<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 September 28, 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 November 12 1997, the registrant had 42,898,035 shares of Common Stock,
$0.01 par value, outstanding.
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GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
as of September 28, 1997 (unaudited) and December 31, 1996......1
Condensed Consolidated Statements of Earnings (unaudited) -
Third Quarter and Nine Months ended September 28, 1997
and September 29, 1996..........................................3
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine Months ended September 28, 1997 and September 29, 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...............................................22
Item 3. Defaults Upon Senior Securities.....................................22
Item 4. Submission of Matters to Vote of Security Holders...................22
Item 5. Other Information...................................................22
Item 6. Exhibits and Reports on Form 8-K....................................23
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
ASSETS
Sep 28, Dec 31,
1997 1996*
-------- --------
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $6,556 $8,800
Short term investments. . . . . . . . . . . . . . . . . 0 4,401
Receivables:
Trade receivables, net of reserves. . . . . . . . . 41,101 27,107
Royalties . . . . . . . . . . . . . . . . . . . . . 17,207 15,613
Other . . . . . . . . . . . . . . . . . . . . . . . 5,458 4,042
-------- --------
63,766 46,762
Inventories . . . . . . . . . . . . . . . . . . . . . . 105,864 79,489
Prepaid expenses and other current assets . . . . . . . 17,165 11,863
-------- --------
Total current assets. . . . . . . . . . . . . . . 193,351 151,315
Property and equipment, at cost, net of accumulated
depreciation and amortization. . . . . . . . . . . . . . . 88,834 64,302
Long-term investments. . . . . . . . . . . . . . . . . . . . 14,234 8,106
Other assets, at cost, net of accumulated amortization . . . 16,660 15,583
-------- --------
$313,079 $239,306
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable
and long-term debt. . . . . . . . . . . . . . . . . . . . $674 $6,099
Accounts payable . . . . . . . . . . . . . . . . . . . . . 40,939 39,285
Accrued expenses . . . . . . . . . . . . . . . . . . . . . 20,701 24,935
Income taxes payable . . . . . . . . . . . . . . . . . . . 0 4,175
-------- --------
Total current liabilities. . . . . . . . . . . . . . . 62,314 74,494
Notes payable and long-term debt, net of current
installments . . . . . . . . . . . . . . . . . . . . . . . 164,300 121,217
Other liabilities. . . . . . . . . . . . . . . . . . . . . . 9,137 8,667
-------- --------
235,751 204,378
1
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
(continued)
Sep 28, Dec 31,
1997 1996*
-------- --------
Stockholders' equity:
Preferred stock. $0.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding . . . . . . . - -
Common stock, $0.01 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,
September 28, 1997 and December 31, 1996, respectively,
including 20,030,792 shares in Treasury. . . . . . . . 137 135
Paid-in capital. . . . . . . . . . . . . . . . . . . . . 158,589 155,591
Retained earnings. . . . . . . . . . . . . . . . . . . . 69,569 29,921
Foreign currency translation adjustment. . . . . . . . . (191) 57
Treasury stock, 20,030,792 shares repurchased. . . . . . (150,776) (150,776)
-------- --------
Net stockholders' equity . . . . . . . . . . . . . . 77,328 34,928
-------- --------
$313,079 $239,306
======== ========
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>
Third Quarter Ended Nine Months Ended
------------------- ---------------------
Sep 28, Sep 29, Sep 28, Sep 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
Product sales. . . . . . . . . . . . . . . . . . . . $126,978 $139,511 $357,112 $371,622
Net royalties. . . . . . . . . . . . . . . . . . . . 15,464 14,987 39,581 40,282
-------- -------- -------- --------
142,442 154,498 396,693 411,904
Cost of sales. . . . . . . . . . . . . . . . . . . . . 78,068 84,284 216,286 221,397
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . 64,374 70,214 180,407 190,507
Selling, general & administrative expenses . . . . . . 39,250 39,490 111,676 112,319
Reorganization charge (note 5) . . . . . . . . . . . . 0 0 0 3,559
-------- -------- -------- --------
Earnings from operations . . . . . . . . . . . . 25,124 30,724 68,731 74,629
Non-operating income (expense):
Interest, net. . . . . . . . . . . . . . . . . . . . (3,480) (3,843) (9,893) (11,134)
Other, net . . . . . . . . . . . . . . . . . . . . . 55 (618) 126 (765)
-------- -------- -------- --------
(3,425) (4,461) (9,767) (11,899)
Earnings before income taxes and
cumulative effect of change in
accounting principle. . . . . . . . . . . . . . 21,699 26,263 58,964 62,730
Income taxes . . . . . . . . . . . . . . . . . . . . . 8,593 5,925 23,278 7,523
