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 30, 1996
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 33-69236
-------------------------------
GUESS ?, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3679695
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1444 South Alameda Street
Los Angeles, California 90021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(213) 765-3100
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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
As of August 13, 1996, the registrant had 42,681,819 shares of Common Stock,
$.01 par value, outstanding.
GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
June 30, 1996 and December 31, 1995.............................. 2
Condensed Consolidated Statements of Earnings (Unaudited) - Second
Quarter and Six Months ended June 30, 1996 and July 2, 1995...... 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months ended June 30, 1996 and July 2, 1995.................. 4
Notes to Condensed Consolidated Financial Statements (Unaudited)... 5
Item 2. Management's discussion and analysis of financial condition
and results of operations................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
1
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
June 30, December 31,
1996 1995*
ASSETS
Current assets:
Cash............................................ $5,442 $6,417
Receivables:
Trade receivables, net of reserves........ 31,403 22,886
Royalties................................. 10,875 9,975
Other..................................... 3,427 4,040
-------- --------
45,705 36,901
Inventories..................................... 92,340 72,889
Prepaid expenses................................ 6,845 5,557
-------- --------
Total current assets................ 150,332 121,764
Property and equipment, at cost, net of accumulated
depreciation and amortization..................... 67,346 68,199
Long-term investments................................. 3,408 3,394
Other assets, at cost, net of accumulated
amortization...................................... 8,649 9,278
-------- --------
$229,735 $202,635
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and
long-term debt............................. $4,056 $4,123
Accounts payable............................... 37,221 40,701
Accrued expenses............................... 23,865 18,332
Income taxes payable........................... 775 1,036
-------- --------
Total current liabilities.......... 65,917 64,192
Notes payable and long-term debt, net of current
installments..................................... 148,712 119,212
Minority interest.................................... 247 75
Other liabilities.................................... 8,535 8,159
-------- --------
223,411 191,638
Stockholders' equity:
Preferred stock. Authorized 10,000,000 shares;
no shares issued and outstanding........... - -
Common stock, $.01 par value. Authorized
150,000,000 shares; issued 52,712,611 and
issued and outstanding 32,681,819,
including 20,030,792 shares in Treasury.... 35 35
Paid-in capital................................ 181 181
Retained earnings.............................. 156,836 161,567
Foreign currency translation adjustment........ 48 (10)
Treasury stock, 20,030,792 shares repurchased.. (150,776) (150,776)
-------- --------
Net stockholders' equity........... 6,324 10,997
-------- --------
$229,735 $202,635
-------- --------
-------- --------
See accompanying notes to condensed consolidated financial statements
*Condensed from Audited Balance Sheet
2
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
(unaudited)
Second Quarter Ended Six Months Ended
-------------------- -------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
-------- -------- -------- -------
Net revenue:
Product sales............................ $108,836 $92,933 $232,111 $206,579
Net royalties............................ 13,672 11,816 25,295 23,073
-------- ------- -------- --------
122,508 104,749 257,406 229,652
Cost of sales.................................. 66,634 55,542 137,113 120,809
-------- ------- -------- --------
Gross profit................................... 55,874 49,207 120,293 108,843
Selling, general and administrative expenses... 37,597 32,308 72,829 66,468
Reorganization charge (note 5)................. 3,559 - 3,559 -
-------- ------- -------- --------
Earnings from operations........... 14,718 16,899 43,905 42,375
-------- ------- -------- --------
Non-operating income (expense):
Interest, net............................ (3,742) (3,885) (7,291) (7,926)
Other, net............................... 173 (16) (147) (180)
-------- ------- -------- --------
(3,569) (3,901) (7,438) (8,106)
Earnings before income taxes....... 11,149 12,998 36,467 34,269
Income taxes................................... 327 716 1,598 1,275
-------- ------- -------- --------
Net earnings....................... $10,822 $12,282 $34,869 $32,994
-------- ------- -------- --------
-------- ------- -------- --------
Supplemental pro forma financial
information (note 2):
Earnings before income taxes, as presented.... $11,149 $12,998 $36,467 $34,269
Pro forma provision for income taxes.......... 4,426 5,199 14,477 13,708
-------- ------- -------- --------
Pro forma net earnings........................ $6,723 $7,799 $21,990 $20,561
-------- ------- -------- --------
