ITEM 1. BUSINESS
YES Clothing Co.(R), "the Company" designs, contracts for the manufacture of and markets diversified lines of apparel for women in junior sizes, young men and kids. The Company sells its apparel to retail department stores and specialty chains and stores. The Company's garments are made in the United States and to a lesser extent in the Far East.
The Company was incorporated in California in 1982. Its principal executive offices are located at 1380 West Washington Boulevard, Los Angeles, California 90007, and its telephone number at that address is (213) 765-7800.
SALE TRANSACTION
On June 4, 1996, Georges Marciano and affiliates sold to Guy Anthome 3,515,000 shares of common stock at a purchase price of $0.01 per share. Mr. Marciano resigned as a director and Chairman of the Board and agreed to cancel the option and warrant issued in his favor. Mr. Anthome agreed to become Chairman of the Board and Chief Executive Officer at a salary of $150,000 per year. This transaction is known herein as the Sale Transaction.
ACQUISITION TRANSACTION
In November 1994, former Company Chairman of the Board and Chief Executive Officer, George Randall, and former President, Moshe Tsabag, signed an agreement to sell their holdings in the Company to affiliates of Georges Marciano, founder and former chairman of Guess, Inc.. The transaction closed on January 31, 1995, resulting in the acquisition by Marciano affiliates of approximately 80% of the outstanding common stock of the Company. As a result of the Acquisition Transaction, George Randall resigned his positions with the Company in January 1995 and Moshe Tsabag resigned as President in January 1995 and as a Board Member and employee in April 1995. This transaction is known herein as the Acquisition Transaction.
BUSINESS STRATEGY
Subsequent to the Acquisition Transaction by affiliates of Georges Marciano on January 31, 1995, the Company has changed its product focus in styles produced, the price of its products and targeted gross margins. The Company licensed a number of trademarks and designs from Mr. Marciano. However, the strategy was not successful and upon the close of the Sale Transaction the Company has reconsidered its design and marketing strategy. Subsequent to the Sale Transaction, the Company changed its merchandising and design direction and assembled a new management team. Most of its senior executive officers have been replaced and its design staff has been supplemented. The Company's business strategy is now to increase sales by reintroducing the YES label as a mass market line and by licensing branded lines of apparel.
Immediately before the Sale Transaction, Mr. Marciano, through an affiliated company, agreed to advance 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 to purchase certain assets approximating $1,463,000 in value. Mr. Marciano also agreed to cancel 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.
On June 25, 1996, the Company signed a five-year licensing agreement to design, manufacture and market men's and boy's sportswear for Body Glove International. The Company will pay a royalty on net sales of 6% on men's and 5% on boy's apparel.
APPAREL AND APPAREL DESIGN
The Company offers clothing for the women's "junior" market and for young men's and children's markets. The Company's business is generally divided among five retail selling seasons: Spring, Summer, Fall, Back-to-School; and Holiday. For each selling season, the Company introduces a separate apparel collection each year. Seasonal factors can cause some variance in production and sales levels among fiscal quarters in any fiscal year, but the Company does not regard its overall business as highly seasonal.
JUNIOR'S. The Company's clothing for the "junior" market incorporates current styles, fabrics and colors with a look that is designed to appeal to a broad cross-section of young women. Clothing for the junior market is characterized by sizes tailored for youthful figured women, The Company uses primarily denim and, to a lesser degree, twill, for shirts, pants, shorts, vests, jackets and dresses and knit and woven cotton for T-shirts, sweatshirts and other types of shirts. In addition, the Company has developed novelty knits for tops, using fabrics such as second skin satin, printed mesh and printed nylon.
YOUNG MEN'S. The company markets under the YES U.S.A.(TM) and YES Men(R) labels, denim jeans, shorts, jackets, and vests and cotton and denim shirts, T- shirts and sweatshirts. The men's line, with its distinctive look, uses denim, flannel, polar fleece, corduroy, cotton and rayon twill, wool and rayon gabardine, cotton pique and nylon in the production of T-shirts, sweatshirts, shirts, shorts, vests, jackets and pants.
CHILDREN'S WEAR. Prior to fiscal 1994, the Company had manufactured children's wear, mainly for girls aged to 7 to 14. In fiscal 1994, the Company discontinued the manufacture of children's wear and licensed out the YES name for the production of children's apparel. Subsequent to the Acquisition Transaction, the Company reacquired the children's wear license and began marketing, under the YES Kids(R) label, denim jeans, overalls, shorts, shortalls, skirts, skirtalls, vests, and jackets, cotton T-shirts and sweatshirts and denim and cotton shirts.
