STAGE II APPAREL CORP, PRES14A, 1997-12-15

STAGE II APPAREL CORP
PRES14A, 1997-12-15
MEN'S & BOYS' FURNISHGS, WORK CLOTHG, & ALLIED GARMENTS

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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]

Check the Appropriate Box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6[c][2])
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-12

- --------------------------------------------------------------------------------
STAGE II APPAREL CORP.
(Name of Registrant as Specified in its Charter)
and
(Name of Person Filing Proxy Statement)

(Name of Persons Filing Proxy Statement if other than the Registrant) -- N/A
- --------------------------------------------------------------------------------

Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed per Exchange Act Rules 14a-6(i)(1) and 0-11
[ ] Fee paid previously with preliminary materials

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing with which the offsetting fee was previously
paid. Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.

================================================================================
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PRELIMINARY COPY
STAGE II APPAREL CORP.
350 FIFTH AVENUE
NEW YORK, NY 10118
------------------------
PROXY STATEMENT PURSUANT TO SECTION 14(A)
AND INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF
THE SECURITIES ACT OF 1934
------------------------
December , 1997
Dear Shareholders:

You are cordially invited to attend a special meeting of shareholders of
Stage II Apparel Corp. (the "Company") to vote on a proposal (the "Proposal") to
approve the issuance of 4,008,654 shares (the "Exchange Shares") of the
Company's common stock ("SA Common Stock") pursuant to a Purchase Agreement
dated as of December 8, 1997 (the "Purchase Agreement") among the Company,
Shorebreak Group, Inc. ("Shorebreak") and its shareholders (the "Shorebreak
Shareholders"). The Special Meeting is described in the accompanying Notice of
Special Meeting of Shareholders, and the transactions contemplated by the
Purchase Agreement (the "Transactions") are described in the accompanying Proxy
Statement.

The Company has been seeking to implement a strategic business combination
for over a year, with a view in increasing shareholder values by adding new
apparel licenses or business lines to its reduced asset base and bringing in a
new management team. The Transactions have been structured to achieve each of
these goals.

The Purchase Agreement provides for the Company's acquisition of all the
outstanding capital stock of Shorebreak in consideration for the issuance of the
Exchange Shares and the Company's repurchase of 1,900,000 shares of SA Common
(the "Repurchase") held by Jack Clark, Robert Plotkin and Steven R. Clark,
officers, directors and principal shareholders of the Company (the "Principal
Shareholders") in consideration for their release from guarantees of the
Company's indebtedness to its factor and their receipt of options to purchase a
total of 1,500,000 shares of SA Common (the "Options") at exercise prices ranges
from $.50 to $1.75 per share. After giving effect to the Repurchase, the
Exchange Shares will represent two-thirds of the outstanding SA Common.

The Transactions also include a reconstitution of the Company's board of
directors (the "Board") with designees of the Shorebreak Shareholders and the
addition of a new management team headed by Richard Siskind, the chief executive
officer of Shorebreak and several other companies engaged in various segments of
the apparel industry, in which he has over 30 years' experience. The Purchase
Agreement also provides for a new credit facility to be arranged for the Company
by the Shorebreak Shareholders.

The Board believes Mr. Siskind's experience, industry contacts and
successful track record will help position him and his management team to
complete the Company's turnaround started by its current management. In
addition, the Repurchase and related issuance of the Options have been
structured to enable the Principal Shareholders to rebuild part of their
relinquished stake in the Company and benefit by the Transactions only to the
extent the Company's anticipated turnaround is accomplished.

The Board has unanimously determined that the Transactions are in the best
interests of the Company and its minority public shareholders (the "Public
Shareholders") and recommends that you vote FOR approval of the Proposal.
Chapman, Spira & Carson, LLC has given its opinion that the Transactions are
fair from a financial point of view to the Company and the Public Shareholders.

You are urged to read carefully the accompanying Proxy Statement for a
complete description of the Transactions. Whether or not you plan to attend the
Special Meetings, please be sure to date, sign and return the proxy card in the
enclosed envelope as promptly as possible so that your shares may be represented
at the Special Meeting and voted in accordance with your wishes.
Sincerely yours,

JACK CLARK
Chairman of the Board
<PAGE> 3

PRELIMINARY COPY
STAGE II APPAREL CORP.
350 FIFTH AVENUE -- 9TH FLOOR
NEW YORK, NY 10118
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 31, 1997

A special meeting of the shareholders of (the 'Special Meeting") of Stage
II Apparel Corp., a New York corporation (the "Company"), will be held in the
Company's offices located on the 9th Floor of the Empire State Building, 350
Fifth Avenue, New York, New York at 9:00 a.m. on Wednesday, December 31, 1997
for the following purpose:

To consider and vote upon a proposal (the "Proposal") to approve the
issuance of 4,008,654 shares of the Company's common stock ("SA Common
Stock") pursuant to a Purchase Agreement dated as of December 8, 1997 among
the Company, Shorebreak Group, Inc. and its shareholders (the "Purchase
Agreement").

Only record holders of SA Common Stock at the close of business on December
19, 1997 (the "Record Date") are entitled to notice of the Special Meeting and
to vote on the Proposal. Each share of SA Common Stock entitles the holder to
one vote at the Special Meeting. Approval of the Proposal requires affirmative
votes by holders of a majority of the outstanding shares of SA Common Stock. As
of the Record Date, a total of 3,903,267 shares of SA Common Stock were issued
and outstanding. The Company's officers and directors have informed the Company
that they intend to vote their shares, representing approximately 55% of the
outstanding SA Common Stock, for approval of the Proposal.

On December 8, 1997, the Board of Directors of the Company unanimously
concluded that the Proposal and the other transactions contemplated by the
Purchase Agreement are in the best interests of the Company and are fair to its
minority public shareholders. The Board of Directors unanimously recommends that
shareholders vote "FOR" approval of the Proposal. Please complete, sign and date
the enclosed proxy card and mail it as soon as possible in the return envelope
provided for that purpose. Information on the voting and revocation of proxies
is included in the accompanying Proxy Statement under the caption "Solicitation
of Proxies."
By Order of the Board of Directors

Jack Clark,
Chairman of the Board
<PAGE> 4

PRELIMINARY COPY
STAGE II APPAREL CORP.

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PROXY STATEMENT PURSUANT TO SECTION 14(A)
AND INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF
THE SECURITIES ACT OF 1934
------------------------

INTRODUCTION

THE TRANSACTIONS

This Proxy Statement is furnished on behalf of the Board of Directors (the
"Board") of Stage II Apparel Corp. (the "Company" or "Stage II") for soliciting
proxies to be voted at a special meeting of the Company's shareholders (the
"Special Meeting") on December 31, 1997 or any adjournment. The Special Meeting
will be held to vote on a proposal (the "Proposal") to approve the issuance of
4,008,654 shares (the "Control Shares") of the Company's common stock ("SA
Common Stock") pursuant to a Purchase Agreement dated as of December 8, 1997
(the "Purchase Agreement") among the Company, Shorebreak Group, Inc.
("Shorebreak") and its shareholders (the "Shorebreak Shareholders").

The transactions contemplated by the Purchase Agreement (the
"Transactions") are comprised of five basic components:

- Repurchase. The Company will repurchase 1.9 million shares of SA Common
Stock (the "Repurchase") held by Jack Clark, its Chairman of the Board, Steven
R. Clark, its President, and Robert Plotkin, a consultant who previously served
as its President (collectively, the "Principal Shareholders") in consideration
for their release from guarantees of the Company's indebtedness to its factor
and their receipt of options to purchase a total of 1.5 million shares of SA
Common Stock at exercise prices ranging from $.50 to $1.75 per share (the
"Options").

- Shorebreak Acquisition. The Company will acquire all of the outstanding
capital stock of Shorebreak in exchange for the Control Shares, which will
constitute two-thirds of the SA Common Stock to be outstanding after giving
effect to the Repurchase.

- Board Reconstitution. The Company's board of directors (the "Board")
will be reconstituted with designees of Shorebreak (the "Board Reconstitution").

- Management Realignment. The Company will gain a new management team
(the "Management Realignment") headed by Richard Siskind, the principal
shareholder and chief executive officer of Shorebreak. See "Shorebreak Group,
Inc."

- New Credit Facility. The Company will obtain a new credit facility to
be arranged by the Shorebreak Shareholders.

Completion of the Transactions is subject to various closing conditions,
including receipt of a fairness opinion from a qualified investment banking firm
and approval of the Proposal by holders of a majority of the outstanding shares
of SA Common Stock. A complete description of the Proposal and the other
Transactions contemplated by the Purchase Agreement is provided in this Proxy
Statement under the caption "The Transactions."

PARTIES TO THE TRANSACTIONS

The Company. Stage II designs and distributes an extensive range of men's
and boy's casual apparel and activewear under nationally recognized brand names
as well as private and proprietary labels. The Company markets its apparel
primarily to mass merchandisers. The Company was incorporated in New York in
March 1980 and completed an initial public offering of SA Common Stock in
October 1987. The SA
<PAGE> 5

Common Stock is listed on the American Stock Exchange (the "AMEX") under the
trading symbol SA. Stage II is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports and other information with the
Securities and Exchange Commission (the "SEC") and the AMEX. See "Additional
Information." The Company's principal executive offices are located at 350 Fifth
Avenue, 9th Floor, New York, New York 10118, and its telephone number is (212)
564-5865.

Shorebreak. Shorebreak also distributes men's and boy's casual apparel and
activewear under licensed brand names and markets its products primarily to
major department stores. Shorebreak was incorporate in New York in February
1997. The capital stock of Shorebreak is privately held by the Shorebreak
Shareholders. See "Principal Shareholders of Shorebreak." Shorebreak's principal
executive offices are located at 1385 Broadway, New York, New York 10018, and
its telephone number is (212) 840-0880.

FORWARD LOOKING STATEMENTS

This Proxy Statement includes forward looking statements within the meaning
of Section 21E of the Exchange Act relating to matters such as anticipated
operating and financial performance, business prospects, developments and
results of the Company. Actual performance, prospects, developments and results
may differ materially from anticipated results due to economic conditions and
other risks, uncertainties and circumstances partly or totally outside the
control of the Company, including risks of inflation, fluctuations in market
demand for the Company's products and changes in the level of future expenses
for the manufacturing and distribution of those products. Words such as
"anticipated," "expect," "intend" and similar expressions are intended to
identify forward looking statements, all of which are subject to these risks and
uncertainties.

BACKGROUND OF THE TRANSACTIONS

OPERATIONAL DIFFICULTIES

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, both
through direct licensing arrangements or acquisitions of other apparel
companies. In 1996, the Company streamlined its operations to focus on its most
popular labels, relinquishing its license rights for various other labels and
initiating a program to cut overhead to reflect the planned reduction in its
asset base and revenue stream.

Difficulties in reducing fixed overhead costs and maintaining strong profit
margins in the face of intensified competition, consolidation and overall
weakness in the retail apparel market have contributed to the Company net losses
in 1996, 1995 and 1994 aggregating $7.0 million, $3.3 million and $.9 million,
respectively. Stage II has financed these losses with borrowings under its
credit facility that have been reduced from time to time with repatriated
earnings of its Hong Kong subsidiary aggregating $3.4 million in 1996 and $6.3
million in the first nine months of 1997.

As part of its strategy for returning to profitability, in addition to
consolidating its licensing arrangements in 1996, reducing the scope of its
operations to concentrate on its most successful products and trimming overhead
expenses, the Company has added new commission sales personnel and realigned
management to focus on its core product lines. Despite these efforts, the
Company incurred net losses aggregating $2.3 million in the first nine months of
1997. See "Management's Discussion and Analysis of Financial Position and
Results of Operations of Stage II."

EFFORTS TO IDENTIFY A STRATEGIC COMBINATION

The Company has been seeking to implement a strategic business combination
for over a year, with a view in increasing shareholder values by adding new
apparel licenses or business lines to its reduced asset base and bringing in a
new management team. Historically, Stage II has been substantially dependent on
the

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expertise of Jack Clark, its Chairman of the Board, who has reached retirement
age and is seeking to reduce his management role with the Company. See "Current
Executive Officers and Directors of Stage II."

During 1996, Stage II held discussions with two potential bidders for a
controlling interest in the Company. Although those discussions were abandoned
in December 1996 primarily due to concerns over litigation with the Company's
former president, a recent settlement of that lawsuit paved the way for renewed
discussions with one of those parties (the "Initial Bidder") in August 1997. On
September 4, 1997, the Initial Bidder submitted a proposal (the "Competing
Proposal") contemplating the purchase of a controlling interest in the Company
from the Principal Shareholders.

During August and early September 1997, the Company also conducted
negotiations with Shorebreak, focusing primarily on their respective business
plans and prospects as well as the proposed terms of the Transactions. These
discussions resulted in Shorebreak's submission of a letter of intent for the
Transactions (the "Letter of Intent"). During this period, the SA Common Stock
traded in a range between $ 1/2 and $ 3/4, with limited trading volume. See "The
Transactions -- Methods of Determining Consideration for the
Transactions -- Determination of Control Share Exchange Price." On September 18,
1997, the Company accepted the Letter of Intent and abandoned the Competing
Proposal in favor of the Transactions, which are expected to provide greater
value to the Company and its shareholders than the Competing Proposal or other
potential strategic alternatives. On September 19, 1997, in response to
unusually high trading volumes and price increases in the SA Common Stock, the
Company issued a press release summarizing the terms of the Letter of Intent.

During September 1997, review procedures were initiated with Shorebreak and
the Shorebreak Shareholders as contemplated by the Letter of Intent. Negotiation
of definitive documentation for the Transactions (the "Transaction Agreements")
continued through the first week of December 1997. During this period, the
Company's management conferred with the Board and its legal and financial
advisors on the issues raised in this process. In addition, preliminary
discussions were held by the Company's management with Chapman, Spira & Carson,
LLC, an investment banking firm ("Chapman Spira"), with a view to the engagement
of that firm to evaluate the fairness of the Transactions to Stage II and its
minority public shareholders (the "Public Shareholders") from a financial point
of view (the "Fairness Opinion"). In November 1997, representatives of Chapman,
Spira & Carson advised the Company, based on a preliminary analysis, that it
anticipated being able to render a Fairness Opinion on the Transactions.

On December 8, 1997, the Board unanimously approved the Transactions,
formally engaged Chapman, Spira & Carson to render a fairness opinion on the
Transactions and, subject to receipt of the opinion, recommended approval of the
Proposal by the Company's shareholders. See "The Transactions -- Opinion of
Chapman, Spira & Carson." The Purchase Agreement was executed by the parties the
same day. On December 9, 1997, the Company issued a press release summarizing
the terms of the Purchase Agreement.

THE TRANSACTIONS

THE TRANSACTION AGREEMENTS

The Transaction Agreements consist of the Purchase Agreement and several
related agreements that are exhibits to the Purchase Agreement (the "Related
Agreements") to be executed upon the closing of the Transactions (the
"Closing"). The Related Agreements include a Repurchase Agreement among the
Company and the Principal Shareholders relating to the Repurchase, a 1997
Nonqualified Stock Option Plan (the "Option Plan") relating to the Options and
an Employment Agreement between the Company and Jack Clark (the "JC Employment
Agreement") relating to the Management Realignment. The terms of the Transaction
Agreements are summarized below. This summary is not a complete description and
is qualified by reference to the provisions of the Transaction Agreements. The
Purchase Agreement has been filed with the SEC as an exhibit to a Current Report
of the Company on Form 8-K. See "Additional Information."

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THE PURCHASE AGREEMENT

The Purchase Agreement provides for the Company's purchase of all the
outstanding capital stock of Shorebreak from the Shorebreak Shareholders (the
"Shorebreak Shares") in exchange for the issuance of the Control Shares to them
in proportion to their ownership interests in Shorebreak. The number of Control
Shares issuable in exchange for the outstanding capital stock of Shorebreak was
based on the Board's determination of the relative contributions of Stage II and
Shorebreak to the combined enterprise. This determination was supported by the
Board's valuation of Shorebreak at approximately $2.5 million, payable in
Control Shares valued at $ 5/8 per share, representing the last sale price of
the SA Common Stock on September 3, 1997 (the "Control Share Exchange Value").
The chronology of events leading to this determination is set forth below under
the caption "Method of Determining Consideration for the Transactions." The
Control Shares will represent two-thirds of the SA Common Stock to be
outstanding after giving effect to the Repurchase. See "The Repurchase
Agreement" below.

The obligation of Stage II to issue the Control Shares in payment for the
Shorebreak Shares is subject to a number of conditions, including (i) absence of
any breach of the covenants or the representations and warranties of Shorebreak
and the Shorebreak Shareholders in the Purchase Agreement, (ii) satisfactory
completion of the Company's due diligence review by the fifth business day after
delivery of all disclosure schedules to the Purchase Agreement, (iii) completion
of Shorebreak's physical inventory, (iv) receipt of the Fairness Opinion and
approval of the Proposal by the requisite vote of the Company's shareholders,
(v) receipt of the Options by the Principal Shareholders, (vi) replacement of
the Company's existing credit facility (the "Existing Credit Facility") with a
new credit facility (the "New Credit Facility") to be arranged by the Shorebreak
Shareholders with interest rates and fees no less favorable to the Company than
the Existing Facility and with adequate credit availability to fund the
Company's financing requirements based on the Shorebreak Shareholders' business
plan for the Company, (vii) receipt by Jack Clark and Robert Plotkin of releases
form their guarantees of the Company's indebtedness under the Existing Credit
Facility, (viii) execution of the JC Employment by Jack Clark and (ix) absence
of any legal or regulatory impediment to the Transactions.

The obligation of the Shorebreak Shareholders to sell the Shorebreak Shares
to the Company is also subject various conditions, including (i) absence of any
breach of the Company's covenants or representations and warranties in the
Purchase Agreement, (ii) satisfactory completion of Shorebreak's due diligence
review by the fifth business day after delivery of all disclosure schedules to
the Purchase Agreement, (iii) completion of the Company's physical inventory,
(iv) timely mailing of this Proxy Statement at least ten days prior to the
Closing and the related completion of the Board Reconstitution, (v) execution of
the Repurchase Agreement and completion of the Repurchase, (vi) receipt of the
Fairness Opinion and approval of the Proposal by the requisite vote of the
Company's shareholders, (vii) approval by the AMEX of the Company's additional
listing application for the Control Shares and (viii) absence of any legal or
regulatory impediment to the Transactions.

The Purchase Agreement also provides for a number of covenants by the
Company and Shorebreak, including (i) conduct of its business in the ordinary
course prior to the Closing, (ii) timely mailing of this Proxy Statement at
least ten days prior to the Closing, (iii) completion of mutually acceptable
arrangements (in addition to the JC Employment Agreement) for the continued
employment of the Company's senior executive officers and (iv) indemnities
against losses arising from any breach of the parties' covenants or
representations and warranties in the Purchase Agreement. Each party's
indemnification obligation is subject to a minimum threshold of $50,000 and a
maximum exposure of $2.5 million.

In addition, although the Board's approval of the Transactions has the
effect of waiving certain protections against business combinations with
interested stockholders under the Company's certificate of incorporation and the
New York Business Corporation Law, the Shorebreak Shareholders have agreed (the
"Shorebreak Standstill") they will not vote their Control Shares or take any
action as directors of the Company to approve a merger or consolidation of Stage
II with, or a sale of all or substantially all the assets of Stage II to any
affiliate of the Shorebreak Shareholders (other than a merger or consolidation
of the Company with one of its subsidiaries that does not have the effect of
increasing the percentage ownership of the

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Shorebreak Shareholders in the surviving corporation) unless (i) the effective
consideration per share of SA Common Stock to be received by other holders of SA
Common Stock in the transaction complies in all material respects with any
applicable requirements of New York law regarding the fairness of transactions
between a corporation and a controlling stockholder and (ii) if the transaction
is consummated within three years after the Closing, the consideration to be
received in the transaction on an equivalent per share basis has a value that is
not less than $1.00 per share of SA Common Stock or the transaction is approved
by holders (other than the Shorebreak Shareholders and their affiliates) of SA
Common Stock representing a majority of the SA Common Stock (other than shares
held by the Shorebreak Shareholders and their affiliates) voted on the
transaction.

THE REPURCHASE AGREEMENT

Under the terms of the Repurchase Agreement, in exchange for the Options
and the release of Jack Clark and Robert Plotkin from personal guarantees of the
Company's indebtedness under the Existing Credit Facility, the Principal
Shareholders will relinquish their existing financial stake in the Company
aggregating 1.9 million shares of SA Common Stock (the "Repurchased Shares").
The Repurchased Shares represent a 53% ownership interest in the Company based
on 3,903,267 shares currently outstanding. The Company will repurchase the
Repurchased Shares in the following amounts:

<TABLE>
<CAPTION>
NUMBER OF
REPURCHASED
NAME OF PRINCIPAL SHAREHOLDER SHARES
------------------------------------------------------------ -----------
<S> <C>
Jack Clark.................................................. 1,225,000
Robert Plotkin.............................................. 500,000
Steven R. Clark............................................. 175,000
</TABLE>

The Options to be issued in exchange for the Repurchased Shares will be
allocated among three series (each, an "Option Series"), entitling the Principal
Shareholders to purchase a total of 1.5 million shares of SA Common Stock as
follows:

<TABLE>
<CAPTION>
SHARES VESTING
SUBJECT DATE--YEARS EXERCISE EXPIRATION DATE-
SERIES TO OPTION AFTER CLOSING PRICE YEARS AFTER CLOSING
- ------ --------- ------------------ ----------- -------------------
<S> <C> <C> <C> <C>
A 500,000 One $ .50 Five
B 500,000 Two 1.00 Six
C 500,000 Three 1.50 - 1.75(1) Seven
</TABLE>

- ---------------
(1) The exercise price of the Series C Options issued to Robert Plotkin and
Steven R. Clark will be $1.50, and the exercise price of the Series C
Options issued to Jack Clark will be $1.75.

