<PAGE> 1
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 JUNE 30, 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 JULY 31, 1997
Common Stock 4,196,462
<PAGE> 2
STAGE II APPAREL CORP.
INDEX
PART I. FINANCIAL INFORMATION PAGE
Condensed Consolidated Balance Sheets - June 30,1997
(unaudited) and December 31, 1996....................................... 2
Condensed Consolidated Statements of Operations -Three and
Six Months Ended June 30, 1997 and 1996 (unaudited) ................... 3
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 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.................................................. 11
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash ............................................................................. $ 215 $ 429
Accounts receivable .............................................................. 667 1,334
Finished goods inventory ......................................................... 5,632 5,130
Prepaid expenses ................................................................. 513 374
Prepaid income taxes and refunds receivable ...................................... 112 130
-------- --------
Total current assets ........................................................ 7,139 7,397
Property and equipment, at cost, less accumulated depreciation ................... 517 585
Marketable securities ............................................................ 3,119 8,655
Goodwill, less accumulated amortization .......................................... 7,274 7,558
Covenant not to compete, less accumulated amortization ........................... 278 300
Other assets .................................................................... 1,458 1,314
-------- --------
TOTAL ASSETS ................................................................ $ 19,785 $ 25,809
======== ========
LIABILITIES:
Due to factor .................................................................... $ 5,279 $ 7,174
Due to bank ...................................................................... -- 434
Accounts payable ................................................................. 539 1,838
Notes payable - current .......................................................... 170 185
Notes payable to shareholder - current ........................................... 411 411
Income taxes payable ............................................................. 36 8
Accrued royalties ................................................................ 152 182
Other current liabilities ........................................................ 607 488
-------- --------
Total current liabilities ................................................... 7,194 10,720
Notes payable - long term ........................................................ -- 199
Notes payable to shareholder - long term .................................... 500 500
-------- --------
TOTAL LIABILITIES ........................................................... 7,694 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 June 30, 1997 and December 31, 1996, respectively 50 50
Additional paid-in capital ....................................................... 7,502 7,502
Retained earnings ................................................................ 6,890 9,346
-------- --------
14,442 16,898
Less treasury stock, at cost; 797 shares at June 30, 1997 and December 31, 1996 .. (2,092) (2,092)
Allowance for decline in market value of securities available for sale ........... (133) (329)
Cumulative translation adjustment ................................................ (126) (87)
-------- --------
TOTAL SHAREHOLDERS' EQUITY .................................................. 12,091 14,390
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....................................... $ 19,785 $ 25,809
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 4
STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
($ in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ---------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net sales ......................................................... 2,348 5,693 6,415 14,130
Cost of goods sold ................................................ 2,048 4,882 5,438 11,672
------ ------ ------ -------
Gross profit ...................................................... 300 811 977 2,458
Commission and other income ....................................... 110 247 195 360
Selling, general and administrative ............................... 1,763 2,525 3,422 5,081
------ ------ ------ -------
Operating loss .................................................... (1,353) (1,467) (2,250) (2,263)
Other income /(expenses)
Interest and factoring expenses ................................... (134) (470) (358) (1,245)
Interest income ................................................... 61 186 138 400
Loss on sale of securities ........................................ (252) -- (285) --
------ ------ ------ -------
Loss before income tax (benefit) .................................. (1,678) (1,751) (2,755) (3,108)
Income tax (benefit) .............................................. (9) 20
------ ------ ------ -------
Net loss from continuing operations ............................... (1,678) (1,751) (2,746) (3,128)
Discontinued operations:
Gain /(loss) on disposal of discontinued subsidiary, including
a provision of $160,000 for operating loss during phase-out period 290 (1,719) 290 (1,860)
------ ------ ------ -------
Net loss .......................................................... (1,388) (3,470) (2,456) (4,988)
Net loss per common share:
Loss from continuing operations ............................... $(0.40) $(0.42) $(0.65) $ (0.75)
Gain / Loss from discontinued operations ....................... $ 0.07 $(0.41) $ 0.07 $ (0.44)
------ ------ ------ -------
$(0.33) $(0.83) $(0.58) $ (1.19)
====== ====== ====== =======
