<PAGE> 1
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 SEPTEMBER 30, 1996
[ ] 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 Identification No.)
incorporation or organization)
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 November 11, 1996: 7,036,492
<PAGE> 2
YES CLOTHING CO.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
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
Item 4: Submission of Matters to a Vote of
Security Holders 10
Item 6: Exhibits and Reports on Form 8-K 10
Signatures 11
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
YES Clothing Co.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 March 31
1996 1996
(unaudited)
<S> <C> <C>
ASSETS
------
Current Assets:
Cash $ 5,000 $ 103,000
Accounts receivable, non-factored-net 321,000 1,000
Other receivables and deposits 80,000 2,000
Inventories 587,000 1,398,000
Prepaid expenses 252,000 94,000
-------------- --------------
Total current assets 1,245,000 $ 1,598,000
Equipment, net 670,000 978,000
Other Assets 85,000 76,000
-------------- --------------
TOTAL ASSETS $ 2,000,000 $ 2,652,000
============== ==============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 336,000 $ 881,000
Accrued expenses and other current liabilities 343,000 292,000
Due to factor 329,000 3,232,000
Advances from affiliate 250,000 369,000
Note payable to bank 1,140,000 0
Contract payables 84,000 57,000
-------------- --------------
Total current liabilities 2,482,000 4,831,000
-------------- --------------
Long-term liabilities:
Contract payables 58,000 61,000
-------------- --------------
Total long-term liabilities 58,000 61,000
-------------- --------------
Shareholder's Equity:
Preferred stock, no par; 2,000,000 shares authorized; no share
issued and outstanding
Common stock, no par; 20,000,000 shares authorized; 7,036,492
issued and outstanding 11,308,000 8,573,000
Retained deficit (11,848,000) (10,813,000)
-------------- --------------
Total shareholder's equity (540,000) (2,240,000)
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 2,000,000 $ 2,652,000
============== ==============
</TABLE>
See Notes to Financial Statements
3
<PAGE> 4
YES Clothing Co.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
September 30 September 30
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 1,611,000 $ 4,681,000 $ 581,000 $ 1,996,000
Cost of Sales 1,001,000 3,794,000 520,000 1,954,000
--------------- -------------- ----------- -------------
Gross Profit 610,000 887,000 61,000 42,000
Commission Income 0 31,000 0 0
--------------- -------------- ----------- -------------
Gross Operating Income 610,000 918,000 61,000 42,000
Operating expenses:
Selling, general &
administrative 1,597,000 3,394,000 927,000 1,572,000
--------------- -------------- ----------- -------------
Loss from operations (987,000) (2,476,000) (866,000) (1,530,000)
Trademark acquisition 0 (25,000) 0 0
Gain on Sale of Assets 54,000 0 0 0
Interest income (expense) -- net (102,000) (138,000) (28,000) (62,000)
--------------- -------------- ----------- -------------
Loss before income tax (1,035,000) (2,639,000) (894,000) (1,592,000)
Provision for income taxes 0 0 0 0
Net loss (1,035,000) (2,639,000) (894,000) (1,592,000)
=============== ============== =========== =============
Loss per share $ (0.15) $ (0.50) $ (0.13) $ (0.24)
=============== ============== =========== =============
Average number of shares
outstanding 7,036,000 5,279,000 7,036,000 6,686,000
=============== ============== =========== =============
</TABLE>
See notes to financial statements.
4
<PAGE> 5
YES Clothing Co.