PRODUCTION
MANUFACTURING. The Company manufactures its garments using independent cutting and sewing contractors located principally in the Los Angeles area. The Company seeks to produce high quality garments through the use of quality fabrics, insistence on quality workmanship and use of comprehensive fabric and garment inspection programs.
The Company acquires fabric from suppliers and supplies such fabric, together with the garment pattern, to an independent contractor for cutting. The cut fabric and any buttons, zippers and other trim to be used on the garments are then delivered to independent sewing contractors. Under the Company's supervision, these contractors assemble and sew the fabric and add trim in accordance with production samples. The Company also employs a production coordinator and two full-time production assistants who regularly visit the Company's contractors to review the quality of the work in progress. Prior to distribution, the garments are delivered to the Company's warehouse for final inspection in the Quality Control Department.
The lead time to fill new orders placed by the Company with its manufacturing contractors generally ranges from three to four weeks for domestically produced garments. The Company generally schedules the manufacture of apparel based on orders received to reduce the risk of obsolescence of its garment inventory. The Company continuously monitors for obsolete and damaged inventory. Such inventory is usually sold to customers who specialize in merchandising off-price clothing or sold through a company owned factory outlet store.
The Company has long-standing relationships with its cutting contractor and many of its sewing production contractors but does not have written agreements with any of its contractors. For its domestically produced garments, the Company currently utilizes only one cutting contractor (who is located in the Company's facility and who works mainly for the Company) and approximately 15 sewing contractors (all of whom are located in the Los Angeles area).
The Company believes that its relationships with its cutting and sewing contractors are satisfactory. The Company does not believe that the loss of any contractor would have material adverse effect on the Company's operations as there are a number of domestic and foreign cutting and sewing contractors who can manufacture the Company's garments.
FABRICS. The fabrics primarily used by the Company are denim, cotton knits (jersey) and woven cotton (chambray and poplin), which are purchased domestically.
The Company believes that during the fiscal year ended March 31, 1996, its total (100%) expenditures for fabrics used in its domestically produced garments were paid to suppliers located in the United States. For the fiscal year ended March 31, 1996, approximately 10% of the Company's expenditures for domestically purchased fabrics was accounted for by its largest domestic fabric supplier, approximately 22% of such expenditures was accounted for by the Company's four largest domestic suppliers and approximately 29% of such expenditures was accounted for by the Company's ten largest domestic suppliers.
The Company does not have any long-term arrangements with any of its fabric suppliers. To date, the Company has not experienced any difficulty in satisfying its fabric requirements and it believes that the large number and diversity of potential suppliers minimizes the risk of the loss of any one supplier. The Company believes that the effect of the loss of one or a few of its fabric suppliers on the Company's operations would be minimal due to the large number and diversity of potential suppliers and the relative ease with which new supplier relationship may be established.
SALES AND MARKETING
The Company sells its apparel throughout the United States to retail department stores, specialty chains and specialty stores. For the fiscal year ended March 31, 1996, the Company sold its
apparel to over 800 retailing customers. Approximately 86.3% of sales were made to the Company's 100 largest customers.
Sales of the Company's garments are made through independent sales organizations and directly by the Company's sales staff. The Company maintains showrooms in New York City and Los Angeles for women's and men's apparel. The Company also engages the services of an independent sales organization in Miami which operates a showroom displaying the Company's products. Sales representatives at each showroom are responsible for marketing the Company's apparel within an assigned territory. Each sales representative meets with customers in the showroom, makes sales calls to customers and represents the Company at trade shows within the assigned territory. The sales organizations are retained on non-exclusive basis. The Company's independent sales organization is compensated on a commission basis on terms consistent with industry practice. The Company does not sell its garments on consignment.
The Company generally sells its products on net-30 day terms, except for Misfits and GMSurf(TM) Junior products which are sold on 8/10 end of month terms. The Company no longer has the right to use these trademarks.
The Company's backlog consists of purchase orders that have been received but not shipped, and amounted to approximately $1,100,000, $3,200,000 and $9,137,000 as of June 20, 1996, June 20, 1995 and June 20, 1994, respectively. The Company expects to ship all of the orders comprising the backlog prior to September 30, 1996.
While the failure to fill orders on a timely basis could have material adverse effect on the Company's sales, the Company has generally not experienced difficulty in shipping orders by the dates requested by its customers. The company does not generally accept returns except for damaged or defective garments or with respect to late deliveries. However, the Company does grant markdown money for slow moving goods.
