GUESS INC ET AL/CA/, 10-K405, 1998-03-31

GUESS INC ET AL/CA/
10-K405, 1998-03-31
WOMEN'S, MISSES', CHILDREN'S & INFANTS' UNDERGARMENTS

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

COMMISSION FILE NUMBER 1-11893

GUESS ?, INC.
(Exact name of registrant as specified in its charter)

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<S> <C>
DELAWARE 95-3679695
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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1444 SOUTH ALAMEDA STREET
LOS ANGELES, CALIFORNIA 90021
(213) 765-3100
(Address, including zip code, and telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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<S> <C>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, par value $0.01 per share New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark whether the 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.

/X/ Yes / / No

Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

As of March 6, 1998, the aggregate market value of the voting and non-voting
common equity stock held by non-affiliates of the registrant was $42,095,644.

As of March 6, 1998, the registrant had 42,902,035 shares of Common Stock
outstanding.

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TABLE OF CONTENTS

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ITEM DESCRIPTION PAGE
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PART I

1 Business............................................................................................ 1

2 Properties.......................................................................................... 8

3 Legal Proceedings................................................................................... 8

4 Submission of Matters to a Vote of Security Holders................................................. 11

PART II

5 Market for Registrant's Common Equity and Related Stockholder Matters............................... 12

6 Selected Financial Data............................................................................. 12

7 Management's Discussion and Analysis of Financial Condition and Results of Operations............... 14

7A Quantitative and Qualitative Disclosures About Market Risks......................................... 23

8 Financial Statements and Supplementary Data......................................................... 23

9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 23

PART III

10 Directors and Executive Officers of the Registrant.................................................. 23

11 Executive Compensation.............................................................................. 23

12 Security Ownership of Certain Beneficial Owners and Management...................................... 23

13 Certain Relationships and Related Transactions...................................................... 23

PART IV

14 Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K........................ 24
</TABLE>
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PART I

ITEM 1. BUSINESS

Important Factors Regarding Forward-Looking Statements

Various forward-looking statements have been made in this Form 10-K.
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.

For additional information regarding forward-looking statements, refer to
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."

GENERAL

Guess ?, Inc. ("the Company" or "Guess"), founded in 1981 by the Marciano
brothers, designs, markets, distributes and licenses one of the world's leading
lifestyle collections of casual apparel, accessories and related consumer
products. The Company's apparel for men and women is marketed under numerous
trademarks including Guess, Guess ?, Guess U.S.A., Guess Collection and Guess ?
and Triangle Design. The lines include full collections of denim and cotton
clothing, including jeans, pants, overalls, skirts, dresses, shorts, blouses,
shirts, jackets and knitwear. In addition, the Company has granted licenses to
manufacture and distribute a broad range of products that complement the
Company's apparel lines, including clothing for infants and children,
activewear, footwear, eyewear, watches, home products and other fashion
accessories. Revenue generated from wholesale and retail operations and from
licensing activities, were 48.5%, 41.9% and 9.6%, respectively, of net revenue
in 1997. The Company's total net revenue in 1997 was $515.4 million and net
earnings (including the favorable effect of a $4.0 million change in accounting)
were $37.5 million.

Company Products. 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 net royalties from worldwide licensing activities. The
following table sets forth the net revenue of the Company through its channels
of distribution.

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<CAPTION>
YEAR ENDED DECEMBER 31,
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1997 1996 1995
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(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Revenue:
Wholesale operations............................. $ 250,040 48.5% $ 288,046 52.2% $ 270,931 55.7%
Retail operations................................ 215,873 41.9 209,828 38.1 169,428 34.8
Net revenue from product sales................... 465,913 90.4 497,874 90.3 440,359 90.5
Net royalties.................................... 49,459 9.6 53,288 9.7 46,374 9.5
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Total net revenue................................ $ 515,372 100.0% $ 551,162 100.0% $ 486,733 100.0%
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</TABLE>

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PRODUCTS

The Company's apparel products are organized into two primary categories:
men's apparel and women's apparel (including Guess Collection). A major portion
of the Company's men's and women's apparel lines consists of basic, recurring
styles which the Company believes are less susceptible to fashion obsolescence
and are less seasonal in nature than fashion product styles. Basic product
styles provide the Company with a base of business that usually carries over
from season to season and year to year. Basic products are primarily made of
denim and include jeans, skirts, dresses, overalls and shorts in a variety of
fits, washes and styles. To take advantage of contemporary trends, the Company
complements its basic styles with more fashion-oriented items. Fashion products
range in style from contemporary sportswear to casual apparel and include
colored denim items, pants, shirts, jackets and knitwear made of a variety of
materials including fine cotton, man-made fabric and leather. A limited number
of best-selling fashion items in a collection may be included in one or more
subsequent collections, and a select few may be added to the Company's basic
styles.

The Company's line of women's apparel also includes the Guess Collection, a
collection of women's skirts, tops, jackets, blazers and blouses incorporating a
sophisticated combination of colors and styles. These products are currently
sold exclusively through the Company-owned and -operated retail stores and
primarily appeals to the contemporary segment of the apparel market.

Licensed Products. The high level of desirability of the Guess brand name
among consumers has allowed the Company to selectively expand its product
offerings and distribution channels worldwide through licensing arrangements.
The Company currently has 39 licensees. Worldwide sales of licensed products (as
reported to the Company by its licensees) were approximately $669 million in
1997. The Company's net royalties from such sales including fees from new
licensees were $49.5 million in 1997. Approximately 48% of the Company's gross
royalties were derived from its top four licensed product lines in 1997.

DESIGN

Under the direction of Maurice Marciano, Guess garments are designed by an
in-house staff of three design teams (men's, women's and Guess Collection)
located in Los Angeles, California. Guess design teams travel throughout the
world in order to monitor fashion trends and discover new fabrics. Fabric shows
in Europe, Asia and the United States provide additional opportunities to
discover and sample new fabrics. These fabrics, together with the trends
uncovered by the Company's designers, serve as the primary source of inspiration
for the Company's lines and collections. The Company also maintains a fashion
library consisting of antique and contemporary garments as an additional source
of creative concepts. In addition, design teams regularly meet with members of
the sales, merchandising and retail operations to further refine the Company's
products in order to meet the particular needs of the Company's markets.

DOMESTIC WHOLESALE CUSTOMERS

The Company's domestic wholesale customers consist primarily of better
department stores and select upscale specialty stores, which have the image and
merchandising expertise that Guess requires for the effective presentation of
its products. Leading wholesale customers include Federated Department Stores,
Inc., The May Department Stores Company and Dillard Department Stores, Inc.,
among others. During 1997, the Company sold its products directly to
approximately 3,000 retail doors within the United States.

A key element of the Company's merchandising strategy is the shop-in-shop
merchandising format, an exclusive selling area within a department store that
presents a full array of Guess products using Guess signage and fixtures. At
December 31, 1997, there were approximately 1,270 shop-in-shops (excluding
shop-in-shops installed by licensees) that feature Guess products (other than
the Guess Collection). The Company intends to add or remodel approximately 60
shop-in-shops by the end of 1998.

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Sales representatives are located in the Company's showrooms in New York,
Los Angeles, Dallas, Chicago and Hong Kong. They coordinate with customers the
inventory level and product mix that should be carried in each store to maximize
retail sell-through and enhance the customers' profit margins. Such inventory
level and product mix are then used as the basis for developing sales
projections and product needs for each wholesale customer and scheduling
production. The merchandisers work with the store to ensure that the Company's
products are appropriately displayed.

Certain of the Company's domestic wholesale customers, including some under
common ownership, have accounted for significant portions of the Company's net
revenue. During 1997, Bloomingdale's, Macy's and other affiliated stores owned
by Federated Department Stores, Inc. together accounted for approximately 8.5%
of the Company's net revenue. During the same period, Dillard Department Stores
and The May Department Stores Company accounted for approximately 6.4% and 6.3%
of the Company's net revenue, respectively.

DOMESTIC RETAIL OPERATIONS

At December 31, 1997, the Company's domestic retail operations consisted of
87 retail and 49 factory outlet stores owned and operated directly by Guess in
the United States, which principally sell Guess label products. Guess retail
stores outside the United States, with the exception of the Company-owned and
- -operated store in Florence, Italy, are owned and operated by the Company's
distributors and licensees. See "International Business". Since the beginning of
1993 through December 31, 1997, the Company has opened a total of 63 retail and
35 factory outlet stores and has closed 13 retail and 8 factory outlet stores.
The percentage of net revenue generated by the retail network has increased from
29.0% to 46.3% of the Company's net revenue from product sales from 1993 through
1997.

Retail Stores. The Company's 87 domestic retail stores range in size from
approximately 3,400 to 8,500 square feet. The Company's retail stores carry a
full assortment of men's and women's Guess merchandise, including most of its
licensed products. During 1997, the Company opened 22 retail stores and plans to
open one store and close six stores during 1998. The planned slow-down in the
roll-out of new retail stores during 1998 is primarily due to the Company's
desire to focus its efforts on improving the profitability and efficiency of
existing stores.

Factory Outlet Stores. The Company's 49 domestic factory outlet stores range
in size from approximately 4,000 to 7,500 square feet and are located in outlet
malls and strip centers generally operating outside the shopping radius of the
Company's wholesale customers and its retail stores. These stores sell selected
styles of Guess apparel and licensed products at a discount to value-conscious
customers, enabling the Company to effectively control the distribution of its
excess inventory, thereby protecting the Guess image. During 1997, the Company
opened four and closed one factory store. The Company plans to open two and
close one factory outlet store in 1998.

INTERNATIONAL BUSINESS

Guess derives net revenue and earnings outside the United States from two
principal sources: (i) sales of Guess brand apparel directly to 14 foreign
distributors who distribute such apparel to better department stores, upscale
specialty retail stores and Guess-licensed retail stores operated by Guess
distributors or licensees and (ii) royalties from licensees who manufacture and
distribute Guess brand products outside the United States.

The Company sells products through distributors and licensees throughout
Asia, Central and South America, Europe, South Africa and the Middle East. More
recently, the Company has entered into distribution arrangements for Vietnam,
the Dominican Republic and Guam.

At December 31, 1997, 269 Guess retail and outlet stores were operated
internationally by licensees and distributors. The Company's retail store
license agreements generally provide detailed guidelines for

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store fixtures, merchandising and marketing programs and the appearance,
merchandising and service standards of these stores are closely monitored to
ensure the Guess image is maintained. The Company has been advised by its
distributors and licensees that they plan to open approximately 30 new stores in
1998. Guess also owns and operates a flagship Guess retail store located in
Florence, Italy.

LICENSE AGREEMENTS AND TERMS

The Company's manufacturing license agreements customarily provide for a
three-to five-year initial term with a possible option to renew prior to
expiration for an additional multi-year period. In addition to licensing
products which complement the Company's apparel products, Guess has granted
licenses for the manufacture and sale of Guess branded products similar to the
Company's, including men's and women's denim and knitwear, in markets such as
the Philippines, Canada, Argentina, Mexico, Chile, South Africa, South Korea,
Brazil and Japan. Licenses granted to certain licensees which have produced
high-quality products and otherwise have demonstrated solid operating
performance, such as Guess Watches and Guess Eyewear, have been renewed and in
some cases expanded to include new products or markets. The typical license
agreement requires that the licensee pay the Company the greater of a royalty
based on a percentage of the licensee's net sales of licensed products or a
guaranteed minimum royalty that typically increases over the term of the license
agreement. Generally, licensees are required to spend a percentage of the net
sales of licensed products for advertising and promotion of the licensed
products. In addition, certain licensees are required to contribute toward the
protection of the Company's trademarks within the territories granted to such
licensees, thereby assisting Guess in its efforts to prevent counterfeiting and
other trademark infringement in such territories.

The Company's Licensing Department strictly monitors product design,
development, merchandising and marketing. All Guess brand products, advertising,
promotional and packaging materials must be approved in advance by Guess. The
Licensing Department meets regularly with licensees to ensure consistency with
Guess's overall marketing, merchandising and design strategies, and to ensure
uniformity and quality control.

In addition to the retail stores operated outside of the United States as
mentioned above in the "International Business," section Guess licensees operate
43 retail and outlet stores in the United States.

In May 1997, the Company formed a joint venture in Europe with the Fingen
Group, a leading European apparel manufacturer and distributor owned by the
Fratini family. The new joint venture, Maco Apparel, S.p.a., has entered into a
license agreement with the Company for the manufacture and sale of Guess
jeanswear products throughout Europe and has purchased certain of the Company's
operations in Italy. Maco Apparel, S.p.a. produces a full collection of casual
lifestyle jeanswear apparel, including men's and women's jeans. The Company will
continue to design the collections to be sold in the European market. In
addition, an affiliate of Maco Apparel, S.p.a., Fingen Apparel N.V., has entered
in a retail store license agreement with the Company for the opening and
operation of Guess retail stores throughout Europe.

ADVERTISING AND MARKETING

The Company's advertising, public relations and marketing strategy is to
promote a consistent high impact image which endures regardless of changing
consumer trends. Since the Company's inception, Paul Marciano has had principal
responsibility for the Guess brand image and creative vision. All worldwide
advertising and promotional material is controlled through the Company's
Advertising Department based in Los Angeles. Guess Jeans, Guess U.S.A. and Guess
Inc. images have been showcased in international and domestic print campaigns
found in dozens of major publications, and outdoor and broadcast media
throughout the United States.

ADVERTISING. The Company's advertising strategy promotes the Guess image and
products, with an emphasis on image. The Company's signature black and white
print advertisements, as well as color print

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advertisements, have garnered prestigious awards, including Clio, Belding and
Mobius awards for creativity and excellence. Such awards, which the Company has
received on numerous occasions, are generally awarded on the basis of the
judgment of prominent members of the advertising industry. Guess has maintained
a high degree of consistency in its advertisements, using similar themes and
images. The Company requires its licensees and distributors to invest a
percentage of their net sales of licensed products and net purchases of Guess
products, respectively, in advertising, promotion and marketing. During 1997,
the Company's advertising expenditures, together with amounts spent by its
licensees and distributors (as reported to the Company by such licensees and
distributors), exceeded $43 million.

The Company's in-house Advertising Department is responsible for media
placement of all advertising worldwide, which includes approval of all
advertising campaigns from its licensees and distributors. The Company uses a
variety of media which emphasizes print and outdoor advertising. The Company has
focused advertisement placement in national and international contemporary
fashion/beauty and lifestyle magazines including Vanity Fair, Harpers Bazaar,
Elle, W and Details. By retaining control over its advertising programs, the
Company is able to maintain the integrity of the Guess brand image while
realizing substantial cost savings when compared to the use of outside agencies.

The Company further strengthens communications with customers through Guess
Interactive, the Company's web site (http://www.guess.com). This global medium
enables the Company to provide timely information in an entertaining fashion to
consumers on the Company's history, Guess products and store locations and
allows the Company to receive and respond directly to customer feedback.

SOURCING AND PRODUCT DEVELOPMENT

The Company sources products through numerous suppliers, many of whom have
established relationships with the Company. The Company seeks to achieve the
most efficient means for timely delivery of its high quality products. The
Company's fabric specialists work with fabric mills in the United States, Europe
and Asia to develop woven and knitted fabrics that enhance the products'
comfort, design and appearance. For a substantial portion of the Company's
apparel products, fabric purchases take place generally four to five months
prior to the corresponding selling season. Delivery of certain basic products
are generally done through the Company's Quick Response EDI (Electronic Data
Interchange) replenishment system which ensures shipment of such products
generally within 48 hours of receipt of customer orders.

The Company engages both domestic and foreign contractors for its
production. During 1997, the Company purchased approximately 54% of its raw
materials, labor and finished goods in the United States, 22% in Asia, 13% in
Mexico and 11% elsewhere. In recent years, Guess has been increasing its
sourcing of fabrics and production outside the United States. The production and
sourcing staffs in Los Angeles oversee all aspects of fabric acquisition,
apparel manufacturing, quality control and production, as well as researching
and developing new sources of supply. The Company operates product sourcing and
quality control offices in Los Angeles and Hong Kong.

The Company does not own any production equipment other than cutting
machinery. Apparel products are produced for the Company by approximately 100
different contractors. None of the contractors engaged by the Company accounted
for more than 5% of the Company's total production during 1997. The Company has
long-term relationships with many of its contractors, although it does not have
long-term written agreements with them. The Company uses a variety of raw
materials, principally consisting of woven denim, woven cotton and knitted
fabrics and yarns. The Company must make commitments for a significant portion
of its fabric purchases well in advance of sales, although the Company's risk is
reduced because a substantial portion of the Company's products (approximately
40% in 1997) are sewn in basic denim.

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QUALITY CONTROL

The Company's quality control program is designed to ensure that products
meet the Company's high quality standards. The Company monitors the quality of
its fabrics prior to the production of garments and inspects prototypes of each
product before production runs commence. The Company also performs random
in-line quality control checks during and after production before the garments
leave the contractor. Final random inspections occur when the garments are
received in the Company's distribution centers. The Company believes that its
policy of inspecting its products at its distribution centers and at the
contractors' facilities is important in maintaining the quality and reputation
of its products.

WAREHOUSE AND DISTRIBUTION CENTERS

The Company utilizes distribution centers at three strategically located
sites. Distribution of the Company's products in the United States is
centralized in the Los Angeles, California facility which leased from a related
party and operated by the Company. The Company also holds a 10% ownership
interest in a licensee which operates a distribution center in Florence and
services Europe. Additionally, the Company utilizes a contract warehouse in Hong
Kong which services the Pacific Rim.

In order to ensure that each of its retail customers receive merchandise in
satisfactory condition, substantially all Company products are processed through
one of the Company's distribution centers before delivery to the retail
customer. Each customer is assigned to one of the Company's distribution
centers, depending on the customers' location.