-------- ------- -------- --------
Pro forma net earnings per share............. $ .16 $ .53
Weighted average common shares outstanding... 41,412 41,412
-------- --------
-------- --------
See accompanying notes to condensed consolidated financial statements
3
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended
----------------
June 30, July 2,
1996 1995
---- -----
Cash flows from operating activities:
Net earnings................................................ $34,869 $32,994
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment....................................... 8,379 6,822
Amortization of deferred charges...................... 669 801
Loss on disposition of property and equipment......... 100 259
Foreign translation adjustment........................ 33 17
Minority interest..................................... 172 (51)
Undistributed equity method earnings.................. (9) (21)
(Increase) decrease in:
Receivables..................................... (8,803) (12,119)
Inventories..................................... (19,451) 6,097
Prepaid expenses................................ (1,288) (309)
Other assets.................................... 234 428
Increase (decrease) in:
Accounts payable................................ (3,479) 2,294
Accrued expenses................................ 5,367 1,728
Income taxes payable............................ (261) (191)
-------- -------
Net cash provided by operating
activities.......................... 16,532 38,749
Cash flows from investing activities:
Purchases of property and equipment......................... (7,986) (12,527)
Proceeds from the disposition of property and equipment..... 360 127
Lease incentives granted.................................... 261 1,248
Purchases of long-term investments.......................... - (122)
-------- -------
Net cash used by investing activities..... (7,365) (11,274)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt.............. 105,943 75,254
Repayments of notes payable and long-term debt.............. (76,510) (63,861)
Distributions to stockholders............................... (39,600) (41,800)
-------- -------
Net cash used by financing activities..... (10,167) (30,407)
Effect of exchange rates changes on cash:......................... 25 (10)
Net decrease in cash.............................................. (975) (2,942)
Cash, beginning of period......................................... 6,417 5,994
-------- -------
Cash, end of period............................................... $5,442 $3,052
-------- -------
-------- -------
Supplemental disclosures:
Cash paid during the period for:
Interest.............................................. $6,926 $7,627
Income taxes.......................................... 1,856 1,467
See accompanying notes to condensed consolidated financial statements.
4
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the financial
position as of June 30, 1996, and the results of operations and cash flows
for the six months ended June 30, 1996. Operating results for the
second quarter and six months ended June 30, 1996, are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1996. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with Rule 10-01 of
Regulation S-X and accordingly, they have been condensed and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. 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, 1995 and in the Company's Registration Statement Form S-1
(File No. 333-4419) effective August 7, 1996.
(2) Summary of Significant Accounting Policies
Pro Forma Net Earnings
Pro forma net earnings represent the results of operations adjusted to
reflect a provision for income taxes on historical earnings before income
taxes, which gives effect to the change in the Company's income tax status to
a C corporation as a result of the public sale of its common stock. Upon
termination of the Company's S corporation status on August 12, 1996, it
recorded an earnings benefit resulting from the establishment of net deferred
tax assets (approximately $7.4 million), which was based upon temporary book to
tax differences existing at the date of termination of the Company's S
Corporation status. The principal difference between the pro forma income
tax rate and Federal statutory rate of 35% relates primarily to state income
taxes.
Pro forma net earnings per share have been computed by dividing pro forma net
earnings by the weighted average number of shares of common stock outstanding
during the period. The pro forma net earnings per share gives effect to the
issuance of shares of common stock to generate sufficient cash to pay (i) a
distribution to stockholders in an amount equal to the previously earned and
undistributed taxable S corporation earnings (the "S Corporation
Distribution") aggregating approximately $176.9 million through the date of
termination as if such distribution had been made at June 30, 1996 and the
Company's S corporation status had been terminated at such date, and (ii) the
$300,000 to be paid by the Company to the trusts for the respective benefit
of Maurice Marciano, Paul Marciano and Armand Marciano (the "Marciano
Trusts") in connection with the merger of Marciano International, Inc.
("Marciano International"), a Company which is wholly owned by the Marciano
Trusts, with and into the Company (See also note 6).