ADVERTISING AND PROMOTION
The Company's advertising strategy is to promote an image associated with a fashionable look and youthful style and to promote the YES Clothing Co.(R) brands. The Company did not advertise extensively in 1996 and anticipates increasing its advertising budget in 1997. The Company had no cooperative advertising program for its retailers although it did, with advance approval, reimburse its customers for advertising the Company's products. The Company's expenditures for advertising and promotion were approximately $155,000 during fiscal 1996 (2.0% of net sales), $442,000 during fiscal 1995 (1.5% of net sales), and approximately $524,000 during fiscal 1994 (1.9% of net sales).
BRANDS AND TRADEMARKS
The Company's principal trademarks, YES Clothing Co.(R), YES(R), YES Men(R), YES Kids(R) and YES Jeans(R) are registered with the United States Patent and Trademark Office. The Company also has registered or has trademark applications pending, for these trademarks in other countries. The Company believes that these trademarks have significant value in the marketing of its apparel. There are other companies in the apparel and apparel-related industries that incorporate the word "yes" in their trademarks, and there can be no assurance that these or future trademarks which may be granted will not diminish the value of the Company's "YES Clothing Co.(R)" or "YES(R)" trademarks. Subsequent to the Acquisition
Transaction, the Company applied for domestic and foreign trademarks for YES U.S.A.(TM) in a diamond design.
Guess Inc. has filed oppositions and cancellations to certain of the Company's trademarks.
In addition to the YES(R) brand, the Company marketed apparel under the GM Surf(TM) and Misfits(R) labels which were licensed to the Company under an agreement with Marble Sportswear, Inc., a company controlled by Georges Marciano (see Related Party Transactions). These license agreements were terminated on May 1, 1996.
COMPETITION
The segments of the apparel industry in which the Company competes are highly fragmented. The Company competes with numerous other apparel manufacturers, which vary in size and in the products with which they design and manufacture. In addition, department stores, including some of the Company's customers, sell competing apparel under their own labels. Many of the Company's competitors are larger and have greater financial resources than the Company.
The marketing of apparel is highly competitive. The Company believes that the ability to gauge effectively and to respond to changes in consumer demands and tastes as well as the ability to produce and deliver its products on a timely basis are necessary to compete successfully in the apparel industry. The Company believes that consumer acceptance depends on the image, design, quality and price of its garments, and that its continuity will depend on its ability to remain competitive in these areas. The failure to design garments that meet with acceptance in the marketplace in the future could result in the material deterioration of customer loyalty and the Company's image and could adversely affect the Company's business.
EMPLOYEES
As of March 31, 1996, the Company employed 41 persons. None of the Company's employees are represented by a labor union. The Company considers its relations with employees to be satisfactory.
ENVIRONMENTAL REGULATION
The cost and effect of complying with environmental regulations are not material due to the nature of the Company's business.
ITEM 2.
ITEM 2. PROPERTIES
Effective May 1, 1992, the Company's executive offices, merchandising, production, shipping and warehousing facilities became located in a facility in Los Angeles totaling approximately 75,000 square feet, occupied pursuant to a lease expiring in May 1997. The Company also leases the following showrooms pursuant to leases expiring as indicated: Los Angeles (August 1997) and New York City showroom (June 2000). Management expects that in the normal course of business, such leases will be renewed or replaced by other leases. The Company believes its current facilities are generally in good operating condition and are suitable and adequate for its foreseeable needs. The Company does not believe the loss of any of these facilities would have a material adverse effect on its operations as equivalent facilities are readily available.
The Company also operates an Outlet Store located in Park City, Utah for the sale of slow moving/off season merchandise.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings the outcome of which could have a material effect on the company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of fiscal year 1996 to a vote of security holders.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common stock is traded on the NASDAQ SmallCap Market under the symbol YSCO. The following table sets forth the range of high and low sales prices of the Common stock, as reported by NASDAQ for each quarterly period during the past three fiscal years:
MARKET PRICES
APPROXIMATE NUMBER OF HOLDERS OF COMMON STOCK SECURITIES
The Company had approximately 51 holders of record of Common stock as of March 31, 1996.