At its distribution center in Los Angeles, the Company has also developed a
fully integrated and automated distribution system. The bar code scanning of
merchandise, picking tickets and distribution cartons, together with radio
frequency communications, provide timely, controlled, accurate and instantaneous
updates to the distribution information systems.

COMPETITION

The apparel industry is highly competitive and fragmented, and is subject to
rapidly changing consumer demands and preferences. The Company believes that its
success depends in large part upon its ability to anticipate, gauge and respond
to changing consumer demands and fashion trends in a timely manner and upon the
continued appeal to consumers of the Guess image. Guess competes with numerous
apparel manufacturers and distributors and several well-known designers which
have recently entered or re-entered the designer denim market. The Company's
retail and factory outlet stores face competition from other retailers,
including some of the Company's major wholesale customers. The Company's
licensed apparel and accessories also compete with a substantial number of
designer and non-designer lines and various other well-known brands. Many of the
Company's competitors have greater financial resources than Guess. Although the
level and nature of competition differ among its product categories, Guess
believes that it competes on the basis of its brand image, quality of design,
workmanship and product assortment.

TRADEMARKS

The Company owns numerous trademarks, including Guess?, Guess, Guess? and
Triangle Design, Baby Guess, Guess Kids, Guess U.S.A. and Guess Collection. At
December 31, 1997, the Company had more than 2,100 U.S. and international
registered trademarks or trademark applications pending with the trademark
offices of the United States and in over 170 countries around the world. From
time to time, the Company adopts new trademarks in connection with the marketing
of new product lines. The Company considers its trademarks to have significant
value in the marketing of its products and acts aggressively to register and
protect its trademarks worldwide.

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Like many well-known brands, the Company's trademarks are subject to
infringement. Guess has a staff devoted to the monitoring and aggressive
protection of its trademarks worldwide.

WHOLESALE BACKLOG

The Company maintains a model stock program in its basic denim products
which allows Guess to generally replenish a customer's inventory within 48
hours. Guess generally receives orders for its fashion apparel 90 to 120 days
prior to the time the products are delivered to stores. At March 8, 1998, the
Company had unfilled wholesale orders, consisting primarily of orders for
fashion apparel, of approximately $71.3 million, compared to $85.6 million for
such orders at March 9, 1997. Guess expects to fill substantially all of these
orders in 1998. The backlog of wholesale orders at any given time is affected by
various factors, including seasonality and the scheduling of manufacturing and
shipment of products. Accordingly, a comparison of backlogs of wholesale orders
from period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments.

EMPLOYEES

Guess believes that its employees ("associates") are one of its most
valuable resources. At December 31, 1997, there were approximately 2,800
associates. Associates include approximately 900 and 1,900 in wholesale
operations and retail operations, respectively.

Guess is not a party to any labor agreements and none of its associates are
represented by labor unions. The Company considers its relationship with its
associates to be good and has not experienced any interruption of its operations
due to labor disputes. In addition, the Company was among the first in the
apparel industry to implement a program to monitor the compliance of
subcontractors with Federal minimum wage and overtime pay requirements. See Item
3. "Legal Proceedings."

ENVIRONMENTAL MATTERS

The Company is subject to federal, state and local laws, regulations and
ordinances that (i) govern activities or operations that may have adverse
environmental effects (such as emissions to air, discharges to water, and the
generation, handling, storage and disposal of solid and hazardous wastes) or
(ii) impose liability for the costs of clean up or other remediation of
contaminated property, including damages from spills, disposals or other
releases of hazardous substances or wastes, in certain circumstances without
regard to fault. Certain of the Company's operations routinely involve the
handling of chemicals and wastes, some of which are or may become regulated as
hazardous substances. The Company has not incurred, and does not expect to
incur, any significant expenditures or liabilities for environmental matters. As
a result, the Company believes that its environmental obligations will not have
a material adverse effect on its financial condition or results of operations.

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ITEM 2. PROPERTIES

Certain information concerning Guess's principal facilities, all of which
are leased, is set forth below:

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APPROXIMATE
AREA IN
LOCATION USE SQUARE FEET
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1444 South Alameda Street Principal executive and administrative offices, design facilities, 514,000
Los Angeles, California sales offices, distribution and warehouse facilities, production
control, sourcing

1385 Broadway Administrative offices, public relations, showrooms 43,200
119 W. 40th Street
New York, New York

Kowloon, Hong Kong Distribution and licensing coordination control 3,000

Florence, Italy Administrative office and retail store 4,100
</TABLE>

The Company's corporate, wholesale and retail headquarters and its
production, warehousing and distribution facilities are located in Los Angeles,
California and consist of seven adjacent buildings totaling approximately
514,000 square feet. Certain of these facilities are leased from limited
partnerships in which the sole partners are trusts controlled by and for the
benefit of Maurice Marciano, Paul Marciano and Armand Marciano and their
families (the "Principal Stockholders") pursuant to leases that expire in July
2008. The total lease payments to these limited partnerships are $230,000 per
month with aggregate minimum lease commitments to these partnerships at December
31, 1997 totaling approximately $25.7 million. See "Item 13. Certain
Relationships and Related Transactions."

In addition, Guess leases its showrooms, advertising, licensing, sales and
merchandising offices, remote warehousing facility and retail and factory outlet
store locations under non-cancelable operating lease agreements expiring on
various dates through May 2012. These facilities are located principally in the
United States, with aggregate minimum lease commitments, at December 31, 1997,
totaling approximately $179.8 million.

The current terms of the Company's store leases, including renewal options,
expire as follows:

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NUMBER OF
YEARS LEASE TERMS EXPIRE STORES
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<S> <C>
1998-2000.......................................................................... 28
2001-2003.......................................................................... 32
2004-2006.......................................................................... 40
2007-2009.......................................................................... 35
Thereafter......................................................................... 1
</TABLE>

Guess believes that its existing facilities are well maintained, in good
operating condition and are adequate to support its present level of operations.
See Notes 8 and 9 of Notes to Financial Statements for further information
regarding current lease obligations.

ITEM 3. LEGAL PROCEEDINGS

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Plaintiffs contend that the Company is liable for its contractors' violations
because it is a "joint employer" with its independent contractors. 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. Although a settlement of these charges was proposed, it was not
approved by the NLRB, and the charges currently are set for an administrative
hearing beginning on March 30, 1998. In Case No. 21-CA-31807, 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 where ongoing union organizing campaigns are being
conducted. In this case, UNITE alleges that the Company has violated the
proposed settlement in cases No. 21-CA-31524, No. 21-CA-31565 and No.
21-CA-31648 by allegedly engaging in such conduct. Case No. 21-CA-31807 is
currently under investigation by the NLRB. The NLRB has informed the Company it
is evaluating several theories on which it may issue a complaint.

On August 7, 1997 UNITE filed Case No. 21-CA-32201, alleging the Company
violated the NLRA by filing retaliatory state and federal civil lawsuits against
UNITE and UNITE's employees, seeking fees and costs incurred defending such
lawsuits. These lawsuits primarily concern the legality of UNITE's picketing
activities against the Company, as well as trademark and other similar
violations under state and federal law. The NLRB determined not to issue a
complaint with respect to the Company's federal trademark suit, and to issue a
compliant with respect to certain of the Company's state law claims.

On November 14, 1997, UNITE filed Case No. 21-CA-32433 against the Company.
In this case, UNITE alleges the Company has interfered with, restrained and
coerced employees in the exercise of their Section 7 rights by filing and
prosecuting two other civil lawsuits against UNITE. The first of these lawsuits
concerns UNITE's alleged breach of a 1995 settlement agreement with the Company.
The second civil lawsuit involves the Company's claim for libel brought against
UNITE. In both of these cases, UNITE seeks, among other things, recovery of the
fees and costs in defending the civil lawsuits. The NLRB has informed the
Company that further processing of this charge will be held in abeyance pending
outcome of the underlying civil lawsuit.

On June 19, 1997 (Case 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 LLP ("MSK") and certain employees of the Company and
MSK, 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 certain of the
contractors' employees were unlawfully polled and interrogated regarding their
union sympathies and threatened with plant closure. In this case, it is further
alleged the Company and its independent contractors were jointly liable for the
independent contractors' employees. On December 9 and 11, 1997, the Regional
Director for Region 21 of the NLRB ("Regional Director") advised the Company
that the portions of Case No. 21-Ca-32106 against MSK and the portion of that
charge which alleged the Company and its independent contractors were joint
employers would be dismissed. The NLRB has issued a formal complaint regarding
the allegations against the Company that it had unlawfully polled and
interrogated employees of its independent contractors regarding their union
and/or protected concerted activities.

9
<PAGE>
In Case No. 21-CA-32131 filed on June 30, 1997 and subsequently amended,
UNITE filed with the NLRB charges alleging that the Company 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)
interrogating and polling employees regarding their and other employees' union
sympathies and activities; (b) organizing anti-union demonstrations; (c)
promising benefits to employees if they withdrew support for UNITE; (d)
threatening employees due to their support and activities on behalf of UNITE;
(e) assisting and supporting an unlawful employee committee; and (f) engaging in
other conduct designed to have a negative effect on UNITE's corporate campaign.
In Case No. 21-CA-32136, filed on July 3, 1997 and subsequently amended, UNITE
alleges that the Company unlawfully discharged two employees because of their
union activities.

In November 1997, the Regional Director issued a consolidated complaint
against the Company based on the unfair labor practice charges filed in Cases
No. 21-CA-32131 and No. 21-CA-32136. The consolidated complaint alleges 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
administrative hearing on the consolidated complaint is scheduled to begin on
March 30, 1998. The Regional Director has determined to consolidate Cases No.
21-CA-31524, No. 21-CA-31565 and No. 21-CA-31648 with Cases No. 21-CA-32131 and
No. 21-CA-32136.

On December 11, 1997, UNITE filed Case No. 21-CA-32427 alleging the Company
unlawfully discharged certain employees in October 1997 because of certain union
activities and unlawfully threatened employees due to their union activities. On
February 10, 1998, the NLRB determined to issue a complaint against the Company
alleging the Company unlawfully terminated eleven employees due to their union
activities and to consolidate this complaint with the consolidated complaint
issued in Cases No. 21-CA-32131, 21-CA-32136, 21-CA-31524, 21-CA-31565 and
21-CA-31648. On October 30, 1997, The Regional Director indicated her intent to
request 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 (in Case No. 21-CA-32136),
disestablish the employee committee and require the Company to refrain from
violating the NLRA pending the outcome of the NLRB's administrative proceedings
on these charges. On December 31,1997, the NLRB informed the Company that
UNITE's request for injunctive relief has been deferred until the close of the
evidentiary record at the administrative hearing on the consolidated complaint.

The Regional Director has given the Company the opportunity to enter into
negotiations over a settlement agreement which would resolve Cases No.
21-CA-32131, 21-CA-32136, 21-CA-31524, 21-CA-31565, 21-CA-31648 and 21-CA-32427,
as well as other pending charges. The Company's senior management is currently
reviewing the Regional Director's proposal and evaluating its options.

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 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

10
<PAGE>
meets USDOL guidelines for such programs. However, there can be no assurance
that, 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 occurring 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 twelve months ended December
31, 1997.

On February 24, 1998, the Company and Maurice Marciano, Paul Marciano and
Armand Marciano, as individuals, were named as defendants in a putative class
action entitled John N. Robinson v. Guess ?, Inc., Maurice Marciano, Paul
Marciano and Armand Marciano, case number BC186583, filed in the Los Angeles
Superior Court. The complaint (the "Complaint") purports to state a claim under
Sections 11.12(2) and 15 of the Securities Act of 1933 for alleged
misrepresentations in connection with the Company's initial public offering (the
"IPO") in August 1996. Mr. Robinson purports to represent a class of all
purchasers of the Company's stock in the IPO and seeks unspecified damages. The
case has just been filed, and a response by the defendants is not yet due. While
it is too soon to predict the outcome of the case with any certainty, the
Company believes it has meritorious defenses to each of the claims asserted and
intends to vigorously defend itself.

The Company believes the outcome of one or more of the above cases could
have a material adverse effect on the Company's financial condition and results
of operations.

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 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.

(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.

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------------ --------- -------------
<S> <C> <C> <C>
Armand Marciano 41,990,268 46,722 0
</TABLE>

(1) To ratify the selection of KPMG Peat Marwick LLP to serve as independent
certified public accountants for the year ended December 31, 1997.

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
------------ --------- ---------
<S> <C> <C> <C>
41,999,921 21,076 15,993
</TABLE>

11
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since August 8, 1996, the Company's Common Stock has been listed on the New
York Stock Exchange under the symbol "GES." The following table sets forth, for
the periods indicated, the high and low sales prices of the Company's Common
Stock, as reported on the New York Stock Exchange Composite Tape.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 HIGH LOW
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Third Quarter (from August 7, 1996)................................... 18 1/4 13 1/4
Fourth Quarter 1996................................................... 14 3/8 11 5/8
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1997
- ----------------------------------------------------------------------
<S> <C> <C>
First Quarter 1997.................................................... 14 5/8 10 1/4
Second Quarter 1997................................................... 13 3/8 10 1/8
Third Quarter 1997.................................................... 10 1/4 8 3/4
Fourth Quarter 1997................................................... 9 3/4 6 3/8
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1998
- ----------------------------------------------------------------------
<S> <C> <C>
First Quarter through March 6, 1998................................... 6 15/16 5 3/16
</TABLE>

On March 6, 1998, the closing sales price per share of the Company's Common
Stock as reported on the New York Stock Exchange Composite Tape was 5 7/8. On
March 6, 1998, there were 169 holders of record of the Company's Common Stock.

DIVIDEND POLICY

The Company intends to use its cash flow from operations in 1998 principally
to finance the expansion and remodel of its retail stores, shop-in-shop programs
and operations. Any future determination as to the payment of dividends will be
at the discretion of the Company's Board of Directors and will depend upon the
Company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant by the Board of Directors. The agreement
governing the Company's revolving credit facility and the indenture pursuant to
which the Senior Subordinated Notes were issued restrict the payment of
dividends by the Company.

Since its IPO on August 8, 1996, the Company has not declared any dividends
on its Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below have been derived from the
audited consolidated financial statements of the Company and the related notes
thereto. The following selected financial data should be read in conjunction
with the Company's consolidated financial statements and the related notes
included

12
<PAGE>
in Item 14 herein, and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net revenue........................................ $ 515,372 $ 551,162 $ 486,733 $ 547,812 $ 520,224
Earnings from operations........................... 70,646 98,095 82,928 117,807 114,464
Net earnings....................................... 37,511 66,741 63,919 97,641 103,471
SUPPLEMENTAL STATEMENT OF EARNINGS DATA(1)
Earnings before income taxes and change in accounting
principle(2)....................................... $ 54,887 $ 82,567 $ 66,814 $ 101,181 $ 105,281
Income taxes......................................... 21,337 33,241 26,726 40,472 42,112
Net earnings......................................... 37,511 49,326 40,088 60,709 63,169
Basic and diluted earnings per share(3).............. $ 0.87 $ 1.18 $ 0.96
Weighted average common shares
outstanding--basic(3).............................. 42,898 41,906 41,675
Weighted average common shares
outstanding--diluted(3)............................ 42,902 41,908 41,675
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 106,670 $ 76,821 $ 57,572 $ 83,127 $ 74,094
Total assets......................................... 287,814 239,306 202,635 207,696 181,017
Notes payable and long-term debt..................... 141,517 127,316 123,335 156,495 189,414
Net stockholders' equity (deficiency)(4)............. 75,330 34,928 10,997 373 (50,284)
</TABLE>

- ------------

(1) Reflects adjustments for Federal and state income taxes as if the Company
had been taxed as a C corporation rather than an S corporation. Prior to the
Company's IPO in August 1996, the Company had elected to be taxed as an S
corporation for Federal income tax purposes. In certain states, the Company
was taxed as an S corporation; in other states, the Company was taxed as a C
corporation. Effective January 1, 1991, the Company elected to be treated as
an S corporation for California tax purposes. As a result of the Company's
IPO, all S corporation elections were terminated.

(2) 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 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 year
ended December 31, 1997. Excluding the cumulative effect of the change in
accounting principle, the effect of the change during 1997 was to increase
net earnings by approximately $6.2 million or $0.14 per share.

(3) 1996 reflects (i) 32,681,819 shares of Common Stock outstanding prior to the
IPO and the assumed issuance of 8,730,000 shares of Common Stock at the IPO
($18.00 per share) to generate sufficient

13
<PAGE>
cash to pay a distribution of retained earnings to its then existing
shareholders as part of the termination of its S corporation status in an
amount equal to retained earnings as of the IPO date and (ii) an average of
42,682,000 shares outstanding subsequent to the IPO, representing the actual
shares outstanding. The difference between the basic and diluted
weighted-average number of common shares outstanding for 1997 and 1996 is
due to 4,000 and 2,000 dilutive stock options, respectively.

(4) Stockholders' deficiency in 1993 resulted from the Company's repurchase of
certain of the Common Stock owned by a former stockholder for $203.5
million.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

GENERAL

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.

