SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED JUNE 30, 1995
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM______________ TO ______________
Commission File Number 0-18064
---------
YES Clothing Co.
----------------
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3768671
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1380 WEST WASHINGTON BLVD., LOS ANGELES, CALIFORNIA 90007
---------------------------------------------------------
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: 213-765-7800
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
--- ---
Number of shares of Common Stock outstanding as of August 11, 1995: 7,036,492
1
YES Clothing Co.
----------------
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Exhibits and Reports on Form 8-K 11
Signatures 13
2
PART I. FINANCIAL INFORMATION
YES Clothing Co.
BALANCE SHEETS
June 30, March 31,
1995 1995
------------ ------------
(unaudited)
ASSETS
------
Current Assets:
Cash $ 95,000 $ 232,000
Due from factor, net 678,000
Accounts receivable, nonfactored-net 229,000 209,000
Other receivables and deposits 96,000 152,000
Inventories 4,337,000 2,158,000
Prepaid expenses 184,000 83,000
----------- -----------
Total current assets 4,941,000 3,512,000
Equipment, net 1,081,000 1,034,000
Other assets 96,000 84,000
Trademarks 143,000
----------- -----------
$ 6,261,000 $ 4,630,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 1,993,000 $ 2,145,000
Accrued expenses and other
current liabilities 318,000 243,000
Due to factor 2,208,000
Advances from affiliate 300,000
Contract payables 47,000 50,000
----------- -----------
Total current liabilities 4,866,000 2,438,000
----------- -----------
Long term liabilities:
Contract payables 110,000 119,000
Due to related party
681,000 538,000
Total long-term liabilities ----------- -----------
791,000 657,000
----------- -----------
Shareholders' Equity:
Preferred stock, no par; 2,000,000
shares authorized; no shares -- --
issued and outstanding
Common stock, no par; 20,000,000
shares authorized; 3,851,799 and
3,821,470 issued and outstanding 4,629,000 4,513,000
Retained earnings (deficit) (4,025,000) (2,978,000)
----------- ----------
Total shareholders' equity 604,000 1,535,000
----------- ----------
$ 6,261,000 $ 4,630,000
=========== ==========
See notes to financial statements.
3
YES Clothing Co.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
JUNE 30
-----------------------
1995 1994
---------- ----------
Net sales $2,686,000 $6,859,000
Cost of sales 1,841,000 5,571,000
---------- ----------
Gross profit 845,000 1,288,000
Commission income 31,000 154,000
Royalty income -0- 24,000
---------- ----------
Gross operating income 876,000 1,466,000
Operating expenses:
Selling, general & administrative 1,822,000 1,868,000
---------- ----------
Loss from operations (946,000) (402,000)
Trademark acquisition (25,000) -0-
Interest (expense) - net (76,000) (29,000)
----------- ---------
Loss before income tax (1,047,000) (431,000)
----------- ---------
Provision for income taxes -0- -0-
----------- ---------
Net loss $(1,047,000) $(431,000)
=========== =========
Loss per share $ (0.27) $ (0.11)
=========== ==========
Average number of shares
outstanding 3,852,000 3,821,000
=========== =========
See notes to financial statements.
4
YES Clothing Co.
STATEMENTS OF CASH FLOWS
Three Months Ended June 30, 1995 and 1994
(Unaudited)
Increase (decrease) in Cash
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,047,000) $(431,000)
Reconciliation of net loss to net cash
flows from operating activities:
Depreciation and amortization 108,000 82,000
Provision for bad debts (114,000)
Changes in assets and liabilities:
Due to/from factor 2,887,000 1,318,000
Accounts receivable, nonfactored (20,000) (455,000)
Other receivables and deposits 56,000 21,000
Inventories (2,179,000) (975,000)
Prepaid expenses (101,000) (16,000)
Other assets (12,000) (10,000)
Trademarks (143,000)
Accounts payable (152,000) 258,000
Accrued expenses and
other current liabilities 75,000 (44,000)
----------- ----------
Net cash used in operating
activities (528,000) (346,000)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (156,000) (31,000)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on contracts payable (12,000) (11,000)
Advances from affiliate 300,000
Borrowing from related party 143,000
Issuance of common stock 116,000
-----------
Net cash provided (used) by
financing activities 547,000 (11,000)
----------- ----------
NET INCREASE (DECREASE) IN CASH (137,000) (388,000)
CASH AND CASH EQUIVALENTS,
Beginning of period 232,000 444,000
----------- ----------
CASH AND CASH EQUIVALENTS,
End of period $ 95,000 $ 56,000
=========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
For interest $ 76,000 $ 30,000
=========== ==========
See notes to financial statements.