The Options of each Option Series will be allocated among the Principal
Shareholders as follows:

<TABLE>
<CAPTION>
OPTION SHARES
SUBJECT TO
EACH OPTION
NAME OF PRINCIPAL SHAREHOLDER SERIES
---------------------------------------------------------- -------------
<S> <C>
Jack Clark................................................ 365,000
Robert Plotkin............................................ 105,000
Steven R. Clark........................................... 30,000
</TABLE>

The Repurchase Agreement also provides for two separate indemnities by the
Principal Shareholders in favor of the Shorebreak Shareholders. Under the first
indemnity, if the Company sustains losses covered by its indemnification under
the Purchase Agreement ("Company Losses"), the Company Losses will be subject to
recoupment, to the extent herein set forth in the Repurchase Agreement, by the
cancellation of a portion of the Options (the "Cancellable Options"). The
Cancellable Options will be limited to Options of each Option Series issued to
Jack Clark, Robert Plotkin and Steven Clark to purchase 36,500 Option Shares,
10,500 Option Shares and 3,000 Option Shares, respectively. For purposes of
determining the number of Cancellable

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Options subject to cancellation under this provision, the value of each
Cancellable Option to be applied against the Company Losses will be the
difference between the exercise price thereof and the closing price of the SA
Common Stock on the date the Company Losses are sustained.

Under the second indemnity provided in the Repurchase Agreement, if the
Company sustains litigation judgments or settlement costs (collectively,
"Litigation Losses") arising from its pending disputes with Henry Weiner, a
former employee, and Unique Sports Generation, Inc., a party to a distribution
arrangement for NBA and NFL licensed apparel (the "Disputes"), the Principal
Shareholders have agreed to reimburse the Company on demand for any Litigation
Losses in the range between $100,000 and $300,000.

JC EMPLOYMENT AGREEMENT

The JC Employment Agreement provides for Jack Clark to terminate his
existing employment agreement and his buy-sell agreement with the Company at the
Closing and continue his employment with in a transitional role as Consulting
Executive for a term of one year, subject to extension for an additional year at
the Company's election, at an annual salary of $100,000. Mr. Clark expects to
work closely with the Shorebreak management team to share his expertise and
assist in the transition contemplated by the Management Realignment. See
"Certain Transactions."

BOARD RECONSTITUTION

As contemplated by the Purchase Agreement, this Proxy Statement includes
the information required by Schedule 14F in accordance with Rule 14f-1 under the
Exchange Act in connection with the Board Reconstitution. The Company has been
advised by Shorebreak that the Shorebreak Designees are Robert Greenberg, the
founder of LA Gear, and Richard Siskind, Jon Siskind and Beverly Roseman, who
are Shorebreak Shareholders and officers and directors of Shorebreak. A
biography of each Shorebreak Designee is included in this Proxy Statement under
the caption "Officers and Directors of Shorebreak and the Shorebreak Designees."
After the Closing, the Board will continue to have at least two independent
directors and an audit committee comprised of a majority of independent
directors in accordance with the listing requirements of the AMEX.

MANAGEMENT REALIGNMENT

The Purchase Agreement contemplated that Shorebreak's senior management
will be added to the Company's senior management at the Closing (the "Management
Realignment"). Richard Siskind will join the Company as chief executive officer,
and Douglas Tudor will be employed as the Company's president. Mr. Siskind is
the principal shareholder and chief executive officer of Shorebreak as well as
several other companies engaged in various segments of the apparel industry, in
which he has over 30 years' experience. Douglas Tudor is a Shorebreak
Shareholder and the president of Shorebreak, with over 17 years' experience in
the apparel industry. See "Officers and Directors of Shorebreak and the
Shorebreak Designees." The Board believes the experience, industry contacts and
successful track records of these executives will position the Company to
complete the turnaround started by current management. See "Advantages of the
Transactions" below.

METHODS OF DETERMINING CONSIDERATION FOR THE TRANSACTIONS

General. In determining the number of Control Shares to be issued by the
Company in consideration for the Shorebreak Shares, the Board evaluated the
relative contributions of Stage II and Shorebreak to the value of the combined
enterprise. This methodology resulted in the determination to issue a number of
Control Shares that will represent two-thirds of the outstanding SA Common Stock
after giving effect to the Repurchase. The Board also reached a comparable
result in arriving at a fair market valuation in the range of $2.5 million for
Shorebreak and a Control Share Exchange Value of $ 5/8 for the SA Common Stock .
The basis for these determinations are discussed separately below.

Enterprise Valuation. In analyzing the relative contributions of Stage II
and Shorebreak to the combined enterprise, the Board considered Shorebreak's
prospective contributions to Stage II in terms of both

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financial and managerial contributions. See "Advantages of the Transactions"
below. Although Shorebreak has only been in business since February 1, 1997, it
recorded net sales of $3.7 million and cash flows of $
million through September 30, 1997. See "Management's Discussion and Analysis of
Financial Position and Results of Operations of Shorebreak." The Board evaluated
this financial performance not only in an historical perspective but also as an
indication of potential future results as Shorebreak endeavors to build on its
initial product lines and customer base. Based on this analysis and its
assessment of the Company's future performance and prospects in the absence of
the Transactions or a comparable strategic combination, the Board determined
that the relative contributions of Shorebreak and the Company to the value of
the combined enterprise contemplated by the Transactions were approximately
two-thirds and one-third, respectively.

The Board concluded on the basis of these relative valuations that the
Shorebreak Shareholders should receive Control Shares representing two-thirds of
the SA Common Stock to be outstanding after giving effect to the Repurchase.
With 2,004,327 shares of SA Common Stock to be outstanding after giving effect
to the Repurchase, this valuation methodology resulted in the determination to
issue 4,008,654 Control Shares in consideration for the Shorebreak Shares. This
will result in a total of 6,012,981 outstanding shares of SA Common Stock
immediately after the Closing, of which two-thirds will be held by the
Shorebreak Shareholders.

Fair Market Valuation. As an alternative methodology for determining the
appropriate number of Control Shares to be issued in the Transactions, the Board
analyzed the fair market value of Shorebreak to the Company. In the course of
this analysis, the Board considered Shorebreak's financial performance as well
as the value of its apparel licenses and customer base. During the period from
the inception of Shorebreak in February 1997 through September 30, 1997,
Shorebreak recorded net income of $232,000 on net sales of $3.7 million, with
shareholders' equity of $234,000 at September 30, 1997. See "Management's
Discussion and Analysis of Financial Position and Results of Operations of
Shorebreak." Because of the perceived growth potential inherent in Shorebreak's
business plan, the Board considered that growth potential a more significant
indication of value than historical shareholders' equity. The Board determined
that Shorebreak's growth potential supported a valuation of $2.5 million for the
Shorebreak Shares. By multiplying that valuation by the Control Share Exchange
Price of $ 5/8, or 4 million shares of SA Common Stock, the Board concluded that
the comparability of this result confirmed the Control Share determination under
its enterprise valuation.

Determination of Control Share Exchange Price. In connection with its fair
market valuation of Shorebreak, the Board considered that the SA Common Stock
had traded in a range between $ 1/2 and $ 3/4 during August 1997, with limited
trading volume, and determined to establish the Control Share Exchange Price for
purposes of that valuation at the SA Common Stock closing price of $ 5/8 on
September 3, 1997, the day before Stage II entered into a letter of intent for
the Competing Proposal. See "Background of the Transactions -- Efforts to
Identify a Strategic Combination." The Board also considered the fact that after
that date the trading prices for the SA Common increased steadily through
September 18, 1997, the signing date for the Letter of Intent, closing at $1 5/8
on that date. Although no information about the discussions leading to the
Competing Proposal or the Letter of Intent for the Transactions was disclosed to
any third parties by officers or other representatives of the Company or
Shorebreak, the parties attributed the increase in trading prices for the SA
Common Stock to third party market rumors and discounted the increases
accordingly. Because the Company's prospects and market value in the absence of
either of these transactions could be expected to have remained at the same
depressed level that generated the August and early September 1997 trading
prices, the Board concluded that the September 3, 1997 closing price of $ 5/8
would be an appropriate exchange value of the SA Common Stock in the
Transaction.

In determining the Control Share Exchange Price, the Board considered that
although the shareholders' equity of the Company at September 30, 1997 was $12.1
million or $2.89 per share, its book value would likely be substantially reduced
in the absence of the Transactions as a result of ongoing losses and writedowns
of goodwill and other non-current assets relating to prior acquisitions. In
addition to the anticipated erosion of the Company's historical book values in
the absence of the Transactions, the accounting treatment of the Transactions is
expected to create a reduction of shareholders' equity to approximately $4.1
million or $.67 per

7
<PAGE> 11

share on a pro forma basis as of September 30, 1997. See "Selected Historical
and Pro Forma Financial Data of State II."

BENEFITS OF THE TRANSACTIONS

General. The Board believes that the Transactions will provide a number of
benefits to the Company. These perceived benefits are discussed below.

The Repurchase and Options. The Repurchase reflects the determination by
the Board and the Principal Shareholders that the Transactions, including the
addition of new management team from Shorebreak in connection with the
Management Realignment, represents the Company's best opportunity to achieve a
turnaround following several years of poor operating performance, weakening
financial condition and depressed market valuations. In addition, the Options
issuable to the Principal Shareholders in exchange for the Repurchased Shares
will enable them to rebuild part of their relinquished stake in the Company and
benefit by the Transactions only to the extent the Company's anticipated
turnaround is accomplished, thereby aligning their interests with the Company's
Public Shareholders.

New Credit Facility. As part of Shorebreak's obligation to obtain releases
from the Principal Shareholders' guarantees to the Company's factor, Stage II is
expected to obtain a New Credit Facility to be arranged by the Shorebreak
Shareholders. See "The Purchase Agreement" above. The New Credit Facility is
expected to provide increased financial flexibility to the Company.

Shorebreak Mission Statement. In evaluating the Transactions, the Board
relied on a business plan developed by Shorebreak for continuing the Company's
efforts to achieve a return to profitability (the "Mission Statement"). The
Mission Statement includes the following measures intended to achieve increased
products sales and profit margins as well as reductions in overhead as part of
this strategy:

- Increasing Sales. The new management team to be added as part of the
Management Realignment will refocus on sales by division or brand name
rather than continue the Company's existing approach in which its sales
personnel are responsible for all product lines. This structure, together
with a greater emphasis on performance based compensation, is expected to
promote increased sales through more highly motivated sales staff with a
deeper knowledge of each product line and targeted customer base.

- Increasing Profit Margins. An effort will be made to increase profit
margins on all sales through reductions in manufacturing inefficiencies
and greater control of inventories, thereby lowering the cost of sales
and creating faster inventory turn with a view to avoiding unnecessary
markdowns.

- Administrative Efficiencies. The Company will continue the cost cutting
efforts undertaken by existing management, but on a more aggressive basis
where appropriate, with a view to maintaining overhead costs in line with
sales.

- Reductions in Fixed Overhead. Stage II currently rents and occupies
10,800 square feet of showroom and executive office space in the Empire
State Building in New York City. An effort will be made to reorganize
this space for more efficient use so that part of the space can be sublet
to offset a portion of the rent.

- Financial Controls. The new management team will seek to implement more
stringent financial controls with a view to reducing factoring charges
and debt levels. The Company will also focus more aggressively on
collection of accounts receivable and on the management of returns and
allowances.

- Financial Resources. In structuring the new credit facility to be
arranged in connection with the Transactions, the Shorebreak Shareholders
will seek to ensure adequate financial support for Stage II on favorable
terms.

- Management Costs and Efficiencies. The new management team will strive
to keep the Company's cost of management below currents ratios as a
percentage of sales and increase organizational efficiencies through the
Management Realignment. See "The Transaction -- Management Realignment."

8
<PAGE> 12

OPINION OF CHAPMAN SPIRA

The following discussion is based on Chapman Spira's analysis of the
Transactions as of the date of this preliminary Proxy Statement. Although
Chapman Spira has advised the Company that nothing has come to its attention as
of the date hereof that would limit its ability to render the Fairness Opinion
and make the supporting statements set forth herein as of the anticipated date
of the definitive Proxy Statement, the discussion is subject to the completion
of diligence procedures by Chapman Spira.

Chapman Spira was engaged by the Company to render an opinion with respect
to the fairness, from a financial point of view, of the Transactions to the
Company and its Public Shareholders. Chapman Spira has advised the Company that
it expects to deliver to the Board its written opinion that, as of the date of
this Proxy Statement, based on the considerations and subject to the assumptions
and limitations stated in its opinion, the Transactions are fair, from a
financial point of view, to Stage II and its Public Shareholders. No limitations
were imposed by the Board upon Chapman Spira with respect to the investigations
made or the procedures to be followed by it in rendering its opinion.

THE FULL TEXT OF THE OPINION OF CHAPMAN SPIRA DATED THE DATE HEREOF, WHICH
SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW
UNDERTAKEN, IS ATTACHED AS APPENDIX A TO THIS PROXY STATEMENT. SHAREHOLDERS ARE
URGED TO READ THE OPINION IN ITS ENTIRETY. CHAPMAN SPIRA'S OPINION IS DIRECTED
ONLY TO THE FAIRNESS OF THE TRANSACTIONS TO THE SHAREHOLDERS OF STAGE II FROM A
FINANCIAL POINT OF VIEW AND DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION TO
EFFECT THE TRANSACTIONS OR CONSTITUTE A RECOMMENDATION ON HOW HOLDERS OF SA
COMMON STOCK SHOULD VOTE. THE SUMMARY OF THE OPINION OF CHAPMAN SPIRA SET FORTH
BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.

In arriving at its opinion, Chapman Spira (i) reviewed the Transaction
Agreements and this Proxy Statement, (ii) reviewed the Company's Annual Reports
on Form 10-K for the fiscal years ended December 31, 1994 through 1996 and its
Quarterly Reports on Form 10-Q for the periods ended March 31, June 30 and
September 30, 1997, (iii) met with certain members of the senior management of
the Company to discuss its operations, historical financial statements, business
plan and future business prospects, including its financing requirements and
availability as well as the outlook for the Company in the absence of the
Transactions, (iv) reviewed historical trading prices and volumes of the SA
Common Stock, (v) compared the financial performance of the Company and the
prices and trading activity of the SA Common Stock with that of other publicly
traded companies that it deemed generally comparable to the Company, (vi)
reviewed certain operating and financial information about Shorebreak, including
its unaudited financial statements for the period from its inception in February
1997 through September 30, 1997, (vii) met with certain members of the senior
management of Shorebreak to discuss its operations, historical financial
statements, business plan and future business prospects, (viii) analyzed the pro
forma impact of the Transactions and (ix) conducted other studies, analysis,
inquiries and investigations that it deemed appropriate. Chapman Spira did not
solicit potential purchasers of Stage II.

In the course of its review, Chapman Spira relied upon and assumed the
accuracy and completeness of the financial and other information provided by the
Company and Shorebreak. Chapman Spira has not assumed any responsibility for
independent verification of the information provided and has further relied upon
the assurances of the Company's management that it is unaware of any facts that
would make the information provided incomplete or misleading. Chapman Spira
considered a variety of factors that could affect the achievability of the
business plan for Stage II prepared by the Shorebreak Shareholders and
considered such alternative scenarios as it deemed appropriate. In arriving at
its opinion, Chapman Spira has not performed any independent appraisal of the
assets of Stage II or Shorebreak. Chapman Spira's opinion is necessarily based
on economic, market and other conditions, and the information made available to
it, as of the date of this Proxy Statement.

Outlook for the Company. Chapman Spira noted that during the last three
years and the first nine months of 1997, the Company's operating performance,
financial position and market value have deteriorated. Chapman Spira also
analyzed the current capital structure of Stage II and reviewed its Existing
Credit Facility and related debt amortization requirements. Chapman Spira
considered that, in the absence of the Transactions, the Company's net sales
from its reduced product lines may continue to be inadequate to

9
<PAGE> 13

profitably support its costs of sales, fixed overhead and debt service
requirements. Chapman Spira also considered that, in the absence of the
Transactions, the Company would expect to seek strategic alternatives that could
include a sale or liquidation of the Company under circumstances that might not
support favorable valuations as a going concern.

Exchange Ratio Analysis. In assessing the fairness of the Transactions to
the Public Shareholders of Stage II, Chapman Spira performed exchange ratio
analyses consisting of an enterprise valuation analysis based on market
multiples of companies it considered comparable to the Company and Shorebreak
and a historical market equity valuation analysis. In each of these analyses,
Chapman Spira evaluated the implied relative contributions being made to the
combined enterprise by the Company and by Shorebreak and compared those
contributions the exchange ratio for the Transactions.

Enterprise Valuation Analysis. In performing an analysis of the relative
contributions of the Company and Shorebreak to the combined enterprise, Chapman
Spira evaluated implied relative contributions based on public market multiples
of (i) projected earnings before interest, taxes, depreciation and amortization
("EBITDA") and cash flows. In this analysis, Chapman Spira assumed that the
Company would have available financing to support its manufacturing orders for
1998 despite pressures currently being experienced by Stage II in connection
with the Existing Credit Facility.

In deriving public market multiples, Chapman Spira reviewed valuation
multiples for apparel companies with small market capitalizations it considered
comparable to Stage II ("Comparable Companies") based on similarities in
operating strategies and product mix. Although Shorebreak is privately held, the
same market multiples were used for the Company and Shorebreak based on
similarities in their product mix and customer bases. Multiples applied to
projected 1997 results were imputed from market multiples of 1996 and 1995
results for the Comparable Companies. Based on public market multiples derived
from a review of the Comparable Companies and certain balance sheet adjustments
when appropriate, Chapman Spira estimated that the implied relative
contributions of the Company and Shorebreak to the combined enterprise would be
% and %, respectively, based on projected 1997 EBITDA and % and
%, respectively, based on projected 1997 cash flows.

HISTORICAL MARKET EQUITY VALUATION ANALYSIS.
[To be developed]

Conclusion. In arriving at its opinion, Chapman Spira performed certain
financial analyses, the material portions of which are summarized above. The
summary set forth above does not purport to be a complete description of Chapman
Spira's analyses. Chapman Spira believes that its analyses and the summary set
forth above must be considered as a whole and that selecting portions of its
analyses could create an incomplete view of the process underlying the analyses
set forth in the opinion. In performing its analyses, Chapman Spira made
numerous assumptions with respect to industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of Stage II and Shorebreak. The values specified in Chapman
Spira's analyses do not purport to be indicative of future trading values of the
SA Common Stock, which may be significantly more or less than the amounts set
forth in Chapman Spira's analyses. Actual values will depend upon several
factors, including events affecting the Company's industry, general economic,
market and interest rate conditions and other factors that generally influence
the price of securities.

Chapman Spira is an internationally recognized investment banking firm and
regularly engages in the evaluation of businesses and their securities in
connection with mergers and acquisitions and for other purposes. The Board
selected Chapman Spira to render an opinion with respect to the fairness, from a
financial point of view, of the Transactions to the Company and its Public
Shareholders on the basis of Chapman Spira's reputation and its familiarity with
the apparel industry. In the course of its business, Chapman Spira may actively
trade the securities of Stage II for its own account and for the accounts of
customers. Accordingly, Chapman Spira may at any time hold a long or short
position in those securities.

Fees Paid to Chapman Spira. As compensation for its services, Chapman
Spira has received a fee of $10,000 and will receive an additional fee of
$10,000 payable upon publication of its opinion in this Proxy

10
<PAGE> 14

Statement. The Company has also agreed to reimburse Chapman Spira for its
out-of-pocket expenses in performing its engagement. The Company has agreed to
indemnify Chapman Spira and its affiliates, their respective directors,
officers, partners, agents and employees and each person, if any, controlling
Chapman Spira or any of its affiliates against certain liabilities, including
certain liabilities under the federal securities laws, relating to or arising
out of its engagement.

FAIRNESS TO INVESTORS

The Board believes that the Transactions are in the best interests of the
Company and are fair to the Public Shareholders in all respects, including
financial, timing and procedural considerations. The Board considered the
factors discussed below in reaching this conclusion.

Advantages of Transactions Compared to Alternatives. The Transactions are
expected to provide benefits to the Company and the Public Shareholders that
would be unavailable from the potential alternatives to the Transactions. See
"Benefits of the Transactions" above. In the absence of the Transactions, the
Company's net sales from its reduced product lines may continue to be inadequate
to generate profits in view of its overhead structure and debt service
requirements. Although the Company would expect to seek strategic alternatives
in the absence of the Transactions, those alternatives could be limited to a
sale or liquidation at potentially unfavorable valuations. The Board also
believes that, while a sale and liquidation of Stage II could provide an
immediate cash return to shareholders and avoid the risks associated with any
acquisition, the Transactions may provide the Public Shareholders with greater
market values for their SA Common Stock than they would likely receive from a
sale and liquidation.

Valuation Methodologies. The Board views the Transactions as a combination
of two enterprises and therefore analyzed relative contributions to the combined
enterprise in negotiating the number of Control Shares to be issued to the
Shorebreak Shareholders in exchange for the Shorebreak Shares. In the absence of
a public trading market to establish the value of the Shorebreak Shares, the
Board believes its valuation methodologies produced a result that is fair to
both the Company and the Shorebreak Shareholders.

The Shorebreak Standstill. The Board considers the Shorebreak Standstill an
important protection for the Public Shareholders by ensuring that the
consideration offered to them in any merger or similar transaction during the
next three years will not be less than $1.00 per share of SA Common Stock. See
"The Purchase Agreement" above.

RECOMMENDATION OF THE BOARD

The Board has unanimously determination that the Transactions are in the
best interests of the Company and the terms of the Transactions are fair to the
Company and the Public Shareholders. Based on this determination, the Board
unanimously approved the Transaction Agreements and recommends that the
shareholders vote "FOR" the Proposal. In making its recommendation, the Board
concluded that the Transactions will provide the benefits summarized above under
the caption "Benefits of the Transactions." Its recommendation is also based in
part on the Fairness Opinion expected to be received from Chapman Spira.

SOLICITATION OF PROXIES

SHAREHOLDER APPROVAL OF THE PROPOSAL

Completion of the Transactions does not require approval by the Company's
shareholders under federal or state law or the Company's certificate of
incorporation. Shareholder approval of the Proposal is being solicited because
the Exchange Shares will represent two-thirds of the outstanding CA Common Stock
upon completion of the Transactions, and the applicable AMEX listing rules
require approval from a listed company's shareholders for any stock issuance
involving more than 20% of the company's outstanding capital stock.

