UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 30, 1997
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 1-11893
--------------------------------
GUESS ?, INC.
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3679695
------------------------------ -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1444 South Alameda Street
Los Angeles, California, 90021
--------------------------------
(Address of principal executive offices)
(213) 765-3100
--------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of May 12, 1997, the registrant had 42,898,035 shares of Common Stock, $.01
par value, outstanding.
GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
as of March 30, 1997 and December 31, 1996 . . . . . . . . . . . . 1
Condensed Consolidated Statements of Earnings (Unaudited) -
First Quarter ended March 30, 1997 and March 31, 1996. . . . . . . 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
First Quarter ended March 30, 1997 and March 31, 1996. . . . . . . 5
Notes to Condensed Consolidated Financial Statements (Unaudited). . . 7
Item 2. Management's discussion and analysis of financial condition and
results of operations. . . . . . . . . . . . . . . . . . . . . . .10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . .16
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . .16
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . . .16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . .16
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . .17
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
ASSETS
MAR 30, DEC 31,
1997 1996*
-------- --------
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $5,763 $8,800
Short term investments . . . . . . . . . . . . . . . . . 0 4,401
Receivables:
Trade receivables, net of reserves . . . . . . . . . . 48,349 27,107
Royalties. . . . . . . . . . . . . . . . . . . . . . . 17,407 15,613
Other. . . . . . . . . . . . . . . . . . . . . . . . . 3,614 4,042
-------- --------
69,370 46,762
Inventories. . . . . . . . . . . . . . . . . . . . . . . 86,640 79,489
Prepaid expenses and other current assets. . . . . . . . 11,731 11,863
-------- --------
Total current assets . . . . . . . . . . . . . . . . 173,504 151,315
Property and equipment, at cost, net of accumulated
depreciation and amortization. . . . . . . . . . . . . . 73,144 64,302
Long-term investments. . . . . . . . . . . . . . . . . . . 14,360 8,106
Other assets, at cost, net of accumulated amortization . . 15,281 15,583
-------- --------
$276,289 $239,306
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable
and long-term debt . . . . . . . . . . . . . . . . . . $7,193 $6,099
Accounts payable . . . . . . . . . . . . . . . . . . . . 43,222 39,285
Accrued expenses . . . . . . . . . . . . . . . . . . . . 16,221 24,935
Income taxes payable . . . . . . . . . . . . . . . . . . 15,935 4,175
-------- --------
Total current liabilities. . . . . . . . . . . . . . 82,571 74,494
Notes payable and long-term debt, net of current
installments . . . . . . . . . . . . . . . . . . . . . . 129,500 121,217
Other liabilities. . . . . . . . . . . . . . . . . . . . . 8,503 8,667
-------- --------
220,574 204,378
1
Stockholders' equity:
Preferred stock. $.01 par value Authorized 10,000,000
shares; no shares issued and outstanding . . . . . . . - -
Common stock, $.01 par value. Authorized 150,000,000
shares; issued 62,928,827 and 62,712,611,
outstanding 42,898,035 and 42,681,819 shares at March
30, 1997 and December 31, 1996, respectively,
including 20,030,792 shares in Treasury. . . . . . . . 137 135
Paid-in capital. . . . . . . . . . . . . . . . . . . . . 158,589 155,591
Retained earnings. . . . . . . . . . . . . . . . . . . . 47,934 29,921
Foreign currency translation adjustment. . . . . . . . . (169) 57
Treasury stock, 20,030,792 shares repurchased. . . . . . (150,776) (150,776)
-------- --------
Net stockholders' equity . . . . . . . . . . . . . . 55,715 34,928
-------- --------
$276,289 $239,306
-------- --------
-------- --------
See accompanying notes to condensed consolidated financial statements
*Condensed from Audited Balance Sheet
2
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
First Quarter Ended
---------------------
March 30, March 31,
1997 1996
--------- ---------
Net revenue:
Product sales. . . . . . . . . . . . . . . . . . . . . . $122,668 $123,275
Net royalties. . . . . . . . . . . . . . . . . . . . . . 13,068 11,623
--------- ---------
135,736 134,898
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . 74,152 70,479
--------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 61,584 64,419
Selling, general & administrative expenses . . . . . . . . 34,731 35,232
--------- ---------
Earnings from operations . . . . . . . . . . . . . . 26,853 29,187
Non-operating income (expense):
Interest, net. . . . . . . . . . . . . . . . . . . . . . (3,226) (3,549)
Other, net . . . . . . . . . . . . . . . . . . . . . . . 119 (320)
--------- ---------
(3,107) (3,869)
Earnings before income taxes and cumulative effect
of change in accounting principle. . . . . . . . . 23,746 25,318
Income taxes . . . . . . . . . . . . . . . . . . . . . . . 9,694 1,271
--------- ---------
Earnings before cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . 14,052 24,047
Cumulative effect of change in accounting for product