-------- -------- -------- --------
Earnings before cumulative effect of
change in accounting principle. . . . . . . . . . . . 13,106 20,338 35,686 55,207
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 . . . . . . . . . . . . . . . . . . $13,106 $20,338 $39,647 $55,207
======== ======== ======== ========
Supplemental pro forma financial information, 1996 periods (note 2):
- --------------------------------------------------------------------
Earnings before income taxes, as presented . . . . . . $26,263 $62,730
Pro forma provision for income taxes . . . . . . . . . 10,637 25,092
-------- --------
Pro forma net earnings . . . . . . . . . . . . . . . . $15,626 $37,638
======== ========
</TABLE>
3
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
(continued)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
--------------------- ---------------------
Sep 28, Sep 29, Sep 28, Sep 29,
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). . . . . . . . . . . . . . $0.31 $0.38 $0.83 $0.91
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). . . . . . . . . . . . . . . . . . . . . . . $0.31 $0.38 $0.92 $0.91
======== ======== ======== ========
Pro forma financial information assuming
the new accounting method is retroactively applied:
- ----------------------------------------------------
Pro forma net earnings. . . . . . . . . . . . . . . $13,106 $15,771 $35,686 $38,072
======== ======== ======== ========
Pro forma net earnings per share. . . . . . . . . . $0.31 $0.38 $0.83 $0.92
======== ======== ======== ========
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>
Nine Months Ended
---------------------
Sep 28, Sep 29,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,647 $55,207
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment. . . . . . 14,358 12,510
Amortization of deferred charges . . . . . . . . . . . . . . . . . (173) 852
Amortization of deferred royalty income. . . . . . . . . . . . . . (1,352) 0
Cumulative effect of change in accounting
principle (note 4). . . . . . . . . . . . . . . . . . . . . . . (3,961) 0
Loss (gain) on disposition of property and equipment . . . . . . . (215) 1,194
Foreign currency translation adjustment. . . . . . . . . . . . . . (48) 46
Minority interest. . . . . . . . . . . . . . . . . . . . . . . . . 0 (75)
Undistributed equity method earnings (loss). . . . . . . . . . . . (126) 322
Deferred royalty income. . . . . . . . . . . . . . . . . . . . . . 2,636 0
(Increase) decrease in:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . (17,004) (22,573)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . (26,374) (11,001)
Prepaid expenses and other current assets. . . . . . . . . . . . (5,302) (21)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . (874) (166)
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 1,653 (1,399)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . (5,558) 1,651
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . (6,882) 4,742
-------- --------
Net cash provided by (used in) operating activities . . . . . . . (9,575) 41,289
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . (33,260) (15,266)
Proceeds from the disposition of property and equipment. . . . . . . 1,253 6,640
Lease incentives granted . . . . . . . . . . . . . . . . . . . . . . 1,187 616
Acquisition of license . . . . . . . . . . . . . . . . . . . . . . . (2,273) 0
Decrease in short-term investments . . . . . . . . . . . . . . . . . 4,401 (431)
Increase in long-term investments. . . . . . . . . . . . . . . . . . (1,435) 0
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . (30,127) (8,441)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt . . . . . . . . . . . 126,835 143,660
Repayments of notes payable and long-term debt . . . . . . . . . . . (89,177) (125,173)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . 0 116,300
Repayments of S distribution notes . . . . . . . . . . . . . . . . . 0 (129,000)
Distributions to stockholders. . . . . . . . . . . . . . . . . . . . 0 (39,600)
-------- --------
Net cash provided by (used in) financing activities . . . . . . . 37,658 (33,813)
</TABLE>
5
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------
Sep 28, Sep 29,
1997 1996
-------- --------
<S> <C> <C>
Effect of exchange rates changes on cash . . . . . . . . . . . . . . . (200) 31
Net decrease in cash . . . . . . . . . . . . . . . . . . . . . . . . . (2,244) (934)
Cash, beginning of period. . . . . . . . . . . . . . . . . . . . . . . 8,800 6,417
-------- --------
Cash, end of period. . . . . . . . . . . . . . . . . . . . . . . . . . $6,556 $5,483
======== ========
Supplemental disclosures:
- -------------------------
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,430 $13,393
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,180 2,947
Supplemental disclosure of noncash investing activities:
- -------------------------------------------------------
During the nine months ended September 28, 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.
