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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q/A
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 25, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-11893
GUESS ?, INC.
(Exact name of Company as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-3679695
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
1444 SOUTH ALAMEDA STREET
LOS ANGELES, CALIFORNIA, 90021
(Address of principal executive offices)
(213) 765-3100
(Company's telephone number, including area code)
------------------------
Indicate by check mark whether the Company (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 Company
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 February 14, 2000 the Company had 43,337,285 shares of Common Stock,
$.01 par value per share, outstanding.
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GUESS ?, INC.
FORM 10-Q/A
TABLE OF CONTENTS
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<CAPTION>
PAGE
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<S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) as
of September 25, 1999 and December 31, 1998......... 2
Condensed Consolidated Statements of Earnings
(Unaudited) - Third Quarter and Nine Months ended
September 25, 1999 and September 27, 1998........... 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months ended September 25, 1999
and September 27, 1998.............................. 4
Notes to Condensed Consolidated Financial Statements
(Unaudited)......................................... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risks............................................ 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 14
Item 2. Changes in Securities and Use of Proceeds......... 15
Item 3. Defaults Upon Senior Securities................... 15
Item 4. Submission of Matters to a Vote of Security
Holders................................................. 15
Item 5. Other Information................................. 15
Item 6. Exhibits and Reports on Form 8-K.................. 15
</TABLE>
The Company is filing this Amendment to its Quarterly Report on Form 10-Q for
the period ended September 25, 1999 filed with the Securities and Exchange
Commission on November 8, 1999 in order to revise the Financial Statements and
the Management's Discussion and Analysis of Financial Condition and Results of
Operations sections in that Report. During its 1999 year-end closing, the
Company learned that certain inventory costs and related costs of goods sold
should have been recognized in the third quarter. Accordingly, the Company is
restating its 1999 third quarter and nine months results. Recognizing these
costs in the third quarter results is a reduction in previously reported net
income. Pursuant to Rule 12b-5 under the Securities Exchange Act of 1934, the
Company is including the complete text of the Quarterly Report as revised. The
Company has also updated its legal proceedings section to reflect developments
subsequent to the filing of the 10-Q.
1
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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)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 25, DECEMBER 31,
1999 1998
------------- ------------
(RESTATED)
<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)..................... 94,194 89,499
Prepaid expenses and other current assets................. 7,138 8,206
Prepaid income taxes...................................... 695 --
Deferred tax assets....................................... 6,496 6,496
--------- ---------
Total current assets.................................... 206,034 156,092
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
--------- ---------
$ 322,592 $ 263,772
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current installments of bank debt and long term debt...... $ 5,998 $ --
Accounts payable.......................................... 49,477 32,802
Accrued expenses.......................................... 27,682 21,770
Income taxes payable...................................... -- 210
--------- ---------
Total current liabilities............................... 83,157 54,782
Notes payable and long-term debt, less current
installments.............................................. 95,283 99,000
Other liabilities........................................... 8,890 9,581
--------- ---------
187,330 163,363
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......................................... 125,281 92,543
Accumulated other comprehensive loss...................... (151) (84)
Treasury stock, 20,030,792 shares repurchased............. (150,776) (150,776)
--------- ---------
Net stockholders' equity................................ 134,226 100,409
--------- ---------
$ 322,592 $ 263,772
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statement.
2
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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 25, SEP 25, SEP 25,
1999 1998 1999 1998
---------- -------- ---------- --------
(RESTATED) (RESTATED)
<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....................................... 90,286 75,356 229,832 193,505
-------- -------- -------- --------
Gross profit........................................ 65,261 54,782 174,324 145,469
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........... 26,199 18,991 61,840 44,214
Interest expense, net............................... 2,364 3,188 6,902 9,779
-------- -------- -------- --------
Earnings before income taxes........................ 23,835 15,803 54,938 34,435
-------- -------- -------- --------
Income taxes (note 6)............................... 9,600 6,164 22,200 13,405
-------- -------- -------- --------
Net earnings........................................ $ 14,235 $ 9,639 $ 32,738 $ 21,030
======== ======== ======== ========
Net earnings per share:
Basic and diluted................................. $ 0.33 $ 0.22 $ 0.76 $ 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.