display fixtures, net of income tax expense of $2,707
(note 4) . . . . . . . . . . . . . . . . . . . . . . . . 3,961 0
--------- ---------
Net earnings . . . . . . . . . . . . . . . . . . . . $18,013 $24,047
--------- ---------
--------- ---------
Supplemental pro forma financial information (note 2):
- --------------------------------------------------------
Earnings before income taxes, as presented . . . . . . . . $25,318
Pro forma provision for income taxes . . . . . . . . . . . 10,051
---------
Pro forma net earnings . . . . . . . . . . . . . . . . . . $15,267
---------
---------
Earnings per share:
Earnings before cumulative effect of change in accounting
principle (1996 period-pro forma, note 2). . . . . . . . $0.33 $0.37
Cumulative effect of change in accounting for product
display fixtures (note 4). . . . . . . . . . . . . . . . $0.09 ---
--------- ---------
Net earnings (1996 period-pro forma, note 2) . . . . . . . $0.42 $0.37
--------- ---------
--------- ---------
3
Pro forma financial information assuming the new
accounting method is retroactively applied:
Pro forma net earnings . . . . . . . . . . . . . . . . $14,052 $15,411
--------- ---------
--------- ---------
Pro forma net earnings per share . . . . . . . . . . . $0.33 $0.37
--------- ---------
--------- ---------
Weighted average common shares outstanding . . . . . . . . $42,898 $41,412
See accompanying notes to condensed consolidated financial statements
4
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) (Unaudited)
First Quarter Ended
---------------------
March 30, March 31,
1997 1996
--------- ---------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . $18,013 $24,047
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization of property and
equipment. . . . . . . . . . . . . . . . . . . . . . 4,691 4,282
Amortization of deferred charges . . . . . . . . . . . (118) 247
Cumulative effect of change in accounting principle. . (3,961) 0
Loss (gain) on disposition of property and equipment . (1) 16
Foreign currency translation adjustment. . . . . . . . (85) 15
Minority interest. . . . . . . . . . . . . . . . . . . 0 342
Undistributed equity method earnings . . . . . . . . . (119) (9)
(Increase) decrease in:
Receivables. . . . . . . . . . . . . . . . . . . . . (22,608) (18,807)
Inventories. . . . . . . . . . . . . . . . . . . . . (7,150) (17,583)
Prepaid expenses and other current assets. . . . . . 132 49
Other assets . . . . . . . . . . . . . . . . . . . . 528 85
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . 3,935 3,038
Accrued expenses . . . . . . . . . . . . . . . . . . (8,731) (3,416)
Income taxes payable . . . . . . . . . . . . . . . . 9,052 892
--------- ---------
Net cash used in operating activities. . . . . . . . . (6,422) (6,802)
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . (6,866) (2,629)
Proceeds from the disposition of property and equipment. 2 2
Lease incentives granted . . . . . . . . . . . . . . . . 55 11
Acquisition of license . . . . . . . . . . . . . . . . . (2,023) 0
Decrease in short-term investments . . . . . . . . . . . 4,401 0
Increase in long-term investments. . . . . . . . . . . . (1,420) 0
--------- ---------
Net cash used in investing activities. . . . . . . . (5,851) (2,616)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt . . . . . 31,114 55,857
Repayments of notes payable and long-term debt . . . . . (21,737) (26,684)
Distributions to stockholders. . . . . . . . . . . . . . 0 (17,600)
--------- ---------
Net cash provided by financing activities. . . . . . 9,377 11,573
Effect of exchange rates changes on cash:. . . . . . . . . (141) 11
Net increase (decrease) in cash. . . . . . . . . . . . . . (3,037) 2,166
Cash, beginning of period. . . . . . . . . . . . . . . . . 8,800 6,417
--------- ---------
Cash, end of period. . . . . . . . . . . . . . . . . . . . $5,763 $8,583
--------- ---------
--------- ---------
5
Supplemental disclosures:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . $6,551 $5,619
Income taxes . . . . . . . . . . . . . . . . . . . . . 1,328 357
Supplemental disclosure of non cash investing activities:
During the quarter ended March 30, 1997, the Company issued 216,216 shares of
common stock with a value of $3.0 million in connection with the acquisition of
a license.
See accompanying notes to condensed consolidated financial statements.
6
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 30, 1997
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position as of March 30,
1997, and the results of operations and cash flows for the three months ended
March 30, 1997. Operating results for the first quarter ended March 30, 1997,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1997. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission ("SEC"). Accordingly,
they have been condensed and do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1996.
(2) Summary of Significant Accounting Policies
Pro Forma Net Earnings
Pro forma net earnings for the 1996 period represents the results of operations
adjusted to reflect a provision for income taxes on historical earnings before
income taxes, which gives effect to the change in the Company's income tax
status to a C corporation in connection with the public sale of its common
stock.
