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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, 2000 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, 2000
-------------- -------------------------------
Common Stock 4,127,267
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STAGE II APPAREL CORP.
INDEX
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<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Condensed Consolidated Balance Sheets - September 30, 2000 (unaudited) and December 31, 1999................ 2
Condensed Consolidated Statements of Income (Loss) - Three Months and Nine Months Ended
September 30, 2000 and 1999 (unaudited).................................................................. 3
Consolidated Statements of Comprehensive Income (Loss) - Three Months and Nine Months Ended
September 30, 2000 and 1999 (unaudited).................................................................. 4
Condensed Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2000 and 1999 (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................................................................................. 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)
SEPT. 30, DEC. 31,
<TABLE>
<CAPTION>
2000 1999
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(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ................................................. $ 373 $ 691
Marketable securities ..................................................... 757 665
Accounts receivable ....................................................... 207 393
Finished goods inventory .................................................. 5,271 2,145
Prepaid expenses .......................................................... 114 62
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Total current assets .................................................... 6,722 3,956
Property and equipment, at cost, less accumulated depreciation .............. 33
34
Goodwill, less accumulated amortization and impairment of $8,113 at
September 30, 2000 and $7,988 at December 31, 1999 ........................ 1,501 1,626
Trademark, less accumulated amortization of $29 at September 30, 2000
and $11 at December 31, 1999 .............................................. 246 264
Other assets ................................................................ 513 529
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TOTAL ASSETS .............................................................. $ 9,015 $ 6,409
======= =======
LIABILITIES:
Current liabilities:
Due to factor ............................................................. $ 3,310 $ 1,817
Accounts payable .......................................................... 502 380
Due to affiliate .......................................................... 1,757 640
Other current liabilities ................................................. 63 162
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Total current liabilities ............................................... 5,632 2,999
Deferred income ............................................................. 100 100
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000 shares authorized;
none issued and outstanding ............................................... -- --
Common stock, $.01 par value, 9,000 shares authorized; 5,016 and 5,011 shares
issued and 4,127 and 4,122 shares outstanding at September 30, 2000 and
December 31, 1999, respectively ........................................... 50 50
Additional paid-in capital .................................................. 7,366 7,363
Accumulated deficit ......................................................... (2,235) (2,145)
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5,181 5,268
Less treasury stock, at cost; 889 shares at September 30, 2000 and
December 31, 1999 ......................................................... (1,879) (1,879)
Accumulated other comprehensive income (loss) ............................... (19) (79)
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TOTAL SHAREHOLDERS' EQUITY ................................................ 3,283 3,310
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................. $ 9,015 $ 6,409
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
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STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales .................................. $ 2,392 $ 3,412 $ 8,086 $ 7,273
Cost of goods sold ......................... 1,776 2,748 5,950 5,458
------- ------- ------- -------
Gross profit ............................... 616 664 2,136 1,815
Commission and other income ................ 3 4 11 38
619 668 2,147 1,853
Selling, general and administrative expenses 638 554 1,897 1,492
Operating income (loss) .................... (19) 114 250 361
Other income (expenses):
Interest income ......................... 22 16 62 46
Interest and factoring expenses ......... (151) (124) (403) (363)
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Net income (loss) .......................... $ (148) $ 6 $ (91) $ 44
======= ======= ======= =======
Earnings (loss) per common share:
Basic ................................... $ (0.04) $ .00 $ (0.02) $ .01
======= ======= ======= =======
Diluted ................................. $ (0.04) $ .00 $ (0.02) $ .01
======= ======= ======= =======
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net income (loss) .................................... $(148) $ 6 $ (91) $ 44
Other comprehensive income (loss):
Unrealized gains (losses) on marketable securities,
net of taxes .................................... (20) -- 60 3
----- ----- ----- -----
Comprehensive income (loss) .......................... $(168) $ 6 $ (31) $ 47
===== ===== ===== =====
</TABLE>
See Notes to Condensed 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>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
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<S> <C> <C>
Net cash provided by (used in) operating activities $(1,762) $ 705
INVESTING ACTIVITIES:
Purchase of marketable securities ............... (32) (188)
Purchase of equipment .............................. (20) --
Net cash used in investing activities .............. (52) (188)
FINANCING ACTIVITIES:
Factor financing, net ........................... 1,493 (669)
Issuance of common stock ........................ 3 --
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1,496 (669)
Net cash provided by (used in) financing activities -- --
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Net increase (decrease) in cash and cash equivalents (318) (152)
Cash and cash equivalents at beginning of year ..... 691 992
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Cash and cash equivalents at end of period ......... $ 373 $ 840
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes ...................... $ 7 $ --
======= =======
Cash paid for interest, excluding factoring fees $ 341 $ 244
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</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 September 30, 2000 and its
results of operations, comprehensive income and cash flows for the interim
periods presented. The results of operations for the quarter and nine months
ended September 30, 2000 are not necessarily indicative of operating results to
be expected for the full year. 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, 1999 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. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.