Recently Issued Pronouncements
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of,"
in March 1995 which is effective for fiscal years beginning after December
15, 1995. SFAS No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related
to these assets and certain identifiable intangibles to be disposed of. The
Company adopted the provisions of SFAS No. 121 effective April 1, 1996 and
has, accordingly, recorded a write-down aggregating $2.4 million in the
second quarter of 1996 related to certain operating assets to be disposed of
and is included as a component of the $3.6 million Reorganization Charge in
the Company's statement of earnings. The Company does not anticipate that
SFAS No. 121 will have a material impact on its financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to
5
measure compensation costs using the principles of Accounting Principles
Board pronouncement 25 if certain pro forma disclosures are made. SFAS 123
is effective for fiscal years beginning after December 15, 1995. The Company
intends to adopt the provisions for pro forma disclosure requirements of SFAS
123 in fiscal 1996 and anticipates that SFAS 123 will not have a material
impact on its financial statements. As of June 30, 1996, the Company had not
issued any stock options or other instruments under which SFAS 123 would
apply.
(3) Inventories
The components of inventory consist of the following:
June 30, December 31,
1996 1995
-------- ------------
(in thousands)
Raw materials......................................... $13,125 $9,788
Work in Progress...................................... 10,517 11,264
Finished Goods........................................ 68,698 51,837
-------- -------
$92,340 $72,889
-------- -------
-------- -------
(4) Reclassifications
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 presentation.
(5) Reorganization Charge
In the second quarter of 1996, the Company recorded a provision of $3.6
million for certain non-recurring charges relating to the writedown to net
realizable value of operating assets associated with the (i) disposal of two
currently active remote warehouse and production facilities, in contemplation
of the public offering of 7,000,000 shares of the Company's common stock (the
"Offering"), which are not expected to be used in the Company's operations
after the Offering, and (ii) the net book loss incurred by the Company in
connection with the sale of one of its aircraft in contemplation of the
Offering; such aircraft sale was recorded in June 1996 and completed in July
1996.
The writedown to net realizable value related to the disposal of the
warehouse and production facilities of $2.4 million is based upon the
difference between the asset carrying value of $5.7 million and its appraisal
value of $3.9 million and the inclusion of a provision of $.6 million for
estimated disposal costs, comprised primarily of commissions, title fees and
other customary real estate closing costs. The writedown related to the sale
of the aircraft of $1.2 million is based upon the difference between the
asset carrying value of $7.2 million and the sale price of $6.0 million. The
estimated costs of disposal of the aircraft were immaterial. The above
assets are included in property and equipment at June 30, 1996 and the
Company has not recorded any depreciation expense on these assets from the
date the dispositions were contemplated.
The Company has not recorded the charge related to the warehouse and
production facilities to be disposed of as a cumulative effect from the
implementation of SFAS No. 121 recorded net of tax, because the effect of
such implementation is immaterial to the consolidated financial statements.
(6) Subsequent Events
On August 13, 1996, the Company completed the Offering, resulting in net
proceeds to the Company of approximately $116.3 million.
Prior to the consummation of the Offering, (i) Marciano International, which
is owned by the Marciano Trusts and currently holds an interest in the
subsidiaries of the Company, was merged with and into Guess, (ii) all of the
capital stock of Guess Italia was contributed
6
to Guess? Europe, B.V., (iii) the Company effected a 32.66 to 1 split of the
common stock and (iv) as part of the S Corporation Distribution, the Company
distributed to its stockholders $54.0 million of Common Stock valued at
$18.00 per share (the "S Distribution Shares") with the balance of between
$126.0 million and $136.0 million being distributed in the form of promissory
notes bearing interest at 8% per annum (the "S Distribution Notes"). The
Company paid the Marciano Trusts an aggregate of $300,000 in connection with
the merger of Marciano International, Inc. with and into the Company. Such
$300,000 payment was not included in the aggregate principal amount of the S
Distribution Notes. All of such transactions are referred to as the
"Reorganization." All references to the number of shares have been restated
to give effect to the above referenced stock split.
