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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 27, 1999
OR
/ / 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 1-11893
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GUESS ?, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3679695
- ------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1444 South Alameda Street
Los Angeles, California, 90021
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(Address of principal executive offices)
(213) 765-3100
--------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether 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
---- ----
As of May 7, 1999, the registrant had 42,939,702 shares of Common Stock, $0.01
par value, outstanding.
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GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
as of March 27, 1999 and December 31, 1998...................... 1
Condensed Consolidated Statements of Earnings (Unaudited) -
First Quarters ended March 27, 1999 and March 29, 1998.......... 2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
First Quarters ended March 27, 1999 and March 29, 1998.......... 3
Notes to Condensed Consolidated Financial Statements (Unaudited).... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risks......... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 12
Item 2. Changes in Securities and Use of Proceeds........................... 13
Item 3. Defaults Upon Senior Securities..................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................. 13
Item 5. Other Information................................................... 13
Item 6. Exhibits and Reports on Form 8-K.................................... 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
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<CAPTION>
Mar 27, Dec 31,
1999 1998
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ASSETS
Current assets:
Cash........................................................ $ 3,441 $ 5,853
Investments................................................. 14,000 11,900
Receivables:
Trade receivables, net of reserves....................... 39,389 19,685
Royalties, net of reserves............................... 11,668 10,780
Other.................................................... 3,519 3,673
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54,576 34,138
Inventories, net of reserves (note 3)....................... 70,882 89,499
Prepaid expenses............................................ 5,633 8,206
Deferred tax assets......................................... 6,496 6,496
-------- --------
Total current assets.................................. 155,028 156,092
Property and equipment, at cost, net of accumulated
depreciation and amortization............................... 83,190 86,453
Other assets, at cost, net of accumulated amortization........ 23,862 21,227
-------- --------
$262,080 $263,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................ $23,109 $32,802
Accrued expenses............................................ 17,989 21,770
Income taxes payable........................................ 4,663 210
-------- --------
Total current liabilities............................. 45,761 54,782
Notes payable and long-term debt.............................. 95,000 99,000
Other liabilities............................................. 9,334 9,581
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150,095 163,363
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding.................. -- --
Common stock, $0.01 par value. Authorized 150,000,000
shares; issued 62,949,577 and 62,637,327 shares,
outstanding 42,918,785 and 42,906,535 shares at
March 27, 1999 and December 31, 1998, respectively,....... 137 137
Paid-in capital............................................. 158,687 158,589
Retained earnings........................................... 104,029 92,543
Accumulated other comprehensive income (loss)............... (92) (84)
Treasury stock, 20,030,792 shares repurchased............... (150,776) (150,776)
-------- --------
Net stockholders' equity.............................. 111,985 100,409
-------- --------
$262,080 $263,772
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
1
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GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
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<CAPTION>
First Quarter Ended
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March 27, March 29,
1999 1998
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Net revenue:
Product sales........................................ $119,941 $100,205
Net royalties........................................ 9,111 10,563
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129,052 110,768
Cost of sales............................................ 75,024 64,316
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Gross profit............................................. 54,028 46,452
Selling, general & administrative expenses............... 32,280 30,024
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Earnings from operations............................. 21,748 16,428
Other income (expense):
Interest, net........................................ (2,333) (3,182)
Other, net........................................... (112) (212)
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(2,445) (3,394)
Earnings before income taxes......................... 19,303 13,034
Income taxes............................................. 7,817 5,083
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Net earnings......................................... $11,486 $7,951
========= =========
Basic and diluted earnings per share:
- -------------------------------------
Net earnings - basic and diluted......................... $0.27 $0.19
========= =========
Weighted number of shares outstanding - basic............ 42,919 42,902
========= =========
Weighted number of shares outstanding - diluted.......... 43,177 42,903
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
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GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
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First Quarter Ended
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March 27, March 29,
1999 1998
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Cash flows from operating activities:
Net earnings.................................................. $11,486 $7,951
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and
equipment............................................... 5,517 5,693
Amortization of other assets............................... 220 199
Foreign currency translation adjustment.................... 9 65
Loss on disposition of property and equipment.............. 15 --
Undistributed equity method earnings....................... (2) 128
Issuance of common stock...................................... 98 --
(Increase) decrease in:
Receivables............................................. (20,439) (16,873)
Inventories............................................. 18,618 7,114
Prepaid expenses and other current assets............... 2,573 3,708
Other assets............................................ (229) 147
Increase (decrease) in:
Accounts payable........................................ (9,693) (6,131)
Accrued expenses........................................ (4,011) (7,744)
Income taxes payable.................................... 4,453 (64)
--------- ---------
Net cash provided by (used in) operating activities...... 8,615 (5,807)
Cash flows from investing activities:
Purchases of property and equipment........................... (2,292) (1,334)
Proceeds from the disposition of property and equipment....... 6 --
Lease incentives granted...................................... -- 154
Acquisition of license........................................ (125) 94
Increase in short-term investments............................ (2,100) --
Increase in long-term investments............................. (2,500) --
--------- ---------
Net cash used in investing activities.................... (7,011) (1,086)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt................ -- 40,400
Repayments of notes payable and long-term debt................ (4,000) (34,000)
--------- ---------
Net cash provided by (used in) financing activities...... (4,000) 6,400
Effect of exchange rates on cash.................................. (16) (15)
Net decrease in cash.............................................. (2,412) (508)
Cash, beginning of period......................................... 5,853 8,204
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Cash, end of period............................................... $3,441 $7,696
========= =========
Supplemental disclosures:
- -------------------------
Cash paid during the period for:
Interest................................................... $6,274 $6,951
Income taxes............................................... 610 303
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
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GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 27, 1999
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Guess ?, Inc. and its subsidiaries (the
"Company") contain all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position as of March
27, 1999 and the results of operations and cash flows for the three months
ended March 27, 1999 and March 29, 1998. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with Rule
10-01 of Regulation S-X of the Securities and Exchange Commission ("SEC").
Accordingly, they have been condensed and do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer
to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1998.
(2) Summary of Significant Accounting Policies
Earnings Per Share
Basic earnings per share represents net earnings divided by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share represents net earnings divided by the weighted-average
number of shares outstanding, inclusive of the dilutive impact of common
stock equivalents. During the first quarters ended March 27, 1999 and March
29, 1998, the difference between basic and diluted earnings per share was due
to the dilutive impact of options to purchase common stock.
Business Segment Reporting
The Company adopted SFAS 131, "Disclosures About Segments of an Enterprise
and Related Information," effective in 1998. SFAS No. 131 establishes new
standards for reporting information about business segments and related
disclosures about products and services, geographic areas and major
customers. The business segments of the Company are wholesale, retail and
licensing operations. Information to these segments is summarized in note 5.
Software Costs
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-5, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-5"). SOP
98-5 provides guidance on accounting for the costs of computer software
developed or obtained for internal use. It is effective for fiscal years
beginning after December 15, 1998. The Company adopted SOP 98-5 effective
January 1, 1999 and determined that the adoption of SOP 98-5 did not have a
material impact on the Company's financial reporting.
Start-up Costs
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-1 ("SOP 98-1"), "Reporting on the Costs of Start-up
Activities." SOP 98-1 requires that costs of start-up activities, including
organization costs and retail store openings, be expensed as incurred. The
Company adopted SOP 98-1 effective January 1, 1999 and determined the
adoption of SOP 98-1 did not have a material impact on the Company's
financial reporting.
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Comprehensive Income
The Company adopted Statement of Accounting Standards No. 130, "Reporting
Comprehensive Income," on January 1, 1998. The only difference between "net
earnings" and "comprehensive income" is the impact from foreign currency
translation adjustments. Accordingly, a reconciliation of comprehensive
income for the three and nine months ended September 27, 1998 and September
28, 1997 is as follows (in thousands):
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Three Months Ended
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Mar 27, Mar 29,
1999 1998
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Net earnings.................. $11,486 $7,951
Foreign currency
translation adjustment....... (9) (65)
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Comprehensive income.......... $11,477 $7,886
========= =========
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In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
was issued. SFAS 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. The Company
currently does not have any derivative financial instruments and does not
currently employ any hedging activities.