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 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 September
28, 1997, and the results of operations and cash flows for the nine months ended
September 28, 1997. Operating results for the third quarter and nine months
ended September 28, 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 periods 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 in connection with the public sale of its common
stock.
Pro forma net earnings per share for the 1996 periods have 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
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" ("FAS 128"), which is effective for both the 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 the 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):
Sep 28, Dec 31,
1997 1996
-------- -------
(unaudited)
Raw materials. . . . . . . . . . . . . . . . . . $14,729 $12,563
Work in progress . . . . . . . . . . . . . . . . 11,884 12,576
Finished goods . . . . . . . . . . . . . . . . . 79,251 54,350
-------- -------
$105,864 $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 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 cumulative effect of the change
in accounting principle, recorded in the first quarter of 1997, is calculated
based upon the retroactive effect of applying the new accounting method to prior
year fixture acquisitions. The effect of the change on the third quarter and
nine months ended September 28, 1997 was to increase earnings by approximately
$1.9 million and $2.8 million respectively (or $0.04 and $0.06 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 nine months ended September 28, 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" or "IPO"), 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
8
<PAGE>
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 September 28, 1997.
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, 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 third
quarter and nine 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 IPO resulting in a decrease in compensation
expense of $1.0 million and $3.2 million, respectively, (ii) the decrease in
depreciation and operating costs of $0.0 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 $0.3 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 September 29, 1996. 1997 shares are the
weighted average of actual shares outstanding during the third quarter and nine
months periods ended September 28, 1997. Summarized below is the pro forma
financial information for the third quarter and nine months ended September 28,
1997 and September 29, 1996 (in thousands, except per share data):
9
<PAGE>
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
---------------------- ---------------------
Sep 28, Sep 29, Sep 28, Sep 29,
(unaudited) 1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
Product sales. . . . . . . . . . . . . . . . . $126,978 $139,511 $357,112 $371,622
Net royalties. . . . . . . . . . . . . . . . . 15,464 14,987 39,581 40,282
-------- -------- -------- --------
142,442 154,498 396,693 411,904
Cost of sales. . . . . . . . . . . . . . . . . . 78,068 84,284 216,286 221,397
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . . . 64,374 70,214 180,407 190,507
Selling, general & administrative expenses . . . 39,250 38,459 111,676 107,922
-------- -------- -------- --------
Earnings from operations before
reorganization charge. . . . . . . . . . . . 25,124 31,755 68,731 82,585
Reorganization charge (note 5) . . . . . . . . . 0 0 0 3,559
-------- -------- -------- --------
Earnings from operations after
reorganization charge. . . . . . . . . . . . 25,124 31,755 68,731 79,026
Non-operating income (expense):
Interest, net. . . . . . . . . . . . . . . . . (3,480) (3,843) (9,893) (11,134)
Other, net . . . . . . . . . . . . . . . . . . 55 (455) 126 (442)
-------- -------- -------- --------
(3,425) (4,298) (9,767) (11,576)
Earnings before income taxes and
cumulative effect of change in
accounting principle. . . . . . . . . . . 21,699 27,457 58,964 67,450
Income taxes . . . . . . . . . . . . . . . . . . 8,593 11,120 23,278 26,997
-------- -------- -------- --------
Earnings before cumulative effect of
change in accounting principle. . . . . . . . . 13,106 16,337 35,686 40,453
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 . . . . . . . . . . . . . . . $13,106 $16,337 $39,647 $40,453
======== ======== ======== ========
Earnings per share:
Earnings before cumulative effect of
change in accounting principle (1996
periods-pro forma, note 2). . . . . . . . . . . $0.31 $0.38 $0.83 $0.95
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). . . . . . . . . . . . . . . . . . . . $0.31 $0.38 $0.92 $0.95
======== ======== ======== ========
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. In addition to royalty fees, the Company will also receive
$13.9 million over the next four years in consideration of the grant of the
licensing agreement.
