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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 September 25, 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
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
(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 October 29, 1999, the registrant had 43,079,358 shares of Common Stock,
$.01 par value per share, outstanding.
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GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
as of September 25, 1999 and December 31, 1998 1
Condensed Consolidated Statements of Earnings (Unaudited) - Third Quarter
and Nine Months ended September 25, 1999 and September 27, 1998 2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months ended September 25, 1999 and September 27, 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 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
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PART I. FINANCIAL INFORMATION
Item I. Financial Statements
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
September 25, December 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Current Assets:
Cash $ 2,877 $ 5,853
Investments 42,050 11,900
Receivables:
Trade receivables, net of reserves 37,272 19,685
Royalties, net of reserves 11,562 10,780
Other 3,750 3,673
---------------- ----------------
Total Receivables 52,584 34,138
---------------- ----------------
Inventories, net of reserves (note 3) 98,050 89,499
Prepaid expenses and other current assets 7,138 8,206
Deferred tax assets 6,496 6,496
---------------- ----------------
Total current assets 209,195 156,092
Property and equipment, at cost, less accumulated
depreciation and amortization 91,996 86,453
Other assets, at cost, less accumulated amortization 24,562 21,227
---------------- ----------------
$325,753 $263,772
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of bank debt and long term debt $ 5,998 --
Accounts payable 45,863 $32,802
Accrued expenses 27,852 21,770
Income taxes payable 2,305 210
---------------- ----------------
Total current liabilities 82,018 54,782
Notes payable and long-term debt, less current installments 95,283 99,000
Other liabilities 8,890 9,581
---------------- ----------------
186,191 163,363
Minority Interest (note 8) 1,036 --
Stockholder's equity:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding -- --
Common stock, $.01 par value. Authorized 150,000,000
shares; issued 62,994,278 and 62,637,327 shares,
outstanding 43,126,267 and 42,906,535 shares at
September 25, 1999 and December 31, 1998, respectively 139 137
Additional paid-in capital 159,733 158,589
Retained earnings 129,581 92,543
Accumulated other comprehensive loss (151) (84)
Treasury stock, 20,030,792 shares repurchased (150,776) (150,776)
----------------- -----------------
Net stockholders' equity 138,526 100,409
---------------- ----------------
$325,753 $263,772
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statement.
1
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GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------------------- ------------------------------
Sep 25, Sep 27, Sep 25, Sep 27,
1999 1998 1999 1998
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenue:
Product sales $144,142 $118,602 $374,264 $309,102
Net royalties 11,405 11,536 29,892 29,872
------------- ------------- ------------ ------------
155,547 130,138 404,156 338,974
Cost of sales 82,986 75,356 222,532 193,505
------------- ------------- ------------ ------------
Gross profit 72,561 54,782 181,624 145,469
Selling, general and administrative expenses 42,911 35,791 113,133 101,255
Gain on disposition of property and
equipment 3,849 -- 3,849 --
Severance costs relating to distribution
facility relocation (note 5) -- -- 3,200 --
---------------- --------------- ------------ ------------
Earnings before interest and income taxes 33,499 18,991 69,140 44,214
Interest expense, net 2,364 3,188 6,902 9,779
------------- ------------- ------------ ------------
Earnings before income taxes 31,135 15,803 62,238 34,435
------------- ------------- ------------ ------------
Income taxes (note 6) 12,600 6,164 25,200 13,405
------------- ------------- ------------ ------------
Net earnings $18,535 $9,639 $37,038 $21,030
============= ============= ============ ============
Net earnings per share:
Basic and diluted $0.43 $0.22 $0.86 $0.49
============= ============= ============ ============
Weighted average number of shares
outstanding - basic 43,015 42,906 42,958 42,904
============= ============= ============ ============
Weighted average number of shares
outstanding - diluted 43,482 42,907 43,315 42,905
============= ============= ============ ============
</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)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------
Sep 25, Sep 27,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $37,038 $21,030
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 16,513 16,993
Amortization of other assets 804 619
Foreign currency translation adjustment (40) (68)
(Gain) loss on disposition of property and equipment (4,564) 80
Undistributed equity method earnings (loss) (362) 19