Weighted average number of shares outstanding ..................... 4,196 4,196 4,196 4,196
====== ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
Page 3
<PAGE> 5
STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1997 1996
------- -------
<S> <C> <C>
Net cash used in operating activities ............................. ($3,884) ($2,570)
INVESTING ACTIVITIES:
Purchase and sale of property and equipment, net ............. (5) (4)
Sale or redemption of available for sale marketable securities 6,219 629
------- -------
Net cash provided by investing activities ........................ 6,214 625
------- -------
FINANCING ACTIVITIES:
Factor financing, net ............................................. (1,894) 2,232
Repayment of notes ................................................ (170) (84)
Bank financing, net ............................................... (434) (246)
------- -------
Net cash provided by (used in) financing activities ............... (2,498) 1,902
------- -------
Effects of exchange rate changes on cash .......................... (46) 1
------- -------
Net decrease in cash .............................................. (214) (42)
Cash at beginning of year ......................................... 429 151
------- -------
Cash at end of period ............................................. $ 215 $ 109
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes ................................... $ 10 $ 17
======= =======
Cash paid for interest, excluding factoring fees ............. $ 367 $ 810
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 6
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 June 30, 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.It is
suggested that these financial statements be read in conjunction with wth the
annual report and notes there to,which are also included in the company's
December 31, 1996 Form 10-K. The results of operations for June 30, 1997 are not
necessarily indicative of the operating results for the full year, due to the
seasonality of the business.
NOTE 2. FINISHED GOODS INVENTORY
Finished goods inventories for the interim periods presented
were computed using the gross profit margin 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 six months ended June 30, 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 June 30, 1997 and December 31, 1996 were as
follows:
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----- -----
(UNAUDITED)
<S> <C> <C>
Current assets .................................... $ -- $ 769
Current liabilities ............................... -- (996)
Noncurrent assets ................................. -- --
Noncurrent liabilities ............................ -- --
</TABLE>
5
<PAGE> 7
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.
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> 8
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. The companies net losses last year
and in the second quarter of 1997 were primarily caused by difficulties in
reducing fixed SG&A costs,maintaining strong profit margins in the face of
intensified competition and consolidation as well as overall weakness in the
retail apparel market and the sell-off of discontinued lines. 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, realigned management to focus on its core product lines and expanded
into more promising manufacturing agreements.
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 non cash impairment charge of $1.1 million against goodwill of the
subsidiary and .1 million against prepaid salaries. The Company's consolidated
statements of operations for the quarter ended June 30, 1996 have 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 August
1997.
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 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 exceed 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 non cash impairment charge of $1,200,000
against the assets of the Canadian subsidiary. See "Discontinued Operations"
above.
7
<PAGE> 9
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. 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.
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 $ 2,348 $ -- $ -- $ --
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 June 30, 1997 and 1996. Net sales from continuing
operations of $2.3 million for the second quarter of 1997 decreased by 58.8%
from $5.7 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
$1.7 million or 50.8% 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 net sales increased to 87.2% in
the second quarter of 1997 compared to 85.8% 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 $137,000 or 55.5% during the
second quarter of 1997 compared to the corresponding prior quarter, reflecting a
decline in the Company's sales agency business.
SG&A expenses for the second quarter of 1997 decreased by 30.2% to $1.8
million compared to $2.5 million for the second 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 net sales
increased to 75.1% for the second quarter of 1997 compared to 44.4% in the
corresponding prior quarter, reflecting a faster decline in sales than the
Company's ability to reduce fixed SG&A expenses.
8
<PAGE> 10
Interest and factoring expenses, aggregated $134,000 or 5.7% of sales
in the second quarter of 1997 compared to $470,000 or 8.3% of sales in the
corresponding quarter last year, representing a decrease of $336,000 or 71.5%.
The decrease reflects lower interest rates, reduced levels of borrowing and pay
down of debt.
The Company recognized losses from continuing operations before
benefits or provisions for income taxes in the second quarters of 1997 and 1996
aggregating $1.7 million and $1.8 million, respectively, reflecting the
foregoing trends. In the second quarter of 1997, the Company's net loss was $1.4
million or $.33 per share based on 4,196,000 average common shares outstanding.
