UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 28, 1998
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-11893
----------------------------
GUESS ?, INC.
----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3679695
--------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1444 South Alameda Street
Los Angeles, California, 90021
-----------------------------
(Address of principal executive offices)
(213) 765-3100
-----------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
As of August 12, 1998, the registrant had 42,906,535 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 -
as of June 28, 1998 (Unaudited) and December 31, 1997. . . . . . . . . . .1
Condensed Consolidated Statements of Earnings (Unaudited) - Second
Quarter and Six Months ended June 28, 1998 and June 29, 1997 . . . . . . .3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months ended June 28, 1998 and June 29, 1997 . . . . . . . . . . . . .4
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . .9
Item 3. Quantitative and Qualitative Disclosures about Market Risks. . . . . . . 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Defaults on Senior Securities. . . . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to Vote of Security Holders. . . . . . . . . . . . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 18
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
ASSETS
June 28, Dec 31,
1998 1997*
-------- --------
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,452 $8,204
Short term investments . . . . . . . . . . . . . . . . . . 1,500 -
Receivables:
Trade receivables, net of reserves . . . . . . . . . . . . 25,295 17,080
Royalties. . . . . . . . . . . . . . . . . . . . . . . . 14,182 14,663
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 3,538 6,032
-------- --------
43,015 37,775
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 104,722 92,081
Prepaid expenses and other current assets. . . . . . . . . 24,814 29,562
-------- --------
Total current assets . . . . . . . . . . . . . . . . . 179,503 167,622
Property and equipment, at cost, net of accumulated
depreciation and amortization. . . . . . . . . . . . . . . 90,635 98,170
Other assets, at cost, net of accumulated amortization . . . 19,697 22,022
-------- --------
$289,835 $287,814
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable
and long-term debt. . . . . . . . . . . . . . . . . . . . $0 $217
Accounts payable . . . . . . . . . . . . . . . . . . . . . 36,718 38,323
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 18,759 22,314
Income taxes payable . . . . . . . . . . . . . . . . . . . 11 98
-------- --------
Total current liabilities. . . . . . . . . . . . . . . 55,488 60,952
Notes payable and long-term debt, net of current
installments . . . . . . . . . . . . . . . . . . . . . . . 138,000 141,300
Other liabilities. . . . . . . . . . . . . . . . . . . . . . 9,630 10,232
-------- --------
203,118 212,484
1
June 28, Dec 31,
1998 1997*
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding . . . . . . . . -- --
Common stock, $.01 par value. Authorized 150,000,000
shares; issued 62,932,827 and 62,928,827 shares,
outstanding 42,902,035 and 42,898,035 shares at,
June 28, 1998 and December 31, 1997, respectively,
including 20,030,792 shares in Treasury . . . . . . . . 137 137
Paid-in capital . . . . . . . . . . . . . . . . . . . . . 158,589 158,589
Retained earnings . . . . . . . . . . . . . . . . . . . . 78,822 67,432
Foreign currency translation adjustment . . . . . . . . . (55) (52)
Treasury stock, 20,030,792 shares repurchased . . . . . . (150,776) (150,776)
--------- ---------
Net stockholders' equity . . . . . . . . . . . . . . . 86,717 75,330
--------- ---------
$ 289,835 $ 287,814
--------- ---------
--------- ---------
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)
Second Quarter Ended Six Months Ended
-------------------- ----------------
June 28, June 29, June 28, June 29,
1998 1997 1998 1997
-------- -------- -------- --------
Net revenue:
Product sales. . . . . . . . . . . . . . . . . . . . . . . $90,295 $107,466 $190,500 $230,134
Net royalties. . . . . . . . . . . . . . . . . . . . . . . 7,773 11,049 18,336 24,117
-------- -------- -------- --------
98,068 118,515 208,836 254,251
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 53,833 64,066 118,149 138,218
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 44,235 54,449 90,687 116,033
Selling, general & administrative exp. . . . . . . . . . . . 35,216 37,695 65,240 72,426
-------- -------- -------- --------
Earnings from operations . . . . . . . . . . . . . . . 9,019 16,754 25,447 43,607
Non-operating income (expense):
