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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 SEPTEMBER 30, 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.)
1385 BROADWAY
NEW YORK, NEW YORK 10018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (212) 840-0880
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
TITLE OF CLASS OUTSTANDING AT OCTOBER 31, 1998
Common Stock 3,903,267
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STAGE II APPAREL CORP.
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Condensed Consolidated Balance Sheets - September 30, 1998
(unaudited) and December 31, 1997 2
Condensed Consolidated Statements of Operations - Three Months
and Nine Months Ended September 30, 1998 and 1997 (unaudited) 3
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997 (unaudited) 4
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II. OTHER INFORMATION 10
1
<PAGE>
PART I. FINANCIAL INFORMATION
STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
SEPT. 30, DEC. 31,
1998 1997
-------- --------
(UNAUDITED)
ASSETS:
Cash and cash equivalents $ 1,354 $ 641
Restricted cash --- 679
Accounts receivable 573 496
Finished goods inventory 4,027 2,496
Prepaid expenses 147 214
Prepaid income taxes and refunds receivable 30 30
-------- --------
Total current assets 6,131 4,556
Property and equipment, at cost, less
accumulated depreciation 112 500
Marketable securities 3,012 3,325
Goodwill, less accumulated amortization and
impairment of $7,752 at September 30, 1998
and $7,654 at December 31, 1997,
respectively 1,862 1,960
Other assets
508 837
-------- --------
TOTAL ASSETS $ 11,625 $ 11,178
======== ========
LIABILITIES:
Due to factor $7,214 $4,650
Accounts payable 720 850
Accrued royalties 40 78
Other current liabilities 99 273
Total current liabilities 8,073 5,851
Long term liabilities --- ---
-------- --------
TOTAL LIABILITIES 8,073 5,851
-------- --------
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 September 30, 1998
and December 31, 1997 50 50
Additional paid-in capital 7,502 7,502
Retained earnings (deficit) (1,698) 97
-------- --------
5,854 7,649
Less treasury stock, at cost; 1,089 shares at
September 30, 1998 and December 31, 1997 (2,302) (2,302)
Allowance for decline in market value of
securities available for sale --- (20)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 3,552 5,327
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,625 $ 11,178
======== ========
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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 4,130 $ 5,718 $ 7,638 $ 12,133
Cost of goods sold 3,038 4,423 5,694 9,861
-------- -------- -------- --------
Gross profit 1,092 1,295 1,944 2,272
Commission and other income 96 318 202 513
-------- -------- -------- --------
1,188 1,613 2,146 2,785
Selling, general and administrative expenses 765 1,437 2,717 4,859
Loss on lease cancellation 561 --- 561 ---
-------- -------- -------- --------
Operating income (loss) (138) 176 (1,132) (2,074)
Other income (expenses):
Interest income and other expenses (9) 73 100 211
Interest and factoring expenses (274) (321) (712) (679)
Loss on sale of marketable securities --- --- --- (285)
-------- -------- -------- --------
Loss from continuing operations before
income taxes (benefit) (421) (72) (1,744) (2,827)
Income taxes (benefit) 51 --- 51 (9)
-------- -------- -------- --------
Loss from continuing operations (472) (72) (1,795) (2,818)
Extraordinary item -- gain on extinguishment of debt --- 205 --- 205
Discontinued operations:
Gain on disposal of discontinued subsidiary --- --- --- 290
-------- -------- -------- --------
Net income (loss) $ (472) $ 133 $ (1,795) $ (2,323)
======== ======== ======== ========
Basic and dilutive net loss per common share:
Income (loss) from continuing operations (.12) (.02) (.46) (.67)
Extraordinary item -- extinguishment of debt --- .05 --- .05
Gain from discontinued operations --- --- --- .07
-------- -------- -------- --------
$ (.12) $ .03 $ (.46) $ (.55)
======== ======== ======== ========
Weighted average common shares outstanding 3,903 4,174 3,903 4,187
======== ======== ======== ========
</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>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
Net cash used in operating activities $ (2,111) $ (1,862)
INVESTING ACTIVITIES:
Purchase and sale of property and equipment, net --- (46)
Sale or redemption of available for sale marketable securities 260 6,219
Net cash provided by investing activities 260 6,173
--------- ---------
FINANCING ACTIVITIES:
Factor financing, net 2,564 (1,976)
Repayment of notes --- (970)
Purchase of treasury stock --- (204)
Bank financing, net --- (434)
--------- ---------
Net cash provided by (used in) financing activities 2,564 (3,584)
--------- ---------
Effects of exchange rate changes on cash --- (40)
--------- ---------
Net increase (decrease) in cash 713 687
Cash at beginning of year 641 429
--------- ---------
Cash at end of period $ 1,354 $ 1,116
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes $ 51 $ 10
========= =========
Cash paid for interest, excluding factoring fees $ 502 $ 501
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
STAGE II APPAREL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION -- The accompanying unaudited condensed
consolidated financial statements of Stage II Apparel Corp. (the "Company") have
been prepared in accordance with generally accepted accounting principles and,
in the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary to fairly present the Company's financial
position at September 30, 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"). Pursuant to the Purchase Agreement, Mr.