In the second quarter of 1996, after accounting for a loss of $1,719,000 from
discontinued operations of Woody Sports, the Company's net loss was $3.5 million
or $.83 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 June 30, 1997 are not
necessarily indicative of operating results to be expected for the full year.
Six Months Ended June 30, 1997 and 1996. Net sales of $6,415,000 for
the first six months of 1997 decreased by 54.6% from $14,130,000 in the
corresponding period last year.The decrease reflects the general downturn in the
retail trade, the termination of certain licenses and a planned reduction in
volume in anticipation of the continuing weak retail trade.
Cost of goods sold as a percentage of sales increased by 2.2% from the
corresponding period last year. The increase resulted from a higher level of
promotional sales, and a concentrated effort to reduce prior inventory styles.
Selling, general and administrative expenses for the first six months
of 1997 decreased by 32.7% to $3,422,000 compared to $5,081,000 for the same
period of 1996, primarily from a reduction in variable costs associated with
lower sales volumes. Selling, general and administrative expenses as a
percentage of sales increased to 53.3% for the first six months of 1997 compared
to 36.0 % in the same period last year, reflecting a faster decline in sales
than the Company's ability to reduce fixed SG&A expenses.
Interest and factoring expenses, decreased by $887,000 or 71.2% for the
first six months of 1997 compared to the same period of 1996, reflecting
decrease levels of financing and pay down of current debt.
The Company recognized a loss from continuing operations of $2,755,000
before income taxes in the first six months of 1997, compared to a loss before
taxes of $3,108,000 for the corresponding period last year . This reflects the
foregoing trends and , for the prior period included an impairment charge of
$125,000 against the carrying value of prepaid salaries under FAS 121. See
"Recent Developments -- Asset impairment under FAS 121" above.
After accounting for the disposal of the discontinued subsidiary, the
loss was $.58 for the current period versus $1.19 for the first six months of
1996.
The results of operations for the quarter and six months ended June 30,
1997 are not necessarily indicative of operating results to be expected for the
full year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. Net cash used by Stage II's operating activities during the
first half of 1997 aggregated $3,884,000. The Company's cash position during the
period was further increased by the sale of marketable securities held by Stage
II HK netting $6.2 million. During the first quarter of 1997, $6.0 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
decreased from $429,000 at December 31, 1996 to $215,000 at June 30, 1997.
9
<PAGE> 11
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 half of 1997, the Company decided to repatriate an
additional $6.3 million of Stage II HK's retained earnings to reduce short term
debt. Of that amount , $5.0 million was repatriated in the second quarter of
1997. 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 $285,000 was incurred from the sale of securities in the first half of
1997.
During the first four months of 1997, Stage II maintained a factoring
agreement with Republic Factors Corp. (the "Prior Facility"). As of June 30,
1997, the Company's net direct borrowings under the Prior Agreement aggregated $
.8 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 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.
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.
10
<PAGE> 12
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.
EXHIBIT
NUMBER: EXHIBIT
10.1 Factoring Agreement dated April 29, 1997 between the Company
and Milberg Factors Corp.
10.2 Change in the company's certifying accountant
11
<PAGE> 13
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: August 14, 1997 By: /s/ Jack Clark
--------------------------
Jack Clark
Chairman of the Board
(Duly Authorized Officer)
By: /s/ Michael T. Hanrahan
--------------------------
Michael T. Hanrahan
Treasurer and
Chief Financial Officer
(Duly Authorized Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 215,000
<SECURITIES> 3,119,000
<RECEIVABLES> 667,000
<ALLOWANCES> (220,094)
<INVENTORY> 5,632,000
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<PP&E> 1,415,000
<DEPRECIATION> 898,000
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<CURRENT-LIABILITIES> 7,194,000
<BONDS> 0
0
0
<COMMON> 50,000
<OTHER-SE> 12,041,000
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<INTEREST-EXPENSE> 358,000
<INCOME-PRETAX> (2,755,000)
<INCOME-TAX> (9,000)
<INCOME-CONTINUING> (2,746,000)
<DISCONTINUED> 290,000
<EXTRAORDINARY> 0
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<NET-INCOME> (2,456,000)
<EPS-PRIMARY> ($.58)
<EPS-DILUTED> ($.58)
</TABLE>