Interest, net. . . . . . . . . . . . . . . . . . . . . . . (3,409) (3,187) (6,591) (6,413)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . (12) (48) (224) 71
-------- -------- -------- -------
(3,421) (3,235) (6,815) (6,342)
Earnings before income taxes and
cumulative effect of change in
accounting principle. . . . . . . . . . . . . . . . . 5,598 13,519 18,632 37,265
Income taxes (5) . . . . . . . . . . . . . . . . . . . . . . 2,158 4,991 7,241 14,685
-------- -------- -------- --------
Earnings before cumulative effect of
change in accounting principle. . . . . . . . . . . . . . . 3,440 8,528 11,391 22,580
Cumulative effect of change in accounting
for product display fixtures, net of
income tax expense of $2,707 (note 4) . . . . . . . . . . . 0 0 0 3,961
-------- -------- -------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . . $3,440 $8,528 $11,391 $26,541
-------- -------- -------- --------
-------- -------- -------- --------
Basic and diluted earnings per share:
- ------------------------------------
Earnings before cumulative effect of change
in accounting principle . . . . . . . . . . . . . . . . . . $0.08 $0.20 $0.27 0.53
Cumulative effect of change in accounting
for product display fixtures, net of
income tax expense of $2,707 (note 4) . . . . . . . . . . . $0.00 $0.00 $0.00 $0.09
-------- -------- -------- --------
Net earnings - basic and diluted. . . . . . . . . . . . . . $0.08 $0.20 $0.27 $0.62
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common shares
outstanding - basic. . . . . . . . . . . . . . . . . . . . 42,902 42,898 42,902 42,898
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common shares
outstanding - diluted. . . . . . . . . . . . . . . . . . . 42,903 42,916 42,905 42,919
-------- -------- -------- --------
-------- -------- -------- --------
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 28, June 29,
1998 1997
-------- --------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ 11,391 $ 26,541
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization of property and equipment 11,591 9,383
Amortization of goodwill . . . . . . . . . . . . . . . . 377 151
Amortization of deferred royalty income . . . . . . . . 0 (109)
Cumulative effect of change in accounting
principle (note 4) . . . . . . . . . . . . . . . . . 0 (3,961)
Loss (gain) on disposition of property and equipment . . 80 (351)
Foreign currency translation adjustment . . . . . . . . 3 (62)
Undistributed equity method earnings . . . . . . . . . . (214) (71)
(Increase) decrease in:
Receivables . . . . . . . . . . . . . . . . . . . . . (5,240) (9,909)
Inventories . . . . . . . . . . . . . . . . . . . . . (12,641) (24,011)
Prepaid expenses and other current assets . . . . . . 4,749 (2,719)
Other assets . . . . . . . . . . . . . . . . . . . . . 2,371 4,188
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . (1,605) 2,869
Accrued expenses . . . . . . . . . . . . . . . . . . . (2,945) (5,010)
Income taxes payable . . . . . . . . . . . . . . . . . (87) (6,259)
--------- ---------
Net cash provided by (used in) operating activities . . 6,830 (9,330)
Cash flows from investing activities:
Purchases of property and equipment . . . . . . . . . . . (5,510) (17,409)
Proceeds from the disposition of property and equipment . 6 1,250
Lease incentives granted . . . . . . . . . . . . . . . . . 154 757
Acquisition of license . . . . . . . . . . . . . . . . . . (21) (2,148)
(Increase) decrease in short-term investments . . . . . . (1,500) 4,401
(Increase) decrease in long-term investments . . . . . . . 812 (1,485)
--------- ---------
Net cash used in investing activities . . . . . . . . . (6,059) (14,634)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt . . . . . . 57,300 75,735
Repayments of notes payable and long-term debt . . . . . . (60,817) (55,936)
--------- ---------
Net cash provided by (used in) financing activities . . (3,517) 19,799
Effect of exchange rates on cash . . . . . . . . . . . . . . (6) (183)
Net decrease in cash . . . . . . . . . . . . . . . . . . . . (2,752) (4,348)
Cash, beginning of period . . . . . . . . . . . . . . . . . 8,204 8,800
--------- ---------
Cash, end of period . . . . . . . . . . . . . . . . . . . . $ 5,452 $ 4,452
--------- ---------
--------- ---------
4
Six Months Ended
----------------
June 28, June 29,
1998 1997
-------- --------
Supplemental disclosures:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . $7,903 $7,422
Income taxes . . . . . . . . . . . . . . . . . . . . . . 440 20,260
Supplemental disclosure of noncash investing activities:
During the quarter ended March 30, 1997, the Company issued 216,216 shares of
common stock with a value of $3.0 million in connection with the acquisition of
a license.