Concurrent with the consummation of the transaction related to the Offerings
(the "Closing Date"), the Company's S corporation status was terminated (the
"S Termination Date"). Prior to the S Termination Date, the Company declared
a distribution to its stockholders that included all of its previously earned
and undistributed S corporation earnings through the date of termination of
the Company's S corporation status. The S Corporation Distribution occurred
prior to the S Termination Date and was comprised of the S Distribution
Shares and the S Distribution Notes. As a result of S Corporation Termination
the Company is no longer treated as an S Corporation and, accordingly, is
fully subject to federal and state income taxes.
Pursuant to the above transactions, the Company previously disclosed certain
pro forma financial information in the June 30, 1996 consolidated financial
statements included in the Company's Registration Statement on Form S-1 on
file with the Securities and Exchange Commission, effective August 7, 1996
(file no. 333-4419). The pro forma operating results reflect adjustments to
historical operating results for (a) the elimination of salaries and bonuses
paid to the principal executive officers in excess of the salaries and
bonuses to be paid to such officers under their respective employment
agreements following the Offering, (b) the decreases in depreciation and
operating costs associated with an aircraft owned by the Company which was
sold prior to the Offering, (c) the elimination of the minority interest in
GEBV and Guess Italia through the merger of Marciano International with and
into the Company in connection with the Reorganization (such
amounts had previously been recorded as minority interest in the Company
statements of earnings) and (d) adjustments for Federal and state income
taxes as if the Company had been taxed as a C corporation rather than an S
corporation. Summarized below is the pro forma financial information for the
six month periods ended June 30, 1996 and July 2, 1995:
Six months ended
June 30, July 2,
1996 1995
-------- --------
Earnings from operations $47,271 $45,817
Earnings before income taxes 39,993 37,912
Income taxes 15,877 15,165
-------- -------
Net earnings $24,116 $22,747
-------- -------
-------- -------
Net Earnings per share .58
Weighted average common shares
outstanding 41,412
Pursuant to SEC rules and regulations, the pro forma net earnings per share
gives effect to the issuance of shares of common stock to generate sufficient
cash to pay (a) S corporation distribution in an amount equal to retained
earnings at June 30, 1996 and (b) the $300,000 paid by the by the Company in
connection with the merger of Marciano International with and into the
Company.
For comparison purposes only, the following information for the six months
ended June 30, 1996 is presented to show the net earnings per share and
weighted average common shares
7
outstanding as calculated on a full dilution basis, whereby all of the shares
outstanding after the completion of the Offering and after giving effect to
the S corporation distribution were considered to be outstanding for the
entire period.
Net earnings per share .57
Weighted average common shares Outstanding 42,682
Immediately prior to the Offering, the Company was granted options to
purchase 1,203,905 shares pursuant to the Company's 1996 Equity Incentive
Plan with an exercise price equal to the initial public price of $18.00 per
share.
8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto included herein. Except
for historical information contained herein, the statements set forth in this
Item 2 are forward looking and involve risks and uncertainties. For
information regarding potential factors that could affect the Company's
financial results, refer to pages 8-12 of the prospectus contained in the
Company's registration statement on Form S-1 (file no. 333-4419) on file with
the United States Securities and Exchange Commission, as declared effective
on August 7, 1996, which information is incorporated by reference herein.
OVERVIEW
The Company derives its revenue from the sale of Guess brand products through
its wholesale, retail and licensing operations.
RESULTS OF OPERATIONS
NET REVENUE. Net revenue increased $17.8 million or 17.0% to $122.5 million
in the quarter ended June 30, 1996 from $104.7 million in the quarter ended
July 2, 1995. Net revenue from wholesale operations increased $4.6 million
to $61.6 million from $57.0 million, due principally to increased sales
outside the United States of $3.9 million. Net revenue from retail
operations increased $11.3 million to $47.2 million from $35.9 million,
primarily attributable to an increase of 12.5% in comparable store net
revenue and from volume generated by 13 new store openings, offset by the
closing of five stores. The increase in comparable store net revenue was
primarily attributable to a more favorable merchandise mix and the
implementation of improved inventory management systems. Net royalties
increased 15.7% in the quarter ended June 30, 1996 to $13.7 million from
$11.8 million in the quarter ended July 2, 1995. Revenue from international
operations comprised 8.6% and 6.3% of the Company's net revenue during the
second quarter of 1996 and 1995, respectively.
