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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended March 31, 1998 Commission File No. 1-9502
STAGE II APPAREL CORP.
(Exact name of registrant as specified in its charter)
New York 13-3016967
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Fifth Avenue
New York, New York 10118
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 564-5865
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Title of Class Outstanding at April 30, 1998
<S> <C>
Common Stock 3,903,267
</TABLE>
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STAGE II APPAREL CORP.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
----
<S> <C>
Condensed Consolidated Balance Sheets -
March 31, 1998 (unaudited) and December 31, 1997........................ 2
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1998 and 1997 (unaudited)................. 3
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 (unaudited).................. 4
Notes to Condensed Consolidated Financial Statements.................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 7
Part II. Other Information............................................. 9
</TABLE>
1
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PART I. FINANCIAL INFORMATION
STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
March 31, Dec. 31,
1998 1997
----------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............ $ 516 $ 641
Restricted cash ...................... 693 679
Accounts receivable................... 560 496
Finished goods inventory.............. 3,049 2,496
Prepaid expenses ..................... 209 214
Prepaid income taxes and refunds
receivable.......................... 30 30
----------- ----------
Total current assets ............ 5,057 4,556
Property and equipment, at cost, less
accumulated depreciation............ 467 500
Marketable securities................. 3,334 3,325
Goodwill, less accumulated
amortization and impairment of
$7,687 at March 31, 1998 and $7,654
at December 31, 1997, respectively.. 1,927 1,960
Other assets ......................... 801 837
----------- ----------
TOTAL ASSETS .................... $ 11,586 $ 11,178
----------- ----------
----------- ----------
LIABILITIES:
Due to factor ........................ $ 6,075 $ 4,650
Accounts payable ..................... 506 850
Accrued royalties .................... 115 78
Other current liabilities ............ 270 273
----------- ----------
Total current liabilities ....... 6,966 5,851
Long term liabilities ................ -- --
----------- ----------
TOTAL LIABILITIES ............... 6,966 5,851
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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 3,903 shares outstanding
at March 31, 1998 and
December 31, 1997 .................. 50 50
Additional paid-in capital ........... 7,502 7,502
Retained earnings (deficit) .......... (595) 97
----------- ----------
6,957 7,649
Less treasury stock, at cost; 1,089
shares at March 31, 1998 and
December 31, 1997 .................. (2,302) (2,302)
Allowance for decline in market value
of securities available for sale.... (35) (20)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY ...... 4,620 5,327
----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ............... $ 11,586 $ 11,178
----------- ----------
----------- ----------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
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STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales.................................... $ 1,855 $ 4,067
Cost of goods sold........................... 1,437 3,390
-------- --------
Gross profit................................. 418 677
Commission and other income.................. 68 85
-------- --------
486 762
Selling, general and administrative expenses. 1,038 1,659
Loss on sale of marketable securities........ -- (33)
-------- --------
Operating loss............................... (552) (930)
Other income (expenses):
Interest income......................... 73 77
Interest and factoring expenses......... (213) (224)
-------- --------
Loss before income tax benefit............... (692) (1,077)
Income taxes (benefit)....................... -- (9)
-------- --------
Net loss..................................... $ (692) $(1,068)
-------- --------
-------- --------
Basic and dilutive net loss per common share. $ (.18) $ (.26)
-------- --------
-------- --------
Weighted average common shares outstanding... 3,903 4,196
-------- --------
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Net cash provided by (used in) operating activities..... $(1,550) $ 665
Investing Activities:
Purchase and sale of property and equipment, net... -- (2)
Sale or redemption of available for sale marketable
securities........................................ -- 1,219
Loss on sale of securities......................... -- (33)
-------- --------
Net cash provided by (used in) investing activities..... (1,550) 1,184
-------- --------
Financing Activities:
Factor financing, net.............................. 1,425 (979)
Bank financing, net................................ -- (434)
-------- --------
Net cash provided by (used in) financing activities..... 1,425 (1,413)
-------- --------
Effects of exchange rate changes on cash................ -- (43)
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Net increase (decrease) in cash......................... (125) 393
Cash at beginning of year............................... 641 429
-------- --------
Cash at end of period................................... $ 516 $ 822
-------- --------
-------- --------
Supplemental disclosure of cash flows information:
Cash paid for income taxes........................ $ 2 $ 10
-------- --------
-------- --------
Cash paid for interest, excluding factoring fees.. $ 124 $ 167
-------- --------
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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STAGE II APPAREL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Stage II Apparel Corp. (the "Company") have been prepared in accordance with
generally accepted accounting principles and, in the opinion of management,
reflect all adjustments (consisting of normal recurring adjustments) necessary
to fairly present the Company's financial position at March 31, 1998 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, 1997 and are incorporated herein by reference.
Note 2. Finished Goods Inventory
Finished goods inventories for the interim periods presented were computed
using the gross profit method.
Note 3. Change of Control
On May 11, 1998, the Company consummated the transactions contemplated by
its Stock Purchase Agreement dated as of February 26, 1998 with three of its
principal shareholders (the "Founders") and Richard Siskind (the "Purchase
Agreement"), providing for the Founders' sale of approximately 1.9 million
shares (the "Control Shares") of the Company's common stock to Mr. Siskind in
consideration for their release from guarantees of the Company's indebtedness to
its factor and their receipt of options to reacquire a total of 1.5 million
Control Shares. The Control Shares represent 48.7% of the Company's common
stock outstanding as of the date of the closing. The transactions contemplated
by the Purchase Agreement (the "Change of Control Transactions") also include
the employment of Mr. Siskind as CEO of Stage II and the reconstitution of the
Company's board of directors with designees of Mr. Siskind.
Note 4. New Credit Facility
In connection with the closing of the Change of Control Transactions, the
Company obtained a new factoring and credit facility arranged by Mr. Siskind
with The CIT Group/Commercial Services, Inc. (the "Credit Facility") to replace
its existing facility. The Credit Facility provides for short term borrowings
by the Company 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 and marketable securities. 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. 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 the net receivables it purchases.
The Credit Facility 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 Facility are
determined from time to time by the factor based upon the Company's financing
requirements and financial performance.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Stage II Apparel Corp. (the "Company" or "Stage II") designs and
distributes an extensive range of men's and boy's casual apparel and activewear.
The Company markets its apparel primarily to sporting goods and specialty
stores, mass merchandisers and wholesale membership clubs 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 Asia, 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. During
the last three years, the Company streamlined its operations to focus on its
most popular labels, relinquishing its license rights for five brand name lines,
liquidating its Canadian and Hong Kong subsidiaries and discontinuing its
arrangements with a licensee of NBA and NFL brand sportswear. The relinquished
lines were replaced with a new exclusive license for the Dunlop brand late in
1996. Stage II has also increased its emphasis on proprietary and private label
sales, including its own Timber Run, Pro Tour and Main Event labels.
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 costs are included in selling, general and
administrative ("SG&A") expenses. Difficulties in reducing fixed overhead costs
and maintaining strong gross profit margins in the face of intensified
competition, consolidation and overall weakness in the retail apparel market
contributed to the Company's net losses in 1997, 1996 and 1995 aggregating $9.2
million, $7.0 million and $3.3 million, respectively. These losses included
noncash charges for asset writedowns aggregating $5.3 million in 1997 and $1.7
million in 1996. Although the Company sustained an additional loss of $692,000
in the first quarter of 1998, it was 35.2% less than the loss incurred in the
first quarter of 1997.
Recent Developments
Recurring Losses. Stage II has financed its losses over the last three
years with borrowings under its credit facility that have been reduced from time
to time with repatriated earnings of its Hong Kong subsidiary aggregating $9.4
million in 1997, of which $6.0 million was used to repay short term debt, and
$3.4 million in 1996, all of which was used for debt reduction. As part of its
strategy for returning to profitability, in addition to consolidating its
licensing arrangements, 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. In addition to these efforts, the Company has been seeking
to implement strategic changes to reverse the decline in its business. These
efforts have been undertaken with a view in increasing shareholder values by
bringing in a new management team, cutting expenses and adding new apparel
licenses or business lines to the Company's reduced asset base.
Change of Control. To implement these objectives, Stage II entered into a
stock purchase agreement in February 1998 with three of its founders (the
"Founders") and Richard Siskind (the "Purchase Agreement"), the principal
shareholder and CEO of several companies engaged in various segments of the
apparel industry. The transactions contemplated by the Purchase Agreement (the
"Change of Control Transactions") were consummated on May 11, 1998 and included
the sale to Mr. Siskind of approximately 1.9 million shares of the Company's
common stock ("Common Stock") held by the Founders (the "Control Shares") in
consideration for their release from guarantees of the Company's indebtedness to
its factor and their receipt of options to reacquire a total of 1.5
6
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million Control Shares from Mr. Siskind at exercise prices ranging from $.50 to
$1.50 per share (the "Founders Options"). The Control Shares represent 48.7% of
the Common Stock outstanding as of the date of this Report
Other Change of Control Transactions. In addition to the sale of the
Control Shares, the Change of Control Transactions included (i) the Company's
issuance to Mr. Siskind of options to purchase up to 1.5 million shares of
Common Stock on the same terms as the Founders Options, exercisable only to the
extent the Founders Options are exercised, (ii) the Company's issuance to Mr.