5
YES Clothing Co.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Basis of presentation:
The accompanying financial statements are unaudited, but in the opinion of
management of the Company contain all adjustments, consisting of only normal
recurring accruals, necessary to present fairly the financial position at June
30, 1995, and the results of operations and changes in cash flows for the three
months ended June 30, 1995 and 1994. Certain information and footnote
disclosures normally included in financial statements that have been prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, although management of the Company believes that the disclosures
contained in these financial statements are adequate to make the information
presented therein not misleading. For further information, refer to the
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1995 as filed with the
Securities and Exchange Commission. The results of operations for the three
months ended June 30, 1995 are not necessarily indicative of the results of
operations to be expected for the fiscal year ending March 31, 1996.
NOTE 2 - Due to/from factor:
The amount due to/from factor is net of estimated customer returns,
allowances and discounts as follows:
June 30, March 31,
1995 1995
----------- -----------
Unmatured receivables $ 2,531,000 $ 4,408,000
Advances (3,571,000) (3,115,000)
Open credits (1,168,000) (615,000)
----------- -----------
$(2,207,000) $ 678,000
=========== ===========
NOTE 3 - Inventories:
Inventories consisted of the following:
June 30, March 31,
1995 1995
----------- -----------
Raw materials $ 1,269,000 $ 560,000
Work-in-progress 776,000 339,000
Finished goods 2,292,000 1,259,000
----------- -----------
$ 4,337,000 $ 2,158,000
=========== ===========
NOTE 4 - Interest income (expense) - net:
Net interest income consisted of the following:
Income Expense Net
------ ------- ---
Three months ended June 30, 1995 $ -0- $76,000 $(76,000)
Three months ended June 30, 1994 $1,000 $30,000 $(29,000)
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YES Clothing Co. (The "Company") designs, contracts for the manufacture of
and markets diversified lines of apparel for young women, young men and kids.
The Company sells its apparel to retail department stores and specialty chain
stores. The Company's garments are made in the United States and, to a lesser
extent, in the Far East.
Results of Operations
---------------------
RECENT DEVELOPMENTS. On June 17, 1995, Georges Marciano agreed to become
Chief Executive Officer and Chairman of the Board of the Company, to provide
additional capital for the Company, and to license to YES certain trademarks
controlled by Marciano affiliates. The additional capital was received by the
Company on July 12, 1995.
As Chief Executive Officer and Chairman of the Board of YES Clothing
Co.(R), Mr. Marciano will receive a salary of $1 per year plus options to
acquire 500,000 shares of common stock per year at $1.25 per share for four
years (the closing price of the company's common stock on June 13, 1995) vesting
monthly during continued employment and expiring in 10 years. In addition to
his duties as Chairman and Chief Executive Officer, Mr. Marciano will supervise
all of the Company's design departments.
On July 12, 1995, Mr. Marciano contributed $3,300,000 in additional capital
to the Company in exchange for 2,640,000 shares of common stock and converted
additional shares of common stock at $1.25 per share in exchange of $681,000
owed by the Company to Mr. Marciano for advances and expenses incurred by him on
the Company's behalf. In addition, the Company has granted Mr. Marciano a two-
year warrant to acquire an additional 2,000,000 shares at $1.25 per share.
Shareholder approval will be sought for the grant of the options and warrant to
Mr. Marciano. The pro-forma effect of these contributions as if they had
occurred on June 30, 1995 is set forth below.
YES Clothing Co.
PRO-FORMA BALANCE SHEET
June 30, 1995
Historical Pro-forma Pro-forma
Basis Adjustments Balances
------------- ----------- -----------
(unaudited)
ASSETS
------
Current Assets:
Cash $ 95,000 $ 3,300,000/a/ $ 3,395,000
Accounts receivable 229,000 - 229,000
Other receivables 96,000 - 96,000
Inventories 4,337,000 - 4,337,000
Prepaid expenses 184,000 - 184,000
------------ ----------- -----------
Total current assets 4,941,000 3,300,000 8,241,000
Equipment, net 1,081,000 - 1,081,000
Other assets 96,000 - 96,000
Trademarks 143,000 143,000
------------ ----------- -----------
$ 6,261,000 $ 3,300,000 $ 9,561,000
============ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable $ 1,993,000 $ - $ 1,993,000
Accrued expenses 318,000 - 318,000
Due to factor 2,208,000 - 2,208,000
Advances from affiliate 300,000 - 300,000
Contract payables 47,000 - 47,000
------------ ----------- -----------
Total current liabilities 4,866,000 - 4,866,000
------------ ----------- -----------
Long term liabilities:
Contract payables 110,000 - 110,000
Due to related party 681,000 (681,000)/b/ -
------------ ----------- -----------
Total long-term liabilities 791,000 (681,000) 110,000
------------ ----------- -----------
Shareholders' Equity:
Preferred stock, no par; 2,000,000
shares authorized; no shares - - -
issued and outstanding
Common stock, no par; 20,000,000
shares authorized;
7,036,492 issued and outstanding 4,629,000 3,981,000 8,610,000
Retained earnings (4,025,000) - (4,025,000)
------------ ----------- -----------
Total shareholders' equity 604,000 3,981,000 4,585,000
------------ ----------- -----------
$ 6,261,000 $ 3,300,000 $ 9,561,000
============ =========== ===========
/a/ Contributions of $3,300,000 in cash in exchange for common stock at $1.25
per share on July 12, 1995.
