<PAGE>
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 29, 1997
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, 1997, the registrant had 42,898,035 shares of Common Stock,
$.01 par value, outstanding.
<PAGE>
GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
as of June 29, 1997 (Unaudited) and December 31, 1996. . . . . . 1
Condensed Consolidated Statements of Earnings (Unaudited) -
Second Quarter and Six Months ended June 29, 1997 and
June 30, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months ended June 29, 1997 and June 30, 1996 . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 2. Management's discussion and analysis of financial condition and
results of operations. . . . . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 22
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
June 29, Dec 31,
1997 1996*
-------- --------
<S> <C> <C>
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $4,452 $8,800
Short term investments . . . . . . . . . . . . . . . . . 0 4,401
Receivables:
Trade receivables, net of reserves . . . . . . . . . . 36,057 27,107
Royalties. . . . . . . . . . . . . . . . . . . . . . . 16,354 15,613
Other. . . . . . . . . . . . . . . . . . . . . . . . . 7,060 4,042
-------- --------
59,471 46,762
Inventories. . . . . . . . . . . . . . . . . . . . . . . 103,501 79,489
Prepaid expenses and other current assets. . . . . . . . 14,582 11,863
-------- --------
Total current assets . . . . . . . . . . . . . . . . 182,006 151,315
Property and equipment, at cost, net of accumulated
depreciation and amortization. . . . . . . . . . . . . . 78,097 64,302
Long-term investments. . . . . . . . . . . . . . . . . . . 14,221 8,106
Other assets, at cost, net of accumulated amortization . . 22,933 15,583
-------- --------
$297,257 $239,306
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable
and long-term debt. . . . . . . . . . . . . . . . . . . $915 $6,099
Accounts payable . . . . . . . . . . . . . . . . . . . . 42,155 39,285
Accrued expenses . . . . . . . . . . . . . . . . . . . . 21,719 24,935
Income taxes payable . . . . . . . . . . . . . . . . . . 623 4,175
-------- --------
Total current liabilities. . . . . . . . . . . . . . 65,412 74,494
Notes payable and long-term debt, net of current
installments . . . . . . . . . . . . . . . . . . . . . . 146,200 121,217
Other liabilities. . . . . . . . . . . . . . . . . . . . . 21,421 8,667
-------- --------
233,033 204,378
1
<PAGE>
June 29, Dec 31,
1997 1996
-------- --------
<S> <C> <C>
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 62,928,827 and 62,712,611,
outstanding 42,898,035 and 42,681,819 shares at,
June 29, 1997 and December 31, 1996, respectively,
including 20,030,792 shares in Treasury. . . . . . . . 137 135
Paid-in capital. . . . . . . . . . . . . . . . . . . . . 158,589 155,591
Retained earnings. . . . . . . . . . . . . . . . . . . . 56,462 29,921
Foreign currency translation adjustment. . . . . . . . . (188) 57
Treasury stock, 20,030,792 shares repurchased. . . . . . (150,776) (150,776)
-------- --------
Net stockholders' equity . . . . . . . . . . . . . . 64,224 34,928
-------- --------
$297,257 $239,306
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
*Condensed from Audited Balance Sheet
2
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
----------------------- -----------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
Product sales. . . . . . . . . . . . . . . . . . . . . . $107,466 $108,836 $230,134 $232,111
Net royalties. . . . . . . . . . . . . . . . . . . . . . 11,049 13,672 24,117 25,295
-------- -------- -------- --------
118,515 122,508 254,251 257,406
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . 64,066 66,634 138,218 137,113
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 54,449 55,874 116,033 120,293
Selling, general & administrative expenses . . . . . . . . 37,695 37,597 72,426 72,829
Reorganization charge (note 5) . . . . . . . . . . . . . . 0 3,559 0 3,559
-------- -------- -------- --------
Earnings from operations . . . . . . . . . . . . . . 16,754 14,718 43,607 43,905
Non-operating income (expense):
Interest, net. . . . . . . . . . . . . . . . . . . . . . (3,187) (3,742) (6,413) (7,291)
Other, net . . . . . . . . . . . . . . . . . . . . . . . (48) 173 71 (147)
-------- -------- -------- --------
(3,235) (3,569) (6,342) (7,438)
Earnings before income taxes and
cumulative effect of change in
accounting principle. . . . . . . . . . . . . . . . 13,519 11,149 37,265 36,467
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 4,991 327 14,685 1,598
-------- -------- -------- --------
Earnings before cumulative effect of
change in accounting principle. . . . . . . . . . . . . . 8,528 10,822 22,580 34,869
Cumulative effect of change in accounting
for product display fixtures, net of
income tax expense of $2,707 (note 4) . . . . . . . . . . 0 0 3,961 0
-------- -------- -------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . $8,528 $10,822 $26,541 $34,869
-------- -------- -------- --------
-------- -------- -------- --------
Supplemental pro forma financial information (note 2):
- ------------------------------------------------------
Earnings before income taxes, as presented . . . . . . . . $11,149 $36,467
Pro forma provision for income taxes . . . . . . . . . . . 4,426 14,477
-------- --------
Pro forma net earnings . . . . . . . . . . . . . . . . . . $6,723 $21,990
-------- --------
-------- --------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
----------------------- -----------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Earnings per share:
Earnings before cumulative effect of
change in accounting principle (1996
periods-pro forma, note 2). . . . . . . . . . . . . . . . $0.20 $0.16 $0.53 0.53
Cumulative effect of change in accounting
for product display fixtures (note 4) . . . . . . . . . . $0.00 $0.00 $0.09 $0.00
-------- -------- -------- --------
Net earnings (1996 periods-pro forma,
note 2). . . . . . . . . . . . . . . . . . . . . . . . . $0.20 $0.16 $0.62 $0.53
-------- -------- -------- --------
-------- -------- -------- --------
Pro forma financial information assuming
the new accounting method is retroactively applied:
- ----------------------------------------------------
Pro forma net earnings. . . . . . . . . . . . . . . . . $8,528 $6,868 $22,580 $22,279
-------- -------- -------- --------
-------- -------- -------- --------
Pro forma net earnings per share. . . . . . . . . . . . $0.20 $0.17 $0.53 $0.54
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding . . . . . . . . 42,898 41,412 42,898 41,412
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 29, June 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . $26,541 $34,869
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization of property and equipment. 9,383 8,379
Amortization of deferred charges . . . . . . . . . . . . (285) 669
Amortization of deferred royalty income. . . . . . . . . (109) 0
Cumulative effect of change in accounting
principle (note 4). . . . . . . . . . . . . . . . . . (3,961) 0
Loss (gain) on disposition of property and equipment . . (351) 100