See accompanying notes to condensed consolidated financial statements.
5
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 28, 1998
(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 28,
1998, and the results of operations and cash flows for the six months ended June
28, 1998. Operating results for the second quarter and six months ended June 28,
1998, are not necessarily indicative of the results that may be expected for the
year ending December 31, 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. 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, 1997.
(2) Summary of Significant Accounting Policies
Earnings Per Share
Basic earnings per share represent net earnings divided by the weighted- average
number of common shares outstanding for the period. Diluted earnings per share
represent net earnings divided by the weighted-average number of shares
outstanding, inclusive of the dilutive impact of common stock equivalents.
During the six months ended June 28, 1998 and June 29, 1997, the difference
between basic and diluted earnings per share was due to the dilutive impact of
options to purchase common stock.
Recently Issued Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"). SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general-purpose financial statements. SFAS 130 requires all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement displayed with the
same prominence as other financial statements. SFAS 130 does not require a
specific financial statement format but requires an enterprise to display an
amount representing total comprehensive income for the period covered by that
financial statement. SFAS 130 requires an enterprise to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. SFAS 130 is effective for fiscal years
beginning after December 15, 1997.
6
The Company adopted SFAS 130 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 six months ended June 28, 1998 and June 29, 1997 is as follows (in
thousands):
June 28, June 29,
1998 1997
--------- ---------
Net earnings..................................... $11,391 $26,541
Foreign currency translation adjustment.......... (3) 62
--------- ---------
Comprehensive income.............................. $11,388 $26,603
--------- ---------
--------- ---------
In June 1997, FASB issued Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 established standards for public business enterprises to report
information about operating segments in annual financial statements and requires
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes FASB Statement No. 14, Financial Reporting
for Segments of a Business Enterprise, but retains the requirement to report
information about major customers. It amends FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, to remove the special
disclosure requirement for previously unconsolidated subsidiaries. SFAS 131
requires, among other items, that a public business enterprise report a measure
of segment profit or loss, certain specific revenue and expense items, and
segment assets information about the revenue derived from the enterprise's
products or services and major customers. SFAS 131 also requires the enterprise
report descriptive information about the way the operating segments were
determined and the products and services provided by the operating segments.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. SFAS 131 need not be applied to interim
financial statements in the initial year of application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. Management believes the adoption of SFAS 131 will not have a
material impact on the Company's financial reporting.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company will
adopt SOP 98-1 effective in 1999. The adoption of SOP 98-1 will require the
Company to modify its method of accounting for software. Based on the
information currently available, the Company does not expect the adoption of SOP
98-1 to have a significant impact on its financial position or results of
operations.
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. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. Earlier application is encouraged. Restatement of previously issued
financial statements is not permitted. In the fiscal year in which the SOP 98-5
is first adopted, the application should be reported as a cumulative effect of a
change in accounting principle. Management believes the adoption of SOP 98-5
will not have a material impact on the Company's financial reporting.
7
In June 1998, the FASB issued SFAS 133 ("SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 modifies the
accounting for derivative and hedging activities and is effective for fiscal
years beginning after December 15, 1999. Since the Company does not presently
invest in derivatives or engage in hedging activities, SFAS No. 133 will not
impact the Company's financial position or results of operations.
(3) Inventories
The components of inventory consist of the following (in thousands):
June 28, Dec 31,
1998 1997
--------- ---------
Raw materials. . . . . . . . . . . . . . . . . . . $12,369 $12,988
Work in progress . . . . . . . . . . . . . . . . . 18,740 8,059
Finished goods . . . . . . . . . . . . . . . . . . 73,613 71,034
--------- ---------
$104,722 $92,081
--------- ---------
--------- ---------
(4) Change in Accounting Principle
Effective January 1, 1997, the Company changed its method of accounting for
product display fixtures located in its wholesale customers' retail stores,
whereby the costs for such fixtures are capitalized and depreciated over five
years using the straight-line method. In prior years, these costs had been
expensed as incurred. The Company believes this method more closely matches the
long-term benefit the product display fixtures provide with the expected future
revenue from such fixtures. The cumulative effect of the change in accounting
principle, recorded in the first quarter of 1997, is calculated based upon the
retroactive effect of applying the new accounting method to prior year fixture
acquisitions. The cumulative effect of the change in accounting principle of
$4.0 million (after reduction of income tax expense of $2.7 million) is included
in earnings for the quarter ended March 30, 1997.
