<PAGE>
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 June 26, 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.
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(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 August 3, 1999, the registrant had 43,085,040 shares of Common Stock, $.01
par value per share, outstanding.
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GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C> <C>
Condensed Consolidated Balance Sheets - (Unaudited)
as of June 26, 1999 and December 31, 1998.......................................................1
Condensed Consolidated Statements of Earnings (Unaudited) - Second
Quarter and Six Months ended June 26, 1999 and June 28, 1998....................................2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months ended June 26, 1999 and June 28, 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>
<PAGE>
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
June 26, Dec 31,
1999 1998
-------- --------
<S> <C> <C>
Current assets:
Cash.............................................................................. $ 4,292 $ 5,853
Investments....................................................................... 29,810 11,900
Receivables:
Trade receivables, net of reserves............................................. 29,586 19,685
Royalties, net of reserves..................................................... 11,979 10,780
Other.......................................................................... 3,292 3,673
-------- --------
44,857 34,138
Inventories, net of reserves (note 3)............................................. 79,895 89,499
Prepaid expenses.................................................................. 13,150 8,206
Deferred tax assets............................................................... 6,496 6,496
-------- --------
Total current assets........................................................ 178,500 156,092
Property and equipment, at cost, less accumulated
depreciation and amortization..................................................... 83,724 86,453
Other assets, at cost, less accumulated amortization.................................. 23,958 21,227
-------- --------
$286,182 $263,772
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................. $ 36,489 $ 32,802
Accrued expenses.................................................................. 27,851 21,770
Income taxes payable.............................................................. -- 210
-------- --------
Total current liabilities................................................... 64,340 54,782
Notes payable and long-term debt installments......................................... 93,562 99,000
Other liabilities..................................................................... 9,018 9,581
-------- --------
166,920 163,363
Stockholders' 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 42,963,486 and 42,906,535 shares at
June 26, 1999 and December 31, 1998, respectively.............................. 138 137
Additional paid-in capital........................................................ 158,980 158,589
Retained earnings................................................................. 111,046 92,543
Accumulated other comprehensive loss.............................................. (126) (84)
Treasury stock, 20,030,792 shares repurchased .................................... (150,776) (150,776)
-------- --------
Net stockholders' equity.................................................... 119,262 100,409
-------- --------
$286,182 $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)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
--------------------- ----------------------
June 26, June 28, June 26, June 28,
1999 1998 1999 1998
Net revenue: -------- -------- -------- --------
<S> <C> <C> <C> <C>
Product sales............................................. $110,181 $90,295 $230,122 $190,500
Net royalties............................................. 9,376 7,773 18,487 18,336
-------- -------- -------- --------
119,557 98,068 248,609 208,836
Cost of sales................................................. 64,522 53,833 139,546 118,149
-------- -------- -------- --------
Gross profit.................................................. 55,035 44,235 109,063 90,687
Selling, general & administrative expenses.................... 37,830 35,228 70,222 65,464
Severance costs relating to distribution
facility relocation (note 5) .............................. 3,200 -- 3,200 --
-------- -------- -------- --------
Earnings from operations...................................... 14,005 9,007 35,641 25,223
Interest, net................................................. (2,205) (3,409) (4,538) (6,591)
-------- -------- -------- -------
Earnings before income taxes.................................. 11,800 5,598 31,103 18,632
Income taxes (note 6)......................................... 4,783 2,158 12,600 7,241
-------- -------- -------- --------
Net earnings.................................................. $ 7,017 $ 3,440 $ 18,503 $ 11,391
======== ======== ======== ========
Basic and diluted earnings per share:
- ------------------------------------
Net earnings - basic and diluted.............................. $ 0.16 $ 0.08 $ 0.43 $ 0.27
======== ======== ======== ========
Weighted average number of shares
outstanding - basic....................................... 42,939 42,902 42,927 42,902
======== ======== ======== ========
Weighted average number of shares
outstanding - diluted..................................... 43,286 42,903 43,237 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>
Six Months Ended
-----------------------
June 26, June 28,
1999 1998