ACTUAL AND PRO FORMA RESULTS OF OPERATIONS

The following table sets forth actual operating results for the 1997 period
and pro forma operating results for the 1996 and 1995 periods. Pro forma
operating results reflect adjustments to historical operating results for (i)
the elimination of salaries and bonuses paid to Maurice, Paul and Armand
Marciano ("Principal Executive Officers") in excess of an aggregate of $4.9
million per year (the estimated 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 IPO), resulting in a
decrease in compensation expense of $3.5 million and $2.4 million for 1996 and
1995, respectively; (ii) the decrease in depreciation and operating costs of
$1.2 million and $2.6 million for 1996 and 1995, 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, B.V. ("GEBV")
and Guess? Italia, S.r.l. ("Guess? Italia") through the merger of Marciano
International, Inc. ("Marciano International") with and into the Company in
connection with the IPO, resulting in the inclusion in net earnings of $323,000
and $274,000 for 1996 and 1995, respectively, which amounts had previously been
recorded as

14
<PAGE>
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
throughout the periods presented.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net revenue:
Product sales.............................................................. $ 465,913 $ 497,874 $ 440,359
Net royalties.............................................................. 49,459 53,288 46,374
---------- ---------- ----------
Total net revenue........................................................ 515,372 551,162 486,733
Cost of sales................................................................ 288,408 298,631 262,142
---------- ---------- ----------
Gross profit................................................................. 226,964 252,531 224,591
Selling, general and administrative expenses................................. 156,318 146,186 136,606
---------- ---------- ----------
Earnings from operations before reorganization charge...................... 70,646 106,345 87,985
Reorganization charge........................................................ -- 3,559 --
---------- ---------- ----------
Earnings from operations after reorganization charge....................... 70,646 102,786 87,985
Non-operating income (expense):
Interest expense, net........................................................ (13,718) (14,539) (15,957)
Non-operating income (expense), net.......................................... (2,041) (666) 117
---------- ---------- ----------
(15,759) (15,205) (15,840)
Earnings before income taxes and cumulative effect of change in accounting
principle................................................................ 54,887 87,581 72,145
Income taxes................................................................. 21,337 35,257 28,858
---------- ---------- ----------
Earnings before cumulative effect of change in accounting principle........ 33,550 52,324 43,287
Cumulative effect of change in accounting for product display fixtures, net
of income tax expense of $2,707............................................ 3,961 -- --
---------- ---------- ----------
Net earnings............................................................... $ 37,511 $ 52,324 $ 43,287
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

15
<PAGE>
The following table sets forth actual operating results for the 1997 period
and pro forma operating results for the 1996 and 1995 periods as a percentage of
net revenue.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net revenue:
Product sales................................................................... 90.4% 90.3% 90.5%
Net royalties................................................................... 9.6 9.7 9.5
--------- --------- ---------
Total net revenue............................................................. 100.0 100.0 100.0
Cost of sales..................................................................... 56.0 54.2 53.9
--------- --------- ---------
Gross profit...................................................................... 44.0 45.8 46.1
Selling, general and administrative expenses...................................... 30.3 26.5 28.0
--------- --------- ---------
Earnings from operations before reorganization charge........................... 13.7 19.3 18.1
Reorganization charge............................................................. -- 0.6 --
--------- --------- ---------
Earnings from operations after reorganization charge............................ 13.7 18.6 18.1
Non-operating income (expense): Interest expense, net............................. (2.7) (2.6) (3.3)
Non-operating income (expense), net............................................... (0.4) (0.1) 0.0
--------- --------- ---------
(3.1) (2.7) (3.3)
Earnings before income taxes and cumulative effect of change in accounting
principle..................................................................... 10.6 15.9 14.8
Income taxes...................................................................... 4.1 6.4 5.9
--------- --------- ---------
Earnings before cumulative effect of change in accounting principle............. 6.5 9.5 8.9
Cumulative effect of change in accounting for product display fixtures, net of
income tax expense of $2,707)................................................. 0.8 -- --
--------- --------- ---------
Net earnings.................................................................... 7.3% 9.5% 8.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996.

NET REVENUE. Net revenue decreased $35.8 million or 6.5% to $515.4 million
in the year ended December 31, 1997 from $551.2 million in the year ended
December 31, 1996. Net revenue from wholesale operations decreased $38.1 million
or 13.2% to $250.0 million from $288.1 million. Domestic and international
wholesale operations net revenue decreased by $26.1 million and $12.0 million,
respectively. The Company's domestic wholesale net sales declined primarily as a
result of increased competition in branded basic denim apparel and $10.0 million
in markdowns and returns in excess of anticipated levels in the 1997 period.
International wholesale operations decreased primarily due to the sale of the
Guess? Italia operations during the second quarter of 1997. Net revenue from
retail operations increased $6.1 million or 2.9% to $215.9 million from $209.8
million, from volume generated by new store openings, partially offset by an
8.4% decrease in comparable store net revenue. The decrease in comparable store
revenue was primarily due to production delays related to fabric and a loss of
merchandise in a factory fire during the first half of 1997, as well as
softening Pacific Rim tourism adversely affecting west coast stores and
aggressive campaigns against the Company by UNITE (see also "Legal
Proceedings"). Net royalties decreased 7.1% in the year ended December 31, 1997
to $49.5 million from $53.3 million in the year ended December 31, 1996. The
decline in net royalties was primarily due to lower royalties resulting from
discontinued licenses and non-recurring technical assistance fees recorded in
the second quarter of 1996, partially offset by the increase in net royalties
from new licensees. Net revenue from international operations comprised 11.5%
and 12.1% of the Company's net revenue during 1997 and 1996, respectively.

16
<PAGE>
GROSS PROFIT. Gross profit decreased 10.1% to $227.0 million in the year
ended December 31, 1997 from $252.5 million in the year ended December 31, 1996.
The decline in gross profit resulted from lower net royalties, as well as
decreased net revenue from product sales. Gross profit from product sales
decreased 10.9% to $177.5 million in the year ended December 31, 1997 from
$199.2 million in the year ended December 31, 1996. Gross margin decreased to
44.0% in the year ended December 31, 1997 as compared to 45.8% in the year ended
December 31, 1996. Gross margin from product sales decreased to 38.1% in the
year ended December 31, 1997 compared to 40.0% in the year ended December 31,
1996. The decline in the gross margin was primarily the result of higher
domestic wholesale markdowns and fixed store occupancy costs being spread over a
lower revenue base in the 1997 period.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased 3.6% in the year ended December 31,
1997 to $156.3 million, or 30.3% of net revenue, from $150.9 million, or 27.4%
of net revenue, in the year ended December 31, 1996. On a pro forma basis, SG&A
expenses would have increased 6.9% in the year ended December 31, 1997 to $156.3
million, or 30.3% of net revenue, from $146.3 million, or 26.5% of net revenue,
in the year ended December 31, 1996. The increase in SG&A expense was primarily
the result of higher depreciation expense associated with increased capital
expenditures, higher legal costs associated with UNITE activities (see "Legal
Proceedings"), $3.1 million in non-recurring general and administrative expenses
and increased store expenses related to the expansion of the retail operations.

REORGANIZATION CHARGE. In anticipation of the IPO, in the second quarter of
1996, the Company recorded reserves for certain non-recurring charges related to
the write-downs of operating assets to be disposed amounting to $3.6 million for
(i) disposal of two remote warehouse and production facilities 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 were based upon the book value of the related assets as of June
30, 1996. The Company intends to relocate the warehouse and production
operations located at the remote facilities to its central facility in Los
Angeles in an effort to centralize its operations and improve operating
efficiencies.

INTEREST EXPENSE, NET. Net interest expense decreased 5.6% to $13.7 million
in the year ended December 31, 1997 from $14.5 million in the year ended
December 31, 1996. This decrease resulted primarily from a lower average
effective interest rate, partially offset by slightly higher outstanding average
debt. For the year ended December 31, 1997, the average debt balance was $145.3
million, with an average effective interest rate of 9.1%. For the year ended
December 31, 1996, the average debt balance was $144.4 million, with an average
effective interest rate of 9.4%.

OTHER NON-OPERATING EXPENSES. Other non-operating expenses were $2.0 million
in the year ended December 31, 1997 as compared to $1.0 million in the year
ended December 31, 1996. On a pro forma basis, other non-operating expenses
would have been $2.0 million in the year ended December 31, 1997 compared to
$0.7 million in the year ended December 31, 1996. The increase was primarily due
to a $1.4 million write-down to the lower of cost or market of a certain equity
investment.

INCOME TAXES. Prior to the IPO, 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 and foreign income taxes, plus Federal income taxes
after the IPO, were $21.3 million and $15.8 million in the years ended December
31, 1997 and December 31, 1996, respectively. 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 would have been $21.3 million and $35.3 million in the years ended
December 31, 1997 and December 31, 1996, respectively.

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

17
<PAGE>
straight-line method. In prior years, these costs were expensed as incurred. The
Company believes this new method will more closely match the long-term benefit
the product display fixtures provide with the expected future revenue from such
fixtures. The cumulative effect of the change in accounting principle, recorded
in the first quarter of 1997, is calculated based on the retroactive effect of
applying the new accounting method to prior year fixture acquisitions. The
cumulative effect of the change in accounting principle of $4.0 million (after
reduction for income tax expense of $2.7 million) is included in earnings for
the year ended December 31, 1997. Excluding the cumulative effect of the change
in accounting principle, the effect of the change during 1997 was to increase
net earnings by approximately $6.2 million or $0.14 per share.

NET EARNINGS. Net earnings decreased to $37.5 million in the year ended
December 31, 1997, from $66.7 million in the year ended December 31, 1996. On a
pro forma basis, net earnings would have decreased to $37.5 million in the year
ended December 31, 1997, from $52.3 million in the year ended December 31, 1996.
Excluding the cumulative effect of the change in accounting principle in 1997
and reorganization charge in 1996, pro forma net earnings would have decreased
by 35.9% to $33.5 million, or 6.5% of net revenue, in the year ended December
31, 1997 from $54.4 million, or 9.9% of net revenue, in the year ended December
31, 1996.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.

NET REVENUE. Net revenue increased $64.5 million or 13.2% to $551.2 million
in the year ended December 31, 1996 from $486.7 million in the year ended
December 31, 1995. Net revenue from wholesale operations increased $17.2 million
or 6.3% to $288.1 million from $270.9 million, due principally to an increase in
sales outside the United States of $31.5 million, partially offset by a $14.3
million decline in domestic wholesale sales. The Company's domestic net sales
declined primarily as a result of increased competition in branded basic denim
apparel. Net revenue from retail operations increased $40.4 million or 23.8% to
$209.8 million from $169.4 million, primarily attributable to an increase of
9.3% in comparable store net revenue and from volume generated by new store
openings. The increase in comparable store net revenue was primarily
attributable to a favorable merchandise mix and the implementation of improved
inventory management systems. Net royalties increased 14.9% in the year ended
December 31, 1996 to $53.3 million from $46.4 million in the year ended December
31, 1995. Net revenue from international operations comprised 12.1% and 6.9% of
the Company's net revenue during 1996 and 1995, respectively.

GROSS PROFIT. Gross profit increased 12.4% to $252.5 million in the year
ended December 31, 1996 from $224.6 million in the year ended December 31, 1995.
The increase in gross profit resulted from increased net royalties, as well as
increased net revenue from product sales. Gross profit from product sales
increased 11.8% to $199.2 million in the year ended December 31, 1996 from
$178.2 million in the year ended December 31, 1995. Gross margin decreased to
45.8% in the year ended December 31, 1996 as compared to 46.1% in the year ended
December 31, 1995. Gross margin from product sales decreased to 40.0% in the
year ended December 31, 1996 as compared to 40.5% in the year ended December 31,
1995, which included a provision of $3.9 million for store closing expenses.
Without this provision, gross margin from product sales would have decreased to
40.0% from 41.4%. The decline was primarily the result of the growth in net
revenue derived from international operations which generally carry lower gross
profit margins, increased occupancy costs associated with stores opened in 1995
and lower gross margin experienced in the Retail Division resulting from an
increase of employee sales at lower gross margins.

SG&A EXPENSES. SG&A expenses increased 6.5% in the year ended December 31,
1996 to $150.9 million, or 27.4% of net revenue, from $141.7 million, or 29.1%
of net revenue, in the year ended December 31, 1995. On a pro forma basis, SG&A
expenses would have increased 7.0% in the year ended December 31, 1996 to $146.2
million, or 26.5% of net revenue, from $136.6 million, or 28.1% of net revenue,
in the year ended December 31, 1995. The increase in SG&A expense was primarily
the result of increased store expenses related to the expansion of the retail
operation, increased administrative expenses

18
<PAGE>
related to the expansion of the international operations and a non-recurring
executive bonus of $1.0 million. The decrease in SG&A expenses as a percentage
of net revenue was the result of fixed expenses being spread over a larger
revenue base in the 1996 period.

REORGANIZATION CHARGE. In anticipation of the IPO, in the second quarter of
1996, the Company recorded reserves for certain non-recurring charges related to
the write-downs of operating assets to be disposed amounting to $3.6 million
for: (i) disposal of two remote warehouse and production facilities 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 were based on the book value of the related assets at June 30,
1996.

INTEREST EXPENSE, NET. Net interest expense decreased 8.9% to $14.5 million
in the year ended December 31, 1996 from $16.0 million in the year ended
December 31, 1995. This decrease resulted primarily from lower outstanding debt,
as well as lower interest rates. For the year ended December 31, 1996, the
average debt balance was $144.4 million, with an average effective interest rate
of 9.4%. For the year ended December 31, 1995, the average debt balance was
$156.6 million, with an average effective interest rate of 9.6%.

INCOME TAXES. Prior to the IPO, 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 taxes and foreign taxes, plus Federal taxes
after the IPO, were $15.8 million and $2.9 million in the years ended December
31, 1996 and December 31, 1995, respectively. 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 would have been $35.3 million and $28.9 million in the years ended
December 31, 1996 and December 31, 1995, respectively.

NET EARNINGS. Net earnings increased to $66.7 million in the year ended
December 31, 1996, from $63.9 million in the year ended December 31, 1995. On a
pro forma basis, net earnings would have increased to $52.3 million in the year
ended December 31, 1996, from $43.3 million in the year ended December 31, 1995.
Excluding the Reorganization Charge, pro forma net earnings would have increased
by 25.8% to $54.4 million, or 9.9% of net revenue, in the year ended December
31, 1996 from $43.3 million, or 8.9% of net revenue, in the year ended December
31, 1995.

LIQUIDITY AND CAPITAL RESOURCES

The Company has relied primarily upon internally generated funds, trade
credit and bank borrowings to finance its operations. At December 31, 1997 the
Company had working capital of $106.7 million, compared to $76.8 million at
December 31, 1996. The $29.9 million increase in working capital is primarily
due to a $17.7 million increase in prepaid expenses and current deferred tax
assets and a $12.6 million increase in inventories. The increase in inventory
relates to new 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.
At December 31, 1997, the Company had $36.3 million in outstanding borrowings
under the revolving credit facility and outstanding letters of credit of $1.0
million. At December 31, 1997, the Company had $62.7 million available for
future borrowings under such facility. The revolving credit facility will expire
in December 1999. In addition to the revolving credit facility, the Company also
has a $25.0 million letter of credit facility. At December 31, 1997, the Company
had $13.0 million outstanding under this facility. The Credit Agreement contains
various restrictive covenants requiring, among other things, the maintenance of
certain financial ratios. The Company was in compliance with or had obtained
waivers for all such covenants as of December 31, 1997.

Capital expenditures, net of lease incentives granted, totaled $46.3 million
for 1997 and $20.2 million for 1996. The increase in the Company's capital
expenditure was due to an aggressive shop-in-shop

19
<PAGE>
expansion program and the increase in new store openings. Approximately $14.0
million was spent on the shop-in-shop program during 1997 (See also note 16 of
Notes to Financial Statements - Cumulative Effect of Change in Accounting for
Product Display Fixtures). The Company estimates that its capital expenditures
for 1998 will be approximately $20.0 million, primarily for retail store
expansion and remodeling, the shop-in-shop program and operations.

The Company anticipates it will be able to satisfy its ongoing cash
requirements through 1998, including retail and international expansion plans,
and interest payments on the Company's Senior Subordinated Notes, primarily with
cash flow from operations, supplemented, if necessary, by borrowings under its
revolving Credit Agreement.

In May 1997, the Company sold substantially all of the assets and
liabilities of Guess? Italia to Maco. In connection with this sale, the Company
also purchased a 10% ownership interest in and entered into an approximate
10-year license agreement with Maco, granting it the right to manufacture and
distribute certain men's and women's jeanswear apparel, which bear the Guess
trademark, in certain parts of Europe. In addition to royalty fees, the Company
will also receive $14.1 million over the next four years in consideration of the
grant of the license rights. During 1997, the Company recorded $2.6 million in
revenue in connection with the grant of the license rights and an additional
$1.0 million in royalty fees related to product sales.

OTHER MATTERS

YEAR 2000

The Company is assessing the internal readiness of its computer systems for
handling the year 2000. The Company expects to implement successfully the
systems and programming changes necessary to address year 2000 issues with
respect to its internal systems and does not believe that the cost of such
actions will have a material adverse effect on its results of operations or
financial condition. Although the Company is not aware of any material
operational issues or costs associated with preparing its internal systems for
the year 2000, there can be no assurance that there will not be a delay in, or
increased costs associated with, the implementation of the necessary systems and
changes to address the year 2000 issues, and the Company's inability to
implement such systems and changes could have an adverse effect on future
results of operations.

LABOR ISSUES

The Union of Needletrades, Industrial and Textile Employees ("UNITE") has
continued to conduct a corporate campaign against the Company. In addition to
the legal proceedings (See "Legal Proceedings") initiated by UNITE, UNITE has,
and continues to, through the media and otherwise attempted to tarnish the
Company's image and affect the sales of the Company's product. The Company
believes that such corporate campaign could have a material adverse effect on
the Company's financial condition and results of operations.

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

20
<PAGE>
as of the date of which they are made. The registrant undertakes no obligation
to update publicly or revise any forward-looking statements.

Important factors that could cause actual results to differ materially from
the registrant's forward-looking statements, as well as affect the registrant's
ability to achieve its financial and other goals, include, but are not limited
to, the following:

The Company's inability to identify and respond appropriately to changing
consumer demands and fashion trends could adversely affect consumer
acceptance of Guess products.