(5) 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.
8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-Q.
Forward-looking statements may also be in the registrant's other reports filed
under the Securities Exchange Act of 1934, in its press releases and in other
documents. In addition, from time to time, the registrant through its
management may make oral forward-looking statements.
Forward-looking statements generally refer to future plans and performance, and
are identified by the words "believe," "expect," "anticipate," "optimistic,"
"intend," "aim," "will" or similar expressions. Readers are cautioned not to
place undue reliance on these forward-looking statements, which refer only as of
the date on which they are made. The registrant undertakes no obligation to
update publicly or revise any forward-looking statements. Reference is hereby
made to the registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 for a discussion of important factors that could cause actual
results to differ materially from the forward-looking statements.
OVERVIEW
The Company derives its net revenue from the sale of Guess men's, women's and
girl's apparel worldwide to wholesale customers and distributors; from the sale
of Guess men's and women's apparel and its licensees' products through the
Company's network of retail and factory stores located primarily in the United
States; and from net royalties via worldwide licensing activities.
RESULTS OF OPERATIONS
NET REVENUE. Net revenue decreased $20.4 million or 17.2% to $98.1 million in
the second quarter ended June 28, 1998 from $118.5 million in the second quarter
ended June 29, 1997. Net revenue from wholesale operations decreased $15.6
million or 26.2% to $44.0 million from $59.6 million. Net revenue from both
domestic and international wholesale operations decreased, by $11.8 million or
23.2% and $3.8 million or 43.0%, respectively. For the six months ended June 28,
1998, net revenue decreased $45.4 million or 17.9% to $208.8 million from $254.2
million for the six months ended June 29, 1997. Net revenue from wholesale
operations decreased $35.3 million or 25.2% to $104.7 million from $139.9
million. Domestic and international wholesale operations net revenue decreased
$18.6 million or 16.7% and $16.7 million or 58.3%, respectively. International
wholesale operations decreased primarily due to the sale of Guess? Italia
operations in June 1997, which reflects the absence of $14.0 million of net
revenue recorded in the prior year. For both the quarter and six months ended
June 28, 1998, the Company's domestic wholesale net revenue declined primarily
due to increased competition in branded basic denim apparel.
Net revenue from retail operations decreased $1.6 million or 3.3% to $46.3
million from $47.9 million in the quarter ended June 28, 1998. For the six
months ended June 28, 1998, net revenue from retail operations decreased $4.4
million or 4.9% to $85.8 million from $90.2 million in 1997. The decrease was
primarily attributable to a decrease in comparable store net revenue, down 14.4%
in the second quarter ended June 28, 1998 and 17.8% in the six months ended June
28, 1998, partially offset by increased volume generated by new store openings.
The decrease in comparable store net revenue was primarily due to product
assortment changes in the factory stores and softening Pacific Rim tourism,
which has significantly impacted west coast business.
9
Net royalties decreased $3.3 million or 29.6% in the quarter ended June 28, 1998
to $7.8 million from $11.0 million in the quarter ended June 29, 1997. For the
six months ended June 28, 1998, net royalties decreased $5.8 million or 24.0% to
$18.3 million from $24.1 million in the six months ended June 29, 1997. This
decrease was primarily the result of discontinued licenses and lower revenue
derived from Asian markets.
Net revenue from international operations comprised 9.1% and 13.7% of the
Company's net revenue during the first six months of 1998 and 1997,
respectively.