Pro forma net earnings per share for the 1996 period has been computed by
dividing pro forma net earnings by the weighted average number of shares of
common stock outstanding during the period. Options to purchase common stock are
included in the calculation as common stock equivalents provided that their
impact is not anti-dilutive.
Recently Issued Pronouncements
The Financial Accounting Standards Board has recently issued Statement No. 128,
"Earnings per Share" ("FAS 128"), issued in February 1997 and effective for both
interim and annual periods ending after December 15, 1997. The Company will
adopt FAS 128 in the fourth quarter of 1997. FAS 128 requires the presentation
of "Basic" earnings per share which represents income available to common
shareholders divided by the weighted average number of common shares outstanding
for the period. A dual presentation of "Diluted" earnings per share will also
be required. The Diluted presentation is similar to the current presentation of
fully diluted earnings per share. FAS 128 requires restatement of all prior-
period earnings per share data presented. Management believes the adoption of
FAS 128 will not have a material impact on the Company's financial position or
results of operations.
7
(3) Inventories
The components of inventory consist of the following (in thousands):
March 30, December 31,
1997 1996
--------- ---------
Raw materials. . . . . . . . . . . . . . . . . . . . . $12,475 $12,563
Work in Progress . . . . . . . . . . . . . . . . . . . 16,081 12,576
Finished Goods . . . . . . . . . . . . . . . . . . . . 58,084 54,350
--------- ---------
$86,640 $79,489
--------- ---------
--------- ---------
(4) Change in Accounting Principle
Effective January 1, 1997, the Company changed its method of accounting for
product display fixtures located in its wholesale customers' retail stores,
whereby the costs for such fixtures will be capitalized and amortized over five
years over the straight-line method. In previous years, these costs had been
expensed as incurred. The Company believes that this new method will more
closely match the long-term benefit that the product display fixtures provide
with the expected future revenue from such fixtures. The new method has been
applied retroactively to product display fixture acquisitions of prior years.
The effect of the change on the quarter ended March 30, 1997 was to increase
earnings by approximately $.2 million (or $0.00 per share), excluding the
cumulative effect of the change in accounting principle. The cumulative effect
of the change in accounting principle of $4.0 million (after reduction for
income tax expense of $2.7 million) is included in earnings for the quarter
ended March 30, 1997.
(5) Pro forma results of operations
The following table sets forth pro forma operating results for the periods
indicated. Pro forma operating results reflect adjustments to the 1996 operating
results for (i) the elimination of salaries and bonuses paid to Maurice, Paul
and Armand Marciano ("the Principal Executive Officers") in excess of an
aggregate of $4.9 million per year (the aggregate salaries and bonuses to be
paid to the Principal Executive Officers under their respective employment
agreements which became effective concurrently with the consummation of the
Company's initial public offering ("IPO")) resulting in a decrease in
compensation expense of $1.2 million, (ii) the decrease in depreciation and
operating costs of $.6 million associated with an aircraft owned by the Company
which was sold in contemplation of the IPO, (iii) the elimination of the
minority interest in Guess Europe, BV and Guess Italia, S.r.l. through the
merger of Marciano International with and into the Company in connection with
the IPO, resulting in the inclusion in net earnings of $.3 million, which had
previously been recorded as minority interest and (iv) adjustments for Federal
and state income taxes as if the Company had been taxed as a C corporation
rather than an S corporation.
For comparison purposes only, earnings per share and weighted average common
shares outstanding have been calculated on a fully-diluted basis, whereby all of
the shares outstanding immediately following the completion of the IPO and after
giving effect to the S corporation distribution in connection therewith
8
were considered to be outstanding at March 31, 1996. 1997 shares are the
weighted average of actual shares outstanding during the first quarter of 1997.
Summarized below is the pro forma financial information for the first quarters
ended March 30, 1997 and March 31, 1996 (in thousands, except per share data):
First quarter ended
-------------------
MAR 30, MAR 31,
1997 1996
-------- --------
Net revenue:
Product sales. . . . . . . . . . . . . . . . . . . . . . 122,668 123,275
Net royalties. . . . . . . . . . . . . . . . . . . . . . 13,068 11,623
-------- --------
Total net revenue. . . . . . . . . . . . . . . . . . . 135,736 134,898
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . 74,152 70,479
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 61,584 64,419
Selling, general and administrative expenses . . . . . . . 34,731 33,392
-------- --------
Earnings from operations . . . . . . . . . . . . . . . . 26,853 31,027
Interest expense, net. . . . . . . . . . . . . . . . . . . (3,226) (3,549)
Non operating income (expense), net. . . . . . . . . . . . 119 9
-------- --------
Earnings before income taxes and cumulative effect
of accounting change . . . . . . . . . . . . . . . . . 23,746 27,487
Pro forma income taxes . . . . . . . . . . . . . . . . . . 9,694 10,912
-------- --------
Earnings before cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . 14,052 16,575
Cumulative effect of change in accounting for product
display fixtures, net of income tax expense of $2,707. . 3,961 0
-------- --------
Pro forma net earnings . . . . . . . . . . . . . . . . . . 18,013 16,575
-------- --------
-------- --------
Earnings per share:
Earnings before cumulative effect of change
in accounting principle (1996 period-pro forma,
note 2). . . . . . . . . . . . . . . . . . . . . . . . $0.33 $0.39
Cumulative effect of change in accounting
for product display fixtures (note 4). . . . . . . . . . 0.09 ---
-------- --------
Net earnings per share (1996 period-pro forma, note 2) . . $0.42 $0.39
-------- --------
-------- --------
Weighted average common shares outstanding . . . . . . . . 42,898 42,682
9
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-Q. Forward-
looking statements may also be in the registrant's other reports filed under the
Securities Exchange Act of 1934, in its press releases and in other documents.