/b/ Conversions of amounts owed to principal stockholder and his affiliate into
shares of common stock at $1.25 per share on July 12, 1995.
The Company has also agreed to enter into a five-year trademark license
agreement for Mr. Marciano's "GM Surf(TM)" and "Misfits(R)" lines of clothing at
royalties of 7% of gross sales, plus an additional 2% for advertising, with
royalties to commence on January 31, 1996.
If all of the shares, warrants and options described above are issued and
exercised, Mr. Marciano and his affiliates' ownership of the Company may
increase to approximately 93% by the end of four years.
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items in the Company's Statements of
Operations.
7
Percentage of Net Sales
---------------------------
Three Months Ended
June 30,
1995 1994
------------ ------------
Net sales 100.0% 100.0%
Cost of sales 68.6 81.2
----- -----
Gross profit from sales 31.4 18.8
Commission and royalty income 1.2 2.6
----- -----
Gross operating income 32.6 21.4
----- -----
Operating expenses 67.8 27.3
----- -----
Loss from operations (35.2) ( 5.9)
Trademark acquisition ( 0.9) -0-
Interest expense - net ( 2.8) ( 0.4)
----- -----
Loss before income taxes (38.9) (6.3)
Tax provision -0- -0-
----- -----
Net loss (38.9%) ( 6.3%)
===== =====
Three Months Ended June 30, 1995 Compared to Three Months Ended June 30, 1994:
------------------------------------------------------------------------------
Net sales for the three months ended June 30, 1995 were $2,686,000 as
compared to $6,859,000 for the same period in 1994. This represents a decrease
of $4,173,000 or 60.8% in net sales for the period due to a major restructuring
of its product line including the types and styles of garments manufactured and
the phase out of other product lines. The Company discontinued its reliance on
fabrics using cotton/spandex knit and shifted its focus to using primarily denim
and knit/woven cotton.
Gross profit as a percentage of net sales increased to 31.4% for the three
months ended June 30, 1995 from 18.8% for the three months ended June 30, 1994.
The increase was mainly due to the shift to higher margined products and the
introduction of several new lines including "GM Surf(TM)" and "Misfits(R)".
Commission and royalty income was $31,000 for the three months ended June
30, 1995 as compared to $154,000 for the three months ended June 30, 1994. The
decline in commission and royalty income is due to the discontinuation of
commission transactions on direct shipment of goods manufactured overseas and
the termination of license agreements in Canada and the United States.
Operating expenses comprised of selling, general and administrative
expenses ("S, G & A") decreased by $46,000 to $1,822,000 for the three months
ended June 30, 1995 from $1,868,000 in the same period in 1994. The decrease in
S, G & A expenses is due primarily to a decline in payroll as a result of a
reduction in the number of employees, and decreases in advertising and group
insurance expenses. However, S, G & A increased as a percentage of sales due to
lower sales volume.
Interest expenses increased by $47,000 (from $29,000 to $76,000) for the
three-month period ended June 30, 1995 due to increased working capital
requirements and borrowing from the Company's factor.
8
Capital Resources and Liquidity
-------------------------------
On June 17, 1995, Georges Marciano agreed to provide $3,300,000 in
additional capital to the Company in exchange for 2,640,000 shares of common
stock and to convert additional shares of common stock at $1.25 per share in
exchange of approximately $700,000 owed by the Company to Mr. Marciano for
advances and expenses incurred by him on the Company's behalf. The additional
capital was received by the Company on July 12, 1995 and Mr. Marciano was issued
3,184,693 shares shortly thereafter. Without the infusion of these funds and due
to continuing losses, the Company would have completely depleted its working
capital by July of 1995. The Company was operating on overdrafts from its factor
guaranteed by letters of credit supplied by Mr. Marciano.
Prior to the capital infusion, the Company had funded its activities
principally from cash flow generated from operations and credit facilities with
its institutional lender.
The Company had an agreement with a factor and through June 1994 with a
bank, whereby the factor purchased accounts receivable from the Company on a
non-recourse basis and remitted the funds on a maturity basis. The bank
provided the Company with an unsecured $3,000,000 facility for commercial
letters of credit and, at March 31, 1994, the Company had $1,618,000 of letters
of credit outstanding. Under the credit facility, the Company was prohibited
from declaring or paying any dividends on any class of its stock.