(3) Inventories
The components of inventory consist of the following (in thousands):
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Mar 27, Dec 31,
1999 1998
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Raw materials.................................... $3,997 $9,400
Work in progress................................. 5,541 7,922
Finished goods - wholesale....................... 26,437 35,465
Finished goods - retail.......................... 34,907 36,712
--------- ---------
$70,882 $89,499
========= =========
</TABLE>
(4) Income taxes
Income taxes for the interim periods were computed using the effective tax
rate estimated to be applicable for the full fiscal year, which is subject to
ongoing review and evaluation by management.
(5) Segment Information
In accordance with the requirements of SFAS 131, "Disclosures about Segments
of and Enterprise and Related Information," the Company's reportable business
segments and respective accounting policies of the segments are the same as
those described in note 2. Management evaluates segment performance based
primarily on revenue and earnings from operations. Interest income and
expense is evaluated on a consolidated basis and not allocated to the
Company's business segments.
5
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Net revenue and earnings from operations is summarized as follows for the
quarters ended March 27, 1999 and March 29, 1998 (in thousands):
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First Quarter Ended
Mar 27, Mar 29,
1999 1998
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Net revenue:
Wholesale operations...................... $68,467 $60,682
Retail operations......................... 51,474 39,523
Licensing operations...................... 9,111 10,563
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$129,052 $110,768
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Earnings from operations:
Wholesale operations...................... $14,031 $10,478
Retail operations......................... 7 (3,149)
Licensing operations...................... 7,710 9,099
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$21,748 $16,428
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</TABLE>
Due to the seasonal nature of these business segments, especially retail
operations, the above net revenue and operating results for the first quarter
are not necessarily indicative of the results that may be expected for the
full fiscal year.
6
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-Q.
Forward-looking statements may also be in the registrant's other reports
filed under the Securities Exchange Act of 1934, as amended, in its press
releases and in other documents. In addition, from time to time, the
registrant through its management may make oral forward-looking statements.
Forward-looking statements generally refer to future plans and performance,
and are identified by the words "believe," "expect," "anticipate,"
"optimistic," "intend," "aim," "estimate," "may," "plan," "predict," "will"
or the negative thereof and similar expressions. Readers are cautioned not to
place undue reliance on these forward-looking statements, which refer only as
of the date of which they are made. The registrant undertakes no obligation
to update publicly or revise any forward-looking statements. Such statements
are subject to a number of risks and uncertainties, including the timely
availability and acceptance of products and the impact of competitive
products and reference is hereby made to the registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998 for a discussion of
important factors that could cause actual results to differ materially from
the forward-looking statements.
OVERVIEW
The Company derives its net revenue from the sale of Guess men's, women's and
girl's apparel worldwide to wholesale customers and distributors; from the
sale of Guess men's, women's and girl's apparel and its licensees' products
through the Company's network of retail and factory outlet stores located
primarily in the United States; and from net royalties via worldwide
licensing activities.
RESULTS OF OPERATIONS
First Quarters Ended March 27, 1999 and March 29, 1998
NET REVENUE. Net revenue increased $18.3 million or 16.5% to $129.1 million
in the first quarter ended March 27, 1999 from $110.8 million in the first
quarter ended March 29, 1998. Net revenue from wholesale operations increased
$7.8 million or 12.8% to $68.5 million from $60.7 million. The Company's
wholesale net revenue increased primarily due to stronger demand for both the
women's and men's product lines. Net revenue from retail operations increased
$12.0 million or 30.2% to $51.5 million from $39.5 million, primarily
attributable to a 28.9% increase in comparable store net revenue. The
increase in comparable store net revenue was primarily due to improved
merchandising and product assortment offerings. Net royalties decreased $1.5
million or 13.7% in the first quarter ended March 27, 1999 to $9.1 million
from $10.6 million in the first quarter ended March 29, 1998. The decline in
net royalties was primarily due to decreased revenue from certain
discontinuing licenses and the continued economic pressures on Asian, South
American and Mexican licenses, partially offset by growth in European
licensing revenue. Net revenue from international operations comprised 8.4%
and 10.0% of the Company's net revenue during the first quarters of 1999 and
1998, respectively. The decrease in the percentage of revenue from
international operations was primarily due to the increased domestic revenue.
