from this Agreement and/or the Receivables
and/or any of our obligations to you, including, without limitation, to defend
successfully, in whole or in part, any and all actions or proceedings brought by
the undersigned. In addition, we agree to reimburse you for the amount of all
filing and search fees, reasonable attorneys fees, cost and expenses incurred by
you in connection with the negotiating and closing of this agreement and any
ancillary documents issued in connection herewith and modifications and
additions to any of them. We shall also pay your customary charges for all
services performed by you for us at our request and all banking facility charges
incurred in connection with the opening and operation of our account with you,
and we shall also pay you your customary charges for any field examination,
collateral analysis or other business analysis, the need for which is determined
by you, plus all costs and disbursements incurred by you in the performance of
such examinations or analysis. If any remittances are made directly to us, we
shall hold the same as your property and immediately deliver them to you in
their original form. We hereby waive presentment and protest of any instrument
and notice thereof, notice of default and any other notices to which we might
otherwise be entitled. All sales of Receivables to you by us shall be deemed to
include all of our right, title and interest to all of our books, records, files
and all other data and documents relating to each Receivable. If any tax by any
governmental authority is imposed on any transaction between us, or in respect
to sales or the merchandise affected by such sales, which you are or may be
required to withhold or pay, we agree to indemnify and hold you harmless in
respect of such taxes, and we will repay you the amount of any such taxes, which
may be charged to our account.
6. We warrant that we are solvent and will so remain during the terms of the
Agreement. We agree to furnish to you year-end financial statements certified
by our regularly employed Certified Public Accountant, such unaudited financial
statements and financial information as you shall reasonably request, and, on
each anniversary hereof, a list of our shareholders, officers and directors.
This Agreement shall be governed by and interpreted in accordance with the laws
of the State of New York applicable to contracts to be performed wholly within
the State of New York and shall have an initial term of one year from its
effective date and thereafter shall be automatically renewed for successive
periods of one year unless terminated by us at the conclusion of its initial
term or any renewal term by giving you at least sixty (60) days prior written
notice; provided, however, that you may terminate it at any time during the
initial term or any renewal term by giving us at least sixty (60) days prior
written notice. The mailing of a registered or certified letter of notice
addressed by one party to the other at its usual address shall constitute
sufficient notice, and the termination shall be effective on the appropriate
date specified in such letter. Notwithstanding the foregoing, you may terminate
this Agreement, without notice, upon the occurrence of any one or more of the
following events (an "Event of
<PAGE>
Default"): (a) default in the payment or performance, when due or payable, of
any payment required under this Agreement or under any future agreement or
supplement with you or under any agreement to which we are a party with third
parties; (b) any warranty, representation, or other statement made or furnished
to you by us or on our behalf or by any guarantor of our obligations hereunder
or in connection herewith or in any instrument furnished in compliance with or
in reference to this Agreement proves to have been false or misleading in any
material respect when made or furnished or becomes false in any material
respect; (c) e fail or neglect to perform, keep or observe any term, provision,
condition, covenant, warranty or representation contained in this Agreement or
in any other agreement between us or any rider or supplement which is required
to be performed, kept or observed by us; (d) any statement, report, financial
statement, or certificate made or delivered by us, or by any of our officers,
employees or agents, to you is not true and correct in any material respect; (e)
the imposition of a lien or encumbrance on any of our assets, including the
Receivables, or the making of any levy, seizure, or attachment on all or any of
our assets, including the Receivables; (f) any material adverse change in our
financial condition or the financial condition of any guarantor of our
obligations hereunder; (g) we or any guarantor of our obligations hereunder
become insolvent, or unable to meet our debts as they mature, or fail, suspend
or go out of business or a case is commenced under the Bankruptcy Code or an
order for relief in a case under the Bankruptcy Code is entered with respect to
us or any such guarantor, or a custodian or receiver (or other court designee
performing the functions of a receiver) is appointed for or takes possession of