Siskind options to purchase up to 900,000 shares of Common Stock at an exercise
price of $.75 per share, (iii) the reconstitution of the Company's board of
directors with designees of Mr. Siskind, (iv) the addition of a new management
team headed by Mr. Siskind and (v) the arrangement by Mr. Siskind of a new
credit facility for the Company. See "Liquidity and Capital Resources." All of
the options issued to Mr. Siskind are subject to shareholder approval at the
Company's 1998 annual meeting.
The Company believes Mr. Siskind's experience, industry contacts and
successful track record will enable Stage II to complete the turnaround started
by its current management. To assist in that effort, Jack Clark, one of the
Founders who has served as the Company's Chairman and CEO since 1982, entered
into a new employment agreement with the Company contemplating a transitional
role for one year.
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 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>
1998................... $1,855 $ -- $ -- $ -- $ --
1997................... 4,067 2,348 5,718 4,414 16,547
1996................... 8,437 5,693 10,397 8,901 33,428
</TABLE>
Quarter Ended March 31, 1998 and 1997. Net sales of $1.9 million for the
first quarter of 1998 decreased by 54.4% from $4.1 million in the corresponding
quarter of 1997. The decrease primarily reflects the termination of certain
brand name apparel licenses as part of the planned reduction in the scope of
operations, as well as the elimination of customer accounts not preapproved by
the Company's factor. The decline in net sales for the first quarter of 1998
was also influenced by temporary disruptions in the Company's factoring
arrangements in connection with the Change of Control Transactions. See
"Recent Developments."
Cost of goods sold as a percentage of sales decreased to 77.5% in the first
quarter of 1998 compared to 83.4% in the same quarter last year. The decrease
reflects higher gross profit margins on the Company's new apparel lines and
lower levels of promotional sales of discontinued lines.
Commission and other income decreased by $17,000 or 20.0% during the first
quarter of 1998 compared to the corresponding prior quarter, reflecting a
decline in the Company's sales agency business.
SG&A expenses of $1.0 million for the first quarter of 1998 decreased by
37.4% compared to $1.7 million for the first quarter of 1997, primarily from a
reduction in variable costs associated with lower sales volumes and a cost
reduction plan adopted as part of the Company's redirection of its business.
SG&A expenses as a percentage
7
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of sales increased to 56.0% for the first quarter of 1998 compared to 40.8% in
the corresponding prior quarter, reflecting a faster decline in sales than the
Company's ability to reduce fixed SG&A expenses.
Interest and factoring expenses, net of interest income, aggregated
$140,000 or 7.5% of sales in the first quarter of 1998 compared to $147,000 or
3.6% of sales in the corresponding quarter last year. The decrease reflects a
slight reduction in borrowing levels.
The Company recognized losses in the first quarters of 1998 and 1997
aggregating $692,000 and $1.1 million, respectively, reflecting the foregoing
trends. In the first quarter of 1998, the Company's net loss was $.18 per share
based on 3,903,000 average common shares outstanding. In the first quarter of
1997, the Company's net loss was $.26 per share based on 4,196,000 average
common shares outstanding.
The results of operations for the quarter ended March 31, 1998 are not
necessarily indicative of operating results to be expected for the full year.
Liquidity and Capital Resources
Liquidity. Net cash used by Stage II's operating activities during the
first quarter of 1998 aggregated $1.6 million. The Company's cash position
decreased 19.5% from $641,000 at December 31, 1997 to $516,000 at March 31,
1998.
Capital Resources. During 1997, the Company repatriated all of its Hong
Kong subsidiary's cash and marketable securities aggregating $9.3 million, of
which $6.0 million was used 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.
Prior to the Change of Control Transactions, Stage II maintained a credit
facility (the "Prior Credit Facility") under a factoring agreement with Milberg
Factors Corp. The Prior Credit Facility provided for short term borrowings by
Stage II at a floating interest rate equal to 1/2% above the prime rate.
Borrowings under the Prior Credit Facility were payable upon demand and secured
by the Company's inventory, accounts receivable, cash surrender value of
officers' life insurance, restricted cash and marketable securities. The factor
purchased the Company's accounts receivable that it had preapproved, without
recourse except in cases of merchandise returns or billing or merchandise
disputes in the normal course of business. In addition, the factor was
responsible for the accounting and collection of all accounts receivable sold to
it by the Company. The factor receives a commission under the Prior Credit
Facility in an amount less than 1% of the net receivables it purchased. As of
March 31, 1998, the Company's net direct borrowings under the Prior Credit
Facility aggregated $6.1 million.
The Prior Credit Facility also provided 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 Facility are
determined from time to time by the factor based upon the Company's financing
requirements and financial performance.
In connection with the closing of the Change of Control Transactions, Stage
II obtained a new factoring and credit facility arranged by Mr. Siskind with The
CIT Group/Commercial Services, Inc. (the "Credit Facility") to replace its
existing facility. See "Recent Developments." The agreements covering the
Credit Facility provide for substantially the same terms and conditions as the
Prior Credit Facility. Those agreements may be terminated without penalty by
the Company on May 31, 2000 or the end of any subsequent contract year upon 60
days notice.
The Company believes that its internally generated funds and borrowings
available under its Credit Facility 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 March 31, 1998, Stage II had no material capital expenditure
requirements.
8
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Forward Looking Statements
This Report includes forward looking statements within the meaning of
Section 21E of the Securities 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.
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8 - K.
(a) Exhibits.
Exhibit
Number: Exhibit
10.1 Factoring Agreement dated May 11, 1998 between the Company and
The CIT Group/Commercial Services, Inc.
10.2 Inventory Security Agreement dated May 11, 1998 between the
Company and The CIT Group/Commercial Services, Inc.
10.3 Letter of Credit Agreement dated May 11, 1998 between the Company
and The CIT Group/Commercial Services, Inc.
10.4 Option Agreement-A dated May 11, 1998 between the Company and
Richard Siskind.
10.5 Option Agreement-B dated May 11, 1998 between the Company and
Richard Siskind.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K
dated March 2, 1998.
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAGE II APPAREL CORP.
Date: May 13, 1998 By: /s/ Michael Hanrahan
---------------------------------
Michael Hanrahan
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
10
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Exhibit 10.1
____________________, 1998
Stage II Apparel Corp.
350 Fifth Avenue, Suite 901
New York, NY 10118
FACTORING AGREEMENT
Ladies and Gentlemen:
We are pleased to confirm the terms and conditions that will govern our
funds in use accounting, notification factoring arrangement with advances (the
"Agreement").
1. SALE OF ACCOUNTS
You sell and assign to us, and we purchase as absolute owner, all accounts
receivable arising from your sales of inventory or rendition of services,
including those under any trade names, through any divisions and through any
selling agent (collectively, the "Accounts" and individually, an "Account").
2. CREDIT APPROVAL
2.1 Requests for credit approval for all of your orders must be submitted
to our Credit Department via computer by either: (a) On-Line Terminal Access, or
(b) Electronic Batch Transmission. If you are unable to submit orders via
computer, then orders can be submitted over the phone, by fax or in writing.
All credit decisions by our Credit Department (including approvals, declines and
holds) will be sent to you daily by a Credit Decisions Report, which constitutes
the official record of our credit decisions. Credit approvals will be effective
only if shipment is made or services are rendered within thirty (30) days from
the completion date specified in our credit approval. Credit approval of any
Account may be withdrawn by us any time before delivery is made or services are
rendered.
2.2 We assume the Credit Risk on each Account approved in the Credit
Decision Report. "Credit Risk" means the customer's failure to pay the Account
in full when due on its longest maturity solely because of its financial
inability to pay. If there is any change in the amount, terms, shipping date or
delivery date for any shipment of goods or rendition of services (other than
accepting returns and granting allowances as provided in section 8 below), you
must submit a change of terms request to us, and, if such pertains to a Factor
Risk Account, then we shall advise you of our decision either to retain the
Credit Risk or to withdraw the credit approval. Accounts on which we bear the
Credit Risk are referred to collectively as "Factor Risk Accounts",
<PAGE>
and individually as a "Factor Risk Account". Accounts on which you bear some or
all of the risk as to credit are referred to collectively as "Client Risk
Accounts", and individually as a "Client Risk Account".
2.3 We shall have no liability to you or to any person, firm or entity for
declining, withholding or withdrawing credit approval on any order. If we
decline to credit approve an order and furnish to you any information regarding
the credit standing of that customer, such information is confidential and you
agree not to reveal same to the customer, your sales agent or any third party.
You agree that we have no obligation to perform, in any respect, any contracts
relating to any Accounts.
3. INVOICING
You agree to place a notice (in form and content acceptable to us) on each
invoice and invoice equivalent that the Account is sold, assigned and payable
only to us, and to take all necessary steps so that payments and remittance
information are directed to us. All invoices, or their equivalents, will be
promptly mailed or otherwise transmitted by you to your customers at your
expense. You will provide us with copies of all invoices (or the equivalent
thereof if the invoices were sent electronically), confirmation of the sale of
the Accounts to us and proof of shipment or delivery, all as we may reasonably
request. If you fail to provide us with copies of such invoices (or
equivalents) or such proofs when requested by us, we will not bear any Credit
Risk as to those Accounts.