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 addition to royalty fees.
Since July 1996 the Company has been the subject of a corporate campaign (which
has included limited picketing and negative media) by the Union of Needletrades,
Industrial & Textile Employees ("UNITE"). See also "Legal Proceedings". 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.
Although the Company's net revenue from wholesale operations during the third
quarter of 1997 was relatively unchanged from the comparable period last year
(excluding the effect of reduced international sales resulting primarily from
the sale of Guess? Italia), the Company remains cautious about wholesale
operations. Continued competitive pressures (especially in the area of branded
basic denim apparel) and lower average selling prices have negatively affected
wholesale sales. The Company remains optimistic, however, that its strategy
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of deepening product offerings, increasing the number of shop-in-shops and
strengthening retail partnerships will lead to improvement in its wholesale
operations.
During the third quarter of 1997, two of the Company's executive officers, Roger
Williams, its Executive Vice President and Chief Financial Officer, and Michael
Wallen, its President of Retail Merchandising, resigned for unrelated personal
reasons. Andrea Weiss, the President of Retail Operations, has assumed Mr.
Wallen's responsibilities, and the Company is actively seeking a new Chief
Financial Officer. In the meantime, the duties previously performed by Mr.
Williams are being assumed by Maurice Marciano and the other senior members of
the finance department. The Company believes that there has been and will
continue to be little, if any, impact on its operations arising out of these
departures. The founders of the Company, Maurice, Paul and Armand Marciano, who
each have over 20 years of experience in the apparel industry, continue to be
actively involved in the management of the Company. The Company also recognizes
the substantial benefits it has received from having two very knowledgeable
independent directors and continues to actively seek two additional independent
directors.
RESULTS OF OPERATIONS
NET REVENUE. Net revenue decreased $12.1 million or 7.8% to $142.4 million in
the third quarter ended September 28, 1997 from $154.5 million in the third
quarter ended September 29, 1996. Net revenue from wholesale operations
decreased $13.2 million or 16.0% to $68.4 million from $81.6 million. The
decrease in wholesale net revenue was primarily due to a $12.3 million decline
in Guess? Italia operations. This decline was primarily the result of the sale
of Guess? Italia's wholesale operations during the second quarter of 1997. The
Company's domestic wholesale revenue was unchanged from the comparable period
last year. Net revenue from retail operations increased $0.6 million or 0.9% to
$58.5 million from $57.9 million, primarily attributable to increased volume
generated by new store openings, offset by a 11.1% decrease in comparable store
net revenue. The decline in comparable store net revenue was primarily
attributable to a soft back-to-school selling season and lower average selling
prices. Net royalties increased $0.5 million or 3.2% in the third quarter ended
September 28, 1997 to $15.5 million from $15.0 million in the third quarter
ended September 29, 1996. Net revenue from international operations comprised
9.1% and 15.3% of the Company's net revenue during the third quarter of 1997 and
1996, respectively.
Net revenue decreased $15.2 million or 3.7% to $396.7 million in the nine months
ended September 28, 1997 from $411.9 million in the nine months ended September
29, 1996. Net revenue from wholesale operations decreased $17.8 million or 7.9%
to $208.5 million from $226.3 million due principally to decreased domestic
revenue of $9.2 million as well as a $9.5 million decline in Guess? Italia
operations. This decline was primarily the result of the sale of Guess? Italia's
wholesale operations during the second quarter of 1997. The Company's domestic
sales declined primarily as a result of increased competition in branded basic
denim apparel and lower average selling prices. Net revenue from retail
operations increased $3.3 million or 2.3% to $148.6 million from $145.3 million,
primarily attributable to increased volume generated by new store openings,
partially offset by a 6.9% decrease in comparable store net revenue. The decline
in comparable store net revenue was
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primarily attributable to production delays related to fabric and a loss of
merchandise in a factory fire in the first half of 1997, as well a soft
back-to-school selling season and lower average selling prices. Net royalties
decreased $0.7 million or 1.7% in the nine months ended September 28, 1997 to
$39.6 million from $40.3 million in the nine months ended September 29, 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 12.0% and 12.8% of the Company's net revenue during the
first nine months of 1997 and 1996, respectively.