Foreign currency translation adjustment. . . . . . . . . (62) 33
Minority interest. . . . . . . . . . . . . . . . . . . . 0 172
Undistributed equity method earnings . . . . . . . . . . (71) (9)
(Increase) decrease in:
Receivables. . . . . . . . . . . . . . . . . . . . . . (9,909) (8,803)
Inventories. . . . . . . . . . . . . . . . . . . . . . (24,011) (19,451)
Prepaid expenses and other current assets. . . . . . . (2,719) (1,288)
Other assets . . . . . . . . . . . . . . . . . . . . . 4,188 234
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . 2,869 (3,479)
Accrued expenses . . . . . . . . . . . . . . . . . . . (4,574) 5,367
Income taxes payable . . . . . . . . . . . . . . . . . (6,259) (261)
-------- --------
Net cash provided by (used in) operating activities . . (9,330) 16,532
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . (17,409) (7,986)
Proceeds from the disposition of property and equipment. . 1,250 360
Lease incentives granted . . . . . . . . . . . . . . . . . 757 261
Acquisition of license . . . . . . . . . . . . . . . . . . (2,148) 0
Decrease in short-term investments . . . . . . . . . . . . 4,401 0
Increase in long-term investments. . . . . . . . . . . . . (1,485) 0
-------- --------
Net cash used in investing activities . . . . . . . . . (14,634) (7,365)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt . . . . . . 75,735 105,943
Repayments of notes payable and long-term debt . . . . . . (55,936) (76,510)
Distributions to stockholders. . . . . . . . . . . . . . . 0 (39,600)
-------- --------
Net cash provided by (used in) financing activities . . 19,799 (10,167)
Effect of exchange rates changes on cash . . . . . . . . . . (183) 25
Net decrease in cash . . . . . . . . . . . . . . . . . . . . (4,348) (975)
Cash, beginning of period. . . . . . . . . . . . . . . . . . 8,800 6,417
-------- --------
Cash, end of period. . . . . . . . . . . . . . . . . . . . . $4,452 $5,442
-------- --------
-------- --------
5
<PAGE>
June 29, June 30,
1997 1996
-------- --------
<S> <C> <C>
Supplemental disclosures:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . $7,422 $6,926
Income taxes . . . . . . . . . . . . . . . . . . . . . . 20,260 1,856
</TABLE>
Supplemental disclosure of noncash investing activities:
During the six months ended June 29, 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.
6
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 29, 1997
(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 29,
1997, and the results of operations and cash flows for the six months ended June
29, 1997. Operating results for the second quarter and six months ended June 29,
1997, are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. 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, 1996.
(2) Summary of Significant Accounting Policies
Pro Forma Net Earnings
Pro forma net earnings for the 1996 period represents 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 in connection with the public sale of its common
stock.
Pro forma net earnings per share for the 1996 period has been computed by
dividing pro forma net earnings by the weighted average number of shares of
common stock outstanding during the period. Options to purchase common stock
are included in the calculation as common stock equivalents provided that their
impact is not anti-dilutive.
Recently Issued Pronouncements
The Financial Accounting Standards Board has recently issued Statement No. 128,
"Earnings per Share" ("FAS 128"), issued in February 1997 and effective for both
interim and annual periods ending after December 15, 1997. The Company will
adopt FAS 128 in the fourth quarter of 1997. FAS 128 requires the presentation
of "Basic" earnings per share which represents income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. A dual presentation of "Diluted" earnings per share will also
be required. The Diluted presentation is similar to the current presentation of
fully diluted earnings per share. FAS 128 requires restatement of all
prior-period earnings per share data presented. Management believes the
adoption of FAS 128 will not have a material impact on the Company's financial
position or results of operations.
7
<PAGE>
(3) Inventories
The components of inventory consist of the following (in thousands):
June 29, Dec. 31,
1997 1996
-------- --------
(unaudited)
Raw materials. . . . . . . . . . . . . . . . . . . $16,446 $12,563
Work in progress . . . . . . . . . . . . . . . . . 17,812 12,576
Finished goods . . . . . . . . . . . . . . . . . . 69,243 54,350
-------- -------
$103,501 $79,489
-------- -------
-------- -------
(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 will be capitalized and amortized over five
years using the straight-line method. In prior years, these costs had been
expensed as incurred. The Company believes that this new method will more
closely match the long-term benefit that the product display fixtures provide
with the expected future revenue from such fixtures. The new method has been
applied retroactively to product display fixture acquisitions of prior years.
The effect of the change on the second quarter and six months ended June 29,
1997 was to increase earnings by approximately $0.7 million and $0.9 million,
respectively (or $0.02 and $0.02 per share, respectively), excluding the
cumulative effect of the change in accounting principle. 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.
(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 write-down to net realizable
value of operating assets associated with the (i) disposal of two remote
warehouse and production facilities, in contemplation of the public offering of
7,000,000 shares of the Company's common stock (the "Offering"), which were not
expected to be used in the Company's operations after the Offering, and (ii) the
net book loss incurred by the Company in connection with the sale of one of its
aircraft in contemplation of the Offering; such aircraft sale was recorded in
June 1996 and completed in July 1996.
The write-down to net realizable value related to the disposal of the warehouse
and production facilities of $2.4 million is based upon the difference between
the asset carrying value of $5.7 million and its then appraisal value of $3.9
million and the inclusion of a provision of $0.6 million for estimated disposal
costs, comprised primarily of commissions, title fees and other customary real
estate closing costs. The write-down related to the sale of the aircraft of $1.2
million is based upon the difference between the asset carrying value of $7.2
million and the sale price of $6.0 million. The estimated costs of disposal of
the aircraft were immaterial. The two remote warehouse and production
facilities are included in property and equipment at June 29, 1997.
8
<PAGE>
The Company has not recorded the charge related to the warehouse and production
facilities to be disposed of as a cumulative effect from the implementation of
SFAS No. 121 recorded net of tax, because the effect of such implementation is
immaterial to the consolidated financial statements.
