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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, 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 APRIL 15, 2000
Common Stock 4,127,267
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STAGE II APPAREL CORP.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Condensed Consolidated Balance Sheets -- March 31, 2000 (unaudited) and December 31, 1999................... 2
Condensed Consolidated Statements of Income -- Three Months Ended March 31, 2000
and 1999 (unaudited)..................................................................................... 3
Consolidated Statements of Comprehensive Income -- Three Months Ended
March 31, 2000 and 1999 (unaudited)...................................................................... 4
Condensed Consolidated Statements of Cash Flows -- Three Months Ended
March 31, 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................................................................................. 10
</TABLE>
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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,
2000 1999
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ASSETS: (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 720 $ 691
Marketable securities 701 665
Accounts receivable 245 393
Finished goods inventory 3,771 2,145
Prepaid expenses 141 62
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Total current assets 5,578 3,956
Property and equipment, at cost, less accumulated depreciation 19 34
Goodwill, less accumulated amortization and impairment of $8,029 at
March 31, 2000 and $7,988 at December 31, 1999 1,585 1,626
Trademark, less accumulated amortization of $17 at March 31, 2000
and $11 at December 31, 1999 258 264
Other assets 518 529
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TOTAL ASSETS $ 7,958 $ 6,409
======= =======
LIABILITIES:
Current liabilities:
Due to factor $ 3,268 $ 1,817
Accounts payable 555 380
Due to affiliate 546 640
Accrued royalties 2 2
Other current liabilities 107 160
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Total current liabilities 4,478 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; 5,017 and 5,011 shares
issued and 4,128 and 4,122 shares outstanding at March 31, 2000 and
December 31, 1999, respectively 50 50
Additional paid-in capital 7,366 7,363
Accumulated deficit (2,108) (2,145)
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5,308 5,268
Less treasury stock, at cost; 889 shares at March 31, 2000 and
December 31, 1999 (1,879) (1,879)
Accumulated other comprehensive loss (49) (79)
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TOTAL SHAREHOLDERS' EQUITY 3,380 3,310
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,958 $ 6,409
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
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STAGE II APPAREL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
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<S> <C> <C>
Net sales ........................................ $ 2,935 $ 1,591
Cost of goods sold ............................... 2,181 1,076
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Gross profit ..................................... 754 515
Commission and other income ...................... 5 29
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759 544
Selling, general and administrative expenses ..... 636 432
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Operating income ................................. 123 112
Other income (expenses):
Interest income ............................... 19 15
Interest and factoring expenses ............... (105) (116)
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Net income ....................................... $ 37 $ 11
======= =======
Basic and dilutive net income per common share ... $ .01 $ .00
======= =======
Weighted average common shares outstanding ....... 4,122 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
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------
2000 1999
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<S> <C> <C>
Net income ................................................. $37 $11
Other comprehensive income:
Unrealized gains on marketable securities, net of taxes . 30 --
--- ---
Comprehensive income ....................................... $67 $11
=== ===
</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,
--------------------
2000 1999
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<S> <C> <C>
Net cash used in operating activities .............. $(1,419) $(453)
INVESTING ACTIVITIES:
Purchase of marketable securities ............... (6) --
FINANCING ACTIVITIES:
Factor financing, net ........................... 1,451 455
Issuance of common stock ........................ 3 --
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Net cash provided by financing activities .......... 1,454 455
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Net increase (decrease) in cash and cash equivalents 29 2
Cash and cash equivalents at beginning of year ..... 691 992
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Cash and cash equivalents at end of period ......... $ 720 $ 994
======= =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes ...................... $ 2 $ 2
======= =====
Cash paid for interest, excluding factoring fees $ 83 $ 83
======= =====
</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, 2000 and its
results of operations, comprehensive income 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, 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.
NOTE 4. COMMON STOCK
During the quarter ended March 31, 2000, options to purchase a total of
6,000 shares of the Company's common stock were exercised at $.50 per share.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
INTRODUCTION. 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. Since adding a new management team in connection with a
change of control transaction in May 1998, the Company has streamlined its
operations, increased its focus on its most popular labels, acquired the CROSS
COLOURS trademark, a pioneer in the early development of young men's urban
fashion, added an Internet enabled virtual showroom for new and existing
customers.
TURNAROUND STRATEGY. As part of the strategy for returning the Company
to profitability, its new management adopted a turnaround strategy that includes
the following components:
o INCREASED SALES -- implemented more favorable licensing arrangements
and restructured the sales force by division or brand name to promote a more
highly motivated staff with a deeper knowledge of each product line and targeted
customer base;
o INCREASED PROFIT MARGINS -- modified manufacturing arrangements to
promote efficiencies, with greater control of inventories, to lower the cost of
sales while creating faster inventory turn, thereby avoiding unnecessary
markdowns;
o LOWER FACTORING AND RENT CHARGES -- added more stringent controls to
reduce factoring charges and relocated offices at a substantial savings in
annual rent;
o PROMOTED ADMINISTRATIVE EFFICIENCIES -- pursued cost cutting
initiatives, on an aggressive basis where appropriate, with a minimum objective
of bringing overhead costs in line with sales;
o OPTIMIZED FINANCIAL EFFICIENCIES -- prioritized the collection of
accounts receivable and the stricter management of customer returns and
allowances; and
o INCREASED PRODUCTIVITY -- increased organizational efficiencies and
reduced the Company's cost of management below prior ratios as a percentage of
sales, with a greater use of stock options to offset substantial reductions in
salary levels.