DIVIDENDS
The Company has never paid cash dividends on its common equity. The Company is not restricted from making any cash dividend payments under its current credit agreement with its factor. However, the Company intends to retain any earnings within the Company for the foreseeable future.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for each of the five years in the period ended March 31, 1996 are derived from the audited Financial Statements of the Company and should
be read in conjunction with such Financial Statements and related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
(a) Weighted average number of shares have been computed based on the number of shares outstanding each period. The effect of options granted but not exercised has not been included as the effect would have either been immaterial or antidilutive.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
FISCAL YEARS 1996, 1995 AND 1994
NET SALES decreased by $21,029,000 or 73.5% to $7,551,000 in fiscal 1996 due to a lack of acceptance of the Company's new marketing and design direction after the Acquisition Transaction and the termination of the Company's prior business practices.
In fiscal 1995, net sales increased by $697,000 or 2.5% to $28,580,000 due to the addition of the GMSurf(TM) and Misfits(R) lines at the end of the fourth quarter of that fiscal year.
GROSS PROFIT as a percentage of net sales decreased significantly to minus 20.0% in fiscal 1996 from 11.8% in fiscal 1995 due to a number of factors, including decreased sales volume, significant price competition, increased materials costs and markdown of inventory as a result of poor sales and an excessive inventory level. Gross profit as a percentage of net sales decreased to 11.8% in fiscal 1995 from 13.2% in fiscal 1994 due to higher levels of markdowns and a reduction in prices negotiated by retailers in response to cost conscious consumers.
COMMISSION INCOME decreased by $352,000 or 91.9% to $31,000 due to the discontinuation of commission transactions. Commission income is generated from shipments of goods manufactured in the
Orient to domestic and overseas customers. In fiscal 1995, commission income decreased $306,000 or 44.4% to $383,000 from $689,000 in fiscal 1994 due to a general decline in sales.
The Company had no ROYALTY INCOME in fiscal 1996. Royalty income decreased by $9,000 to $51,000 in fiscal 1995 from $60,000 in fiscal 1994 due to the termination of licensee agreements in Canada and the United States.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A") decreased to $6,039,000 in fiscal 1996 from $7,972,000 in fiscal 1995, which represented 80.0% and 27.9% of net sales, respectively. (When commission and royalty income is added to net sales, the percentage of SG&A is reduced to 79.6% and 27.5%, respectively.)
The main factors reducing SG&A in fiscal 1996 were as follows:
1) Payroll and payroll tax decreased to $1,704,000 in fiscal 1996 from $2,795,000 in fiscal 1995 due to a reduction in the number of employees and levels of compensation paid to officers.
2) Sales commission and factor expense decreased to $202,000 in fiscal 1996 from $747,000 in fiscal 1995 due to the reduction in sales.
3) Advertising and travel expenses were reduced to $775,000 in fiscal 1995 from $1,064,000 in fiscal 1994 in order to conserve working capital.
SG&A expenses decreased to $7,972,000 in fiscal 1995 from $8,816,000 is fiscal 1994 primarily due to decreases in insurance, advertising, travel, payroll, payroll tax and profit sharing expenses.
OTHER INCOME - INSURANCE - Subsequent to March 31, 1992, the Company incurred the loss of substantially all of its finished goods inventory in connection with civil disturbances in the City of Los Angeles. During the fiscal year ended March 31, 1993 the Company recovered, from one insurance company, the cost of the inventory lost and its normal gross profit which would have been derived from the sales of those goods. During the fiscal year ended March 31, 1994 the Company recovered $1,658,000, net of costs, from a second insurance company for business interruption losses related to the civil disturbance.
INTEREST INCOME decreased to $1,000 in fiscal 1996 from $3,000 in fiscal 1995. Interest income decreased to $3,000 in fiscal 1995 from $74,000 in fiscal 1994 due to a change in the Company's factoring agreement. (See CAPITAL RESOURCES AND LIQUIDITY).
INTEREST EXPENSE increased to $284,000 in fiscal 1996 from $255,000 in fiscal 1995 due to increased working capital requirements and borrowings from the Company's Factor. Interest expense increased to $255,000 in fiscal 1995 from $128,000 in fiscal 1994 due to increased borrowings from the Company's Factor.
INCOME TAXES in fiscal 1995 includes a valuation allowance of $6,377,000 which is equal to 100% of the net deferred tax asset. This valuation allowance is considered appropriate since the Company cannot conclude that it is more likely than not that the net deferred tax asset will be realized.
CAPITAL RESOURCES AND LIQUIDITY
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).
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. As a result of not meeting its guaranteed minimum sales, the Company has accrued for the commission rate increase in Fiscal 1996.