Siskind acquired approximately 1.9 million shares (the "Control Shares") of the
Company's common stock from the Founders 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 "Founder
Options"). 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 the Company and the reconstitution of the
Company's board of directors with his designees. In July 1998, Founder Options
for 1.35 million Control Shares were acquired from the Founders by Jon Siskind,
an officer and director of the Company.
NOTE 4. NEW CREDIT FACILITY -- In connection with 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 prior facility. The Credit Facility provides for the
factor to purchase 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
purchased from 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 and for short term borrowings at a
floating interest rate equal to 1/2% above the prime rate. The Company's
obligations under the Credit Agreement are payable upon demand and secured by
its inventory, accounts receivable and marketable securities. 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.
NOTE 5. OFFICE RELOCATION -- In July 1998, the Company obtained a
cancellation of its New York City office lease, which covered 10,800 square feet
for a term through 2006 at an average annual rent of $343,000 plus electricity,
taxes and expense escalations. The lease cancellation was effective as of July
15, 1998, subject to payment of a $325,000 cancellation fee in four installments
through October 1, 1998. In connection with the cancellation, the Company
relocated its administrative and sales offices to 1385 Broadway, New York, New
York, where it obtained leases for 3,000 square feet through 2003 at a total
annual cost of approximately $80,000, representing an annual savings to the
Company over $330,000.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Stage II Apparel Corp. (the "Company" or "Stage II") designs and
distributes an extensive range of men's and boy's casual apparel, activewear and
collection sportswear. 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 and the ADOLFO brand in 1998. 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 SG&A expenses 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 reported an additional loss of $1.8 million in the first
nine months of 1998, the success of its cost cutting program contributed to a
return to profitable operations in the third quarter of 1998 before giving
effect to lease cancellation, relocation and other nonrecurring or noncash
expenses recognized in the quarter. See "Recent Developments--Office
Relocation."
RECENT DEVELOPMENTS
TURNAROUND STRATEGY. 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 $9.3
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
tightened its inventory control, improved its sourcing arrangements, added new
commission sales personnel and realigned management to focus on its core product
lines.
CHANGE OF CONTROL. To implement its turnaround strategy, Stage II entered
into a stock purchase agreement (the "Purchase Agreement") in February 1998 with
three of its founders (the "Founders") and Richard Siskind, 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 million
Control Shares from Mr. Siskind at exercise prices ranging from $.50 to $1.50
per share (the "Founders
6
<PAGE>
Options"). The Control Shares represent 48.7% of the Common Stock outstanding
as of the date of this Report. In July 1998, Founder Options for 1.35 million
Control Shares were acquired from the Founders by Jon Siskind, an officer and
director of the Company.
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 Richard 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 of 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 were approved by the shareholders of
the Company at its 1998 annual meeting.
OFFICE RELOCATION. In July 1998, Stage II obtained a cancellation of its
office lease at 350 Fifth Avenue in New York City and relocated its
administrative and sales offices to 1385 Broadway, New York, New York. The
cancelled lease covered 10,800 square feet for a term through 2006 at an average
annual rent of $343,000 plus electricity, taxes and expense escalations. In the
absence of the cancellation, the Company's estimated future obligations under
the lease would have aggregated approximately $4 million. The lease
cancellation was effective as of July 15, 1998, subject to payment of a $325,000
cancellation fee in four installments through October 1, 1998. These fees and
related relocation costs aggregating $561,000 were recognized in the third
quarter of 1998, contributing to the Company's reported net loss for the
quarter. The new lease arrangements cover 3,000 square feet through 2003 at a
total annual cost of approximately $80,000. This represents an annual savings
to the Company over $330,000 and positions Stage II for an anticipated return to
profitability in 1999.