(Increase) decrease in:
Receivables (12,353) (10,800)
Inventories (581) (11,625)
Prepaid expenses 2,325 10,434
Other assets (325) 1,537
Increase (decrease) in:
Accounts payable 3,519 (2,991)
Accrued expenses 4,986 (4,452)
Income taxes payable 2,053 --
---------------- ----------------
Net cash provided by operating activities 49,013 20,776
Cash flows from investing activities:
Purchases of property and equipment (20,231) (8,784)
Proceeds from the disposition of property and equipment 6,372 8
Lease incentives granted 222 154
Acquisition of license (375) (146)
Increase in short-term investments (30,150) --
Acquisition of interest in Strandel Inc. (2,027) --
(Increase) decrease in long-term investments (2,232) 812
----------------- ----------------
Net cash used in investing activities (48,421) (7,956)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 3,015 80,700
Repayments of notes payable and long-term debt (7,702) (97,317)
Issuance of common stock 1,146 --
---------------- ----------------
Net cash used in financing activities (3,541) (16,617)
Effect of exchange rates on cash (27) 55
Net decrease in cash (2,976) (3,742)
Cash, beginning of period 5,853 8,204
---------------- ----------------
Cash, end of period $2,877 $4,462
================ ================
Supplemental disclosures:
Cash paid during the period for:
Interest $12,911 $14,741
Income taxes 15,158 1,930
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 25, 1999
(in thousands)
(unaudited)
(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, considered
necessary for a fair presentation of the condensed consolidated balance sheets
as of September 25, 1999 and December 31, 1998, the consolidated statements of
earnings for the quarter and nine months ended September 25, 1999 and September
27, 1998, and the statements of cash flows for the nine months ended September
25, 1999 and September 27, 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. The results of operations for the quarter and nine months
ended September 25, 1999 are not necessarily indicative of the results of
operations for the full fiscal year. 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 quarter and nine months ended September 25, 1999 and September 27,
1998, the difference between basic and diluted earnings per share was due to the
dilutive impact of options to purchase common stock. Options to purchase 767,436
shares of common stock at prices ranging from $10.50 to $13.13 during the nine
month period ended September 25, 1999 and options to purchase 1,501,679 shares
of common stock at prices ranging from $5.50 to $11.00 during the nine month
period ended September 27, 1998 were not included in the computation of diluted
earnings per share because the exercise prices were greater than the average
market price of the common stock. Therefore, the options are anti-dilutive.
Business Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131 (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 7.
Software Costs
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 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 98-1 effective January 1, 1999 and determined that
the adoption of SOP 98-1 did not have a material impact on the Company's
financial reporting.
4
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Start-up Costs
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires that costs of start-up activities, including
organization costs and retail store openings, be expensed as incurred. The
Company adopted SOP 98-5 effective January 1, 1999 and determined the adoption
of SOP 98-5 did not have a material impact on the Company's financial reporting.
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 quarter and nine months ended September 25, 1999 and September 27, 1998
is as follows (in thousands):
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Sep 25, Sep 27, Sep 25, Sep 27,
1999 1998 1999 1998
------------- ------------- ------------- ------------
Net earnings $18,535 $9,639 $37,038 $21,030
Foreign currency
translation adjustment 25 71 67 68
------------- ------------- ------------- ------------
Comprehensive income $18,560 $9,710 $37,105 $21,098
============= ============= ============= ============
</TABLE>
Future Accounting Change
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, 2000. 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):
<TABLE>
<CAPTION>
Sep 25, Dec 31,
1999 1998
--------------- ------------
<S> <C> <C>
Raw materials $ 6,789 $ 9,400
Work in progress 12,018 7,922
Finished goods - wholesale 39,036 35,465
Finished goods - retail 40,207 36,712
--------------- ------------
$98,050 $89,499
=============== ============
</TABLE>
(4) Investments
Short-term investments consist primarily of interest bearing deposit accounts.
5
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(5) Severance costs
In accordance with the requirements of EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," the Company recorded a
$3,200 charge, during the second quarter, for future severance costs related to
the relocation of distribution operations to Louisville, Kentucky.
(6) 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.
