UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 29, 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)
(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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
As of October 22, 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) -
September 29, 1996 and December 31, 1995......................... 2
Condensed Consolidated Statements of Earnings (Unaudited) - Third
Quarter and Nine Months ended September 29, 1996 and October 1, 1995 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months ended September 29, 1996 and October 1, 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............................................ 14
Item 6. Exhibits and Reports on Form 8-K............................. 14
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
SEP 29, DEC 31,
1996 1995*
-------- --------
ASSETS
Current assets:
Cash............................................ $ 5,483 $ 6,417
Short term investments.......................... 431 0
Receivables:
Trade receivables, net of reserves........ 42,579 22,886
Royalties................................. 13,008 9,975
Other..................................... 3,887 4,040
-------- --------
59,474 36,901
Inventories..................................... 83,890 72,889
Prepaid expenses and other current assets....... 9,241 5,557
-------- --------
Total current assets................ 158,519 121,764
Property and equipment, at cost, net of accumulated
depreciation and amortization..................... 63,211 68,199
Long-term investments................................. 2,953 3,394
Other assets, at cost, net of accumulated
amortization...................................... 12,725 9,278
-------- --------
$237,408 $202,635
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and
long-term debt............................. $ 6,356 $ 4,123
Accounts payable............................... 39,301 40,701
Accrued expenses............................... 20,569 18,332
Income taxes payable........................... 5,778 1,036
-------- --------
Total current liabilities.......... 72,004 64,192
Notes payable and long-term debt, net of current
installments..................................... 135,466 119,212
Minority interest.................................... 0 75
Other liabilities.................................... 8,778 8,159
-------- --------
216,248 191,638
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 62,712,611,
outstanding 42,681,819 and 32,681,819
shares respectively, including
20,030,792 shares in Treasury.............. 135 35
Paid-in capital................................ 153,347 181
Retained earnings.............................. 18,387 161,567
Foreign currency translation adjustment........ 67 (10)
Treasury stock, 20,030,792 shares repurchased.. (150,776) (150,776)
-------- --------
Net stockholders' equity........... 21,160 10,997
-------- --------
$237,408 $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, except per share data)
(unaudited)
Third Quarter Ended Nine Months Ended
------------------- ------------------
SEP 29, OCT 1, SEP 29, OCT 1,
1996 1995 1996 1995
-------- -------- -------- --------
Net revenue:
Product sales......................... $139,511 $121,325 $371,622 $327,904
Net royalties......................... 14,987 11,804 40,282 34,877
-------- -------- -------- --------
154,498 133,129 411,904 362,781
Cost of sales............................... 84,284 73,981 221,397 194,790
-------- -------- -------- --------
Gross profit................................ 70,214 59,148 190,507 167,991
Selling, general & administrative expenses.. 39,490 37,916 112,319 104,384
Reorganization charge (note 5).............. - - 3,559 -
-------- -------- -------- --------
Earnings from operations........ 30,724 21,232 74,629 63,607
-------- -------- -------- --------
Non-operating income (expense):
Interest, net......................... (3,843) (3,937) (11,134) (11,863)
Other, net............................ (618) 27 (765) (153)
-------- -------- -------- --------
(4,461) (3,910) (11,899) (12,016)
Earnings before income taxes.... 26,263 17,322 62,730 51,591
Income taxes................................ 5,925 838 7,523 2,113
-------- -------- -------- --------
Net earnings.................... $20,338 $16,484 $55,207 $49,478
-------- -------- -------- --------
-------- -------- -------- --------
Supplemental pro forma financial information (note 2) * :
- ---------------------------------------------------------
Earnings before income taxes, as presented.. $26,263 $17,322 $62,730 $51,591
Pro forma provision for income taxes........ 10,637 6,927 25,092 20,635
-------- -------- -------- --------
Pro forma net earnings...................... $15,626 $10,395 $37,638 $30,956
-------- -------- -------- --------
-------- -------- -------- --------
Pro forma net earnings per share............ $ .40 $ 1.08
Weighted average common shares outstanding.. 38,727 34,771
-------- --------
-------- --------
* For additional information on pro forma financial information, see note 6.