(6) Pro Forma Results of Operations
The following table sets forth pro forma operating results for the periods
indicated. Pro forma operating results reflect adjustments to the 1996 second
quarter and six month operating results for (i) the elimination of salaries and
bonuses paid to Maurice, Paul and Armand Marciano ("the Principal Executive
Officers") in excess of an aggregate of $4.9 million per year (the aggregate
salaries and bonuses to be paid to the Principal Executive Officers under their
respective employment agreements which became effective concurrently with the
consummation of the Company's initial public offering ("IPO")) resulting in a
decrease in compensation expense of $0.9 million and $2.2 million, respectively,
(ii) the decrease in depreciation and operating costs of $0.6 million and $1.2
million, respectively, associated with an aircraft owned by the Company which
was sold in contemplation of the IPO, (iii) the elimination of the minority
interest in Guess Europe, BV and Guess Italia, S.r.l. through the merger of
Marciano International with and into the Company in connection with the IPO,
resulting in the inclusion in net earnings of ($0.2) million and $0.2 million,
respectively, which had previously been recorded as minority interest and (iv)
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 fully-diluted basis, whereby all of
the shares outstanding immediately following the completion of the IPO and after
giving effect to the S corporation distribution in connection therewith were
considered to be outstanding at June 30, 1996. 1997 shares are the weighted
average of actual shares outstanding during the second quarter and six months
periods ended June 29, 1997. Summarized below is the pro forma financial
information for the second quarter and six months ended June 29, 1997 and June
30, 1996 (in thousands, except per share data):
9
<PAGE>
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
----------------------- -----------------------
June 29, June 30, June 29, June 30,
(Unaudited) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
Product sales. . . . . . . . . . . . . . . . . . . . . . $107,466 $108,836 $230,134 $232,111
Net royalties. . . . . . . . . . . . . . . . . . . . . . 11,049 13,672 24,117 25,295
-------- -------- -------- --------
118,515 122,508 254,251 257,406
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . 64,066 66,634 138,218 137,113
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 54,449 55,874 116,033 120,293
Selling, general & administrative expenses . . . . . . . . 37,695 36,070 72,426 69,463
-------- -------- -------- --------
Earnings from operations before
reorganization charge. . . . . . . . . . . . . . . . . 16,754 19,804 43,607 50,830
Reorganization charge (note 5) . . . . . . . . . . . . . . 0 3,559 0 3,559
-------- -------- -------- --------
Earnings from operations after
reorganization charge. . . . . . . . . . . . . . . . . 16,754 16,245 43,607 47,271
Non-operating income (expense):
Interest, net. . . . . . . . . . . . . . . . . . . . . . (3,187) (3,742) (6,413) (7,291)
Other, net . . . . . . . . . . . . . . . . . . . . . . . (48) 4 71 13
-------- -------- -------- --------
(3,235) (3,738) (6,342) (7,278)
Earnings before income taxes and
cumulative effect of change in
accounting principle. . . . . . . . . . . . . . . . 13,519 12,507 37,265 39,993
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 4,991 4,965 14,685 15,877
-------- -------- -------- --------
Earnings before cumulative effect of
change in accounting principle. . . . . . . . . . . . . . 8,528 7,542 22,580 24,116
Cumulative effect of change in accounting
for product display fixtures, net of
income tax expense of $2,707 (note 4) . . . . . . . . . . 0 0 3,961 0
-------- -------- -------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . $8,528 $7,542 $26,541 $24,116
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per share:
Earnings before cumulative effect of
change in accounting principle (1996
periods-pro forma, note 2). . . . . . . . . . . . . . . . $0.20 $0.18 $0.53 0.57
Cumulative effect of change in accounting
for product display fixtures (note 4) . . . . . . . . . . $0.00 $0.00 $0.09 $0.00
-------- -------- -------- --------
Net earnings (1996 periods-pro forma,
note 2). . . . . . . . . . . . . . . . . . . . . . . . . $0.20 $0.18 $0.62 $0.57
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares outstanding . . . . . . . . 42,898 42,682 42,898 42,682
</TABLE>
See accompanying notes to condensed consolidated financial statements.
10
<PAGE>
(7) Disposition of Assets
In May, 1997, the Company sold substantially all of the assets and liabilities
of Guess? Italia, S.r.l., a wholly owned subsidiary, to Maco Apparel, S.p.a.
("Maco") at net book value. In connection with this sale, the Company also
purchased a 10% ownership interest in Maco and entered into an approximate
10-year licensing agreement with Maco granting it the right to manufacture and
distribute mens and womens apparel, which bear the Guess trademark, in certain
parts of Europe. This licensing agreement provides for technical assistance
fees aggregating $13.9 million, to be paid to the Company over the next four
years, in additional to royalty fees.
11
<PAGE>
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 speak only as of
the date of 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, 1996 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 and women'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 outlet stores primarily in the United
States and from net royalties from worldwide licensing activities.
In May, 1997, the Company sold substantially all of the assets and liabilities
of Guess? Italia, S.r.l., a wholly owned subsidiary, to Maco Apparel, S.p.a.
("Maco") at net book value. In connection with this sale, the Company also
purchased a 10% ownership interest in Maco and entered into an approximate
10-year licensing agreement with Maco granting it the right to manufacture and
distribute mens and womens apparel, which bear the Guess trademark, in certain
parts of Europe. This licensing agreement provides for technical assistance
fees aggregating $13.9 million, to be paid to the Company over the next four
years, in additional to royalty fees.
Since July 1996, the Company has been the subject of a corporate campaign
(limited picketing, negative media, etc.; See also Legal Proceedings) by the
Union of Needletrades, Industrial & Textile Employees ("UNITE"). There can be
no assurance that such corporate campaign, over time, will not have a material
adverse effect on the Company's financial condition or results of operations.
RESULTS OF OPERATIONS
NET REVENUE. Net revenue decreased $4.0 million or 3.3% to $118.5 million in
the second quarter ended June 29, 1997 from $122.5 million in the second quarter
ended June 30, 1996. Net revenue from wholesale operations decreased $2.0
million or 3.4% to $59.6 million from $61.8 million, due principally to
decreased domestic sales of $2.4 million, partially offset by a $0.4 million
increase in sales outside the United States. The Company's domestic sales
declined primarily as a result of lower off-price revenue. This decline was
partially offset by a 4.6% increase in full-price revenue, despite lower average
selling prices and increased competition. Net revenue from retail operations
increased $0.7 million or 1.5% to
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$47.9 million from $47.2 million, primarily attributable to increased volume
generated by new store openings, partially offset by a 7.7% decrease in
comparable store net revenue. The decline in comparable store net revenue
was primarily attributable to sluggish market conditions experienced in the
factory outlet stores and a loss of merchandise resulting from a factory fire
(which was fully insured) at an overseas contractor. Net royalties decreased
$2.7 million or 19.2% in the second quarter ended June 29, 1997 to $11.0
million from $13.7 million in the second quarter ended June 30, 1996. This
decrease was primarily due to the loss of revenue related to the buyback of
the Knitwear license agreement and non-recurring technical assistance fees
recorded in the second quarter of 1996. Net revenue from international
operations comprised 9.6% and 8.6% of the Company's net revenue during the
second quarter of 1997 and 1996, respectively.
Net revenue decreased $3.1 million or 1.2% to $254.3 million in the six months
ended June 29, 1997 from $257.3 million in the six months ended June 30, 1996.