GROSS PROFIT. Gross profit decreased 18.8% to $44.2 million in the second
quarter ended June 28, 1998 from $54.4 million in the second quarter ended June
29, 1997. The decrease in gross profit resulted from decreased net revenue from
product sales and net royalties. Gross profit from product sales decreased 16.0%
to $36.5 million in the second quarter ended June 28, 1998 from $43.4 million in
the second quarter ended June 29, 1997. Gross margin was 45.1% in the second
quarter ended June 28, 1998 compared to 45.9% in the second quarter ended June
29, 1997. Gross margin from product sales for the second quarter ended June 28,
1998 remained flat at 40.4% compared to the same period in 1997, despite the
negative impact resulting from fixed store occupancy costs being spread over a
lower revenue base.
Gross profit decreased 21.8% to $90.7 million in the six months ended June 28,
1998 from $116.0 million in the six months ended June 29, 1997. The decrease in
gross profit resulted primarily from decreased net revenue from product sales
and net royalties. Gross profit from product sales decreased 21.3% to $72.4
million in the six months ended June 28, 1998 from $91.9 million in the six
months ended June 29, 1997. Gross margin was 43.4% in the six months ended June
28, 1998 compared to 45.6% in the six months ended June 29, 1997. Gross margin
from product sales for the six months ended June 28, 1998 decreased to 38.0%
from 39.9% for the six months ended June 29, 1997. The decline in gross margin
from product sales was primarily due to fixed store occupancy costs being spread
over a lower revenue base.
SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses decreased
6.6% in the second quarter ended June 28, 1998 to $35.2 million, or 35.9% of net
revenue, compared to $37.7 million, or 31.8% of net revenue, in the second
quarter ended June 29, 1997. SG&A expenses also decreased in the six months
ended June 28, 1998 to $65.2 million, or 31.2% of net revenue, from $72.4
million, or 28.5% of net revenue, in the six months ended June 29, 1997. The
decrease was primarily due to cost reduction initiatives implemented in the
fourth quarter of 1997 and lower advertising expenses. As a percentage of net
revenue, the increase in SG&A expenses was the result of fixed expenses being
spread over a lower revenue base in 1998.
EARNINGS FROM OPERATIONS. Earnings from operations decreased 46.2% to $9.0
million, or 9.2% of net revenue, in the second quarter ended June 28, 1998 from
$16.8 million, or 14.1% of net revenue, in the second quarter ended June 29,
1997. Earnings from operations decreased 41.6% to $25.5 million, or 12.2% of net
revenue, in the six months ended June 28, 1998 from $43.6 million, or 17.2% of
net revenue, in the six months ended June 29, 1997. The decrease in earnings
from operations was primarily due to lower revenue.
INTEREST EXPENSE, NET. Net interest expense increased 7.0% to $3.4 million in
the second quarter ended June 28, 1998 from $3.2 million in the same period in
1997. The increase is due to higher outstanding debt and a higher average
effective interest rate in 1998. For the second quarter ended June 28, 1998, the
average debt balance was $145.3 million, with an average effective interest rate
of 8.9%. For the second quarter ended June 29, 1997, the average debt balance
was $143.6 million, with an average effective interest rate of 8.8%. Net
interest expense increased 2.8% to $6.6 million in the six
10
months ended June 28, 1998 from $6.4 million in the six months ended June 29,
1997, due to higher outstanding debt in 1998. For the six months ended June 28,
1998, the average debt balance was $146.0 million, with an average effective
interest rate of 8.8%. For the six months ended June 29, 1997, the average debt
balance was $137.4 million, with an average effective interest rate of 8.9%.
NET EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Net
earnings before the net cumulative effect of a change in accounting principle
decreased 59.7% to $3.4 million, or 3.5% of net revenue, in the second quarter
ended June 28, 1998 from $8.5 million, or 7.2% of net revenue, in the second
quarter ended June 29, 1997. Net earnings before cumulative effect of change in
accounting principle decreased 49.5% to $11.4 million, or 5.5% of net revenue,
in the six months ended June 28, 1998, from $22.6 million, or 8.9% of net
revenue, in the six months ended June 29, 1997.
NET CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Effective January 1,
1997, the Company changed its method of accounting for product display fixtures
located in its wholesale customers' retail stores, whereby the costs for such
fixtures are capitalized and depreciated over five years using the straight-line
method. In prior years, these costs had been expensed as incurred. The Company
believes this method more closely matches the long-term benefit the product
display fixtures provide with the expected future revenue from such fixtures.