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. There were no letters of credit outstanding as of March 31, 1996. Commitments outstanding under the letter of credit facility as of March 31, 1995 amounted to $652,000.
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, agreed to advance 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 to purchase certain assets approximating $1,463,000 in value. Mr. Marciano also agreed to cancel 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 March 31, 1996, the Company had net working capital deficit of $3,233,000, as compared to a surplus of $866,000 as of March 31, 1995. The Company's current ratio as of March 31, 1996 was (0.3), as compared to 1.4 as of March 31, 1995. The decreases in working capital and current ratio are primarily due to continued operating losses. The factoring position had a net overadvance of $3,232,000 as compared
to $678,000 in available funds as of March 31, 1995. This change is due to increased working capital requirments.
Inventories at March 31, 1996 were $1,398,000 as compared to $2,158,000 at March 31, 1995, a decrease of $760,000. The decrease was due to a reduction of inventories to levels consistent with reduced order backlog and the markdown of slow-moving and obsolete merchandise.
The Company has funded its activities principally from advances and letters of credit provided by its principal shareholder.
In June 1996, the Company entered into an agreement with Imperial Bank which provides the Company with a $1,200,000 credit facility 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 the end of summer of 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.
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 October 1996.
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------
Board of Directors Yes Clothing Co.
We have audited the accompanying balance sheet of Yes Clothing Co. as of March 31, 1996 and 1995 and the related statements of operations, changes in shareholders' equity and cash flows for the years then ended. We have also audited the financial statement schedule for the year ended March 31, 1996, listed under item 14. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Yes Clothing Co. as of March 31, 1996 and 1995, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. In our opinion, the schedule for the year ended March 31, 1996 and 1995 presents fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred operating losses, has a deficit of working capital and tangible net worth, and other adverse financial indicators. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
MOSS ADAMS LLP
Los Angeles, California May 30, 1996 (except for Note 10, as to which the date is June 4, 1996)
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS --------------------------------------
Board of Directors Yes Clothing Co.
We have audited the balance sheet of Yes Clothing Co., as of March 31, 1994, and the accompanying related statement of operations, changes in shareholders' equity and cash flows for year then ended. We have also audited the financial statement schedules listed under Item 14. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Yes Clothing Co., as of March 31, 1994 and the results of its operations and its cash flows for year then ended, in conformity with generally accepted accounting principles.
Also, in our opinion, the schedules for the year ended March 31, 1994 present fairly, in all material respects, the information set forth therein.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the "Financial Condition" section of Note 1 to the financial statements, the Company has incurred operating losses, has a deficit of working capital and tangible net worth, and other adverse financial indicators. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters also are discussed in the "Financial Condition" section of Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
BDO SEIDMAN, LLP Los Angeles, California May 27, 1994 (except for the "Financial Condition" section of Note 1 which is as of July 12, 1996)
YES CLOTHING CO.
BALANCE SHEET
MARCH 31, 1996 AND 1995
ASSETS
The accompanying notes are an integral part of these financial statements
YES CLOTHING CO.
STATEMENT OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995, AND 1994
The accompanying notes are an integral part of these financial statements
YES CLOTHING CO.
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these financial statements
YES CLOTHING CO.
STATEMENT OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
The accompanying notes are an integral part of these financial statements
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 1 - ORGANIZATION AND FINANCIAL CONDITION
ORGANIZATION - Yes Clothing Co.(R) (the "Company") was incorporated on July 1, 1982, in the State of California. The Company designs, manufactures and markets a diversified line of apparel primarily for women and young men. The Company sells its garments throughout the United States and Canada to retail department stores, specialty chains and specialty stores.
The Company also arranged for the manufacture, in the Orient, of certain of its styles, which are shipped directly from the manufacturer to customers in the United States, Europe and Japan. In connection there within, the Company received a percentage of the sales price charged by the manufacturer and recognized this amount as commission income in the accompanying statement of operations. Subsequent to the acquisition transaction as described below, the Company discontinued these commission transactions.
In January 1995, control of the Company changed when its two principal shareholders sold all of their shares, amounting to approximately 80% of the Company's outstanding stock, to affiliates of an individual. This transaction is herein referred to as the "Acquisition Transaction" and the collective new majority interest as the "Principal Shareholder". The principal shareholder currently holds approximately 88% of the Company's outstanding stock.
FINANCIAL CONDITION - The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. The Company sustained a substantial loss for the year ended March 31, 1996 and has experienced operating and net losses each year since 1992. The operating results for the three months ended June 30, 1996 are anticipated to reflect continued net losses. At this time, the Company is not able to sustain operations without an infusion of capital.