See accompanying notes to condensed consolidated financial statements
3
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
------------------
SEP 29, OCT 1,
1996 1995
-------- --------
Cash flows from operating activities:
Net earnings............................................. $55,207 $49,478
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment........................................ 12,510 10,432
Amortization of deferred charges..................... 852 1,190
Loss on disposition of property and equipment........ 1,194 676
Foreign currency translation adjustment.............. 46 9
Minority interest.................................... (75) 37
Undistributed equity method earnings................. 322 (136)
(Increase) decrease in:
Receivables...................................... (22,573) (13,098)
Inventories...................................... (11,001) 10,321
Prepaid expenses and other current assets........ (21) (1,693)
Other assets..................................... (166) 649
Increase (decrease) in:
Accounts payable................................. (1,399) 9,413
Accrued expenses................................. 1,651 (20)
Income taxes payable............................. 4,742 60
-------- --------
Net cash provided by operating activities.... 41,289 67,318
Cash flows from investing activities:
Purchases of property and equipment...................... (15,266) (18,652)
Proceeds from the disposition of property and equipment.. 6,640 138
Lease incentives granted................................. 616 1,403
Purchases of short-term investments...................... (431) -
Purchases of long-term investments....................... - (23)
-------- --------
Net cash used by investing activities........ (8,441) (17,134)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt........... 143,660 99,375
Repayments of notes payable and long-term debt........... (125,173) (101,277)
Proceeds from issuance of common stock................... 116,300 -
Repayments of S distribution notes....................... (129,000) -
Distributions to stockholders............................ (39,600) (51,800)
-------- --------
Net cash used by financing activities........ (33,813) (53,702)
Effect of exchange rates changes on cash:.................... 31 (7)
Net decrease in cash......................................... (934) (3,525)
Cash, beginning of period.................................... 6,417 5,994
-------- --------
Cash, end of period.......................................... $5,483 $2,469
-------- --------
-------- --------
Supplemental disclosures:
Cash paid during the period for:
Interest........................................... $13,393 $14,233
Income taxes....................................... 2,947 1,764
See accompanying notes to condensed consolidated financial statements.
4
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 29, 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 September 29, 1996, and the results of operations and cash
flows for the nine months ended September 29, 1996. Operating results for the
third quarter and nine months ended September 29, 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
of the Securities and Exchange Commission ("SEC"). Accordingly, they have
been condensed and do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1995 and in the Company's
Registration Statement on Form S-1 (File No. 333-4419) completed August 13,
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 merger of Marciano International, Inc.
("Marciano International"), a company which was wholly owned by the trusts
for the respective benefit of Maurice Marciano, Paul Marciano and Armand
Marciano (the "Marciano Trusts") with and into Guess (the "Marciano
International Merger"), and 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 $185.0 million and (ii) the $300,000
to be paid by the Company to the Marciano Trusts in connection with the
Marciano International Merger (See also note 6).
Recently Issued Pronouncements
5
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 continuing 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 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 has adopted the
provisions for pro forma disclosure requirements of SFAS 123 effective
January 1, in fiscal 1996 and will incorporate the required per forma
information in its 1996 report on form 10-K and anticipates that SFAS 123
will not have a material impact on its financial statements. As of September
29, 1996, the Company had not issued any exercisable stock options or other
instruments under which SFAS 123 would apply.
(3) Inventories
The components of inventory consist of the following (in thousands):
SEP 29, DEC 31,
1996 1995
-------- --------
Raw materials.................................. $13,421 $9,788
Work in Progress............................... 8,423 11,264
Finished Goods................................. 62,046 51,837
-------- --------
$83,890 $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 resulting in a
net book loss of $2.4 million, in contemplation of the public offering of
6
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 of $1.2 million incurred by the Company in connection
with the sale of one of its aircraft in contemplation of the Offering.
(6) Initial Public Offering
On August 13, 1996, the Company completed the Offering, resulting in net
proceeds to the Company of approximately $116.3 million.