Net revenue increased $27.7 million or 12.1% to $257.4 million in the six
months ended June 30, 1996 from $229.7 million in the six months ended July
2, 1995. Net revenue from wholesale operations increased $2.4 million to
$144.8 million from $142.4 million, due principally to increased sales
outside the United States of $12.1 million, partially offset by a $9.7
million decline in domestic wholesale sales. The decline in domestic
wholesale sales resulted primarily from a $3.1 million decline due to closing
certain accounts and a $1.2 million decline due to the licensing out of
certain apparel lines. Net revenue from retail operations increased $23.1
million to $87.3 million from $64.2 million, primarily attributable to an
increase of 14.4% in comparable store net revenue and from volume generated
by 13 new store openings, offset by the closing of five stores. The increase
in comparable store net revenue was primarily attributable to a more
favorable merchandise mix and the implementation of improved inventory
management systems. Net royalties increased 9.6% in the six months ended
June 30, 1996, to $25.3 million from $23.1 million in the six months ended
July 2, 1995. Net revenue from international operations comprised 11.3% and
6.8% of the Company's net revenue during the first six months of 1996 and
1995, respectively.
GROSS PROFIT. Gross profit increased 13.5% to $55.9 million in the quarter
ended June 30, 1996 from $49.2 million in the quarter ended July 2, 1995.
The increase in gross profit resulted from increased net royalties and
increased net revenue from product sales. Gross profit from product sales
increased 12.9% to $42.2 million in the quarter ended June 30, 1996 from
$37.4 million in the quarter ended July 2, 1995. Gross profit as a
percentage of net revenue decreased to 45.6% in the quarter ended June 30,
1996 as compared to 47.0% in the quarter ended July 2, 1995. Gross profit
from product sales as a percentage of net revenue decreased to 38.8% from
40.2% in the comparable 1995 period primarily due to higher offprice revenue
and higher retail revenue (which generally has a relatively lower gross
profit margin) as percentages of total revenue in the quarter ended June 30,
1996.
Gross profit increased 10.5% to $120.3 million in the six months ended June
30, 1996 from $108.8 million in the six months ended July 2, 1995. The
increase in gross profit resulted from increased net royalties and increased
net revenue from product sales. Gross profit from product sales increased
10.7% to $95.0 million in the six months ended June 30, 1996 from $85.8
million in the six months ended July 2, 1995. Gross profit as a percentage
of net revenue decreased to 46.7% in the six months ended June 30, 1996 as
compared to 47.4% in the six months ended July 2, 1995. Gross profit from
product sales as a percentage of net revenue decreased to 40.9% from 41.5% in
the comparable 1995 period primarily as a result of growth in net revenue
derived from both international and retail operations, both of which
generally have relatively lower gross profit margins.
9
SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses
increased 16.4% in the quarter ended June 30, 1996 to $37.6 million, or 30.7%
of net revenue, from $32.3 million, or 30.8% of net revenue, in the quarter
ended July 2, 1995. SG&A expenses increased 9.6% in the six months ended June
30, 1996 to $72.8 million, or 28.3% of net revenue, from $66.5 million, or
28.9% of net revenue, in the six months ended July 2, 1995. These increases
were primarily the result of increased store expenses related to the
expansion of the retail operation. The decrease in SG&A expenses as a
percentage of net revenue was the result of fixed expenses being spread over
a larger revenue base in the 1996 period.
REORGANIZATION CHARGE. In anticipation of the Offering, in the second
quarter of 1996 the Company recorded reserves totaling $3.6 million for
certain non-recurring charges related to the writedowns of operating assets
to be disposed of, which included:(i) the disposal of two currently active
remote warehouse and production facilities not expected to be used in the
Company's operations after the Offering, resulting in a net book loss of $2.4
million, and (ii) the net book loss of $1.2 million incurred by the Company
in connection with the sale of one of its aircraft. The above charges are
based upon the net book value of the related assets as of June 30, 1996. The
Company intends to relocate the warehouse and production operations located
at the remote facilities to its central facility in Los Angeles in an effort
to centralize its operations and improve operating efficiencies.