A decision by the controlling owner of a group of department stores or any
other significant customer to decrease the amount purchased from the Company
or to cease carrying Guess products could have a material adverse effect on
the Company's financial condition and results of operations.

The inability of the Company to control the quality, focus, image or
distribution of its licensed products could impact consumer receptivity to
the Company's products generally and, therefore, adversely affect the
Company's financial condition and results of operations.

The failure of the Company to continue to enhance operating control systems
could adversely affect the Company's financial condition and results of
operations.

Factors beyond the Company's control may affect the Company's ability to
expand its network of retail stores, including general economic and business
conditions affecting consumer spending.

A general failure by the Company to maintain and control its existing
distribution and licensing arrangements or to procure additional
distribution and licensing relationships could adversely affect the
Company's growth strategy, which could adversely affect the Company's
financial condition and results of operations.

The extended loss of the services of one or more of the Principal Executive
Officers could have a material adverse effect on the Company's operations.

The Company's operations may be affected adversely by political instability
resulting in the disruption of trade with the countries in which the
Company's contractors, suppliers or customers are located, the imposition of
additional regulations relating to imports, the imposition of additional
duties, taxes and other charges on imports, significant fluctuations in the
value of the dollar against foreign currencies or restrictions on the
transfer of funds. Also, a substantial increase in customs duties could have
an adverse effect on the Company's financial condition or results of
operations.

The inability of a manufacturer to ship the Company's products in a timely
manner or to meet the Company's quality standards could adversely affect the
Company's ability to deliver products to its customers in a timely manner.

No assurance can be given that others will not assert rights in, or
ownership of, trademarks and other proprietary rights of Guess. In addition,
the laws of certain foreign countries do not protect proprietary rights to
the same extent as do the laws of the United States.

SEASONALITY

The Company's business is impacted by the general seasonal trends
characteristic of the apparel and retail industries. The Company's wholesale
operations generally experience stronger performance in the first and third
quarters, while retail operations are generally stronger in the third and fourth
quarters. As the timing of the shipment of products may vary from year to year,
the result for any particular quarter may not be indicative of results for the
full year. The Company has not had significant overhead and other costs
generally associated with large seasonal variations.

21
<PAGE>
INFLATION

The Company does not believe the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net revenue or profitability. Although higher rates of
inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, the Company does not believe they have had
a material effect on the Company's net revenue or profitability.

EXCHANGE RATES

The Company receives United States dollars for substantially all of its
product sales and its licensing revenues. 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 RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board issued Statement No. 128, "Earnings
per Share" ("FAS 128"), in February 1997 effective for both interim and annual
periods ending after December 15, 1997. The Company adopted 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 is also required. The Diluted
presentation is similar to the Company's historical presentation of fully
diluted earnings per share. FAS 128 requires restatement of all prior-period
earnings per share data presented. All per-share data contained in the Company's
financial statements has been restated to reflect this adoption.

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS 130"). SFAS 130 establishes standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS 130
requires all items that are required to be recognized under accounting standards
as components of comprehensive income to be reported in a financial statement
that is displayed with the same prominence as other financial statements. SFAS
130 does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period covered by that financial statement. SFAS 130 requires an enterprise
to (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS 130 is
effective for fiscal years beginning after December 15, 1997. Management has
determined the only impact from the adoption of SFAS 130 will be from foreign
currency adjustments.

22
<PAGE>
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirement for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets information about the revenues derived from the enterprise's
products or services and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. Management has not determined whether the adoption of SFAS 131 will
have a material impact on the Company's financial reporting.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is incorporated herein by reference to
the Financial Statements and Supplementary Data listed in Item 14 of Part IV of
this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

Information with respect to Directors may be found under the caption
"Directors and Executive Officers" in the Company's Proxy Statement ("Proxy
Statement") dated March 31, 1998, for the 1998 Annual Meeting of Shareholders to
be held May 18, 1998. Such information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION

The information in the Proxy Statement set forth under the caption
"Executive Compensation" is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth under the caption "Security Ownership and Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.

23
<PAGE>
PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K

(a) Documents Filed with Report

(1) Consolidated Financial Statements

The financial statements listed on the accompanying Index to
Consolidated Financial Statements and Financial Statement Schedule are
filed as part of this report.

(2) Consolidated Financial Statement Schedule

The financial statement schedule listed on the accompanying Index to
Consolidated Financial Statements and Financial Statement Schedule are
filed as part of this report.

(3) Exhibits

The exhibits listed on the accompanying Index to Exhibits are filed as
part of this report.

(b) Reports on Form 8-K

No reports on Form 8-K were filed by the Company during the last quarter of
the fiscal year ended December 31, 1997.

24
<PAGE>
GUESS ?, INC.

FORM 10-K

ITEMS 8, 14(A) AND 14(D)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
1 Consolidated Financial Statements

Independent Auditors' Report........................................................................ F-2

Consolidated Balance Sheets at December 31, 1997 and 1996........................................... F-3

Consolidated Statements of Earnings for the Years
Ended December 31, 1997, 1996 and 1995............................................................ F-4

Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.................................................................. F-5

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.................................................................. F-6

Notes to Consolidated Financial Statements.......................................................... F-7

2 Consolidated Financial Statement Schedule

Valuation and Qualifying Accounts................................................................... F-27
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

To The Board of Directors and Stockholders

of Guess ?, Inc.:

We have audited the accompanying consolidated financial statements of Guess
?, Inc. and Subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule, as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Guess ?,
Inc. and Subsidiaries at December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed in note 16, the Company changed its method of accounting for
its product display fixtures in 1997.

KPMG Peat Marwick LLP

Los Angeles, California
February 24, 1998

F-2
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1997 AND 1996

(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Current Assets:
Cash.................................................................................... $ 8,204 $ 8,800
Short-term investments (note 2)......................................................... -- 4,401
Receivables:
Trade receivables, net of reserves aggregating $11,196 and $9,737 at December 31, 1997
and 1996, respectively.............................................................. 17,080 27,107
Royalties............................................................................. 14,663 15,613
Other................................................................................. 6,032 4,042
---------- ----------
37,775 46,762
Inventories (note 3).................................................................... 92,081 79,489
Prepaid expenses........................................................................ 5,422 5,055
Prepaid taxes........................................................................... 14,705 194
Deferred tax assets (note 6)............................................................ 9,435 6,614
---------- ----------
Total current assets.............................................................. 167,622 151,315

Property and equipment, at cost, net of accumulated depreciation and amortization (note
4)...................................................................................... 98,170 64,302
Long-term investments (note 2)............................................................ 2,340 2,901
Other assets, at cost, net of accumulated amortization of $790 and $421 at December 31,
1997 and 1996, respectively (notes 6 and 14)............................................ 19,682 20,788
---------- ----------
$ 287,814 $ 239,306
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and long-term debt (note 5)....................... $ 217 $ 6,099
Accounts payable........................................................................ 38,323 39,285
Accrued expenses........................................................................ 22,314 24,935
Income taxes payable (note 6)........................................................... 98 4,175
---------- ----------
Total current liabilities......................................................... 60,952 74,494
Notes payable and long-term debt, net of current installments (note 5).................... 141,300 121,217
Other liabilities......................................................................... 10,232 8,667
---------- ----------
212,484 204,378
Stockholders' equity (note 7):
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 shares at 1997 and 1996, outstanding 42,898,035 and 42,681,819 shares
actual, respectively, 20,030,792 shares held in Treasury.............................. 137 135
Paid-in capital 158,589 155,591
Retained earnings 67,432 29,921
Foreign currency translation adjustment................................................. (52) 57
Treasury stock, 20,030,792 shares repurchased........................................... (150,776) (150,776)
---------- ----------
Net stockholders' equity.......................................................... 75,330 34,928
---------- ----------
Commitments and contingencies (note 9) $ 287,814 $ 239,306
---------- ----------
---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

DECEMBER 31, 1997, 1996 AND 1995

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net revenue
Product sales.............................................................. $ 465,913 $ 497,874 $ 440,359
Net royalties.............................................................. 49,459 53,288 46,374
---------- ---------- ----------
515,372 551,162 486,733
Cost of sales................................................................ 288,408 298,631 262,142
---------- ---------- ----------
Gross profit................................................................. 226,964 252,531 224,591
Selling, general and administrative expenses................................. 156,318 150,877 141,663
Reorganization charge (note 15).............................................. -- 3,559 --
---------- ---------- ----------
Earnings from operations................................................... 70,646 98,095 82,928
---------- ---------- ----------
Non-operating expense:
Interest, net.............................................................. (13,718) (14,539) (15,957)
Other, net................................................................. (2,041) (989) (157)
---------- ---------- ----------
(15,759) (15,528) (16,114)
Earnings before income taxes and cumulative effect of change in accounting
principle................................................................ 54,887 82,567 66,814
Income taxes (note 6)........................................................ 21,337 15,826 2,895
---------- ---------- ----------
Earnings before cumulative effect of change in accounting principle........ 33,550 66,741 63,919

Cumulative effect of change in accounting for product display fixtures, net
of income tax expense of $2,707 (note 16).................................. 3,961 -- --
---------- ---------- ----------
Net earnings............................................................... $ 37,511 $ 66,741 $ 63,919
---------- ---------- ----------
---------- ---------- ----------
Supplemental pro forma financial information (note 1):
- -----------------------------------------------------------------------------

Earnings before income taxes and cumulative effect of change in accounting
principle, as presented.................................................... $ 54,887 $ 82,567 $ 66,814
Pro forma provision for income taxes (1996 and 1995 periods)(unaudited)(note
6)......................................................................... 21,337 33,241 26,726
---------- ---------- ----------
Pro forma earnings before cumulative effect of change in accounting principle
(1996 and 1995 periods) (unaudited)........................................ $ 33,550 $ 49,326 $ 40,088
Cumulative effect of change in accounting for product display fixtures, net
of income tax expense of $2,707 (note 16).................................. 3,961 -- --
---------- ---------- ----------
Pro forma net earnings (1996 and 1995 periods) (unaudited) (note 6).......... $ 37,511 $ 49,326 $ 40,088
---------- ---------- ----------
---------- ---------- ----------
Basic and diluted earnings per share:
- -----------------------------------------------------------------------------

Earnings before cumulative effect of change in accounting principle (1996 and
1995 periods, pro forma)................................................... $ 0.78 $ 1.18 $ 0.96
Cumulative effect of change in accounting for product display fixtures, net
of income tax expense of $2,707 (note 16).................................. 0.09 -- --
---------- ---------- ----------
Net earnings (1996 and 1995 periods, pro forma).............................. $ 0.87 $ 1.18 $ 0.96
---------- ---------- ----------
---------- ---------- ----------
Weighted number of common shares outstanding................................. 42,898 41,906 41,675
---------- ---------- ----------
---------- ---------- ----------
Weighted number of common and dilutive shares outstanding.................... 42,902 41,908 41,675
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(IN THOUSANDS)

<TABLE>
<CAPTION>
FOREIGN
CURRENCY
COMMON PAID-IN RETAINED TRANS. TREASURY
STOCK CAPITAL EARNINGS ADJ. STOCK TOTAL
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ $ 35 $ 181 $ 150,948 $ (15) $ (150,776) $ 373
Net earnings.......................... -- -- 63,919 -- -- 63,919
Stockholder distributions............. -- -- (53,300) -- -- (53,300)
Foreign currency translation
adjustment.......................... -- -- -- 5 -- 5
----- ---------- ----------- ----------- ----------- -----------
Balance at December 31, 1995............ 35 181 161,567 (10) (150,776) 10,997
Net earnings.......................... -- -- 66,741 -- -- 66,741
Stockholder distributions............. -- -- (224,600) -- -- (224,600)
Issuance of common stock.............. 100 169,200 -- -- -- 169,300
Reclassification of stockholder
distributions in excess of retained
earnings............................ -- (15,252) 15,252 -- -- 0
Net equity adjustments resulting from
Marciano International merger....... -- 1,462 10,961 -- -- 12,423
Foreign currency translation
adjustment.......................... -- -- -- 67 -- 67
----- ---------- ----------- ----------- ----------- -----------
Balance at December 31, 1996............ 135 155,591 29,921 57 (150,776) 34,928
Net earnings.......................... -- -- 37,511 -- -- 37,511
Issuance of common stock.............. 2 2,998 -- -- -- 3,000
Foreign currency translation
adjustment.......................... -- -- -- (109) -- (109)
----- ---------- ----------- ----------- ----------- -----------
Balance at December 31, 1997............ $ 137 $ 158,589 $ 67,432 $ (52) $ (150,776) $ 75,330
----- ---------- ----------- ----------- ----------- -----------
----- ---------- ----------- ----------- ----------- -----------
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

(IN THOUSANDS)

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings................................................................ $ 37,511 $ 66,741 $ 63,919
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization of property and equipment................... 20,071 16,233 14,277
Amortization of deferred charges.......................................... 369 804 1,373
Amortization of deferred royalty income................................... (2,623) -- --
Cumulative effect of change in accounting principle (note 16)............. (3,961) -- --
Loss on disposition of property and equipment............................. 120 2,235 814
Foreign currency translation adjustment................................... 91 42 (14)
Contributions from minority interest...................................... 0 336 22
Equity method losses (earnings)........................................... 603 666 (117)
(Increase) decrease in:
Receivables............................................................. 8,988 (8,811) 1,599
Inventories............................................................. (12,591) (6,529) 10,884
Prepaids and other current assets....................................... (3,189) (1,941) (665)
Prepaid taxes........................................................... (14,511) (8) (55)
Other assets............................................................ 8,105 (411) 1,858
Increase (decrease) in:
Accounts payable........................................................ (964) (1,447) 10,861
Accrued expenses........................................................ (993) 6,058 3,658
Income taxes payable.................................................... (6,784) 2,867 22
---------- ---------- ----------
Net cash provided by operating activities............................. 30,242 76,835 108,436

Cash flows from investing activities
Net (purchase of) proceeds from the sale of short-term investments.......... 4,401 (4,401) --
Purchases of property and equipment......................................... (48,836) (21,110) (23,757)
Proceeds from the disposition of property and equipment..................... 1,445 6,640 192
Lease incentives granted.................................................... 2,561 886 2,015
Acquisition of license...................................................... (2,975) (5,000) --
Purchase of long-term investments........................................... (1,435) (173) (23)
---------- ---------- ----------
Net cash used by investing activities................................. (44,839) (23,158) (21,573)

Cash flows from financing activities
Proceeds from notes payable and long-term debt.............................. 163,935 176,289 131,193
Repayment of notes payable and long-term debt............................... (149,734) (174,308) (164,353)
Proceeds from issuance of common stock...................................... -- 115,300 --
Repayments of S distribution notes.......................................... -- (129,000) --
Distributions to stockholders............................................... -- (39,600) (53,300)
---------- ---------- ----------
Net cash provided (used) by financing activities...................... 14,201 (51,319) (86,460)

Effect of exchange rates on cash.............................................. (200) 25 20
Net increase (decrease) in cash............................................... (596) 2,383 423
Cash at beginning of period................................................... 8,800 6,417 5,994
---------- ---------- ----------
Cash at end of period......................................................... $ 8,204 $ 8,800 $ 6,417
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures
Cash paid during the period for:
Interest.................................................................. $ 15,185 $ 14,246 $ 15,396
Income taxes.............................................................. 39,558 14,703 1,925

On January 2, 1997, in connection with acquisition of a license, the Company issued 216,216 shares of Common Stock
aggregating $3.0 million.
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Guess ?, Inc. ("the Company" or "Guess") designs, develops, and markets
quality contemporary jeans and other casual wear for men and women. The Company
distributes its products through major department stores, specialty retailers,
foreign distributors and its network of Company-owned and -operated retail and
factory outlet stores. The company also licenses its trademarks under licensing
arrangements for the sale of product in the United States and internationally.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Guess ?, Inc.
and its wholly-owned foreign subsidiary, Guess Europe, B.V., a Netherlands
corporation ("GEBV"). GEBV holds three wholly-owned subsidiaries: Ranche,
Limited, a Hong Kong corporation ("Ranche"), Guess Asia, a Hong Kong
corporation, and Guess? Italia, S.r.l., an Italian corporation ("Guess?
Italia"). Accordingly, all references herein to "Guess ?, Inc." include the
consolidated results of the Company and its subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.

INVENTORIES

Inventories are valued at the lower of cost (first-in, first-out) or market.

TRADE AND ROYALTY RECEIVABLES

The Company extends trade credit to its customers in the ordinary course of
business. None of the receivables due from customers at December 31, 1997 and
1996 involved factored accounts or other contingencies relating to third-party
risk, except to the extent the Company has chosen to insure certain accounts
from risk of loss under a catastrophic loss policy.

REVENUE RECOGNITION

The Company recognizes revenue from the sale of merchandise upon shipment.
Royalty income is based upon a percentage, as defined in the underlying
agreement, of the licensees' net revenue. The Company accrues for estimated
sales returns and allowances in the period in which the related revenue is
recognized.

SIGNIFICANT CUSTOMER

An individual customer aggregating in excess of 10% of net revenue for the
year ended December 31, 1995 is summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------------
1997 1996 1995
----- ----- ---------
<S> <C> <C> <C>
Customer A............................................................... 8.5% 8.6% 11.0%
</TABLE>

F-7
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION AND AMORTIZATION

Depreciation and amortization of property and equipment are provided using
the straight-line method over the following useful lives:

<TABLE>
<S> <C>
18 to 31
Building and building improvements........................... years
Land improvements............................................ 5 years
Machinery and equipment...................................... 3 to 5 years
Corporate aircraft........................................... 7 years
Corporate vehicles........................................... 3 years
Shop Fixtures................................................ 5 years
</TABLE>

Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the term of the lease. Construction in progress is not
depreciated until the related asset is completed.

Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight line basis over the expected
periods to be benefited, generally 15 years.