128, EARNINGS PER SHARE ("FAS 128"). Under FAS 128, companies that are publicly
held or have complex capital structures are required to present basic and
diluted earnings per share ("EPS") on the face of the income statement. FAS 128
replaces the presentation of primary EPS with a presentation of basic EPS and,
if applicable, diluted EPS. Basic EPS excludes dilution and is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted and the resulting additional shares are dilutive
because their inclusion decreases the amount of EPS.
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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 casual apparel, activewear and collection
sportswear for men and boys. The Company markets its apparel to specialty and
department store chains, sporting goods stores and wholesale membership clubs
under nationally recognized brand names as well as proprietary and private
labels. In May 1999, Stage II completed the acquisition of the Cross Colours
trademark, a pioneer brand in the early development of the young men's urban
fashion. The Company has developed its own lines of Cross Colours products
internally, with a strategy of offering affordable prices to expand the
availability of lifestyle urban streetwear to a wider audience within the young
men's market. In addition to its own Cross Colours apparel lines, Stage II also
plans to license a wide variety of retail items under this brand, focusing
initially on footwear, accessories, kids' and juniors' activewear and home
products. In August 1999, the Company obtained an exclusive license to use the
STANLEY BLACKER brand for men's activewear, swimwear, jeans, sleepwear and
loungewear, as well as various categories of accessories.
RESULTS OF OPERATIONS
QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999. Net sales of $2,392,000 for
the third quarter of 2000 decreased by 29.9% from $3,412,000 in the
corresponding quarter of 1999. The decline in net sales was due to the overall
weakness in the Company's segment of the apparel market in 2000 as well as the
sales of discontinued brands in 1999.
Gross profit as a percentage of sales was 25.8% in the third quarter of
2000 compared to 19.5% in the same quarter last year. The increase was primarily
due to the sales of new brands, as compared to the sales of discontinued brands
at lower gross margins in 1999.
Selling, general and administrative expenses of $638,000 for the third
quarter of 2000 increased by 15.2% compared to $554,000 for the third quarter of
1999, reflecting the increased expenses with respect to the Company's new CROSS
COLOURS brand of urban streetwear. As a percentage of sales, selling, general
and administrative expenses were 26.7% in the third quarter of 2000 compared to
16.2% for the same quarter in 1999.
Interest and factoring expenses, net of interest income, aggregated
$129,000 or 5.4% of sales in the third quarter of 2000 compared to $108,000 or
3.2% of sales in the corresponding quarter last year. The increase reflects
higher borrowing levels and increased interest rates.
The Company recognized a net loss of $148,000 or $(.04) per share in
the third quarter of 2000 compared to net income of $6,000 or $.00 per share in
the corresponding quarter of 1999. The loss was due primarily to overall
weakness in the Company's segment of the apparel market.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999. Net sales of $8,086,000
for the first nine months of 2000 increased by 11.2% from $7,273,000 in the
corresponding period in 1999.
Gross profit as a percentage of sales was 26.4% in the first nine
months of 2000 compared to 25.0% in the same period last year. The increase is
primarily due to the sales of new brands, as compared to the sales of
discontinued brands at lower gross margins in 1999.
Selling, general and administrative expenses of $1,897,000 for the
first nine months of 2000 increased by 27.1% compared to $1,492,000 for the
first nine months of 1999, primarily reflecting the increased expenses with
respect to the Company's new CROSS COLOURS brand of urban streetwear. As a
percentage of sales, selling, general and administrative expenses were 23.5% in
the first three quarters of 2000 compared to 20.5% in the same period last year.
7
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Interest and factoring expenses, net of interest income, aggregated
$341,000 or 4.2% of sales in the first nine months of 2000 compared to $317,000
or 4.4% of sales in the corresponding period last year. The increase reflects
higher borrowing levels and increased interest rates.
The Company recognized a net loss of $91,000 or $(.02) per share in the
first nine months of 2000 compared to net income of $44,000 or $.01 per share in
the corresponding period in 1999, reflecting the foregoing trends. The loss was
due primarily to overall weakness in the Company's segment of the apparel
market.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Net cash used by Stage II's operating activities during the
first nine months of 2000 aggregated $1.7 million. The Company's cash position
decreased from $691,000 at December 31, 1999 to $373,000 at September 30, 2000.
CAPITAL RESOURCES. At September 30, 2000, the Company had marketable
securities with a carrying value of $757,000.
Stage II maintains a factoring and credit facility with The CIT
Group/Commercial Services, Inc. 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 Stage II. 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 1/2% above the prime
rate.
The Company's obligations under the credit facility are payable on
demand and secured by its inventory and accounts receivable. 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, 2001
or the end of any subsequent contract year upon 60 days notice. As of September
30, 2000, the Company's net direct borrowings under the credit facility
aggregated $3.3 million. This reflects an increase of $1.5 million from debt
levels at December 31, 1999, attributable to additions to inventory since year
end.
The Company has received from an affiliated Company credit amounting to
$1,757 for purchases of inventory.
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 facility or seek other external means to finance its operations in the
future. As of September 30, 2000, 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.
8
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K.
(a) EXHIBITS:
EXHIBIT
NUMBER: EXHIBIT
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27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K.
None
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 10, 2000 By: /s/ RICHARD SISKIND
----------------------------------
Richard Siskind
Chief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer)
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