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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, 1999 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 APRIL 15, 1999
Common Stock 3,903,267
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STAGE II APPAREL CORP.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------- ----
<S> <C>
Condensed Consolidated Balance Sheets - March 31, 1999 (unaudited) and December 31, 1998 . 2
Condensed Consolidated Statements of Operations -- Three Months Ended
March 31, 1999 and 1998 (unaudited) ...................................................... 3
Consolidated Statements of Comprehensive Income (Loss) -- Three Months Ended
March 31, 1999 and 1998 (unaudited) ...................................................... 4
Condensed Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 1999 and 1998 (unaudited) ...................................................... 5
Notes to Condensed Consolidated Financial Statements ..................................... 6
Management's Discussion and Analysis of Financial Condition and Results of Operations .... 7
PART II. OTHER INFORMATION ............................................................... 10
</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,
1999 1998
------- -------
<S> <C> <C>
ASSETS: (UNAUDITED)
Current assets:
Cash and cash equivalents ............................................... $ 994 $ 992
Accounts receivable ..................................................... 89 103
Finished goods inventory ................................................ 2,764 2,855
Prepaid expenses ........................................................ 88 54
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Total current assets .................................................. 3,935 4,004
Property and equipment, at cost, less accumulated depreciation ........... 68 86
Marketable securities .................................................... 376 388
Goodwill, less accumulated amortization and impairment of $7,863 at
March 31, 1999 and $7,821 at December 31, 1998, respectively ............ 1,751 1,793
Other assets ............................................................. 525 529
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TOTAL ASSETS ............................................................ $ 6,655 $ 6,800
======= =======
LIABILITIES:
Current liabilities:
Due to factor ........................................................... $ 2,786 $ 2,331
Accounts payable ........................................................ 416 1,031
Due to affiliate ........................................................ 19 26
Accrued royalties ....................................................... 118 80
Other current liabilities ............................................... 274 301
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Total current liabilities ............................................. 3,613 3,769
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TOTAL LIABILITIES ......................................................... 3,613 3,769
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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 3,904 shares outstanding at March 31, 1999 and December 31, 1998 .... 50 50
Additional paid-in capital ............................................... 7,502 7,502
Accumulated deficit ...................................................... (2,210) (2,221)
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5,342 5,331
Less treasury stock, at cost; 1,089 shares at March 31, 1999 and
December 31, 1998 ....................................................... (2,302) (2,302)
Accumulated other comprehensive income ................................... 2 2
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TOTAL SHAREHOLDERS= EQUITY .............................................. 3,042 3,031
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TOTAL LIABILITIES AND SHAREHOLDERS= EQUITY ............................... $ 6,655 $ 6,800
======= =======
</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,
-------------------
1999 1998
<S> <C> <C>
Net sales .............................................. $ 1,591 $ 1,855
Cost of goods sold ..................................... 1,076 1,437
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Gross profit ........................................... 515 418
Commission and other income ............................ 29 68
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544 486
Selling, general and administrative expenses ........... 432 1,038
------- -------
Operating income (loss) ................................ 112 (552)
Other income (expenses):
Interest income ...................................... 15 73
Interest and factoring expenses ...................... (116) (213)
------- -------
Net income (loss) ...................................... $ 11 $ (692)
======= =======
Basic and dilutive net income (loss) per common share .. $ .00 $ (.18)
======= =======
Weighted average common shares outstanding ............. 3,904 3,904
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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STAGE II APPAREL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Net income (loss) ................................................ $11 $(692)
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities, net of taxes -- (15)
--- -----
Comprehensive income (loss) ...................................... $11 $(707)
=== =====
</TABLE>
See Notes to Consolidated Financial Statements.
4
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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,
------------------
1999 1998
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<S> <C> <C>
Net cash used in operating activities .................. $(453) $(1,550)
FINANCING ACTIVITIES:
Factor financing, net ................................ 455 1,425
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Net cash provided by financing activities .............. 455 1,425
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Net increase (decrease) in cash and cash equivalents ... 2 (125)
Cash and cash equivalents at beginning of year ......... 992 641
----- -------
Cash and cash equivalents at end of period ............. $ 994 $ 516
===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes ........................... $ 2 $ 2
===== =======
Cash paid for interest, excluding factoring fees ..... $ 83 $ 124
===== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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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, 1999 and its
results of operations, comprehensive income (loss) 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, 1998 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. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, REPORTING COMPREHENSIVE INCOME ("FAS 130").