FOREIGN CURRENCY TRANSLATION

In accordance with the Financial Accounting Standards Board (the "FASB")
Statement No. 52, balance sheet accounts of the Company's foreign operations are
translated from foreign currencies into U.S. dollars at year end or historical
rates while income and expenses are translated at the weighted-average exchange
rates for the year. The related translation adjustments are reflected as a
foreign currency translation adjustment in the consolidated balance sheet.

INCOME TAXES

Prior to the IPO in August 1996, the Company had elected to be taxed as an S
corporation for Federal income tax purposes. In certain states, the Company was
taxed as an S corporation, including California, in other states, the Company
was taxed as a C corporation. As a result of the Company's IPO, all S
corporation elections were terminated.

The Company uses the asset and liability method of accounting for income
taxes. Under this method, deferred income taxes are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
taxes of a change in tax rates is recognized in income in the period that
includes the enactment date.

RECENT ACCOUNTING 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 adopted
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

F-8
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
divided by the weighted-average number of Common Shares outstanding for the
period. A dual presentation of "Diluted" earnings per share is also required.
The Diluted presentation is similar to the Company's historical presentation of
fully diluted earnings per share. FAS 128 requires restatement of all
prior-period earnings per share data presented. The Company's financial
statements reflect this adoption.

The difference between the basic and diluted weighted-average number of
common shares outstanding for 1997 and 1996 is due to 4,000 and 2,000 dilutive
stock options, respectively. Options granted under the Guess ?, Inc. 1996 Equity
Incentive Plan during the fiscal years ended December 31, 1996 and 1997 to
purchase shares of Common Stock ranged in price from $9.00 to $18.00 were
outstanding during each respective year but were not included in the
computations of diluted earnings per share because the exercise price of such
options was greater than the average market price.

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS 131"). SFAS 131 established standards for public business enterprises to
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This statement supersedes FASB Statement
No. 14, Financial Reporting for Segments of a Business Enterprise, but retains
the requirement to report information about major customers. It amends FASB
Statement No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove
the special disclosure requirement for previously unconsolidated subsidiaries.
SFAS 131 requires, among other items, that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets information about the revenues derived from the enterprise's
products or services and major customers. SFAS 131 also requires that the
enterprise report descriptive information about the way that the operating
segments were determined and the products and services provided by the operating
segments. SFAS 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS 131 need not be applied to
interim financial statements in the initial year of application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second

F-9
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
year of application. Management has not determined whether the adoption of SFAS
131 will have a material impact on the Company's financial reporting.

PRO FORMA NET EARNINGS

Pro forma net earnings represent the results of operations adjusted to
reflect a provision for income taxes on historical earnings before income taxes,
which gives effect to the change in the Company's income tax status to a C
corporation as a result of the public sale of its Common Stock. Following the
Company's IPO and the subsequent termination of its S corporation status on
August 12, 1996, the Company recorded net deferred tax assets aggregating $11.0
million, representing the difference between financial reporting and tax bases
of assets and liabilities, using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The principal difference
between the pro forma income tax rate and the Federal statutory rate of 35%
relates primarily to state income taxes.

Actual and pro forma basic earnings per share have been computed by dividing
net and pro forma earnings by the weighted-average number of actual shares of
Common Stock outstanding during the period. Options to purchase Common Stock are
included in the calculation of diluted earnings per share, provided their impact
is not anti-dilutive.

CREDIT RISK

The Company sells its merchandise principally to customers throughout the
United States and to a lesser extent, internationally. Management performs
regular evaluations concerning the ability of its customers to satisfy their
obligations and records a provision for doubtful accounts based on these
evaluations. The Company's credit losses for the periods presented are
insignificant and have not exceeded management's estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of the Company's financial instruments, which
principally include cash, short and long-term investments, trade receivables,
accounts payable and accrued expenses, approximates fair value due to the
relatively short maturity of such instruments.

The fair value of the Company's debt instruments are based on the amount of
future cash flows associated with each instrument discounted using the Company's
borrowing rate. At December 31, 1997 and 1996, the carrying value of all
financial instruments was not materially different from fair value.

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities

F-10
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to prepare these consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.

LONG-LIVED ASSETS

It is the Company's policy to account for long-lived assets, including
intangibles, at the lower of amortized cost or fair value. As part of an ongoing
review of the valuation and amortization of long-lived assets, management
assesses the carrying value of such assets as current facts and circumstances
suggest that they may be impaired. If this assessment indicates that the
intangibles will not be recoverable, as determined by a non-discounted cash flow
analysis over the remaining amortization period, the carrying value of the
Company's long-lived assets would be reduced to its estimated fair market value
based on the discounted cash flows. The Company has determined that its
long-lived assets, as presented on the accompanying balance sheets as of
December 31, 1996 and 1997, are not impaired.

ADVERTISING COSTS

The Company expenses the cost of advertising as incurred. Advertising
expenses charged to operations for the years ended December 31, 1997, 1996 and
1995 were $22.5 million, $23.6 million and $24.9 million, respectively.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation.

(2) INVESTMENTS

Short-term investments consist of overnight interest bearing deposit
accounts aggregating $0 and $4,401,000 at December 31, 1997 and 1996,
respectively.

Long-term investments consist of certain debt and equity securities
aggregating $2,340,000 and $2,901,000 at December 31, 1997 and 1996,
respectively. The majority of these investments are primarily related to the
Company's ownership interests in companies which are accounted for under the
equity method. See also note 8--Related Party Transactions.

(3) INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials......................................................... $ 12,988 $ 12,563
Work in process....................................................... 8,059 12,576
Finished goods........................................................ 71,034 54,350
---------- ----------
$ 92,081 $ 79,489
---------- ----------
---------- ----------
</TABLE>

F-11
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(4) PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)

<S> <C> <C>
Land and land improvements............................................ $ 5,729 $ 5,729
Building and building improvements.................................... 8,462 8,462
Leasehold improvements................................................ 59,174 42,646
Machinery and equipment............................................... 71,057 58,477
Corporate aircraft.................................................... 5,725 5,160
Shop fixtures......................................................... 24,665 --
Construction in progress.............................................. 240 806
---------- ----------
175,052 121,280
Less accumulated depreciation and amortization........................ 76,882 56,978
---------- ----------
$ 98,170 $ 64,302
---------- ----------
---------- ----------
</TABLE>

Construction in progress at December 31, 1997 and 1996 represents the costs
associated with the construction of buildings and improvements used in the
Company's operations and other capitalizable expenses in progress.

(5) NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt are summarized as follows:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
9 1/2% Senior Subordinated Notes due 2003............................. $ 105,000 $ 105,000
Advances under a secured $100,000,000 long-term line of credit with a
syndicate of banks; interest is variable, with an average annual
effective rate of 7.98% in 1997, and interest payable monthly....... 36,300 16,000
Note payable, secured by corporate aircraft, bearing interest at 8.23%
per year, payable in quarterly principal and interest installments
of $221,003 through March 1998...................................... 217 1,040
Other, including capitalized leases................................... -- 5,276
---------- ----------
141,517 127,316
Less current installments............................................. 217 6,099
---------- ----------
$ 141,300 $ 121,217
---------- ----------
---------- ----------
</TABLE>

F-12
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(5) NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The Credit Agreement contains various restrictive covenants requiring, among
other things, the maintenance of certain financial ratios. The Company was in
compliance with or had obtained waivers for all such covenants as of December
31, 1997.

Aggregate maturities of notes payable and long-term debt are summarized as
follows:

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1997 (IN THOUSANDS):
<S> <C>
1997.......................................................... $ 217
1998.......................................................... --
1999.......................................................... 36,300
2000.......................................................... --
2001.......................................................... --
Thereafter.................................................... 105,000
----------
$ 141,517
----------
----------
</TABLE>

The Senior Subordinated Notes are redeemable at the option of the Company,
in whole or in part, on or after August 15, 1998, at various redemption prices.

(6) INCOME TAXES

The provision for income taxes, including the pro forma provision for income
taxes giving effect as if the Company had been a C corporation throughout all of
1996 and 1995, is summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current.................................. $ 17,487 $ 33,686 $ 26,112
Deferred................................. 2,995 (7,449) (4,572)
State:
Current.................................. 3,973 7,339 5,559
Deferred................................. (1,212) (693) (373)
Foreign:
Current.................................. 801 358 --
--------- --------- ---------
$ 24,044 $ 33,241 $ 26,726
--------- --------- ---------
--------- --------- ---------
</TABLE>

The Company's statement of earnings for 1996 includes a provision for income
taxes of $15.8 million, which principally represents the Federal and state
income taxes recorded from the date of the S orporation election termination,
August 12, 1996, through December 31, 1996.

F-13
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(6) INCOME TAXES (CONTINUED)
The actual pro forma provision for income taxes differs from the expected
income taxes obtained by applying the statutory Federal income tax rate to
earnings before income taxes as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense.......... $ 20,092 $ 28,924 $ 22,716
State taxes, net of Federal benefit...... 2,928 4,109 4,101
Foreign.................................. 801 -- --
Other.................................... 223 208 (91)
--------- --------- ---------
$ 24,044 $ 33,241 $ 26,726
--------- --------- ---------
--------- --------- ---------
</TABLE>

1997 income tax expense includes taxes of $2,707,000 related to a one-time
change in accounting (see also note 16). The Company's income statement has
presented the change in accounting net of this income tax expense.

Deferred income tax benefit (reduction) resulted from the following for the
years ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Uniform capitalization................................ $ 1,206 $ --
Deferred rent......................................... 524 --
Deferred lease incentives............................. 662 --
Bad debt and other reserves........................... 2,352 981
Depreciation and gain on sale of fixed assets......... (6,144) 4,101
Write-down of investments............................. (1,062) --
State taxes........................................... 100 2,569
Other................................................. 579 491
--------- ---------
$ (1,783) $ 8,142
--------- ---------
--------- ---------
</TABLE>

F-14
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(6) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of current and non-current deferred tax assets and deferred tax
liabilities at December 31, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred Tax Assets:
Retail store closure reserves..................... $ 1,130 $ 3,444
Deferred lease incentives......................... 2,124 1,462
Rent expense...................................... 1,944 1,251
Uniform capitalization adjustment................. 2,086 1,191
State income taxes................................ 902 2,453
Bad debt and other reserves....................... 2,688 1,625
Other............................................. 2,985 2,215
--------- ---------
Total gross deferred assets..................... 13,859 13,641
Less: Valuation allowance........................... -- --
Less: Deferred tax liabilities...................... (2,420) (419)
--------- ---------
Net deferred tax assets............................. $ 11,439 $ 13,222
--------- ---------
--------- ---------
</TABLE>

Included above at December 31, 1997 and 1996 are $9,434,000 and $6,614,000
for current deferred tax assets, respectively and $2,004,000 and $6,608,000 for
non-current deferred tax assets.

Management believes it is more likely than not that the results of
operations will generate sufficient taxable earnings to realize net deferred tax
assets.

(7) STOCKHOLDERS' EQUITY

On January 2, 1997, the Company issued 216,216 share of Common Stock at
$13.87 per share in connection with an Asset Purchase Agreement, whereby the
Company purchased the rights, title and interest to the then existing license
agreement between the Company and Sweatshirt Apparel U.S.A., Inc. for the
manufacturing and distribution rights for Guess women's knitwear products. The
aggregate purchase price was $10.0 million, of which $5.0 million was paid in
cash in the fourth quarter of 1996, $2.0 million was paid in cash in the first
quarter of 1997 and the balance of $3.0 million was paid in the form of the
aforementioned stock issuance.

In connection with the Company's IPO of 7,000,000 shares of Common Stock at
$18.00 per share, which took place on August 7, 1996, (i) Marciano
International, which was owned by the Marciano Trusts and held an interest in
the subsidiaries of Guess, was merged with and into the Company; (ii) all of the
capital stock of Guess? Italia was contributed to GEBV; (iii) the Company
effected a 32.66 to 1 split of the Common Stock; (iv) the Company declared a
distribution of $185.0 million to the Principal Stockholders, representing the
Company's previously taxed and undistributed S corporation earnings which
included a distribution of $54.0 million (3,000,000 shares at $18.00 per share)
of Common Stock, $129.0 million in cash generated primarily from the IPO and
$2.0 million in S Distribution Notes, (v) the Company terminated its status as
an S corporation, and (vi) the Company granted options to purchase 1,225,673
shares pursuant to the Company's 1996 Equity Incentive Plan with an exercise
price equal to the IPO price of $18.00 per share.

F-15
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(8) RELATED PARTY TRANSACTIONS

The Company is engaged in various transactions with entities affiliated with
trusts for the respective benefit of Maurice, Paul and Armand Marciano (the
"Marciano Trusts"). The Company believes that the arrangements involving each of
the companies in which the Marciano Trusts have an investment, and related party
transactions discussed below were entered into on terms no less favorable to the
Company than could have been obtained from an unaffiliated third party.

LICENSE AGREEMENTS AND LICENSEE TRANSACTIONS

On September 28, 1990, the Company entered into a license agreement with
Charles David of California ("Charles David"). Charles David is controlled by
the father-in-law of Maurice Marciano. The Marciano Trusts and Nathalie Marciano
(the spouse of Maurice Marciano) together own 50% of Charles David, and the
remaining 50% is owned by the father-in-law of Maurice Marciano. The license
agreement grants Charles David the rights to manufacture worldwide and
distribute worldwide (except Japan and certain European countries) for men,
women and some children, leather and rubber footwear, excluding athletic
footwear, which bear the Guess trademark. The license also includes related shoe
care products and accessories. Gross royalties earned by the Company under such
license agreement for the fiscal years ended December 31, 1997, 1996 and 1995
were $1.2 million, $1.5 million and $1.9 million, respectively. Additionally,
the Company purchased $6.1 million, $6.0 million and $6.4 million of product
from Charles David for resale in the Company's retail stores during the same
periods.

On September 1, 1994, the Company entered into a license agreement with
California Sunshine Activewear, Inc. ("California Sunshine"), granting it the
rights to manufacture and distribute men's and women's activewear, which bear
the Guess trademark, in the United States. The Marciano Trusts together own 51%
of California Sunshine. Gross royalties earned by the Company under such license
agreement for the fiscal years ended December 31, 1997, 1996 and 1995 were $1.0
million, $742,000 and $343,000, respectively. Additionally, the Company
purchased $1.5 million, $1.4 million and $254,000 of product from California
Sunshine for resale in the Company's retail stores during the same periods.

Effective January 1, 1995, the Company entered into a license agreement with
Guess? Italia, S.r.l. ("Guess? Italia"), granting it exclusive rights in Italy
and non-exclusive rights in certain other countries within Europe to manufacture
and distribute men's and women's apparel and accessories which bear the Guess
trademark. This license agreement was terminated in May 1997 in connection with
the sale of the wholesale operations of Guess? Italia (see also "Maco Apparel,
S.p.a." discussion below). The Company and Guess? Italia also entered into a
retail store license agreement as of January 1, 1995, whereby Guess? Italia was
granted the non-exclusive rights to operate Guess stores in Italy. Prior to the
IPO, Guess? Italia was owned 79% by the Company and 21% by Marciano
International, a company wholly-owned by the Marciano Trusts. As part of the
reorganization and in connection with the IPO, Guess? Italia became a
wholly-owned subsidiary of the Company when Marciano International was merged
with and into the Company. Gross royalties earned by the Company under such
license agreement for the fiscal years ended December 31, 1997, 1996 and 1995
were $575,000, $766,000 and $480,000, respectively. Additionally, the Company
purchased $223,000, $327,000 and $511,000 of product from Guess? Italia and sold
$21,000, $89,000 and $399,000 of product to Guess? Italia for resale in its
retail store and to other wholesale customers during the fiscal years ended
December 31, 1997, 1996 and 1995, respectively.

In May 1997, the Company sold substantially all of the assets and
liabilities of Guess? Italia to Maco Apparel, S.p.a. ("Maco"). The effect of the
net asset disposal was immaterial to the Company's results of

F-16
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(8) RELATED PARTY TRANSACTIONS (CONTINUED)
operations. In connection with this sale, the Company also purchased a 10%
ownership interest in Maco and entered into an approximate 10-year license
agreement with Maco granting it the right to manufacture and distribute certain
men's and women's apparel, which bear the Guess trademark, in certain parts of
Europe. In addition to royalty fees, the Company will also receive $14.1 million
over the next four years in consideration of the grant of the license rights.
During 1997, the Company recorded $2.6 million in revenue in connection with the
grant of the license rights and an additional $1.0 million in royalty fees
related to product sales.

Effective December 9, 1992, the Company entered into a license agreement
with Nantucket Industries, Inc. ("Nantucket"), granting it the rights to
manufacture and distribute within the United States women's intimate apparel
which bear the Guess trademark. Nantucket is owned 13.0% by the Company and 3.8%
by the trusts for the respective benefit of Paul Marciano and Armand Marciano.
With respect to Nantucket, during the fiscal years ended December 31, 1997, 1996
and 1995, the Company recorded gross royalty income of $752,000, $327,000 and
$264,000, respectively; purchased $310,000, $416,000 and $505,000, respectively,
of product for resale in its retail stores; and recorded equity losses of
$261,000, $349,000 and $98,000, respectively. In December 1997, Maurice Marciano
sold all of the shares of Nantucket common stock held by his trust, which
collectively gave the Company and its affiliates less than a 20% ownership in
Nantucket. Accordingly, effective December 1997, the Company no longer records
equity income or losses from this investment with respect to Nantucket. In
connection with the lower aggregate percentage of ownership in Nantucket, in
December 1997 the Company changed from the equity income method to the lower of
cost or market method of valuing this investment, which resulted in an
additional $1.4 million loss in the fourth quarter of 1997.