In addition, from time to time, the registrant through its management may make
oral forward-looking statements.
Forward-looking statements generally refer to future plans and performance, and
are identified by the words "believe", "expect", "anticipate", "optimistic",
"intend", "aim", "will" or similar expressions. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date of which they are made. The registrant undertakes no obligation to
update publicly or revise any forward-looking statements.
OVERVIEW
The Company derives its net revenue from the sale of Guess men's and women's
apparel worldwide to wholesale customers and distributors, from the sale of
Guess men's and women's apparel and its licensees' products through the
Company's network of retail and factory outlet stores primarily in the United
States and from net royalties from worldwide licensing activities.
RESULTS OF OPERATIONS
NET REVENUE. Net revenue increased $0.8 million or 0.6% to $135.7 million in
the first quarter ended March 30, 1997 from $134.9 million in the first quarter
ended March 31, 1996. Net revenue from wholesale operations decreased $2.8
million or 3.3% to $80.3 million from $83.1 million, due principally to
decreased domestic sales of $6.8 million, partially offset by a $4.0 million
increase in sales outside the United States. The Company's domestic sales
declined primarily as a result of increased competition in branded basic denim
apparel and lower average selling prices. Net revenue from retail operations
increased $2.1 million or 5.4% to $42.3 million from $40.2 million, primarily
attributable to increased volume generated by new store openings. Comparable
store sales were flat from the prior year. Production delays related to fabric
and start up programs caused a decline in comparable store sales. Net royalties
increased $1.5 million or 12.4% in the first quarter ended March 30, 1997 to
$13.1 million from $11.6 million in the first quarter ended March 31, 1996. Net
revenue from international operations comprised 17.3% and 13.7% of the Company's
net revenue during the first quarter of 1997 and 1996, respectively.
GROSS PROFIT. Gross profit decreased 4.4% to $61.6 million in the first quarter
ended March 30, 1997 from $64.4 million in the first quarter ended March 31,
1996. The decrease in gross profit resulted from decreased net revenue from
product sales partially offset by increased net royalties. Gross profit from
product sales decreased 8.1% to $48.5 million in the first quarter ended March
30, 1997 from $52.8 million in the first quarter ended March 31, 1996. Gross
profit as a percentage of net revenue decreased to 45.4% in the first quarter
ended March 30, 1997 as compared to 47.8% in the first quarter
10
ended March 31, 1996. Gross profit from product sales as a percentage of net
revenue from product sales decreased to 39.6% in the first quarter ended
March 30, 1997 from 42.8% in the first quarter ended March 31, 1996. The
decline was primarily the result of lower gross profit rates in both the
wholesale business and the retail store operations. The lower gross profit rate
in the wholesale business primarily resulted from lower selling prices on
certain products in response to increased competition in branded basic denim
apparel and the timing of markdowns. The lower gross profit rate in the retail
store operations resulted primarily from higher occupancy costs related to
comparable stores.
SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses decreased
1.4% in the quarter ended March 30, 1997 to $34.7 million, or 25.6% of net
revenue, from $35.2 million, or 26.1% of net revenue, in the first quarter ended
March 31, 1996. On a pro forma basis, SG&A expenses increased 4.0% in the
quarter ended March 30, 1997 to $34.7 million, or 25.6% of net revenue, from
$33.4 million, or 24.8% of net revenue, in the first quarter ended March 31,
1996. The increase was principally due to an increase in general and
administrative costs related to the expansion of the retail division and Guess
Italia, and increased costs associated with corporate marketing studies. As a
percentage of net sales, the increase in general and administrative costs was
the result of increased fixed expenses being spread over flat sales.
EARNINGS FROM OPERATIONS. Earnings from operations decreased 8.0% to $26.9
million, or 19.8% of net revenue in the first quarter ended March 30, 1997, from
$29.2 million, or 21.6% of net revenue, in the first quarter ended March 31,
1996. On a pro forma basis, earnings from operations decreased 13.5% to $26.9
million, or 19.8% of net revenue, in the first quarter ended March 30, 1997,
from $31.0 million, or 23.0% of net revenue, in the first quarter ended
March 31, 1996. This decline was primarily attributable to the decrease in
gross profit as well as increased SG&A expenses.