FAS 130 establishes standards for reporting and display of comprehensive income
and its components in financial statements. Appropriate items in the
accompanying consolidated financial statements for the quarter ended March 31,
1998 have been reclassified to conform to the provisions of FAS 130.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
GENERAL. Stage II Apparel Corp. (the "Company" or "Stage II") designs and
distributes an extensive range of casual apparel, activewear and collection
sportswear for men and boys. The Company markets its apparel to sporting goods,
specialty and department 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 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 six 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 have been replaced with a new
exclusive license for the ADOLFO brand in 1998 and an increased emphasis on the
Company's own proprietary labels, primarily TIMBER RUN and, commencing in 1999,
the CROSS COLOURS trademark.
In general, the Company's licensed brand name apparel sells at a higher
price and with greater gross profit margins than comparable non-branded apparel.
These advantages are partially offset by royalty and advertising expenses
incurred in accordance with the Company's license agreements. These costs are
included in selling, general and administrative ("SG&A") expenses. The new
management team that joined the Company as part of a change of control
transaction in May 1998 (the "Change of Control Transaction") plans to add
apparel lines that retain the advantages of brand name recognition without the
high costs associated with Stage II's prior licenses.
TURNAROUND STRATEGY
Stage II incurred net losses in each year since 1994. To reverse this
trend, the Company's new management adopted a turnaround strategy that includes
the following components:
o INCREASING SALES -- by restructuring the Company's sales force by
division or brand name to promote a more highly motivated sales staff with a
deeper knowledge of each product line and targeted customer base
o INCREASING PROFIT MARGINS -- by reducing manufacturing inefficiencies,
with greater control of inventories, to lower the Company's cost of sales while
creating faster inventory turn, thereby avoiding unnecessary markdowns
o LOWERING FACTORING CHARGES -- by adding more stringent financial
controls with a view to reducing factoring charges and debt levels
o PROMOTING ADMINISTRATIVE EFFICIENCIES -- by continuing the cost cutting
efforts undertaken by prior management, but on a more aggressive basis where
appropriate, with a minimum objective of bringing overhead costs in line with
sales
o OPTIMIZING FINANCIAL EFFICIENCIES -- by prioritizing the collection of
accounts receivable and the management of returns and allowances
o INCREASING PRODUCTIVITY -- by reducing the Company's cost of management
below prior ratios as a percentage of sales while increasing organizational
efficiencies, with a greater use of stock options to offset substantial
reductions in salary levels.
Although the Company reported a loss of $2.3 million in 1998, the success
of its turnaround strategy implemented by new management contributed to a return
to profitable operations in the last two quarters of the year before giving
effect to lease cancellation and relocation expenses of $561,000, writeoffs of
accounts receivable and
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other noncash or nonrecurring items adding $209,000 to SG&A expenses in the
third quarter and $560,000 in the fourth quarter of 1998. For the three months
ended March 31, 1999, Stage II realized net income of $11,000 on net sales of
$1.6 million, marking the Company's first profitable quarter since the third
quarter of 1997.
RECENT DEVELOPMENTS
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
required a fee of $325,000 and was effective as of July 15, 1998. The fee and
related relocation costs and writeoffs of leasehold improvements aggregated
$561,000 and 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 contributed
to Stage II's return to profitability in the first quarter of 1999.
INTERNET SALES. In March 1999, Stage II launched a website on the Internet
for sales of its branded and proprietary apparel lines to retailers in the
United States. Over time, the facility is expected to enhance the Company's
visibility to the trade and provide a convenient sourcing tool to its customers.
If successful, it could also reduce the Company's dependence on commissioned
salesmen, resulting in higher gross profit margins. Initial sales on the website
were recorded in the first quarter of 1999.
PRODUCT INNOVATION. In March 1999, Stage II agreed to acquire the CROSS
COLOURS trademark, a pioneer brand in the early development of young men's urban
fashion. The brand was launched in 1989 and achieved rapid success in the early
1990s by creating a fresh new urban look in the youth fashion forward market.