11
<PAGE> 15

SPECIAL MEETING

The Board is soliciting the votes of the Company's shareholders to approve
the Proposal at the Special Meeting. The Special Meeting will be held in the
offices of Stage II located on the 9th Floor of the Empire State Building, 350
Fifth Avenue, New York, New York at 9:00 a.m., EST, on Wednesday, December 31,
1997. In accordance with the bylaws of Stage II, if the Special Meeting is
adjourned for any reason, the time and place of the adjourned meeting will be
announced at the Special Meeting but, unless the adjournment exceeds 30 days, no
notice of the adjourned meeting will be given, no new record date will be fixed,
and proxies will not be resolicited.

SHAREHOLDERS ENTITLED TO VOTE

Shareholders of record as of the close of business on December 19, 1997 are
entitled to notice of and to vote at the Special Meeting. As of that date, the
Company had outstanding 3,904,327 shares of SA Common Stock. Each share of SA
Common Stock is entitled to one vote. The Company's bylaws provide that a
majority of the outstanding shares entitled to vote, represented in person or by
proxy, constitute a quorum at the meeting.

VOTING

Approval of the Proposal will require the affirmative vote of the holders
of a majority of the outstanding shares of SA Common Stock. Approximately 55% of
the outstanding SA Common Stock is currently held by officers and directors of
Stage II. See "Principal Shareholders of Stage II." The Company's officers and
directors have indicated that they intend to vote their shares of SA Common
Stock for the approval of the Proposal. Accordingly, approval of the Proposal is
assured.

AMEX rules for the voting of securities held in street or nominee name
generally require member brokers to receive specific instructions from the
beneficial owners to vote on matters such as the Proposal. If a member broker
indicates on its proxy that it does not have discretionary authority or specific
instructions to vote certain shares on the Proposal, those shares will not be
considered as present and entitled to vote at the Special Meeting. Shares
represented by proxies that reflect abstentions will be treated as present and
entitled to vote for purposes of determining the presence of a quorum. In
determining voting results, an abstention is treated as a share present and
entitled to vote on the approval of the Proposal, but is counted as neither
"FOR" nor "AGAINST." Therefore, an abstention has the same effect as a negative
vote on the approval of the Proposal.

PROXIES

All properly executed proxies received prior to the Special Meeting will be
voted in accordance with the instructions marked on the proxy cards. If no
instructions are made, the shares will be voted "FOR" the approval of the
Proposal. In accordance with the Company's bylaws, no other business may be
presented for consideration at the Special Meeting. A shareholder giving a proxy
may revoke it at any time by giving written notice to the Secretary of the
Company before it is voted, by executing a proxy bearing a later date or by
attending the Special Meeting and voting in person.

MAILING OF PROXY MATERIALS

This Proxy Statement and related proxy card are being mailed to
shareholders on or about December 22, 1997. Upon request, additional proxy
materials will be furnished without cost to brokers and other nominees for
forwarding to beneficial owners of shares held in their names. In addition to
the use of the mails, proxies may be solicited by directors, officers and
employees of the Company, without additional compensation, by personal
interview, telephone or otherwise. All costs of the solicitation will be borne
by the Company.

12
<PAGE> 16

PRICE RANGE OF SA COMMON STOCK AND RELATED SHAREHOLDER MATTERS

TRADING MARKET

The SA Common Stock is listed for trading on the AMEX under the symbol SA.
The following table sets forth, for the periods indicated, the high and low
sales prices for the SA Common Stock as reported on the AMEX.

<TABLE>
<CAPTION>
MARKET PRICES
-----------------
HIGH LOW
---- ----
<S> <C> <C>
1995:
First quarter........................................... $ 4 5/8 $ 3 5/8
Second quarter.......................................... 4 2 7/8
Third quarter........................................... 3 1/2 2 1/2
Fourth quarter.......................................... 31/16 2 1/2

1996:

First quarter........................................... $ 4 1/8 $ 2 3/16
Second quarter.......................................... 3 7/8 2 3/4
Third quarter........................................... 3 1/8 2 3/4
Fourth quarter.......................................... 3 1 7/8

1997:

First quarter........................................... $ 2 1/8 $ 17/16
Second quarter.......................................... 1 7/8 15/16
Third quarter........................................... 3 1/2
Fourth Quarter (through December 11, 1997).............. 21/16 7/8
</TABLE>

SECURITY HOLDERS

As of November 30, 1997, there were 127 holders of record of the SA Common
Stock. Stage II estimates that there are at least 900 beneficial owners of its
SA Common Stock.

DIVIDENDS

Stage II paid four quarterly dividends of $.03 per share in 1994. The
Company did not pay any dividends during 1996 or 1995 and does not expect to
consider reinstituting dividend payments in the foreseeable future.

13
<PAGE> 17

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA OF STAGE II

HISTORICAL INFORMATION

The following tables presents selected historical and pro forma financial
data of Stage II. The historical financial information at and for the year ended
December 31 in each of the five years through 1996 is derived from the audited
financial statements of the Company. The historical financial information at and
for the nine months ended September 30, 1997 and 1996 is derived from the
unaudited financial statements of Stage II and, in its opinion, includes all
adjustments (consisting only of normal recurring accruals and adjustments)
necessary for a fair presentation of the financial information for those
periods. The selected financial data for each of the three years ended December
31, 1995 has been restated to account for the operations of Woody Sports
Apparel, Inc., the Company's former majority owned Canadian subsidiary ("Woody
Sports"), as discontinued operations in view of the Company's decision to
dispose of its interest in Woody Sports. For each of the three years through
December 31, 1996 and the nine months ended September 30, 1997 and 1996, the
following financial information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Stage II as well as the Consolidated Financial Statements of the Company and
related Notes included at the end of this Proxy Statement.

PRO FORMA INFORMATION

The pro forma financial information presented below gives effect to the
Transactions as if they occurred on January 1, 1997. The pro forma financial
information is unaudited and should be read in conjunction with the Unaudited
Pro Forma Financial Statements of Stage II and the related Notes thereto
presented at the end of this Proxy Statement. The pro forma financial
information is presented for illustrative purposes only and is not necessarily
indicative of either future financial performance or actual results of
operations. Although the Transactions are ultimately expected to result in a
reduction of selling, general and administrative expenses, no pro forma
adjustments have been reflected because the Company has not completed specific
cost reduction plans.

ACCOUNTING TREATMENT OF THE TRANSACTIONS

As a result of the Shorebreak Shareholders' proposed ownership of
two-thirds of the SA Common Stock to be outstanding upon completion of the
Transactions after accounting for the Repurchase, the parties expect to account
for the Transactions under paragraph 70 of APB 16 as a reverse acquisition of
the Company by Shorebreak. In accordance with APB 16, the Company's consolidated
assets and liabilities will be recorded after completion of the Transactions at
their fair values. Under this accounting treatment, the Board's valuation of
$2.5 million for Shorebreak in the Transactions will result in a consolidated
shareholders' equity of $4.1 million based on Shorebreak's two-thirds interest
in the combined enterprise (the "Enterprise Value"). APB 16 will require a
writedown of the Company's non-current assets and its property, plant and
equipment to the extent that the net fair value of its assets and liabilities
exceeds the Enterprise Value.

14
<PAGE> 18

STAGE II APPAREL CORP. AND SUBSIDIARIES
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------------- ----------------------------------------------------
1997 1997 1996 1996 1995 1994 1993 1992
--------- ----------- ------- -------- ------- ------- ------- -------
PRO FORMA (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $15,870 $12,133 $24,527 $533,428 $60,177 $59,560 $59,574 $75,524
Cost of goods sold................ 12,795 9,861 19,943 28,016 48,357 46,778 46,270 56,893
------- ------- ------- -------- ------- ------- ------- -------
Gross profit...................... 3,075 2,272 4,584 5,412 11,820 12,782 13,304 18,631
Commission and other income....... 513 513 715 678 1,599 853 1,180 1,255
------- ------- ------- -------- ------- ------- ------- -------
3,588 2,785 5,299 6,090 13,419 13,635 14,484 19,886
Selling, general and
administrative expenses......... 4,840 4,859 7,167 9,195 13,341 13,059 12,201 15,046
Impairment of prepaid salary and
non-compete..................... -- -- -- 512 -- -- -- --
Provision (benefit) for litigation
cost............................ -- -- -- (13) 577 -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Operating profit (loss)........... (1,252) (2,074) (1,868) (3,604) (499) 576 2,283 4,840
Interest, net..................... 551 468 1,303 1,588 2,421 1,818 829 1,292
Loss on sale of securities........ (285) (285) -- -- -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) before income
taxes........................... (2,089) (2,827) (3,171) (5,192) (2,920) (1,242) 1,454 3,548
Provision (benefit) for income
taxes........................... 14 9 55 (33) (342) (438) 629 1,331
------- ------- ------- -------- ------- ------- ------- -------
Income (loss) before extraordinary
item from continuing
operations...................... (2,103) (2,818) 3,116) (5,159) (2,578) (804) 825 2,217
Extraordinary item -- gain on
extinguishment of debt.......... 205 205 -- -- -- -- -- --
Discontinued operations:
Income (loss) from discontinued
operations...................... -- -- -- (324) (684) (61) 8 --
Gain (loss) on disposal of
discontinued subsidiary......... 290 290 (1,860) (1,479) -- -- -- --
------- ------- ------- -------- ------- ------- ------- -------
(1,608) (2,323) (4,976) (1,803) (684) (61) 8 --
Cumulative effect of accounting
change.......................... -- -- -- -- -- -- 401 --
------- ------- ------- -------- ------- ------- ------- -------
Net income (loss)................. $(1,608) (2,323) (4,976) $ (6,962) $(3,262) $ (865) $ 1,234 $ 2,217
======= ======= ======= ======== ======= ======= ======= =======
Net income (loss) per common
share:
Income (loss) from continuing
operations...................... $ (.35) $ (.67) $ (.74) $ (1.23) $ (.60) $ (.19) $ .20 $ .55
Extraordinary
item -- extinguishment of
debt............................ .04 .05 -- -- -- -- -- --
Gain (loss) from discontinued
operations...................... .05 .07 -- (.43) (.18) (.02) -- --
Cumulative effect of accounting
change.......................... -- -- -- -- -- -- .10 --
------- ------- ------- -------- ------- ------- ------- -------
$ (.36) $ (.55) $ (1.18) $ (1.66) $ (.78) $ (.21) $ .30 $ .55
======= ======= ======= ======== ======= ======= ======= =======
Dividends paid per common share... $ -- $ -- $ -- $ -- $ -- $ .12 $ .12 $ .03
======= ======= ======= ======== ======= ======= ======= =======
Weighted average shares
outstanding..................... 6,013 4,187 4,196 4,196 4,195 4,161 4,155 4,064
======= ======= ======= ======== ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
----------------------- ------------------------------------------------------
1997 1997 1996 1995 1994 1993 1992
--------- ----------- ------- ------- ------- ------- -------
PRO FORMA (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Total assets............................. $11,764 $19,226 $25,809 $39,536 $41,126 $32,747 $33,742
Due to factor............................ 5,197 5,197 7,174 11,658 9,630 2,149 2,443
Total liabilities........................ 7,110 7,167 11,419 17,858 16,712 6,319 8,424
Shareholders' equity..................... 4,034 12,059 14,390 21,678 24,414 26,409 25,318
Book value per share..................... .67 2.88 3.43 5.17 5.87 6.36 6.23
</TABLE>

15
<PAGE> 19

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION

AND RESULTS OF INFORMATION OF STATE II

GENERAL

The Company 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 has also increased its emphasis on proprietary and private label sales,
including its own Timber Run label, and has 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. The Company plans to relinquish its non-exclusive
Spalding license in favor of an expanded program for its exclusive Dunlop lines
and may discontinue its arrangements with Unique Sports in 1998.

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 Company's net losses in 1996 and in the
first half of 1997 were primarily caused by difficulties in reducing fixed SG&A
costs, maintaining strong profit margins in the face of intensified competition
and overall weakness in the retail apparel market. 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 September 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 was completed in the third quarter
of 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, as part of the plan of
liquidation for Woody Sports, the Company took a noncash impairment charge of
$1.2 million against the assets of the Canadian subsidiary. See "Discontinued
Operations" above.

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<PAGE> 20

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 the
Company and Stage II HK. In September 1996, Mr. Goldman and his co-defendants
filed an answer denying Stage II's claims in the lawsuit and asserting various
counterclaims. During September 1997, the parties agreed to settle the lawsuit
for a payment from the Company of approximately $1.15 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. The settlement payments were
completed by the Company in November 1997.

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 $ 5,718 $ -- $ --
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>

The following tables present the Company's gross profit from continuing
operations, income (loss) from continuing operations and income (loss) per share
from continuing operations on a quarterly basis during the last three years.

QUARTERLY GROSS PROFIT FROM CONTINUING OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1997................................. $ 677 $ 300 $ 2,272 $ -- $ --
1996................................. 1,647 811 2,126 828 5,412
1995................................. 3,126 2,271 4,393 2,030 11,820
1994................................. 3,134 2,230 4,612 2,806 12,782
</TABLE>

QUARTERLY INCOME (LOSS) FROM CONTINUING OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1997................................. $(1,068) $(1,678) $ (72) $ -- $ --
1996................................. (1,377) (2,489) 12 (1,305) (5,159)
1995................................. (453) (769) 464 (1,820) (2,578)
1994................................. (55) (507) 304 (546) (804)
</TABLE>

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<PAGE> 21

QUARTERLY INCOME (LOSS) PER SHARE FROM CONTINUING OPERATIONS

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
1997................................. $ (.26) $ (.40) $ (.02) $ -- $ --
1996................................. (.33) (.59) .00 (.31) (1.23)
1995................................. (.10) (.18) .11 (.43) (.60)
1994................................. (.02) (.11) .07 (.13) (.19)
</TABLE>

Nine Months Ended September 30, 1997 and 1996. Net sales of $12.1 million
for the first nine months of 1997 decreased by 50.5% from $24.5 million in the
corresponding period last year. The decrease primarily reflects the termination
of certain brand name apparel licenses in 1996 and a planned reduction in the
scope of the Company's operations. Sales of replacement brand name and
proprietary lines began to offset the decline in the third quarter of 1997.

Cost of goods sold as a percentage of sales in the first nine months of
1997 and 1996 remained constant at 81.3%.

SG&A expenses for the first nine months of 1997 decreased by 32.2% to $4.9
million compared to $7.2 million for the same period of 1996, primarily from a
reduction in variable costs associated with lower sales volumes. SG&A expenses
as a percentage of sales increased to 40.0% for the first nine months of 1997
compared to 29.2 % 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 $1.2 million or 64.2% for the
first nine months of 1997 compared to the same period of 1996, reflecting a
reduction of current debt.

The Company realized a $205,000 gain from the extinguishment of debt
relating to the Townsley settlement in the third quarter of 1997. "See Recent
Developments -- Litigation Settlement."

The Company recognized a loss from continuing operations of $2.6 million
before income taxes in the first nine months of 1997, compared to a loss before
taxes of $3.2 million for the corresponding period last year, reflecting the
foregoing trends. The loss 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 Company's discontinued subsidiary, the loss was $.55 per
share for the current period versus $1.18 per share for the first nine months of
1996.

The results of operations for the nine months ended September 30, 1997 are
not necessarily indicative of operating results to be expected for the full
year.

1996 Compared to 1995. Net sales from continuing operations of $33.4
million for 1996 decreased by 44.5% from $60.2 million in 1995. The decrease
reflects intensified competition, consolidation and overall weakness in the
retail apparel trade, the termination of certain brand name apparel licenses and
a planned reduction in the scope of the Company's operations. Approximately
$10.2 million or 38.1% 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 83.8% in 1996
compared to 80.4% in 1995. 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 approximately $.9 million during
1996 compared to the prior year, reflecting a decline in the Company's sales
agency business.

SG&A expenses for 1996 decreased by 31.1% to $9.2 million compared to $13.3
million for 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. SG&A expenses as
a percentage of sales increased to 27.5% for 1996 compared to 22.2% in the prior
year, reflecting a faster decline in sales than the Company's ability to reduce
fixed SG&A expenses.

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<PAGE> 22

During 1996, the Company recognized noncash impairment charges aggregating
$512,000 for writeoffs of a former officer's prepaid salary and non-compete
covenant. See "Recent Developments -- Asset Impairment under FAS 121" above. In
addition, during 1995, Stage II recognized a provision of $577,000 for
litigation costs relating primarily to performance adjustments for an
acquisition completed by the Company in 1987.

Interest and factoring expenses, net of interest income, aggregated $1.6
million or 4.8% of sales in 1996 compared to $2.4 million or 4.0% of sales in
1995, representing a decrease of $.8 million or 34.4%. The decrease reflects
lower interest rates, reduced levels of borrowing and slightly higher levels of
interest income.

The Company recognized losses from continuing operations before income tax
benefits in 1996 and 1995 aggregating $5.2 million and $2.9 million,
respectively, reflecting the foregoing trends and, for 1996, noncash impairment
charges aggregating $512,000 for writeoffs of a former officer's prepaid salary
and a non-compete covenant. See "Recent Developments -- Asset Impairment under
FAS 121" above. After accounting for losses of $324,000 and $765,000 from
discontinued operations of Woody Sports in 1996 and 1995, respectively, and a
charge of $1.5 million in 1996 for an estimated loss on disposal of the
discontinued operations, the Company's net loss was $7.0 million or $1.66 per
share in 1996 based on 4,196,000 average common shares outstanding compared to a
net loss of $3.3 million or $.78 per share for 1995 based on 4,195,000 average
common shares outstanding. See "Recent Developments--Discontinued Operations"
above.

1995 Compared to 1994. The Company's net sales from continuing operations
of $60.2 million in 1995 increased by 1.0% compared to $59.6 million in the
prior year. Net sales in both years was affected by the general downturn in the
retail trade, the termination of certain licenses and the timing of product
shipments.

Cost of goods sold as a percentage of net sales increased to 80.4% during
1995 compared to 78.5% during 1994. The increase reflects lower gross profit
margins primarily resulting from higher levels of promotional sales in 1995 in
response to the weak retail climate.

Commission and other income increased by approximately $.7 million during
1995 compared to the prior year, primarily reflecting increased volume of the
Company's sales agency business.

SG&A expenses of $13.3 million in 1995 increased by 2.2% from $13.1 million
in the prior year. The relatively constant level of SG&A expenses reflects
ongoing efforts to cut costs partially offset by costs associated with
terminating several licenses in 1995.

Interest and factoring expenses, net of interest income, aggregated $2.4
million in 1995, representing an increase of 33.2% compared to net interest and
factoring expenses of $1.8 million in 1994. The increase was due to higher
interest rates, increased levels of borrowing and lower levels of interest
income.

In 1995, Stage II incurred nonrecurring litigation costs aggregating
$577,000. The costs relate primarily to performance adjustments for an
acquisition completed by the Company in 1987.

Stage II recognized losses from continuing operations before income tax
benefits in 1995 and 1994 aggregating $2.8 million and $1.2 million,
respectively, reflecting decreased sales and profit margins, increased borrowing
costs and nonrecurring litigation costs. After accounting for losses of $765,000
and $83,000 from discontinued operations of Woody Sports in 1995 and 1994,
respectively, the Company's net loss was $3.3 million or $.78 per share for 1995
based on 4,195,000 average common shares outstanding compared to a net loss of
$.9 million or $.21 per share for 1994 based on 4,161,000 average common shares
outstanding.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity. Net cash used by Stage II's operating activities during the
first nine months of 1997 aggregated $1.9 million. The Company's cash position
during the period was increased by advances under the Existing Credit Facility
aggregating $4.0 million and the sale of marketable securities held by Stage II
HK netting $6.2 million. During the period, $6.0 million was repaid to the
Company's factor and $434,000 was repaid on bank borrowings by Woody Sports.

Net cash provided by the Company's operating activities during 1996
aggregated $3.4 million. The Company's cash position during the year was further
increased by the sale of marketable securities held by

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<PAGE> 23

Stage II HK netting $2.1 million. During 1996, $4.5 million was repaid to the
Company's factor, $577,000 was repaid on bank borrowings by Woody Sports and
$171,000 was paid to note holders. As a result of these activities, the
Company's cash position increased from $151,000 at December 31, 1995 to $429,000
at December 31, 1996.

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 are subject to the current U.S. tax rate
(less the amount previously paid in local taxes) when repatriated and made
available for domestic use.

During the nine months of 1997, the Company repatriated $6.2 million of
Stage II HK's retained earnings to reduce short term debt. The repatriation did
not trigger domestic taxes due to the availability of net operating losses to
offset the taxable income created, although a loss of $285,000 was incurred from
the related sale of securities.

During the first four months of 1997, Stage II maintained a factoring
agreement with Republic Factors Corp. (the "Prior Facility"). In April 1997, the
Company replaced the Prior Facility with the Existing Credit 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, restricted cash 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. As of September 30, 1997, Stage II had no material capital expenditure
requirements.

Inflation. The general level of inflation in domestic and foreign
economies has not had a material effect on the Company's operating results
during the last three years.

New Accounting Pronouncement. In June 1996, the Financial Accounting
Standards Board issued Statement No. 125, Accounting For Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities ("FAS 125"). FAS 125 is
effective for covered transactions occurring after December 31, 1996 and is to
be applied prospectively. FAS 125 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial components approach
that focuses on control. It distinguishes transfers of financial assets that
amount to sales from transfers to collateralize secured borrowings. The Company
does not expect the adoption of FAS 125 to have a material effect on its
financial position, results of operations or liquidity.

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<PAGE> 24

BUSINESS AND PROPERTIES OF STAGE II

INTRODUCTION

General. 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. During the last two years, the Company has streamlined its
operations to focus on its most popular labels and has increased reliance on its
proprietary 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.

Market Position. Management of the Company has been engaged in importing
and marketing apparel for over 40 years and believes that Stage II is a
recognized supplier of men's and boy's casual apparel and activewear. This
assessment is based on factors including merchandiser recognition of the
Company's licensed brand names as reflected in independent studies, its apparel
sales penetration in major chain stores and the fragmented nature of this
segment of the apparel industry. Stage II sells its products primarily to
sporting goods and specialty stores, mass merchandisers and various wholesale
membership clubs. During 1996, the Company had over 500 customers.

Market Sector. Stage II has specialized in casual apparel and activewear
primarily for men and boys since its inception in 1980. The Company's products
offer customers a wide selection of apparel styles, fabrics and colors for
leisure and sports activities and are sold at "popular" and "moderate to better"
prices.