STATEMENTS OF CASH FLOWS
Six Months Ended September 30, 1996 and 1995
(Unaudited)
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,035,000) $ (2,639,000)
Reconciliation of net loss to net cash flows from operating
activities:
Depreciation and amortization 115,000 232,000
Increase (decrease) in credits due customers
and allowance for doubtful accounts (109,000) (138,000)
Increase (decrease) in cash due to changes in assets
and liabilities:
Due from factor 498,000 3,134,000
Accounts receivable, nonfactored (320,000) 300,000
Other receivables and deposits (78,000) 108,000
Inventories (811,000) (1,928,000)
Prepaid expenses (158,000) (135,000)
Other assets (9,000) (12,000)
Trademarks - (147,000)
Accounts payable (545,000) (1,019,000)
Accrued expenses 51,000 34,000
------------ ------------
Net cash used in operating activities (779,000) (2,210,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment 247,000 (416,000)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on contracts payable 24,000 (21,000)
Borrowing (repayment) from(to) related party (119,000) (232,000)
Issuance of common stock - 4,097,000
Borrowing from bank 1,140,000 -
Contributions of capital 2,735,000 -
Advance from factor -- net (3,346,000) (1,382,000)
------------ ------------
Net cash provided (used) by financing activities 434,000 2,462,000
------------ ------------
NET INCREASE (DECREASE) IN CASH (98,000) (164,000)
CASH AND CASH EQUIVALENTS, Beginning of period 103,000 232,000
------------ ------------
CASH AND CASH EQUIVALENTS, End of period $ 5,000 $ 68,000
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period:
For interest $ 102,000 $ 139,000
============ ============
</TABLE>
See Notes to Financial Statements
5
<PAGE> 6
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, they contain all adjustments, consisting
of only normal recurring accruals, necessary to present fairly the financial
position at September 30, 1996, and the results of operations and changes in
cash flows for the six months ended September 30, 1996 and 1995. 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,
1996 as filed with the Securities and Exchange Commission. The results of
operations for the six months ended September 30, 1996 are not necessarily
indicative of the results of operations to be expected for the fiscal year
ending March 31, 1997.
NOTE 2 ---- DUE TO/FROM FACTOR
The amount due to/from factor is net of estimated customer returns,
allowances and discounts as follows:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
<S> <C> <C>
Unmatured receivables $ 91,000 $ 660,000
Advances (59,000) (3,406,000)
Open credits (361,000) (486,000)
--------------- --------------
$ (329,000) $ (3,232,000)
=============== ==============
</TABLE>
NOTE 3 ---- INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
September 30, 1996 March 31, 1996
<S> <C> <C>
Raw materials $ 50,000 $ 401,000
Work-in-process 31,000 82,000
Finished goods 506,000 915,000
--------------- --------------
$ 587,000 $ 1,398,000
=============== ==============
</TABLE>
NOTE 4 ---- INTEREST INCOME (EXPENSE) - NET:
Net interest income consisted of the following:
<TABLE>
<CAPTION>
Income Expense Net
--------------- ------------- -------------
<S> <C> <C> <C>
Six months ended September 30, 1996 $ 0 $102,000 $(102,000)
Six months ended September 30, 1995 $1,000 $139,000 $(138,000)
Three months ended September 30, 1996 $ 0 $28,000 $ (28,000)
Three months ended September 30, 1995 $1,000 $63,000 $ (62,000)
</TABLE>
6
<PAGE> 7
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
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.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------------------------------
Six Months Ended Three Months Ended
September 30 September 30
1996 1995 1996 1995
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Net Sales 100.0 100.0 100.0 100.0
Cost of Sales 62.1 81.1 89.5 97.9
-------------- -------------- ------------- ------------
Gross profit from sales 37.9 18.9 10.5 2.1
Commission income - 0.7 - -
-------------- -------------- ------------- ------------
Gross operating income 37.9 19.6 10.5 2.1
Operating expenses 99.1 72.5 159.5 78.8
-------------- -------------- ------------- ------------
Loss from operations (61.2) (52.9) (149.0) (76.7)
Gain on Sale of assets 3.3 - - -
Trademark acquisition - (0.5) - -
Interest expense -- net (6.3) (3.0) (4.8) (3.1)
-------------- -------------- ------------- ------------
Loss before income taxes (64.2) (56.4) (153.8) (79.8)
Tax provision - - - -
-------------- -------------- ------------- ------------
Net loss (64.2) (56.4) (153.8) (79.8)
============== ============== ============= ============
</TABLE>
Six Months Ended September 30, 1996 Compared to Six Months Ended September 30,
1995
Net sales for the six months ended September 30, 1996 were $1,611,000
as compared to $4,681,000 for the same period in 1995. This represented a
decrease of 65.6% in net sales for the period. The decrease was mainly due to
the termination of GM Surf(TM) and Misfits(R) license agreements and subsequent
restructuring of the Company's product line.