(7) Segment Information
In accordance with the requirements of SFAS 131, "Disclosures about Segments of
an 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
are evaluated on a consolidated basis and are not allocated to the Company's
business segments.
Net revenue and earnings from operations are summarized as follows for the third
quarters and nine months ended September 25, 1999 and September 27, 1998 (in
thousands):
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------------------ -----------------------------
Sep 25, Sep 27, Sep 25, Sep 27,
1999 1998 1999 1998
--------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Net revenue:
Wholesale operations $ 70,179 $ 58,075 $187,778 $162,759
Retail operations 73,963 60,527 186,486 146,343
Licensing operations 11,405 11,536 29,892 29,872
--------------- ------------- --------------- ------------
$155,547 $130,138 $404,156 $338,974
=============== ============= =============== ============
Earnings from operations:
Wholesale operations $ 13,177 $ 1,148 $ 26,644 $ 12,298
Retail operations 11,514 8,096 18,312 7,292
Licensing operations 8,808 9,747 24,184 24,624
--------------- ------------- --------------- ------------
$ 33,499 $ 18,991 $ 69,140 $ 44,214
=============== ============= =============== ============
</TABLE>
Due to the seasonal nature of these business segments, especially retail
operations, the above net revenue and operating results for the third quarter
and the nine months ended September 25, 1999, are not necessarily indicative of
the results that may be expected for the full fiscal year.
(8) Acquisition of Interest in Strandel Inc.
On August 4, 1999, the Company completed its purchase of an additional 40% of
Strandel Inc., whereby the Company's ownership has been increased to 60%.
Strandel Inc. ("Guess Canada") is the Company's licensee for wholesale and
retail operations in Canada. As part of the transaction, the Company paid $2,027
and will provide long-term financing of up to $13,400 to Guess Canada to expand
its Canadian retail operations. The Company will have an option to acquire the
remaining 40% of Guess Canada commencing December 31, 2001. The acquisition was
accounted as a purchase and the results of Guess Canada are included in the
Company's consolidated financial statements from the date of acquisition. The
Company is presently gathering information to allocate the purchase price to the
net assets acquired. The operating results of Guess Canada are immaterial to the
Company's consolidated financial statements.
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
Third Quarters and Nine Months Ended September 25, 1999 and September 27, 1998
NET REVENUE. Net revenue for the third quarter increased $25.4 million or 19.5%
to $155.5 million from $130.1 million in the quarter ended September 27, 1998.
Excluding Guess Canada, net revenue from wholesale operations increased $6.8
million or 11.7% to $64.9 million in the quarter from $58.1 million for the
comparable 1998. The Company's wholesale net revenue increased primarily due to
stronger domestic demand for women's and men's product lines. Excluding
E-Commerce, net revenue from retail operations increased $13.2 million or 21.8%
to $73.7 million in the third quarter from $60.5 million for the same period in
1998. This increase was primarily attributable to a 21.3% increase in comparable
store sales resulting from continued improvements in merchandising and
fashion-focused product mix. The retail segment is benefiting from improved
customer service levels resulting from enhanced personnel training and incentive
programs. Net royalty revenue remained constant with an increase of activity in
the European market and certain licensed products offset with the
discontinuation of certain licensees, as well as continuing economic and
currency valuation issues in Mexico, South America and certain parts of Asia.
Net revenue increased $65.2 million or 19.2% to $404.2 million from $339.0
million for the nine months ended September 27, 1998. Excluding Guess Canada,
net revenue from wholesale operations increased $19.7 million or 12.1% to $182.5
million from $162.8 million in the nine months ended September 27, 1998
primarily due to an increase of $19.7 million in domestic wholesale net revenue.
Domestic net revenue increased primarily due to stronger demand for fashion
products. International wholesale net revenue remained constant due to adverse
economic conditions in Mexico, South America and Asia. Excluding E-Commerce, net
revenue from retail operations increased $39.6 million or 27.1% to $189.9
million in the nine months ended September 25, 1999 from $146.3 million in 1998.