Net revenue from wholesale operations decreased $4.9 million or 3.3% to $139.9
million from $144.8 million, due principally to decreased domestic sales of $9.3
million, partially offset by a $4.4 million increase in sales outside the United
States. The Company's domestic sales declined primarily as a result of increased
competition in branded basic denim apparel, lower average selling prices and a
decline in off-price revenue. Net revenue from retail operations increased $2.9
million or 3.3% to $90.3 million from $87.3 million, primarily attributable to
increased volume generated by new store openings, partially offset by a 4.1%
decrease in comparable store net revenue. The decline in comparable store net
revenue was primarily attributable to production delays related to fabric and
start-up programs in the first quarter of 1997 and the aforementioned contractor
factory fire, as well as sluggish second quarter 1997 market conditions
experienced in the factory outlet stores. Net royalties decreased $1.2 million
or 4.7% in the six months ended June 29, 1997 to $24.1 million from $25.3
million in the six months ended June 30, 1996. This decrease was primarily due
to non-recurring technical assistance fees recorded in the second quarter of
1996. Net revenue from international operations comprised 13.7% and 11.3% of the
Company's net revenue during the first six months of 1997 and 1996,
respectively.
GROSS PROFIT. Gross profit decreased 2.6% to $54.4 million in the second
quarter ended June 29, 1997 from $55.9 million in the second quarter ended June
30, 1996. The decrease in gross profit resulted from decreased net revenue from
product sales and net royalties. Gross profit from product sales increased 2.8%
to $43.4 million in the second quarter ended June 29, 1997 from $42.2 million in
the second quarter ended June 30, 1996. As a percentage of net revenue, gross
profit increased to 45.9% in the second quarter ended June 29, 1997 as compared
to 45.6% in the second quarter ended June 30, 1996. Gross profit from product
sales as a percentage of net revenue from product sales increased to 40.4% in
the second quarter ended June 29, 1997 from 38.8% in the second quarter ended
June 30, 1996. This increase was primarily the result of a higher gross profit
rate in the wholesale business, partially offset by a lower gross profit rate in
the retail store operations. The higher gross profit rate in the wholesale
business primarily resulted from improved product sourcing, as well as a
favorable merchandise mix resulting from lower off-price revenue (which
generally carries a lower gross profit rate). The lower gross profit rate in the
retail store operations resulted primarily from fixed store occupancy costs
being spread over a lower revenue base in the 1997 period.
Gross profit decreased 3.5% to $116.0 million in the six months ended June 29,
1997 from $120.3 million in the six months ended June 30, 1996. The decrease in
gross profit resulted from decreased net revenue from product sales and
decreased net royalties. Gross profit from product sales decreased 3.2% to $91.9
million in
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the six months ended June 29, 1997 from $95.0 million in the six months ended
June 30, 1996. As a percentage of net revenue, gross profit decreased to
45.6% in the six months ended June 29, 1997 as compared to 46.7% in the six
months ended June 30, 1996. Gross profit from product sales as a percentage
of net revenue from product sales decreased to 39.9% in the six months ended
June 29, 1997 from 40.9% in the six months ended June 30, 1996. This decrease
is principally due to the lower gross profit rate in the retail store
operations, resulting primarily from fixed store occupancy costs being spread
over a lower revenue base in the 1997 period.
SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses remained
relatively flat in the second quarter ended June 29, 1997 at $37.7 million, or
31.8% of net revenue, compared to $37.6 million, or 30.7% of net revenue, in the
second quarter ended June 30, 1996. SG&A expenses decreased 0.6% in the six
months ended June 29, 1997 to $72.4 million, or 28.5% of net revenue, from $72.8
million, or 28.3% of net revenue, in the six months ended June 30, 1996. On a
pro forma basis, SG&A expenses increased 4.5% in the second quarter ended June
29, 1997 to $37.7 million, or 31.8% of net revenue, from $36.1 million, or 29.4%
of net revenue, in the second quarter ended June 30, 1996. This increase was
principally due to an increase in general and administrative costs related to
the expansion of the retail division and certain one-time costs associated with
the disposition of Guess Italia. On a pro forma basis, SG&A expenses increased
4.3% in the six months ended June 29, 1997 to $72.4 million, or 28.5% of net
revenue, from $69.5 million, or 27.0% of net revenue, in the six months ended
June 30, 1996. This increase was principally due to an increase in general and
administrative costs related to the expansion of the retail division and certain
one-time costs associated with the disposition of Guess Italia, as well as
increased sample development costs. As a percentage of net revenue, the
increases in SG&A expenses for both periods were the result of fixed expenses
being spread over a lower revenue base in the 1997 period.
EARNINGS FROM OPERATIONS BEFORE REORGANIZATION CHARGE. Earnings from operations
decreased 8.3% to $16.7 million, or 14.1% of net revenue in the second quarter
ended June 29, 1997, from $18.3 million, or 14.9% of net revenue, in the second
quarter ended June 30, 1996. Earnings from operations before reorganization
charge decreased 8.1% to $43.6 million, or 17.2% of net revenue in the six
months ended June 29, 1997, from $47.5 million, or 18.4% of net revenue, in the
six months ended June 30, 1996. On a pro forma basis, earnings from operations
before reorganization charge decreased 15.4% to $16.7 million, or 14.1% of net
revenue, in the second quarter ended June 29, 1997, from $19.8 million, or 16.2%
of net revenue, in the second quarter ended June 30, 1996. The pro forma
decline was primarily attributable to lower net royalties and increased SG&A
expenses, partially offset by an increase in gross margin from product sales. On
a pro forma basis, earnings from operations before reorganization charge
decreased 14.2% to $43.6 million, or 17.2% of net revenue, in the six months
ended June 29, 1997, from $50.8 million, or 19.7% of net revenue, in the six
months ended June 30, 1996. This pro forma decline was primarily attributable to
the decrease in gross profit, as well as increased SG&A expenses.
REORGANIZATION CHARGE. In connection with the IPO on August 7, 1996, in the
second quarter of 1996, the Company recorded reserves totaling $3.6 million for
certain non-recurring charges related to the write-downs of operating assets to
be disposed of, which included: (i) the disposal of two remote warehouse and
production facilities not expected to be used in the Company's operations after
the IPO, 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
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aircraft. The above charges are based upon the net book value of the related
assets as of June 30, 1996.
EARNINGS FROM OPERATIONS AFTER REORGANIZATION CHARGE. Earnings from operations
increased 13.8% to $16.7 million, or 14.1% of net revenue in the second quarter
ended June 29, 1997, from $14.7 million, or 12.0% of net revenue, in the second
quarter ended June 30, 1996. Earnings from operations decreased 0.7% to $43.7
million, or 17.2% of net revenue in the six months ended June 29, 1997, from
$43.9 million, or 17.1% of net revenue, in the six months ended June 30, 1996.