4. REPRESENTATIONS AND WARRANTIES
4.1 You represent and warrant that: each Account is based upon a bona fide
sale and delivery of inventory or rendition of services made by you in the
ordinary course of business; the inventory being sold and the Accounts created
are your exclusive property and are not, and will not be, subject to any lien,
consignment arrangement, encumbrance or security interest other than in our
favor; all amounts are due in United States Dollars; all original invoices bear
notice of the sale and assignment to us; any taxes or fees relating to your
Accounts or inventory are solely your responsibility; and none of the Accounts
factored with us hereunder represent sales to any subsidiary, affiliate or
parent company. You also warrant and represent that: your customers have
accepted the goods or services and owe and are obligated to pay the full amounts
stated in the invoices according to their terms, without dispute, claim, offset,
defense, deduction, rejection, recoupment, counterclaim or contra account, other
than as to returns and allowances as provided in section 8 below (the foregoing
being referred to in this Agreement as "Customer Claims").
4.2 You further represent and warrant that: you are a duly organized and
validly existing business organization qualified to do business in all states
where required; the most recent financial statements provided by you to us
accurately reflect your financial condition as of that date and there has been
no material adverse change in your financial condition since the date of those
financial statements. You agree to furnish us with such information concerning
your business affairs and financial condition as we may reasonably request from
time to time. You will
2
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furnish to us as soon as possible, but not later than one hundred twenty (120)
days after the close of each of your fiscal years, your financial statements as
of the end of such year, audited by a firm of independent, certified public
accountants, selected by you and acceptable to us.
4.3 You agree that you will promptly notify us of any change in your:
name, location of your chief executive office, place(s) of business, use of
trade names and divisions, and legal or business structure. Further, you agree
that you will promptly notify us of any change in control of the ownership of
your business organization, and of significant law suits or proceedings against
you.
5. PURCHASE OF ACCOUNTS
We shall purchase the Accounts for the gross amount of the respective
invoices, less our factoring fees or charges, trade and cash discounts allowable
to, or taken by, your customers and credits and allowances ("Purchase Price").
Our purchase of the Accounts will be reflected on the Statement of Account
(defined in section 10 below), which we shall render to you, which will also
reflect all credits and discounts made available to your customers.
6. ADVANCES
At your request, and in our sole discretion, we may advance funds to you of
up to eighty-five percent (85%) of your Factor Risk Accounts, prior to the
collection of the Accounts. We have the right, at any time and from time to
time, to hold any reserves we deem reasonably necessary as security for the
payment and performance of any and all of your Obligations (defined in section
12 below). All amounts you owe us, including all advances to you and any debit
balance in your Client Position Account (defined in section 10 below), and any
Obligations, are payable on demand and may be charged to your account at any
time.
7. PAYMENT OF ACCOUNTS
7.1 All payments received by us on the Accounts will be promptly applied to
your account with us after crediting your customer's account. In exchange for
such application, we shall charge your account monthly with the cost of three
(3) additional business days on all such payments at the rate charged by us in
section 14.1 below on debit balances. No checks, drafts or other instruments
received by us will constitute final payment of an Account unless and until such
items have actually been collected.
7.2 We shall credit your account with the Purchase Price of any Factor
Risk Account which remains unpaid:
(a) as of the date of the Account's longest maturity if a proceeding or
petition is filed by or against the customer under any state or
federal bankruptcy or insolvency law, or if a receiver or trustee is
appointed for the customer; or
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(b) as of the last day of the third month following the Account's longest
maturity date if such Account remains unpaid as of said date without
the occurrence of any of the events specified in clause (a) above.
If any Factor Risk Account credited to you was not paid for any reason other
than Credit Risk, we shall reverse the credit and charge your account
accordingly, and such Account is then deemed to be a Client Risk Account.
8. CUSTOMER CLAIMS AND CHARGE BACKS
8.1 You must notify us promptly of any matter affecting the value,
enforceability or collectibility of any Account and of all Customer Claims. You
agree to promptly issue credit memoranda or otherwise adjust the customer's
account upon accepting returns or granting allowances. For full invoice credit
memoranda, you agree to send duplicate copies thereof to us and to confirm their
assignment to us. You may continue to do so until we have advised you that all
such credits or allowances on Factor Risk Accounts require our prior written
approval. We shall cooperate with you in the adjustment of Customer Claims, but
we retain the right to adjust Customer Claims on Factor Risk Accounts directly
with customers, upon such terms as we in our sole discretion may deem advisable.
8.2 We may at any time charge back to your account the amount of: (a) any
Factor Risk Account which is not paid in full when due for any reason other than
Credit Risk; (b) any Factor Risk Account which is not paid in full when due
because of an act of God, civil strife, or war; (c) anticipation (interest)
deducted by a customer on any Account; (d) Customer Claims; (e) any Client Risk
Account which is not paid in full when due; and (f) any Account for which there
is a breach of any representation or warranty. A charge back does not
constitute a reassignment of an Account. We shall immediately charge any
deduction taken by a customer to your account.
8.3 We may at any time charge to your account the amount of: (a) payments
we receive on Client Risk Accounts which we are required at any time to turnover
or return (including preference claims); (b) all remittance expenses (including
incoming wire charges, currency conversion fees and stop payment fees), other
than stop payment fees on Factor Risk Accounts; (c) expenses, collection agency
fees and attorneys' fees incurred by us in collecting or attempting to collect
any Client Risk Account or any Obligation (defined in section 12 below); and (d)
our fees for handling collections on Client Risk Accounts which you have
requested us to process, as provided in the Guide (see section 18.2 below).
9. HANDLING AND COLLECTING ACCOUNTS; RETURNED GOODS
9.1 As owners of the Factor Risk Accounts, we have the right to: (a) bring
suit, or otherwise enforce collection, in your name or ours; (b) modify the
terms of payment, (c) settle, compromise or release, in whole or in part, any
amounts owing, and (d) issue credits in your name or ours. To the extent
applicable, you waive any and all claims and defenses based on suretyship. If
moneys are due and owing from a customer for both Factor Risk Accounts and
Client Risk Accounts, you agree that any payments or recoveries received on such
Accounts may be applied first to any Factor Risk Accounts. Once you have
granted or issued a discount, credit or
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allowance on any Account, you have no further interest therein. Any checks,
cash, notes or other documents or instruments, proceeds or property received
with respect to the Accounts must be held by you in trust for us, separate from
your own property, and immediately turned over to us with proper endorsements.
We may endorse your name or ours on any such check, draft, instrument or
document.
9.2 As owners and assignees of the Accounts and all proceeds thereof, upon
our written notice, you will, at your expense, set aside, mark with our name and
hold in trust for us, any and all returned, rejected, reclaimed or repossessed
inventory ("Returned Goods"). Further, upon such notice, you agree promptly:
to notify us of all Returned Goods and, at our request, either to deliver same
to us, or to pay us the invoice price thereof, or to sell the same for our
account.
10. STATEMENT OF ACCOUNT
After the end of each month, we shall send you certain reports reflecting
Accounts purchased, advances made, fees and charges and all other financial
transactions between us during that month ("Reports"). The Reports sent to you
each month include a Statement of Account reflecting transactions in three
sections: Accounts Receivable, Client Position Account and Funds In Use. The
Reports shall be deemed correct and binding upon you and shall constitute an
account stated between us unless we receive your written statement of exceptions
within thirty (30) days after same are mailed to you.
11. GRANT OF SECURITY INTEREST
11.1 You hereby assign and grant to us a continuing security interest in
all of your right, title and interest in and to all of your now existing and
future: (a) accounts receivable (including Accounts), instruments, documents,
chattel paper, general intangibles, and any other obligations owing to you; (b)
unpaid seller's rights (including rescission, repossession, replevin,
reclamation and stoppage in transit); (c) rights to any inventory represented by
the foregoing, including Returned Goods; (d) reserves and credit balances
arising hereunder; (e) guarantees or collateral for the foregoing (including
rights under any letters of credit or other credit enhancements in your favor);
(f) insurance policies, proceeds or rights relating to the foregoing; (g)
federal, state and local income tax refunds; (h) cash and non-cash proceeds of
the foregoing; and (i) Books and Records (defined in section 13 below)
evidencing or pertaining to the foregoing.
11.2 You agree to comply with all applicable laws to perfect our
security interest in collateral pledged to us hereunder, and to execute
financing statements and other documents as we may require to effectuate the
foregoing and to implement this Agreement. To the extent permitted by
applicable law, you authorize us to sign your name, or to file financing
statements or continuations without your signature, all in order to create,
perfect or maintain our security interest in the collateral.
12. OBLIGATIONS SECURED
The security interest granted hereunder and any lien or security interest
that we now or hereafter have in any of your other assets, collateral or
property, secure the payment and
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performance of all of your now existing and future indebtedness and obligations
to us, whether absolute or contingent, whether arising under this Agreement or
any other agreement or arrangement between us, by operation of law or otherwise
("Obligations"). Obligations also includes ledger debt (which means
indebtedness for goods and services purchased by you from any party whose
accounts receivable are factored or financed by us), and indebtedness arising
under any guaranty, credit enhancement or other credit support granted by you in
our favor. Any reserves or balances to your credit and any other assets,
collateral or property of yours in our possession constitutes security for any
and all Obligations.
13. BOOKS AND RECORDS AND EXAMINATIONS
13.1 You agree to maintain such Books and Records concerning the Accounts
as we may reasonably request and to reflect our ownership of the Accounts
therein. "Books and Records" means your accounting and financial records
(whether paper, computer or electronic), data, tapes, discs, or other media, and
all programs, files, records and procedure manuals relating thereto, wherever
located.