This increase was due primarily to merchandising and product assortment
offerings. Net revenue from international product sales comprised 4.8% and 5.7%
of the Company's net revenue during the first nine months of 1999 and 1998,
7
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respectively. Net royalty revenue remained constant with an increase of activity
in the European market and certain licensed products offset with the
discontinuing certain licensees and the economic pressures on Mexican, South
America and Asia licensees. In the nine months ended September 25, 1999, the
Company terminated its licensee agreements for the Baby GUESS, boys and golf
product lines.
GROSS PROFIT. Gross profit increased 32.5% to $72.6 million in the third quarter
ended September 25, 1999 from $54.8 million in the third quarter ended September
27, 1998. The increase in gross profit resulted from increased net revenue from
product sales. Gross profit from product sales increased 41.7% to $61.2 million
in the quarter from $43.2 million in 1998. Gross margin was 46.6% in the quarter
ended September 25, 1999 compared to 42.1% in the quarter ended September 27,
1998. Gross margin from product sales for the quarter ended September 25, 1999
was 42.4% compared to 36.5% for the same period in 1998. The increase in gross
margin from product sales for the quarter was primarily due to lower off-price
sales, lower markdowns, and the effect of spreading retail occupancy costs over
a higher sales base.
Gross profit increased 24.8% to $181.6 million in the nine months ended
September 25, 1999 from $145.5 million in the nine months ended September 27,
1998. The increase in gross profit resulted primarily from increased net
revenue from product sales. Gross profit from product sales increased 31.2%
to $151.7 million in the nine months ended September 25, 1999 from $115.6
million in the nine months ended September 27, 1998. Gross margin was 44.9%
in the nine months ended September 25, 1999 compared to 42.9% in the nine
months ended September 27, 1998. Gross margin from product sales for the nine
months ended September 25, 1999 increased to 40.5% from 37.4% for the nine
months ended September 27, 1998. The increase in gross margin from product
sales for the nine month period was primarily due to lower off-price sales
and the effect of spreading retail occupancy costs over a higher sales base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses of $42.9 million increased to 27.6% of net
revenue in the quarter ended September 25, 1999 compared to $35.8 million or
27.5% of net revenue in the third quarter ended September 27, 1998. Due to
its cost containment efforts, the Company maintained a proportional increase
in SG&A dollars to the increase in net revenues during the third quarter.
SG&A expenses of $113.1 million decreased to 28.0% of net revenue in the nine
months ended September 25, 1999 from $101.3 million or 29.9% of net revenue
in the nine months ended September 27, 1998. The decrease in SG&A as a
percentage of revenue for the nine months ended September 25, 1999 is
primarily due to the Company's efforts on its cost containment programs.
GAIN ON DISPOSITION OF PROPERTY AND EQUIPMENT. In the quarter ended September
25, 1999, the Company realized a non-recurring pretax gain of $3.8 million,
or $0.05 per share, on the disposition of property and equipment. Excluding
this non-recurring gain, net earnings were $16.2 million, or $0.38 per share
for the third quarter of 1999.
SEVERANCE COST. In accordance with the requirements of EITF 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)," the
Company recorded a $3.2 million charge for future severance costs related to
the relocation of distribution operations to Louisville, Kentucky, during the
second quarter of 1999.
EARNINGS BEFORE INTEREST AND INCOME TAXES. Earnings before interest and
income taxes increased 76.3% to $33.5 million, or 21.5% of net revenue, in
the third quarter ended September 25, 1999 from $19.0 million, or 14.6% of
net revenue, in the third quarter ended September 27, 1998. Earnings before
interest and income taxes increased 56.3% to $69.1 million, or 17.1% of net
revenue, in the nine months ended September 25, 1999 from $44.2 million, or
13.0% of net revenue, in the nine months ended September 27, 1998. The
increase in earnings before interest and income taxes was primarily due to
higher revenue.