On a pro forma basis, earnings from operations increased 3.1% to $16.7 million,
or 14.1% of net revenue, in the second quarter ended June 29, 1997, from $16.2
million, or 13.3% of net revenue, in the second quarter ended June 30, 1996. On
a pro forma basis, earnings from operations decreased 7.8% to $43.6 million, or
17.2% of net revenue, in the six months ended June 29, 1997, from $47.2 million,
or 18.4% of net revenue, in the six months ended June 30, 1996.
INTEREST EXPENSE, NET. Net interest expense decreased 14.8% to $3.2 million in
the second quarter ended June 29, 1997 from $3.7 million in the second quarter
ended June 30, 1996. This decrease primarily resulted from lower outstanding
debt and a lower average effective interest rate in the 1997 period. For the
second quarter ended June 29, 1997, the average debt balance was $144.1 million,
with an average effective interest rate of 8.9%. For the second quarter ended
June 30, 1996, the average debt balance was $154.6 million, with an average
effective interest rate of 9.2%. Net interest expense decreased 12.0% to $6.4
million in the six months ended June 29, 1997 from $7.3 million in the six
months ended June 30, 1996, resulting from lower outstanding debt. For the six
months ended June 29, 1997, the average debt balance was $137.8 million, with an
average effective interest rate of 9.3%. For the six months ended June 30,
1996, the average debt balance was $149.3 million, with an average effective
interest rate of 9.3%.
INCOME TAXES. Prior to the IPO (which occurred during August 1996), for Federal
and certain state income tax purposes, the Company elected to be treated as an S
corporation and, therefore, generally was not subject to income tax on its
earnings. The Company's income taxes, which represent state income and franchise
taxes and foreign taxes, plus Federal income taxes in the 1997 period, were $5.0
million in the second quarter ended June 29, 1997 and $0.3 million in the second
quarter ended June 30, 1996. Income taxes were $14.7 million in the six months
ended June 29, 1997 and $1.6 million in the six months ended June 30, 1996. The
Company's S corporation status was terminated in connection with the IPO and,
therefore, the Company is now fully subject to Federal, state and foreign income
taxes. On a pro forma basis, income taxes were $5.0 million in the second
quarter ended June 29, 1997 and $5.0 million in the second quarter ended June
30, 1996. On a pro forma basis, income taxes were $14.7 million in the six
months ended June 29, 1997 and $15.9 million in the six months ended June 30,
1996.
NET EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Net
earnings before the net cumulative effect of change in accounting principle
decreased 21.3% to $8.5 million, or 7.2% of net revenue, in the second quarter
ended June 29, 1997, from $10.8 million, or 8.8% of net revenue, in the second
quarter ended June 30, 1996. Net earnings before the net cumulative effect of
change in accounting principle decreased 35.2% to $22.6 million, or 8.9% of net
revenue, in the six months ended June 29, 1997, from $34.9 million, or 13.5% of
net revenue, in the six months ended June 30, 1996. On a pro forma basis, net
earnings before cumulative effect of change in accounting principle increased
13.1% to $8.5 million, or 7.2% of net revenue, in the second quarter ended June
29, 1997, from $7.6 million, or 6.2% of net revenue, in the second quarter ended
June 30, 1996. On a pro forma basis, net earnings before the net cumulative
effect
15
<PAGE>
of change in accounting principle decreased 6.4% to $22.6 million, or 8.9% of
net revenue, in the six months ended June 29, 1997, from $24.1 million, or
9.4% of net revenue, in the six months ended June 30, 1996.
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 will be capitalized and amortized over five years using the
straight-line method. In prior years, these costs had been expensed as
incurred. The Company believes that this new method will more closely match the
long-term benefit that the product display fixtures provide with the expected
future revenue from such fixtures. The new method has been applied
retroactively to product display fixture acquisitions of prior years. The effect
of the change on the second quarter and six months ended June 29, 1997 was to
increase earnings by approximately $0.7 million and $0.9 million, respectively
(or $0.02 and $0.02 per share, respectively), excluding the cumulative effect of
the change in accounting principle. 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.
NET EARNINGS. Net earnings decreased 21.2% to $8.5 million, or 7.2% of net
revenue, in the second quarter ended June 29, 1997, from $10.8 million, or 8.8%
of net revenue, in the second quarter ended June 30, 1996. Net earnings
decreased 23.9% to $26.6 million, or 10.4% of net revenue, in the six months
ended June 29, 1997, from $34.9 million, or 13.5% of net revenue, in the six
months ended June 30, 1996. On a pro forma basis, net earnings increased 13.1%
to $8.5 million, or 7.2% of net revenue, in the second quarter ended June 29,
1997, from $7.6 million, or 6.2% of net revenue, in the second quarter ended
June 30, 1996. This increase was primarily the result of a reorganization charge
recorded in the second quarter of 1996, partially offset by lower revenue and
higher SG&A expenses in the 1997 period. On a pro forma basis, net earnings
increased 10.1% to $26.5 million, or 10.4% of net revenue, in the six months
ended June 29, 1997, from $24.1 million, or 9.4% of net revenue, in the six
months ended June 30, 1996. This increase was primarily the result of the change
in accounting principle, partially offset by lower net revenue and increased
SG&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon internally generated funds, trade credit
and bank borrowings to finance its operations and expansion. At June 29, 1997,
the Company had working capital of $116.6 million compared to $76.8 million at
December 31, 1996. The $39.8 million increase in working capital was due
principally to a $12.7 million increase in receivables and a $24.0 million
increase in inventories. The increase in receivables resulted primarily from
seasonal changes in volume. The increase in inventories resulted primarily from
seasonal changes in volume, early receipts of inventory related to the Key Items
Program and new retail store additions.
The Company's Credit Agreement provides for a $100.0 million revolving credit
facility which includes a $20.0 million sublimit for letters of credit. As of
June 29, 1997, the Company had $41.2 million in outstanding borrowings under the
revolving credit facility and outstanding letters of credit of $8.0 million. As
of June 29, 1997, the Company had $50.8 million available for future borrowings
under such facility. The revolving credit facility will expire in December 1999.
In addition to this revolving credit facility, the Company also has a $25.0
million letter of credit facility. As of June 29, 1997, the Company had $22.5
million outstanding under this facility.
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Capital expenditures, net of lease incentives granted, totaled $16.6 million in
the six months ended June 29, 1997. The Company estimates that its capital
expenditures for fiscal 1997 will be approximately $45.0 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 expansion plans 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 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 or profitability.
EXCHANGE RATES
The Company receives United States dollars for substantially all of its product
sales and its licensing revenue. Inventory purchases from offshore contract
manufacturers are primarily denominated in United States dollars; however,
purchase prices for the Company's products may be impacted by fluctuations in
the exchange rate between the United States dollar 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 United States dollars.