The success of the turnaround strategy implemented by the Company's new
management contributed to a return to profitable operations in each quarter of
1999, marking the Company's first profitable year since 1993. This trend
continued in the first quarter of 2000, with substantial gains in net sales of
its redesigned apparel lineup.
RECENT DEVELOPMENTS
INTERNET SALES. In March 1999, Stage II launched an e-commerce
business-to-business 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. While sales on the website have been modest to
date, the Company has achieved its initial goal of attracting additional
retailers, who use the facility as a virtual showroom and then follow up with
orders via phone or fax, avoiding the time and expense of traveling to the
Company's showroom in New York City.
PRODUCT INNOVATION. In May 1999, Stage II completed the acquisition of
the CROSS COLOURS trademark, a pioneer brand in the early development of 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
7
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urban streetwear to a wider audience within the young men's youth 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.
The Company's licensing campaign for CROSS COLOURS was initiated in the
first quarter of 2000 with Kids Headquarters under an exclusive three-year
manufacturing and distribution arrangement for boys' sportswear. Kids
Headquarters is a division of Wear Me Apparel, one of the largest privately
owned children's apparel companies with over 25 years of success in this market.
The launch of CROSS COLOURS for boys is scheduled for the Spring 2001 season.
Additional licensing proposals for this brand are continuing to be reviewed for
other categories of the fast growing urban streetwear youth fashion market.
NEW LICENSE AGREEMENT. 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. With this established prestige brand, Stage II expects to increase
its presence in the higher end markets with a wider distribution channel for the
covered categories, upgrading its product mix to further improve overall
margins.
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>
2000........... $ 2,935 $ --- $ --- $ --- $ ---
1999........... 1,591 2,270 3,412 3,264 10,537
1998........... 1,855 1,653 4,130 2,229 9,867
</TABLE>
QUARTERS ENDED MARCH 31, 2000 AND 1999. Net sales of $2.9 million for
the first quarter of 2000 increased by 84.5% from $1.6 million in the
corresponding quarter of 1999. The increase primarily reflects a restructuring
the Company's sales force by division or brand name to promote a more highly
motivated team with a deeper knowledge of each product line and targeted
customer base. As reflected in the progressive quarterly sales growth throughout
1999 and the first quarter of 2000, it also reflects the emergence of Stage II's
revamped product mix and marketing strategy.
Cost of goods sold as a percentage of sales increased to 74.3% in the
first quarter of 2000 compared to 67.6% in the same quarter last year. The
increase primarily reflects unusually high gross margins on various apparel
sales in the first quarter of 1999.
SG&A expenses of $636,000 for the first quarter of 2000 increased by
47.2% compared to $432,000 for the first quarter of 1999, primarily reflecting
higher variable expenses associated with the Company's launch of its new CROSS
COLOURS brand of urban streetwear and increased sales volumes of its other
apparel lines. As a percentage of sales, SG&A expenses were 21.7% in the first
quarter of 2000 compared to 27.2% in the same quarter in 1999.
Interest and factoring expenses, net of interest income, aggregated
$86,000 or 2.9% of sales in the first quarter of 2000 compared to $101,000 or
6.3% of sales in the corresponding quarter last year. The decrease reflects a
slight reduction in borrowing levels.
8
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The Company realized net income of $37,000 or $.01 per share in the
first quarter of 2000 compared to net income of $11,000 or $.00 per share in the
corresponding quarter of 1999, reflecting the foregoing trends.
The results of operations for the quarter ended March 31, 2000 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 2000 aggregated $1.4 million. The Company's cash position
increased from $691,000 at December 31, 1999 to $720,000 at March 31, 2000 due
primarily to increased factor debt.
CAPITAL RESOURCES. At March 31, 2000, the Company had marketable
securities with a carrying value of $701,000.
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 2% above the prime
rate.
The Company's obligations under the credit facility are 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 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 March 31, 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 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 March 31, 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.
9
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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: May 11, 2000 By: /s/ RICHARD SISKIND
----------------------------------
Richard Siskind
Chief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer)
10
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS OF STAGE II APPARANT CORP. FOR THE QUARTER ENDED MARCH 31, 2000 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 720
<SECURITIES> 701
<RECEIVABLES> 245
<ALLOWANCES> 0
<INVENTORY> 3,771
<CURRENT-ASSETS> 5,578
<PP&E> 19
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,958
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 7,416
<OTHER-SE> (2,108)
<TOTAL-LIABILITY-AND-EQUITY> 7,958
<SALES> 2,935
<TOTAL-REVENUES> 2,940
<CGS> 2,181
<TOTAL-COSTS> 636
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 37
<INCOME-TAX> 0
<INCOME-CONTINUING> 37
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