-------- --------
Cash flows from operating activities:
<S> <C> <C>
Net earnings........................................................................ $18,503 $11,391
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and equipment.......................... 11,026 11,591
Amortization of other assets..................................................... 508 377
Foreign currency translation adjustment.......................................... (16) 3
(Gain) loss on disposition of property and equipment............................. (211) 80
Undistributed equity method earnings............................................. (71) (214)
(Increase) decrease in:
Receivables................................................................... (10,719) (5,240)
Inventories................................................................... 9,604 (12,641)
Prepaid expenses ............................................................. (4,944) 4,749
Other assets.................................................................. (307) 1,371
Increase (decrease) in:
Accounts payable.............................................................. 3,687 (1,605)
Accrued expenses.............................................................. 5,707 (2,945)
Income taxes payable.......................................................... (210) (87)
-------- --------
Net cash provided by operating activities...................................... 32,557 6,830
Cash flows from investing activities:
Purchases of property and equipment................................................. (8,527) (5,510)
Proceeds from the disposition of property and equipment............................. 252 6
Lease incentives granted............................................................ -- 154
Acquisition of license.............................................................. (250) (21)
Increase decrease in short-term investments......................................... (17,910) (1,500)
(Increase) decrease in long-term investments........................................ (2,611) 812
-------- --------
Net cash used in investing activities.......................................... (29,046) (6,059)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt...................................... -- 57,300
Repayments of notes payable and long-term debt...................................... (5,438) (60,817)
Issuance of common stock............................................................ 392 --
-------- --------
Net cash provided by financing activities...................................... (5,046) (3,517)
Effect of exchange rates on cash........................................................ (26) (6)
Net decrease in cash.................................................................... (1,561) (2,752)
Cash, beginning of period............................................................... 5,853 8,204
-------- --------
Cash, end of period..................................................................... $ 4,292 $ 5,452
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest......................................................................... $ 6,367 $7,903
Income taxes..................................................................... 12,022 440
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 26, 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 June 26, 1999 and December 31, 1998, the
consolidated statements of earnings for the three and six months periods
ended June 26, 1999 and June 28, 1998, and the statements of cash flows for
the six months ended June 26, 1999 and June 28, 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 three and six month periods ended June 26, 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 three and six months ended June 26, 1999 and
June 28, 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 812,936 shares of common stock at prices ranging from $8.93 to
$13.13 during the six month period ended June 26, 1999 and options to purchase
1,104,210 shares of common stock at prices ranging from $6.00 to $11.00
during the six month period ended June 28, 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 6.
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 three and six months ended June 26, 1999 and June 28, 1998 is
as follows (in thousands):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
--------------------- ----------------------
June 26, June 28, June 26, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings.................................................. $7,017 $3,440 $18,503 $11,391
Foreign currency
translation adjustment...................................... 25 62 16 (3)
-------- -------- -------- --------
Comprehensive income.......................................... $7,042 $3,502 $18,519 $11,388
======== ======== ======== ========
</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>
June 26, Dec 31,
1999 1998
-------- -------
<S> <C> <C>
Raw materials................................................................... $ 6,844 $ 9,400
Work in progress................................................................ 8,529 7,922
Finished goods - wholesale...................................................... 29,350 35,465
Finished goods - retail......................................................... 35,172 36,712
------- -------
$79,895 $89,499
======= =======
</TABLE>
(4) Investments
Short-term investments consist primarily of interest bearing deposit accounts.
5
<PAGE>
(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 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 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 are evaluated on a consolidated basis and not allocated to the
Company's business segments.