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
The Financial Accounting Standards Board has recently issued Statement No. 128,
"Earnings per Share" ("FAS 128"), issued in February 1997 and effective for both
interim and annual periods ending after December 15, 1997. The Company will
adopt FAS 128 in the fourth quarter of 1997. FAS 128 requires the presentation
of "Basic" earnings per share which represents income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. A dual presentation of "Diluted" earnings per share will also
be required. The Diluted presentation is similar to the current presentation of
17
<PAGE>
fully diluted earnings per share. FAS 128 requires restatement of all
prior-period earnings per share data presented. Management believes the adoption
of FAS 128 will not have a material impact on the Company's financial position
or results of operations.
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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) (the "State Case"). The State Case
was remanded to the United State District Court for the Central District of
California (Case No. 96-5484HLH (JGX)) (the "Federal Case"). Both cases sought
damages and injunctive relief, and alleged, 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.
Certain components of the complaint have been remanded back to State Court,
resulting in two litigation cases. In the Federal Case, plaintiffs claimed that
the Company's independent contractors violated the Federal Fair labor Standards
Act ("FLSA") by failing to pay minimum wage and overtime in accordance with the
FLSA. On July 14, 1997, the Federal Court dismissed the entirety of the Federal
Case but for one plaintiff, and dismissal of the remainder of the case is
anticipated. In the State Case, also a purported class action, plaintiffs
assert claims for violation of state wage and hour laws, wrongful discharge,
breach of contract, and certain counts of negligence 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. In the State Case, plaintiffs also allege that the
Company breached its agreement with the United States Department of Labor
regarding the monitoring of its independent contractors. Plaintiffs contend that
the Company is liable for its contractors' violations because it is a "joint
employer" with its independent contractors.
The Union of Needletrades, Industrial & Textile Employees ("UNITE") has filed
with the National Labor Relations Board ("NLRB") several charges that the
Company has engaged and is engaging in unfair labor practices within the meaning
of the National Labor Relations Act ("NLRA"). In cases No. 21-CA-31524, No.
21-CA-31565 and No. 21-CA-31648, UNITE has alleged that the senior management of
the Company unlawfully discharged certain employees because of certain union
activities and unlawfully threatened and coerced employees in the exercise of
their rights under Section 7 of the NLRA. In an agreement with the NLRB, the
Company agreed to reinstate all of the employees allegedly unlawfully discharged
because of their union activities and agreed to pay them back wages which
aggregate approximately $70,000. The settlement also provides for the posting
of a notice for 60 days at the Company stating that the matter has been settled
and that the Company agrees to comply with the NLRA. The notice has a
non-admission clause concerning liability. Prior to the payment of the back
wages, UNITE filed an additional unfair labor practice charge with the NLRB (No.
21-CA-31807). In this charge, UNITE alleges that the Company has unlawfully
threatened to move its production to Mexico and elsewhere outside the United
States thus unlawfully interfering with the organizing campaign at the Company's
headquarters, and has unlawfully ceased doing business with independent
contractors at which ongoing union organizing campaigns are being conducted.
This charge also alleges that the Company has violated the settlement agreement
in cases No. 21-CA-31524, No. 21-CA-31565 and No. 21-CA-31648 by making such
threats. Charge No. 21-CA-31807 is currently under investigation by the NLRB,
however the General Counsel of the NLRB has indicated to the Company that the
NLRB intends to issue a complaint in this case. The Company has been informed
by the NLRB that the NLRB is evaluating several legal theories on which to bring
the complaint including, but not limited to, the theory
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that the Company is a joint employer. The NLRB has also indicated that in the
absence of a "joint employer" finding, the complaint may be brought on a
theory that the Company has violated the NLRA by terminating contractual
relationships with certain contractors and/or providing a lesser amount of
work to certain contractors based on the contractors being subject to union
organizing efforts by UNITE. The NLRB has also indicated the possibility of
pursuing a theory that the Company is involved in an integrated production
effort with its contractors and is therefore liable for the loss of
contractor employee jobs.
Pending a decision by the NLRB regarding the allegation that the Company
breached the settlement agreement reached in cases No. 21-CA-31524, No.
21-CA-31565 and No. 21-CA-31648, the Company has withheld paying the
approximately $70,000 in back wages agreed to in its above described settlement
with the NLRB and has not posted notice of the settlement agreement. The
subject employees, however, have been reinstated and continue to be employed by
the Company.
In addition to the above cases, UNITE has filed a series of unfair labor
practice charges against the Company and related parties. In Case No.
31-CA-22380, UNITE is seeking fees and costs for having to defend certain causes
of actions filed against UNITE by the Company. On June 19, 1997 (No.
21-CA-32106), UNITE filed with the NLRB charges that the Company, one of the
Company's independent contractors, the law firm of Mitchell Silberberg & Knupp
and certain employees of the Company and Mitchell, Silberberg & Knupp, acting in
concert with each other interfered with the employees of the independent
contractors in the exercise of such employees' Section 7 rights under the NLRA
respecting the enforcement of wage and hour laws. In another action filed on
June 30, 1997 (No. 21-CA-32131), UNITE filed with the NLRB charges alleging
that the Company and its President, Paul Marciano, have restrained, coerced, and
interfered with the Company's employees rights under Section 7 of the NLRA by
engaging in certain unlawful conduct including, without limitation: (a)
breaching the Settlement Agreement in cases 21-CA-31524, 21-CA-31565 and
21-CA-31648; (b) organizing anti-union demonstrations; and (c) bestowing certain
benefits to Company supporters while denying similar benefits to UNITE
supporters.
The Company believes that 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.
The Company 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 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
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ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Registrant's Annual Meeting of Stockholders was held on May 28, 1997.
(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 the management's nominee as listed in the
proxy statement. The nominee was elected.
(c) The matters voted at the Annual Meeting the results were as follows:
(1) To elect the Class I Director to serve as such until the 2000 Annual
Meeting of Stockholders and until his successor has been elected and
qualified.
For Withheld
--- --------
Armand Marciano 41,990,268 46,722
To ratify the selection of KPMG Peat Marwick LLP to serve as
independent certified public accountants for the year ended
December 31, 1997.
For Against Abstain
--- ------- -------
41,999,921 21,076 15,993
ITEM 5. Other Information
On May 28, 1997, Robert C. Davis was appointed to the Company's Board of
Directors. Mr. Davis, age 50, is the former President and Chief Operating
Officer of St. John Knits. Following his resignation in April 1996 for family
reasons, Mr. Davis has remained active at St. John in his capacity of
consultant to the Chairman and Founder, Bob Gray. Mr. Davis, a director of
St. John Knits since 1984, became President of the Company in 1992 and served
as Chief Operating Officer and Secretary since 1988. From 1980 to 1988, Mr.