GROSS PROFIT. Gross profit decreased 8.3% to $64.4 million in the third quarter
ended September 28, 1997 from $70.2 million in the third quarter ended September
29, 1996. The decrease in gross profit resulted from decreased net revenue from
product sales, partially offset by increased net royalties. Gross profit from
product sales decreased 11.4% to $48.9 million in the third quarter ended
September 28, 1997 from $55.2 million in the third quarter ended September 29,
1996. As a percentage of net revenue, gross profit decreased to 45.2% in the
third quarter ended September 28, 1997 as compared to 45.4% in the third quarter
ended September 29, 1996. Gross profit from product sales as a percentage of net
revenue from product sales decreased to 38.5% in the third quarter ended
September 28, 1997 from 39.6% in the third quarter ended September 29, 1996.
This decrease was primarily the result of a lower gross profit rate in the
retail store operations, which resulted from fixed store occupancy costs being
spread over a lower revenue base in the 1997 period.
Gross profit decreased 5.3% to $180.4 million in the nine months ended September
28, 1997 from $190.5 million in the nine months ended September 29, 1996. The
decrease in gross profit resulted from decreased net revenue from product sales
and decreased net royalties. Gross profit from product sales decreased 6.3% to
$140.8 million in the nine months ended September 28, 1997 from $150.2 million
in the nine months ended September 29, 1996. As a percentage of net revenue,
gross profit decreased to 45.5% in the nine months ended September 28, 1997 as
compared to 46.3% in the nine months ended September 29, 1996. Gross profit from
product sales as a percentage of net revenue from product sales decreased to
39.4% in the nine months ended September 28, 1997 from 40.4% in the nine months
ended September 29, 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 decreased
0.6% in the third quarter ended September 28, 1997 to $39.3 million, or 27.6% of
net revenue, compared to $39.5 million, or 25.6% of net revenue, in the third
quarter ended September 29, 1996. SG&A expenses decreased 0.6% in the nine
months ended September 28, 1997 to $111.7 million, or 28.2% of net revenue, from
$112.3 million, or 27.3% of net revenue, in the nine months ended September 29,
1996. On a pro forma basis, SG&A expenses increased 2.1% in the third quarter
ended September 28, 1997 to $39.3 million, or 27.6% of net revenue, from $38.5
million, or 24.9% of net revenue, in the third quarter ended September 29, 1996.
The pro forma increase was principally due to an increase in selling costs
related to the expansion of the retail division and higher legal costs,
partially offset by a decrease resulting from the sale of Guess? Italia. On a
pro forma basis, SG&A expenses increased 3.5% in the nine months ended September
28, 1997 to $111.7 million, or 28.2% of net revenue,
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from $107.9 million, or 26.2% of net revenue, in the nine months ended
September 29, 1996. The pro forma increase was principally due to an
increase in SG&A costs related to the expansion of the retail division and
increased legal and sample development costs. As a percentage of net revenue,
the increases in SG&A expenses for the third quarter and nine months ended
September 28, 1997 were the result of fixed expenses being spread over a
lower revenue base in the 1997 periods.