Net revenue and earnings from operations are summarized as follows for the
second quarters and six months ended June 26, 1999 and June 28, 1998 (in
thousands):
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
--------------------- ----------------------
June 26, June 28, June 26, June 28,
1999 1998 1999 1998
Net revenue: -------- -------- -------- --------
<S> <C> <C> <C> <C>
Wholesale operations........................................ $ 49,132 $44,002 $117,599 $104,684
Retail operations........................................... 61,049 46,293 112,523 85,816
Licensing operations........................................ 9,376 7,773 18,487 18,336
-------- -------- -------- --------
$119,557 $98,068 $248,609 $208,836
======== ======== ======== ========
Earnings from operations:
Wholesale operations........................................ $ (452) $ 884 $ 13,467 $ 11,150
Retail operations........................................... 6,791 2,345 6,798 (804)
Licensing operations........................................ 7,666 5,778 15,376 14,877
-------- -------- -------- --------
$14,005 $ 9,007 $ 35,641 $ 25,223
======== ======== ======== ========
</TABLE>
Due to the seasonal nature of these business segments, especially retail
operations, the above net revenue and operating results for the second
quarter and the six months ended June 26, 1999, are not necessarily
indicative of the results that may be expected for the full fiscal year.
(8) Subsequent Event
In the second quarter of fiscal 1999, the Company entered into a letter of
intent to acquire a 60% controlling interest in Strandel Inc. ("Strandel"),
the Company's licensee for wholesale and retail operations in Canada. On
August 4, 1999, the transaction was completed and the Company paid $2,027.
The Company has an option to acquire the remaining 40% of Strandel commencing
December 31, 2001. As part of the transaction, the Company will provide
long-term financing of up to $13,400 to Strandel for a retail expansion
program in Canada.
6
<PAGE>
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
Second Quarters and Six Months Ended June 26, 1999 and June 28, 1998
NET REVENUE. Net revenue increased $21.5 million or 21.9% to $119.6 million
in the quarter ended June 26, 1999 from $98.1 million in the quarter ended
June 28, 1998. Net revenue from wholesale operations increased $5.1 million
or 11.7% to $49.1 million in the quarter ended June 26, 1999 from $44.0
million in the quarter ended June 28, 1998. The Company's wholesale net
revenue increased primarily due to stronger domestic demand for women's and
men's product lines and a shift to more fashion oriented product mix. Net
revenue from retail operations increased $14.8 million or 31.9% to $61.0
million in the quarter ended June 26, 1999 from $46.3 million in the quarter
ended June 28, 1998. This increase was primarily attributable to a 30.9%
increase in comparable store net revenue resulting from continued
improvements in merchandising and product assortment offerings and to
enhanced personnel training. Net royalty revenue increased $1.6 million or
20.6% in the quarter ended June 26, 1999 to $9.4 million from $7.8 million in
the quarter ended June 28, 1998. The increase in net royalty revenue was due
primarily to $1.9 million net revenue resulting from settlements and
adjustments for terminated licensees.
Net revenue increased $39.8 million or 19.0% to $248.6 million from $208.8
million for the six months ended June 28, 1998. Net revenue from wholesale
operations increased $12.9 million or 12.3% to $117.6 million from $104.7
million in the six months ended June 28, 1998 primarily due to an increase of
$13.7 million in domestic wholesale net revenue. Domestic net revenue
increased primarily due to stronger demand for fashion products, while
international decreased primarily due to adverse economic conditions in Asia,
South America and Mexico. Net revenue from retail operations increased $26.7
million or 31.1% to $112.5 million in the six months ended June 26, 1999 from
$85.8 million in 1998. This increase was primarily attributable to a 30.0%
increase in comparable store net revenue resulting from continued
improvements in merchandising and product assortment offerings. Net royalty
revenue increased $0.2 million or 0.8% to $18.5 million in the six months
ended June
7
<PAGE>
26, 1999 from $18.3 million in the six months ended June 28, 1998. The
increase in net royalty revenue was due primarily to $1.9 million net revenue
resulting from settlements and adjustments for terminated licensees,
partially offset by decreased revenue from certain discontinuing licenses and
the economic pressures on Asian, South American and Mexican licensees. In the
six months ended June 26, 1999, the Company terminated its license agreements
for the Baby GUESS, boys and golf product lines. Net revenue from
international operations comprised 6.9% and 9.1% of the Company's net revenue
during the first six months of 1999 and 1998, respectively.