In connection with the Offering, (i) Marciano International, which was owned
by the Marciano Trusts and held 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 to Guess? Europe, B.V. ("GEBV"), (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 $131.0 million being distributed in the form of
promissory notes bearing interest at 8% per annum (the "S Distribution
Notes"). During the third quarter of 1996, the Company paid $129.0 million
of the S Distribution Notes, funded primarily with proceeds from the
Offering. The Company also 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 the S Corporation
Termination the Company is no longer treated as an S Corporation and,
accordingly, is fully subject to federal and state income taxes that would
apply to a C corporation.
Pursuant to the above transactions, the following pro forma operating results
are presented to 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. For comparison purposes only,
earnings per share and weighted average common shares outstanding have been
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
7
considered to be outstanding for the entire period. Summarized below is the
pro forma financial information for the third quarter and nine month periods
ended September 29, 1996 and October 1, 1995 (in thousands, except per share
data):
Third quarter ended Nine months ended
------------------- -------------------
SEP 29, OCT 1, SEP 29, OCT 1,
1996 1995 1996 1995
-------- -------- -------- --------
Total revenue $154,498 $133,129 $411,904 $362,781
Earnings from operations 31,755 22,413 79,029(1) 68,230
Earnings before income taxes 27,457 18,591 67,450(1) 56,503
Income taxes 11,120 7,436 26,997 22,601
Net earnings 16,337 11,155 40,453(1) 33,902
Net earnings per share $.38 $.26 $.95 $.79
Weighted average common shares
outstanding 42,682 42,682 42,682 42,682
(1) Nine months ended September 29, 1996 includes a non-recurring
reorganization charge of $3.6 million (pretax) and $2.1 million (after tax)
or $.05 per share (See also note 5).
Immediately prior to the Offering, the Company granted options to purchase
1,208,405 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. This
Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements which reflect the
Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or those anticipated. In this report, the words
"anticipates," "believes," "expects," "intends," "future," and similar
expressions identify forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date hereof.
OVERVIEW
The Company derives its revenue from the sale of Guess brand products through
its domestic wholesale, international wholesale, retail and licensing
operations.
RESULTS OF OPERATIONS
NET REVENUE. Net revenue increased $21.4 million or 16.1% to $154.5 million
in the quarter ended September 29, 1996 from $133.1 million in the quarter
ended October 1, 1995. Net revenue from wholesale operations increased $9.9
million or 13.8% to $81.6 million from $71.7 million, due principally to
increased sales outside the United States of $13.3 million partially offset
by a $3.4 million decline in domestic sales. The decline in domestic
wholesale sales included a $1.4 million decline due to closing certain
accounts and a $0.1 million decline due to the licensing out of certain
apparel lines. Net revenue from retail operations increased $8.3 million or
16.7% to $57.9 million from $49.6 million, primarily attributable to an
increase of 5.9% in comparable store net revenue and from volume generated by
ten new store openings, offset by the closing of three 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 $3.2 million or 27.0% in the
quarter ended September 29, 1996 to $15.0 million from $11.8 million in the
quarter ended October 1, 1995. Revenue from international operations
comprised 15.3% and 7.5% of the Company's net revenue during the third
quarter of 1996 and 1995, respectively.
Net revenue increased $49.1 million or 13.5% to $411.9 million in the nine
months ended September 29, 1996 from $362.8 million in the nine months ended
October 1, 1995. Net revenue from wholesale operations increased $12.2
million or 5.7% to $226.3 million from $214.1 million, due principally to
increased sales outside the United States of $25.4 million, partially offset
by a $13.2 million decline in domestic wholesale sales. The decline in
domestic wholesale sales included a $4.5 million decline due to closing
certain accounts and a $1.3 million decline due to the licensing out of
certain apparel lines. In addition, the Company's domestic net sales declined
during this period as a result of increased competition in branded basic
denim apparel. Net revenue from retail operations increased $31.5 million to
$145.3 million from $113.8 million, primarily attributable to an increase of
10.9% in comparable store net revenue and from volume generated by ten new
store
9
openings, partially offset by the closing of three 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 $5.4 million or 15.5% in the nine months
ended September 29, 1996 to $40.3 million from $34.9 million in the nine
months ended October 1, 1995. Net revenue from international operations
comprised 12.8% and 7.1% of the Company's net revenue during the first nine
months of 1996 and 1995, respectively.