EARNINGS FROM OPERATIONS BEFORE REORGANIZATION CHARGE. Earnings from operations
decreased 18.2% to $25.1 million, or 17.6% of net revenue, in the third quarter
ended September 28, 1997, from $30.7 million, or 19.9% of net revenue, in the
third quarter ended September 29, 1996. Earnings from operations before the
reorganization charge decreased 12.1% to $68.7 million, or 17.3% of net revenue,
in the nine months ended September 28, 1997, from $78.2 million, or 19.0% of net
revenue, in the nine months ended September 29, 1996. On a pro forma basis,
earnings from operations before reorganization charge decreased 20.9% to $25.1
million, or 17.6% of net revenue, in the third quarter ended September 28, 1997,
from $31.8 million, or 20.6% of net revenue, in the third quarter ended
September 29, 1996. The pro forma decline was primarily attributable to lower
net revenue from product sales. On a pro forma basis, earnings from operations
before reorganization charge decreased 16.8% to $68.7 million, or 17.3% of net
revenue, in the nine months ended September 28, 1997, from $82.6 million, or
20.0% of net revenue, in the nine months ended September 29, 1996. The pro forma
decline was primarily attributable to the decrease in net revenue and gross
profit rate.
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 aircraft. The above charges are based upon the net book value of the related
assets as of September 29, 1996.
INTEREST EXPENSE, NET. Net interest expense decreased 9.4% to $3.5 million in
the third quarter ended September 28, 1997 from $3.8 million in the third
quarter ended September 29, 1996. This decrease primarily resulted from lower
outstanding debt. For the third quarter ended September 28, 1997, the average
debt balance was $159.0 million with an average effective interest rate of 8.6%.
For the third quarter ended September 29, 1996, the average debt balance was
$179.7 million with an average effective interest rate of 8.6%. Net interest
expense decreased 11.1% to $9.9 million in the nine months ended September 28,
1997 from $11.1 million in the nine months ended September 29, 1996, resulting
from lower outstanding debt partially offset by higher interest rates in the
1997 period. For the nine months ended September 28, 1997, the average debt
balance was $143.9 million, with an average effective interest rate of 9.0%. For
the nine months ended September 29, 1996, the average debt balance was $160.5
million with an average effective interest rate of 8.8%.
INCOME TAXES. Prior to the IPO (which occurred during August 1996), for Federal
and certain state income tax purposes, the Company elected to be
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treated as a 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 $8.6 million in the third quarter ended September 28,
1997 and $5.9 million in the third quarter ended September 29, 1996. Income
taxes were $23.3 million in the nine months ended September 28, 1997 and $7.5
million for the nine months ended September 29, 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 $8.6 million in the third quarter
ended September 28, 1997 and $11.1 million in the third quarter ended
September 29, 1996. On a pro forma basis, income taxes were $23.3 million for
the nine months ended September 28, 1997 and $27.0 million for the nine
months ended September 29, 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 cumulative effect of the change in
accounting principle, recorded in the first quarter of 1997, is calculated based
upon the retroactive effect of applying the new accounting method to prior year
fixture acquisitions. The effect of the change on the third quarter and nine
months ended September 28, 1997 was to increase earnings by approximately $1.9
million and $2.8 million, respectively (or $0.04 and $0.06 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 nine months ended September 28, 1997.
NET EARNINGS. Net earnings decreased 35.6% to $13.1 million, or 9.2% of net
revenue, in the third quarter ended September 28, 1997, from $20.3 million, or
13.2% of net revenue, in the third quarter ended September 29, 1996. Net
earnings decreased 28.2% to $39.6 million, or 10.0% of net revenue, in the nine
months ended September 28, 1997, from $55.3 million, or 13.4% of net revenue, in
the nine months ended September 29, 1996. On a pro forma basis, net earnings
decreased 19.8% to $13.1 million, or 9.2% of net revenue, in the third quarter
ended September 28, 1997, from $16.3 million, or 10.6% of net revenue, in the
third quarter ended September 29, 1996. This decrease was primarily the result
of lower net revenue from product sales. On a pro forma basis, net earnings
decreased 2.0% to $39.6 million, or 10.0% of net revenue, in the nine months
ended September 28, 1997, from $40.5 million, or 9.8% of net revenue, in the
nine months ended September 29, 1996. This decrease was primarily the result of
lower net revenue and gross profit rate.