GROSS PROFIT. Gross profit increased 16.3% to $54.0 million in the first
quarter ended March 27, 1999 from $46.5 million in the first quarter ended
March 29, 1998. The increase in gross profit was due to higher net revenue
from product sales, partially offset by lower net royalties. Gross margin
remained the same at 41.9% in the quarter ended March 27, 1999 compared to
the quarter ended March 29, 1998. Gross margin from product sales increased
to 37.5% in the quarter ended March 27, 1999 compared to 35.8% in the quarter
ended March 29, 1998. The increase in gross margin was primarily attributable
7
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to fixed store occupancy costs being spread over a higher comparable store
revenue base in the 1999 period.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased 7.5% in the quarter ended March
27, 1999 to $32.3 million, or 25.0% of net revenue, from $30.0 million, or
27.1% of net revenue, in the first quarter ended March 29, 1998. The increase
was primarily due to higher store selling expenses, related to higher retail
volume. As a percentage of net revenue, the decrease in SG&A costs was the
result of fixed expenses being spread over a higher revenue base in the 1999
period.
EARNINGS FROM OPERATIONS. Earnings from operations increased $5.3 million or
32.4% to $21.7 million, or 16.9% of net revenue, in the first quarter ended
March 27, 1999 from $16.4 million, or 14.8% of net revenue, in the first
quarter ended March 29, 1998. The increase in earnings from operations was
primarily due to higher revenue from wholesale and retail operations,
partially offset by a decrease in net revenue from licensing operations.
Earnings from wholesale operations increased 33.9% to $14.0 million, or 10.9%
of net revenue, in the first quarter ended March 27, 1999 from $10.5 million,
or 9.5% of net revenue, in the first quarter ended March 29, 1998 primarily
due to increased revenue from both the men's and women's product lines.
Earnings from retail operations increased 100.2% to $0.0 million in the first
quarter ended March 27, 1999 from a loss of $3.1 million, or 2.8% of net
revenue, in the first quarter ended March 29, 1998, primarily due to higher
revenue. Earnings from retail operations reflect normal seasonal revenue
patterns, with the first quarter typically producing the lowest retail
revenue. Additionally, the lower seasonal earnings reflect fixed store
occupancy costs being spread over this lower revenue base. Earnings from
licensing operations decreased 15.3% to $7.7 million, or 6.0% of net revenue,
in the first quarter ended March 27, 1999 from $9.1 million, or 8.2% of net
revenue, in the first quarter ended March 29, 1998.
INTEREST EXPENSE, NET. Net interest expense decreased 26.7% to $2.3 million
in the first quarter ended March 27, 1999 from $3.2 million in the first
quarter ended March 29, 1998. The decrease in interest expense was due to
lower outstanding debt in the first quarter ended March 27, 1999, partially
offset by a higher net effective interest rate. For the first quarter ended
March 27, 1999, the average debt balance was $96.8 million, with an average
effective interest rate of 9.5%. For the first quarter ended March 29, 1998,
the average debt balance was $146.9 million, with an average effective
interest rate of 8.8%.
INCOME TAXES. The income tax provision for the first quarter ended March 27,
1999 was $7.8 million, or a 40.5% effective tax rate. The income tax
provision for the first quarter ended March 29, 1998 was $5.1 million, or a
39.0% effective tax rate. The effective tax rates for both periods were
impacted by certain realized state tax credits and tax planning strategies.
NET EARNINGS. Net earnings increased 44.5% to $11.5 million, or 8.9% of net
revenue, in the first quarter ended March 27, 1999, from $8.0 million, or
7.2% of net revenue, in the first quarter ended March 29, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds, trade credit
and bank borrowings to finance its operations and expansion. At March 27,
1999, the Company had working capital of $109.3 million compared to $101.3
million at December 31, 1998. The increase was primarily due to a $20.4
million increase in net receivables and a $13.7 million decrease in accounts
payable and accrued expenses, which were partially offset by an $18.6 million
decrease in inventory and $6.8 million increase in income taxes payable. The
increase in net receivables was primarily due to seasonal changes in volume.