EARNINGS FROM OPERATIONS. Earnings from operations, including the
Reorganization Charge discussed above, decreased 12.9% to $14.7 million, or
12.0% of net revenue in the quarter ended June 30, 1996, from $16.9 million,
or 16.1% of net revenue, in the quarter ended July 2, 1995. Earnings from
operations increased 3.6% to $43.9 million, or 17.1% of net revenue in the
six months ended June 30, 1996, from $42.4 million, or 18.5% of net revenue,
in the six months ended July 2, 1995. Excluding the aforementioned
reorganization charge, earnings from operations would have increased 8.2% or
$1.4 million to $18.3 million in the quarter ended June 30, 1996, from $16.9
million in the comparable quarter. For the six month months ended June 30,
1996, excluding the aforementioned reorganization charge, earnings from
operations would have increased 12.0% or $5.1 million to $47.5 million, from
$42.4 million in the comparable period. These increases are primarily related
to increases in revenue.
INTEREST EXPENSE, NET. Net interest expense decreased 3.7% to $3.7 million in
the quarter ended June 30, 1996 from $3.9 million in the quarter ended July
2, 1995. For the quarter ending June 30, 1996, the average debt balance was
$154.6 million, with an average effective interest rate of 9.2%. For the
quarter ending July 2, 1995, the average debt balance was $164.9 million,
with an average effective interest rate of 9.4%. Net interest expense
decreased 8.0% to $7.3 million in the six months ended June 30, 1996 from
$7.9 million in the six months ended July 2, 1995. These decreases resulted
primarily from lower outstanding debt. For the first six months of 1996, the
average debt balance was $149.3 million, with an average effective interest
rate of 9.3%. For the first six months of 1995, the average debt balance was
$164.8 million, with an average effective interest rate of 9.4%.
NET EARNINGS. Net earnings decreased 11.9% to $10.8 million, or 8.8% of net
revenue, in the quarter ended June 30, 1996, from $12.3 million, or 11.7% of
net revenue, in the quarter ended July 2, 1995. Net earnings increased 5.7%
to $34.9 million, or 13.5% of net revenue, in the six months ended June 30,
1996, from $33.0 million, or 14.4% of net revenue, in the six months ended
July 2, 1995. Excluding the aforementioned reorganization charge, net
earnings would have increased 16.3% or $2.1 million to $14.4 million in the
quarter ended June 30, 1996, from $12.3 million in the comparable quarter.
For the six month ended June 30, 1996, excluding the aforementioned
reorganization charge, net earnings would have increased 16.2% or $5.3
million to $38.3 million, from $33.0 million in the comparable period. These
increases are primarily related to increases in revenue.
10
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon internally generated funds, trade
credit and bank borrowings to finance its operations and expansion and to
make periodic distributions to stockholders. At June 30, 1996, the Company
had working capital of $84.4 million compared to $57.6 million at December
31, 1995. The $26.8 million increase in working capital primarily resulted
from a $19.5 million increase in inventories, an $8.8 million increase in
receivables and a $3.5 million decrease in payables, partially offset by a
$5.4 million increase in accrued liabilities. The increase in inventory
relates to seasonal requirements and the buildup of initial inventory of the
Company's Bare Basics line.
The Company's revolving credit agreement provides for a $100.0 million
revolving credit facility which includes a $20.0 million sublimit for letters
of credit. As of June 30, 1996, the Company had $43.0 million in outstanding
borrowings under the revolving credit facility and outstanding letters of
credit of $8.6 million. As of June 30, 1996, the Company had $48.4 million
available for future borrowings under such facility. The revolving credit
facility will expire in December 1997. In addition to this revolving credit
facility, the Company has a $25.0 million letter of credit facility. As of
June 30, 1996, the Company had $15.3 million outstanding under this facility.
After application of net proceeds of the Offering to repay a substantial
portion of the S Distribution Notes, approximately $16.0 million of S
Distribution Notes will remain outstanding. The S Distribution Notes will
bear interest at 8% per annum and will mature on January 1, 1997.