INTEREST EXPENSE, NET. Net interest expense decreased 25.0% to $2.4 million
in the third quarter ended September 25, 1999 from $3.2 million for the
comparable period in 1998. The decrease is due to lower outstanding debt in
the third quarter of 1999. Total debt at September 25, 1999 was $101.3
million, which included $91.6 million of our Corporate Bonds and $9.7 million
bank debt related to Guess Canada. On a comparable basis, the average debt
8
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balance for the third quarter of 1999 was $92.8 million, with an average
effective interest rate of 9.5% versus an average debt balance of $134.5
million, with an average effective interest rate of 9.1%. Net interest
expense decreased 29.5% to $6.9 million in the nine months ended September
25, 1999 from $9.8 million in the nine months ended September 27, 1998, due
to the lower outstanding debt in 1999 partially offset by a higher effective
interest rate. Excluding Guess Canada, the average debt balance for the nine
months ended September 25, 1999, was $94.7 million, with an average effective
interest rate of 9.6%. For the nine months ended September 27, 1998, the
average debt balance was $142.2 million, with an average effective interest
rate of 8.8%.
INCOME TAXES. The income tax provision for the quarter ended September 25, 1999
was $12.6 million, or a 40.5% effective tax rate, compared to $6.2 million, or a
39.0% effective tax rate, in the quarter ended September 27, 1998. The income
tax provision for the nine months ended September 25, 1999 was $25.2 million, or
a 40.5% effective tax rate, compared to $13.4 million, or a 38.9% effective tax
rate, in the nine months ended September 27, 1998. The effective tax rates for
both years were impacted by certain realized state tax credits and tax planning
strategies. 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 the company.
NET EARNINGS. Net earnings increased 92.3% to $18.5 million, or 11.9% of net
revenue, in the third quarter ended September 25, 1999, from $9.6 million, or
7.4% of net revenue, in the same period in 1998. Net earnings increased 76.2% to
$37.0 million, or 9.2% of net revenue, in the nine months ended September 25,
1999, from $21.0 million, or 6.2% of net revenue, in the nine months ended
September 27, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 25, 1999 the Company relied primarily on
internally generated funds and trade credit to finance its operations and
expansion. At September 25, 1999, the Company had working capital of $127.1
million compared to $101.3 million at December 31, 1998. The increase was
primarily due to a $27.2 million increase in cash and short-term investments and
$17.6 million increase in net receivables.
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 $35.0 million sub-limit for letters
of credit. At September 25, 1999, the Company had no outstanding borrowings
under the revolving credit facility, $1.7 million in outstanding standby letters
of credit and $23.8 million in outstanding documentary letters of credit. At
September 25, 1999, the Company had $74.5 million available for future
borrowings under such facility. The revolving credit facility will expire in
December 1999. The Company is in the process of negotiating a new credit
facility. 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 September 25, 1999.
Capital expenditures, net of lease incentives granted, totaled $20.2 million in
the nine months ended September 25, 1999. The Company estimates its capital
expenditures for fiscal 1999 will be approximately $61.0 million, primarily for
the retail store expansion and remodeling, shop-in-shop programs, a new
distribution center and operations. The Company has amended 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 for the next twelve months for working capital, capital
expenditures and interest on the Company's senior subordinated notes, primarily
with cash flow from operations, supplemented, if necessary, by borrowings under
its Credit Agreement.
9
<PAGE>
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.
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 implementation, and Phase 4:
contingency planning.
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 final testing of systems currently underway. The
Company is currently performing diagnostics and implementing Year 2000 compliant
solutions on 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 efforts by the middle of the
1999 fourth quarter.
10
<PAGE>
The Company is monitoring the progress of its key third parties Year 2000
readiness. As part of this process, the Company has requested assurances from
its key third parties as to their Year 2000 readiness and their plans to become
Year 2000 compliant. As of September 25, 1999, the Company has received
responses from most of its key vendors acknowledging their compliance, or intent
to comply, with Year 2000 issues.
Risks and Contingency Plans of Year 2000 Issues
The Company has conducted a Business Continuity Project to identify potential
areas of disruptions and develop viable contingency plans. This project was
completed in the third quarter of 1999. The timing of any 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 key third
parties 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.
Costs to Address Year 2000 Issues
The costs to plan, modify, or replace systems for the Year 2000 issue incurred
in conjunction with normal operating activities. These costs were funded through
operating cash flows and were expensed over the four-year project period, as
incurred. The Year 2000 project is significantly completed and the costs
associated with its completion are minor.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks.