8
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The Company's Amended and Restated Revolving Credit Agreement dated March 28,
1997, as amended to date (the "Credit Agreement"), provides for a $100.0
million revolving credit facility, which includes a $25.0 million sublimit
for letters of credit. At March 27, 1999, the Company had no outstanding
borrowings under the revolving credit facility, $1.7 million in outstanding
standby letters of credit and $12.0 million in outstanding commercial letters
of credit. At March 27, 1999, the Company had $86.3 million available for
future borrowings under such facility. The revolving credit facility will
expire in December 1999. The Credit Agreement contains various restrictive
covenants requiring, among other things, the maintenance of certain financial
ratios. The Company was in compliance with all such covenants as of March 27,
1999.
Capital expenditures, net of lease incentives granted, totaled $2.3 million
in the quarter ended March 27, 1999. The Company estimates its capital
expenditures for fiscal 1999 will be approximately $62.0 million, primarily
for the retail store expansion and remodeling, shop-in-shop programs, a new
distribution center and operations. The Company is currently in the process
of amending its Credit Agreement to permit fiscal year 1999 capital
expenditures to be at the level described above.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements through 1999 for working capital and interest on the Company's
senior subordinated notes, primarily with cash flow from operations,
supplemented, if necessary, by borrowings under its revolving Credit
Agreement and anticipated replacements thereof.
SEASONALITY
The Company's business is impacted by the general seasonal trends
characteristic of the apparel and retail industries. The Company's wholesale
operations generally experience stronger performance in the first and third
quarters, while retail operations are generally stronger in the third and
fourth quarters. As the timing of the shipment of products may vary from year
to year, the result for any particular quarter may not be indicative of
results for the full year. The Company has not had significant overhead and
other costs generally associated with large seasonal variations.
INFLATION
The Company does not believe the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net revenue or profitability. Although higher rates
of inflation have been experienced in a number of foreign countries in which
the Company's products are manufactured, the Company does not believe they
have had a material effect on the Company's net revenue or profitability.
EXCHANGE RATES
The Company receives United States dollars ("USD") for substantially all of
its product sales and its licensing revenues. Inventory purchases from
offshore contract manufacturers are primarily denominated in USD; however,
purchase prices for the Company's products may be impacted by fluctuations in
the exchange rate between the USD and the local currencies of the contract
manufacturers, which may have the effect of increasing the Company's cost of
goods in the future. In addition, royalties received from the Company's
international licensees are subject to foreign currency translation
fluctuations as a result of the net sales of the licensee being denominated
in local currency and royalties being paid to the Company in USD. During the
last three fiscal years, exchange rate fluctuations have not had a material
impact on the Company's inventory costs. The Company currently does not
engage in hedging activities with respect to such exchange rate risk.
9
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THE YEAR 2000 ISSUE
The Year 2000 issue is primarily a result of older computer programs,
commercial systems, and embedded chips, using a two-digit format, as opposed
to a four-digit format, to indicate the year. The business risk is that some
of these systems might be unable to interpret dates beyond 1999. Such a
failure might cause a disruption to the operations of the system(s) and/or
the business function(s) it supports.
In recognition of this risk, the Company has established a Year 2000 Project
Team. The Company began its Year 2000 readiness assessment and remediation
efforts in 1996. The effort was divided into 4 phases: Phase 1: assessment,
Phase 2: remediation, Phase 3: testing and certification, and Phase 4:
contingency plans.
State of Readiness
Phase 1 and Phase 2 included a review of all hardware and software systems,
business functions and trading partners that contain and/or exchange
date-sensitive information. Critical IT systems, which include the Company's
enterprise-wide information system, time clocks, e-mail and phone systems,
are stated Year 2000 compliant with initial testing of systems currently
underway. The Company is currently performing diagnostics and implementing
Year 2000 compliant solutions in its non-IT systems, such as manufacturing
equipment and those systems involved with facility management (security
systems, air/heating systems, fire suppression systems). Phases 1 and 2 are
concluded. The Company estimates that it will complete its Phase 3 Testing
and Certification efforts by mid-1999.