Capital expenditures, net of lease incentives granted, totaled $7.7 million
in the six months ended June 30, 1996. The Company estimates that its
capital expenditures for fiscal 1996 will be approximately $20.0 million,
primarily for the expansion of its retail stores and operations.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements through 1997, including retail and international expansion plans
and interest on the Senior Subordinated Notes, primarily with cash flow from
operations, supplemented, if necessary, by borrowing under its revolving
credit agreement.
SEASONALITY
The Company's business is impacted by the general seasonal trends that are
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 results 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 that 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
that they have had a material effect on the Company's net revenue of
profitability.
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of,"
in March 1995 which is effective for fiscal years beginning after December
15, 1995. SFAS No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related
to these assets and certain identifiable intangibles to be disposed of. The
Company adopted the provisions of SFAS No. 121 effective April 1, 1996 and
has, accordingly, recorded a write-down aggregating $2.4 million in the
second quarter of 1996 related to certain operating assets to be disposed of
and is included as a component of the $3.6 million Reorganization Charge in
the Company's statement of earnings. The Company does not anticipate that
SFAS No. 121 will have a material impact on its financial statements.
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In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to measure compensation costs
using the principles of Accounting Principles Board pronouncement 25 if
certain pro forma disclosures are made. SFAS 123 is effective for fiscal
years beginning after December 15, 1995. The Company intends to adopt the
provisions for pro forma disclosure requirements of SFAS 123 in fiscal 1996
and anticipates that SFAS 123 will not have a material impact on its
financial statements. As of June 30, 1996, the Company had not issued any
stock options or other instruments under which SFAS 133 would apply.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Litigation
On August 7, 1996, a purported 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, styled as Brenda Figueroa
et. al. v. Guess ?, Inc. et al. (Dist. Ct. Case No. 96-5485HLH(JGx)). The
complaint, which seeks damages and injunctive relief, alleges, among other
things, that the defendants' practices with respect to the employees of such
independent contractors have violated various federal and state labor laws
and regulations. Based upon the information available to the Company at this
time, the Company does not believe that the outcome of such purported class
action will have a material adverse effect on the Company's financial
condition or results of operations.
Guess is also a party to various other claims, complaints and other legal
actions that have arisen in the ordinary course of business from time to
time. The Company believes that the outcome of such pending legal
proceedings, in the aggregate, will not have a material adverse effect on the
Company's financial condition or results of operations.
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)
4.1 Specimen stock certificate (1)
10.1 Amended and Restated Stockholders' Agreement (1)
10.2 Letter of Agreement, dated January 22, 1996, between the
Registrant and Andrea Weiss (1)
10.3 Employment Agreement, dated as of May 14, 1996, between the
Registrant and Francis K. Duane. (1)
10.4 Amendment No. 8 to the Revolving Credit Agreement, dated February
13, 1996, among the parties thereto (1)
10.5 1996 Equity Incentive Plan. (2)
10.6 1996 Non-Employee Directors' Stock Option Plan (1)
10.7 Annual Incentive Bonus Plan. (1)
10.8 Employment Agreement between the Registrant and Maurice
Marciano. (1)
10.9 Employment Agreement between the Registrant and Paul Marciano. (1)
10.10 Employment Agreement between the Registrant and Armand Marciano. (1)
10.11 Registration Rights Agreement among the Registrant and certain
stockholders of the Registrant. (1)
10.12 Indemnification Agreement among the Registrant and certain
stockholders of the Registrant. (1)
10.13 Form of Indemnification Agreement. (1)
27.1 Financial Data Schedule
99.1 Pages 8-12 from the prospectus included in the Company's
Registration Statement on Form S-1 (File No. 333-4419) as filed
by the Company on August 9, 1996 pursuant to Rule 424(b).
- ------------------
(1) Incorporated by reference from Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-4419) filed by the Company on July 30,
1996.
(2) Incorporated by reference from Amendment No. 4 to the Registration
Statement on Form S-1 (File No. 333-4419) filed by the Company on July 31,
1996.
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the second
quarter ended June 30, 1996.
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SIGNATURES
Pursuant to the requirements of Rule 12b-15 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 14, 1996 By: /s/ Maurice Marciano
----------------------------------
Maurice Marciano
Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: August 14, 1996 By: /s/ Roger Williams
----------------------------------
Roger Williams
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
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