13.2 Upon our reasonable request, you agree to make your Books and Records
available to us for examination and to permit us to make copies or extracts
thereof. Also, you agree to permit us to visit your premises during your
business hours and to conduct such examinations as we deem reasonably necessary.
To cover our costs and expenses of any such examinations, we shall charge you a
fee for each day, or part thereof, during which such examination is conducted,
plus any out-of-pocket costs and expenses incurred by us, as provided in the
Guide (see section 18.2 below).
14. INTEREST
14.1 Interest is charged as of the last day of each month based on the
daily debit balances in your Funds In Use account for that month, at a rate
equal to the sum of one-half of one percent (.5%) plus the Chase Prime Rate
(defined below). The Chase Prime Rate is the per annum rate of interest
publicly announced by The Chase Manhattan Bank (or its successor) in New York,
New York from time to time as its prime rate, and is not intended to be the
lowest rate of interest charged by The Chase Manhattan Bank to its borrowers.
Any change in the rate of interest hereunder due to a change in the Chase Prime
Rate will take effect as of the first of the month following such change in the
Chase Prime Rate. Interest will be credited as of the last day of each month
based on the daily credit balances in your Funds In Use account for that month,
at a rate three percent (3%) per annum below the Chase Prime Rate being used to
calculate interest for the period. All interest is calculated on a 360 day
year.
14.2 In no event will interest charged hereunder exceed the highest
lawful rate. In the event, however, that we do receive interest in excess of
the highest lawful rate, you agree that your sole remedy would be to seek
repayment of such excess, and you irrevocably waive any and all other rights and
remedies which may be available to you under law or in equity.
15. FACTORING FEES AND OTHER CHARGES
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15.1 For our services hereunder, you will pay us a factoring fee or charge
of sixty-five hundredths of one percent (.65%) of the gross face amount of all
Accounts factored with us, but in no event less than $3.00 per invoice. In
addition, you will pay a fee of one-quarter of one percent (1/4 of 1%) of the
gross face amount of each Account for each thirty (30) day period or part
thereof by which the longest terms of sale applicable to such Account exceed
thirty (30) days (whether as originally stated or as a result of a change of
terms requested by you or the customer). For Accounts arising from sales to
customers located outside the fifty states of the United States of America, you
will pay us an additional factoring fee of one percent (1%) of the gross face
amount of all such Accounts. All factoring fees or charges are due and charged
to your account upon our purchase of the underlying Account. If the actual
factoring fees or charges paid to us by you during any year or part thereof
("Period"), is less than $70,000.00 ("Minimum Factoring Fees"), we shall charge
your account as of the end of such Period with an amount equal to the difference
between the actual factoring fees or charges paid during such Period and said
Minimum Factoring Fees.
15.2 You agree to pay all costs and expenses incurred by us in connection
with the preparation, execution, administration and enforcement of this
Agreement, including all reasonable fees and expenses attributable to the
services of our attorneys (whether in-house or outside), search fees and public
record filing fees. Furthermore, you agree to pay to us our fees (as more fully
set forth in the Guide, see section 18.2 below) including fees for: (a) special
reports prepared by us at your request; (b) wire transfers; (c) handling change
of terms requests relating to Accounts; and (d) your usage of our on-line
computer services. Beginning on the first of the month six months from the date
hereof, you also agree to pay us our fees for: (i) each new customer set-up on
our customer accounts receivable data base and each new customer relationship
established for you; (ii) crediting your account with proceeds of non-factored
invoices received by us; and (iii) charge backs of invoices factored with us
that were paid directly to you. All such fees will be charged to your account
when incurred. Our fees may be changed by us from time to time upon
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notice to you; however, any failure to give you such notice does not constitute
a breach of this Agreement and does not impair our ability to institute any such
change.
15.3 Any tax or fee of any governmental authority imposed on or arising
from any transactions between us, any sales made by you, or any inventory
relating to such sales is your sole responsibility (other than income and
franchise taxes imposed on us which are not related to any specific transaction
between us). If we are required to withhold or pay any such tax or fee, or any
interest or penalties thereon, you hereby indemnify and hold us harmless
therefor and we shall charge your account with the full amount thereof.
15.4 If during the next six months from the date hereof, you have not
begun to process all invoices with us by means of Electronic Batch Transmission,
we shall have the option of designating the Anniversary Date to be three years
from the date hereof.
16. TERMINATION
16.1 You may terminate this Agreement only as of an Anniversary Date and
then only by giving us at least sixty (60) days prior written notice of
termination. "Anniversary Date" means the last day of the month occurring two
years from the date hereof, and the same date in each year thereafter. In the
event that this Agreement is terminated by you prior to an Anniversary Date, we
shall be entitled to the unpaid portion of the Minimum Factoring Fees, if any,
for such Period, as provided in section 15.1 above, as of the effective date of
termination. Except as otherwise provided, we may terminate this Agreement at
any time by giving you at least sixty (60) days prior written notice of
termination. However, we may terminate this Agreement immediately, without
prior notice to you, upon the occurrence of an Event of Default (defined in
section 17.1 below).
16.2 This Agreement remains effective between us until terminated as
herein provided. Unless sooner demanded, all Obligations will become
immediately due and payable upon any termination of this Agreement.
16.3 All of our rights, liens and security interests hereunder continue
and remain in full force and effect after any termination of this Agreement and
pending a final accounting, we may withhold any balances in your account unless
we are supplied with an indemnity satisfactory to us to cover all Obligations.
You agree to continue to assign accounts receivable to us and to remit to us all
collections on accounts receivable, until all Obligations have been paid in full
or we have been supplied with an indemnity satisfactory to us to cover all
Obligations.
16.4 At our option, we shall be entitled to extend this Agreement for one
(1) year if the aggregate amount of Factor Risk Accounts paid by us to you
under section 7.2 of this Agreement during any Contract Year, net of recoveries
thereon, exceeds twenty percent (20%) of the aggregate factoring fees and
charges charged to your account during such Contract Year. "Contract Year"
means the twelve-month period ending on the Anniversary Date and each
Anniversary Date thereafter. We agree to give you notice of any such extension,
and notwithstanding anything contained in section 16.1 above to the contrary,
the then next occurring
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Anniversary Date will be extended for an additional one (1) year period. Any
failure to give you notice of such extension will not constitute a breach of
this Agreement and will not impair our ability to extend this Agreement to the
next Anniversary Date.
17. EVENTS OF DEFAULT AND REMEDIES UPON DEFAULT
17.1 It is an "Event of Default" under this Agreement if: (a) your
business ceases or a meeting of your creditors is called; (b) any bankruptcy,
insolvency, arrangement, reorganization, receivership or similar proceeding is
commenced by or against you under any federal or state law; (c) you breach any
representation, warranty or covenant contained in this Agreement; or (d) you
fail to pay any Obligation when due.
17.2 After the occurrence of an Event of Default which is not waived by
us, we may terminate this Agreement without notice to you. We shall then have
immediate access to, and may remove from any premises where same may be located,
any and all Books and Records as may pertain to the Accounts, Returned Goods and
any other collateral hereunder. Furthermore, as may be necessary to administer
and enforce our rights in the Accounts, Returned Goods and any other collateral
hereunder, or to facilitate the collection or realization thereof, we have your
permission to: (a) use (at your expense) your personnel, supplies, equipment,
computers and space, at your place of business or elsewhere; and (b) notify
postal authorities to change the address for delivery of your mail to such
address as we may designate and to receive and open your mail. We agree to turn
over to you or your representative all mail not related to the aforesaid
purposes.
17.3 After the occurrence of an Event of Default which is not waived by
us, with respect to any other property or collateral in which we have a security
interest, we shall have all of the rights and remedies of a secured party under
Article 9 of the Uniform Commercial Code. If notice of intended disposition of
any such property or collateral is required by law, it is agreed that five (5)
days notice constitutes reasonable notice. The net cash proceeds resulting from
the exercise of any of the foregoing rights, after deducting all charges, costs
and expenses (including reasonable attorneys' fees) will be applied by us to the
payment or satisfaction of the Obligations, whether due or to become due, in
such order as we may elect. You remain liable to us for any deficiencies. With
respect to Factor Risk Accounts and Returned Goods relating thereto, you hereby
confirm that we are the owners thereof, and that our rights of ownership permit
us to deal with this property as owner and you confirm that you have no interest
therein.
18. MISCELLANEOUS PROVISIONS
18.1 This Agreement, and all attendant documentation, as the same may be
amended from time to time, constitutes the entire agreement between us with
regard to the subject matter hereof, and supersedes any prior agreements or
understandings. This Agreement can be changed only by a writing signed by both
of us. Our failure or delay in exercising any right hereunder will not
constitute a waiver thereof or bar us from exercising any of our rights at any
time. The validity, interpretation and enforcement of this Agreement is governed
by the laws of the State of New York, excluding the conflict laws of such State.
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18.2 The Client Service Guide, as supplemented and amended from time to
time (the "Guide") has been furnished to you or is being furnished to you
concurrently with the signing of this Agreement, and by your signature below you
acknowledge receipt thereof. The Guide provides information on credit approval
processes, accounting procedures and fees. The procedures for Electronic Batch
Transmission are covered in supplemental instructions to the Guide. From time
to time, we may provide you with amendments, additions, modifications, revisions
or supplements to the Guide, which will be operative for transactions between
us. All information and exhibits contained in the Guide, on any screen accessed
by you, and on any print-outs, reports, statements or notices received by you
are, and will be, our exclusive property and are not to be disclosed to, or used
by, anyone other than you, your employees or your professional advisors, in
whole or in part, unless we have consented in writing.