3
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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
---------- --------
(RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 32,738 $ 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........................................... 3,275 (11,625)
Prepaid expenses...................................... 1,629 10,434
Other assets.......................................... (325) 1,537
Increase (decrease) in:
Accounts payable...................................... 7,134 (2,991)
Accrued expenses...................................... 4,816 (4,452)
Income taxes payable.................................. (252) --
-------- --------
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 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.
4
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GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 25, 1999--RESTATED
(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 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 relating to these segments is summarized in note 7.
5
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GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 25, 1999--RESTATED
(IN THOUSANDS)
(UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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
------------------- -------------------
SEP 25, SEP 25, SEP 25, SEP 25,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings............................. $14,235 $9,639 $32,738 $21,030
Foreign currency translation
adjustment............................. 25 71 67 68
------- ------ ------- -------
Comprehensive income..................... $14,260 $9,710 $32,805 $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.
6
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GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 25, 1999--RESTATED
(IN THOUSANDS)
(UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTATED FINANCIAL STATEMENTS
These restated financial statements reflect the recognition of an additional
$7,300 in inventory costs and related costs of good sold in the third quarter
over what was previously reported. This change resulted in a reduction of
previously reported net income of approximately $4,300, or $0.10 per share, for
the third quarter, for its wholesale operations.
(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.......................................... 8,162 7,922
Finished goods - wholesale................................ 39,036 35,465
Finished goods - retail................................... 40,207 36,712
------- -------
$94,194 $89,499
======= =======
</TABLE>
(4) INVESTMENTS
Short-term investments consist primarily of interest bearing deposit
accounts.
(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.
7
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GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 25, 1999--RESTATED
(IN THOUSANDS)
(UNAUDITED)
(7) SEGMENT INFORMATION (CONTINUED)
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 25, SEP 25, SEP 25,
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.............. $ 5,877 $ 1,148 $ 19,344 $ 12,298
Retail operations................. 11,514 8,096 18,312 7,292
Licensing operations.............. 8,808 9,747 24,184 24,624
-------- -------- -------- --------
$ 26,199 $ 18,991 $ 61,840 $ 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
allocation of the purchase price to net assets acquired was minor. The operating
results of Guess Canada are immaterial to the Company's consolidated financial
statements.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPORTANT NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q/A contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange
Act"). Forward-looking statements may also be in the Company's other reports
filed under the Exchange Act, in its press releases and in other documents. In
addition, from time to time, the Company through its management may make oral
forward-looking statements.
Forward-looking statements generally relate to future events or future
financial performance, and include statements dealing with current plans,
intentions, objectives, beliefs and expectations. Some forward-looking
statements can be identified by terminology such as "may," "will," "should,"
"expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential," "optimistic," "aims," or "continue" or the negative of
such terms or other comparable terminology. Certain statements in this
Form 10-Q/A, including but not limited to those relating to the company's
expected results, the accuracy of data relating to, and anticipated levels of,
its future inventory and gross margins, its anticipated cash requirements and
sources, the relocation of its distribution center, its cost containment efforts
and its business seasonality, are forward-looking statements.
Forward-looking statements are only expectations, and involve known and
unknown risks and uncertainties, which may cause actual results in future
periods and other future events to differ materially from what is currently
anticipated. Factors which may cause actual results in future periods to differ
from current expectations include, among other things, the continued
availability of sufficient working capital, the successful integration of new
stores into existing operations, the continued desirability and customer
acceptance of existing and future product lines, possible cancellations of
wholesale orders, the success of competitive products, the success of the
company's programs to strengthen its inventory cost accounting controls and
procedures, the success of technology to be used in the company's new
distribution center and the availability of adequate sources of capital. In
addition to these factors, the economic and other factors identified in the
Company's most recent Annual Report on Form 10-K, including but not limited to
the risk factors discussed therein, could affect the forward-looking statements
contained in this Report.
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
9
<PAGE>
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 $185.9 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, respectively. Net royalty revenue remained constant
with an increase of activity in the European market and certain licensed
products offset with the discontinuing of 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 19.2% to $65.3 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 24.8% to
$53.9 million in the quarter from $43.2 million in 1998. After the additional
costs being recognized in the third quarter, gross margin rates for the restated
third quarter are not representative of what we would have otherwise expected
for the third quarter. Gross margin was 42.0% 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
37.4% compared to 36.5% for the same period in 1998. Gross margin from product
sales for the quarter reflected lower off-price sales, lower markdowns, and the
effect of spreading retail occupancy costs over a higher sales base.