INTEREST EXPENSE, NET. Net interest expense decreased 9.1% to $3.2 million in
the first quarter ended March 30, 1997 from $3.5 million in the first quarter
ended March 31, 1996. This decrease resulted from lower outstanding debt,
partially offset by a higher net effective interest rate. For the first quarter
ended March 30, 1997, the average debt balance was $136.7 million, with an
average effective interest rate of 9.6%. For the first quarter ended March 31,
1996, the average debt balance was $152.5 million, with an average effective
interest rate of 9.3%.
INCOME TAXES. Prior to the IPO, which occurred during August 1996, for Federal
and certain state income tax purposes, the Company elected to be treated as an S
corporation and therefore generally was not subject to income tax on its
earnings. The Company's income taxes, which represent state income taxes and
foreign taxes, plus Federal taxes in the 1997 period, were $9.7 million and $1.3
million in the quarters ended March 30, 1997 and March 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 were $9.7 million and $10.9
million in the quarters ended March 30, 1997 and March 31, 1996, respectively.
11
NET EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Net
earnings before the net cumulative effect of change in accounting principle
decreased 41.6% to $14.1 million, or 10.4% of net revenue, in the first quarter
ended March 30, 1997, from $24.0 million, or 17.8% of net revenue, in the first
quarter ended March 31, 1996. On a pro forma basis, net earnings before
cumulative effect of change in accounting principle decreased 15.2% to $14.1
million, or 10.4% of net revenue, in the first quarter ended March 30, 1997,
from $16.6 million, or 12.3% of net revenue, in the first quarter ended
March 31, 1996. The decrease was primarily attributable to lower gross profit
and increased SG&A expenses.
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 over the straight-
line method. In previous years, these costs had been expensed as incurred. The
Company believes that this new method will more closely match the long-term
benefit that the product display fixtures provide with the expected future
revenue from such fixtures. The new method has been applied retroactively to
product display fixture acquisitions of prior years. The effect of the change
on the quarter ended March 30, 1997 was to increase earnings by approximately
$.2 million (or $0.00 per share), excluding the cumulative effect of the change
in accounting principle. The cumulative effect of the change in accounting
principle of $4.0 million (after reduction for income tax expense of $2.7
million) is included in earnings for the quarter ended March 30, 1997.
NET EARNINGS. Net earnings decreased 25.1% to $18.0 million, or 13.3% of net
revenue, in the first quarter ended March 30, 1997, from $24.0 million, or 17.8%
of net revenue, in the first quarter ended March 31, 1996. On a pro forma
basis, net earnings increased 8.7% to $18.0 million, or 13.3% of net revenue, in
the first quarter ended March 30, 1997, from $16.6 million, or 12.3% of net
revenue, in the first quarter ended March 31, 1996. The increase was the result
of the change in accounting principle partially offset by lower gross profit and
increased SG&A expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon internally generated funds, trade credit
and bank borrowings to finance its operations and expansion. At March 30, 1997,
the Company had working capital of $90.9 million compared to $76.8 million at
December 31, 1996. The $14.1 million increase in working capital was due
principally to a $22.6 million increase in receivables, a $7.2 million increase
in inventories, and a $4.9 million decrease in payables and accrued expenses,
partially offset by an $11.8 million increase in income taxes payable. The
increase in receivables and inventories resulted primarily from seasonal changes
in volume.
The Company's Credit Agreement provides for a $100.0 million revolving credit
facility which includes a $20.0 million sublimit for letters of credit. As of
March 30, 1997, the Company had $24.5 million in outstanding borrowings under
the revolving credit facility and outstanding letters of credit of $8.6 million.
As of March 30, 1997, the Company had $66.9 million available for future
borrowings under such facility. The revolving credit facility will expire in
December 1999. In addition to this revolving credit facility, the
12
Company also has a $25.0 million letter of credit facility. As of March 30,
1997, the Company had $11.7 million outstanding under this facility.
Capital expenditures, net of lease incentives granted, totaled $6.8 million in
the quarter ended March 30, 1997. The Company estimates that its capital
expenditures for fiscal 1997 will be approximately $45.0 million, primarily for
the expansion of its retail stores and operations.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements through 1997, including retail and international expansion plans
and interest on the Company's Senior Subordinated Notes, primarily with cash
flow from operations, supplemented, if necessary, by borrowings under its
revolving Credit Agreement.
SEASONALITY
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. The Company's wholesale
operations generally experience stronger performance in the first and third
quarters, while retail operations are generally stronger in the third and fourth
quarters. As the timing of the shipment of products may vary from year to year,
the results for any particular quarter may not be indicative of results for the
full year. The Company has not had significant overhead and other costs
generally associated with large seasonal variations.