PRODUCTS

General. The Company's product mix was historically based on the
perception that retail customers generally preferred quality brand name apparel
over comparable proprietary or private label products. Stage II initiated a
program in 1982 to acquire U.S. license rights to nationally recognized brand
names and expanded its product lines to accommodate as many as sixteen brand
name licenses by 1993. Over the past few years, in response to increased demand
for more moderately priced casual apparel and activewear for men and boys, the
Company has consolidated its branded apparel lines to concentrate on its three
most popular licenses. Stage II has also placed greater emphasis on its own
proprietary labels, including Main Event, Rancho Santa Fe, Top Seed, Metro
Clothing Company, Pro Tour and Timber Run.

Brand Name Licenses. During the course of its license acquisition program,
the Company has added and thereafter discontinued various brand name licenses in
favor of more advantageous arrangements for its current brand name lines. During
1996, Stage II relinquished license rights for its McGregor, Walt Disney,
Taz/Major League Baseball and Coleman lines, added an exclusive license with
Dunlop for men's activewear and retained its licenses for the Spalding brand.

In addition to its exclusive licenses, Stage II has acquired various
non-exclusive licenses and manufacturing rights. In 1993, through the
acquisition of a controlling interest in Woody Sports, the Company added
Canadian activewear licenses from the National Hockey League, Major League
Baseball, the National Collegiate Athletic Association and the Canadian Football
League. During 1996, the Company expanded this program domestically through
manufacturing arrangements with Unique Sports, which holds non-exclusive
licenses for various categories of men's and boy's activewear from the National
Basketball Association and, commencing in April 1997, the National Football
League.

During 1997, Stage II elected to dispose of its interest in Woody Sports,
which was liquidated in mid-year. By year end, the Company plans to relinquish
its non-exclusive Spalding license in favor of an expanded program for its
exclusive Dunlop lines and may discontinue its arrangements with Unique Sports
for the NBA and NFL brands in 1998. See "Management's Discussion and Analysis of
Financial Position and Results of Operations of Stage II."

Licensed Brand Name Apparel Sales. The Company'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. During 1996, 1995 and
1994, sales of brand name apparel accounted for approximately 71%, 78% and 94%,

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<PAGE> 25

respectively, of the Company's net sales. The gradual reduction in brand name
apparel as a percentage of the Company's overall product mix reflects its
strategy for increasing reliance on its own proprietary labels and its
customers' private labels in response to greater demand for more moderately
priced men's and boy's activewear.

License Agreements. The Company's license agreements generally require it
to make minimum annual royalty payments and advertising expenditures and provide
for maintenance of quality control. The license agreements also provide the
licensor with a right of termination if the Company defaults on these
obligations and, in certain cases, if specified minimum levels of annual net
sales for licensed products are not met. These thresholds generally increase for
each successive license year. Stage II is in compliance with the terms of each
of its license agreements. The agreements run for various periods and are
generally renewable. Prior to expiration of a profitable license, Stage II is
usually able to obtain renewals or replacements on comparable terms.

License agreements for the Company's Spalding and Coleman lines each
accounted for over 10% of its net sales in 1996 and 1995. These agreements
provide for minimum annual royalty payments ranging from approximately $175,000
to $650,000. Stage II's net sales under these two license agreements during 1996
and 1995 aggregated approximately $19 million and $27 million, respectively. The
license agreement with Coleman was terminated by mutual consent in May 1996 and
replaced with a new Dunlop license. The Company has also increased emphasis on
its own Timber Run label and plans to increase the focus on its exclusive Dunlop
lines in 1998.

MARKETING AND DISTRIBUTION

Marketing Strategy. The Company's marketing strategy focuses on multiple
product lines of quality casual apparel and activewear distinguished by design,
label and price. This permits Stage II to sell products to both discount and
full price operating divisions of major retailers. The Company's broad range of
brand name and proprietary label apparel also enables it to deliver similar
apparel items under different labels to competing merchandising customers.

Marketing Vehicles. Stage II sells its products through a sales force
consisting of seven sales employees and nine sales agents located in New York
City and other domestic locations. The Company advertises its brand name
products through its catalogs distributed each season and magazines including
Discount Stores News, a trade periodical, and the Daily News Record. The Company
also displays its merchandise in showrooms at its New York City headquarters. In
addition, Stage II exhibits its apparel at the semi-annual trade shows produced
by the Men's Apparel Guild in Las Vegas (MAGIC), a major men's and boy's apparel
show, and other trade shows, including the Atlanta Super Show and the BATMAN's
show for big and tall men's apparel.

Customers. In 1996, the Company's products were sold to over 500 customers
operating national and regional chains of sporting goods, specialty and mass
merchandising stores throughout the United States and Canada. Some of the
Company's largest customers during 1996 (measured by sales) included Ames
Department Stores, Inc., Army-Airforce Exchange Service, Hills Dept. Stores,
K-Mart Stores, Inc., Henry Modell & Co., Value City, Venture Stores, Inc. and
Wal-Mart Stores, Inc. Approximately 68% of the Company's 1996 net sales were
made to its ten largest customers, of which Wal-Mart Stores, Inc. and Ames
Department Stores, Inc. were the only customers accounting for more than 10% of
net sales.

Distribution. The Company's brand name and proprietary label products are
generally prepacked at the manufacturing site into cartons, shipped to an East
Coast warehouse and then shipped directly to the customer without repacking.
Products sold under retailers' own private labels are shipped directly to the
retailer.

SALES AGENCY OPERATIONS

Stage II HK has historically provided sales agency services to Stage II and
acted as purchasing agent to certain major retailing customers of the Company.
These functions included monitoring the production and quality control of
garments manufactured for the Company in various foreign locations, inspects
production

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<PAGE> 26

facilities and evaluates potential future suppliers. Stage II HK also assisted
the Company's manufacturers in locating and purchasing manufacturing machinery
and raw materials from time to time and when necessary to ensure timely delivery
of finished products to meet the Company's manufacturing orders. The operations
of Stage II HK were wound down during the four quarter of 1997, with its
monitoring functions being replaced by outside contractors as part of the
Company's cost cutting measures. Its sales agency business is currently
conducted directly by the Company.

During 1996, Stage II and Stage II HK also acted as purchasing agent for
$14 million (net sales equivalent) of apparel for other apparel companies and
retailers. These amounts are not included as net sales of the Company. Instead,
the fees for these services are reflected as commission income. Information on
the amounts of net sales and commission income, operating profit and
identifiable assets attributable to the Company's operations in the United
States, Canada and in the Far East is set forth in Note 2 of the Notes to the
Company's Consolidated Financial Statements included elsewhere in this Report.

MANUFACTURING

General. Stage II does not currently own or operate any manufacturing
facilities. Although the Company previously operated a domestic screen printing
facility, those operations were discontinued in 1993.

Manufacturing Sources. The Company's products are manufactured in
accordance with its designs, specifications and production schedules by
approximately 70 independent foreign and domestic manufacturers located in over
15 countries. Stage II determines its manufacturing requirements based on
customer orders placed or indicated approximately six months prior to shipment.
Manufacturing is then arranged on an order-by-order basis.

While there are no long term contractual commitments between Stage II and
its manufacturers, management believes the Company can continue to meet its
manufacturing requirements from its current manufacturers and, if necessary,
from other foreign and domestic sources. The Company's management has extensive
experience in the apparel industry and has established long term relationships
with independent manufacturers over the years. Management believes that these
relationships facilitate its sourcing of manufacturing requirements. The Company
also believes that the number and geographical diversity of its manufacturing
sources minimize the potential risks of quota limitations on imports from
certain foreign countries and adverse consequences that would result from
termination of its relationship with any of its manufacturers. See "Imports and
Import Restrictions" below.

Production Allocations. Stage II allocates production among its suppliers
based on a number of criteria, including quota considerations for foreign
suppliers, availability of production capability, quality, pricing and
flexibility in meeting changing production requirements on relatively short
notice. During 1996, approximately 9% of the Company's products were
manufactured in the United States, with the balance of its products manufactured
in over 14 countries in the Far East, Africa and Europe.

Quality Control. All finished products manufactured for the Company are
inspected by employees or agents of the Company or Stage II HK prior to
acceptance and payment to ensure that they meet the Company's design, quality
and other production specifications. Employees or agents of the Company or Stage
II HK inspect initial product samples provided by manufacturers for compliance
with production specifications, and production runs are not authorized until
conforming samples have been approved. Payment for each foreign manufacturing
order is generally backed by an irrevocable international letter of credit
issued under the Company's credit agreement approximately two to six months
prior to shipment of the products. The letters of credit may not be drawn until
an authorized employee or agent of Stage II issues an inspection certificate
certifying that the products are in compliance with the manufacturing order.

IMPORTS AND IMPORT RESTRICTIONS

Current Import Considerations. The Company imports approximately 91% of
its products from various foreign countries located in the Far East, Africa and
Europe. Since 1963, imports of apparel products from these countries have been
subject to constraints imposed by multilateral textile agreements with the
United

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<PAGE> 27

States applicable to specific product categories. As products in a certain
product category are imported from a country into the United States, that
country's quota for the product category is utilized. When an annual quota limit
is reached, no more products in the category may enter into the United States
during the year from that country. Stage II monitors the amount of unutilized
quota available for import of the Company's products on a weekly basis and
arranges its production schedules accordingly. The Company further minimizes its
potential exposure to quota risks through, among other things, geographical
diversification of its manufacturing sources and shifts of production among
countries and manufacturers. Stage II bases its choice of manufacturer, in part,
on quota considerations.

Potential Future Restrictions. The Company's ability to obtain necessary
product requirements may be affected by additional bilateral agreements,
unilateral trade restrictions, substantial decreases in textile import quotas, a
significant drop in the value of the dollar against foreign currency, political
instability resulting in the disruption of trade from exporting countries or the
imposition of additional duties, taxes or other charges on imports. From time to
time, legislation has been introduced in both houses of Congress seeking to
limit the import of foreign goods, including cloth, clothes and shoes, to the
United States. The Company's management has substantial experience in developing
and maintaining sources of supply, foreign and domestic, and therefore believes
that Stage II will be able to adjust to any future import restrictions by
obtaining required quota rights or, when necessary, moving production to
countries in which applicable quotas remain unfilled or to countries in which no
quotas are imposed.

BACKLOG

The Company's backlog of orders for garments at March 14, 1997 totaled
approximately $14 million, including 1997 sales through that date, representing
a decrease of $14 million from the comparable backlog of approximately $28
million at March 16, 1996, including sales through that date. Substantially all
of the orders at March 14, 1997 were scheduled for delivery by the end of the
year. Backlog represents orders placed by customers that are not yet due for
shipment. The amount of unfilled orders at a particular time is affected by a
number of factors including the scheduling of the manufacture and shipment of
the product, which in some instances is dependent on the desires of the
customer. Cancellations, rejections and returns can reduce the amount of net
sales resulting from the backlog of orders. Accordingly, a comparison of
unfilled orders from period to period is not necessarily meaningful or
indicative of subsequent actual shipments.

COMPETITION

The apparel business is highly competitive and consists of many importers,
distributors and manufacturers, none of which accounts for a significant
percentage of total industry sales, but some of which are larger and have
substantially greater resources than the Company. Stage II competes with
distributors that import apparel from abroad, with domestic retailers having
established foreign manufacturing relationships and with companies that produce
apparel domestically. The Company's sector of the apparel industry is highly
fragmented, and management believes that Stage II is a leading supplier of
casual apparel and activewear marketed to mass merchandisers under a number of
nationally recognized brand names and proprietary labels.

EMPLOYEES

As of November 30, 1997, the Company had 28 full-time employees. None of
the Company's employees are represented by a union. Stage II considers its
working relationships with employees to be good and has never experienced an
interruption of its operations due to any kind of labor dispute.

NEW YORK OFFICE HEADQUARTERS

The Company's New York sales and administrative offices are located in the
Empire State Building at 350 Fifth Avenue, New York, New York 10118 and consist
of approximately 10,800 square feet. The offices are occupied under a lease
running through 2006 and providing for an average annual base rent of
approximately $343,000. The Company also is obligated to pay for electricity,
certain taxes and expense

24
<PAGE> 28

escalations. In 1996, the Company made additional payments for these items
aggregating approximately $96,000.

DISTRIBUTION FACILITIES

During 1996, the Company distributed substantially all of its finished
garments in the United States from a public distribution facility located in the
New York metropolitan area, leased on a month-to-month basis. In 1996 and 1995,
the aggregate storage costs incurred at all distribution facilities were
approximately $188,000 and $289,000, respectively.

LEGAL PROCEEDINGS

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 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 the
Company and Stage II HK. In September 1996, Mr. Goldman and his co-defendants
filed an answer denying Stage II's claims in the lawsuit and asserting various
counterclaims. During September 1997, the parties agreed to settle the lawsuit
for a payment from the Company of approximately $1.15 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. The settlement payments were
completed by the Company in November 1997.

The Company is a party to several other legal proceedings incidental to its
business, none of which is considered to be material to its financial position,
results of operations or liquidity.

25
<PAGE> 29

CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF STAGE II

GENERAL

As contemplated by the Purchase Agreement, the current directors of the
Company have agreed to relinquish their seats at the time of the Closing and
appoint the Shorebreak Designees to fill the vacancies created by their
resignations. Section 14(f) of the Exchange Act and Rule 14f-1 thereunder
require the following information about the Company's current executive officers
and directors, as well as the information provided in this Proxy Statement about
the Shorebreak Designees, to be filed with the SEC and mailed to shareholders
not less than ten days prior to the appointment of the Shorebreak Designees to
the Board in accordance with the terms of the Purchase Agreement. See"Officers
and Directors of Shorebreak and the Shorebreak Designees."

DIRECTORS AND EXECUTIVE OFFICERS

The current directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
OFFICER OF
STAGE II
NAME AGE POSITION SINCE
- -------------------- --- --------------------------------------------------------- ----------
<S> <C> <C> <C>
Jack Clark.......... 70 Chairman of the Board and a director 1982
Steven R. Clark..... 40 President and a director 1980
Ronald Cohen........ 55 Executive Vice President -- Operations and a director 1996
Executive Vice President -- Production and Foreign
Carl Jenkins........ 54 Operations 1996
Michael Hanrahan.... 32 Treasurer 1997
Robert Plotkin...... 55 Director 1980
</TABLE>

A summary of the business experience and background of the Company's
executive officers and directors is set forth below.

Jack Clark has served as the Chairman of the Board and a director of the
Company since 1982. From 1982 through January 1987, he served as a consultant to
the Company and other apparel companies in his capacity as president of J.C.C.
Consulting Corp., with his services since that date provided directly and
exclusively to the Company. Mr. Clark is primarily responsible for the Company's
strategic planning, including product designs and development, manufacturing and
acquisitions. Mr. Clark has been engaged in the apparel business for over 40
years.

Steven R. Clark has been a member of the Company's sales force and served
as a director of the Company since its formation in 1980, and has served as its
President since 1996 and Executive Vice President -- Big and Tall Apparel since
1992, prior to which he was Division Head -- Big and Tall Apparel. He is the son
of Jack Clark, Chairman of the Board of the Company, and has been engaged in the
apparel business for over 15 years.

Ronald Cohen joined Stage II in 1988 as Director of Operations and was
appointed as Executive Vice President -Operations and a director of Stage II in
1996. He is principally responsible for the Company's computer operations,
import arrangements and sales monitoring. Prior to joining Stage II, Mr. Cohen
served for four years as President of Scottodd, Inc., a consulting company.

Carl Jenkins joined the Company in 1994 as Director of Production and
Foreign Operations and was appointed as Executive Vice President -- Production
and Foreign Operations in 1996. Prior to joining Stage II, he served in a
similar position with Townsley for more than five years.

Michael Hanrahan [to be developed]

26
<PAGE> 30

Eugene Myers, age 72, has served as a director of the Company since 1990.
He was a principal shareholder in Sarena Fashions Ltd., a manufacturer of
ladies' intimate apparel, and served as its President from 1984 until 1989. From
1978 through 1987, Mr. Myers also served as President of My-Line Apparel Ltd., a
manufacturer of ladies' intimate apparel. He has been engaged in the apparel
business for over 35 years.

Robert Plotkin, age 55, has served as a director of the Company since its
formation in 1980. He also served as the Company's President until October 1994.
Since that time, he has served as a consultant to the Company. Mr. Plotkin has
been engaged in the apparel business for over 30 years.

BOARD CLASSES

The Board is divided into two classes. The Class II directors were elected
at the Company's 1997 annual meeting of shareholders to serve for a two-year
term expiring at the 1999 annual meeting or until their successors are chosen
and have qualified. The Class I directors were elected at the Company's 1996
annual meeting of shareholders to serve for a two-year term expiring at the 1998
annual meeting. The Shorebreak Designees will be assigned to serve as either
Class I or Class II directors at the election of the Shorebreak Shareholders.
See "Officers and Directors of Shorebreak and the Shorebreak Designees."

1996 BOARD MEETINGS

During 1996, the Board took action, either at meetings or by consent, on a
total of four occasions. No director attended or participated in fewer than 75%
of these meetings or action by consent.

COMMITTEES AND COMMITTEE MEETINGS

The Board has an Audit Committee and a Compensation Committee. During 1996
and the first nine months of 1997, both committees are comprised of Eugene Myers
and Stephen J. Jelin, who subsequently retired from the Board. The Audit
Committee is responsible for monitoring and reviewing the financial affairs and
financial statements of the Company and performing related internal financial
review procedures. The Compensation Committee is responsible for evaluating
salary and bonus arrangements for all officers and key employees and for
administering the Company's employee benefit plans. During 1996, each of these
Committees held one meeting. The Board has no other standing committees.

COMPENSATION OF DIRECTORS

The outside directors of the Company received directors' fees at the rate
of $3,000 per meeting during 1996.

COMPENSATION OF NAMED EXECUTIVE OFFICERS

The following table sets forth the total remuneration paid during the last
three years to the five most highly compensated executive officers of the
Company.

27
<PAGE> 31

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
NAME AND ----------------- -------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) OPTION/SAR AWARDS(#) COMPENSATION(2)
- ----------------------------------- ---- -------- ----- -------- -------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Jack Clark......................... 1996 $345,000 -- -- -- $4,000
Chairman of the Board 1995 543,000 -- -- -- 4,000
1994 468,000 -- -- 40,000 4,000

Henry Weiner(3).................... 1996 227,000 -- -- -- 3,000
Executive VP-Spalding 1995 279,000 -- -- -- 3,000
1994 229,000 -- -- 20,000 3,000

Ronald Cohen....................... 1996 124,000 -- -- -- 3,000
Executive VP-Operations 1995 123,000 -- -- -- 3,000
1994 117,000 -- -- 10,000 3,000

Steven R. Clark.................... 1996 118,000 -- -- -- 2,000
President 1995 121,000 -- -- -- 3,000
1994 132,000 -- -- -- 2,000

Stuart Goldman(3).................. 1996 114,000 -- -- -- 1,000
President 1995 542,000 -- -- -- 4,000
1994 57,000 -- -- 63,000 --
</TABLE>

- ---------------
(1) Perquisites and other benefits did not exceed 10% of any named officer's
total annual salary.
(2) Reflects the Company's contribution to the accounts of the named executive
officers under its Employee Stock Ownership and Salary Deferral Plan. See
"Employee Benefit Plans" below.
(3) Mr. Weiner resigned from his position with the Company in the first quarter
of 1997, and Mr. Goldman was terminated by the Company in April 1996.

STOCK OPTIONS

The Company maintains two incentive stock option plans (the "ISO Plans").
See "Employee Benefit Plans -- Employee Stock Option Plans" below. The following
table sets forth information as of December 31, 1996 on stock options held under
the ISO Plans by the Company's five most highly compensated executive officers
in 1996, none of whom received any option grants or exercised any stock options
during 1996.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF VALUE
SHARES UNEXERCISED UNEXERCISED
ACQUIRED OPTIONS AT IN-THE-MONEY
ON VALUE YEAR OPTIONS AT
NAME EXERCISE REALIZED ENDED(1) YEAR END(2)
------------------------------------ --------- --------- ------------ -------------
<S> <C> <C> <C> <C>
Jack Clark.......................... None N/A 40,000 N/A
Henry Weiner........................ None N/A 20,000 N/A
Ronald Cohen........................ None N/A 10,000 N/A
Steven R. Clark..................... None N/A -- N/A
Stuart Goldman...................... None N/A -- N/A
</TABLE>

- ---------------
(1) All of the stock options are currently exercisable.
(2) The closing price of the Common Stock on the AMEX on December 31, 1996 was
below the exercise price of the options.

EMPLOYEE BENEFIT PLANS

Stock Option Plans. The ISO Plans maintained by the Company were adopted
in 1987 (the "1987 Plan") and 1994 (the "1994 Plan"), providing for the grant of
options to purchase up to 200,000 shares and 300,000 shares, respectively, of
Common Stock to key employees. The terms of the two ISO Plans are identical,
except for the additional shares of Common Stock covered by the 1994 Plan.

28
<PAGE> 32

The exercise price for options granted under the ISO Plans is fixed by a
Compensation Committee of the Board at 100% of the market price of the Common
Stock on the date of the grant or 110% of the market price for any optionee who
is a principal shareholder. Each option granted under the ISO Plans is
exercisable for periods of up to ten years from the date of grant, or three
months after termination of employment, with certain exceptions.

At December 31, 1996, options to purchase a total of 140,000 shares at
exercise prices ranging from $2 7/8 to $6 5/8 per share were outstanding under
the ISO Plans, and options to purchase 360,000 shares were reserved for future
grants. No options were exercised during 1996, 1995 or 1994.

Employee Stock Ownership and Salary Deferral Plan. In 1994, the Company
converted its Profit Sharing Plan into an Employee Stock Ownership and Salary
Deferral Plan (the "Savings Plan"). Under the Savings Plan, for each dollar
contributed by electing employees to a retirement savings account from up to 12%
of their annual compensation, the Company may contribute up to $.40, subject to
certain limitations under Section 401(k) of the Internal Revenue Code (the
"Code"). The Company's expense for these contributions in 1996, 1995 and 1994
aggregated $38,000, $69,000 and $55,000, respectively.