Effective December 1, 1989, the Company entered into a license agreement
with Strandel, Inc. ("Strandel"), granting it the rights to manufacture and
distribute in Canada men's, women's and children's knits and woven sportswear,
which bear the Guess trademark. Strandel is owned 20% by the Company. With
respect to Strandel, during the fiscal years ended December 31, 1997, 1996 and
1995, the Company recorded gross royalty income of $1.6 million, $1.8 million
and $1.9 million, respectively, and recorded equity income (losses) of
$(126,000), $(127,000) and $215,000, respectively.

On July 1, 1995, the Company entered into a license agreement with Cignal
Limited, a Hong Kong company, granting it the rights to manufacture and
distribute in New Zealand, Australia, Canada and parts of Southeast Asia men's
and women's underwear, lingerie and sleepwear which bear the Guess trademark. On
January 1, 1997, the Company acquired a 50% interest in Cignal. With respect to
Cignal, during 1997, the Company recorded $58,000 of royalty income and $91,000
of equity losses.

On January 1, 1997, the Company acquired from Pour le bebe, Inc., a
California corporation, a 24.75% limited partnership interest in S.W.P.I., Ltd.,
a California limited partnership, as payment in lieu of unpaid license fees due
November 1, 1996. The Marciano Trusts have a 75.25% ownership interest in
S.W.P.I., Ltd. The 24.75% limited partnership in S.W.P.I., Ltd. was valued at
$1.4 million by the Company, based on the fair market value of the real estate
limited partnership. During 1997, the Company recorded $26,000 of equity income
associated with the real estate limited partnership.

F-17
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(8) RELATED PARTY TRANSACTIONS (CONTINUED)
BUYING AGENCY AGREEMENT

In February 1996, the Company entered into a buying agency agreement with
Newtimes Guess?, Ltd. ("Newtimes") The Company owns 50% of Newtimes. Pursuant to
such agreement, the Company pays Newtimes a commission based on the cost of
finished garments purchased for the Company. Commissions earned by Newtimes from
the Company during the fiscal year ended December 31, 1997 were $1.7 million.
Additionally, with respect to Newtimes, the Company recorded $150,000 in equity
losses during 1997. In February 1998, the Company informed Newtimes it wished to
discontinue the partnership. The Company is currently evaluating its
relationship with Newtimes and does not believe that the effect of a
discontinuation in the partnership will have a material adverse effect on the
Company's financial condition and results of operations.

LEASES

The Company leases manufacturing, warehouse and administrative facilities
from partnerships affiliated with the Marciano Trusts and certain of its
affiliates (the "Principal Stockholders"). The leases in effect at December 31,
1997 will expire in July 2008. Aggregate lease payments under leases in effect
for the fiscal years ended December 31, 1997, 1996 and 1995 were $2.6 million,
$2.9 million and $2.6 million, respectively.

Effective August 1, 1996, the Company subleased, on a month-to-month basis,
a portion of a Guess facility to Southwest Pacific Investment Company ("SWPI"),
an entity owned by the Marciano Trusts. Rental income recorded during 1997 and
1996 with respect to SWPI aggregated $125,000 and $57,000, respectively. The
month-to-month sublease with SWPI was terminated on December 31, 1997.

(9) COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases its showrooms and retail store locations under operating
lease agreements expiring on various dates through January 2012. Some of these
leases require the Company to make periodic payments for property taxes and
common area operating expenses. Certain leases include rent abatements and
scheduled rent escalations, for which the effects are being amortized and
recorded over the lease term. The Company also leases some of its equipment
under operating lease agreements expiring at various dates through September
2002.

Future minimum rental payments under non-cancelable operating leases at
December 31, 1997 are as follows:

F-18
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Year ending December 31, (in thousands):

<TABLE>
<S> <C>
1998.............................................................................. $ 27,121
1999.............................................................................. 25,926
2000.............................................................................. 25,159
2001.............................................................................. 24,532
2002.............................................................................. 22,665
Thereafter........................................................................ 80,079
---------
$ 205,482
---------
---------
</TABLE>

Rental expense for all operating leases during the years ended December 31,
1997, 1996, and 1995 aggregated $30.8 million, $26.4 million, and $21.9 million,
respectively.

INCENTIVE BONUSES

Certain officers of the Company are entitled to incentive bonuses based on
the Company's profits.

LITIGATION

On August 7, 1996, a class action complaint naming the Company and certain
of its independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, titled as Brenda Figueroa et. al. v.
Guess ?, Inc. et. al. (Case No. BC 155 165). In this case, 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.
Plaintiffs also allege that the Company breached its agreement with the United
States Department of Labor ("USDOL") regarding the monitoring of its independent
contractors.

F-19
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On August 7, 1997 UNITE filed Case No. 21-CA-32201, alleging the Company
violated the NLRA by filing retaliatory state and federal civil lawsuits against
UNITE and UNITE's employees, seeking fees and costs incurred defending such
lawsuits. These lawsuits primarily concern the legality of UNITE's picketing
activities against the Company, as well as trademark and other similar
violations under state and federal law. The NLRB determined not to issue a
complaint with respect to the Company's federal trademark suit, and to issue a
compliant with respect to certain of the Company's state law claims.

On June 19, 1997 (Case 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 LLP ("MSK") and certain employees of the Company and
MSK, 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 certain of the
contractors' employees were unlawfully polled and interrogated regarding their
union sympathies and threatened with plant closure. In this case, it is further
alleged the Company and its independent contractors were jointly liable for the
independent contractors' employees. On December 9 and 11, 1997, the Regional
Director for Region 21 of the NLRB ("Regional Director") advised the Company
that the portions of Case No. 21-CA-32106 against MSK and the portion of that
charge which alleged the Company and its independent contractors were joint
employers would be dismissed. The NLRB has issued a formal complaint regarding
the allegations against the Company that it had unlawfully polled and
interrogated employees of its independent contractors regarding their union
and/or protected concerted activities.

In Case No. 21-CA-32131 filed on June 30, 1997 and subsequently amended,
UNITE filed with the NLRB charges alleging that the Company 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)
interrogating and polling employees regarding their and other employees' union
sympathies and activities; (b) organizing anti-union demonstrations; (c)
promising benefits to employees if they withdrew support for UNITE; (d)
threatening employees due to their support and activities on behalf of UNITE;
(e) assisting and supporting an unlawful employee committee; and (f) engaging in
other conduct designed to have a negative effect on UNITE's corporate campaign.
In Case No. 21-CA-32136, filed on July 3, 1997 and subsequently amended, UNITE
alleges that the Company unlawfully discharged two employees because of their
union activities.

F-20
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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
administrative hearing on the consolidated complaint is scheduled to begin on
March 30, 1998. The Regional Director has determined to consolidate Cases No.
21-CA-31524, No. 21-CA-31565 and No. 21-CA-31648 with Cases No. 21-CA-32131 and
No. 21-CA-32136.

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 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, 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 occurring 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 twelve months ended December 31, 1997.

F-21
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
On February 24, 1998, the Company and Maurice Marciano, Paul Marciano and
Armand Marciano, as individuals, were named as defendants in a putative class
action entitled John N. Robinson v. Guess ?, Inc., Maurice Marciano, Paul
Marciano and Armand Marciano, case number BC186583, filed in the Los Angeles
Superior Court. The complaint (the "Complaint") purports to state a claim under
Sections 11.12(2) and 15 of the Securities Act of 1933 for alleged
misrepresentations in connection with the Company's initial public offering (the
"IPO") in August 1996. Mr. Robinson purports to represent a class of all
purchasers of the Company's stock in the IPO and seeks unspecified damages. The
case has just been filed, and a response by the defendants is not yet due. While
it is too soon to predict the outcome of the case with any certainty, the
Company believes it has meritorious defenses to each of the claims asserted and
intends to vigorously defend itself.

The Company believes the outcome of one or more of the above cases could
have a material adverse effect on the Company's financial condition and results
of operations.

(10) SAVINGS PLAN

On January 1, 1992, the Company established the Guess ? Inc. Savings Plan
(the "Savings Plan") under Section 401(k) of the Internal Revenue Code. Under
the Savings Plan, employees ("associates") may contribute up to 15% of their
compensation per year subject to the elective limits as defined by IRS
guidelines and the Company may make matching contributions in amounts not to
exceed 1.5% of the associates' annual compensation. The Company's contributions
to the Savings Plan during the years ended December 31, 1997, 1996 and 1995
aggregated $298,000, $284,000 and $261,000, respectively.

F-22
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(11) QUARTERLY INFORMATION (UNAUDITED)

The following is a summary of the unaudited quarterly financial information
for the years ended December 31, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue...................................................... $ 135,736 $ 118,515 $ 142,442 $ 118,679
Gross profit..................................................... 61,584 54,449 64,374 46,557
Earnings (loss) before income taxes and cumulative of change in
accounting principle........................................... 23,746 13,519 21,699 (4,077)
Earnings (loss) before cumulative effect of change in accounting
principle...................................................... 14,052 8,528 13,106 (2,136)
Net earnings (loss).............................................. 18,013 8,528 13,106 (2,136)

FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenue...................................................... $ 134,898 $ 122,508 $ 154,498 $ 139,258
Gross profit..................................................... 64,419 55,874 70,214 62,024
Earnings before income taxes..................................... 25,318 11,149 26,263 19,837
Net earnings..................................................... 24,047 10,822 20,338 11,534
Supplemental pro forma earnings:
Earnings before income taxes................................... 25,318 11,149 26,263 19,837
Net earnings................................................... 15,267 6,723 15,626 11,710
</TABLE>

The supplemental pro forma earnings presents net earnings, based on
historical earnings before income taxes, as if the Company was taxed as a C
corporation rather than an S corporation for all periods presented.

During the fourth quarter of 1997, the Company recorded approximately $3
million in non-recurring general and administrative expenses and approximately
$10 million in markdowns and returns in excess of anticipated levels.

(12) SEGMENT INFORMATION

Net revenue is summarized as follows for the years ended December 31, 1997,
1996 and 1995:

<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Domestic................................................. $ 455,968 $ 484,358 $ 453,344
International............................................ 59,404 66,804 33,389
---------- ---------- ----------
$ 515,372 $ 551,162 $ 486,733
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

(13) STOCK OPTION PLAN

On July 30, 1996, the Board of Directors adopted the Guess ?, Inc. 1996
Non-Employee Directors' Stock Option Plan pursuant to which the Board of
Directors may grant stock options to non-employee directors. This plan
authorizes grants of options to purchase up to 500,000 shares of authorized but

F-23
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(13) STOCK OPTION PLAN (CONTINUED)
unissued Common Stock. Stock options are granted with an exercise price equal to
the stock's fair market value at the date of grant. At December 31, 1997 and
1996, there were 28,886 and 0 options issued under this plan, respectively.

On July 30, 1996, the Board of Directors adopted the Guess ?, Inc. 1996
Equity Incentive Plan (the "Plan") pursuant to which the Board of Directors may
grant stock options to officers, key associates and consultants. The Plan
authorizes grants of options to purchase up to 4,500,000 shares of authorized
but unissued Common Stock. Stock options are granted with an exercise price
equal to the stock's fair market value at the date of grant. Stock options have
ten year terms (five years in the case of an incentive stock option granted to a
ten percent shareholder) and vest and become fully exercisable after varying
time periods from the date of grant based on length of service or specified
performance goals.

At December 31, 1997 and 1996, there were 3,208,645 and 3,248,895 additional
shares available for grant under the Plan, respectively. The per share
weighted-average fair value of stock options granted during 1997 and 1996 was
$9.75 and $15.83, respectively on the dates of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1997 and
1996 expected dividend yields of 0.0% and 0.0%, respectively, 1997 and 1996
risk-free interest rates of 6.50% and 6.57%, respectively, 1997 and 1996
volatility factors of 30% and 27%, respectively, and 1997 and 1996 expected
lives of four years.

The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation based on the
fair value at the grant date for its stock options under Financial Accounting
Standards Board Statement No. 123 ("SFAS No. 123"), the Company's pro forma net
earnings and net earnings per share for the year ended December 31, 1997 would
have been reduced to the pro forma amounts indicated below (in thousands, except
per share data):

<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Pro forma net earnings.................................................. $ 35,222 $ 48,287
Pro forma earnings per share............................................ $ 0.82 $ 1.15
</TABLE>

Pro forma net earnings reflects only options granted since the inception of
the Plan on July 30, 1996. The full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the options'
vesting period of four years.

F-24
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(13) STOCK OPTION PLAN (CONTINUED)
Stock option activity during the period indicated is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
----------- ----------------
<S> <C> <C>
Balance at July 30, 1996...................................... -- $ --
Granted..................................................... 1,287,105 17.74
Exercised................................................... -- --
Forfeited................................................... (36,000) (18.00)
Expired..................................................... -- --
----------- -------
Balance at December 31, 1996.................................. 1,251,105 17.73
Granted..................................................... 1,406,105 10.78
Exercised................................................... -- --
Forfeited................................................... (1,365,855) (16.88)
Expired..................................................... -- --
----------- -------
Balance at December 31, 1997.................................. 1,291,355 $ 11.05
----------- -------
----------- -------
</TABLE>

At December 31, 1997 and 1996, the weighted-average exercise price was
$11.05 and $17.73, respectively, and the weighted-average remaining contractual
lives of outstanding options were 8.85 and 9.63 years, respectively. The price
range of options outstanding at December 31, 1997 was $9.00 to $11.00. The price
range of options outstanding at December 31, 1996 was $12.50 to $18.00.

At December 31, 1997, the number of options exercisable was 179,527 and the
weighted-average exercise price of those options was $11.03.

On August 11, 1997, the options granted on August 13, 1996, with an original
exercise price of $18.00, were repriced to $11.00. All other terms of the
options granted remain the same.

(14) ACQUISITION

On December 4, 1996, the Company entered into an Asset Purchase Agreement in
which the Company purchased the rights, title and interest to the existing
License Agreement between the Company and Sweatshirt Apparel U.S.A., Inc.
("Sweatshirt Apparel"), for the manufacturing and distribution rights for Guess
women's knitwear products. In connection with the Asset Purchase Agreement, the
existing License Agreement between the Company and Sweatshirt Apparel was
terminated on December 31, 1996. The aggregate purchase price was $10.0 million,
of which $5.0 million was paid in cash prior to December 31, 1996, and $2.0
million was paid in cash and $3.0 million was settled in the form of a stock
issuance made on January 2, 1997 (216,216 shares at $13.87 per share). In
addition, one of the Principal Stockholders of Sweatshirt Apparel will receive
an earnout of no less than $0.5 million for each of five years, commencing in
1997.

F-25
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1997 AND 1996

(14) ACQUISITION (CONTINUED)
women's jeans. The Company will continue to design the collections to be sold in
the European market. In addition, an affiliate of Maco Apparel, S.p.a., Fingen
Apparel N.V., has entered into a retail store license agreement with the Company
for the opening and operation of Guess retail stores throughout Europe.

(15) REORGANIZATION CHARGE

In the second quarter of 1996, the Company recorded a provision amounting to
$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
currently active remote warehouse and production facilities, 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 write-down to net realizable value related to the disposal of the
warehouse and production facilities of $2.4 million is based upon the asset
carrying value of $5.7 million less its appraisal value of $3.9 million and
includes a provision of $600,000 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 asset carrying value of $7.2 million less the sale price of $6.0
million. The estimated costs of disposal of the aircraft were immaterial.

(16) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PRODUCT DISPLAY FIXTURES

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 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 year ended December 31, 1997.
Excluding the cumulative effect of the change in accounting principle, the
effect of the change during 1997 was to increase net earnings by approximately
$6.2 million or $0.14 per share.

(17) SUBSEQUENT EVENT

On January 1, 1998, the Company formed two wholly-owned subsidiaries; Guess?
Retail, Inc. and Guess? Licensing, Inc. The two subsidiaries will consolidate
activities which were formerly operated as divisions, which the Company believes
will result in greater operating efficiencies.

F-26
<PAGE>
SCHEDULE II

GUESS ?, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE
BEGINNING COSTS AND AND AT END
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
- ------------------------------------------------------------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
As of December 31, 1995
Allowance for obsolescence...................................... $ 2,400 $ 2,352 $ (392) $ 4,360
Accounts receivable............................................. 10,391 5,147 (4,689) 10,849
As of December 31, 1996
Allowance for obsolescence...................................... 4,360 (218) (885) 3,257
Accounts receivable............................................. 10,849 4,280 (5,392) 9,737
As of December 31, 1997
Allowance for obsolescence...................................... 3,257 3,764 (3,456) 3,565
Accounts receivable............................................. 9,737 12,747 (11,270) 11,214
</TABLE>

F-27
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on March 23, 1998.

<TABLE>
<S> <C> <C>
GUESS ?, INC.