Gross profit increased 19.8% to $174.3 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 24.9% to
$144.4 million in the nine months ended September 25, 1999 from $115.6 million
in the nine months ended September 27, 1998. Gross margin was 43.1% 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 38.6% 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
10
<PAGE>
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 38.0% to $26.2 million, or 16.8% 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 39.9% to $61.8 million, or 15.3% 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 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 $9.6 million, or a 40.3% 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
$22.2 million, or a 40.4% 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 47.9% to $14.2 million, or 9.2% 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 55.7% to
$32.7 million, or 8.0% 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
$122.9 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.
11
<PAGE>
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 expired in December 1999. The Credit Agreement contained 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.
On December 3, 1999, the Company entered into a $125,000,000 Credit
Agreement ("Credit Facility") with Chase Manhattan Bank. The Credit Facility
provides the company with a revolving credit facility, which includes a
$50 million sub-limit for letters of credit. The Credit Facility contains
various restrictive covenants requiring, among other things, the maintenance of
certain financial ratios. As of February 16, 2000, the Company was in compliance
with all such covenants.
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 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 Facility.
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.
12
<PAGE>
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 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, 2 and 3 are concluded.
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. The Company has received responses from most of its key
vendors acknowledging their compliance 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Not applicable.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. The plaintiffs asserted 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
them with respect to their employees. The plaintiffs also alleged 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, the Company would stipulate to the certification of
a class. On July 19, 1999, the Court gave preliminary approval to the
settlement. The plaintiff has the right to cancel the settlement under certain
circumstances. The Court has scheduled a hearing on March 1, 2000 to determine
whether it will give final approval to the settlement.
On July 7, 1998, the Union of Needletrades, Industrial and Textile Employees
("UNITE") filed with the National Labor Relations Board ("NLRB") charges against
the Company alleging that the Company violated the National Labor Relations Act
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 were dismissed by the
NLRB. UNITE appealed, and, on October 15, 1999, the NLRB dismissed the appeal.
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 filed in the Los Angeles Superior Court. The complaint, as
amended, purported 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 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 January 10, 2000, the claims were
dismissed in their entirety. However, Robinson has the right to appeal the
dismissal.
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. 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.
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 alleged that PLB defaulted under the license agreements,
that the license agreements properly were terminated and that PLB breached the
license agreements. On July 19, 1999, PLB filed a counterdemand for arbitration
against the Company. PLB sought damages consisting of all royalties paid to the
Company over the course of their relationship and injunctive relief against the
Company alleging breach of contract, violation of the California Franchise
Relations Act, interference with prospective economic advantage, unlawful
14
<PAGE>
business practices, statutory unfair competition and fraud. The arbitration is
pending before the American Arbitration Association pursuant to arbitration
clauses in the license agreements.
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
None.
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
- ------- -----------------------------------------------------
<C> <S>
3.1. Restated Certificate of Incorporation of the Company.
(1)
3.2. Bylaws of the Company. (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.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<C> <S>
GUESS ?, INC.
Date: February 16, 2000 By: /s/ MAURICE MARCIANO
--------------------------------------------
Maurice Marciano
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND DIRECTOR (PRINCIPAL EXECUTIVE
OFFICER)
Date: February 16, 2000 By: /s/ BRIAN FLEMING
--------------------------------------------
Brian Fleming
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER (PRINCIPAL FINANCIAL OFFICER AND
CHIEF ACCOUNTING OFFICER)
</TABLE>
16
<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> 94,194
<CURRENT-ASSETS> 206,034
<PP&E> 188,810
<DEPRECIATION> 96,814
<TOTAL-ASSETS> 322,592
<CURRENT-LIABILITIES> 83,157
<BONDS> 91,562
0
0
<COMMON> 139
<OTHER-SE> 134,087
<TOTAL-LIABILITY-AND-EQUITY> 322,592
<SALES> 374,264
<TOTAL-REVENUES> 404,156
<CGS> 229,832
<TOTAL-COSTS> 342,316
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,931
<INTEREST-EXPENSE> 6,902
<INCOME-PRETAX> 54,938
<INCOME-TAX> 22,200
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,738
<EPS-BASIC> $0.76
<EPS-DILUTED> $0.76
<FN>
<F1>Includes net royalties of $29.9 million
</FN>
</TABLE>