INFLATION
The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net revenue or profitability. Although higher rates
of inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, the Company does not believe that they have
had a material effect on the Company's net revenue of profitability.
EXCHANGE RATES
The Company receives United States dollars for substantially all of its product
sales and its licensing revenue. Inventory purchases from offshore contract
manufacturers are primarily denominated in United States dollars; however,
purchase prices for the Company's products may be impacted by fluctuations in
the exchange rate between the United States dollar and the local currencies of
the contract manufacturers, which may have the effect of increasing the
Company's cost of goods in the future. In addition, royalties received from the
Company's international licensees are subject to foreign currency translation
fluctuations as a result of the net sales of the licensee being denominated in
local currency and royalties being paid to the Company in United States dollars.
During the last three fiscal years, exchange rate fluctuations have not had a
material impact on the Company's inventory costs. The Company currently does not
engage in hedging activities with respect to such exchange rate risk.
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement No. 128,
"Earnings per Share" ("FAS 128"), issued in February 1997 and effective
13
for both interim and annual periods ending after December 15, 1997. The Company
will adopt FAS 128 in the fourth quarter of 1997. FAS 128 requires the
presentation of "Basic" earnings per share which represents income available to
common shareholders divided by the weighted average number of common shares
outstanding for the period. A dual presentation of "Diluted" earnings per share
will also be required. The Diluted presentation is similar to the current
presentation of fully diluted earnings per share. FAS 128 requires restatement
of all prior-period earnings per share data presented. believes the adoption of
FAS 128 will not have a material impact on the Company's financial position or
results of operations.
14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Litigation
On August 7, 1996, a class action complaint naming the Company and certain of
fits independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, styled as Brenda Figueroa et. al. v.
Guess ?, Inc. et. al. (Dist. Ct. Case No. 96-5484HLH(JGx)) (the "Federal
Case"). The complaint, which sought damages and injunctive relief, alleged,
among other things, that the defendants' practices with respect to the employees
of such independent contractors have violated various federal and state labor
laws and regulations. Certain components of the complaint have been remanded to
state court (LASC Case No. BC 155 165) (the "State Case"), resulting in two
litigation cases. In the Federal Case, plaintiffs claim that the Company's
independent contractors violated the Federal Fair Labor Standards Act ("FLSA")
by failing to pay minimum wage and overtime in accordance with the FLSA. In the
State Case, also a purported class action, plaintiffs assert claims for
violation of state wage and hour laws, wrongful discharge, breach of contract,
and certain counts of negligence arising out of the Company's relationship with
its independent contractors and actions taken by the Company's independent
contractors with respect to the employees of such independent contractors. In
the State Action, plaintiffs allege that the Company breached its agreement with
the United States Department of Labor regarding the monitoring of its
independent contractors. In both actions, plaintiffs contend that the Company
is liable for its contractors' violations because it is a "joint employer" with
its independent contractors. The trial in the Federal Case is currently set for
December 1997.
The Union of Needletrades, Industrial & Textile Employees ("UNITE") has filed
with the National Labor Relations Board ("NLRB") several charges that the
Company has engaged and is engaging in unfair labor practices within the meaning
of the National Labor Relations Act in cases No. 21-CA-31524, No. 21-CA-31565
and No. 21-CA-31648. UNITE has alleged that the senior management of the
Company unlawfully discharged certain employees because of certain union
activities and unlawfully threatened and coerced employees in the exercise of
their rights under Section 7 of the National Labor Relations Act. In an
agreement with the NLRB, the Company agreed to reinstate all of the employees
allegedly unlawfully discharged because of their union activities and agreed to
pay them back pay which aggregates approximately $70,000. The settlement also
provides for the posting of a notice for 60 days at the Company stating that the
matter has been settled and that the Company agrees to comply with the National
Labor Relations Act. The notice has a non-admission clause concerning
liability. Prior to the payment of the back wages, UNITE filed an additional
unfair labor practice charge with the NLRB (No. 21-CA-31807). In this charge,
the union alleges that the Company has unlawfully threatened to move its
production to Mexico and elsewhere outside the United States thus unlawfully
interfering with the organizing campaign at the Company's headquarters, and has
unlawfully ceased doing business with independent contractors at which ongoing
union organizing campaigns are being conducted. This charge also alleges that
the Company has violated the settlement agreement in cases No. 21-CA-31524, No.
21-CA-31565 and No. 21-CA-31648 by making such threats. Charge No. 21-CA-31807
is currently under investigation by the NLRB, however the General Counsel of the
NLRB has indicated to the
15
Company that the NLRB intends to issue a complaint in this case. The Company
has been informed by the NLRB that the NLRB is evaluating several legal theories
on which to bring the complaint including, but not limited to, the theory that
the Company is a joint employer. The NLRB has also indicated that in the absence
of a "joint employer" finding, the complaint may be brought on a theory that the
Company has violated the National Labor Relations Act by terminating contractual
relationships with certain contractors and/or providing a lesser amount of work
to certain contractors based on the contractors being subject to union
organizing efforts by UNITE. The NLRB has also indicated the possibility of
pursuing a theory that the Company is involved in an integrated production
effort with its contractors and is therefore liable for the loss of contractor
employee jobs.