GROSS PROFIT. Gross profit increased 24.4% to $55.0 million in the second
quarter ended June 26, 1999 from $44.2 million in the second quarter ended
June 28, 1998. The increase in gross profit resulted from increased net
revenue from product sales and net royalties. Gross profit from product sales
increased 25.2% to $45.7 million in the quarter ended June 26, 1999 from
$36.5 million in the quarter ended June 28, 1998. Gross margin was 46.0% in
the quarter ended June 26, 1999 compared to 45.1% in the quarter ended June
28, 1998. Gross margin from product sales for the quarter ended June 26, 1999
was 41.4% compared to 40.4% for the same period in 1998. The increase in
gross margin from product sales for the three month period was primarily due
to fixed store occupancy costs being spread over a higher net revenue base.
Gross profit increased 20.3% to $109.1 million in the six months ended June
26, 1999 from $90.7 million in the six months ended June 28, 1998. The
increase in gross profit resulted primarily from increased net revenue from
product sales. Gross profit from product sales increased 25.2% to $90.6
million in the six months ended June 26, 1999 from $72.4 million in the six
months ended June 28, 1998. Gross margin was 43.9% in the six months ended
June 26, 1999 compared to 43.4% in the six months ended June 28, 1998. Gross
margin from product sales for the six months ended June 26, 1999 increased to
39.4% from 38.0% for the six months ended June 28, 1998. The increase in
gross margin from product sales for the six month period was primarily due to
fixed store occupancy costs being spread over a higher net revenue base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses of $37.8 million decreased to 31.6% of net
revenue in the three months ended June 26, 1999 compared to $35.2 million or
35.9% of net revenue in the second quarter ended June 28, 1998. SG&A expenses
of $70.2 million decreased to 28.2% of net revenue in the six months ended
June 26, 1999 from $65.5 million or 31.3% of net revenue in the six months
ended June 28, 1998. The decrease in SG&A as a percentage of revenue for both
the quarter and six months ended June 26, 1999 is primarily due to the
Company's efforts on its cost containment programs.
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 $3,200 charge for future severance costs related to the relocation of
distribution operations to Louisville, Kentucky.
EARNINGS FROM OPERATIONS. Earnings from operations increased 55.5% to $14.0
million, or 11.7% of net revenue, in the second quarter ended June 26, 1999
from $9.0 million, or 9.2% of net revenue, in the second quarter ended June
28 1998. Earnings from operations increased 41.3% to $35.6 million, or 14.3%
of net revenue, in the six months ended June 26, 1999 from $25.2 million, or
12.1% of net revenue, in the six months ended June 28, 1998. The increase in
earnings from operations was primarily due to higher revenue.
INTEREST EXPENSE, NET. Net interest expense decreased 35.3% to $2.2 million
in the second quarter ended June 26, 1999 from $3.4 million for the
comparable period in 1998. The decrease is due to lower outstanding debt. For
the second quarter ended June 26, 1999, the average debt balance was $94.7
million, with an average effective interest rate of 9.4%. For the second
quarter ended June
8
<PAGE>
28, 1998, the average debt balance was $145.3 million, with an average
effective interest rate of 8.9%. Net interest expense decreased 31.1% to $4.5
million in the six months ended June 26, 1999 from $6.6 million in the six
months ended June 28, 1998, due to lower outstanding debt in 1999. For the
six months ended June 26, 1999, the average debt balance was $95.7 million,
with an average effective interest rate of 9.7%. For the six months ended
June 28, 1998, the average debt balance was $146.0 million, with an average
effective interest rate of 8.8%.
INCOME TAXES. The income tax provision for the three months ended June 26,
1999 was $4.8 million, or a 40.5% effective tax rate, compared to $2.2
million, or a 38.5% effective tax rate, in the three months ended June 28,
1998. The income tax provision for the six months ended June 26, 1998 was
$12.6 million, or a 40.5% effective tax rate, compared to $7.2 million, or a
38.9% effective tax rate, in the six months ended June 28, 1998. The
effective tax rates for both years were impacted by certain realized state
tax credits and tax planning strategies.