The Saving Plan also enables the Company to make discretionary
contributions for open market purchases of its Common Stock to be allocated to
the accounts of all employees in proportion to their annual compensation. This
feature was added in 1994 and is intended to qualify for treatment under Section
401(a) of the Code. The Company did not make any discretionary contributions to
the Savings Plan for this purpose in 1996, 1995 or 1994.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board has a Compensation Committee comprised of Messrs. Jelin and
Myers. Neither one of these directors has ever served as an officer of the
Company or any of its subsidiaries or had any related party transactions with
the Company.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

General. In recommending 1996 compensation levels for the Company's
officers, including the Chief Executive Officer and other named executive
officers, the Compensation Committee of the Board applied the Board's
established compensation policies and criteria intended to promote the Company's
overall objective of maximizing shareholder value over time. These procedures
are aimed at maintaining a competitive compensation package to attract and
retain talented personnel while also responding to both individual and corporate
performance measures. Recommendations for 1996 salary levels and long term
compensation were based on evaluations during January 1996 and thereafter.

Compensation Policy. The Company's executive compensation policy is
designed to maintain competitive levels of pay along with equity incentives to
attract and retain qualified executives with interests, as co-owners of the
Company, identical to those of its unaffiliated shareholders. This policy is
implemented through a salary structure augmented by stock option and Savings
Plan participation. The Committee's objective is to integrate these compensation
components with the annual and long term performance of the Company as well as
the achievements and contributions of the individual executives.

While the Committee's goal is to maintain executive compensation at levels
that are competitive with industry peers and linked to corporate performance,
actual compensation in any particular year may be above or below published rates
for competitors. In addition, due to the overall weakness of the retail apparel
market, the Company's compensation levels from year to year may not correlate
directly with various corporate performance measures in a particular year. The
Committee believes, however, that the Company's compensation program enables it
to balance the relationship between compensation and performance in the best
interests of the shareholders.

The separate components of the Company's executive compensation program for
1996 are described below, along with a discussion of the evaluations made by the
Committee in recommending 1996 compensation levels for the five most senior
executive officers.

29
<PAGE> 33

Annual Compensation. Annual compensation paid to the Company's named
executive officers is limited to base salaries, without any bonus or commission
payments, plus contributions to their accounts under the Company's Savings Plan,
which are generally dependent upon the amount of their own contributions. Salary
levels for the Company's top five executive officers are established by the
Board based on recommendations of the Compensation Committee.

Recommendations by the Compensation Committee for salary levels in 1996
were based on several historical and comparative performance factors. The
Committee also considered comparative compensation and performance data for
various other apparel companies and the performance of each of the Company's
senior officers within his particular area of operating responsibility. Although
the Committee reached favorable evaluations on the basis of these criteria, it
recommended that the Board reduce 1996 salaries below the prior year's level for
those officers in view of the existing competitiveness of their salary levels,
the overall weakness of the retail apparel market at the time of their
deliberations and the cost containment objectives of the Board.

The Compensation Committee's 1996 salary recommendation for Jack Clark, the
Chairman of the Board, was based on similar criteria as well as considerations
of overall corporate leadership, contribution to the Company's performance and
assumption of increased responsibilities. These positive considerations were
offset by the Company's cost containment objectives, resulting in a 36%
reduction in Mr. Clark's 1996 salary compared to his 1995 compensation.

Long Term Compensation. Long term incentives are provided through the
Company's ISO Plans. Options provide executives and other key employees with the
opportunity to establish or increase their equity interest in the Company and to
share in any appreciation in the value of the Common Stock. As a result of the
Company's disappointing financial results, no options were granted to its five
most highly compensated executive officers during 1996.

Conclusion. The Compensation Committee believes that the executive
compensation policies implemented through its recommendations serve the interest
of the Company's shareholders and the long range goals of the Company.

This report has been approved by the following members of the Compensation
Committee:

STEPHEN JELIN EUGENE MYERS

30
<PAGE> 34

PERFORMANCE GRAPH

The following graph compares the yearly percentage change in the Company's
cumulative total shareholder return with the cumulative return (assuming
reinvestment of dividends) of (i) the Russell 2,000 Index and (ii) an Apparel
Index group as published by Value Line. Inc.

<TABLE>
<CAPTION>
Measurement Period Russell 2000
(Fiscal Year Covered) Index Apparel Stage II Apparel
<S> <C> <C> <C>
1991 100.00 100.00 100.00
1992 209.19 122.33 118.41
1993 164.66 140.80 91.62
1994 139.98 138.01 85.18
1995 177.26 101.80 91.16
1996 205.30 122.92 67.87
</TABLE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF STAGE II

The following table sets forth information on the beneficial ownership of
the Common Stock as of November 30, 1997 by (i)) each person known by the
Company to own beneficially more than 5% of the outstanding Common Stock, based
on Statements on Schedule 13D filed with the SEC, (ii) the Company's five most
highly compensated executive officers during its last fiscal year, (iii) each
director of the Company and (iv) all directors and executive officers of the
Company as a group. Except as indicated in the footnotes to the table, the named
beneficial owners have sole voting and investment power for the reported shares.

<TABLE>
<CAPTION>
COMMON STOCK
ADDRESS OF BENEFICIALLY PERCENTAGE
5% SHAREHOLDERS 5% BENEFICIAL OWNERS OWNED OF CLASS
- --------------------------------- --------------------------------- ------------- -----------
<S> <C> <C> <C>
Fortuna Investment Partners, L.P.
Fortuna Capital Management, Inc.
Ronald J. Vannuki................ 100 Wilshire Boulevard
Santa Monica, CA 90401 425,900(1) 10.0%
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Jack Clark........................................................... 1,430,503(2) 33.4
Ronald Cohen......................................................... 10,000(3) .2
Steven R. Clark...................................................... 169,080 3.9
Stephen Jelin........................................................ -- --
Eugene Myers......................................................... 400 --
Robert Plotkin....................................................... 509,363(4) 11.9
All officers and directors as a group (11 persons)................... 2,164,946(5) 50.6
</TABLE>

31
<PAGE> 35

- ---------------
(1) Based on a Statement on Schedule 13D, reflects shares held directly by
Fortuna Investment Partners, L.P. ("FIP") and indirectly by Fortuna Capital
Management, Inc. ("FCP"), the general partner of FIP, and by Mr. Vannuki, as
President and Chief Executive Officer of FCP. Excludes (i) 700 shares of
Common Stock held in Mr. Vannuki's IRA. See "Certain Transaction."
(2) Includes (I) 13,700 shares owned by a trust of which Mr. Clark is a
beneficiary, (ii) 39,519 shares held by a foundation owned by Mr. Clark,
(iii) 12,400 shares owned by his wife and (iv) 40,000 shares subject to
stock options.
(3) Represents 10,000 shares subject to stock options.
(4) Includes 1,000 shares owned by Mr. Plotkin's wife.
(5) Includes (i) a total of 65,219 shares owned indirectly by officers and
directors of the Company and (ii) an aggregate of 85,000 shares subject to
stock options.

CERTAIN TRANSACTIONS

The Company is a party to a 1992 buy-sell agreement with Jack Clark, a
director and officer of the Company, providing for the Company's repurchase of
the shares of Common Stock by his estate in the event of his death. The purchase
price for any shares repurchased under the agreement will be the average of the
closing prices of the Common Stock on its principal trading market during the
five trading days preceding the date of Mr. Clark's death or the book value per
share of the Common Stock as reflected in the Company's most recent periodic
report filed with the Securities and Exchange Commission prior to the date of
death, whichever is greater. The Company maintains insurance policies on the
life of Mr. Clark covering $5.4 million of its repurchase commitment under the
agreement at premiums aggregating approximately $2.3 million over a period of
seven years, with corresponding cash surrender values estimated to reach
approximately $2 million by the end of that period. To the extent not covered by
these policies, the Company will have the option to fund the balance of any
repurchase commitment with a promissory note payable over three years with
interest at a market rate. Mr. Clark will have the option, upon the sale of his
entire interest in the Company, to purchase its insurance policies on his life
at their prevailing cash surrender value. The JC Employment Agreement provides
for the termination of the buy-sell agreement. See "The Transactions -- JC
Employment Agreement."

On March 5, 1996, the Company entered into an agreement (the "Consulting
Agreement") with AMP Consulting Services, Inc. ("AMP"), Fector Detwiler & Co.,
Inc. ("FDC") and Fortuna Capital Management Company ("FCM"), providing for
various consulting and financial advisory services and the issuance of
performance-based options (the "Options"). FCM is a principal shareholder of the
Company. See "Principal Shareholders." Anthony M. Pisano, the principal
shareholder of AMP, served as Chief Financial Officer of the Company during the
first half of 1997.

The advisory services provided under the Consulting Agreement included (i)
a review of the Company's operations to consider ways of increasing the
efficiency and financial performance of the Company's existing apparel business,
(ii) the evaluation of strategic opportunities to either expand or divest the
current business and acquire new businesses within or outside the apparel
industry and to develop profitable strategies for the resulting enterprise and
(iii) the identification of potential transactions to implement the recommended
strategic plan. The Consulting Agreement had a term ending September 1, 1996,
subject to earlier termination or extension by the Company.

In connection with the Consulting Agreement, the Company granted Options to
AMP, FDC and FCM to purchase 200,000 shares, 100,000 shares and 200,000 shares,
respectively, of its Common Stock at $3 1/8 per share, exercisable only if
specified performance goals were met (a "Qualifying Event"). In addition, Jack
Clark, the Company's Chairman of the Board, issued Options to FDC and FCM to
purchase 434,000 shares and 866,000 shares, respectively, of Common Stock owned
by him upon the occurrence of a Qualifying Event at an exercise price of $4 3/4
per share. The FDC and FCM Options expired on March 1, 1997, and the AMP Options
expired on May 1, 1997.

32
<PAGE> 36

RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS OF STAGE II

On July 25, 1997, the Company dismissed KPMG Peat Marwick LLP ("KPMG") as
its independent accountants. On the same date, the Company engaged Mahoney Cohen
& Company, CPA, P.C. ("MC&C") as its independent accountants. The change in
accountants was approved by the Audit Committee of the Board. Neither of KPMG's
reports on the Company's financial statements for the years ended December 31,
1996 and 1995 contained an adverse opinion or disclaimer of opinion, or was
qualified or modified as to uncertainty, audit scope or accounting principles.
During the last two years and the interim period prior to the change in
accountants, (i) the Company had no disagreements with KPMG on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, (ii) KPMG id not advise the Company of any "reportable
event" as defined in Regulation S-K under the Securities Exchange Act of 1934
and (iii) the Company did not consult with MC&C on any accounting, auditing,
financial reporting or any other matters.

33
<PAGE> 37

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS OF SHOREBREAK

GENERAL

Shorebreak has elected to be treated as an S corporation for federal income
tax purposes. Therefore, Shorebreak has not been subject to federal income tax
on the corporate level. Upon consummation of the Transactions, Shorebreak will
terminate its status as an S corporation. The following discussion nevertheless
assumes that Shorebreak will continue to operate independently of any affiliated
companies. This discussion should be read in conjunction with the Unaudited
Financial Statements of Shorebreak included at the end of this Proxy Statement.

OPERATIONS

Since its inception, office space, bookkeeping and record keeping services
have been provided to Shorebreak by R. Siskind and Company ("RSC"), an apparel
company owned by Richard Siskind. These services have been charged to Shorebreak
on a market value basis and have been booked in the appropriate accounting
period.

During its start-up phase, Shorebreak's business was seasonal, with the
bulk of its sales occurring in the first two quarters. As additional licenses
are acquired, however, the seasonality of its business is expected to decrease.

RESULTS OF OPERATIONS

From its inception in February 1997 through September 30, 1997, Shorebreak
realized net income of $234,000 net sales of its apparel products aggregating
$3.7 million. Cost of goods sold during the interim period totaled $2.9 million
or 78.5% of net sales. During the period, Shorebreak recorded SG&A expenses of
$462,000 or 12.4% of net sales. Shorebreak believes its costs are within norms
for a start-up company is its segment of the apparel industry.

LIQUIDITY AND CAPITAL RESOURCES

In accordance with industry custom, Shorebreak factors its accounts
receivable with a factor on a recourse basis. The factor purchases Shorebreak's
accounts receivable, thereby providing funds when the goods are shipped to the
customer rather than when the customer pays for the goods. The factor charges
Shorebreak interest on all uncollected advances and a factor's commission on all
sales. The interest rate is calculated as a percentage in excess of the prime
rate announced by Chase Manhattan Bank from time to time. As of September 30,
1997, the effective the interest rate was 1 1/2% above the prime rate, and the
commission was .65% on each sale. Once the factor approves and accepts an
account receivable, it is responsible for its collection unless the customer
files a formal dispute regarding payment. In that event, the factor can charge
back the item to Shorebreak's account, requiring Shorebreak to resolve the
issue. The factor has a lien on all factored receivables and the associated
proceeds.

Certain Shorebreak Shareholders have advanced funds to Shorebreak as
needed, and a portion of those loans have been repaid. As of September 30, 1997,
the outstanding balance of the loans aggregated $350,000, of which $50,000 are
subordinated to factor debt. To date, Shorebreak has not experienced any
liquidity constraints, and it does not anticipate any if its business continues
to grow at its present rate. As of September 30, 1997, Shorebreak had no
material capital expenditure requirements.

34
<PAGE> 38

BUSINESS OF SHOREBREAK
INTRODUCTION

General. Shorebreak designs and distributes an extensive range of men's
and boy's casual sportswear and activewear. Shorebreak was organized and
commenced business in February of 1997. During that period, it has procured
apparel licenses for the CHUK-A and Cross Colours brands. Shorebreak anticipates
expanding its licensed brands to differentiate its apparel lines so long as
those brands can be sold in its available channels of distribution. Shorebreak
markets its apparel to retailers, including department stores, specialty shops
and chain stores. Its products are produced and finished domestically, enabling
it turn inventory at a rapid rate while reducing its overall manufacturing and
shipping risks.

Market Position. Management of Shorebreak has been engaged in marketing
men's and boy's apparel for over 20 years. A relatively new company,
Shorebreak's sales are not a significant percentage of the overall total market
volume in its industry segment. On the basis of its licenses, however,
Shorebreak operates in the middle-to-upper middle tier of the retail market in
the casual apparel industry.

Market Sector. Shorebreak specializes in casual sportswear and activewear
for men and boys. Shorebreak's products offer retailers a broad selection of
colors, fabrics, designs and styles for lifestyle and active sports activities
and are sold at moderate price points.

PRODUCTS

General. Shorebreak primarily sells men's sportswear and active related
apparel. Shorebreak's product mix is merchandised to offer a wide selection of
brand name apparel produced with life style designing and higher-end quality.
Emphasis is currently being placed on meeting the demand for younger, popular
priced fashion sportswear.

Brand Name Licenses. Shorebreak is the licensee of the CHUK- A and Cross
Colours brands for certain markets. Subject to compliance with stated
conditions, it has the exclusive right to utilize the CHUK-A brand on knits,
wovens, and swimwear for sale to apparel stores in the Unites States and U.S.
territories with the exception of discount chains and mass merchants. The label
is marketed and designed by Charles Anderson, a major graphic artist, and is
being marketed to specialty and better department stores.

The Cross Colours license is a nationally known moderately priced brand,
geared and fashioned for a younger urban market customer. The license was
acquired to penetrate the growing urban market in young men's and boy's
sportswear.

RSC recently acquired the license to E.N.U.F. International, a Utah based
clothing company. The E.N.U.F. brand targets the department and specialty store
market in mid-price point sportswear. RSC intends to assign this license at a
later date to Shorebreak.

License Agreements. Shorebreak's license agreements generally require it
to make minimum quarterly royalty payments. The CHUK-A license terminates in
June 2002 and will be automatically renewed for one year periods unless either
party gives written notification of its intent to terminate the license at least
sixty days prior to the end of the period. The Cross Colours license ends on
December 31, 1999 and is automatically renewable for two successive three-year
periods unless either party gives written notification of its intent to
terminate the license at least sixty days prior to the end of the period. Both
licenses specify sales thresholds that increase for each successive year.

The products sold by Shorebreak must meet the quality standards of the
licensors. The licensors promote the sales of the branded product through
advertising and other promotional methods.

MARKETING AND DISTRIBUTION

Marketing Strategy. Shorebreak markets its apparel to department stores
and other major retailers, utilizing different strategies geared to the
particular product and customer target.

Marketing Vehicles. Shorebreak exhibits the merchandise in its own
showroom, participates in tradeshow exhibitions throughout the United States,
distributes direct mailings and advertises to industry based consumers. Sales
are also conducted through regional commission sales agents.

35
<PAGE> 39

Customers. Shorebreak's products are sold to over 20 customers operating
national chains of sporting goods, specialty and mass merchandising stores
throughout the United States. Some of Shorebreak's major customers include
Montgomery Ward, Charming Shops and Mervyns. Shorebreak has succeeded throughout
its start-up phase to steadily increase its customer account. Montgomery Ward
and Charming Shops each account for over 10% of Shorebreak's net sales.
Shorebreak does not believe it is dependent on these accounts, since additional
major accounts are being solicited on a regular basis.

Distribution. Shorebreak's products are shipped directly to its customers
from its San Diego, California distribution center.

MANUFACTURING

General. Shorebreak does not own or operate any manufacturing facilities.
All manufacturing is done by U.S. domestic mills to Shorebreak's order.

Manufacturing Sources. Shorebreak buys blank apparel from various mills
based on quality and price. Outside contractors then dye, screen and embroider
the apparel as necessary for pre-sold inventory. Shorebreak also contracts for
the manufacture of various other sportswear items.

Production Allocations. Although Shorebreak generally contracts with a
consistent group of mills and contractors, it utilizes a variety of different
mills and contractors as availability, quality, scheduling and other factors
dictate.

Quality Control. All finished products manufactured for Shorebreak are
inspected by its employees or agents prior to acceptance and payment to ensure
that they meet Shorebreak's design, quality and other specifications. Employees
of Shorebreak inspect initial product samples provided by manufacturers for
compliance with production specifications, and production runs are not
authorized until conforming samples have been approved.

BACKLOG

Shorebreak normally ships within 60 days of receipt of a customer's
purchase order. Generally, orders in house average between $500,000 and
$600,000.

GEOGRAPHIC AREA DATA

Shorebreak operates in one industry segment. Shorebreak's sales are made in
the United States primarily to national and regional chains of department and
specialty stores. These department and specialty stores distribute the products
to their stores located throughout the country.

COMPETITION

The apparel business is highly competitive and consists of many importers,
distributors and manufacturers, none of which accounts for a significant
percentage of total industry sales, but some of which are larger and have
substantially greater resources than Shorebreak. Shorebreak competes with
distributors that import apparel from abroad, with domestic retailers that have
established foreign manufacturing relationships and with companies that produce
apparel domestically. Shorebreak's sector of the apparel industry is highly
fragmented. Shorebreak's sales volume is not significant compared to the overall
market.

EMPLOYEES

Shorebreak has 12 employees in administrative, sales and warehouse
capacities. None of Shorebreak's employees are represented by a union.
Shorebreak considers its relationship with its employees to be good.

PROPERTIES

Headquarters and Distribution Facility. Shorebreak's sales, administrative
offices and storage facility are located in its San Diego, California warehouse.
The warehouse consists of approximately 4,800 square feet and is occupied under
a lease running through August 31, 1999. The annual base rent is approximately
$38,400. Shorebreak is also obligated to pay for electricity, certain taxes and
expense escalations. All of Shorebreak's finished garments are distributed from
this facility.

36
<PAGE> 40

OFFICERS, DIRECTORS OF SHOREBREAK AND THE SHOREBREAK DESIGNEES

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of Shorebreak are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION SINCE
- ----------------------------------------------- --- --------------------------------------- ----
<S> <C> <C> <C>
Richard Siskind................................ 52 Chief Executive Officer and a director 1997
Douglas Tudor.................................. 39 President and a director 1997
Jon Siskind.................................... 28 Vice President and a director 1997
Beverly Roseman................................ 39 Secretary, Treasurer and a director 1997
</TABLE>

The foregoing directors and executive officers are also the Shorebreak
Shareholders. See "Ownership of the Control Shares" below. In addition, Richard
Siskind, Jon Siskind and Beverly Roseman, together with Robert Greenberg, who is
not affiliated with Shorebreak, will be the Shorebreak Designees to the Board of
Stage II as a result of the Board Reconstitution. See "The Transactions -- Board
Reconstitution." A summary of their business experience and background is set
forth below.

Richard Siskind has been in the apparel business for over 30 years, serving
in a variety of roles and positions. By 1977, Mr. Siskind had assumed the
position of president of David Small Industries, Inc. In 1982 he co-founded
Apparel Exchange, Inc., an affiliated company. Both companies sold off-price
men's, women's and children's apparel and reached sales in excess of $100
million by 1989. Mr. Siskind sold both companies in 1989. In 1991 Mr. Siskind
founded RSC. He is a director, sole shareholder and chief executive officer of
RSC, which is in the business of purchasing top brand name men's and women's
apparel and accessories, and redistributing it to a global clientele of upscale
off-price retailers.

Douglas Tudor has been in the apparel business for approximately 17 years.
From 1980 to 1984, he was employed by Koala Arts, Inc. as a purchasing and
marketing manager. In 1984, he formed Shorebreak Unlimited, Inc., which produced
and sold men's and boy's fashions knitwear and activewear. In 1991, Shorebreak
Unlimited, Inc. merged into and became a division of South Carolina Tees, Inc.
The division was dissolved in January 1997, and its licenses were sold to
Shorebreak Group, Inc., which was founded by Mr. Tudor and Richard Siskind in
February 1997.

Jon Siskind graduated from the University of Hartford in 1991, where he
received his B.A. in Economics. He joined RSC in the same year as an account
executive handling the Northeast and Mid West territories. In 1994, he was
appointed National Sales Manager and given the additional responsibility for
overseeing all sales and distribution. In 1995, he was appointed as RSC's Vice
President of Sales. Jon Siskind is the son of Richard Siskind.

Beverly Roseman joined RSC in 1992 as the Merchandise Manager. In 1995,
Mrs. Roseman was appointed as RSC's Vice President of Buying, Merchandising and
Operations. Mrs. Roseman also oversees the Human Resources, MIS and Operational
divisions of RSC. From 1975 to 1980, Mrs. Roseman worked for R.H. Macy's, first
as trainee and then as a buyer. She was employed from 1980 to 1982 as a buyer
for The Broadway Department Stores in California, from 1982 to 1988 as a buyer
for Marshall's Inc. and from 1988 to 1992 as a Senior Buyer for T.J. Maxx. Mrs.
Roseman is a graduate of Adelphi University.