either our or any such guarantor's assets or affairs; (h) we or any guarantor of
our obligations hereunder cease to conduct our business as now conducted or are
enjoined, restrained or in any way prevented by court, governmental or
administrative order from conducting all or any material part of our business
affairs; (i) a notice of any lien, levy or assessment is filed of record with
respect to all or any of our assets by the United States, or any department,
agency or instrumentality thereof, or by any state, country, municipal or other
governmental agency, including, without limitation, the Pension Benefit Guaranty
Corporation, or if nay taxes or debts owing at any time or times hereafter to
any one of them becomes a lien or encumbrance upon any of the Receivables or any
of our other assets and the same is not released within thirty (30) days after
the same becomes a lien or encumbrance; (j) you shall in good faith deem
yourself insecure or unsale; (k) any guaranty given you with respect to our
obligations is limited or terminated or otherwise deemed unenforceable or
invalid; (l) death of a guarantor of our obligations hereunder or in connection
herewith which guaranty is not replaced by a guarantor, acceptable to you in
your sole discretion; (m) we shall fail to pay our taxes when due unless such
taxes are being contested in good faith by appropriate proceeding and with
respect to which adequate reserves have been provided on our books; (n) should
there be a sale or transfer of all or substantially all of our assets or any
material change in our shareholdings; or (o) should our Tangible Net Worth (as
customarily defined under GAAP) be less than $4,000,000.00; or (p) should our
Working Capital (as customarily defined under GAAP) but including all marketable
securities whether current or long term be less than $2,600,000.00. Upon the
effective date of termination for whatever reason, all moneys chargeable to our
account under this Agreement shall be immediately due and payable without
further notice or demand. Notwithstanding termination, until all your rights
and all our obligations hereunder (including without limitation the payment in
full of all moneys chargeable to our account under this Agreement and the
provision of an indemnity as provided in the last sentence of this Agreement)
have been fully satisfied, (i) we shall continue to assign to you and
<PAGE>
grant you a security interest in all Receivables then existing or thereafter
arising, shall not factor or assign Receivables, or grant a security interest
therein, to any other person or entity, shall state on the fact of all invoices
that the Accounts Receivable represented by such invoices have been assigned and
are payable only to you, and shall immediately deliver any remittances to you in
their original form, (ii) all of our obligations and all of you rights and
powers with respect to Receivables then existing or thereafter arising, with
respect to other security then existing thereafter arising or acquired, and with
respect to transactions or events occurring prior to the effective date of such
termination shall be unaffected and unimpaired by such termination, and (iii)
all of our representations, warranties, covenants and agreements and all other
provisions binding upon us contained herein shall survive and continue in full
force and effect, and shall be fully operative.
7. Failure by you to exercise any right, remedy or option under this Agreement
or delay by you in exercising the same will not operate as a waiver; no waiver
or consent by you will be effective unless it is writing and then only to the
extent specifically stated. This Agreement cannot be changed or terminated
other than by a writing signed by the party to be charged, is our entire
contract, and is for the benefit of and binding upon the parties hereto and
their respective successors and assigns, heirs, executors, administrators and
personal representatives. Your rights and remedies under this agreement will be
cumulative and not exclusive of any other right or remedy which you may have.
Both you and we waive all right to a trial by jury in any litigation relating to
transactions under this Agreement, supplements hereto and any related
agreements, and we agree not to assert any counterclaim of any nature in such
litigation. In the event that you cease to act as factor for us hereunder, we
agree to furnish to you an indemnity satisfactory to you against any item which
could be charged to use under the terms hereof which may in your sole and
absolute discretion include the retention of any property held by your or the
holding by you without interest from the termination of any balance standing to
our credit, as security for our obligations hereunder.
ATTEST: Very truly yours,
STAGE II APPAREL CORP.
/s/ Barbara Cicardo By: /s/ Jack Clark
Barbara Cicardo, Secretary Jack Clark, Chairman of the Board
(Seal) Date: April 10, 1997
Address: 350 Fifth Avenue
New York, NY 10118
ATTEST:
Accepted at New York, N.Y.
MILBERG FACTORS, INC.
/s/ Harold H. Oertell By: /s/ Leonard L. Milberg
Harold H. Oertell, Secretary/Treasurer Leonard L. Milberg, Chairman
(Seal) Date: April 10, 1997