Gross profit as a percentage of net sales increased to 37.9% for the
six months ended September 30, 1996 from 18.9% for the six months ended
September 30, 1995. The increase was due to higher than anticipated selling
prices on discontinued GM Surf(TM) and Misfits(R) product lines and a reduction
in the reserve for chargebacks.
There was no commission or royalty income for the six months ended
September 30, 1996. For the six months ended September 30, 1995, commission
income was $31,000. There was no royalty income. The Company discontinued all
commission income transactions and terminated its licensing agreements in
Canada and the U.S.
7
<PAGE> 8
Operating expenses consisting of selling, general and administrative
expenses decreased by $1,797,000 or 52.9% to $1,597,000 for the six months
ended September 30, 1996 from $3,394,000 in the same period in 1995. The
decrease in S, G & A was primarily due to reductions in payroll, insurance,
depreciation, legal and professional expenses and sales-related expenses.
Interest expense decreased from $138,000 for the six months ended
September 30, 1995 to $102,000 for the comparable period in 1996 due to a
reduction in borrowings from the factor (see Liquidity and Capital Resources).
Three Months Ended September 30, 1996 Compared to Three Months Ended September
30, 1995
Net sales for the three months ended September 30, 1996 were $581,000
as compared to $1,996,000 for the same period in 1995. This represented a
decrease of $1,415,000 or 70.9% in net sales for the period primarily due to
the reasons stated in the discussion of the six- month period.
Gross profit as a percentage of net sales increased to 10.5% for the
three months ended September 30, 1996 from 2.1% for the three months ended
September 30, 1995. The increase was primarily due to a reduction in overhead
and production costs per unit.
There was no commission or royalty income for the three months ended
September 30, 1995 or 1996.
Operating expenses comprised of selling, general and administrative
expenses ("S, G & A") decreased by $645,000 to $927,000 for the three months
ended September 30, 1996 from $1,572,000 in the same period in 1995 principally
due to the reasons stated above in the discussion of the six-month period.
Interest expenses decreased by $34,000 from $63,000 to $28,000 for the
three-month period ended September 30, 1996 due to decreased working capital
requirements and borrowing from the Company's factor. (See Liquidity and
Capital Resources).
Capital Resources and Liquidity
On June 4, 1996, control of the Company changed when approximately 50%
of the Company's outstanding stock was acquired by Guy Anthome.
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 facility agreement, 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
on May 15, 1995 (the financing bank) effective through March 1997. Both the
old and new agreements are non-recourse (i.e., the factor purchases the
Company's accounts receivable that it has preapproved, without recourse, except
in cases where there are merchandise disputes in the normal course of
business).
8
<PAGE> 9
Under the new factoring agreement, the Company sells substantially all
of its trade accounts receivable, without recourse, and may request advances up
to 70% 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 0.9% of
purchased net receivables.
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
70% advance rate provided under the factoring agreement. There were no letters
of credit outstanding as of September 30, 1996. Commitments outstanding under
the letter of credit facility as of March 31, 1996 amounted to $37,000.
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.
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 and his
affiliates for advances and expenses incurred by them on the Company's behalf.
Without the infusion of these funds and due to continuing losses, the Company
would have completely depleted its working capital by June of 1995.
