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) <TABLE> <CAPTION> SEP 29, DEC 31, 1996 1995* -------- -------- <S> <C> <C> 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 -------- -------- -------- -------- </TABLE> 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) <TABLE> <CAPTION> Third Quarter Ended Nine Months Ended ------------------- ------------------ SEP 29, OCT 1, SEP 29, OCT 1, 1996 1995 1996 1995 -------- -------- -------- -------- <S> <C> <C> <C> <C> 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 -------- -------- -------- -------- </TABLE> * 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) <TABLE> <CAPTION> Nine months ended ------------------ SEP 29, OCT 1, 1996 1995 -------- -------- <S> <C> <C> 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 </TABLE> 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. 12
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. 13
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: 14
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. 15
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) 16