18.3 This Agreement binds and benefits each of us and our respective
successors and assigns, provided, however, that you may not assign this
Agreement or your rights hereunder without our prior written consent.
18.4 Section headings are for convenience only and are not controlling.
The use of "including" means "including without limitation".
18.5 If any provision of this Agreement is contrary to, prohibited by, or
deemed invalid under applicable laws or regulations, such provision will be
inapplicable and deemed omitted to such extent, but the remainder will not be
invalidated thereby and will be given effect so far as possible.
[Remainder of this page intentionally left blank]
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19. JURY TRIAL WAIVER
To the extent permitted by applicable law, we each hereby waive any right
to a trial by jury in any action or proceeding arising directly or indirectly
out of this Agreement, or any other agreement or transaction between us or to
which we are parties.
If the foregoing is in accordance with your understanding, please so
indicate by signing and returning to us the original and one copy of this
Agreement. This Agreement will take effect as of the date set forth above but
only after being accepted below by one of our officers in New York, after which
we shall forward a fully executed copy to you for your files.
Very truly yours,
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By______________________________________
Name:
Title:
Read and Agreed to:
STAGE II APPAREL CORP.
By________________________________
Name:
Title:
Accepted at: New York, New York
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By______________________________________
Name:
Title:
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EXHIBIT 10.2
_______________, 1998
Stage II Apparel Corp.
350 Fifth Avenue, Suite 901
New York, NY 10118
INVENTORY SECURITY AGREEMENT
Gentlemen:
1. As security for the prompt payment in full of all loans and advances made and
to be made to you from time to time by us, in conjunction with the factoring
or accounts receivable financing agreement between us, as amended from time
to time (herein the "Agreement"), as well as to secure the payment in full of
the other Obligations (hereinafter defined), you hereby pledge and grant to
us a continuing general lien upon and security interest in (herein "Security
Interest") the following described "Collateral":
All present and hereafter acquired merchandise, inventory and goods, and all
additions, substitutions and replacements thereof, wherever located, together
with all goods and materials used or usable in manufacturing, processing,
packaging or shipping same; in all stages of production -- from raw materials
through work-in-process to finished goods -- and all proceeds of whatever
sort.
2. This agreement is being executed by you to induce us to make loans or
advances to you or otherwise to extend credit or financial accommodations to
you, or to induce us to enter into or continue a factoring or financing
arrangement with you, and is executed in consideration of our doing or having
done any of the foregoing. You agree that any of the foregoing shall be done
or extended by us in our sole discretion, and shall be deemed to have been
done or extended by us in consideration of and in reliance upon the execution
of this agreement, but that nothing herein shall obligate us to do any of the
foregoing.
3. The amount of the loans and advances made or to be made by us to you, and the
period of time during which they are to remain outstanding shall at all times
be in our sole discretion. The ratio of Collateral to such loans and
advances and to the other Obligations referred to herein must be satisfactory
to us at all times, and the valuation of the Collateral is to be determined
exclusively by us. We are to be at liberty, from time to time, without
responsibility or liability to you, to revise any limit placed by us on loans
and advances or other Obligations.
<PAGE>
4. In addition to the loans and advances made or to be made by us to you or to
others for your account, "Obligations" shall include any and all indebtedness
which may at any time be owing by you to us howsoever arising. Obligations
shall include, without limitation, all indebtedness whether now in existence
or incurred by you from time to time hereafter; whether secured by pledge,
lien upon or security interest in any of your assets or property other than
the Collateral herein described, or by pledge, lien upon or security interest
in the assets or property of any other person, firm, entity or corporation
(herein "person"); whether such indebtedness is absolute or contingent, joint
or several, matured or unmatured, direct or indirect and whether you are
liable to us for such indebtedness as principal, surety, endorser, guarantor
or otherwise. Obligations shall also include, without limitation, your
liability to us for any balances owing in any account maintained on our books
under the Agreement or under any other agreement or arrangement now or
hereafter entered into between us; indebtedness for goods or services
purchased by you from any concern whose accounts receivable are factored or
financed by us; your liability to us as maker or endorser on any promissory
note or other instrument for the payment of money; your liability to us under
any instrument of guaranty or indemnity, or arising under any guaranty,
endorsement or undertaking which we may make or issue to others for your
account, including any accommodation extended with respect to applications
for letters of credit, our acceptance of drafts or our endorsement of notes
or other instruments for your account and benefit. Obligations shall also
include, without limitation, all interest, commissions, financing and service
charges, and expenses and fees chargeable to and due from you under this
agreement, the Agreement or any other agreement or arrangement which may be
now or hereafter entered into between us.
5. The Security Interest in the Collateral, unless expressly limited by the
provisions of paragraph 1 above, shall extend and attach to:
(a) The entire Collateral which is presently in existence and which is owned
by you or in which you have any interest, and all Collateral which you may
purchase or in which you may acquire any interest at any time and from time
to time in the future, whether such Collateral is in transit or in your or
our constructive, actual or exclusive occupancy or possession or otherwise,
or is held by you or others for your account; and
(b) The entire Collateral wherever located, including without limitation, all
Collateral which may be located on your premises, or upon the premises of any
carriers, forwarding agents, truckers, warehousemen, vendors, selling agents,
finishers, converters, processors, or other third persons who may have
possession of the Collateral; and
(c) The entire Collateral and any portion thereof which may be returned,
rejected, reclaimed or repossessed by either of us from your customers, as
well as to all supplies, goods, incidentals, packaging materials, and any
other items which contribute to the finished goods or products manufactured
or processed by you, or to the sale, promotion or shipment thereof.
6. You agree to safeguard, protect and hold all Collateral for our account and
make no disposition thereof except in the regular course of your business as
herein provided. Until we have given you notice to the contrary, any
Collateral which we may from time to time
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permit to remain in your or another person's possession or control, may be
sold and shipped by you to your customers in the ordinary course of your
business, on open account and on terms not exceeding the terms currently
being extended by you to your customers, provided that all proceeds of all
sales (including cash, accounts receivable, checks, notes, instruments for
the payment of money and similar proceeds) are forthwith transferred,
assigned, endorsed, and turned over and delivered to us in accordance with
the provisions of the Agreement. We shall have the right to withdraw this
permission at any time, in which event no further disposition shall be made
of the Collateral without our prior written approval. Invoices covering
sales of Collateral are to be assigned to us in accordance with the
provisions of the Agreement, and the proceeds thereof (if collected by you)
are to be turned over to us in accordance with the provisions of the
Agreement. Cash sales of the Collateral, or sales in which a lien upon or
security interest in the Collateral is retained by you shall only be made by
you with our written approval, and all proceeds of such sales shall not be
commingled with your other property, but shall be segregated, held by you in
trust for us as our exclusive property, and shall be delivered immediately by
you to us in the identical form received by you. Upon the sale, exchange, or
other disposition of the Collateral, as herein provided, the Security
Interest provided for herein shall without break in continuity and without
further formality or act, continue in, and attach to, all proceeds, including
any instruments for the payment of money, accounts receivable, contract
rights, documents of title, shipping documents, chattel paper and all other
cash and non-cash proceeds of such sale, exchange or disposition. As to any
such sale, exchange or other disposition, we shall have all of the rights of
an unpaid seller, including stopping in transit, replevin, rescission and
reclamation.
7. You hereby warrant and represent that you are solvent; that this Security
Interest constitutes and shall at all times constitute a first and only lien
on the Collateral; that you are, or will be at the time additional Collateral
is acquired by you, the absolute owner of the Collateral with full right to
pledge, sell, consign, transfer and create a Security Interest therein, free
and clear of any and all claims or liens in favor of others; that you will at
your expense forever warrant and, at our request, defend the same from any
and all claims and demands of any other person; and that you will not grant,
create or permit to exist, any lien upon or security interest in the
Collateral, or any proceeds, in favor of any other person.
8. You agree to maintain books and records pertaining to the Collateral in such
detail, form and scope as we shall require. You agree that we or our agents
may enter upon your premises at any time, and from time to time for the
purpose of inspecting the Collateral and any and all records pertaining
thereto. You agree to notify us promptly of any change in your name, mailing
address, principal place of business or the location of the Collateral. You
are also to advise us promptly, in sufficient detail, of any substantial
change relating to the type, quantity or quality of the Collateral, or any
event which would have a material effect on the value of the Collateral or on
the Security Interest granted to us herein.
9. You agree to: execute and deliver to us, from time to time, solely for our
convenience in maintaining a record of the Collateral, such consignments or
separate written statements as we may require, designating, identifying or
describing the Collateral pledged to us hereunder. Your failure, however, to
promptly give us such consignments, or other
<PAGE>
statements shall not affect, diminish, modify or otherwise limit our
Security Interest in the Collateral.
10. You agree to comply with the requirements of all state and federal laws in
order to grant to us a valid and perfected first Security Interest in the
Collateral. We are hereby authorized by you to file any financing statements
covering the Collateral whether or not your signature appears thereon. You
agree to do whatever we may request, from time to time, by way of; leasing
warehouses; filing notices of lien, financing statements, amendments,
renewals and continuations thereof; cooperating with our custodians; keeping
stock records; transferring Collateral to our possession; obtaining waivers
from landlords and mortgagees; and performing such further acts as we may
require in order to effect the purposes of this agreement.