The Company entered into a new factoring agreement with Republic Factors
and a letter of credit facility with Republic National Bank of New York (the
financing bank) effective through March 1996. Both the old and the new
agreements are non-recourse (i.e., the factor purchases the Company's accounts
receivable that it has pre-approved, without recourse, except in cases where
there are merchandise disputes in the normal course of business).
Under the new factoring agreement, the Company sells substantially all of
its trade accounts receivable, without recourse, and may request advances, up to
80% on the net sales factored at any time before their maturity date. The
factor is responsible for the accounting and collection of all accounts
receivable sold to it by the Company and receives a commission of 0.6% of
purchased net receivables on a guaranteed minimum volume for the contract year
of $30,000,000. The commission rate will increase to 0.75% of total invoices
factored and be applied retroactively for the contract year if the guaranteed
minimum volume is not attained.
Under the letter of credit facility, the financing bank provides a credit
line for letters of credit, ledger debt and factor guaranties up to the 80%
advance rate provided under the factoring agreement with an additional over
advance facility of $1,050,000. Commitments outstanding under the letter of
credit facility as of June 30, 1995 amounted to $319,000.
9
The agreements are collateralized by accounts receivable and inventory
imported under letters of credit. The Company or the factor may terminate the
credit agreement on the anniversary date of the agreement with at least 60 days
prior written notice.
As of June 30, 1995, the Company had net working capital of $75,000 as
compared to $1,074,000 as of June 30, 1994. The Company's current ratio as of
June 30, 1995 was 1.0 as compared to 1.4 as of June 31, 1994. The decreases in
working capital and current ratio are primarily due to continued net losses
amounting to $1,047,000.
Inventories at June 30, 1995 were $4,337,000 as compared to $2,158,000 at
June 30, 1994, an increase of $2,178,000. The increase was due to a rise in
inventories to levels consistent with seasonal requirements and future bookings.
The Company has funded its activities principally from cash flow generated
from operations and credit facilities with its institutional lender.
In recent years, the Company has experienced financial difficulties due to
major customers filing for reorganization proceedings under bankruptcy laws and
the unfavorable economic climate being experienced in the apparel industry.
These conditions have had a significant negative impact on the Company's
operations being reflected in declining sales and eroding margins, resulting in
net losses amounting to $4,652,000 and $2,934,000 in fiscal 1995 and 1994,
respectively.
On January 31, 1995, control of the Company changed when approximately 80%
of the Company's outstanding stock was acquired by affiliates of Georges
Marciano. Georges Marciano has subsequently made unsecured non-interest bearing
advances from an entity affiliated through common ownership, due on demand, and
amounted to $300,000 as of June 30, 1995 which was repaid after July 12, 1995.
An additional $681,000 was owed by the Company to Mr. Marciano for advances and
expenses incurred by him on the Company's behalf. Mr. Marciano has provided,
from time to time, letters of credit to the Company's factor, Republic Factors
Corp., to support overdrafts in the Company's favor. As of July 28, 1995, Mr.
Marciano had provided a $1,000,000 letter of credit, expiring January 31, 1996,
in favor of Republic Factors Corp. (Mr. Marciano had previously provided another
$1,000,000 letter of credit subsequently cancelled.) Additional material
financial difficulties encountered by the Company would require additional
borrowing to avoid a negative impact on the Company's future operations.
The Company believes that the working capital infusion provided by Georges
Marciano and the availability of credit under current lending agreements and
other financial sources available to it will provide sufficient resources to
finance the Company's currently anticipated working capital needs and capital
expenditures through the end of summer of 1995. Continued financial difficulties
by the Company would require additional borrowings and infusions of capital to
avoid a negative impact on the Company's future operations.
10
The Company has continued to cut its payroll. It has also reduced other
operating costs such as advertising and payroll related costs. Notwithstanding
the foregoing measures, the Company anticipates that it may not be profitable
for the fiscal year ending March 31, 1996.
Part II. OTHER INFORMATION
On June 14, 1995, the NASD notified the Company that its net worth as of
March 31, 1995 had been reduced below the NASD's minimum standards for continued
listing and suggested that the Company would be delisted from the NASD/NMS. In
light of the capital infusion by Mr. Marciano, the Company believes its net
worth is now in excess of the minimum standards and has applied to the NASD for
a waiver from delisting. There is no assurance that the waiver will be granted.
If the Company is delisted from the NASD/NMS, it will apply for listing on the
NASD Small Cap market.
Item 6 - Exhibits and Reports on Form 8-K: none
11
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.
YES Clothing Co.
BY: /s/ GEORGES MARCIANO
_____________________________
GEORGES MARCIANO
Chairman of the Board and
Chief Executive Officer
BY: /s/ JEFFERY P. BUSSE
_____________________________
JEFFREY P. BUSSE
Chief Financial Officer and
Secretary
Dated: August 12, 1995
12