The cumulative effect of the change in accounting principle, recorded in the
first quarter of 1997, is calculated based upon the retroactive effect of
applying the new accounting method to prior year fixture acquisitions. The
cumulative effect of the change in accounting principle of $4.0 million (after
reduction for income tax expense of $2.7 million) is included in earnings for
the six months ended June 29, 1997.
INCOME TAXES. The income tax provision for the six months ended June 28, 1998
was $7.2 million, or a 38.9% effective tax rate. The income tax provision for
the six months ended June 29, 1997 was $14.7, or a 39.4% effective tax rate. The
effective tax rate for both years was impacted by certain realized state tax
credits and tax planning strategies.
NET EARNINGS. Net earnings decreased 59.7% to $3.4 million, or 3.5% of net
revenue, in the second quarter ended June 28, 1998, from $8.5 million, or 7.2%
of net revenue, in the same period in 1997. Net earnings decreased 57.1% to
$11.4 million, or 5.5% of net revenue, in the six months ended June 28, 1998,
from $26.5 million, or 10.4% of net revenue, in the six months ended June 29,
1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds, trade credit and
bank borrowings to finance its operations and expansion. At June 28, 1998, the
Company had working capital of $124.0 million compared to $106.7 million at
December 31, 1997. The increase was primarily due to a seasonal $12.6 million
increase in inventory and $5.2 million increase in net receivables.
The Company's Credit Agreement originally provided for a $100.0 million line of
credit facility. During the first quarter ended March 28, 1998, this amount was
reduced to $86.9 million, as an Asian bank fell out of the Company's bank
syndicate due to a restructuring of the bank's U.S. portfolio. The current
revolving credit facility includes a $25.0 million sublimit for letters of
credit. At June 28, 1998, the Company had $33.0 million in outstanding
borrowings under the revolving credit facility, $0.7 million in outstanding
standby letters of credit and $13.7 million in outstanding commercial letters of
credit. At June 28, 1998, the Company had $39.5 million available for future
borrowings under such facility. The revolving credit
11
facility will expire in December 1999. The Credit Agreement contains various
restrictive covenants requiring, among other things, the maintenance of certain
financial ratios. The Company was in compliance with all such covenants as of
June 28, 1998.
Capital expenditures, net of lease incentives granted, totaled $5.4 million in
the six months ended June 28, 1998 as compared to $16.7 million in the six
months ended June 29, 1997. The Company anticipates that this lower spending
trend will continue for the remainder of 1998, consistent with its plan for
reduced expenditures for new store openings and shop-in-shop remodeling and
openings. During 1998, the Company is significantly slowing down the roll-out of
new retail stores and closing under-performing stores in the United States in
order to focus on improving the profitability and efficiency of existing stores.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the next twelve months for working capital and interest on the
Company's Senior Subordinated Notes, primarily with cash flow from operations,
supplemented, if necessary, by borrowings under its revolving Credit Agreement.
SEASONALITY
The Company's business is impacted by the general seasonal trends characteristic
of the apparel and retail industries. The Company's wholesale operations
generally experience stronger performance in the first and third 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 licensing revenue. 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.
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
In June 1997, FASB issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components
12
(revenue, expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS 130 requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement displayed with the same prominence as other financial
statements. SFAS 130 does not require a specific financial statement format but
requires an enterprise display an amount representing total comprehensive income
for the period covered by that financial statement. SFAS 130 requires an
enterprise to (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. The Company
adopted the provisions of SFAS 130 effective January 1, 1998. The effect of the
adoption was immaterial to the Company's financial position and results of
operations for the quarter ended June 28, 1998.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
131"). SFAS 131 established standards for public business enterprises to report
information about operating segments in annual financial statements and requires
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes FASB Statement No. 14, Financial Reporting
for Segments of a Business Enterprise, but retains the requirement to report
information about major customers. It amends FASB Statement No. 94,
Consolidation of All Majority-Owned Subsidiaries, to remove the special
disclosure requirement for previously unconsolidated subsidiaries. SFAS 131
requires, among other items, that a public business enterprise report a measure
of segment profit or loss, certain specific revenue and expense items, and
segment assets information about the revenue derived from the enterprise's
products or services and major customers. SFAS 131 also requires the enterprise
report descriptive information about the way the operating segments were
determined and the products and services provided by the operating segments.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. SFAS 131 need not be applied to interim
financial statements in the initial year of application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. Management believes that the adoption of SFAS 131 will not have a
material impact on the Company's financial reporting.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The Company will
adopt SOP 98-1 effective in 1999. The adoption of SOP 98-1 will require the
Company to modify its method of accounting for software. Based on the
information currently available, the Company does not expect the adoption of SOP
98-1 to have a significant impact on its financial position or results of
operations.