Davis held various other administrative positions ending with Vice President
- - Operations. Prior to that, Mr. Davis was a partner in a Chicago area law
firm where he handled corporate, labor and litigation matters from 1973 to
1980. Mr. Davis currently serves on the Corporate Board of Kent
Manufacturing in South Carolina.
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<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
- ------- -----------
3.1. Restated Certificate of Incorporation.(1)
3.2. Bylaws of the Registrant.(1)
4.1. Indenture, dated August 23, 1993, between the Registrant and First
Trust National Association, as Trustee.(2)
4.2. First Supplemental Indenture, dated August 23, 1993, between the
Registrant and First Trust National Association, as Trustee.(1)
4.3. Specimen stock certificate.(1)
10.32.* First Amendment and Waiver to Amended and Restated Revolving
Credit Agreement by and between the Registrant and BankBoston, NA,
F/K/A The First National Bank of Boston, Sanwa Bank California and
the Financial Institutions Party hereto.
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.
(2) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 33-69236) originally filed by the Company on
September 22, 1993.
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
June 29, 1997.
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SIGNATURES
Pursuant to the requirements of Rule 12b-15 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GUESS ?, INC.
Date: August 12, 1997 By: /s/ Maurice Marciano
--------------------------------
Maurice Marciano
Chairman of the Board, Chief Executive
Officer and Director (Principal Executive
Officer)
Date: August 12, 1997 By: /s/ Roger Williams
--------------------------------
Roger Williams
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer)
23
<PAGE>
EXHIBIT 10.32. First Amendment and Waiver to Amended and Restated Revolving
Credit Agreement by and between the Registrant and BankBoston,
NA, F/K/A The First National Bank of Boston, Sanwa Bank
California and the Financial Institutions Party hereto.
-------------------------------------------------------------
FIRST AMENDMENT AND WAIVER
TO
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
Dated as of April 30, 1997
1
<PAGE>
FIRST AMENDMENT AND WAIVER
TO
AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
This First Amendment and Waiver to Amended and Restated Revolving Credit
Agreement (this "Waiver") is entered into as of April 30, 1997, by and between
GUESS ?, INC., a Delaware corporation having its chief executive office at 1444
S. Alameda Street, Los Angeles, California, 90021 (the "Company") and
BankBoston, N.A. formerly THE FIRST NATIONAL BANK OF BOSTON, a bank with its
head offices at 100 Federal Street, Boston, Massachusetts, 02110 (the "Agent"),
SANWA BANK CALIFORNIA, a bank with its head offices at 601 South Figueroa
Street, Los Angeles, California 90017 (the "Co-Agent"), and THE FINANCIAL
INSTITUTIONS PARTIES HERETO (the Lenders").
RECITALS
A. The parties hereto have previously entered into that certain Amended and
Restated Revolving Credit Agreement, dated as of March 28, 1997 (the "Credit
Agreement");
B. The Company desires to implement a share repurchase program pursuant to
which the Company may repurchase shares of its common stock as approved by the
Company's board of directors and further subject to the limitation contained in
this First Amendment and Waiver (the "Program");
C. The Company has requested that the Lenders agree to amend the Credit
Agreement to permit the implementation of the Program; and
D. The Lenders have agreed to amend and modify the Credit Agreement to permit
the Program and to waive the restrictions on the repurchase of common stock
under Section 6.7 of the Credit Agreement, but only upon the terms and
conditions set forth in this Amendment and Waiver.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained in this Waiver and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree to the above Recitals and as follows:
1. Definitions. All defined terms used herein without definition shall have
the meanings assigned to them in the Credit Agreement.
2. Amendments to the Credit Agreement. From and after the date hereof the
Credit Agreement is hereby amended as follows:
a. The Credit Agreement is amended by the addition of the following definition:
Stock Repurchase Program. Repurchase by the Company of its common
stock on the public markets or otherwise; provided that the aggregate
purchase price for such shares shall be authorized by
2
<PAGE>
the Company's board of directors and shall not exceed the amount
provided in Section 5.13 of this Agreement.
b. Section 2.1 (c) of the Credit Agreement is deleted in its entirety and is
amended to read as follows:
(c) The proceeds of the Revolving Loans shall be used by the Company
exclusively for working capital purposes, except that, up to $76,000,000
(reduced as provided in Section 5.13) of the Commitment Amount may be used,
in the aggregate, to repurchase some of all of the Senior Subordinated
Notes and fund the Stock Repurchase Program, provided that the Company
shall demonstrate that it will comply with provisions of Sections 5.13 and
6.8 (xiv) of this Agreement.
c. Section 4.10 of the Credit Agreement is deleted in its entirety and
amended to read as follows:
4.10 Use of proceeds. No portion of any Loan is to be used for the
"purpose of purchasing or carrying" any "margin stock" as such terms
are used in Regulations U and X of the Board of Governors of any
Federal Reserve System, 12 C.F.R. 221 and 224, as amended, except for
funds used under the Stock Repurchase Program. After any purchase
under the Stock Repurchase Program the Company shall deliver
certificates demonstrating continued compliance of the Obligations
with applicable regulations.
d. Section 5.13 of the Credit Agreement is delete in its entirety and amended
to read as follows:
5.13 Use of proceeds. The Company will use the proceeds of the
Revolving Loans for the ongoing working capital needs of the Company.
Notwithstanding the foregoing, the Company may use up to $75,000,000,
in the aggregate of the Commitment Amount, reduced by all purchases of
Senior Subordinated Notes prior to the date of this Agreement as set
forth on Exhibit C and further reduced by all purchases of Senior
Subordinated Notes and common stock under the Stock Repurchase Program
made on and after the date hereof, to repurchase a portion of the
Senior Subordinated Notes or any of the Company's common stock under
the Stock Repurchase Program, provided, (i) that the Company shall
satisfy on a pro forma basis, all of the convenants made herein for the
next four (4) fiscal quarters from the date thereof, (ii) that the
Company's repurchase of the Senior Subordinated Notes and common stock
under the Stock Repurchase Program in any fiscal quarter shall be
limited to the amount of the Company's positive net income based on the
average of net income for the preceding four fiscal quarters, as
previously reported to the Agent and using the current quarter as the
fourth quarter for the purposes of the calculation and (iii) that such
repurchase complies with the provisions of Section 6.8 (xiv) hereof.
e. Section 6.7 of the Credit Agreement is deleted in its entirety and amended
to read as follows:
6.7 Equity Distributions. The Company shall not pay any dividends on
any class of its Capital Stock or make any other distribution or
payment on account of or in redemption, retirement
3
<PAGE>
or purchase of such Capital Stock without the prior written consent of
the Majority Lenders; provided that this Section shall not apply to (i)
the issuance, delivery or distribution by the Company of shares of its
common stock pro rata to its existing shareholders and (ii) the
purchase or redemption by the Company of its Capital stock with the
proceeds of the issuance of additional shares of Capital Stock.