The Company's Year 2000 Project Team is coordinating the global effort and
monitoring progress of the Year 2000 readiness with respect to its business
partners. The Company has initiated communications with all of its key
business partners to determine their extent and plans for Year 2000
compliance. As part of this process, the Company has requested written
assurances from its key external business partners as to their Year 2000
readiness status and their plans to become Year 2000 compliant. As of
December 31, 1998, the Company has received responses from most of its key
vendors acknowledging their compliance, or intent to comply, with Year 2000
issues. In the case of some key vendors, the Company has, and will continue
to, obtain and review the compliance testing plans and results to validate
the assurances. This process is ongoing and is expected to continue
throughout 1999.
Risks and Contingency Plans of Year 2000 Issues
The Company has begun the development of its BUSINESS CONTINUITY PLAN. The
initial phases of the plan are expected to be completed by mid-year 1999. The
timing of a Year 2000 related disruption would coincide with a seasonal low
in the Company's business cycle, therefore having less impact on the business.
The Company believes that the reasonably likely worst case scenario would
involve a short-term disruption of systems affecting its supply and
distribution channels. These risks include: a) delayed product deliveries
from suppliers, b) disruption to the distribution channel, including ports,
transportation vendors, government agencies, as well as the Company's own
facilities, and c) general isolated failures of systems and necessary
infrastructure such as electric, water, or communications supply.
At the present time, the Company is not aware of any Year 2000 issues that
are expected to materially affect its products, services, competitive
position or financial performance. However, despite the significant and
best-efforts to make its systems and facilities Year 2000 compliant, the
compliance of its business partners and third-party service providers, is
beyond the Company's control. Accordingly, the Company can give no assurances
that the failure of key suppliers or other third parties to comply with Year
2000 requirements will not have an adverse effect on the Company.
10
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Costs to Address Year 2000 Issues
The costs to plan for, modify, or replace systems for the Year 2000 issue are
estimated by the Company to amount to approximately $3 million. The costs
associated with the Year 2000 project have been budgeted and tracked as a
separate project and have been occurring in conjunction with normal operating
activities. These costs are being funded through operating cash flows and
being expensed over the four-year project period, as incurred. The Company
has engaged and will continue to engage external expertise to supplement
internal staff. Management believes that the internal staff time invested to
address Year 2000 issues should not have a materially adverse affect on other
projects and is, in fact, effecting process improvements as a by-product of
this investment.
Labor Issues
The Union of Needletrades, Industrial and Textile Employees ("UNITE") has
continued to conduct a corporate campaign against the Company. In addition to
the legal proceedings (See "Legal Proceedings") initiated by UNITE, UNITE
has, and continues to, through the media and other means attempted to tarnish
the Company's image and affect the sales of the Company's product. The
Company believes that such corporate campaign could have a material adverse
effect on the Company's financial condition and results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks.
Not applicable.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Litigation
On August 7, 1996, a class action complaint naming the Company and certain of
its independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, titled as Brenda Figueroa et. al.
v. Guess ?, Inc. et. al. (Case No. BC 155 165). In this case, an alleged
class action, plaintiffs assert claims for violation of state wage and hour
laws, wrongful discharge, and breach of contract arising out of the Company's
relationship with its independent contractors and actions taken by the
Company's independent contractors with respect to the employees of such
independent contractors. Plaintiffs also allege that the Company breached its
agreement with the United States Department of Labor regarding the monitoring
of its independent contractors. The Court has held two hearings on certifying
the alleged class. The Court has scheduled an additional hearing on whether a
class will be certified for May 10, 1999. While the Court has not announced a
final ruling, the Court has indicated it likely will at least certify a class
of plaintiffs who allege wrongful termination claims.
On July 7, 1998, UNITE filed with the National Labor Relations Board
("NLRB")charges against the Company alleging that the Company violated the
National Labor Relations Act("NLRA")by failing to uphold certain obligations
under a prior settlement agreement with the NLRB, by denying pro-union
employees access to the Company's facilities, by conferring new benefits to
employees, by making false accusations against UNITE, by conducting video
surveillance of UNITE's offices, and by assisting and organizing an
anti-union demonstration. These allegations have been dismissed by the
Regional Director for Region 21 of the NLRB. UNITE has appealed the Regional
Director's dismissal of the charge to the NLRB's Office of Appeals.