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 September 28,
1997, the Company had working capital of $131.0 million, compared to $76.8
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million at December 31, 1996. The $54.2 million increase in working capital was
due principally to a $17.0 million increase in receivables and a $26.4 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, a buildup 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
September 28, 1997, the Company had $59.3 million in outstanding borrowings
under the revolving credit facility and outstanding letters of credit of $1.0
million. As of September 28, 1997, the Company had $40.7 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 September 28, 1997,
the Company had $11.1 million outstanding under this facility.
Capital expenditures, net of lease incentives granted, totaled $32.1 million in
the nine months ended September 28, 1997. The Company estimates that its
capital expenditures for fiscal 1997 will be approximately $43.0 million
primarily for the expansion of its retail stores, shop-in-shops and operations.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the next twelve months, 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
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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 issued Statement No. 128, "Earnings
per Share" ("FAS 128"), 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.
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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 removed 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.
After removal, certain components of the complaint were remanded back to State
Court, resulting in two litigation cases. Later, plaintiffs dismissed the
remaining federal claims without prejudice, leaving only the state case
currently proceeding. In the State Case, a purported class action, plaintiffs
assert claims for violation of state wage and hour laws, wrongful discharge, and
breach of contract arising out of the Company's relationship with its
independent contractors and actions taken by the Company's independent
contractors with respect to the employees of such independent contractors.
Plaintiffs contend that the Company is liable for its contractors' violations
because it is a "joint employer" with its independent contractors. In the State
Case, plaintiffs also allege that the Company breached its agreement with the
United States Department of Labor ("USDOL") regarding the monitoring of its
independent contractors.
The Union of Needletrades, Industrial & Textile Employees ("UNITE") has filed
with the National Labor Relations Board ("NLRB") various charges that the
Company 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 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
$80,000. 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 settlement 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 UNITE's corporate campaign at the Company's headquarters and at certain of
the Company's independent contractors, and has unlawfully ceased doing business
with certain 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 allegedly engaging in such conduct. Charge No. 21-CA-31807 is
currently under investigation by the NLRB, and no final decision has
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been made by the General Counsel of the NLRB as to whether the NLRB will be
issuing a complaint in this case. The NLRB's General Counsel has informed
the Company that he is evaluating several legal theories on which to issue a
complaint including, but not limited to, the theory that the Company is a
joint employer. The NLRB's General Counsel has also indicated that in the
absence of a "joint employer" finding, a 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's General Counsel 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 $80,000 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, were reinstated.
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. This case was amended by UNITE
on October 6, 1997, to add three additional independent contractors of the
Company as charged parties and to allege that certain of the contractors'
employees were unlawfully polled and interrogated regarding their union
sympathies and threatened with plant closure. In another case filed on June 30,
1997 and subsequently amended on August 15, 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; (c) bestowing certain benefits to Company supporters while
denying similar benefits to UNITE supporters; and (d) engaging in other conduct
designed to have a negative effect on UNITE's corporate campaign. In Case No.
21-CA-32211, filed on August 18, 1997, UNITE alleges that the Company and one of
its independent contractors, in connection with an anti-union march, interfered
with the Section 7 rights of the contractor's employees including, without
limitation, threatening the contractor's employees with relocation of work to
Mexico and loss of work, promising and conferring benefits on the contractor's
employees while denying similar benefits to UNITE supporters, interrogating and
polling the contractor's employees and pressuring them to participate in the
march. In Case No. 21-CA-32212, also filed on August 18, 1997, UNITE alleges
that the Company and one of its licensees engaged in similar unlawful conduct in
connection with two anti-
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union marches. In two other cases (No. 21-CA-32136, filed on July 3, 1997
and amended on August 15, 1997, and No. 21-CA-32317, filed on October 3,
1997), UNITE alleges that the Company unlawfully discharged four employees
because of their union activities.
On October 30, 1997, the Company was informed that the Regional Director for
Region 21 of the NLRB has made a determination on the unfair labor practice
charges filed in Cases No. 21-CA-32131 and No. 21-CA-32136. The NLRB Regional
Director indicated her intent to issue a complaint against the Company alleging
that the Company unlawfully (a) threatened, coerced, restrained and interfered
with its employees in the exercise of their rights under Section 7 of the NLRA,
(b) dominated, administered, supported, assisted and failed to disband an
allegedly unlawful employee committee, (c) discharged an employee allegedly
because of the employee's union activities, (d) created onerous working
conditions for another employee, gave that employee a written warning, a poor
performance evaluation and probation and subsequently discharged that employee
allegedly because of the employee's union activities and (e) issued a written
warning to another employee allegedly because the employee did not engage in
anti-union demonstrations.