Pending a decision by the NLRB regarding the allegation that the Company
breached the settlement agreement reached in cases No. 21-CA-31524, No. 21-CA-
31565 and No. 21-CA-31648, the Company has withheld paying the approximately
$70,000 in back wages agreed to in its above described settlement with the NLRB
and has not posted notice of the settlement agreement. The subject employees,
however, have been reinstated and continue to be employed by the Company. In a
separate action (No. 31-CA-22380), UNITE is seeking fees and costs for having to
defend certain causes of actions filed against UNITE by Guess. The Company
believes that the outcome of one or more of these cases could have a material
adverse effect on the Company's financial condition and results of operations.
Guess is also a party to various other claims, complaints and other legal
actions that have arisen in the ordinary course of business from time to time.
The Company believes that the outcome of such pending legal proceedings, in the
aggregate, will not have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 2. Changes in Securities
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the first quarter
of 1997.
ITEM 5. Other Information
None.
16
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
- ------- -----------
10.31. First Amendment to Amended and Restated Shareholders' Agreement
18.0. Letter regarding change in accounting principles
27.1. Financial Data Schedule
- --------------------------------
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended
March 30, 1997.
17
SIGNATURES
Pursuant to the requirements of Rule 12b-15 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GUESS ?, INC.
Date: May 13, 1997 By: /s/ Maurice Marciano
------------------------------------
Maurice Marciano
Chairman of the Board, Chief Executive
Officer and Director (Principal Executive
Officer)
Date: May 13, 1997 By: /s/ Roger Williams
------------------------------------
Roger Williams
Executive Vice President and Chief
Financial Officer (Principal Financial
Officer)
18
EXHIBIT 10.31. First Amendment to Amended and Restated Shareholders' Agreement
- ------------------------------------------------------------------------------
FIRST AMENDMENT TO
AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
(this "First Amendment") is entered into as of March 31, 1997 by and among
Maurice Marciano, as Trustee of the Maurice Marciano Trust (1995 Restatement),
Paul Marciano, as Trustee of the Paul Marciano Trust dated February 20, 1986,
Armand Marciano, as Trustee of the Armand Marciano Trust dated February 20,
1986, the Maurice Marciano 1996 Grantor Retained Annuity Trust, the Paul
Marciano 1996 Trust (collectively, the "Stockholders") and Guess ?, Inc., a
Delaware corporation, having its principal office and place of business at 1444
South Alameda Street, Los Angeles, California 90021 (hereinafter referred to as
the "Corporation").
WHEREAS, the Stockholders and the Corporation are parties to an
Amended and Restated Shareholders' Agreement dated as of August 8, 1996 (the
"Shareholders' Agreement"), which governs, among other issues, the management
and ownership of the shares of Common Stock owned by the Stockholders;
WHEREAS, the Stockholders and the Corporation desire to amend the
Shareholders' Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants set forth herein, the parties hereto as follows:
Section 1. Amendments to Shareholders' Agreement. The Shareholders'
Agreement is hereby amended as follows:
(a) Legends on Certificates. The legend set forth in Section 3 of
the Shareholders' Agreement is hereby amended to read in its entirety as
follows:
"'The shares represented by this Certificate may not be assigned,
sold, transferred, hypothecated, or otherwise disposed of, except in
accordance with the Amended and Restated Shareholders' Agreement dated
as of August 8, 1996 (as the same may be amended, modified or
supplemented from time to time), which is on file at the office of the
issuer.'"
(b) Restrictions on Disposition. Section 4(E) of the Shareholders'
Agreement is hereby amended to read in its entirety as follows:
"E. Nothing in this Section shall prohibit the transfer of
shares, (1) on the death of the settlor of any Stockholder, (a) by his will or
other instrument disposing of his property on death (including an instrument
creating any Stockholder) or (b) pursuant to the laws of descent and
distribution applicable to his estate, (2) by any Stockholder to its settlor
(identified in the instrument creating the Stockholder, as in effect on the date
hereof or the date on which such Stockholder becomes a party hereto, as the case
may be), or to any trust created by such settlor for the principal benefit of
(a) such settler or (b) such settlor and one or more of such
1
settlor's lineal descendants, (3) by any Stockholder to any one or more of the
lineal descendants of the settlor (identified in the instrument creating the
Stockholder, as in effect on the date hereof or the date on which such
Stockholder becomes a party hereto, as the case may be) of such Stockholder, or
to any trust for the exclusive benefit of any such lineal descendants; provided,
that any such transfer in trust shall not be prohibited solely because the terms
of such trust provide a remainder interest to or for the benefit of one or more
persons who is not a lineal descendant of the settlor, so long as such interest
is payable only in the event that neither such settlor nor any such lineal
descendant of the settlor is then living or (4) in connection with a registered
offering of shares of Common Stock by any Stockholder pursuant to the
Registration Rights Agreement dated as of August 1, 1996 among the Stockholders
and the Corporation. Any successor or transferee who receives shares pursuant
to an event described in clause (1), (2) or (3) above shall, as a condition of
such transfer, enter into an agreement to be bound by the provisions of this
Restated Agreement in its entirety, shall be deemed to be a 'Stockholder'
hereunder and, for purposes of this subsection, if an individual, shall be
deemed to be the 'settlor of a Stockholder.'"