Notwithstanding the forgoing, the Company may repurchase its common
stock under the Stock Repurchase Program, subject to the limitation
provided under Section 5.13 hereof. If an Event of Default or Default
has occurred and is continuing, then the Company shall not pay any
dividends on any class of its Capital Stock or make any repurchases
under the Stock Repurchase Program.
3. Consent and Waiver. Subject to the terms of the Amendment and Waiver, the
Lenders hereby consent to the implementation of the Program and waive any
Default, event of Default, breach or any other claim which could or would now or
hereafter arise pursuant to Section 6.7 of the Credit Agreement as a result of
the implementation of the Program but for such consent.
4. Conditions to First Amendment.
a. The agreements of Agent and the Lenders as set forth in this First
Amendment are subject to the fulfillment of the following conditions:
(1) Receipt by Agent of a fully executed copy of this First Amendment and
Waiver Agreement;
(2) Receipt by the Agent of a certificate signed by the Secretary or Assistant
Secretary of the Company certifying, among other things: (a) that the Articles
of Incorporation of the Company have not been amended since the date of the
certified Articles of Incorporation delivered to Lender and attached thereto as
an exhibit, (b) the By-laws of the Company attached thereto as an exhibit and
that there have been no amendments thereto, (c) the attached resolution of the
Company's Board of Directors authorizing the execution, delivery and performance
of the First Amendment to the Credit Agreement and authorizing the Program as
described to the Lenders, and (d) the names, incumbency and signatures of the
officers of the Company executing the First Amendment to Credit Agreement and
the other loan documents executed by it; and
(3) Such other documents, instruments and agreements as Agent may
reasonably request in connection herewith or in order to effectuate the matters
described herein.
5. Credit Agreement Remains in Full Force and Effect. Except for the
amendments set forth in Section 2 hereof, no other amendment to the Credit
Agreement are being given and all provision of the Credit Agreement shall remain
in full force and effect.
6. Representation and Warranties; No Default or Event of Default. The Company
hereby confirms that the representations and warranties contained in Section 4
of the Credit Agreement are true and correct as of the date hereof (except to
the extent that such representations and warranties relate to a
4
<PAGE>
prior date) and that no Default or Event of Default has occurred and is
continuing on the date hereof.
7. Limitation of Waiver. Any waiver contained herein by the Agent and/or the
Lenders, shall apply to the occurrence specifically described herein and then
only to the extent set forth herein and shall not in any way be construed as a
bar to a waiver of any right or remedy of the Agent and the Lenders as to any
other occurrence or event.
8. Governing Law. This Waiver shall be construed in accordance with and
governed by the laws of the Commonwealth of Massachusetts (without giving effect
to any conflicts of laws provisions contained therein).
9. Feed and Expenses. The Company shall pay the Lenders' reasonable attorneys'
fees and out-of-pocket expenses not to exceed $5000.00 incurred in connection
with this Waiver as of and through the date hereof.
10. Counterparts. This First Amendment and Waiver may be executed in any number
of counterparts, each of which when executed and delivered shall be deemed an
original, but all of which together shall constitute one instrument. In making
proof of this Amendment, it shall not be necessary to account for more than one
counterpart hereof signed by each of the parties hereto. Except to the extent
specifically amended or supplemented hereby, all of the items, conditions and
provisions of the Credit Agreement shall remain unmodified, and the Credit
Agreement, as amended and supplemented by this Amendment, is confirmed as being
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Waiver to be duly
executed as of the day and the year first written.
GUESS ?, INC.
By:
------------------------------------------
Print Name:
------------------------------------------
Title:
------------------------------------------
LENDERS AND AGENTS SIGNATURES ON NEXT PAGE
5
<PAGE>
BANKBOSTON, N.A. FORMERLY
THE FIRST NATIONAL BANK OF BOSTON
(AS AGENT AND LENDER)
By:
------------------------------------------
Print Name:
------------------------------------------
Title:
------------------------------------------
SANWA BANK CALIFORNIA (AS CO-AGENT AND LENDER)
By:
------------------------------------------
Print Name:
------------------------------------------
Title:
------------------------------------------
THE INDUSTRIAL BANK OF JAPAN, LIMITED (AS LENDER)
By:
------------------------------------------
Print Name:
------------------------------------------
Title:
------------------------------------------
CREDIT LYONNAIS LOS ANGELES BRANCH (AS LENDER)
By:
------------------------------------------
Print Name:
------------------------------------------
Title:
------------------------------------------
SUMITOMO BANK OF CALIFORNIA (AS LENDER)
By:
------------------------------------------
Print Name:
------------------------------------------
Title:
------------------------------------------
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-29-1997
<CASH> 4,452
<SECURITIES> 0
<RECEIVABLES> 41,110
<ALLOWANCES> 5,053
<INVENTORY> 103,501
<CURRENT-ASSETS> 182,006
<PP&E> 146,679
<DEPRECIATION> 68,582
<TOTAL-ASSETS> 297,257
<CURRENT-LIABILITIES> 65,412
<BONDS> 146,200
0
0
<COMMON> 137
<OTHER-SE> 64,087
<TOTAL-LIABILITY-AND-EQUITY> 297,257
<SALES> 230,134
<TOTAL-REVENUES> 254,251<F1>
<CGS> 138,218
<TOTAL-COSTS> 210,644
<OTHER-EXPENSES> (71)
<LOSS-PROVISION> 245
<INTEREST-EXPENSE> 6,413
<INCOME-PRETAX> 37,265
<INCOME-TAX> 14,685
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,961)<F2>
<NET-INCOME> 26,541
<EPS-PRIMARY> 0.62<F3>
<EPS-DILUTED> 0
<FN>
<F1>Includes net royalties of $24.1 million.
<F2>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 will be capitalized and amortized over five
years using the straight-line method. In prior years, these costs had been
expensed as incurred. The Company believes that this new method will more
closely match the long-term benefit that the product display fixtures provide
with the expected future revenue from such fixtures. The new method has been
applied retroactively to product display fixture acquisitions of prior years.
The effect of the change on the second quarter and six months ended June 29,
1997 was to increase earnings by approximately $0.7 million and $0.9 million,
respectively (or $0.02 and $0.02 per share, respectively), excluding the
cumulative effect of the change in accounting principle. 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.
<F3>Earnings per share includes the effect of a one-time change in accounting
principle, which was equivalent to $0.09 per share. Earnings per share,
excluding the effect of the accounting change, was $0.53 per share.
</FN>
</TABLE>