Robert Greenberg founded LA Gear, a publicly held footwear company noted
for making athletic footwear fashionable. Mr. Greenberg launched his second
footwear venture with his sons in 1992. At 57, he is the Chairman and CEO of
Skechers USA, Inc., which sells casual lifestyle footwear to major retailers
throughout the United States and in approximately sixty countries. Since its
inception, Skechers, Inc. has become one of the largest privately held footwear
companies in the United States.

EXECUTIVE COMPENSATION

Shorebreak has no incentive based benefit plans, severance plans or key
employee life insurance policies in place. All executive employees are paid a
flat salary. Richard Siskind and Douglas Tudor have each accrued

37
<PAGE> 41

salaries of $35,000 since the inception of Shorebreak. Its other officers have
not accrued or drawn any remuneration from Shorebreak.

OWNERSHIP OF THE CONTROL SHARES

At the Closing of the Transactions, the Shorebreak Shareholders will be
issued Control Shares in proportion to their ownership interests in Shorebreak,
resulting in their beneficial ownership of the Control Shares as follows:

OWNERSHIP OF CONTROL SHARES

<TABLE>
<CAPTION>
NUMBER OF
CONTROL
NAME OF SHOREBREAK SHAREHOLDER SHARES
-------------------------------------------------------------- ---------
<S> <C>
Richard Siskind............................................... 3,508,654
Douglas Tudor................................................. 250,000
Jon Siskind................................................... 200,000
Beverly Roseman............................................... 50,000
</TABLE>

EXPERTS

The consolidated financial statements of Stage II appearing in this Proxy
Statement for the three years ended December 31, 1996 have been audited by KPMG
Peat Marwick LLP, independent auditors, as set forth in their report

thereon included herein. Such consolidated financial statements are
included herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.

ADDITIONAL INFORMATION

Stage II is subject to the information requirements of the Exchange Act and
in accordance therewith files reports and other documents with the SEC. Reports,
proxy material and other information filed by the Company can be inspected and
copied at prescribed rates at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at
the following Regional Offices of the SEC: 7 World Trade Center, Suite 1300, New
York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of these materials can also be
obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. Copies of these materials can also be
obtained at the offices of the American Stock Exchange at 86 Trinity Place, New
York, NY 10006.

38
<PAGE> 42

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
STAGE II APPAREL CORP. AND SUBSIDIARIES:
Consolidated Balance Sheets at September 30, 1997 (unaudited) and December 31,
1996........................................................................ F-2
Consolidated Statements of Operations for the nine months ended September 30,
1997 and 1996 (unaudited)................................................... F-3
Consolidated Statements of Cash Flows for the nine months ended September 30,
1997 and 1996 (unaudited)................................................... F-4
Notes to Interim Consolidated Financial Statements (unaudited)................ F-5
Report of Independent Auditors................................................ F-6
Consolidated Balance Sheets at December 31, 1996 and 1995..................... F-7
Consolidated Statements of Operations for the three years ended December 31,
1996........................................................................ F-8
Consolidated Statements of Cash Flows for the three years ended December 31,
1996........................................................................ F-9
Consolidated Statements of Changes in Stockholders' Equity for the three years
ended December 31, 1996..................................................... F-10
Notes to Consolidated Financial Statements.................................... F-11

UNAUDITED PRO FORMA FINANCIAL STATEMENTS OF STAGE II APPAREL CORP.
Unaudited Pro Forma Balance Sheet at September 30, 1997....................... F-26
Unaudited Pro Forma Statement of Operations for the nine months ended
September 30, 1997.......................................................... F-27
Notes to Unaudited Pro Forma Financial Statements............................. F-28

SHOREBREAK GROUP, INC.:
Balance Sheet at September 30, 1997 (unaudited)............................... F-29
Statement of Income for the period from inception in February 1997 through
September 30, 1997 (unaudited).............................................. F-30
Statement of Cash Flows for the period from inception in February 1997 through
September 30, 1997 (unaudited).............................................. F-31
Notes to Interim Consolidated Financial Statements (unaudited)................ F-32
</TABLE>

F-1
<PAGE> 43

STAGE II APPAREL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31,
1996
SEPTEMBER 30, ------------
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash............................................................. $ 454 $ 429
Restricted cash.................................................. 662 --
Accounts receivable.............................................. 823 1,334
Finished goods inventory......................................... 4,531 5,130
Prepaid expenses................................................. 618 374
Prepaid income taxes and refunds receivable...................... 112 130
------- -------
Total current assets.......................................... 7,200 7,397
Property and equipment, at cost, less accumulated depreciation... 522 585
Marketable securities............................................ 3,292 8,655
Goodwill, less accumulated amortization.......................... 7,226 7,558
Covenant not to compete, less accumulated amortization........... 266 300
Other assets..................................................... 720 1,314
------- -------
TOTAL ASSETS............................................. $19,226 $ 25,809
======= =======
LIABILITIES:
Due to factor.................................................... $ 5,197 $ 7,174
Due to bank...................................................... -- 434
Accounts payable................................................. 481 1,838
Notes payable -- current......................................... 170 185
Notes payable to shareholder -- current.......................... 350 411
Income taxes payable............................................. -- 8
Accrued royalties................................................ 83 182
Other current liabilities........................................ 886 488
------- -------
Total current liabilities..................................... 7,167 10,720
Notes payable -- long term....................................... -- 199
Notes payable to shareholder -- long term........................ -- 500
------- -------
TOTAL LIABILITIES........................................ $ 7,167 $ 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 3,992 shares outstanding at Sept. 30, 1997
and 4,196 at Dec. 31, 1996.................................... 50 50
Additional paid-in capital......................................... 7,502 7,502
Retained earnings................................................ 7,015 9,346
------- -------
14,567 16,898
Less treasury stock, at cost; 1001 shares at Sept.30, 1997 and
797 at Dec. 31, 1996.......................................... (2,297) (2,092)
Allowance for decline in market value of securities available for
sale.......................................................... (85) (329)
Cumulative translation adjustment................................ (126) (87)
------- -------
TOTAL SHAREHOLDERS' EQUITY............................... 12,059 14,390
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $19,226 $ 25,809
======= =======
</TABLE>

See Notes to Unaudited Condensed Consolidated Financial Statements.

F-2
<PAGE> 44

STAGE II APPAREL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
------- -------
(UNAUDITED)
<S> <C> <C>
Net sales................................................................ $12,133 $24,527
Cost of goods sold....................................................... 9,861 19,943
------- -------
Gross profit............................................................. 2,272 4,584
Commission and other income.............................................. 512 715
------- -------
2,782 5,299
Selling, general and administrative expenses............................. (4,859) (7,167)
------- -------
Operating loss........................................................... (2,074) (1,868)
Interest and factoring expense........................................... (679) (1,897)
Interest income.......................................................... 211 594
Loss on sale of securities............................................... (285) --
------- -------
Loss before income tax benefit........................................... (2,827) (3,171)
Income tax benefit....................................................... 9 55
------- -------
Loss from continuing operations before extraordinary items............... (2,818) (3,116)
Extraordinary item -- gain on extinguishment of debt..................... 205 --
Gain (loss) on disposal of discontinued subsidiary, including a provision
of $160,000 for operating losses during phase-out period............... 290 (1,860)
------- -------
Net loss................................................................. $(2,323) $(4,976)
======= =======
Net income (loss) per common share:
Loss from continuing operations........................................ $ (.67) $ (.74)
Extraordinary item -- extinguishment of debt........................... .05 --
Loss from discontinued operations...................................... .07 (.44)
------- -------
$ (.26) $ (1.18)
======= =======
Weighted average common shares outstanding............................... 4,174 4,196
======= =======
</TABLE>

See Notes to Unaudited Condensed Consolidated Financial Statements.

F-3
<PAGE> 45

STAGE II APPAREL CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1997 1996
------- -------
(UNAUDITED)
<S> <C> <C>
Net cash provided by (used in) operating activities...................... $(1,862) $ 325
INVESTING ACTIVITIES:
Purchase and sale of property and equipment, net....................... (46) (8)
Sale or redemption of marketable securities............................ 6,219 771
------- -------
Net cash provided by investing activities................................ 6,173 763
------- -------
FINANCING ACTIVITIES:
Factor financing, net.................................................. (1,976) (758)
Repayment of notes..................................................... (970) (84)
Purchase of treasury stock............................................. (204) --
Bank financing, net.................................................... (434) (196)
------- -------
Net cash provided by (used in) financing activities...................... (3,584) (1,038)
------- -------
Effects of exchange rate changes on cash................................. (40) --
------- -------
Net increase in cash..................................................... 687 50
Cash at beginning of year................................................ 429 151
------- -------
Cash at end of period.................................................... $ 1,116 $ 201
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes............................................. $ 10 $ 17
======= =======
Cash paid for interest, excluding factoring fees....................... $ 501 $ 1,265
======= =======
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

F-4
<PAGE> 46

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 September 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.

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 nine months ended September 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 September 30, 1997 and December 31, 1996 were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1996
SEPTEMBER 30, ------------
1997
-------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Current assets............................................. $-- $ 769
Current liabilities........................................ -- (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.

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, restricted cash 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.

F-5
<PAGE> 47

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 April 29, 1998, subject to automatic one-year renewal
terms unless terminated at the option of either party.

NOTE 5. LITIGATION 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 the Company and Stage II HK. In September 1996, Mr.
Goldman and his co-defendants filed an answer denying Stage II's claims in the
lawsuit and asserting various counterclaims. During September 1997, the parties
agreed to settle the lawsuit for a payment from the Company of approximately
$1.15 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. The settlement payments were completed by the Company in November 1997.

F-6
<PAGE> 48

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Stage II Apparel Corp.:

We have audited the accompanying consolidated balance sheets of Stage II
Apparel Corp. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stage II
Apparel Corp. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

As discussed in notes 1 and 8 to the consolidated financial statements, the
Company changed its method of accounting for marketable securities in 1994 to
adopt the provisions of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."

KPMG PEAT MARWICK LLP

New York, New York
March 31, 1997

F-7
<PAGE> 49

STAGE II APPAREL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
ASSETS:
Cash................................................................... $ 429 $ 151
Accounts receivable (notes 3 and 5).................................... 1,334 2,063
Finished goods inventory (notes 3 and 6)............................... 5,130 12,507
Prepaid expenses....................................................... 374 928
Prepaid income taxes and refunds receivable............................ 130 743
------- -------
Total current assets................................................ 7,397 16,392
Property and equipment, at cost, less accumulated depreciation (note
7).................................................................. 585 772
Marketable securities (notes 3 and 8).................................. 8,655 11,124
Goodwill, less accumulated amortization of $2,056 and $1,562 at
December 31, 1996, and 1995, respectively........................... 7,558 9,230
Covenant not to compete, less accumulated amortization of $213 and $118
at December 31, 1996, and 1995, respectively........................ 300 731
Other assets........................................................... 1,314 1,287
------- -------
TOTAL ASSETS................................................... $25,809 $39,536
======= =======
LIABILITIES:
Due to factor (note 3)................................................. $ 7,174 $11,658
Due to bank (note 4)................................................... 434 1,011
Accounts payable....................................................... 1,838 2,645
Notes payable -- current (note 9)...................................... 185 170
Notes payable to shareholder -- current (note 10)...................... 411 --
Income taxes payable................................................... 8 51
Accrued royalties...................................................... 182 648
Other current liabilities.............................................. 488 380
------- -------
Total current liabilities........................................... 10,720 16,563
Notes payable -- long term (note 9).................................... 199 384
Notes payable to shareholder -- long term (note 10).................... 500 911
------- -------
TOTAL LIABILITIES.............................................. 11,419 17,858
------- -------
SHAREHOLDERS' EQUITY (notes 16 and 17):
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 December 31, 1996 and 1995... 50 50
Additional paid-in capital............................................. 7,502 7,502
Retained earnings...................................................... 9,346 16,308
------- -------
16,898 23,860
Less treasury stock, at cost; 797 shares at December 31, 1996 and
1995................................................................ (2,092) (2,092)
Allowance for decline in market value of securities available for sale
(note 8)............................................................ (329) --
Cumulative translation adjustment...................................... (87) (90)
------- -------
TOTAL SHAREHOLDERS' EQUITY..................................... 14,390 21,678
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY..................... $25,809 $39,536
======= =======
</TABLE>

See Notes to Consolidated Financial Statements.

F-8
<PAGE> 50

STAGE II APPAREL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net sales..................................................... $33,428 $60,177 $59,560
Cost of goods sold (note 6)................................... 28,016 48,357 46,778
------- ------- -------
Gross profit.................................................. 5,412 11,820 12,782
Commission and other income................................... 678 1,599 853
------- ------- -------
6,090 13,419 13,635
Selling, general and administrative expenses (notes 12, 15 &
18)......................................................... 9,195 13,341 13,059
Impairment of prepaid salary and non-compete covenant......... 512 -- --
Provision (benefit) for litigation costs...................... (13) 577 --
------- ------- -------
Operating profit (loss)....................................... (3,604) (499) 576
Other income (expenses):
Interest income............................................. 748 734 832
Interest and factoring expenses............................. (2,336) (3,155) (2,266)
Interest on income tax settlement........................... -- -- (384)
------- ------- -------
Loss from continuing operations before income tax benefit..... (5,192) (2,920) (1,242)
Benefit for income taxes (note 14)............................ (33) (342) (438)
------- ------- -------
Loss from continuing operations............................... (5,159) (2,578) (804)
Discontinued operations:
Loss from discontinued operations........................... (324) (684) (61)
Estimated loss on disposal of discontinued operations....... (1,479) -- --
------- ------- -------
(1,803) (684) (61)
------- ------- -------
Net loss...................................................... $(6,962) $(3,262) $ (865)
======= ======= =======
Net loss per common share:
Loss from continuing operations............................. $ (1.23) $ (.62) $ (.19)
Loss from discontinued operations........................... (.43) (.16) (.02)
------- ------- -------
$ (1.66) $ (.78) $ (.21)
======= ======= =======
Dividends paid per common share............................... $ -- $ -- $ .12
======= ======= =======
Weighted average common shares outstanding.................... 4,196 4,195 4,161
======= ======= =======
</TABLE>

See Notes to Consolidated Financial Statements.

F-9
<PAGE> 51

STAGE II APPAREL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................. $ (6,962) $ (3,262) $ (865)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Provision for discontinued operations.............................. 1,187 -- --
Depreciation and amortization of property and equipment............ 171 202 303
Amortization and impairment of goodwill and non-compete covenant... 1,032 666 328
Loss (gain) on sale or abandonment of property and equipment....... 26 -- (12)
Minority interest in loss of subsidiary............................ -- (81) (22)
Deferred tax expense (benefit)..................................... -- 417 (107)
Changes in assets and liabilities, net of effects of acquisition:
Decrease in accounts receivable, net............................. 670 97 890
Decrease in finished goods inventory............................. 7,354 311 4,762
Decrease in prepaid expenses..................................... 554 272 214
Decrease (increase) in prepaid income taxes and refunds
receivable..................................................... 613 (187) (556)
Decrease (increase) in other assets.............................. (27) 268 (444)
Decrease in accounts payable..................................... (807) (327) (1,447)
Decrease in income taxes payable................................. (42) (109) (6)
Increase (decrease) in accrued royalties......................... (466) (203) 209
Increase (decrease) in other current liabilities................. 75 (606) 671
-------- -------- --------
Net cash provided by (used in) operating activities.................. 3,378 (2,542) 3,918
-------- -------- --------
INVESTING ACTIVITIES:
Purchase and sale of property and equipment, net................... (9) (124) (239)
Sale or redemption of available for sale marketable securities..... 2,139 412 1,695
Purchase of available for sale marketable securities............... -- (198) --
Investment in Woody Sports Apparel Inc. ........................... -- (226) --
Investment in Stage II Licensed Products, Inc. .................... -- -- (85)
Purchase of Townsley Ltd. assets and liabilities, net of cash
acquired......................................................... -- -- (2,006)
-------- -------- --------
Net cash provided by (used in) investing activities.................. 2,130 (136) (635)
-------- -------- --------
FINANCING ACTIVITIES:
Payments of notes payable.......................................... (171) (158) (106)
Borrowings from factor............................................. 29,847 63,277 66,328
Repayments to factor............................................... (34,332) (61,248) (68,236)
Borrowings from bank............................................... 2,862 6,133 5,609
Repayments to bank................................................. (3,439) (5,531) (5,200)
Treasury stock transactions, net................................... -- 23 (1,171)
Cash dividends..................................................... -- -- (493)
-------- -------- --------
Net cash provided by (used in) financing activities.................. (5,233) 2,496 (3,269)
-------- -------- --------
Effects of exchange rate changes on cash............................. 3 (32) (3)
-------- -------- --------
Net increase (decrease) in cash...................................... 278 (214) 11
Cash at beginning of year............................................ 151 365 354
-------- -------- --------
Cash at end of year.................................................. $429..... $ 151 $ 365
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes......................................... $ 16 $ 164 $ 327
======== ======== ========
Cash paid for interest, excluding factoring fees................... $ 1,680 $ 3,121 $ 1,681
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchase of Townsley Ltd. assets and liabilities financed by:
Increase in treasury stock....................................... $ -- $ -- $ 1,300
======== ======== ========
Increase in notes payable........................................ $ -- $ -- $ 911
======== ======== ========
Increase in allowance for decline in market value of available for
sale securities.................................................. $ 329 $ -- $ --
======== ======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-10
<PAGE> 52

STAGE II APPAREL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ALLOWANCE FOR
DECLINE IN
COMMON MARKET VALUE
STOCK ADDITIONAL TREASURY CUMULATIVE OF SECURITIES TOTAL
PAR PAID IN RETAINED STOCK TRANSLATION AVAILABLE SHAREHOLDERS'
VALUE CAPITAL EARNINGS COST ADJUSTMENT FOR SALE EQUITY
------ ---------- -------- -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993....................... $ 50 $7,183 $ 20,928 $ (1,697) $ (55) $ -- $26,409
Purchase of treasury stock
(note 16).................. -- -- -- (1,171) -- -- (1,171)
Treasury stock issued in
acquisition (note 16)...... -- 538 -- 762 -- -- 1,300
Cash dividend -- $.12 per
share...................... -- -- (493) -- -- -- (493)
Translation adjustment....... -- -- -- -- (3) -- (3)
Decline in market value of
securities................. -- -- -- -- -- (762) (762)
Net loss..................... (865) (865)
--- ------ ------- ------- ---- ----- -------
Balance at December 31,
1994....................... 50 7,721 19,570 (2,106) (58) (762) 24,415
Issuance of treasury stock in
settlement (note 16)....... -- 8 -- 14 -- -- 22
Payment on contractual value
of stock (note 16)......... -- (227) -- -- -- -- (227)
Translation adjustment....... -- -- -- -- (32) -- (32)
Decline in market value of
securities................. -- -- -- -- -- 762 762
Net loss..................... -- -- (3,262) -- -- -- (3,262)
--- ------ ------- ------- ---- ----- -------
Balance at December 31,
1995....................... 50 7,502 16,308 (2,092) (90) -- 21,678
Translation adjustment....... -- -- -- -- 3 -- 3
Decline in market value of
securities................. -- -- -- -- -- (329) (329)
Net loss..................... -- -- (6,962) -- -- -- (6,962)
--- ------ ------- ------- ---- ----- -------
Balance at December 31,
1996....................... $ 50 $7,502 $ 9,346 $ (2,092) $ (87) $(329) $14,390
=== ====== ======= ======= ==== ===== =======
</TABLE>

See Notes to Consolidated Financial Statements.

F-11
<PAGE> 53

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The consolidated financial statements include
the accounts of Stage II Apparel Corp. and its subsidiaries (the "Company" or
"Stage II"). Each subsidiary is wholly owned other than a majority owned
Canadian subsidiary. All significant intercompany balances and transactions have
been eliminated in consolidation.

Business Activity. The Company designs, arranges for the manufacture and
markets an extensive range of sports and casual apparel. Products are marketed
under exclusive and non-exclusive brand name licenses as well as proprietary and
private labels. None of the Company's license agreements requires more than
$10,000 in up-front payments. See Note 15 -- Commitments and Contingencies.
Stage II also acts through a wholly owned subsidiary as purchasing agent for
various major retailing customers.

Revenue Recognition. Stage II recognizes revenue from all categories of
apparel sales at the time merchandise is shipped. Commissions from sales agency
operations of the Company's Hong Kong subsidiary ("Stage II HK") are recognized
when invoiced to customers.

Goodwill. The Company's goodwill, representing the excess of purchase
price over fair value of net assets acquired, is amortized on a straight-line
basis over 15 and 25 years, the expected periods to be benefitted. Stage II
assesses the recoverability of goodwill by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired products, customers and
operations. The amount of goodwill impairment, if any, is measured based upon
projected discounted future operating cash flows using a discount rate
reflecting the average market rate of return on long term fixed-income
securities. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved. See "Asset Impairment
under FAS 121" below.

Restatement for Discontinued Operations. The consolidated statements of
operations for the years ended December 31, 1995 and 1994 have been restated to
account for the operations of Woody Sports, the Company's 80% owned Canadian
subsidiary, as discontinued operations in view of the Company's decision to
dispose of its interest in Woody Sports. See Note 4 -- Discontinued Operations.

Asset Impairment under FAS 121. On January 1, 1996, the Company adopted
the Financial Accounting Standards Board's Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of ("FAS
121"). FAS 121 requires long-lived assets and certain identifiable intangibles
to be reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amount may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
the asset to future net cash flows expected to be generated by the asset. If the
asset is considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the asset exceeds the fair value
of the asset. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less cost to sell. Adoption of FAS 121 did not have a
material impact on the Company's financial position, results of operations or
liquidity.

Cash Equivalents. The Company considers all highly liquid debt instruments
with original maturities of three months or less to be cash equivalents. At
December 31, 1996 and 1995, the Company had no cash equivalents.

Marketable Securities. Marketable securities at December 31, 1996 and 1995
consist of U.S. Treasury Notes, Government National Mortgage Association
("GNMA") bonds and corporate equity securities. The Company classifies its debt
and equity securities as available-for-sale and records the securities at fair
value. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of shareholders' equity until realized. Realized gains and
losses from the sale of available-for-sale securities are determined on a
specific identification basis. A

F-12
<PAGE> 54

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

decline in the market value of any available-for-sale security below cost that
is deemed other than temporary results in a reduction in carrying amount to fair
value. The impairment is charged to earnings, and a new cost basis for the
security is established. Dividend and interest income are recognized when
earned.