GROSS PROFIT. Gross profit increased 18.6% to $70.2 million in the quarter
ended September 29, 1996 from $59.2 million in the quarter ended October 1,
1995. The increase in gross profit resulted from increased net revenue from
product sales and increased net royalties. Gross profit from product sales
increased 16.5% to $55.2 million in the quarter ended September 29, 1996 from
$47.4 million in the quarter ended October 1, 1995. Gross profit as a
percentage of net revenue increased to 45.4% in the quarter ended September
29, 1996 as compared to 44.5% in the quarter ended October 1, 1995. Gross
profit from product sales as a percentage of net revenue from product sales
increased to 39.6% in the quarter ended September 29, 1996 from 39.1% in the
quarter ended October 1, 1995, which included a provision of $2.9 million for
store closing expenses. Without this provision, gross profit from product
sales as a percentage of net revenue from product sales would have decreased
to 39.6% from 41.5%. The decline was primarily the result of the growth in
net revenue derived from international operations, which carry lower gross
profit margins, as well as lower gross profit margins experienced in the
company's factory outlet stores.
Gross profit increased 13.4% to $190.5 million in the nine months ended
September 29, 1996 from $168.1 million in the nine months ended October 1,
1995. The increase in gross profit resulted from increased net revenue from
product sales and increased net royalties. Gross profit from product sales
increased 12.8% to $150.2 million in the nine months ended September 29, 1996
from $133.2 million in the nine months ended October 1, 1995. Gross profit
as a percentage of net revenue remained unchanged at 46.3% for both the 1996
and 1995 nine month periods. Gross profit from product sales as a percentage
of net revenue decreased to 40.4% from 40.6% in the nine months ended October
1, 1995, which included a provision of $2.9 million for store closing
expenses recorded in the third quarter of 1995. Without this provision,
gross profit form product sales as a percentage of net revenue from product
sales would have decreased to 40.4% from 41.5%. The decline was primarily
the result of the growth in net revenue derived from international
operations, which carry lower gross profit margins, as well as lower profit
margins experienced on off-price sales.
SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses
increased 3.9% in the quarter ended September 29, 1996 to $39.5 million, or
25.6% of net revenue, from $38.0 million, or 28.5% of net revenue, in the
quarter ended October 1, 1995. SG&A expenses increased 7.5% in the nine
months ended September 29, 1996 to $112.3 million, or 27.3% of net revenue,
from $104.4 million, or 28.8% of net revenue, in the nine months ended
October 1, 1995. These increases were primarily the result of increased
store expenses related to the expansion of the retail operations. 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 periods.
10
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 increased 44.7% to $30.7
million, or 19.9% of net revenue in the quarter ended September 29, 1996,
from $21.2 million, or 15.9% of net revenue, in the quarter ended October 1,
1995. Earnings from operations increased 17.3% to $74.6 million, or 18.1% of
net revenue in the nine months ended September 29, 1996, from $63.6 million,
or 17.5% of net revenue, in the nine months ended October 1, 1995. For the
nine months ended September 29, 1996, excluding the aforementioned
reorganization charge, earnings from operations would have increased 22.9% or
$14.6 million to $78.1 million, from $63.6 million in the comparable period.
These increases are primarily related to increases in net revenue.
INTEREST EXPENSE, NET. Net interest expense decreased 2.4% to $3.8 million in
the quarter ended September 29, 1996 from $3.9 million in the quarter ended
October 1, 1995. For the quarter ending September 29, 1996, the average debt
balance was $179.7 million, with an average effective interest rate of 8.6%.
For the quarter ending October 1, 1995, the average debt balance was $162.8
million, with an average effective interest rate of 9.1%. Net interest
expense decreased 6.1% to $11.1 million in the nine months ended September
29, 1996 from $11.9 million in the nine months ended October 1, 1995. This
decrease resulted from lower outstanding debt and lower interest rates. For
the first nine months of 1996, the average debt balance was $160.5 million,
with an average effective interest rate of 8.8%. For the first nine months
of 1995, the average debt balance was $165.7 million, with an average
effective interest rate of 9.1%.