NET EARNINGS. Net earnings increased 104.0% to $7.0 million, or 5.9% of net
revenue, in the second quarter ended June 26, 1999, from $3.4 million, or
3.5% of net revenue, in the same period in 1998. Net earnings increased 62.4%
to $18.5 million, or 7.4% of net revenue, in the six months ended June 26,
1999, from $11.4 million, or 5.5% of net revenue, in the six months ended
June 28, 1998.
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended June 26, 1999 the company relied primarily on
internally generated funds and trade credit to finance its operations and
expansion. At June 26, 1999, the Company had working capital of $114.2
million compared to $101.3 million at December 31, 1998. The increase was
primarily due to a $16.3 million increase in cash and short-term investments
and $6.8 million increase in net receivables partially offset by a $10.1
million decrease in inventory.
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 sub-limit
for letters of credit. At June 26, 1999, the Company had no outstanding
borrowings under the revolving credit facility, $1.7 million in outstanding
standby letters of credit and $18.9 million in outstanding commercial letters
of credit. At June 26, 1999, the Company had $79.5 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 June 26, 1999.
Capital expenditures, net of lease incentives granted, totaled $8.5 million
in the six months ended June 26, 1999. The Company estimates its capital
expenditures for fiscal 1999 will be approximately $66.0 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 for the next twelve months 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 Credit
Agreement.
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
9
<PAGE>
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 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 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
and Certification efforts by the early 1999 fourth quarter.
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
10
<PAGE>
readiness status and their plans to become Year 2000 compliant. As of June
26, 1999, 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 visited and reviewed 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 in the fourth quarter
of 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.
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 $3.0 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 parties have agreed to settle the case. Under the
settlement, Guess would stipulate to the certification of a class. On July
19, 1999, the Court gave preliminary approval to the settlement. Both the
Company and plaintiff have the right to cancel the settlement under certain
circumstances.
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. The Court had an initial hearing on the
motions, but has ordered further argument and briefing and set an additional
hearing to consider the motion for August 12, 1999. 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
12
<PAGE>
IPO. On July 26, 1999, the Court entered an Order that allows the case to
proceed past the pleadings stage. 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
(a) The Registrant's Annual Meeting of Stockholders was held on May 17,
1999.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees as listed in the
Proxy Statement. Such nominees were elected.
(c) The matters voted upon at the Annual Meeting and the results thereof
were as follows:
I. To elect a Class III Director to hold office for a three-year
term and until his successor is elected and qualified.
FOR WITHHELD
---------- --------
Maurice Marciano 42,546,416 30,563
I. To ratify the election of KPMG LLP as independent certified
public accountants for the year ending December 31, 1999.
FOR AGAINST ABSTAINED
---------- ------- ---------
42,555,187 13,103 8,689
ITEM 5. Other Information
None.
13
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
- ------- -----------
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. 27.1. Financial Data Schedule*
* 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 June
26, 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: August 6, 1999 By: /s/ MAURICE MARCIANO
------------------------------------
Maurice Marciano
Chairman of the Board, Chief Executive
Officer and Director (Principal
Executive Officer)
Date: August 6, 1999 By: /s/ BRIAN FLEMING
------------------------------------
Brian Fleming
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer and Chief Accounting
Officer)
15
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-26-1999
<CASH> 4,292
<SECURITIES> 29,810
<RECEIVABLES> 33,994
<ALLOWANCES> 8,408
<INVENTORY> 79,895
<CURRENT-ASSETS> 178,500
<PP&E> 181,632
<DEPRECIATION> 97,908
<TOTAL-ASSETS> 286,182
<CURRENT-LIABILITIES> 64,340
<BONDS> 93,562
0
0
<COMMON> 138
<OTHER-SE> 119,124
<TOTAL-LIABILITY-AND-EQUITY> 286,182
<SALES> 230,122
<TOTAL-REVENUES> 248,609<F1>
<CGS> 139,546
<TOTAL-COSTS> 212,968
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