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. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. Earlier application is encouraged. Restatement of previously issued
financial statements is not permitted. In the fiscal year in which the SOP 98-5
is first adopted, the application should be reported as
13
a cumulative effect of a change in accounting principle. Management believes the
adoption of SOP 98-5 will not have a material impact on the Company's financial
reporting.
In June 1998, the FASB issued SFAS 133 ("SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 modifies the
accounting for derivative and hedging activities and is effective for fiscal
years beginning after December 15, 1999. Since the Company does not presently
invest in derivatives or engage in hedging activities, SFAS No. 133 will not
impact the Company's financial position or results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks.
Not applicable.
14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Litigation
On August 7, 1996, a class action complaint naming the Company and certain of
its independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, titled as Brenda Figueroa et. al. v.
Guess ?, Inc. et. al. (Case No. BC 155 165). In this case, an uncertified class
action, plaintiffs assert claims for violation of state wage and hour laws,
wrongful discharge, and breach of contract arising out of the Company's
relationship with its independent contractors and actions taken by the Company's
independent contractors with respect to the employees of such independent
contractors. Plaintiffs also allege that the Company breached its agreement with
the United States Department of Labor regarding the monitoring of its
independent contractors.
The Union of Needletrades, Industrial & Textile Employees ("UNITE") has filed
with the National Labor Relations Board ("NLRB") various charges that the
Company is engaging in unfair labor practices within the meaning of the National
Labor Relations Act ("NLRA"). These charges include allegations that the Company
has unlawfully threatened to move its production outside the United States. This
allegation has been dismissed by the Regional Director for Region 21 of the NLRB
and such dismissal has been appealed to the NLRB's Office of Appeals.
UNITE has also filed a number of charges alleging that the Company violated the
NLRA by filing retaliatory state and federal civil lawsuits. UNITE seeks, among
other things, recovery of the fees and costs in defending the civil lawsuits.
These lawsuits primarily concern the legality of UNITE's activities against the
Company. An administrative hearing on certain of these allegations is scheduled
to begin in November, 1998, while the processing of other allegations is being
held in abeyance pending developments in the civil lawsuits.
On June 19, 1997, UNITE filed with the NLRB charges that the Company and certain
company agents acted in concert with each other to interfere with the employees
of certain of the Company's independent contractors in the exercise of such
employees' Section 7 rights under the NLRA respecting the enforcement of wage
and hour laws. In this case the NLRB has issued a formal complaint regarding the
allegations against the Company that it had unlawfully polled and interrogated
employees of its independent contractors regarding their union and/or protected
concerted activities. The administrative hearing on these allegations is
scheduled to begin in October, 1998.
On July 7, 1998, UNITE filed charges against the Company alleging that the
Company violated the NLRA by failing to uphold certain obligations under a prior
settlement agreement with the NLRB, by denying pro-union employees access to the
Company's facilities, by conferring new benefits to employees, by making false
accusations against UNITE, by conducting video surveillance of UNITE's offices,
and by assisting and organizing an anti-union demonstration. The Company has not
yet responded to this case, and the NLRB has not issued a formal complaint.
On February 24, 1998, the Company and Maurice Marciano, Paul Marciano and Armand
Marciano, as individuals, were named as defendants in a class action entitled
John N. Robinson v. Guess ?, Inc., Maurice Marciano, Paul Marciano and Armand
Marciano, case number BC186583, filed in the Los Angeles Superior Court. The
complaint (the "Complaint") purports to state a claim under Sections 11,12(2)
and 15 of the Securities Act of 1933 for alleged misrepresentations in
connection with the Company's initial public offering
15
(the "IPO") in August 1996. Mr. Robinson purports to represent a class of all
purchasers of the Company's stock in the IPO and seeks unspecified damages. A
response by the defendants to the complaint is not yet due. While it is too soon
to predict the outcome of the case with any certainty, the Company believes it
has meritorious defenses to each of the claims asserted and intends to
vigorously defend itself.