Not applicable.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Litigation
The Company is currently a defendant in FIGUEROA ET. AL. V. GUESS, Los Angeles
Superior Court Case No. BC 186583, and in a derivative lawsuit ROBINSON V. GUESS
ET. AL., Los Angeles Superior Court Case No. BC 199709. The Company refers to,
and incorporates by reference, the description of these matters set forth in its
quarterly report on Form 10-Q for the quarter ended June 26, 1999.
On February 24, 1998, John Robinson, a shareholder in the Company, sued the
company and Maurice Marciano, Paul Marciano and Armand Marciano in Los Angeles
Superior Court (Case No. BC 186583). Mr. Robinson seeks damages and recission of
stock purchases as the result of alleged misrepresentations in connection with
the Company's initial public offering (the "IPO") of stock in August 1996. Mr.
Robinson alleges violations of Section 11, 12(a) (2) and 15 of the Securities
Act of 1933, and seeks to represent a class of those who purchased the Company's
stock in the IPO. No class has been certified. On August 31, 1999, the Court
struck a number of Mr. Robinson's allegations, but gave Mr. Robinson leave to
amend certain allegations. Mr. Robinson has now filed an amended complaint. The
Company has filed, and the Marcianos have joined in the filing of, a demurrer
and motion to strike the amended complaint. Those motions are currently
scheduled for hearing in November.
On May 21, 1999, the Company filed a demand for arbitration against Pour Le
bebe, Inc. and Pour la Maison, Inc. (collectively "PLB") seeking damages and
injunctive relief in connection with four written license agreements between the
parties. The Company alleges that PLB defaulted under the license agreements,
that the license agreements properly were terminated and that PLB breached the
license agreements. The arbitration is pending before the American Arbitration
Association pursuant to arbitration clauses in the license agreements. On July
19, 1999, PLB filed a counterdemand for arbitration against the Company. PLB
seeks damages and injunctiverelief against the Company alleging breach of
contract, violation of California Franchise Relations Act, intentional
interference with contractual relations, intentional interference with
prospective economic advantage, unlawful business practices, statutory unfair
competition, and fraud.
The Company believes that 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
None.
12
<PAGE>
ITEM 5. Other Information
On September 1, 1999, Howard Socol was appointed to the Company's Board of
Directors. Mr. Socol, age 54, is founder and President of Socol Consulting
Group, which provides retail and internet consulting services. Prior to that,
Mr. Socol served as the Chief Executive Officer of J. Crew Group from 1998 to
1999. From 1969 to 1997, Mr. Socol was employed in numerous capacities
culminating in Chairman and Chief Executive Officer by Burdines Department
Stores, a division of Federated Department Stores. Mr. Socol is a class III
director, whose term will expire at the 2002 annual meeting.
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
September 25, 1999.
13
<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: November 8, 1999 By: /s/ MAURICE MARCIANO
--------------------------
Maurice Marciano
Chairman of the Board, Chief Executive
Officer and Director
(Principal Executive Officer)
Date: November 8, 1999 By: /s/ BRIAN FLEMING
--------------------------
Brian Fleming
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer and Chief Accounting
Officer
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-25-1999
<CASH> 2,877
<SECURITIES> 42,050
<RECEIVABLES> 45,780
<ALLOWANCES> 8,508
<INVENTORY> 98,050
<CURRENT-ASSETS> 209,195
<PP&E> 188,810
<DEPRECIATION> 96,814
<TOTAL-ASSETS> 325,753
<CURRENT-LIABILITIES> 82,018
<BONDS> 91,562
0
0
<COMMON> 139
<OTHER-SE> 138,387
<TOTAL-LIABILITY-AND-EQUITY> 325,753
<SALES> 374,264
<TOTAL-REVENUES> 404,156<F1>
<CGS> 222,532
<TOTAL-COSTS> 335,016
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,931
<INTEREST-EXPENSE> 6,902
<INCOME-PRETAX> 62,238
<INCOME-TAX> 25,200
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,038
<EPS-BASIC> $0.86
<EPS-DILUTED> $0.86
<FN><F1>Includes net royalties of $29.9 million
</FN>
</TABLE>