As described in Note 10, effective June 4, 1996, the Company's principal shareholder sold approximately 50% of the Company's outstanding shares to an individual who has assumed the position of Chairman and Chief Executive Officer of the Company. This transaction infused substantial capital in the Company, significantly improving its financial condition. Under new management, the Company has the following plans to return to profitability and continue as a going concern:
* Increase sales by reintroducing the "YES" label as a mass market line of apparel and by licensing branded lines of apparel.
* Increase gross margin through the use of controls on manufacturing costs and design and production overhead.
* Assemble an experienced team of apparel professionals with strengths in management, sales and marketing.
* Actively seek additional equity funding.
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES - Inventories are stated at the lower of cost (first-in, first- out basis) or market.
DEPRECIATION AND AMORTIZATION - Depreciation and amortization of property and equipment are provided principally by the straight-line method over the following estimated useful lives:
Furniture and fixtures 5 years Machinery and equipment 10 years Leasehold improvements Life of lease
The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets." This standard will become effective for the year ending March 31, 1997, although earlier application is permitted. The Company has determined that it will implement the new standard in 1997. Long- lived assets such as plant and equipment are recorded at cost, and the cost is reduced over time by depreciation and amortization. SFAS 121 will require that long-lived assets be periodically evaluated and a loss recognized should the carrying amount of the asset be considered unrecoverable. The Company has not determined the impact, if any, that adoption of the new standard will have on the financial condition and results of operations. However, management believes the effect of the new accounting standard will not be significant.
INCOME TAXES - Income taxes are accounted for using an asset and liability approach. Deferred income taxes are provided for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. Income taxes are further explained in Note 9.
LOSS PER SHARE - Loss per share is based on the weighted average number of shares of common stock outstanding during each period. Stock options have not been considered in the loss per share calculations since the effect would be antidilutive.
STATEMENT OF CASH FLOWS - For purposes of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
FINANCIAL INSTRUMENTS AND RISK CONCENTRATION - Financial instruments which potentially subject the Company to concentrations of credit risk consist of accounts receivable. Concentrations of credit risk with respect to receivables are limited due to the use of a factor.
Statement of Financial Accounting Standard No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS 107), became effective in the Company's year ended March 31, 1996. SFAS 107 requires the disclosure of the fair market value of financial instruments for which it is practicable to estimate fair value. Financial instruments include cash, receivables and debt instruments. The Company considers the carrying amounts in the financial statements to approximate fair value for these financial instruments and their expected realization.
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION - The Financial Accounting Standards Board has recently issued Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation. This standard will become effective for the year ending March 31, 1997, although earlier application is permitted. The Company has determined that it will implement the new standard in 1997. Under SFAS 123, a fair value method is used to determine compensation cost for stock options or similar equity instruments. Compensation is measured at the grant date and is recognized over the service or vesting period. Under the current accounting standard, compensation cost is the excess, if any, of the quoted market price of the stock at a measurement date over the amount that must be paid to acquire the stock.
The new standard would allow the Company to continue to account for stock- based compensation under the current standard, with disclosure of the effects of the new standard, or adopt a fair value based method of accounting. The Company has not yet decided which method will be utilized, nor has it determined the impact, if any, that adoption of the new standard will have on the financial condition and results of operations. However, management believes the effect of the new accounting standard will not be significant.
NOTE 3 - TRANSACTIONS WITH FACTOR AND BANK BORROWING
The Company has an agreement with a factor and a letter of credit facility with a related financing bank through March 1997. Under the 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. Under the letter of credit facility, the financing bank provides a credit line for letters of credit, ledger debt and factor guarantees up to the 80% advance rate provided under the factoring agreement with an additional over advance facility of $1,050,000.
The factor charges a commission on the net sales factored and interest on advances at prime plus a negotiated rate. The agreements are collateralized by accounts receivable and inventory imported under letters of credit.
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 3 - TRANSACTIONS WITH FACTOR AND BANK BORROWING (Continued)
There were no outstanding open letters of credit at March 31, 1996. Included in accounts payable at March 31, 1996 is $39,000 due to the factor for piece goods purchases.
Due to/from factor consists of the following:
In conjunction with the transaction described in Note 10, subsequent to March 31, 1996, advances from the factor were repaid.