The Company's strategy is to develop its own lines of CROSS COLOURS products
internally and license a wide variety of retail items to expand the availability
of lifestyle urban streetwear under this brand to a wider audience, targeting
mass merchandisers at price points below fashion forward levels. The Company's
planned licensing business will focus on kids= and juniors= activewear,
footwear, accessories and home products. The CROSS COLOURS licensing campaign is
expected to begin in the second 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.
Quarterly Net Sales
(In thousands)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
<S> <C> <C> <C> <C> <C>
1999 .............. $1,591 $ -- $ -- $ -- $ --
1998 .............. 1,855 1,653 4,130 2,229 9,867
1997 .............. 4,067 2,348 5,718 4,414 16,547
</TABLE>
8
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QUARTERS ENDED MARCH 31, 1999 AND 1998. Net sales of $1.6 million for the
first quarter of 1999 decreased by 14.2% from $1.9 million in the corresponding
quarter of 1998. 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 67.6% in the
first quarter of 1999 compared to 77.5% 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 $39,000 or 57.4% during the first
quarter of 1999 compared to the corresponding prior quarter, reflecting a
decline in the Company's sales agency business.
SG&A expenses of $432,000 for the first quarter of 1999 decreased by 58.4%
compared to $1.0 million for the first quarter of 1998, primarily attributable
to a cost cutting plan adopted as part of the Company's turnaround strategy. See
"Turnaround Strategy" above. As a percentage of sales, SG&A expenses were 27.2%
in the first quarter of 1999 compared to 56.0% in the same quarter last year.
Stage II 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
Transaction.
Interest and factoring expenses, net of interest income, aggregated
$101,000 or 6.4% of sales in the first quarter of 1999 compared to $140,000 or
7.5% of sales in the corresponding quarter last year. The decrease reflects a
slight reduction in borrowing levels.
The Company realized net income of $11,000 or $.00 per share in the first
quarter of 1999 compared to a net loss of $692,000 or $.18 per share in the
corresponding quarter of 1998, reflecting the foregoing trends. Average common
shares outstanding remained unchanged at 3,903,267 shares in both quarters.
The results of operations for the quarter ended March 31, 1999 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 1999 aggregated $453,000. The Company's cash position increased
from $992,000 at December 31, 1998 to $994,000 at March 31, 1999.
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. In 1998, the Company sold marketable securities
netting $3.0 million, all of which was used to reduce short term debt.
In connection with the Change of Control Transaction, Stage II obtained a
new factoring and credit facility with The CIT Group/Commercial Services, Inc.
(the "Credit Facility") to replace its prior credit facility. The agreements
covering the Credit Facility provide 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 sold to it by the Company. The factor
receives a commission under the Credit Facility in an amount less than 1% of the
net receivables it purchases. The agreements covering the Credit Facility also
provide 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 2% above the prime rate. The Company's obligations under the Credit
Facility are payable
9
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on 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. The
agreements covering the Credit Facility 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 March 31, 1999, the Company's net direct borrowings under the Credit
Facility aggregated $2.8 million. This reflects a reduction of $4.2 million from
mid-year 1998 debt levels. The reduction was primarily attributable to debt
repayments of $3 million from the sale of marketable securities and a
substantial reduction of inventory since the Change of Control Transaction.
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, 1999, 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:
EXHIBIT
NUMBER: EXHIBIT
------- -------
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None
10
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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: April 27, 1999 By: /s/ RICHARD SISKIND
--------------------------
Richard Siskind
Chief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer)
11
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q OF STAGE II APPAREL CORPORATION FOR THE QUARTER
ENDED MARCH 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 994
<SECURITIES> 376
<RECEIVABLES> 89
<ALLOWANCES> 0
<INVENTORY> 2,764
<CURRENT-ASSETS> 3,935
<PP&E> 68
<DEPRECIATION> 7,863
<TOTAL-ASSETS> 6,655
<CURRENT-LIABILITIES> 3,613
<BONDS> 0
0
0
<COMMON> 7,552
<OTHER-SE> (2,210)
<TOTAL-LIABILITY-AND-EQUITY> 6,655
<SALES> 1,591
<TOTAL-REVENUES> 1,635
<CGS> 1,076
<TOTAL-COSTS> 1,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 83
<INCOME-PRETAX> 11
<INCOME-TAX> 0
<INCOME-CONTINUING> 11
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