11. You agree to maintain insurance on the Collateral under such policies of
insurance, with such insurance companies, in such amounts and covering such
risks as are at all times satisfactory to us. All policies covering the
Collateral are to be made payable to us, in case of loss, under a standard
non-contributory "mortgagee", "lender" or "secured party" clause and are to
contain such other provisions as we may require to fully protect our
interest in the Collateral and to any payments to be made under such
policies. All original policies are to be delivered to us, premium prepaid,
with the loss payable endorsement in our favor, and shall provide for not
less than ten days prior written notice to us of the exercise of any right
of cancellation. At your request, or if you fail to maintain such insurance,
we shall arrange for such insurance, but at your expense and without any
responsibility on our part for: obtaining the insurance, the solvency of the
insurance companies, the adequacy of the coverage, or the collection of
claims. Unless we shall otherwise agree with you in writing, we shall have
the sole right, in our name or yours, to file claims under any insurance
policies, to receive, receipt and give acquittance for any payments that may
be payable thereunder, and to execute any and all endorsements, receipts,
releases, assignments, reassignments or other documents that may be
necessary to effect the collection, compromise or settlement of any claims
under any such insurance policies.
12. You agree to pay, when due, all taxes, assessments, claims and other charges
(herein "taxes") lawfully levied or assessed upon the Collateral and if such
taxes remain unpaid after the date fixed for the payment thereof, or if any
lien shall be claimed thereunder which in our opinion might create a valid
obligation having priority over the rights granted to us herein, we may,
without notice to you, but on your behalf, pay such taxes, and the amount
thereof shall be an Obligation secured hereby and due to us on demand. Any
and all fees, costs and expenses, of whatever kind and nature, (including
any taxes, attorneys' fees or costs for insurance of any kind), which we may
incur in filing public notices; in preparing or filing documents, making
title examinations or rendering opinions; in protecting, maintaining, or
preserving the Collateral; in enforcing or foreclosing the Security Interest
hereunder, whether through judicial procedures or otherwise; or in defending
or prosecuting any actions or proceedings arising out of or related to our
transactions with you under this arrangement, shall be borne and paid by
you. If same are not promptly paid by you, we may pay same on your behalf,
and the amount thereof shall be an Obligation secured hereby and due to us
on demand.
<PAGE>
13. You agree to comply with all acts, rules, regulations, and orders of any
legislative, administrative or judicial body or official, applicable to the
Collateral or any part thereof, or to the operation of your business;
provided that you may contest any acts, rules, regulations, orders and
directions of such bodies or officials in any reasonable manner which will
not, in our opinion, adversely affect our rights or priority in the
Collateral hereunder.
14. On a breach by you of any of the terms or provisions of this agreement, the
Agreement or any other agreement or arrangement now or hereafter entered
into between us; or on the effective date of a termination of the
Agreement; or on the nonpayment when due of any Obligation owing to
us, whether or not the Agreement shall continue; or upon your
committing an act of bankruptcy, making a general assignment for
the benefit of creditors; or there is filed by or against you a
petition in bankruptcy or for the appointment of a receiver; or there
is commenced under any bankruptcy or insolvency law, any proceeding for
your relief or for the composition, extension, arrangement or adjustment
of any of your obligations; or your business is discontinued as a going
concern; then we shall have the right, with or without notice to you, to
foreclose the Security Interest created herein by any available judicial
procedure, or to take possession of the Collateral without judicial
process, and to enter any premises where the Collateral may be located for
the purpose of taking possession of or removing the Collateral. We shall
have the right without notice or advertisement, to sell, lease, or
otherwise dispose of all or any part of the Collateral, whether in its then
condition or after further preparation or processing, in your name or in
ours, or in the name of such party as we may designate, either at public
or private sale or at any broker's board, in lots or in bulk, for cash or
for credit, with or without warranties or representations, and upon such
other terms and conditions as we in our sole discretion may deem advisable,
and we shall have the right to purchase at any such sale. If notice of
intended disposition of any said Collateral is required by law, five (5)
days notice shall constitute reasonable notification. If any Collateral
shall require maintenance, preparation, or is in process or other
unfinished state, we shall have the right, at our option, to do such
preparation, processing or completion of manufacturing, for the purpose of
putting the Collateral in such saleable form as we shall deem appropriate.
You agree, at our request, to assemble the Collateral and to make it
available to us at places which we shall select, whether at your
premises or elsewhere, and to make available to us your premises and
facilities for the purpose of our taking possession of, removing or
putting the Collateral in saleable form. The proceeds of any such sale,
lease or other disposition of the Collateral shall be applied first,
to the expenses of retaking, holding, storing, processing, preparing
for sale, selling, and the like, and then to the satisfaction of your
Obligations to us, application as to particular Obligations or as to
principal or interest to be in our sole discretion. You shall be liable to
us for, and shall pay to us on demand, any deficiency which may remain
after such sale, lease or other disposition, and we in turn agree to remit
to you, or your successors or assigns, any surplus resulting therefrom. The
enumeration of the foregoing rights is not intended to be exhaustive and
the exercise of any right shall not preclude the exercise of any other
rights, all of which shall be cumulative.
15. The rights and Security Interest granted to us hereunder are to continue in
full force and effect, notwithstanding the termination of the Agreement or
the fact that the principal
<PAGE>
account maintained in your name on our books may from time to time be
temporarily in a credit position, until the final payment to us in full of
all Obligations due to us by you. Our delay, or omission to exercise any
right hereunder, shall not be deemed a waiver thereof, or be deemed a
waiver of any other right, unless such waiver be in writing and signed by
us. A waiver on any one occasion shall not be construed as a bar to or
waiver of any right or remedy on any future occasion.
16. To the extent that your Obligations are now or hereafter secured by any
assets or property other than the Collateral, or by the guarantee,
endorsement, assets or property of any other person, then we shall have the
right in our sole discretion to determine which rights, security, liens,
security interests or remedies we shall at any time pursue, foreclose upon,
relinquish, subordinate, modify or take any other action with respect to,
without in any way modifying or affecting any of them, or of any of our
rights hereunder.
17. This agreement, which is subject to modification only in writing signed by
us, is supplementary to and is to be considered as part of the Agreement.
No course of dealing between us shall change or modify this agreement. The
validity, interpretation and enforcement of this agreement shall be
governed by the laws of the State of New York.
18. If the foregoing is in accordance with your understanding, please so
indicate by signing and returning to us the original and one copy of this
agreement. The agreement shall take effect as of the date set forth above,
after being
<PAGE>
accepted below by one of our officers in New York State, after which, we
shall forward a copy to you with signatures completed for your files.
Very truly yours,
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By____________________________
Name:
Title:
Read and Agreed to:
STAGE II APPAREL CORP.
By____________________________
Name:
Title:
Accepted at New York, New York
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By____________________________
Name:
Title:
<PAGE>
Exhibit 10.3
________________, 1998
Stage II Apparel Corp.
350 Fifth Avenue
New York, NY 10118
Re: Letter of Credit Agreement
--------------------------
Ladies and Gentlemen:
From time to time, in order to assist you in establishing or
opening Letters of Credit with a bank or trust company (herein the "Bank") to
cover the purchase of goods and inventory, you may request us to join in the
applications for such Letters of Credit, and/or guarantee payment or
performance of such Letters and any drafts or acceptances thereunder, thereby
lending our credit to you. These arrangements shall be handled by us subject
to the terms and conditions set forth below.
A. Our assistance in this matter shall at all times and in all respects be in
our sole discretion. The amount and extent of the Letters of Credit and the
terms and conditions thereof and of any drafts or acceptances thereunder,
shall in all respects be determined solely by us and shall be subject to
change, modification and revision by us, at any time and from time to time.
B. Any indebtedness, liability or obligation of any sort whatsoever, however
arising, whether present or future, fixed or contingent, secured or
unsecured, due or to become due, paid or incurred, arising or incurred in
connection with any Letters of Credit, guarantees, drafts or acceptances
thereunder or otherwise (herein the "Obligations") shall be incurred solely
as an accommodation to you and for your account. Obligations shall include,
without being limited to, all amounts due or which may become due under said
Letters of Credit, guarantees or any drafts or acceptances thereunder, all
amounts charged or chargeable to you or to us by the Bank, other financial
institution or correspondent bank which opens, issues or is involved with
such Letter of Credit, any other bank charges; fees and commissions; duties
and taxes; costs of insurance; all such other charges and expenses which
1
<PAGE>
may pertain either directly or indirectly to such Letters of Credit, drafts,
acceptances, guarantees or to the goods or documents relating thereto, and
our charges as herein provided. We shall have the right, at any time and
without notice to you, to charge your account on our books with the amount
of any and all such Obligations. Any debit balance which may exist at any
time or from time to time in your account shall be repayable to us on
demand and shall incur interest at the rate provided in the factoring or
financing agreement between us, as amended (herein the "Agreement"). All
Obligations are to be repaid to us solely in United States currency.