During fiscal 1996, the maximum amount of advances outstanding was approximately $3,571,000. The average advances based upon month-end balances was approximately $2,579,000. The average cost of borrowing, which includes factoring commission and interest, was approximately 10.9% during 1996.
NOTE 4 - INVENTORIES
NOTE 5 - PROPERTY AND EQUIPMENT
In conjunction with the transaction described in Note 10, property and equipment with an aggregate net book value of $260,000 was sold after March 31, 1996.
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 6 - CONTRACTS PAYABLE
The Company leases equipment under capital leases which expire on various dates through March 1998. The remaining obligations under these capital leases for future years ended March 31 are as follows:
Equipment under capital leases and related accumulated depreciation as of March 31, 1996 amounts to $248,000 and $138,000, respectively.
NOTE 7 - DUE TO RELATED PARTY
A $369,000 unsecured note payable to the principal shareholder bears interest at the lessor of 8% or the prime rate of interest less 1%. This note was terminated in connection with the transaction described in Note 10.
NOTE 8 - COMMITMENTS
The Company leases its office, warehouse, retail store and showrooms under various operating leases expiring through August 1999. Minimum payments under non-cancelable operating leases for future years ending March 31 are as follows:
Rent expense for the years ended March 31, 1996, 1995 and 1994, was approximately $656,000 (net of $96,000 sublease income), $609,000 and $593,000, respectively.
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995 NOTE 9 - INCOME TAXES
Income taxes are summarized as follows:
The primary difference between the income tax benefit or expense computed at the U.S. statutory corporate income tax rate and the effective income tax rate is due to the limitations on the utilization of net operating losses and the valuation allowance established due to the uncertainty of realization of a future tax benefit.
Deferred income taxes arise from temporary differences between financial and tax reporting. The effects of these differences on income taxes are as follows:
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 9 - INCOME TAXES (Continued)
At March 31, 1996 and 1995, deferred tax assets and liabilities are comprised of the following elements:
The Federal and State net operating loss carryforwards of approximately $15,035,000 and $16,304,000, respectively, expire from the years 2007 through 2011. Because ownership of the Company changed control during 1996, a portion of the net operating loss carryforwards will be limited. Approximately $5,896,000 and $7,630,000 of Federal and State net operating losses, respectively, are subject to a maximum annual utilization totaling approximately $522,000.
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 10 - SHAREHOLDERS' EQUITY
STOCK OPTION PLAN - The Company has a stock option plan (the "Plan") for key employees, directors, officers and consultants of the Company. The plan provides for the issuance of up to 400,000 shares of common stock. Outstanding options are exercisable for a period of up to ten years and one week from the date of grant. Activity under this plan for 1994 through 1996 is as follows:
REPURCHASE OF STOCK OPTIONS - In conjunction with the change of principal ownership in February 1995, the Company repurchased various stock options for a total of $330,000. Funds for this transaction were provided by the principal shareholder (Note 7).
REPURCHASE OF LICENSE AGREEMENTS - In connection with the change in principal ownership in 1995, the Company reacquired certain licenses for a total of $295,000. This amount is reflected as an "other expense" in the statement of operations.
SIGNIFICANT CAPITAL TRANSACTION - Effective June 4, 1996, the Company's principal shareholder sold approximately 50% of the Company's outstanding shares in a private transaction. Concurrent with this transaction, a Company affiliated through substantially common ownership advanced $3,100,000 to the Company. In addition, the affiliate purchased from the Company certain inventory and equipment for $1,463,000 at a gain of $471,000. The Company used the funds to repay factor advances and related party debt.
The affiliate which advanced the funds has agreed to forgive payment on all but $500,000 (including $369,000 which was owed as of March 31, 1996), which shall be repaid in two installments of $250,000 each by January 31, 1997. The balance of the advances of approximately $1,977,000 will be considered a contribution of capital.,
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 10 - SHAREHOLDERS' EQUITY (Continued)
The selling shareholder returned to the Company for cancellation options to purchase 2,000,000 shares of common stock and warrants to purchase 2,000,000 shares of common stock of the Company. In addition, the Company surrendered its right and licenses to use certain trademarks and names associated with the selling shareholder and the affiliated Company.
The following condensed proforma balance sheet presents the financial condition of the Company as of March 31, 1996, giving effect to these transactions as they occurred on or before March 31, 1996.