Section 2. References to and Effect on Shareholders' Agreement. (a)
Upon the effectiveness of this First Amendment, on and after the date hereof,
each reference in the Shareholders' Agreement to "this Restated Agreement",
"this Agreement", "hereunder", "hereof", "herein," or words of like import
referring to the Shareholders' Agreement shall mean and be a reference to the
Shareholders' Agreement as amended hereby.
(b) Except as specifically amended above, the Shareholders' Agreement
is and shall continue to be in full force and effect and is hereby in all
respects ratified and confirmed.
Section 3. Effectiveness. This First Amendment shall become
effective when executed by each of the parties hereto.
Section 4. Invalidity of any Provision. The invalidity or
unenforceability of any provision of this First Amendment shall not affect the
other provisions hereof, and the First Amendment shall be construed in all
respects as if such invalid or unenforceable provisions were omitted, provided
that the parties shall negotiate in good faith to replace the invalid provision
with a valid provision reflecting the same balance of economic interests.
Section 5. Further Action. A copy of this First Amendment shall be
made a part of the minutes of the Corporation.
Section 6. Applicable Law. This First Amendment shall be construed
in accordance with the laws of the State of Delaware.
Section 7. Entire Agreement. This First Amendment and the
Shareholders' Agreement supersede all agreements as to the subject matter hereof
and thereof among the Stockholders and the Corporation, including in each case
amendments to the Shareholders' Agreement executed by the Stockholders and the
Corporation prior to the date hereof. This First Amendment and the
Shareholders' Agreement set forth all of the provisions, covenants, agreements,
conditions and undertakings between the parties hereto
2
with respect to the subject matter hereof, and supersede all prior and
contemporaneous agreements and understandings express or implied, oral or
written as to the subject matter hereof.
[Signature pages follow]
3
IN WITNESS WHEREOF, the undersigned have caused this First Amendment
to be executed as of the date first hereinabove written.
GUESS ?, INC.
By:
Name:
Title:
STOCKHOLDERS
MAURICE MARCIANO TRUST
(1995 RESTATEMENT)
By:
Maurice Marciano
Trustee
PAUL MARCIANO TRUST
DATED FEBRUARY 20, 1986
By:
Paul Marciano
Trustee
ARMAND MARCIANO TRUST
DATED FEBRUARY 20, 1986
By:
Armand Marciano
Trustee
4
MAURICE MARCIANO 1996 GRANTOR
RETAINED ANNUITY TRUST
By:
Paul Marciano
Co-Trustee
By:
Gary W. Hampar
Co-Trustee
PAUL MARCIANO 1996 GRANTOR
RETAINED ANNUITY TRUST
By:
Maurice Marciano
Co-Trustee
By:
Joseph H. Sugerman
Co-Trustee
ARMAND MARCIANO 1996 GRANTOR
RETAINED ANNUITY TRUST
By:
Maurice Marciano
Co-Trustee
By:
Marc E. Petas
Co-Trustee
5
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
1
5
1,000
3-MOS
DEC-31-1997
JAN-01-1997
MAR-30-1997
5,763
0
53,889
5,540
86,640
173,449
134,613
61,469
276,289
82,570
129,500
0
0
137
55,528
276,289
122,668
135,736
74,152
108,883
(119)
83
3,226
23,746
9,694
0
0
0
(3,961)
18,013
0.42
0
Includes net royalties of $13.1 million.
Includes $4.0 million of income due to a change in accounting method. 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 over
the straight-line method. In previous years, these costs had been expensed as
incurred. The Company believes that this new method will more closely match
the long-term benefit that the product display fixtures provide with the
expected future revenue from such fixtures. The new method has been applied
retroactively to product display fixture acquisitions of prior years. The
effect of the change on the quarter ended March 30, 1997 was to increase
earnings by approximately $.2 million (or $0.00 per share), excluding the
cumulative effect of the change in accounting principle. The cumulative effect
of the change in accounting principle of $4.0 million or $0.09 per share (after
reduction for income tax expense of $2.7 million) is included in earnings for
the quarter ended March 30, 1997.
Earnings per share include 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 $0.33 per share.