C. As security for the prompt payment in full of all of your present and future
indebtedness or obligations whether under the factoring or financing
agreement between us, any other agreement between us or otherwise, as well
as to secure the payment in full of all Obligations referred to herein, you
hereby pledge and grant to us a continuing general lien upon and security
interest in the following "Collateral", whether now owned or hereafter
acquired by you, wherever located, whether in transit or not: all presently
owned and hereafter acquired: (a) warehouse receipts, bills of lading,
shipping documents, documents of title, chattel paper and instruments, all
whether negotiable or not; (b) merchandise, inventory and goods which relate
to any of the foregoing or which are purchased from suppliers located
outside of the United States or its territories or which relate to letters
of credit opened through or with our assistance (whether for purchases from
domestic or foreign suppliers), and all additions thereto, substitutions
therefor and replacements thereof, in all stages of manufacture, process
or production--from raw materials through work-in-process to finished goods,
together with all goods and materials used or usable in manufacturing,
processing, packaging or shipping same, all wherever located and whether in
transit or not; and (c) cash and non-cash proceeds of any and all of the
foregoing, of whatever sort and however arising.
D. You warrant and represent that we have and shall have at all times a valid
and effective first and paramount lien on and security interest in all said
Collateral and that your title to said Collateral is unencumbered by any
other liens. You also warrant and represent that all sales of any goods or
inventory covered hereby shall be made by you in the ordinary course of
business and the accounts arising from such sales and proceeds thereof shall
be transferred and assigned to us pursuant to the Agreement; and you confirm
that our lien and security interest extends and attaches to those accounts
and proceeds. Further, you warrant and represent that all Letters of Credit
are being opened to cover actual purchases of goods and inventory solely for
your account, and said goods will not be sold or transferred, other than as
herein provided, without our specific prior written consent. You agree to
comply with the requirements of any and all laws in order to grant to us
and maintain in our favor, a valid first lien upon and security interest in
the Collateral and to do whatever we may request from time to time in order
to effect the purposes of this Agreement, including, but without limitation,
filing financing statements, keeping
2
<PAGE>
records and making reports on the Collateral to us, advising us of the
location of all Collateral, marking, labeling and segregating such Collateral
and obtaining any necessary agreements or waivers with regard to the
Collateral.
E. You unconditionally indemnify us and hold us harmless from any and all loss,
claim or liability arising from any transactions or occurrences relating to
Letters of Credit established or opened for your account, the Collateral
relating thereto and any drafts or acceptances thereunder, and all
Obligations hereunder, including any such loss or claim due to any action
taken by any Bank. You further agree to hold us harmless for any errors
or omission, whether caused by us, by the Bank or otherwise. Your
unconditional obligation to us hereunder shall not be modified or diminished
for any reason or in any manner whatsoever. You agree that any charges made
to us for your account by the Bank shall be conclusive on us and may be
charged to your account.
F. We shall not be responsible for: The existence, character, quality,
quantity, condition, packing, value or delivery of the goods purporting to
be represented by any documents; any difference or variation in the
character, quality, quantity, condition, packing value or delivery of the
goods from that expressed in the documents; the validity, sufficiency or
genuineness of any documents or of any endorsements thereon, even if such
documents should in fact prove to be in any or all respects invalid,
insufficient, fraudulent or forged; the time, place, manner or order in which
shipment is made; partial or incomplete shipment, or failure or omission to
ship any or all of the goods referred to in the Letters of Credit or
documents; any deviation from instructions; delay, default, or fraud by the
shipper and/or anyone else in connection with the Collateral or the shipping
thereof; or any breach of contract between the shipper or vendors and
yourselves. Furthermore, without being limited by the foregoing, we shall
not be responsible for any act or omission with respect to or in connection
with any Collateral.
G. You agree that any action taken by us, if taken in good faith, or any action
taken by any Bank, under or in connection with the Letters of Credit, the
guarantees, the drafts or acceptances, or the Collateral, shall be binding on
you and shall not put us in any resulting liability to you. In furtherance
thereof, we shall have the full right and authority to clear and resolve any
questions of non-compliance of documents; to give any instructions as to
acceptance or rejection of any documents or goods; to execute any and all
steamship or airway guarantees (and applications therefor), indemnities or
delivery orders; to grant any extensions of the maturity of, time of payment
for, or time of presentation of, any drafts, acceptances, or documents; and
to agree to any amendments, renewals, extensions, modifications, changes or
cancellations of any of the terms or conditions of any of the applications,
Letters of Credit, drafts or acceptances; all in our sole name, and the Bank
shall be entitled to comply with and
3
<PAGE>
honor any and all such documents or instruments executed by or received
solely from us, all without any notice to or any consent from you.
H. Without our express consent and endorsement in writing, you agree not to
clear and resolve any questions of non-compliance of documents; to give any
instructions as to acceptance or rejection of any documents or goods; to
execute any and all applications for steamship or airway guarantees,
indemnities or delivery orders; to grant any extensions of the maturity of,
time of payment for, or time of presentation of, any drafts, acceptances or
documents; or to agree to any amendments, renewals, extensions,
modifications, changes or cancellations of any of the terms or conditions of
any of the applications, Letters of Credit, drafts or acceptances.
I. You agree that any necessary import, export or other licenses or certificates
for the import or handling of the Collateral will have been promptly
procured; all foreign and domestic governmental laws and regulations in
regard to the shipment and importation of the Collateral, or the financing
thereof will have been promptly and fully complied with; and any certificates
in that regard that we may at any time request will be promptly furnished.
In this connection, you warrant and represent that all shipments made under
any such Letters of Credit are in accordance with the governmental laws and
regulations of the countries in which the shipments originate and terminate,
and are not prohibited by any such laws and regulations. You assume all
risk, liability and responsibility for, and agree to pay and discharge, all
present and future local, state, federal or foreign taxes, duties, or levies.
Any embargo, restrictions, laws, customs or regulations of any country,
state, city, or other political subdivision, where the Collateral is or may
be located, or wherein payments are to be made, or wherein drafts may be
drawn, negotiated, accepted, or paid, shall be solely your risk, liability
and responsibility.
J. Any rights, remedies, duties or obligations granted or undertaken by you to
any Bank in any application for Letters of Credit, or any standing agreement
relating to Letters of Credit or otherwise, shall be deemed to have been
granted to us and apply in all respects to us and shall be in addition to
any rights, remedies, duties or obligations contained herein.
K. You hereby agree that prior to your repayment of all indebtedness and
Obligations to us, we may be deemed to be the absolute owner of, with
unqualified rights to possession and disposition of, all Collateral, all of
which may be held by us as security as herein provided. Should possession of
any such Collateral be transferred to you, it shall continue to serve, as
security as herein provided, and any goods or inventory covered hereby may be
sold, transferred or disposed of only as herein above provided.
4
<PAGE>
L. You agree to maintain insurance on the Collateral under such policies of
insurance, with such insurance companies, in such amounts and covering such
risks as are at all times satisfactory to us, but at your expense. All
policies covering the Collateral are to be made payable to us in case of
loss, under a standard non-contributory "mortgagee", "lender's" or "secured
party" clause and are to contain such other provisions as we may require to
fully protect our interests in the Collateral and to any payments to be
made under such policies, and all proceeds of such policies are hereby
assigned to us. All policies are to be delivered to us, premium prepaid;
and shall provide for not less than ten days prior written notice to us of
the exercise of any right of cancellation. We shall have the sole right, in
our own name or your name, to file claims under any such insurance policies
and to deal with and handle such claims and any payments thereunder in all
respects.
M. On breach by you of any of the terms or provisions of this agreement, the
Agreement or any other agreement or arrangement now or hereafter entered into
between us, or on the nonpayment when due of any Obligations or other
indebtedness owing to us by you, whether or not the Agreement shall continue,
or upon your general failure to pay your debts when due, or upon your making
a general assignment for the benefit of creditors or upon there being filed
by or against you a petition in bankruptcy or for the appointment of a
receiver or there is commenced under any bankruptcy or insolvency law
proceedings for your relief or for the composition, extension, arrangement
or adjustment of any of your obligations, or your business is discontinued as
a going concern, we shall have the right, with or without notice to you, to
foreclose the lien and security interest created herein by any available
judicial procedure, or to take possession of the Collateral without judicial
process, and to enter any premises where the Collateral may be located for
the purpose of taking possession of or removing the Collateral. We shall
have the right to sell, lease, or otherwise dispose of all or any part of the
Collateral, whether the goods have arrived or are to arrive, in its then
condition or after further preparation or processing, in your name or in
ours, or in the name of such party as we may designate, either at public or
private sale or at any broker's board, in lots or in bulk, for cash or for
credit, with or without warranties or representations, and upon such other
terms and conditions as we in our sole discretion may deem advisable, and we
shall have the right to purchase at any such sale. You agree, at our
request, to assemble the Collateral and to make it available to us at places
which we shall select, whether at your premises or elsewhere, and to make
available to us all of your premises and facilities for the purpose of our
taking possession of, removing or putting the Collateral in saleable form.
The proceeds of any such sale, lease or other disposition of the Collateral
shall be applied first, to the expenses of retaking, holding, storing,
processing and preparing for sale, selling, and the like, and then to the
satisfaction of your Obligations or other indebtedness to us, application as
to particular Obligations or as to principal or interest to be in our
absolute and sole discretion. You shall be liable to us for, and shall pay
to us on demand, any deficiency which
5
<PAGE>
may remain after such sale, lease, or other disposition, and we in turn agree
to remit to you any surplus resulting therefrom. We shall have all rights
of a secured party under the Uniform Commercial Code. The enumeration of the
foregoing rights is not intended to be exhaustive and the exercise of any
right shall not preclude the exercise of any other rights all of which shall
be cumulative.