The NLRB Regional Director further indicated her intent to withdraw her approval
of the settlement agreement in Cases No. 21-CA-31524, No. 21-CA-31565 and No.
21-CA-31648 and issue a complaint against the Company in these cases which will
be consolidated with the complaint in Cases No. 21-CA-32131 and No. 21-CA-32136.
The NLRB Regional Director also indicated her intent to seek authorization from
the NLRB's General Counsel to seek injunctive relief in federal district court
under Section 10(j) of the NLRA requiring the Company to reinstate the two
discharged employees, disestablish the employee committee and retrain from
violating the NLRA pending the outcome of the NLRB's administrative proceedings
on these charges. The NLRB Regional Director has given the Company the
opportunity to enter into negotiations over a new settlement agreement which
would resolve these five cases. The Company's senior management is currently
reviewing the Regional Director's proposal and evaluating its options.
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.
In connection with its campaign against the company, UNITE has accused the
Company's independent contractors of engaging in illegal industrial homework
operations and violating minimum wage and overtime laws. It also accused the
Company of violating its agreement with the USDOL with respect to its program to
monitor its contractors for compliance with federal labor laws. In addition, as
a result of increased public attention to the apparel industry "sweatshop"
issue, federal and state labor investigators have continued to conduct frequent
inspections of apparel contractors, and federal labor officials have recently
reviewed the Company's contractor compliance monitoring program.
To the best of the its knowledge, the Company's program to monitor its
independent contractors for compliance with federal labor laws is in compliance
with its voluntary agreement with the USDOL and meets USDOL guidelines for such
programs. However, there can be no assurance that,
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despite such program, the Company's contractors will not violate federal or
state labor laws. To the best of the Company's knowledge, no illegal
industrial homework of the Company's apparel has been found at any contractor
in the past year and no violations of minimum wage or overtime laws have been
found at the Company's contractors in the nine months ended September 28,
1997.
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.
ITEM 4. Submission of Matters to a Vote of Security Holders
None.
ITEM 5. Other Information
None.
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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)
27.1.* Financial Data Schedule
- -----------------------------
(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
September 28, 1997.
23
<PAGE>
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/ Terence Tsang
--------------------------------
Terence Tsang
Vice President - Finance,
Corporate Controller and Treasurer
(Principal Financial Officer)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-28-1997
<CASH> 6,556
<SECURITIES> 0
<RECEIVABLES> 46,322
<ALLOWANCES> 5,221
<INVENTORY> 105,864
<CURRENT-ASSETS> 193,351
<PP&E> 162,228
<DEPRECIATION> 73,395
<TOTAL-ASSETS> 313,079
<CURRENT-LIABILITIES> 62,314
<BONDS> 164,300
<COMMON> 137
0
0
<OTHER-SE> 77,191
<TOTAL-LIABILITY-AND-EQUITY> 313,079
<SALES> 357,112
<TOTAL-REVENUES> 396,693<F1>
<CGS> 216,286
<TOTAL-COSTS> 328,605
<OTHER-EXPENSES> (126)
<LOSS-PROVISION> 352
<INTEREST-EXPENSE> 9,893
<INCOME-PRETAX> 58,964
<INCOME-TAX> 23,278
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,961)<F2>
<NET-INCOME> 39,647
<EPS-PRIMARY> 0.92<F3>
<EPS-DILUTED> 0
<FN>
<F1> Includes net royalties of $39.6 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 cumulative effect of
the change in accounting principle, recorded in the first quarter of 1997, is calculated based upon the
retroactive effect of applying the new accounting method to prior year fixture acquisitions. The effect of the
change on the third quarter and nine months ended September 28, 1997 was to increase earnings by
approximately $1.9 million and $2.8 million, respectively (or $0.04 and $0.06 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 nine months ended September 28, 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 $0.83
per share.
</FN>
</TABLE>