By: /s/ MAURICE MARCIANO
-----------------------------------------
Maurice Marciano
Title: CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER AND DIRECTOR
</TABLE>

Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ MAURICE MARCIANO Chief Executive Officer
- ------------------------------ and Director (Principal March 23, 1998
Maurice Marciano Executive Officer)

/s/ PAUL MARCIANO
- ------------------------------ President, Chief Operating March 23, 1998
Paul Marciano Officer and Director

/s/ ARMAND MARCIANO Senior Executive Vice
- ------------------------------ President Assistant March 23, 1998
Armand Marciano Secretary and Director

Vice President--Finance,
Treasurer, and Corporate
Controller (Principal
/s/ TERENCE TSANG Financial Officer and March 23, 1998
- ------------------------------ Chief Accounting
Terence Tsang Officer)

/s/ ALDO PAPONE
- ------------------------------ Director March 23, 1998
Aldo Papone

/s/ ROBERT DAVIS
- ------------------------------ Director March 23, 1998
Robert Davis
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
3.1. Restated Certificate of Incorporation of the Registrant. (1)

3.2. Bylaws of the Registrant. (1)

4.3. Specimen stock certificate. (1)

10.1. Amended and Restated Stockholders' Agreement. (2)

10.4. Letter Agreement, dated January 22, 1996, between the Registrant and Andrea Weiss. (1)

10.5. Employment Agreement, dated as of May 14, 1996, between the Registrant and Francis K. Duane. (1)

10.19. Amendment No. 8 to the Revolving Credit Agreement, dated February 13, 1996, among the parties thereto.
(1)

10.20. Amended and Restated Revolving Credit Agreement, dated as of March 28, 1997. (2)

10.22. 1996 Equity Incentive Plan. (1)

10.23. 1996 Non-Employee Directors' Stock Option Plan. (1)

10.24. Annual Incentive Plan. (1)

10.25. Employment Agreement between the Regristrant and Maurice Marciano. (2)

10.26. Employment Agreement between the Regristrant and Paul Marciano. (2)

10.27. Employment Agreement between the Regristrant and Armand Marciano. (2)

10.28. Registration Rights Agreement among the Registrant and certain stockholders of the Registrant. (2)

10.29. Indemnification Agreement among the Registrant and certain stockholders of the Registrant. (2)

10.30. Indemnification Agreements between the Registrant and certain executives and directors. (2)

10.31. First Amendment to Amended and Restated Shareholders' Agreement.(3)

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. (4)

* 10.33. Amended and Restated 1996 Non-Employee Directors' Stock Option Plan, as amended through March 3, 1997.

* 18.0. Letter regarding change in accounting principles.

* 21.1. List of Subsidiaries.

* 27.1. Financial Data Schedule for the year ended December 31, 1997.

* 27.2 Financial Data Schedule for the years ended December 31, 1996 and 1995 and quarters ended March 31,
1996, June 30, 1996 and September 28, 1996.

* 27.3 Financial Data Schedule quarters ended March 30, 1997, June 29, 1997 and September 28, 1997.
</TABLE>

- ------------

* Filed herewith

(b) Financial Statement Schedule:
<PAGE>
Description

Schedule II Valuation and Qualifying Accounts

- ------------

(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 Company's Annual Report on Form 10-K for
the year ended December 31, 1996.

(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1997.

(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 29, 1997.

<PAGE>

Exhibit 10.33 Amended and Restated 1996 Non-Employee Directors' Stock Option
Plan, as amended through March 3, 1997
- ----------------------------------------------------------------------------
GUESS ?, INC.
AMENDED AND RESTATED 1996
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

(as amended through March 3, 1997)

1. Purpose of the Plan.

The purpose of this Plan is to enable the Company to attract and retain as
non-employee directors individuals with superior training, experience and
ability and to provide additional incentive to such Eligible Directors by
giving them an opportunity to participate in the ownership of the Company.

2. Definitions.

For purposes of the Plan, the following terms shall be defined as set forth
below:

"Affiliate" and "Associate" have the respective meanings ascribed to such terms
in Rule 12b-2 promulgated under the Exchange Act.

"Annual Meeting" means an annual meeting of the Company's stockholders.

"Award Agreement" means a written document issued by the Company to an Optionee
regarding the grant and exercise of Options to purchase shares of Common Stock
and the terms and conditions thereof.

"Beneficial Owner" has the meaning ascribed to such term in Rule 13d-3
promulgated under the Exchange Act.

"Board" means the Board of Directors of the Company.

"Code" means the Internal Revenue Code of 1986, as amended from time to time,
and any successor thereto.

"Combined Voting Power" means the combined voting power of the Company's then
outstanding voting securities.

"Common Stock" means the Common Stock of the Company, par value $.01 per share.

"Company" means Guess ?, Inc., a Delaware corporation, including any wholly
owned Subsidiary or affiliate, or any successor organization.

"Disability" means permanent and total disability within the meaning of Section
22(e)(3) of the Code.

"Election Date" means January 15 of the relevant Election Period, provided,
however, that if the Election Date for an Eligible Director's initial Election
Period shall be the day of initial election or appointment to the Board.

"Election Period" means the calendar year, provided, however, that if an
Eligible Director is initially elected or appointed to the Board as of a date
other than January 1, the initial Election Period for such Eligible Director
shall be the remainder of the year of initial election or appointment.

<PAGE>

"Eligible Director" means a person who is a member of the Board and who is not
an employee of the Company.

"Eligibility Date" means the first business day of each of the Company's fiscal
years, commencing January 1, 1997, while this Plan is in effect.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Fair Market Value" means, on any given date, the closing price of the shares
of Common Stock, as reported on the New York Stock Exchange for such date or,
if Common Stock was not traded on such date, on the next preceding day on which
Common Stock was traded; provided that if the Common Stock is not then traded
on the New York Stock Exchange, Fair Market Value means the fair market value
thereof as of the relevant date of determination as determined in accordance
with a valuation methodology approved by the Board.

"Incentive Stock Option" means any Option intended to be designated as an
"incentive stock option" within the meaning of Section 422 of the Code.

"Non-qualified Stock Option" means any Option that is not an Incentive Stock
Option.

"Option" means any option to purchase shares of the Common Stock of the Company
granted pursuant to this Plan.

"Optionee" means an Eligible Director who receives an Option under the Plan.

"Parent" means any corporation which is a "parent corporation" within the
meaning of Section 424(e) of the Code with respect to the Surviving Entity.

"Person" means any person or "group" within the meaning of Section 13(d)(3) or
Section 14(d)(2) of the Exchange Act.

"Plan" means the Guess ?, Inc. Amended and Restated Non-Employee Directors'
Stock Option Plan, as hereinafter amended from time to time.

"Rules" means the regulations promulgated by the Securities and Exchange
Commission under Section 16 of the Exchange Act, as amended from time to time.

"Subsidiary" means (i) any corporation which is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code with respect to the Company or
(ii) any other corporation or other entity in which the Company, directly or
indirectly, has an equity or similar interest and which the Board designates as
a subsidiary for purposes of the Plan.

"Surviving Entity" has the meaning ascribed to it in Section 9(b) hereof.

Except where otherwise indicated by the context, any masculine terminology used
herein shall also include the feminine and vice versa, and the definition of
any term herein in the singular shall also include the plural and vice versa.

<PAGE>

3. Shares Subject to the Plan.

Except as provided in Section 9, the aggregate number of shares of Common Stock
that may be issued under the Plan is 500,000. Such shares may include
authorized but unissued shares of Common Stock, treasury shares or a
combination of both. In the event the number of shares of Common Stock issued
under the Plan and the number of shares of Common Stock subject to outstanding
awards equals the maximum number of shares of Common Stock authorized under the
Plan, no further awards shall be made unless the Plan is amended (in accordance
with the Rules, if necessary) or additional shares of Common Stock become
available for further awards under the Plan. If and to the extent that Options
granted under the Plan terminate, expire or are canceled without having been
exercised, such shares shall again be available for subsequent awards under the
Plan.

4. Administration of the Plan.

(a) Administration. The Plan shall be administered by the Board.
Subject to the provisions of the Plan, the Board shall be authorized to:

(i) adopt, revise and repeal such administrative rules, guidelines
and practices governing this Plan as it shall from time to time deem advisable;

(ii) interpret the terms and provisions of the Plan and any Option
issued under the Plan (and any agreements relating thereto), and otherwise
settle all claims and disputes arising under the Plan;

(iii) delegate responsibility and authority for the operation and
administration of the Plan, appoint employees and officers of the Company to
act on its behalf, and employ persons to assist in the fulfilling of its
responsibilities under the Plan; and

(iv) otherwise supervise the administration of the Plan; provided,
however, that the Board shall have no discretion with respect to the selection
of Eligible Directors to receive Options hereunder, the number of shares of
Common Stock covered by such Option or the price or timing of any Options
granted hereunder; provided further that any action by the Board relating to
the Plan will be taken only if approved by the affirmative vote of a majority
of the directors who are not then eligible to participate under the Plan.

(b) Delegation to a Committee. The Board may delegate to a committee of
the Board any or all of its authority for administration of the Plan and, if
such delegation occurs, all references to the Board in this Plan shall be
deemed references to the committee to the extent provided in the resolution
establishing the committee.

(c) Loans to Optionees. The Board, in its absolute discretion, may
provide that the Company loan to Optionees sufficient funds to exercise any
Option and/or to pay any withholding due upon exercise of such Option. The
Board shall have the authority to make such determinations at any time and
shall establish repayment terms, including installments, maturity and interest
rates.

<PAGE>

5. Option Grants.

(a) Number of Options Granted. The following Options shall be
automatically granted to each Eligible Director under the Plan, without further
approval or authorization of the Board or any other person:

(i) Each person who first becomes an Eligible Director on or after
the date of the Company's initial public offering of Common Stock shall be
awarded an Option to purchase 10,000 shares of Common Stock as of the date such
person first becomes an Eligible Director.

(ii) On each Eligibility Date, each Eligible Director who has not
been an employee of the Company at any time during the immediately preceding 12
months shall be awarded an Option to purchase 3,000 shares of Common Stock,
provided, however, that an Eligible Director whose initial election or
appointment to the Board occurs after September 30 of a given year (or, if the
fiscal year of the Company shall be other than the calendar year, whose initial
election or appointment to the Board occurs more than nine months after the
start of the Company's fiscal year) shall not receive an award pursuant to this
clause (ii) on the first Eligibility Date to occur after such initial election
or appointment.

In addition to the Options granted under this Section 5, Eligible Directors may
also be awarded Options pursuant to the election provided for in Section 6
below.

(b) Option Price. The Option price per share of Common Stock covered by
an Option granted under this Section 5 shall be 85% of the Fair Market Value of
one share of Common Stock as of the date of grant.

(c) Amendments to this Section 5. Notwithstanding any other provision of
the Plan, until August 15, 1996, this Section 5 may not be amended more then
once, except for amendments necessary to conform the Plan to changes in the
provisions of, or the regulations relating to, the Code.

(d) Exercisability. Subject to the other terms and conditions of the
Plan, Options granted under this Section 5 shall vest and become exercisable
with respect to one-fourth of the shares of Common Stock covered thereby on
each anniversary of the date of grant, provided that the Eligible Director
shall have continued in service on the Board until such date. In no case may
an Option be exercised as to less than 100 shares at any one time (or the
remaining shares covered by the Option if less than 100) during the term of the
Option. Only whole shares shall be issued pursuant to the exercise of any
Option.

6. Elections to Receive Options in Lieu of Annual Retainer Fees.

(a) General; Time and Manner of Making Election. An Eligible Director
may elect to receive, in lieu of his or her annual cash retainer fees for
service on the Board, Options having the terms and conditions set forth in this
Section 6 and in Section 7 below. Such an election shall be made with respect
to any Election Period by completing, signing and returning to the Company, on
or prior to the Election Date, a election form provided for such purpose or
other documentation reasonably acceptable to the general counsel of the
Company. Elections pursuant to this Section 6(a) may be made only with respect
to the entire amount of an Eligible Director's annual cash retainer fees for
service on the Board during an Election Period. Elections shall not be
available either with respect to any portion of such annual retainer fee or

<PAGE>

with respect to any attendance fees or fees for service on, or as chairman of,
a committee. An election, once made, shall be irrevocable.

(b) Number of Shares Subject to Option. The number of shares of Common
Stock subject to an Option awarded pursuant to an election made as provided in
Section 6(a) above shall be calculated using the formula (A x B)/C, where "A"
equals the dollar amount of annual retainer fee deferred, "B" equals 2.50 and
"C" equals the Fair Market Value of one share of Common Stock on the applicable
Election Date. If the foregoing yields a fractional share, the number of
shares subject to the Option shall be rounded up to the nearest whole share.

(c) Date of Grant; Option Price. Options awarded pursuant to this
Section 6 will be granted as of the relevant Election Date. The Option price
per share of Common Stock covered by an Option granted under this Section 6
shall be the Fair Market Value of one share of Common Stock as the date of
grant.

(d) Exercisability. Subject to the other terms and conditions of the
Plan, Options granted under this Section 6 shall vest and become exercisable
with respect to one-fourth of the shares of Common Stock covered thereby on the
first day of each of the four fiscal quarters following the date of grant,
provided that the Eligible Director shall have continued in service on the
Board until such date. In no case may an Option be exercised as to less than
100 shares at any one time (or the remaining shares covered by the Option if
less than 100) during the term of the Option. Only whole shares shall be
issued pursuant to the exercise of any Option.

7. General Terms and Conditions of Options.

All Options granted under the Plan shall have the following terms and
conditions:

(a) Award Agreement. Each Option shall be evidenced by an Award
Agreement containing such terms and conditions which are not inconsistent with
the terms of the Plan. Award Agreements relating to Options may, in the
discretion of the Board, provide restrictions on transfer of shares of Common
Stock acquired upon exercise of any Option during a specified period.

(b) Non-qualified Stock Options. All Options granted hereunder shall be
Non-qualified Stock Options. No Option granted pursuant to this Plan may be
designated as an Incentive Stock Option.

(c) Option Term. The term of each Option shall be ten years. No Option
shall be exercised by any person after expiration of the term of the Option.

(d) Method of Exercise. Exercise of Options shall be subject to any
trading policy of the Company applicable to members of the Board, including
without limitation any "blackout" period requirements or other restrictions on
the time during which Options may be exercised. Shares may be purchased or
acquired pursuant to an Option granted hereunder by giving written notice of
exercise to the Company, specifying the number of shares as to which the
Optionee desires to exercise the Option, and containing any representations
required by the Board. On or before the date specified for completion of the
purchase of shares pursuant to an Option, the Optionee must have paid the
Company the full purchase price of such shares in cash, certified or bank
check, or other instrument acceptable to the Board. As determined by the Board
in its sole discretion, payment in full or in part may also be made by
tendering to the Company shares of previously acquired unrestricted Common

5
<PAGE>

Stock of the Company (having a Fair Market Value as of the date the Option is
exercised equal to the exercise price (or such portion thereof)). Common Stock
used to pay the exercise price may be shares that are already owned by the
Optionee, or the Company may withhold shares of Common Stock that would
otherwise have been received by the Optionee upon exercise of the Option. In
its discretion, in accordance with rules and procedures established by the
Board for this purpose, the Board may also permit an Optionee to exercise an
Option through a "cashless exercise" procedure approved by the Board involving
a broker or dealer approved by the Board, provided that the Optionee has
delivered an irrevocable notice of exercise (the "Notice") to the broker or
dealer and such broker or dealer agrees: (A) to sell immediately the number of
shares of Common Stock specified in the Notice to be acquired upon exercise of
the Option in the ordinary course of its business, (B) to pay promptly to the
Company the aggregate exercise price (plus the amount necessary to satisfy any
applicable tax liability) and (C) to pay to the Optionee the balance of the
proceeds of the sale of such shares over the amount determined under clause (B)
of this sentence, less applicable commissions and fees; provided, however, that
the Board may modify the provisions of this sentence to the extent necessary to
conform the exercise of the Option to Regulation T under the Exchange Act or
any other applicable rules. The manner in which the exercise price may be paid
may be subject to certain conditions specified by the Board, including, without
limitation, conditions intended to avoid the imposition of liability against
the individual under Section 16 of the Exchange Act. If requested by the
Board, the Optionee shall deliver the Award Agreement evidencing an exercised
Option to the Secretary of the Company, who shall endorse thereon a notation of
such exercise and return such Award Agreement to the Optionee exercising the
Option. No fractional shares (or cash in lieu thereof) shall be issued upon
exercise of an Option and the number of shares that may be purchased upon
exercise shall be rounded to the nearest number of whole shares.

(e) Non-transferability. No Option granted under the Plan or any rights
or interests therein may be sold, transferred, assigned, pledged or otherwise
encumbered or disposed of, except by will, or the laws of descent and
distribution or pursuant to a "qualified domestic relations order" ("QDRO") as
defined in the Code or Title I of the Employee Retirement Income Security Act
of 1974, as amended, and the rules and regulations thereunder; provided,
however, that the Board may, subject to such terms and conditions as the Board
shall specify, permit the transfer of an Option granted after August 15, 1996
to an Optionee's family members or to one or more trusts established in whole
or in part for the benefit of one or more of such family members. During the
Optionee's lifetime, all Options shall be exercisable only by the Optionee or,
if applicable, the "alternate payee" under a QDRO, or the family member or
trust to whom such Option has been transferred in accordance with the previous
sentence.

(f) Termination by Reason of Death. In the event of the death of an
Optionee, any Option held by such Optionee may thereafter be exercised, to the
extent exercisable on the date of death, by the legal representative of the
estate or legatee of the Optionee under the will of the Optionee for a period
of one year from the date of such death or until the expiration of the stated
term of such Option, whichever period is shorter, and to the extent not
exercisable on the date of death, such Option shall be forfeited.

(g) Termination by Reason of Disability. In the event of the Disability
of an Optionee, any Option held by such Optionee may thereafter be exercised by
the Optionee, to the extent it was exercisable at the time of such Disability,
for a period of one year from the date of such Disability or until the
expiration of the stated term of such Option, whichever period is shorter, and
to the extent not exercisable on the date of Disability, such

<PAGE>

Option shall be forfeited; provided, however, that if the Optionee dies
within such one-year period, any unexercised Option held by such Optionee
shall thereafter be exercisable to the extent it was exercisable at the time
of death for a period of one year from the date of such death or until the
expiration of the stated term of such Option, whichever period is shorter.

(h) Other Terminations. If an Optionee ceases to be an Eligible Director
for any reason other than death or Disability, any Option held by such Optionee
may thereafter be exercised by the Optionee, to the extent it was exercisable
at the time of such termination, for a period of six months from the date of
such termination or the expiration of the stated term of such Option, whichever
period is shorter, and to the extent not exercisable on the date of
termination, such Option shall be forfeited; provided, however, that if the
Optionee dies within such six-month period, any unexercised Option held by such
Optionee shall thereafter be exercisable, to the extent to which it was
exercisable at the time of death, for a period of one year from the date of
such death or until the expiration of the stated term of the Option, whichever
period is shorter.