NEW ADOLFO LICENSE. In August 1998, the Company added exclusive ADOLFO
licenses for two separate apparel lines. The first includes mens activewear and
leisure lifestyle apparel. The second features an upscale collection of mens
knitwear, sweaters and woven shirts. Both lines will be targeted for
department, sporting goods and specialty stores. The licenses run for
three-year terms with extension rights through December 2009. The ADOLFO
Collection marks the Company's initial success in trading up to more upscale
brands identified with higher quality markets, while the activewear license
provides an opportunity to expand recognition for this brand within the
Company's existing customer base. Stage II expects to allocate substantial
resources to build the new lines and believes the favorable terms of the
license, coupled with the other components of its turnaround strategy, will
contribute to the planned rebuilding of its core business. Sales of the new
ADOLFO lines will start for the Spring season, adding to the Company's revenue
base beginning in the first quarter of 1999.
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.
7
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QUARTERLY NET SALES
(IN THOUSANDS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- --------
1998 $ 1,855 $ 1,653 $ 4,130 $ --- $ ---
1997 4,067 2,348 5,718 4,414 16,547
1996 8,437 5,693 10,397 8,901 33,428
QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997. Net sales of $4.1 million for
the third quarter of 1998 decreased by 27.8% from $5.7 million in the
corresponding quarter of 1997. The decrease primarily reflects the termination
of unprofitable apparel divisions as part of the planned reduction in the scope
of operations, as well as the elimination of lower margin customer accounts with
a longer term view of strengthening gross profits.
Cost of goods sold as a percentage of sales decreased to 73.6% in the third
quarter of 1998 compared to 77.4% in the same quarter last year. The decrease
reflects improved arrangements with new manufacturing sources, higher gross
profit margins on the Company's revamped apparel lines, greater concentration on
core customer accounts and tighter inventory controls.
Commission and other income decreased by $222,000 or 69.8% during the third
quarter of 1998 compared to the corresponding prior quarter, reflecting a
reduction in the Company's sales agency business.
SG&A expenses of $765,000 for the third quarter of 1998 decreased by 46.8%
compared to $1.4 million for the corresponding quarter least year, primarily
attributable to a reduction in variable costs associated with lower sales
volumes and a cost cutting plan adopted as part of the Company's redirection of
its business.. SG&A expenses for the current quarter include various
nonrecurring items and a noncash writedown of accounts receivable totaling
$145,000 and $64,000, respectively. Before accounting for these items, SG&A
expenses as a percentage of sales decreased to 13.5% compared to 25.1% in the
third quarter of 1997. The Company anticipates a continuation in this trend as
a result of an estimated $330,000 in annual savings from its office relocation
in July 1998 and other cost cutting measures adopted by new management following
the Change of Control Transactions,.
Stage II recognized a loss on lease cancellation totaling $561,000 in the
third quarter of 1998 resulting from a cancellation fee for the termination of
its prior office lease and related relocation expenses. The Company expects to
achieve long term benefits more than offsetting these nonrecurring expenses from
substantial saving over the term of its new office lease. See "Recent
Developments--Office Relocation."
Interest and factoring expenses aggregated $274,000 or 6.6% of sales in the
third quarter of 1998 compared to $321,000 or 5.6% of sales in the corresponding
quarter last year. The increase reflects higher borrowing levels in the current
period. See "Liquidity and Capital Resources" below.