N. Any charges, fees, commissions, costs and expenses charged to us for your
account by any Bank in connection with or arising out of Letters of Credit
issued pursuant hereto or out of transactions relating thereto will be
charged to your account in full as received by us and when made by any such
Bank shall be conclusive on us. In addition to the amounts charged to your
account pursuant to the preceding sentence, for our services hereunder we
shall be entitled to our service fees which shall be computed and charged to
your account as follows:
[SEE LETTER OF CREDIT FEE SCHEDULE]
6
<PAGE>
This agreement, which is subject to modification only in writing,
is supplementary to and is to be considered as a part of, the Agreement. If
the foregoing is in accordance with your understanding, please so indicate by
signing and returning the enclosed copy of this letter.
Very truly yours,
THE CIT GROUP/COMMERCIAL SERVICES, INC.
By
---------------------------------
Name:
Title:
Read and Agreed to:
STAGE II APPAREL CORP.
By
------------------------
Name:
Title:
7
<PAGE>
SCHEDULE A
IMPORT LETTER OF CREDIT FEE SCHEDULE
<TABLE>
<CAPTION>
Transaction Fee Minimum
- ----------- --- -------
<S> <C> <C>
Issuance 1/4% of face amount $70.00
Plus: Processing Fee $70.00
Cable Fee $35.00
Amendments
L/C Amount Increase 1/4 of the increased amount
Plus: Processing Fee
First four amendments $75.00
After fourth $95.00
Guarantees $40.00
Plus: Processing Fee $40.00
Discrepancies $40.00
Cancellations $40.00
Unutilized L/C Fee $50.00
Monthly Commissions 1/4% Per Month on
Average Balance $100.00
Payments
Sight $20.00 plus 1/8% of draft amount $55.00
</TABLE>
8
<PAGE>
EXHIBIT 10.4
Stage II Apparel Corp.
1998 NONQUALIFIED STOCK OPTION PLAN-A
OPTION AGREEMENT
OPTION AGREEMENT dated as of May 11, 1998 (the "Effective Date") between
Stage II Apparel Corp., a New York corporation (the "Company"), and the
undersigned option holder (the "Optionee").
In consideration of the services to be rendered to the Company by the
Optionee and to provide the Optionee with a greater interest as a shareholder
in the success of the Company, the Compensation Committee (the "Committee")
of the Board of Directors of the Company (the "Board") has granted to the
Optionee an option to purchase shares of SA Common in accordance with the
provisions of the Company's 1998 Nonqualified Stock Option Plan-A (the
"Plan"). Accordingly, the parties hereto agree as follows.
1 Grant of Option. The Company, by action of the Committee, hereby grants
to the Optionee the right and option (the "Option") to purchase the number of
shares of SA Common (the "Option Shares") at the exercise prices and during
the periods set forth below:
<TABLE>
<CAPTION>
Vesting Date-- Expiration Date--
Option Shares Subject Years After Exercise Years After
Series To Option Effective Date Price Effective Date
- ------ --------- -------------- -------- ---------------
<S> <C> <C> <C> <C>
A 300,000 One $.75 Five
B 300,000 Two $.75 Six
C 300,000 Three $.75 Seven
</TABLE>
2 Exercise of Option.
(1) At any time after a vesting date set forth in Section 1, the vested
portion of the Option shall be exercisable in whole or in part until the
expiration date for that Option Series set forth in Section 1. Each Option
Series shall be subject to accelerated vesting pursuant to Section 7 of the
Plan.
(2) To the extent vested, the Option may be exercised by the Optionee
delivering to the Company a written notice (an "Exercise Notice") signed by
the Optionee stating the number of Option Shares that the Optionee has
elected to purchase and accompanied by payment (in the form prescribed by
Section 9 of the Plan) of an amount equal to the full purchase price for the
Shares to be purchased. Following receipt by the Company of the Exercise
Notice and full
<PAGE>
payment of the purchase price for the Option Shares covered thereby, the
Company shall instruct its transfer agent to issue, as soon as practicable, a
certificate representing the Option Shares so purchased in the name of the
Optionee or any nominee designated in the Exercise Notice and to deliver the
certificate to the Optionee or any designated nominee.
3 Non-Transferability of Option. The Option is not be transferable other
than by will or by the laws of descent and distribution and may be exercised
during the Optionee's lifetime only by the Optionee.
4 Incorporation of Plan. The Option is subject to, and governed by, the
terms and conditions of the Plan, which are hereby incorporated by reference.
This Agreement, including the Plan incorporated by reference herein, is the
entire agreement among the parties with respect to the subject matter and
supersedes all prior agreements and understandings.
5 Governing Law. This Agreement, as well as the grant of the Option and
issuance of the Shares, shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
STAGE II APPAREL CORP.
By:__________S/_____________________
Jack Clark, Chairman
Optionee:
_____________S/_____________________
Richard Siskind
<PAGE>
EXHIBIT 10.5
Stage II Apparel Corp.
1998 NONQUALIFIED STOCK OPTION PLAN-B
OPTION AGREEMENT
OPTION AGREEMENT dated as of May 11, 1998 (the "Effective Date") between
Stage II Apparel Corp., a New York corporation (the "Company"), and the
undersigned option holder (the "Participant").
In consideration for the services rendered to the Company by the
Participant and to provide the Participant with a greater interest as a
shareholder in the success of the Company, the Compensation Committee (the
"Committee") of the Board of Directors of the Company (the "Board") has
granted to the Participant an option to purchase shares of the Company's
common stock, $.01 par value ("SA Common"), in accordance with the provisions
of the Company's 1998 Nonqualified Stock Option Plan B (the "Plan"). The
Options are exercisable only to the extent that options granted by the
Participant (the "RS Options") to Jack Clark ("JC"), Robert Plotkin ("RP"),
and Steven Clark ("SC") to purchase up to 1,500,000 shares of SA Common are
exercised by them. Accordingly, the parties hereto agree as follows.
1 Grant of Option. The Company, by action of the Committee, has granted to
the Participant in three series (each an "Option Series") the right and
option (the "Option") to purchase the number of shares of SA Common (the
"Option Shares") in three series (each an "Option Series") at the exercise
prices and during the periods set forth below:
<TABLE>
<CAPTION>
Vesting Date-- Expiration Date--
Option Shares Subject Years After Exercise Years After
Series To Option Effective Date Price Effective Date
- ------ -------------- -------------- -------- -----------------
<S> <C> <C> <C> <C>
A 500,000 One $ .50 Five
B 500,000 Two 1.00 Six
C 500,000 Three 1.50 Seven
</TABLE>
2 Exercise of Option.
(1) At any time after a vesting date set forth in Section 1, the vested
portion of the Option shall be exercisable in whole or in part until the
expiration date for that Option Series set forth in Section 1, but only to
the extent that RS Options are exercised by JC, RP or SC. Each Option Series
shall be subject to accelerated vesting pursuant to Section 7 of the Plan.
(2) To the extent vested, the Option may be exercised by the
Participant delivering to the Company a written notice (an "Exercise Notice")
signed by the Participant stating the number of RS Options that have been
exercised by JC, RP or SC, and the number of Option
<PAGE>
Shares that the Participant has elected to purchase and accompanied by
payment in the form prescribed by Section 9 of the Plan of an amount equal to
the full purchase price for the Option Shares to be purchased. Following
receipt by the Company of the Exercise Notice and full payment of the
purchase price for the Option Shares covered thereby, the Company shall
instruct its transfer agent to issue, as soon as practicable, a certificate
representing the Option Shares so purchased in the name of the Participant or
any nominee designated in the Exercise Notice and to deliver the certificate
to the Participant or any designated nominee.
3 Non-Transferability of Option. The Option is not be transferable other
than by will or by the laws of descent and distribution and may be exercised
during the Participant's lifetime only by the Participant.
4 Incorporation of Plan. The Option is subject to, and governed by, the
terms and conditions of the Plan, which are hereby incorporated by reference.
This Agreement, including the Plan incorporated by reference herein, is the
entire agreement among the parties with respect to the subject matter and
supersedes all prior agreements and understandings.
5 Governing Law. This Agreement, as well as the grant of the Option and
issuance of the Shares, shall be governed by and construed in accordance with
the laws of the State of New York.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
STAGE II APPAREL CORP.
By:____________S/___________________
Jack Clark, Chairman
PARTICIPANT:
_______________S/___________________
Richard Siskind
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
Quarterly Report on Form 10-Q of Stage II Apparel Corp. for the quarter ended
March 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,209
<SECURITIES> 3,334
<RECEIVABLES> 560
<ALLOWANCES> 0
<INVENTORY> 3,049
<CURRENT-ASSETS> 5,057
<PP&E> 467
<DEPRECIATION> 7,687
<TOTAL-ASSETS> 11,586
<CURRENT-LIABILITIES> 6,966
<BONDS> 0
0
0
<COMMON> 7,552
<OTHER-SE> (595)
<TOTAL-LIABILITY-AND-EQUITY> 11,586
<SALES> 1,855
<TOTAL-REVENUES> 1,996
<CGS> 1,437
<TOTAL-COSTS> 2,475
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 213
<INCOME-PRETAX> (692)
<INCOME-TAX> 0
<INCOME-CONTINUING> (692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (692)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