8. Amendment and Termination.

The Board may amend, alter, suspend or terminate the Plan in whole or in part
at any time and from time to time; provided, however, that, until August 15,
1996, the provisions of the Plan respecting eligibility to participate may not
be amended more frequently than once, other than to comport with changes in the
Code, or the Employee Retirement Income Security Act of 1974, as amended, and
any rules or regulations thereunder; provided further that any amendment,
alteration, suspension or termination which, under the requirements of
applicable federal or state law or regulation or the rules of any stock
exchange or automated quotation system on which the Common Stock may then be
listed or quoted must be approved by the stockholders of the Company, shall not
be effective unless and until such stockholder approval has been obtained in
compliance with such law. The Board may amend the terms of any Option
theretofore granted, prospectively or retroactively, but no such amendment
shall impair the rights of any Optionee without the Optionee's consent.
Notwithstanding any provision herein to the contrary, the Board shall have
broad authority to amend the Plan or any Option to take into account changes in
applicable tax laws, securities laws, accounting rules and other applicable
state and federal laws.

9. Changes in Capital Structure.

(a) In the event of any change in the outstanding Common Stock by reason
of a stock dividend, recapitalization, reorganization, merger, consolidation,
stock split, combination or exchange of shares, (i) such proportionate
adjustments as may be necessary (in the form determined by the Board in its
sole discretion) to reflect such change shall be made to prevent dilution or
enlargement of the rights of Optionees under the Plan with respect to the
aggregate number of shares of Common Stock for which awards in respect thereof
may be granted under the Plan, the number of shares of Common Stock covered by
each outstanding Option, and the exercise price in respect thereof and (ii) the
Board may make such other adjustments, consistent with the foregoing, as it
deems appropriate in its sole discretion.

(b) In the event of a change in control of the Company, (i) all
outstanding Options granted hereunder shall become fully exercisable as of the
date of the Change in Control, whether or not then exercisable, and (ii) in the
case of a change in control involving a merger of, and consolidation involving,
the Company in which the Company is (A) not the surviving corporation (the
"Surviving Entity") or (B) becomes a wholly owned subsidiary

<PAGE>

of the Surviving Entity or any Parent thereof, each outstanding Option
granted hereunder and not exercised (a "Predecessor Option") shall be
converted into an option (a "Substitute Option") to acquire common stock of
the Surviving Entity or its Parent, which Substitute Option shall have
substantially the same terms and conditions as the Predecessor Option, with
appropriate adjustments as to the number and kind of shares and exercise
prices. A "change in control" shall be deemed to have occurred when (A) any
Person (other than (x) the Company, any Subsidiary of the Company, any
employee benefit plan of the Company or of any Subsidiary of the Company, or
any person or entity organized, appointed or established by the Company or
any Subsidiary of the Company for or pursuant to the terms of any such plan
or (y) Maurice Marciano, Paul Marciano or Armand Marciano, or any trust
established in whole or in part for the benefit of one or more of them or
their family members, or any other entity controlled by one or more of them),
alone or together with its Affiliates and Associates (collectively, an
"Acquiring Person"), shall become the Beneficial Owner of twenty percent
(20%) or more of the then outstanding shares of Common Stock or the Combined
Voting Power of the Company (except pursuant to an offer for all outstanding
shares of Common Stock at a price and upon such terms and conditions as a
majority of the Continuing Directors determine to be in the best interests of
the Company and its shareholders (other than an Acquiring Person on whose
behalf the offer is being made)), (B) during any period of two consecutive
years, individuals who at the beginning of such period constitute the Board,
and any new director (other than a director who is a representative or
nominee of an Acquiring Person) whose election by the Board or nomination for
election by the Company's shareholders was approved by a vote of at least a
majority of the directors then still in office who either were directors at
the beginning of the period or whose election or nomination for election was
previously so approved (collectively, the "Continuing Directors"), cease for
any reason to constitute a majority of the Board, (C) the shareholders of the
Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the Surviving Entity or any Parent of
such Surviving Entity) at least 80% of the Combined Voting Power of the
Company, such Surviving Entity or the Parent of such Surviving Entity
outstanding immediately after such merger or consolidation, or (D) the
shareholders of the Company approve a plan of reorganization (other than a
reorganization under the United States Bankruptcy Code) or complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets; provided,
however, that a change in control shall not be deemed to have occurred in the
event of (x) a sale or conveyance in which the Company continues as a holding
company of an entity or entities that conduct all or substantially all of the
business or businesses formerly conducted by the Company or (y) any
transaction undertaken for the purpose of incorporating the Company under the
laws of another jurisdiction, if such transaction does not materially affect
the beneficial ownership of the Company's capital stock.

10. Unfunded Status of the Plan.

The Plan is unfunded. Nothing contained herein shall give any such Optionee
any rights that are greater than those of a general creditor of the Company.
In its sole discretion, the Board may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver Common
Stock or payments in lieu thereof with respect to awards hereunder.

<PAGE>

11. Effective Date and Term of the Plan.

The Plan shall be effective as of the date the Plan is approved by the Board,
provided that the Plan is approved by the affirmative votes of a majority of
shares of Common Stock or by written consent of a majority of shares of Common
Stock. Options granted under the Plan prior to such shareholder approval shall
be and are made subject to defeasance by the failure of the shareholders to
approve the Plan. The Plan shall continue in effect until the earlier of
(a) ten years from the date of the first grant of Options or (b) the
termination of the Plan by action of the Board. No Options shall be granted
pursuant to the Plan on or after such termination date, but Options granted
prior to such date may extend beyond that date. The Board shall have the right
to suspend or terminate the Plan at any time except with respect to any Options
then outstanding.

12. General Provisions.

(a) Representations by Optionees. The Board may require each Optionee to
represent to and agree with the Company in writing that the Optionee is
acquiring the shares of Common Stock without a view to distribution or other
disposition thereof. The certificates for such shares may include any legend
that the Company deems appropriate to reflect any restrictions on transfer.

(b) No Restrictions on Adoption of Other Compensation Arrangements.
Nothing contained in this Plan shall prevent the Board from adopting other or
additional compensation arrangements (subject to stockholder approval, if such
approval is required) and such arrangements may be either generally applicable
or applicable only in specific cases.

(c) No Right to Re-Election. The adoption of the Plan shall not
interfere in any way with the right of the Company to terminate its
relationship with any of its directors at any time.

(d) Tax Withholding. No later than the date as of which an amount first
becomes includable in the gross income of the Optionee for applicable income
tax purposes with respect to any award under the Plan, the Optionee shall pay
to the Company or make arrangements satisfactory to the Board regarding the
payment of any federal, state or local taxes of any kind required by law to be
withheld with respect to such amount. Unless otherwise determined by the
Board, in accordance with rules and procedures established by the Board, the
minimum required withholding obligations may be settled with Common Stock,
including Common Stock that is part of the award that gives rise to the
withholding requirement. The obligation of the Company under the Plan shall be
conditional upon such payment or arrangements and the Company shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment of any kind otherwise due to the Optionee.

(e) Issue and Transfer Taxes. The Board may agree to require the Company
to pay issuance or transfer taxes on shares issued pursuant to the exercise of
an Option under the Plan.

(f) Applicable Law. The Plan shall be governed by and subject to the
laws of the State of Delaware and to all applicable laws and to the approvals
by any governmental or regulatory agency as may be required.

(g) Severability. If any provision of this Plan shall be held illegal or
invalid for any reason, such illegality or invalidity shall not affect the
remaining provisions of this Plan, but this Plan shall be construed and

<PAGE>

enforced as if such illegal or invalid provision had never been included
herein.

(h) Compliance with Rule 16b-3. The Plan is intended to comply with
Rule 16b-3 under the Exchange Act or its successors under the Exchange Act and
the Board shall interpret and administer the provisions of the Plan or any
Award Agreement in a manner consistent therewith. To the extent any provision
of the Plan or Award Agreement or any action by the Board fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Board. Moreover, in the event the Plan or an Award Agreement
does not include a provision required by Rule 16(b)(3) to be stated therein,
such provision (other than one relating to eligibility requirements, or the
price and amount of Awards) shall be deemed automatically to be incorporated by
reference into the Plan or such Award Agreement.

(i) Expenses. All expenses and costs in connection with the
administration of the Plan or the issuance of Options hereunder shall be borne
by the Company.

(j) Headings. The headings of sections herein are included for
convenience of reference and shall not affect the meaning of any of the
provisions of the Plan.

<PAGE>

EXHIBIT 18.0 Letter regarding change in accounting principles
- ------------------------------------------------------------------------------

April 23, 1997

Guess ? Inc.
Los Angeles, California

Gentleman:

We have been furnished with a copy of Form 10-Q of Guess ?, Inc. for the
quarter ended March 30, 1997, and have read the Company's statements contained
in Note 4 to the condensed financial statements included therein. As stated in
Note 4, the Company changed its method of accounting for product display
fixtures and states that the newly adopted accounting principle is preferable
in the circumstances because the newly adopted principle more accurately
matches the long-term benefit derived from the product display fixtures with
the expected future revenue from such fixtures. In accordance with your
request, we have reviewed and discussed with Company officials the circumstance
and business judgment and planning upon which the decision to make this change
in the method of accounting was based.

We have not audited any financial statements of Guess ?, Inc. as of any date or
for any period subsequent to December 31, 1996, nor have we audited the
information set forth in the aforementioned Note 4 to the condensed financial
statements; accordingly, we do not express an opinion concerning the factual
information contained therein.

With regard to the aforementioned accounting charge, authoritative criteria
have not been established for evaluating the preferability of one acceptable
method of accounting over another acceptable method. However, for purposes of
Guess ?, Inc.'s compliance with the requirements of the Securities and Exchange
Commission, we are furnishing this letter.

Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the Company's circumstances.

Very truly yours,

KPMG PEAT MARWICK LLP

<PAGE>

Exhibit 21.1. List of Subsidiaries.
- ------------------------------------------------------------------------------

LIST OF SUBSIDIARIES

<TABLE>
<CAPTION>
Investment in Location Owned by Percent of Ownership
- ------------- -------- -------- -------------------
<S> <C> <C> <C>
Guess? Europe, BV Netherlands Guess?, Inc. 100%
Guess? Asia Hong Kong Guess? Europe, BV 100%
Ranche Ltd. Hong Kong Guess? Europe, BV 100%
</TABLE>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,204
<SECURITIES> 0
<RECEIVABLES> 28,276
<ALLOWANCES> 11,196
<INVENTORY> 92,081
<CURRENT-ASSETS> 167,622
<PP&E> 175,052
<DEPRECIATION> 76,882
<TOTAL-ASSETS> 287,814
<CURRENT-LIABILITIES> 60,952
<BONDS> 141,300
0
0
<COMMON> 137
<OTHER-SE> 75,193
<TOTAL-LIABILITY-AND-EQUITY> 287,814
<SALES> 465,913
<TOTAL-REVENUES> 515,372<F1>
<CGS> 288,408
<TOTAL-COSTS> 444,726
<OTHER-EXPENSES> 2,041
<LOSS-PROVISION> 73
<INTEREST-EXPENSE> 13,718
<INCOME-PRETAX> 54,887
<INCOME-TAX> 21,337
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (3,961)<F2>
<NET-INCOME> 37,511
<EPS-PRIMARY> .87<F3>
<EPS-DILUTED> .87<F3>
<FN>
<F1>Includes net royalties of $49.5 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 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 year ended
December 31, 1997. Excluding the cumulative effect of the change in accounting
principle, the effect of the change during 1997 was to increase net earnings by
approximately $6.2 million or $0.14 per share.
<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 $0.78 per share-basic.
Diluted earnings per share were the same as basic earnings per share.
</FN>

</TABLE>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 12-MOS 12-MOS 3-MOS 3-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1996
DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1995 JAN-01-1996 APR-01-1996
JUL-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-3-1996
SEP-29-1996
<CASH> 13,201 6,417 8,583 5,442
5,914
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 36,844 33,882 51,147 39,625
52,047
<ALLOWANCES> 9,737 10,849 8,142 8,222
9,468
<INVENTORY> 79,489 72,889 90,472 92,340
83,890
<CURRENT-ASSETS> 151,315 121,764 160,271 150,332
158,519
<PP&E> 121,280 119,920 122,383 126,811
117,667
<DEPRECIATION> 56,978 51,721 55,855 59,465
54,456
<TOTAL-ASSETS> 239,306 202,635 239,267 229,735
237,408
<CURRENT-LIABILITIES> 74,494 64,192 66,401 65,917
72,004
<BONDS> 121,217 119,212 146,752 148,712
135,466
0 0 0 0
0
0 0 0 0
0
<COMMON> 135 35 35 35
135
<OTHER-SE> 34,793 10,962 17,435 6,289
21,025
<TOTAL-LIABILITY-AND-EQUITY> 239,306 202,635 239,267 229,735
237,408
<SALES> 497,874 440,359 123,275 108,836
139,511
<TOTAL-REVENUES> 551,162<F1> 486,733<F1> 134,898<F1> 122,508
<F1> 154,498<F1>
<CGS> 298,631 262,142 70,479 66,634
84,284
<TOTAL-COSTS> 453,067 403,805 105,711 107,790
<F2> 123,774
<OTHER-EXPENSES> 989 157 320 (173)
618
<LOSS-PROVISION> 323 136 161 42
92
<INTEREST-EXPENSE> 14,539 15,957 3,549 3,742
3,843
<INCOME-PRETAX> 82,567 66,814 25,318 11,149
26,263
<INCOME-TAX> 15,826 2,895 1,271 327
5,925
<INCOME-CONTINUING> 66,741 63,919 24,047 10,822
20,338
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> 66,741 63,919 24,047 10,822
20,338
<EPS-PRIMARY> 0.00 0.00 0.00 0.00
0.00
<EPS-DILUTED> 0.00 0.00 0.00 0.00
0.00
<FN>
<F1>FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND QUARTERS ENDED MARCH 31,
1996, JUNE 30, 1996 AND SEPTEMBER 29, 1996, INCLUDES NET ROYALTIES OF $53.3
MILLION, $46.4 MILLION, $11.6 MILLION, $16.7 MILLION AND $15.0 MILLION,
RESPECTIVELY.
<F2>INCLUDES NON-RECURRING CHARGES RELATED TO THE WRITEDOWN OF OPERATING ASSETS TO
BE DISPOSED OF IN CONTEMPLATION OF THE OFFERINGS AGGREGATING $3.6 MILLION
RELATING TO (A) DISPOSAL OF TWO CURRENTLY ACTIVE REMOVE WAREHOUSE AND
PRODUCTION FACILITIES, WHICH ARE NOT EXPECTED TO BE USED IN THE COMPANY'S
OPERATIONS AFTER THE OFFERINGS, RESULTING IN A NET BOOK LOSS OF $2.4 MILLION,
AND (B) THE NET BOOK LOSS OF $1.2 MILLION INCURRED BY THE COMPANY IN CONNECTION
WITH THE SALE OF ONE OF ITS AIRCRAFT TO AN UNAFFILIATED THIRD PARTY FOR $6.0
MILLION IN CONTEMPLATION OF THE OFFERINGS.
</FN>

</TABLE>

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 MAR-31-1997 JUN-30-1997
<PERIOD-END> MAR-30-1997 JUN-29-1997 SEP-28-1997
<CASH> 5,763 4,452 6,556
<SECURITIES> 0 0 0
<RECEIVABLES> 53,715 41,080 46,322
<ALLOWANCES> 5,366 5,023 5,221
<INVENTORY> 86,640 103,501 105,864
<CURRENT-ASSETS> 173,504 182,006 193,351
<PP&E> 134,613 146,679 162,228
<DEPRECIATION> 61,469 68,582 73,394
<TOTAL-ASSETS> 276,289 297,257 313,079
<CURRENT-LIABILITIES> 82,571 65,412 62,314
<BONDS> 129,500 146,200 164,300
0 0 0
0 0 0
<COMMON> 137 137 137
<OTHER-SE> 55,578 64,087 77,191
<TOTAL-LIABILITY-AND-EQUITY> 276,289 297,257 313,079
<SALES> 122,668 107,466 126,978
<TOTAL-REVENUES> 135,736<F1> 118,515<F1> 142,442<F1>
<CGS> 74,152 64,066 78,068
<TOTAL-COSTS> 108,883 101,761 117,318
<OTHER-EXPENSES> (119) 48 (55)
<LOSS-PROVISION> 83 162 106
<INTEREST-EXPENSE> 3,226 3,187 3,480
<INCOME-PRETAX> 23,746 13,519 21,699
<INCOME-TAX> 9,694 4,991 8,593
<INCOME-CONTINUING> 14,052 8,528 13,106
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 3,961<F2> 0 0
<NET-INCOME> 18,013 8,528 13,106
<EPS-PRIMARY> 0.42 0.20 0.31
<EPS-DILUTED> 0.42 0.20 0.31
<FN>
<F1>FOR THE QUARTERS ENDED MARCH 30, 1997, JUNE 29, 1997 AND SEPTEMBER 28, 1997,
INCLUDES NET ROYALTIES OF $13.1 MILLION, $11.0 MILLION, $15.5 MILLION,
RESPECTIVELY.
<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 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 YEAR ENDED DECEMBER 31, 1997.
EXCLUDING THE CUMULATIVE EFFECT OF THE CHANGE IN ACCOUNTING PRINCIPLE, THE
EFFECT OF THE CHANGE DURING 1997 WAS TO INCREASE NET EARNINGS BY APPROXIMATELY
$6.2 MILLION OR $0.14 PER SHARE.
</FN>

</TABLE>