NET EARNINGS. Net earnings increased 23.4% to $20.3 million, or 13.2% of net
revenue, in the quarter ended September 29, 1996, from $16.5 million, or
12.4% of net revenue, in the quarter ended October 1, 1995. Net earnings
increased 11.6% to $55.2 million, or 13.4% of net revenue, in the nine months
ended September 29, 1996, from $49.5 million, or 13.6% of net revenue, in the
nine months ended October 1, 1995. For the nine months ended September 29,
1996, excluding the aforementioned reorganization charge, net earnings would
have increased 13.7% or $7.9 million to $57.4 million, from $49.5 million in
the comparable period. These increases are primarily related to increases in
revenue.
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 September 29, 1996, the
Company had
11
working capital of $86.5 million compared to $57.6 million at December 31,
1995. The $28.9 million increase in working capital was due principally to
an $11.0 million increase in inventories and a $22.6 million increase in
receivables, partially offset by a $4.7 million increase in income taxes
payable. 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 facility for letters
of credit. As of September 29, 1996, the Company had $30.0 million in
outstanding borrowings under the revolving credit facility and outstanding
letters of credit of $8.6 million. As of September 29, 1996, the Company had
$61.4 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 September 29, 1996, the Company had $8.6 million outstanding
under this facility.
After application of net proceeds of the Offering repaying a substantial
portion of the S Distribution Notes, approximately $2.0 million of S
Distribution Notes remain outstanding at September 29, 1996. The S
Distribution Notes bear interest at 8% per annum and mature on January 1,
1997.
Capital expenditures, net of lease incentives granted, totaled $14.7 million
in the nine months ended September 29, 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.
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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 for the nine months ended September 29,
1996. 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 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 has adopted the
provisions for pro forma disclosure requirements of SFAS 123 effective
January 1, 1996 and will incorporate the required pro forma information in
its 1996 report on Form 10-K. The Company anticipates that SFAS 123 will not
have a material impact on its financial statements.
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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.
The union of Needletrades, Industrial & Textile Employees has filed with the
National Labor Relations Board several charges alleging that the Company has
engaged and is engaging in unfair labor practices within the meaning of the
National Labor Relations Act ("NLRB") (Cases 21-CA-31515, 21-CA-31524 and
21-CA-31561). The charges are currently being investigated by the NLRB.
Based upon the information available to the Company at this time, the Company
does not believe that the outcome of such investigation 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 4. Submission of Matters to a Vote of Security Holders
On July 30, 1996, the stockholders of the Company, acting by unanimous
written consent, (a) approved and adopted a Restated Certificate of
Incorporation and new bylaws of the Company (each of which was filed as an
exhibit to the Company's registration statement on Form S-1 (file no.
333-4419)); (b) approved a 32.664669-for-one stock split of each share of
Common Stock issued and outstanding at such date; and (c) approved and
adopted the Company's 1996 Equity Incentive Plan, 1996 Non-Employee
Directors' Stock Option Plan and Annual Incentive Bonus Plan, each in the
respective form adopted by the Board of Directors of the Company.
At a joint special meeting of the Company's stockholders and board of
directors on August 8, 1996, the stockholders of the Company unanimously
approved and adopted the Agreement and Plan of Merger whereby Marciano
International, Inc. was merged with and into the Company.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
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Exhibit
Number Description
- ------- -----------
10.1 Employment Agreement between the Registrant and Maurice
Marciano.
10.2 Employment Agreement between the Registrant and Paul Marciano.
10.3 Employment Agreement between the Registrant and Armand Marciano.
10.14 Registration Rights Agreement among the Registrant and certain
stockholders of the Registrant.
10.15 Indemnification Agreement among the Registrant and certain
stockholders of the Registrant.
11.0 Computation of Net Earnings Per Share
27.1 Financial Data Schedule
- ---------------------------------
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
September 29, 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: October 22, 1996 By: /s/ Maurice Marciano
----------------------------------
Maurice Marciano
Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: October 22, 1996 By: /s/ Roger Williams
----------------------------------
Roger Williams
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
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