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
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Stockholders was held on May 18, 1998.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees as listed in the Proxy
Statement. Such nominees were elected.
(c) The matters voted upon at the Annual Meeting and the results thereof were
as follows:
I. To elect Class II Directors, each to hold office for a three-year term
and until each of their successors are elected and qualified.
FOR WITHHELD
--------- --------
Paul Marciano 42,363,098 81,625
Robert Davis 42,358,248 86,475
I. To ratify the election of KPMG Peat Marwick LLP as independent
certified public accountants for the year ending December 31, 1998.
FOR AGAINST ABSTAINED
--------- ------- ---------
42,407,902 15,440 21,381
16
ITEM 5. Other Information
On June 3, 1998, Alice T. Kane was appointed to the Company's Board of
Directors. Ms. Kane, age 50, is Executive Vice President of American General
Corporation's recently formed investment advisory subsidiary, American General
Investment Management, L.P. American General Corporation is one of the nation's
largest diversified financial organizations with assets of approximately $98
billion. Prior to joining American General Corporation on June 1, 1998, Ms. Kane
served her entire financial services industry career at New York Life Insurance
Company where she joined the company in 1972. Up until her departure, she was
Executive Vice President and Chief Marketing Officer after serving as Executive
Vice President with responsibility for managing the company's asset management
division from 1994 to 1997. Ms. Kane was also Chairman of New York Life's
MainStay Mutual Funds, and served as General Counsel of New York Life from 1986
to 1995.
On July 20, 1998, Brian L. Fleming was appointed the Company's Executive Vice
President and Chief Financial Officer. Mr. Fleming, age 54, was Executive Vice
President and Chief Financial Officer of the Santa Anita Companies since
November 1997. From May 1994 through November 1997, Mr. Fleming was Executive
Vice President and Chief Financial Officer of Santa Anita Realty Enterprises,
Inc. ("Realty"), a self-administered real estate investment trust which owned
the Santa Anita racetrack, interests in major regional shopping centers and
other real estate investments. From August 1996 until Realty's November 1997
merger with Meditrust Corporation, Mr. Fleming also served as President, Chief
Executive Officer and a Director of Realty. Prior to May 1994, Mr. Fleming had a
20-year career with Carter Hawley Hale Stores, Inc., a full-line department
store company, where he served as Senior Vice President-Accounting and Taxes
since 1987.
17
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
- ------- -----------
3.1. Restated Certificate of Incorporation of the Registrant. (1)
3.2. Bylaws of the Registrant. (1)
4.3. Specimen stock certificate. (1)
10.32.* Second Amendment and Consent to the Amended and Restated Revolving
Credit Agreement by and between Guess ?, Inc. And BankBoston, N.A.,
F/K/A The First National Bank of Boston, Sanwa Bank California and
Financial Institutions Party Hereto.
10.33.* Third Amendment and Consent to the Amended and Restated Revolving Credit
Agreement by and between Guess ?, Inc. And BankBoston, N.A., F/K/A The
First National Bank of Boston, Sanwa Bank California and the Financial
Institutions Party Hereto.
10.34.* Amendment No. 1 to The Guess?, Inc. Amended and Restated 1996 Non-
Employee Directors' Stock Option Plan
10.35.* Employment Agreement dated July 6, 1998 between Guess?, Inc. and
Brian L. Fleming.
27.1.* Financial Data Schedule
* Filed herewith
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-4419) filed by the Company on June 24, 1996,
as amended.
- --------------------------------
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended June
28, 1998.
18
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 10, 1998 By: /s/ MAURICE MARCIANO
--------------------------------
Maurice Marciano
Chairman of the Board, Chief Executive
Officer and Director (Principal Executive
Officer)
Date: August 10, 1998 By: /s/ BRIAN L. FLEMING
--------------------------------
Brian L. Fleming
Executive Vice President and
Chief Financial Officer (Principal
Financial Officer)
19