The Company recognized a net loss of $472,000 or $.12 per share based on
3,903,000 average common shares outstanding in the third quarter of 1998,
compared to net income of $133,000 or $.03 per share based on 4,174,000 average
common shares outstanding in the corresponding quarter of 1997, reflecting the
foregoing trends. Operating results for the third quarter of 1998 were
adversely affected by lease cancellation and relocation costs of $561,000 and
various nonrecurring or noncash SG&A expenses aggregating $209,000 recognized in
the quarter and were aided in the 1997 interim period by an extraordinary gain
of $205,000 on the extinguishment of debt in connection with a litigation
settlement.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997. Net sales of $7.6 million
for the nine months ended September 30, 1998 decreased by 37.0% from $12.1
million in the corresponding period in 1997. The decrease
8
<PAGE>
primarily reflects the termination of unprofitable apparel divisions as part of
the planned reduction in the scope of operations, as well as the elimination of
lower margin customer accounts with a longer term view of strengthening gross
profits. The decline in net sales for the interim period in 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 74.5% in the first
nine months of 1998 compared to 81.3% in the same period last year. The
decrease reflects improved arrangements with new manufacturing sources, higher
gross profit margins on the Company's revamped apparel lines, greater
concentration on core customer accounts and tighter inventory controls.
Commission and other income decreased by $311,000 or 60.6% during the first
nine months of 1998 compared to the corresponding prior period, reflecting a
decline in the Company's sales agency business.
SG&A expenses of $2.7 million for the first nine months of 1998 decreased
by 44.1% compared to $4.9 million for the corresponding period in 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 of sales increased to 35.6% for the
first nine months of 1998 compared to 40.0% in the corresponding prior period,
reflecting the Company's ability to reduce fixed SG&A expenses at a greater rate
than the decline in sales.
Stage II recognized a loss on lease cancellation totaling $561,000 in the
third quarter of 1998 resulting from a cancellation fee for the termination of
its prior office lease and related relocation expenses. The Company expects to
achieve long term benefits more than offsetting these nonrecurring expenses from
substantial saving over the term of its new office lease. See "Recent
Developments--Office Relocation."
Interest and factoring expenses aggregated $712,000 or 9.3% of sales in the
nine months of 1998 compared to $679,000 or 5.6% of sales in the corresponding
quarter last year. The increase reflects higher borrowing levels and
nonrecurring refinancing costs. See "Liquidity and Capital Resources" below.
The Company recognized net losses of $1.8 million or $.46 per share based
on 3,903,000 average common shares outstanding in the first nine months of 1998
and $2.3 million or $.55 per share based on 4,187,000 average common shares
outstanding in the corresponding period in 1997, reflecting the foregoing
trends.
The results of operations for the quarter and nine months ended September
30, 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 nine months of 1998 aggregated $2.1 million. Primarily as a result of
factor financing aggregating $2.6 million, the Company's cash position increased
from $.6 million at December 31, 1997 to $1.4 million at September 30, 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 the factor to purchase 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
9
<PAGE>
responsible for the accounting and collection of all accounts receivable sold to
it by the Company. The factor received a commission under the Prior Credit
Facility in an amount less than 1% of the net receivables it purchased. The
Prior Credit Facility also provided for the issuance of letters of credit to
fund the Company's foreign manufacturing orders and for short term borrowings at
a floating interest rate equal to 1/2% above the prime rate. The Company's
obligations under the Prior Credit Facility were payable on demand and secured
by its inventory, accounts receivable and marketable securities. The aggregate
amount of letters of credit and borrowings available under the Prior Credit
Facility were determined from time to time by the factor based upon the
Company's financing requirements and financial performance.
In connection with 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 the Prior
Credit 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. As of September 30, 1998, the Company's net direct borrowings under the
Credit Facility aggregated $7.2 million.
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 September 30, 1998, the Company had no material capital
expenditure requirements.
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. None
(b) REPORTS ON FORM 8-K. The Company filed a Current Report on Form 8-K
dated July 15, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STAGE II APPAREL CORP.
Date: November 11, 1998 By: /s/ Richard Siskind
------------------------
Richard Siskind
Chief Executive Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,354
<SECURITIES> 3,012
<RECEIVABLES> 573
<ALLOWANCES> 0
<INVENTORY> 4,027
<CURRENT-ASSETS> 8,131
<PP&E> 112
<DEPRECIATION> 7,752
<TOTAL-ASSETS> 11,625
<CURRENT-LIABILITIES> 8,073
<BONDS> 0
0
0
<COMMON> 7,552
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 11,625
<SALES> 7,638
<TOTAL-REVENUES> 7,940
<CGS> 5,694
<TOTAL-COSTS> 8,411
<OTHER-EXPENSES> 561
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 712
<INCOME-PRETAX> (1,744)
<INCOME-TAX> 51
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</TABLE>