On June 4, 1996, as part of the Sale Transaction, Mr. Marciano, through
an affiliated company, advanced to the Company $3,100,000 to pay off
liabilities associated with three $1,000,000 letters of credit issued on behalf
of the Company in favor of Republic Factors and purchased certain assets
approximating $1,463,000 in value. Mr. Marciano also canceled debts owed to him
and his affiliates by the Company totaling $2,767,000 in exchange for a payment
of $250,000 on June 4, 1996 and a note payable of $250,000 due on January 31,
1997.
As of September 30, 1996, the Company had a net working capital
deficit of $1,237,000, as compared to a surplus of $1,751,000 as of September
30, 1995. The Company's current ratio as of September 30, 1996 was (0.50), as
compared to 1.7 as of September 30, 1995. The decreases in working capital
and current ratio are primarily due to continued operating losses.
Inventories at September 30, 1996 were $587,000 as compared to
$4,086,000 at September 30, 1995, a decrease of $3,499,000. The decrease was
due to a reduction of inventories to levels consistent with reduced order
backlog, and repositioning of the Company's product lines.
The Company had funded its activities principally from advances and
letters of credit provided by Georges Marciano and his affiliates.
In June 1996, the Company entered into an agreement with Imperial Bank
which provides the Company with a $1,200,000 credit facility at an interest
rate of 9.75% secured by a letter of credit provided by an unaffiliated third
party.
The Company believes that the credit lines 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 November 1996. Continued financial
difficulties encountered by the Company would require additional borrowings and
infusions of capital to avoid a negative impact on the Company's continued
future operations after that time period.
9
<PAGE> 10
The Company has continued to cut its payroll and reduce its operating
costs. Notwithstanding the foregoing measures, the Company anticipates that it
will not be profitable for the fiscal year ending March 31, 1997, and absent
additional capital or additional third party credit, the Company will exhaust
its available capital by November 1996.
Part II. OTHER INFORMATION
On September 20, 1996, the Company was delisted from the NASD SmallCap
market. The Company subsequently applied for listing in the Over-the-Counter
(OTC) Bulletin Board and its securities were transferred to that market
effective September 23, 1996.
On November 1, 1996, Messrs. Kroll and Schoenholz resigned from the
Board of Directors of the Company.
Item 4 ---- Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on
October 7, 1996.
(b) Not applicable
(c) The following items were voted upon at Annual Meeting of
Shareholders
(i). Elections of Directors
<TABLE>
<CAPTION>
FOR WITHHELD
<S> <C> <C>
Guy Anthome 6,871,596 135,500
Jeffrey Busse 6,871,196 135,900
Irving Kroll 6,871,196 135,900
Maurice Schoenholz 6,871,596 135,500
</TABLE>
(ii). Ratification of Selection of Independent Auditors.
7,000,196 votes cast FOR Moss-Adams as Independent Auditors
5,700 votes cast AGAINST Moss-Adams as Independent Auditors
1,200 votes cast to ABSTAIN.
(iii). Amendment of the Company's 1989 Stock Option Plan
6,340,532 votes cast FOR the Grant of Warrant and Options
156,905 votes cast AGAINST the Grant of Warrant and Options
4,710 votes cast to ABSTAIN.
Item 6 ---- Exhibits and Reports on Form 8-K: None
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities and 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/ Guy Anthome
--------------------------------------
GUY ANTHOME
Chairman of the Board and
Chief Executive Officer
BY: /s/ Jeffrey Busse
--------------------------------------
JEFFREY P. BUSSE
Chief Financial Officer and
Secretary
Dated: November 11, 1996
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 5,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 587,000
<CURRENT-ASSETS> 1,245,000
<PP&E> 2,530,000
<DEPRECIATION> 1,860,000
<TOTAL-ASSETS> 2,000,000
<CURRENT-LIABILITIES> 2,482,000
<BONDS> 0
11,308,000
0
<COMMON> 0
<OTHER-SE> (11,848,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,000,000
<SALES> 1,611,000
<TOTAL-REVENUES> 1,611,000
<CGS> 1,001,000
<TOTAL-COSTS> 1,001,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102,000
<INCOME-PRETAX> (1,035,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,035,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,035,000)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