YES CLOTHING CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
NOTE 11 - INSURANCE RECOVERIES
Subsequent to March 31, 1992, the Company incurred the loss of substantially all of its finished goods inventory in connection with civil disturbances in the City of Los Angeles. During the fiscal year ended March 31, 1993 the Company recovered from one insurance company, the cost of the inventory lost and its normal gross profit which would have been derived from the sale of those goods. For the years ended March 31, 1995 and 1994, the Company recovered a net $63,000 AND $1,658,000, respectively, from a second insurance company for business interruptions losses related to the civil disturbances.
NOTE 12 - OTHER RELATED PARTY TRANSACTIONS
A law firm in which one member of the Board of Directors is a partner, was paid $93,000 and $62,000 for legal services for the years ended March 31, 1995 and 1994, respectively. This Board member resigned effective May 16, 1995.
One former member of the Board of Directors served as a consultant to the Company and was paid $111,000 for consulting services for the year ended March 31, 1994, $100,000 for which was special bonus in connection with the settlement of the Company's business interruption claim (Note 11), and $6,000 annually for the year ended March 31, 1995. Another former member of the Board of Directors served as a consultant to the Company and was paid $4,000 for consulting services for the year ended March 31, 1994.
YES CLOTHING CO.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(a) Represents net write-offs of uncollectible accounts against the allowance.
(b) Represents write-offs of uncollectible accounts against the reserve.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is hereby incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A which involves the election of Directors.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is hereby incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A which involves the election of Directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is hereby incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A which involves the election of Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is hereby incorporated by reference to the Company's proxy statement to be filed pursuant to Regulation 14A which involves the election of Directors.
PART IV
ITEM 14. EXHIBIT, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The following financial statements of Yes Clothing Co.(R) are included in Item 8:
Item 8:
Balance sheet Statement of operations Statement of changes in shareholders' equity Statement of cash flows Notes to financial statements
Financial Statement Schedule: II - Valuation and qualifying accounts
EXHIBITS
See index to exhibits.
REPORTS ON FORM 8-K
The Company filed a report on Form 8K on June 18, 1996 with respect to the June 4, 1996 transaction between Marciano, the Company and Anthome.
REPORT OF MANAGEMENT
The accompanying financial statements have been prepared by management in conformity with generally accepted accounting principles, and necessarily include some amounts that are based on management's best estimates and judgments.
Yes Clothing Co.(R) maintains a system of internal accounting controls designed to provide management with reasonable assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization and recorded properly. The concept of reasonable assurance is based on the recognition that the cost of a system of internal control should not exceed the benefits derived and that the evaluation of those factors requires estimates and judgments by management. Further, because of inherent limitations in any system of internal accounting control, errors or irregularities may occur and not be detected. Nevertheless, management believes that a high level of internal control is maintained by Yes Clothing Co. through the selection and training of qualified personnel, and the establishment and communication of accounting and business policies.
The Audit Committee of the Board of Directors, composed solely of outside directors, meets periodically with management and with Yes Clothing Co.(R)'s independent auditors to review matters relating to the quality of financial reporting and internal accounting control, and the nature, extent and results of their audits. Yes Clothing Co.'s independent auditors have free access to the Audit Committee.
Guy Anthome Guy Anthome Jeffrey Busse Chairman, President Chief Financial Chief Executive Officer Officer
SIGNATURES
Pursuant to the requirements of Section 13 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/ GUY ANTHOME ------------------------- Chairman of the Board and Chief Executive Officer
July 12, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Guy Anthome Chairman of the Board - - --------------------------- Chief Executive Officer July 12, 1996 Guy Anthome and Director Principal Executive Officer
/s/ Guy Anthome - - --------------------------- President Guy Anthome and Director July 12, 1996
/s/ Jeffrey P. Busse - - --------------------------- Chief Financial Officer Jeffrey P. Busse and Director July 12, 1996 Principal Financial and Accounting Officer
/s/ Irving B. Kroll - - --------------------------- Director July 12, 1996 Irving B. Kroll
/s/ Maurice Schoenholz - - --------------------------- Director July 12, 1996 Maurice Schoenholz
INDEX TO EXHIBITS
_______________________
* Management contract or executive compensation plan or arrangement. (1) Filed as an exhibit to the annual Report on Form 10-K for the fiscal year ended March 31, 1990, and incorporated herein by this reference. (2) Filed as an exhibit to the annual Report on Form 10-K for the fiscal year ended March 31, 1991 and incorporated herein by this reference. (3) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1992, and incorporated herein by this reference. (4) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1993 and incorporated herein by this reference. (5) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1994. (6) Filed as an exhibit to the Annual Report on Form 10-K for the fiscal year ended March 31, 1995.