Finished Goods Inventory. Finished goods inventory is stated at the lower
of cost (first-in, first-out) or market.

Property and Equipment. Property and equipment are recorded at cost.
Depreciation and amortization are computed on both the straight-line and
accelerated methods, at rates based upon estimated useful lives of 3 to 5 years
for automobiles, 5 to 7 years for furniture, fixtures and equipment and the
shorter of lease term or life of the leasehold improvements. When assets are
retired or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts, and any resulting gain or loss is reflected in
operations. The cost of maintenance and repairs is charged to income as
incurred, and significant renewals and betterments are capitalized.

Income Taxes. Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are projected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Net Loss per Share. Net loss per share of common stock is computed based
on the weighted average number of shares of common stock outstanding during each
period. The Company's outstanding stock options are anti-dilutive and therefore
have not been considered in the computation of net loss per share.

Stock Based Compensation. The Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS
123"), in 1996. Under the provisions of FAS 123, companies can elect to account
for stock based compensation plans using a fair value based method or continue
measuring compensation expense for those plans using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. The Company has elected to
continue using the intrinsic value method to account for its stock based
compensation plans. See Note 17 -- Stock Option Plans.

Use of Estimates. Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.

Foreign Currency Translation. The assets and liabilities of Woody Sports
are translated at prevailing year-end rates of exchange, and its income and
expense accounts are translated at the weighted average rates for each period
presented. Until liquidation of Woody Sports is completed, foreign exchange
translation gains or losses are recorded in the equity section of the
accompanying consolidated balance sheets. Upon liquidation of Woody Sports,
translation gains or losses will be included in the determination of income or
loss.

Reclassifications. Certain 1995 and 1994 items have been reclassified to
conform to the 1996 consolidated financial statement presentation.

NOTE 2. MAJOR CUSTOMERS AND GEOGRAPHIC AREA DATA

Stage II operates in one industry segment. The Company's apparel sales are
made primarily in the United States. Its customers are generally comprised of
national and regional chains of sporting goods and specialty stores, mass
merchandisers and various wholesale membership clubs. During 1996, 1995 and
1994, approxi-

F-13
<PAGE> 55

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

mately 68%, 60% and 53%, respectively, of net sales were made to the Company's
ten largest customers, none of which accounted for 10% or more of net sales
except Wal-Mart Stores, Inc. in all three of those years and Ames Department
Stores, Inc. in 1996.

Information regarding the Company's geographic operations, including
corporate assets consisting primarily of cash and marketable securities, is set
forth below. Intercompany sales between the Company and Stage II HK are recorded
on a cash plus 8% mark-up basis. Identifiable assets of the Company's
discontinued Canadian subsidiary aggregating $769,000, $2.3 million and $1.6
million at December 31, 1996, 1995 and 1994, respectively, are included in
identifiable assets in the United States. See Note 4 -- Discontinued Operations.

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------------------
UNITED
CORPORATE ASSETS: STATES FAR EAST CONSOLIDATED
----------------------------------------------------- ------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. Treasury notes.................................. $ -- $ 2,237 $ 2,237
Discount on notes.................................... -- (6) (6)
GNMAs................................................ -- 6,413 6,413
Equity securities.................................... 11 -- 11
Goodwill............................................. 6,283 1,275 7,558
Non-compete covenant................................. 100 200 300
------ ------- -------
$6,394 $ 10,119 $ 16,513
====== ======= =======
</TABLE>

<TABLE>
<CAPTION>
UNITED
CORPORATE OPERATIONS: STATES FAR EAST CORPORATE ELIMINATIONS CONSOLIDATED
------------------------------------ ------- -------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Net sales........................... $33,428 $ 15,004 $ -- $(15,004) $ 33,428
Commissions and other income........ 2 676 -- -- 678
Operating profit (loss)............. (4,798) 1,080 -- 114 (3,604)
Interest income..................... -- -- -- -- 748
Interest and factoring expenses..... -- -- -- -- (2,336)
Loss from continuing operations
before income tax benefit......... -- -- -- -- (5,192)
Identifiable assets................. 6,207 9,748 16,513 (6,659) 25,809
Year ended December 31, 1995
Net sales........................... 60,177 20,230 -- (20,230) 60,177
Commissions and other income........ 169 1,430 -- -- 1,599
Provision for litigation costs...... -- -- -- -- 577
Operating profit (loss)............. (2,705) 2,321 -- (115) (499)
Interest income..................... -- -- -- -- 734
Interest and factoring expenses..... -- -- -- -- (3,155)
Loss from continuing operations
before income tax benefit......... -- -- -- -- (2,920)
Identifiable assets................. 18,869 5,241 21,050 (5,624) 39,536
</TABLE>

F-14
<PAGE> 56

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3. DUE TO FACTOR

Stage II maintains a factoring agreement (the "Credit Agreement") with a
financial institution (the "Factor") providing a revolving credit facility for
short-term borrowings by the Company at a floating interest rate equal to 1/2%
above prime prior to June 30, 1995, 1 1/4% above prime for the quarter ended
September 30, 1995, 1% above prime for the quarter ended December 31, 1995 and
1/2% above prime thereafter. Borrowings under the Credit Agreement are payable
upon demand and secured by the Company's inventory, accounts receivable,
marketable securities and collateral provided by the two principal shareholders
of the Company. The Factor purchases the Company's accounts receivable that it
has preapproved, without recourse, except in cases of merchandise returns or
billing or merchandise disputes in the normal course of business. The Factor is
responsible for the accounting for and collection of all accounts receivable
sold to it by Stage II. The Credit Agreement also provides for the issuance of
letters of credit 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 $13 million. The Company may terminate the Credit Agreement for
any reason at the renewal date, without penalty, upon 30 days' prior written
notice, while the Factor has the right of termination upon 30 days' prior
written notice at any time. The Credit Agreement expires on December 31, 1997,
subject to automatic one-year renewal terms unless terminated at the option of
either party. Stage II was indebted to the Factor under the Credit Agreement at
December 31, 1996 and 1995 as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Factor advances.......................................... $11,500 $18,324
Accounts receivable...................................... (4,326) (6,666)
------- -------
Net due to factor........................................ $ 7,174 $11,658
======= =======
</TABLE>

Stage II intends to repay most of its borrowings under the Credit Agreement
during the second quarter of 1997 with repatriated earnings of Stage II HK and
refinance the balance of these borrowings under a new credit agreement expected
to be entered with a different financial institution that has provided a firm
commitment for the new arrangement on terms similar to the Credit Agreement.

F-15
<PAGE> 57

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 4. DISCONTINUED OPERATIONS

In July 1996, the Company finalized its plan to liquidate the operations of
Woody Sports, its 80% owned Canadian subsidiary. 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, Stage II has provided for an estimated
loss on disposal of $1.5 million, 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 years ended December 31, 1995 and 1994 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 December 31, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
----- -------
(IN THOUSANDS)
<S> <C> <C>
Current assets............................................ $ 769 $ 1,950
Current liabilities....................................... (996) (1,549)
Noncurrent assets......................................... -- 353
Noncurrent liabilities.................................... -- --
</TABLE>

During 1996 and 1995, Woody Sports maintained a line of credit secured by
an assignment of its accounts receivable and inventories, a general security
agreement and an assignment and postponement of intercompany notes and
receivables. The credit facility provided for borrowings at a floating interest
rate equal to 1/2% above the lender's prime rate. At December 31, 1995, Woody
Sports was in default on two financial covenants under the agreement covering
the credit facility requiring the subsidiary to maintain a working capital ratio
of 1.2 to 1 and a debt to tangible net worth ratio of not less than 2.0 to 1.
The subsidiary obtained a waiver for the default of these covenants from the
bank and was in compliance at December 31, 1996 with its credit facility
covenants. On March 31, 1997, all of the subsidiary's obligations under the
facility were repaid, and the facility was terminated in connection with the
liquidation of Woody Sports.

NOTE 5. ACCOUNTS RECEIVABLE

Accounts receivable, less allowances for returns, discounts and bad debts
aggregating $486,000 and $408,000 at December 31, 1996 and 1995, respectively,
consist primarily of non-factored receivables and other amounts due from
customers for domestic shipments and overseas commissions. Substantially all of
the Company's receivables have been pledged in accordance with the terms of its
Credit Agreement and the agreement covering the credit facility of its Canadian
subsidiary. See Note 3 -- Due to Factor.

NOTE 6. FINISHED GOODS INVENTORY

Inventory, consisting primarily of finished goods, is classified as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
------ -------
(IN THOUSANDS)
<S> <C> <C>
Landed.................................................... $3,274 $ 7,267
In transit................................................ 1,856 5,240
------ -------
Total..................................................... $5,130 $12,507
====== =======
</TABLE>

The finished goods inventory has been pledged in accordance with the terms
of the Company's Credit Agreement. See Note 3 -- Due to Factor. For the years
ended December 31, 1996, 1995 and 1994, general

F-16
<PAGE> 58

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and administrative costs charged to cost of goods sold amounted to $711,000,
$870,000 and $721,000, respectively. General and administrative overhead costs
capitalized in inventory at December 31, 1996 and 1995 were $148,000 and
$186,000, respectively.

NOTE 7. PROPERTY AND EQUIPMENT

The major classes of property and equipment are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------ ------
(IN THOUSANDS)
<S> <C> <C>
Automobiles................................................ $ 66 $ 68
Furniture, fixtures and equipment.......................... 548 854
Leasehold improvements..................................... 796 825
------ ------
1,410 1,747
Less accumulated depreciation and amortization............. 825 975
------ ------
Total...................................................... $ 585 $ 772
====== ======
</TABLE>

NOTE 8. MARKETABLE SECURITIES

The following table sets forth the amortized cost, gross unrealized holding
gains, gross unrealized holding losses and fair value for available-for-sale
securities by major security type at December 31, 1996 and 1995. During 1996,
the Company sold marketable securities held by Stage II HK netting $2.1 million.
Substantially all of the balance of these securities have been pledged in
accordance with the terms of the Company's Credit Agreement. See Note 3 -- Due
to Factor. Maturities of the debt securities range from August 2003 through
March 2023.

<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED HOLDING HOLDING FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
U.S. Treasury securities............... $ 2,294 $ -- $ 63 $ 2,231
GNMAs.................................. 6,658 -- 245 6,413
Equity securities...................... 32 -- 21 11
------- ---- ---- -------
Total.................................... $ 8,984 $ -- $329 $ 8,655
======= ==== ==== =======
Year ended December 31, 1995:
U.S. Treasury securities............... 3,688 -- -- 3,688
GNMAs.................................. 7,401 -- -- 7,401
Equity securities...................... 35 -- -- 35
------- ---- ---- -------
Total.................................... $11,124 -- -- $11,124
======= ==== ==== =======
</TABLE>

F-17
<PAGE> 59

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 9. NOTES PAYABLE

Notes payable at December 31, 1996 and 1995 consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
---- (IN ----
THOUSANDS)
<S> <C> <C>
Unsecured notes assumed in 1994 acquisition, discounted to
reflect an 8% interest rate, payable semiannually, maturing
November 30, 1998........................................... $384 $554
Less current maturities....................................... 185 170
---- ----
Long term notes payable....................................... $199 $384
==== ====
</TABLE>

NOTE 10. NOTES PAYABLE TO SHAREHOLDER

Notes payable to shareholder at December 31, 1996 and 1995 were issued in
connection with a 1994 acquisition and consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1995
---- (IN ----
THOUSANDS)
<S> <C> <C>
Unsecured note issued for deferred compensation to former
officer, bearing interest at prime, maturing September 30,
2000, subordinated to Factor (see note 15).................. $500 $500
Unsecured note issued to former officer, bearing interest at
prime, payable annually, maturing September 30, 1996,
subordinated to Factor (see note 15)........................ 411 411
---- ----
Notes payable................................................. $911 $911
==== ====
</TABLE>

At December 31, 1996, all notes payable were scheduled to be paid,
according to their terms, as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
- ------------
<C> <S> <C>
1997 ................................................... $ 596
1998 ................................................... 199
1999 ................................................... --
2000 ................................................... 500
------
Total ................................................... $1,295
======
</TABLE>

NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of financial instruments approximate their fair values
as of December 31, 1996 and 1995. The methods and assumptions used to estimate
the fair values of the financial instruments vary among the types of
instruments. For cash, accounts receivable, due to factor, due to bank, accounts
payable, accrued royalties and other current liabilities, the short maturity of
the instruments and obligations supports their fair values at their respective
carrying amounts. For marketable securities, fair values are based on quoted
market prices at the reporting date for these or similar investments. For
long-term debt, the fair value is estimated by discounting the future cash flows
of each instrument at rates currently offered to the Company for similar debt
instruments of comparable maturities.

F-18
<PAGE> 60

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12. LEASES

The Company leases showroom, office and warehouse space, including a
foreign office, under operating leases expiring at various times through 2006.
Certain leases include escalation clauses based upon the cost of living, as
defined. For the years ended December 31, 1996, 1995 and 1994, rent expense
charged to operations, including variable storage charges at a public warehouse
utilized on a month-to-month basis, aggregated approximately $874,000,
$1,028,000 and $1,082,000, respectively. At December 31, 1996, future minimum
annual rentals under noncancellable operating leases (excluding variable storage
charges at a public warehouse that may be utilized on a month-to-month basis)
are as follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
-------------------------------------------------------------
<S> <C>
1997......................................................... $ 343
1998......................................................... 343
1999......................................................... 343
2000......................................................... 343
2001......................................................... 343
Thereafter................................................... 1,715
Total........................................................ $3,430
</TABLE>

NOTE 13. RELATED PARTY TRANSACTIONS

Shareholders Agreement. In January 1992, Stage II entered into an
agreement with two principal stockholders, directors and executive officers of
the Company, providing for the Company's repurchase of the shares of its Common
Stock held by the estate of the first of these principals to die. The purchase
price for any shares repurchased under the agreement will be the average of the
closing prices of the Common Stock on its principal trading market during the
five trading days preceding the date of an individual's death or the book value
per share of the Common Stock as reflected in the Company's most recent periodic
report filed with the Securities and Exchange Commission prior to the date of
death, whichever is greater.

Stage II initially purchased insurance policies on the lives of these
individuals covering $6 million of its total repurchase commitment under the
agreement at premiums aggregating approximately $2.5 million over a period of
seven years, with corresponding cash surrender values estimated to reach
approximately $2.1 million by the end of that period. Upon the retirement of one
of the executive officers in December 1994, the agreement was modified to cover
only the remaining officer, and the insurance benefit was reduced to $5.4
million, resulting in reductions of approximately $228,000 and $137,000 in the
premium obligations and cash surrender value, respectively. To the extent not
covered by these policies, the Company will have the option to fund the balance
of any repurchase commitment with a promissory note payable over three years
with interest at market rate. The remaining officer will have the option, upon
the sale of his entire interest in Stage II, to purchase the Company's insurance
policy on his life at its prevailing cash surrender value.

Consulting Agreement. On March 5, 1996, the Company entered into an
agreement (the "Consulting Agreement") with AMP Consulting Services, Inc.
("AMP"), Fector Detwiler & Co., Inc. ("FDC") and Fortuna Capital Management
Company ("FCM"), providing for various consulting and financial advisory
services and the issuance of performance-based options (the "Options"). FCM is a
significant shareholder of the Company, and Anthony M. Pisano, the principal
shareholder of AMP, was hired as Chief Financial Officer of the Company in
December 1996.

F-19
<PAGE> 61

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

resulting enterprise and (iii) the identification of potential transactions to
implement the recommended strategic plan. The Consulting Agreement had a term
ending September 1, 1996, subject to earlier termination or extension by the
Company.

In connection with the Consulting Agreement, the Company granted Options to
AMP, FDC and FCM to purchase 200,000 shares, 100,000 shares and 200,000 shares,
respectively, of its Common Stock at $3 1/8 per share, exercisable only if
specified performance goals were met (a "Qualifying Event"). In addition, Jack
Clark, the Company's Chairman of the Board, issued Options to FDC and FCM to
purchase 434,000 shares and 866,000 shares, respectively, of Common Stock owned
by him upon the occurrence of a Qualifying Event at an exercise price of $4 3/4
per share. No charge was recognized upon the issuance of the Options, since
there was no assurance that a Qualifying Event would occur. The FDC and FCM
Options expired unexercised on March 1, 1997, and the AMP Options are scheduled
to expire on May 1, 1997.

Townsley Transaction. In 1994, Stage II obtained two covenants not to
compete with a former director and executive officer hired in connection with
the acquisition of substantially all the assets, subject to related liabilities,
of Townsley, for which the former officer was paid $850,000. In addition, the
former officer was advanced $400,000 against his first four years remuneration
for overseeing the Company's Hong Kong office and foreign operations. See Note
15 -- Commitments and Contingencies.

NOTE 14. INCOME TAXES

The provision (benefit) for income taxes consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income (loss) before provision (benefit) for income
taxes, including discontinued operations:
Domestic............................................ $(6,995) $(2,920) $(1,425)
Foreign............................................. -- (684) 89
------- ------- -------
(6,995) (3,604) (1,336)
Provision (benefit) for income taxes:
Domestic:
Current:
Federal........................................ (36) (740) (335)
State.......................................... 3 14 76
------- ------- -------
(33) (726) (259)
Deferred:
Federal........................................ -- 379 (101)
State.......................................... -- -- (78)
------- ------- -------
-- 379 (179)
------- ------- -------
Foreign............................................. -- 5 --
------- ------- -------
$ (33) $ (342) $ (438)
======= ======= =======
</TABLE>

F-20
<PAGE> 62

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The total provision for income taxes for the years ended December 31, 1996,
1995 and 1994 varied from the United States federal amounts computed by applying
the US statutory rate of 34% to pre-tax income (loss) as a result of the
following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 RATE 1995 RATE 1994 RATE
------- ----- ------- ---- ----- ----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Computed expected tax expense
(benefit).......................... $(2,378) 34.0% $(1,225) 34.0% $(443) 34.0%
Foreign income (loss) taxed at rates
higher (lower) than U.S.
statutory rates.................... -- N/A -- N/A (63) 4.8
Foreign income not subject to
tax benefit........................ -- N/A 233 (6.5) -- N/A
State and local income taxes, net of
federal income tax benefit......... 2 -- 9 (.2) (2) .2
Change in valuation allowance........ 2,220 (31.8) 286 (7.9) -- N/A
Alternative minimum tax.............. -- N/A 97 (2.7) -- N/A
Amortization of nondeductible
goodwill........................... 37 (.5) 37 (1.0) -- N/A
Nondeductible expenses for income tax
purposes........................... 57 (.8) 118 (3.3) -- N/A
Other................................ 29 (.4) 104 (2.9) 70 (5.4)
------- ----- ------- ---- ----- ----
$ (33) .5% $ (342) 9.5% $(438) 33.6%
======= ===== ======= ==== ===== ====
</TABLE>

The tax effects of temporary differences that gave rise to a significant
portion of the deferred tax assets and liabilities at December 31, 1996 and 1995
are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -----
(IN THOUSANDS)
<S> <C> <C>
Current deferred tax assets:
Inventory tax basis greater than financial statement basis.............. $ 135 $ 254
Allowance for decline in market value of securities..................... 132 --
Salary financial statement basis greater than tax basis................. 70 --
Non-compete covenant financial statement basis greater than tax basis... 135 --
Book loss in excess of tax loss on dissolution of subsidiary............ 200 --
------- -----
Total gross current deferred tax assets.............................. 672 254
Less valuation allowance................................................ (672) (254)
------- -----
Net current deferred tax assets...................................... $ -- $ --
======= =====
</TABLE>

F-21
<PAGE> 63

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------- -----
(IN THOUSANDS)
<S> <C> <C>
Long term deferred tax assets:
Net operating loss carryforward......................................... $ 1,764 $ --
Cumulative foreign currency adjustment.................................. 35 36
Amortization of covenant not to compete................................. 47 8
------- -----
Total long term deferred tax assets.................................. 1,846 44
Less valuation allowance.................................................. (1,835) (33)
------- -----
Net long term deferred tax assets....................................... 11 11
------- -----
Long term deferred tax liability:
Property and equipment depreciation.................................. 11 11
------- -----
Total gross long term deferred tax liability....................... 11 11
------- -----
Net long term deferred assets............................................. $ -- $ --
======= =====
</TABLE>

For the years ended December 31, 1996 and 1995, the Company recorded net
increases in the total valuation allowance of $2.2 million and $287,000,
respectively, with no net change in 1994. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. As of December 31, 1996, the Company had net operating
loss carryforwards for income tax purposes of approximately $4.4 million
expiring in 2011.

During 1996, the Internal Revenue Service reviewed the Company's tax
returns for the tax years ended December 31, 1991 and 1992. The results of the
examination did not have a material impact on the consolidated financial
statements.

United States income taxes have not been provided on the unremitted
earnings of foreign subsidiaries, since the undistributed earnings are expected
to be indefinitely reinvested or sheltered by available net operating loss
carryforwards. The undistributed foreign earnings totaled approximately $11.7
million at December 31, 1996.

NOTE 15. COMMITMENTS AND CONTINGENCIES

Outstanding Letters of Credit. At December 31, 1996, the Company was
contingently liable on outstanding letters of credit issued under its Credit
Agreement in the aggregate amount of $3.1 million. See Note 3 -- Due to Factor.
As of that date, the Company's Canadian subsidiary had no outstanding letters of
credit. See Note 4 -- Due to Bank.

License Agreements. The Company's license agreements generally require
minimum royalty payments and advertising expenditures, as well as providing for
maintenance of quality control. The license agreements expire at various dates
(including renewal at the Company's option) through 1998. Under certain
circumstances, the licensor has the right to terminate the license agreement.
Royalty expense for the years ended December 31, 1996, 1995 and 1994 aggregated
approximately $1.8 million, $3.6 million and $4.2 million, respectively.

During 1996, net sales under the Company's license agreements for the
Spalding and Coleman brands each accounted for more than 10% of the consolidated
net sales or approximately $11.5 million and $7.5 million, respectively. The
agreements for the Spalding and Coleman licenses provide for minimum annual

F-22
<PAGE> 64

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

royalty payments of $650,000 and $175,000, respectively. The agreement for the
Coleman license was terminated by mutual consent during 1996.