On February 24, 1998, the Company and Maurice Marciano, Paul Marciano and
Armand Marciano, as individuals, were named as defendants in a class action
entitled John N. Robinson v. Guess ?, Inc., Maurice Marciano, Paul Marciano
and Armand Marciano, Case No. BC186583, filed in the Los Angeles Superior
Court. The complaint (the "Complaint") purported to state a claim under
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933 for alleged
misrepresentations in connection with the Company's initial public offering
(the "IPO") in August 1996. Mr. Robinson purported to represent a class of
all purchasers of the Company's stock in the IPO and sought unspecified
damages.
On October 1, 1998, Mr. Robinson filed an amended complaint ("The Amended
Complaint") naming the same parties as defendants. In the Amended Complaint,
Mr. Robinson purports to represent the same class of purchasers of the
Company's stock in its IPO. As in the original complaint, the Amended
Complaint purports to state claims under Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 for alleged misrepresentations in connection with the
Company's IPO. On December 15, 1998, the Company filed a Demurrer and Motion
to Strike the Amended Complaint. These motions have not yet been heard by the
Court. While it is too soon to predict the outcome of the case with any
certainty, the Company believes that it has meritorious defenses to each of
the claims asserted and intends to vigorously defend itself.
On October 26, 1998, Maurice Marciano, Paul Marciano and Armand Marciano, as
individuals, (the "Marcianos"), as well as the Company, were named as
defendants in a shareholder's derivative complaint entitled John N. Robinson
v. Maurice Marciano, Paul Marciano and Armand Marciano and Guess ?, Inc. ,
filed in the Los Angeles Superior Court. The complaint (the "Derivative
Complaint") purports to state a claim for intentional breach of fiduciary
duty, negligent breach of fiduciary duty, constructive fraud and abuse of
control in connection with the Marcianos' management of the Company since its
IPO. On January 11, 1999, the Marcianos filed a Demurrer and Motion to Strike
12
<PAGE>
the Derivative Complaint. The Company joined in the Demurrer and the Motion
to Strike, both of which were heard on March 25, 1999. On March 25, 1999, the
Court sustained the Marciano's demurrer, but granted the plaintiffs 20 days
to file an amended complaint, which has since been filed. While it is too
soon to predict the outcome of the case with any certainty, the defendants
believe they have meritorious defenses to each of the claims asserted and
intend to vigorously defend themselves.
The Company believes the outcome of one or more of the above cases could have
a material adverse effect on the Company's financial condition and results of
operations.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the first
quarter of 1999.
ITEM 5. Other Information
None.
13
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1. Restated Certificate of Incorporation of the Registrant. (1)
3.2. Bylaws of the Registrant. (1)
4.3. Specimen stock certificate. (1)
27.1. Financial Data Schedule*
</TABLE>
* filed herewith.
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-4419) filed by the Company on June 24, 1996, as
amended.
- --------------------------------
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended March
27, 1999.
14
<PAGE>
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.
GUESS ?, INC.
Date: May 11, 1999 By: /s/ MAURICE MARCIANO
------------------------------------
Maurice Marciano
Chairman of the Board, Chief Executive
Officer and Director (Principal Executive
Officer)
Date: May 11, 1999 By: /s/ BRIAN FLEMING
------------------------------------
Brian Fleming
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer and Chief Accounting
Officer)
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-27-1999
<CASH> 3,441
<SECURITIES> 14,000
<RECEIVABLES> 42,799
<ALLOWANCES> 4,410
<INVENTORY> 70,882
<CURRENT-ASSETS> 155,028
<PP&E> 183,373
<DEPRECIATION> 100,183
<TOTAL-ASSETS> 262,080
<CURRENT-LIABILITIES> 45,761
<BONDS> 95,000
0
0
<COMMON> 137
<OTHER-SE> 111,848
<TOTAL-LIABILITY-AND-EQUITY> 262,080
<SALES> 119,941
<TOTAL-REVENUES> 129,052<F1>
<CGS> 75,024
<TOTAL-COSTS> 107,304
<OTHER-EXPENSES> 112
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 2,333
<INCOME-PRETAX> 19,303
<INCOME-TAX> 7,817
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,486
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.27
<FN>
<F1>INCLUDES NET ROYALTIES OF $9.1 MILLION.
</FN>
</TABLE>