Townsley Litigation. 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 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. The Company is also seeking to rescind
its six-year employment agreement entered with Mr. Goldman in connection with
the Townsley acquisition and the related seven-year employment agreement between
Stage II HK and Mr. Goldman. The lawsuit is based on alleged misrepresentations
in connection with the Townsley acquisition and breach of Mr. Goldman's
fiduciary duties and contractual obligations under his employment agreements.

In June 1996, Mr. Goldman and his co-defendants filed an answer denying
Stage II's claims in the lawsuit and asserting various counterclaims. These
include (i) $2 million in compensation for the unexpired terms of Mr. Goldman's
employment agreements, (ii) $.5 million in payment of the deferred purchase
price for Townsley assets and (iii) a total of $2.4 million in compensatory
damages plus punitive damages for alleged misrepresentations in connection with
the Company's issuance of 292,135 shares of its Common Stock (the "Goldman
Shares") as part of the purchase price for Townsley assets.

During the fourth quarter of 1996, the parties to this 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 Stage II of approximately $1.2 million, partially offset by the
relinquishment of the Goldman Shares.

Sportsotron Settlement. In June 1995, a jury verdict was rendered against
the Company in a lawsuit brought by Coral Diving Products, Inc. to collect a
performance bonus payment in connection with Stage II's acquisition of the
apparel business of Sportsotron, Inc. in 1987. In consideration for withdrawing
its appeal and post-trial motions to vacate the verdict, the Company settled the
matter for $400,000 plus interest from July 1, 1995.

Miscellaneous Claims. Various miscellaneous claims and suits arising in
the ordinary course of business have been filed against the Company. In the
opinion of management, none of these matters will have a material adverse effect
on the results of operations or the financial position of the Company.

NOTE 16. SHAREHOLDERS' EQUITY

During 1994, Stage II repurchased 264,022 shares of its Common Stock for
$1.2 million.

In 1994, the Company issued 292,135 treasury shares of Common Stock as part
of the purchase price for the acquired assets, subject to related liabilities,
of Townsley. The issued shares had a fair value of approximately $1.3 million
and a cost basis of $762,000 at the time of issuance.

In 1995, Stage II was required to make a payment in the amount of $227,000
to support the contractual value of 63,845 treasury shares of Common Stock
issued in 1993 to the seller as part of the purchase price for the Company's 80%
interest in Woody Sports. The shares had a market value of $405,000 and a cost
basis of $127,000 at the time of issuance.

In 1995, the Company issued 5,500 treasury shares of Common Stock as part
of a negotiated settlement on future commissions to be paid. The shares had a
cost of $14,000 and a contractual value of $23,000 at the time of issuance.

F-23
<PAGE> 65

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 17. STOCK OPTION PLANS

The Company maintains Incentive Stock Option Plans (the "Plans") adopted in
1987 and 1994 providing for the grant of options to purchase up to 200,000
shares and 300,000 shares, respectively, of Common Stock to key employees of
Stage II. The purchase price per share of Common Stock issuable upon the
exercise of options granted under the Plans is fixed by a Compensation Committee
of the Board of Directors in an amount equal to at least 100% of the market
price of the Common Stock on the date of the grant or 110% of the market price
for optionees who directly or indirectly possess more than 10% of the total
combined voting power of all classes of the stock of the Company or any parent
or subsidiary thereof. Each option granted under the Plans is exercisable for
periods of up to ten years from the date of grant.

Stock option activity under the Plans for each of the three years ended
December 31, 1996 is summarized below:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE
SHARES SUBJECT EXERCISE PRICE PRICE PER
TO OPTIONS PER SHARE SHARE
-------------- ---------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1993................. 30,000 5$1/2 4 7$/8 - 6 5/8
Options granted.............................. 143,000 4 1/8 3 5/8 - 6 5/8
Options exercised............................ -- -- --
Options canceled............................. -- -- --
======= === ========
Balance at December 31, 1994................. 173,000 4 3/8 3 5/8 - 6 5/8
Options granted.............................. -- -- --
Options exercised............................ -- -- --
Options canceled............................. 25,000 4 7/8 4 1/2 - 5
------- --- --------
Balance at December 31, 1995................. 148,000 4 1/4 3 5/8 - 6 5/8
Options granted.............................. 60,000 2 7/8 2 7/8 - 3
Options exercised............................ -- -- --
Options canceled............................. 68,000 4 3/8 3 5/8 - 4 3/4
------- --- --------
Balance at December 31, 1996................. 140,000 3$5/8 2 7$/8 - 6 5/8
======= === ========
Exercisable at December 31,
1994......................................... 173,000 3 5$/8 - 6 5/8
1995......................................... 148,000 3 5/8 - 6 5/8
1996......................................... 140,000 2 7/8 - 6 5/8
Available for grant at December 31,
1994......................................... 327,000
1995......................................... 352,000
1996......................................... 360,000
</TABLE>

Of the 140,000 options outstanding at December 31, 1996, options to
purchase 10,000 shares were exercisable at $6 5/8, 25,000 shares at an exercise
price of $4 1/2 and 105,000 shares at exercise prices ranging from $2 7/8 to
$3 5/8.

The Company adopted the disclosure-only option under FAS 123 as of January
1, 1996. See Note 1 -- Summary of Significant Accounting Policies. If the
accounting provisions of FAS 123 had been adopted as of the beginning of 1995,
the pro forma effect on the Company's net loss for the years ended December 31,
1996 and 1995 after accounting for the options issued in 1996 at their fair
value at the date of grant would have been immaterial.

F-24
<PAGE> 66

STAGE II APPAREL CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 18. EMPLOYEE STOCK OWNERSHIP AND SALARY DEFERRAL PLAN

In 1994, Stage II converted its Profit Sharing Plan into an Employee Stock
Ownership and Salary Deferral Plan (the "Savings Plan"). Under the Savings Plan,
for each dollar contributed by electing employees to a retirement savings
account up to 12% of their annual compensation, the Company may contribute up to
$.40, subject to certain limitations under Section 401(k) of the Internal
Revenue Code (the "Code"). The Company's expense for these contributions in
1996, 1995 and 1994 aggregated $38,000, $69,000 and $55,000, respectively.

The Saving Plan also enables the Company to make discretionary
contributions for open market purchases of its Common Stock to be allocated to
the accounts of all employees generally in proportion to their annual
compensation. This feature was added in 1994 and is intended to qualify for
treatment under Section 401(a) of the Code. The Company did not make any
discretionary contributions to the Savings Plan for this purpose in 1996, 1995
or 1994.

F-25
<PAGE> 67

STAGE II APPAREL CORP. AND SUBSIDIARIES

UNAUDITED PRO FORMA FINANCIAL STATEMENTS

The accompanying Unaudited Pro Forma Financial Statements of Stage II
Apparel Corp. (the "Company") at and for the nine months ended September 30,
1997 give effect to the transactions (the "Transactions") contemplated by a
Purchase Agreement dated as of December 8, 1997 (the "Purchase Agreement") among
the Company, Shorebreak Group, Inc. ("Shorebreak") and its shareholders (the
"Shorebreak Shareholders") as if the Transactions occurred on January 1, 1997.
The Purchase Agreement provides, among other things, for (i) the Company's
issuance of 4,008,654 shares (the "Control Shares") of its common stock (the "SA
Common Stock") to the Shorebreak Shareholders in exchange for all of the issued
and outstanding shares of capital stock of Shorebreak and (ii) the Company's
repurchase of a total of 1,900,000 shares of SA Common Stock (the "Repurchase")
from three principal shareholders of the Company (the "Principal Shareholders")
in consideration for their release from guarantees of the Company's indebtedness
to its factor and their receipt of options to purchase a total of 1,500,000
shares of SA Common Stock at exercise prices ranging from $.50 to $1.75 per
share (the "Options"). The Control Shares will represent two-thirds of the SA
Common Stock to be outstanding upon consummation of the Transaction after giving
effect to the Repurchase.

As a result of the Shorebreak Shareholders' proposed ownership of
two-thirds of the SA Common Stock to be outstanding upon completion of the
Transactions, the Company expects to account for the Transactions under
paragraph 70 of APB 16 as a reverse acquisition of the Company by Shorebreak. In
accordance with APB 16, the Company's consolidated assets and liabilities will
be recorded after completion of the Transactions at their fair values. Under
this accounting treatment, the parties' valuation of $2.5 million for Shorebreak
in the Transactions will result in a consolidated shareholders' equity of $4.1
million based on Shorebreak's two-thirds interest in the combined enterprise
(the "Enterprise Value"). As reflected in the accompanying pro forma balance
sheet, APB 16 will require a writedown of the Company's non-current assets and
its property, plant and equipment to the extent that the net fair value of its
assets and liabilities exceeds the Enterprise Value.

The pro forma financial information is presented for illustrative purposes
only and is not necessarily indicative of either future financial performance or
actual results of operations. Future results may vary significantly from the
amounts reflected in the following information due to economic factors, future
activities of the Company and other matters. Although the Transactions are
ultimately expected to result in a reduction of selling, general and
administrative expenses, no pro forma adjustments have been reflected because
the Company has not completed specific cost reduction plans. The Unaudited Pro
Forma Financial Statements should be read in conjunction with the accompanying
Notes to the Unaudited Pro Forma Financial Statements as well as the
Consolidated Financial Statements and related Notes of the Company and the
Financial Statements and related Notes of Shorebreak included elsewhere in the
Proxy Statement.

F-26
<PAGE> 68

STAGE II APPAREL CORP. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS

AS OF SEPTEMBER 30, 1997

(IN THOUSANDS)

<TABLE>
<CAPTION>
THE PRO
COMPANY SHOREBREAK ADJUSTMENTS(1) FORMA
------- ---------- -------------- -------
<S> <C> <C> <C> <C>
ASSETS:
Cash........................................ $ 454 $ 76 $ 529
Restricted cash or bond deposit............. 662 20 682
Accounts receivable......................... 823 49 $ (300) 572
Due from factor............................. -- 280 280
Finished goods inventory.................... 4,531 375 (300) 4,605
Prepaid expenses............................ 618 15 (100) 513
Prepaid income taxes and refunds
receivable............................... 112 -- 112
Total current assets..................... 7,200 815 (700) 7,315
------- ---- ------- -------
Property and equipment, at cost, less
accumulated depreciation................. 522 9 (97) 434
Marketable securities....................... 3,292 -- 3,292
Goodwill, less accumulated amortization..... 7,226 -- (7,226) --
Covenant not to compete, less accumulated
amortization............................. 266 -- (266) --
Other assets................................ 720 3 723
------- ---- ------- -------
TOTAL ASSETS............................. $19,226 $827 $ (8,289) $11,764
======= ==== ======= =======
LIABILITIES:
Due to factor............................... $5,197 $ -- $ 5,197
Accounts payable............................ 481 73 554
Notes payable -- current.................... 170 -- 170
Notes payable to shareholders -- current.... 350 300 650
Income taxes payable........................ -- 23 23
Accrued royalties........................... 83 -- 83
Other current liabilities................... 886 97 983
------- ---- ------- -------
Total current liabilities................ 7,167 493 7,660
Notes payable to shareholder -- long term... -- 50 50
------- ---- ------- -------
TOTAL LIABILITIES........................ $7,167 $543 $ 7,710
======= ==== ======= =======
SHAREHOLDERS' EQUITY:
Preferred stock............................. $ -- $ -- $ --
Common stock................................ 50 50 $ (40) 60
Additional paid-in capital.................... 7,502 -- (3,742) 3,760
Retained earnings........................... 7,015 234 (7,015) 234
Less treasury stock......................... (2,297) -- 2,297 --
Allowance for decline in market value of
securities available for sale............ (85) -- 85 --
Cumulative translation adjustment........... (126) 126 --
------- ---- ------- -------
TOTAL SHAREHOLDERS' EQUITY............... 12,059 284 (8,289) 4,054
------- ---- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY................................... $19,226 $827 $ (8,289) $11,764
======= ==== ======= =======
</TABLE>

See Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.

F-27
<PAGE> 69

STAGE II APPAREL CORP. AND SUBSIDIARIES

UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THE PRO
COMPANY SHOREBREAK ADJUSTMENTS FORMA
------- ---------- ----------- -------
<S> <C> <C> <C> <C>
Net sales........................................ $12,133 $3,737 $15,870
Cost of goods sold............................... 9,861 2,984 12,795
------- ------- ------- -------
Gross profit..................................... 2,272 803 3,075
Commission and other income...................... 513 -- 513
------- ------- ------- -------
2,785 1,108 3,588
Selling, general and administrative expenses..... 4,859 462 $ (481) 4,840
------- ------- ------- -------
Operating income (loss).......................... (2,074) 341 481 (1,252)
Interest and factoring expense................... 679 84 763
Interest income.................................. 211 -- 211
Loss on sale of securities....................... 285 -- 285
------- ------- ------- -------
Income (loss) before income taxes (benefit)...... (2,827) 257 481 (2,089)
Income taxes (benefit)........................... (9) 23 14
------- ------- ------- -------
481
Income (loss) from continuing operations before
extraordinary items............................ (2,818) 234 (2,103)
Extraordinary item -- gain on extinguishment of
debt........................................... 205 -- 205
Gain on disposal of discontinued subsidiary...... 290 -- 290
------- ------- ------- -------
Net income (loss)................................ $(2,323) $ 234 $ 481 $(1,608)
======= ======= ======= =======
Net income (loss) per common share:
Loss from continuing operations................ $ (.35)
Extraordinary item -- extinguishment of debt..... .04
Gain from discontinued operations.............. .05
-------
................................................. $ (.27)
=======
Weighted average common shares outstanding....... 6,013
=======
</TABLE>

See Notes to Unaudited Condensed Pro Forma Consolidated Financial Statements.

F-28
<PAGE> 70

NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

NOTE A -- BASIS OF PRESENTATION

The accompanying Unaudited Pro Forma Condensed Financial Statements have
been prepared as if the Transactions had been consummated on January 1, 1997.
The Purchase Agreement for the Transactions contemplates that the Company will
issue to the Shorebreak Shareholders, in consideration for all the outstanding
capital stock of Shorebreak, a total of 4,008,654 shares of SA Common Stock
constituting the Control Shares and will simultaneously complete the Repurchase
by repurchasing a total of 1,500,000 shares of SA Common Stock from the
Principal Shareholders in consideration for their release from guarantees of the
Company's indebtedness to its factor and their receipt of the Options. As a
result of the Shorebreak Shareholders' proposed ownership of two-thirds of the
SA Common Stock to be outstanding upon completion of the Transactions, the
Company expects to account for the Transactions under paragraph 70 of APB 16 as
a reverse acquisition of the Company by Shorebreak.

NOTE B -- PRO FORMA ADJUSTMENTS

In accordance with APB 16, the Company's consolidated assets and
liabilities will be recorded after completion of the Transactions at their fair
values. Under this accounting treatment, the parties' valuation of $2.5 million
for Shorebreak in the Transactions will result in an Enterprise Value of $4.1
million based on Shorebreak's two-thirds interest in the combined enterprise.
The adjustments in the accompanying pro forma balance sheet reflect the
requirement under APB 16 for writedowns of the Company's non-current assets and
its property, plant and equipment to the extent that the net fair value of its
assets and liabilities exceeds the Enterprise Value. As a result of this
accounting treatment, the pro forma balance sheet reflects the elimination of
$7.5 million of goodwill and a covenant not to compete, a reduction of $23,000
in fixed assets, a decrease of $700,000 in current assets to reflect their
realizable value and corresponding adjustments to the shareholders' equity
components of the pro forma balance sheet.

Although the Transactions are ultimately expected to result in a reduction
of selling, general and administrative expenses, no adjustments have been
reflected in the accompanying pro forma statement of operations because the
Company has not completed specific cost reduction plans.

F-29
<PAGE> 71

SHOREBREAK GROUP, INC.

UNAUDITED BALANCE SHEET

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS:
Cash....................................................................... $ 76,000
Bond deposit............................................................... 20,000
Accounts receivable........................................................ 49,000
Due from factor............................................................ 280,000
Inventory.................................................................. 375,000
Prepaid expenses........................................................... 15,000
--------
Total current assets.................................................... 815,000
Property, plant and equipment, at cost, less accumulated depreciation...... 9,000
Other assets............................................................... 3,000
--------
TOTAL ASSETS....................................................... $ 827,000
========

LIABILITIES:
Accounts payable........................................................... $ 73,000
Notes payable to shareholders -- current................................... 300,000
Income taxes payable....................................................... 23,000
Other current liabilities.................................................. 97,000
--------
Total current liabilities............................................... 493,000
Notes payable to shareholder -- long term.................................. 50,000
--------
TOTAL LIABILITIES.................................................. $ 543,000
========
SHAREHOLDERS' EQUITY:
Common stock............................................................... $ 50,000
Retained earnings.......................................................... 254,000
--------
TOTAL SHAREHOLDERS' EQUITY......................................... 284,000
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................... $ 827,000
========
</TABLE>

See Notes to Unaudited Financial Statements.

F-30
<PAGE> 72

SHOREBREAK GROUP, INC.

UNAUDITED STATEMENT OF OPERATIONS

FOR THE PERIOD FROM FEBRUARY 1, 1997 (INCEPTION) THROUGH SEPTEMBER 30, 1997

<TABLE>
<S> <C>
Net sales....................................................................... $3,737,000
Cost of goods sold.............................................................. 2,934,000
----------
Gross profit.................................................................... 803,000
Selling, general and administrative expenses.................................... 462,000
----------
Operating income................................................................ 341,000
Interest and factoring expenses................................................. 84,000
----------
Income before income taxes...................................................... 257,000
Income taxes.................................................................... 23,000
----------
Net income...................................................................... $ 234,000
==========
</TABLE>

See Notes to Unaudited Financial Statements.

F-31
<PAGE> 73

SHOREBREAK GROUP, INC.

UNAUDITED STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM FEBRUARY 1, 1997 (INCEPTION) THROUGH SEPTEMBER 30, 1997

<TABLE>
<S> <C>
Net cash used in operating activities............................................ $(313,000)

INVESTING ACTIVITIES:
Purchase of equipment.......................................................... (11,000)
---------
Net cash used in investing activities............................................ (11,000)
---------

FINANCING ACTIVITIES:
Proceeds from sale of common stock............................................. 50,000
Proceeds from shareholder loans................................................ 350,000
---------
Net cash provided by financing activities........................................ 400,000
---------
Net increase in cash............................................................. 76,000
Cash at beginning of period...................................................... --
---------
Cash at end of period............................................................ $ 76,000
=========
</TABLE>

See Notes to Unaudited Financial Statements.

F-32
<PAGE> 74

SHOREBREAK GROUP, INC.

NOTES TO UNAUDITED STATEMENT OF CASH FLOWS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Activity. Shorebreak Group, Inc. ("Shorebreak") was organized in
February 1997 under the laws of the State of New York. Shorebreak arranges for
the manufacture and distributes an extensive range of brand name casual apparel
under various license agreements. It specializes in knit and bottoms for the
boys, young men and junior categories. Its customers are primarily major
department stores.

Basis of Presentation. The preparation of financial statements in
conformance with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts of assets and liabilities
as of the date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.

Revenue Recognition. Shorebreak recognizes revenue from all categories of
apparel sales at the time merchandise is shipped.

Inventory. Inventory is stated at the lower of cost (first-in, first-out)
or market.

Property and Equipment. Property and equipment are recorded at cost.
Depreciation and amortization are computed on both the straight-line and
accelerated methods, at rates based upon their estimated useful lives. When
assets are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
reflected in operations. The cost of maintenance and repairs is charged to
income as incurred, and significant renewals and betterments are capitalized.

Income Taxes. Shorebreak has elected to be treated as a Subchapter S
corporation. Therefore, no provision has been made for federal income taxes, and
state taxes are accrued at a reduced rate.

NOTE 2. FACTORING AGREEMENT

Shorebreak is a party to a notification factoring agreement with CIT Group
Commercial Services, Inc. Under the terms of the agreement, the factor acquires
accounts receivable and maintains a security interest in the accounts receivable
inventory and other assets of Shorebreak. The factor charges Shorebreak interest
on all uncollected advances and a factor's commission on all sales. The interest
rate is calculated as a percentage in excess of the prime rate announced by
Chase Manhattan Bank from time to time. As of September 30, 1997, the effective
interest rate was 1 1/2% above the prime rate, and the commission was .65% on
each sale.

NOTE 3. NOTES DUE TO SHAREHOLDERS

The shareholders of Shorebreak have advanced funds aggregating $450,000
that have been used for working capital purposes. The loans bear interest at a
rate of 9% per annum and are due at various dates. A principal payment of
$100,000 plus accrued interest was made to a shareholder on September 30, 1997.
A subordination agreement has been entered into by Shorebreak and a shareholder
under which one of these loans in the principal amount of $50,000 has been
subordinated to the factor for an unspecified time.

F-33
<PAGE> 75
STAGE II APPAREL CORP.

(THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS)
STAGE II APPAREL CORP. -- Proxy for the Special Meeting of Shareholders at
9:00 a.m., December 31, 1997, at 350 Fifth Avenue, 9th Floor,
New York, New York 10118

The undersigned hereby appoints Michael Hanrahan and Dayna Clark
Higley, and each of them, with full power of substitution (the "Proxy Holders"),
as Proxies to vote the Common Stock of the undersigned at the aforementioned
Annual Meeting, and any adjournments thereof, upon the matter set forth in the
Notice of Special Meeting and Proxy Statement, as follows:

To consider and vote upon a proposal (the "Proposal") to approve the
issuance of 4,008,654 shares of the Company's common stock ("SA Common
Stock") pursuant to a Purchase Agreement dated as of December 8, 1997
among the Company, Shorebreak Group, Inc. and its shareholders.

This proxy will be voted as specified. If no specification is made, it will be
voted FOR the Proposal business.

[SEE REVERSE SIDE]

<PAGE> 76
[X] Please mark your
votes as in this
sample

The Undersigned directs the Proxy Holders to vote the shares of the
Company's Common Stock owned or held by the undersigned as follows:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

Please mark, sign, date and return the Proxy Card promptly
using the enclosed envelope.

SIGNATURE(S):___________________________________ DATED: ______________1997
(Joint owners must EACH sign. Please sign EXACTLY as your name(s) appear(s)
on the card. When signing as attorney, trustee, executor, administrator,
guardian or corporate officer, please give your FULL title.)