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 29, 1998
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
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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 11, 1998, the registrant had 42,902,035 shares of Common Stock, $0.01
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 29, 1998 and December 31, 1997 . . . . . . . . . . . 1
Condensed Consolidated Statements of Earnings (Unaudited) -
First Quarters ended March 29, 1998 and March 30, 1997 . . . . . 2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
First Quarters ended March 29, 1998 and March 30, 1997 . . . . . 3
Notes to Condensed Consolidated Financial Statements (Unaudited) . . 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Quantitative and Qualitative Disclosures About Market Risks. . . . .12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . .13
Item 2. Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . .15
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . .15
Item 4. Submission of Matters to Vote of Security Holders. . . . . . . . . .15
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . .16
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
MAR 29, DEC 31,
1998 1997*
-------- --------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,696 $8,204
Receivables:
Trade receivables, net of reserves. . . . . . . . . . . . . 33,606 17,080
Royalties . . . . . . . . . . . . . . . . . . . . . . . . . 16,021 14,663
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,020 6,032
-------- --------
54,647 37,775
Inventories, net of reserves (note 3) . . . . . . . . . . . . . 84,967 92,081
Prepaid taxes . . . . . . . . . . . . . . . . . . . . . . . . . 10,284 14,705
Prepaid expenses and other current assets . . . . . . . . . . . 15,571 14,857
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . 173,165 167,622
Property and equipment, at cost, net of accumulated
depreciation and amortization . . . . . . . . . . . . . . . . . 92,557 98,170
Other assets, at cost, net of accumulated amortization. . . . . . 21,454 22,022
-------- --------
$287,176 $287,814
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable
and long-term debt. . . . . . . . . . . . . . . . . . . . . $217 $217
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . 32,193 38,323
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 13,999 22,412
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . 46,409 60,952
Notes payable and long-term debt, net of current
installments. . . . . . . . . . . . . . . . . . . . . . . . . . 147,700 141,300
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . 9,737 10,232
-------- --------
203,846 212,484
Stockholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding. . . . . . . . . . --- ---
Common stock, $0.01 par value. Authorized 150,000,000
shares; issued 62,932,827 and 62,928,827 shares,
outstanding 42,902,035 and 42,898,035 shares at
March 29, 1998 and December 31, 1997, respectively,
20,030,792 shares in Treasury . . . . . . . . . . . . . . . 137 137
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 158,589 158,589
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . 75,382 67,432
Foreign currency translation adjustment. . . . . . . . . . . . (2) (52)
Treasury stock, 20,030,792 shares repurchased. . . . . . . . . (150,776) (150,776)
-------- --------
Net stockholders' equity. . . . . . . . . . . . . . . . . . 83,330 75,330
-------- --------
$287,176 $287,814
-------- --------
-------- --------
See accompanying notes to condensed consolidated financial statements
*Condensed from Audited Balance Sheet
1
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
First Quarter Ended
-------------------------
March 29, March 30,
1998 1997
---------- ----------
Net revenue:
Product sales. . . . . . . . . . . . . . . . . . . . . . . . . $100,205 $122,668
Net royalties. . . . . . . . . . . . . . . . . . . . . . . . . 10,563 13,068
-------- --------
110,768 135,736
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . 64,316 74,152
-------- --------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . 46,452 61,584
Selling, general & administrative expenses. . . . . . . . . . . . 30,024 34,731
-------- --------
Earnings from operations . . . . . . . . . . . . . . . . . . . 16,428 26,853
Non-operating income (expense):
Interest, net. . . . . . . . . . . . . . . . . . . . . . . . . (3,182) (3,226)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . (212) 119
-------- --------
(3,394) (3,107)
Earnings before income taxes and cumulative effect of
change in accounting principle. . . . . . . . . . . . . . . 13,034 23,746
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,083 9,694
-------- --------
Earnings before cumulative effect of change in
accounting principle. . . . . . . . . . . . . . . . . . . . 7,951 14,052
Cumulative effect of change in accounting for product
display fixtures, net of income tax expense of $2,707
(note 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 3,961
-------- --------
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $7,951 $18,013
-------- --------
-------- --------
Basic and diluted earnings per share:
- -------------------------------------
Earnings before cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . . . . . . $0.19 $0.33
Cumulative effect of change in accounting for product
display fixtures, net of income tax expense of $2,707
(note 4). . . . . . . . . . . . . . . . . . . . . . . . . . . . --- $0.09
-------- --------
Net earnings - basic and diluted. . . . . . . . . . . . . . . . . $0.19 $0.42
-------- --------
-------- --------
Weighted average number of common shares outstanding -
basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,902 42,898
-------- --------
-------- --------
Weighted average number of common shares outstanding -
dilutive. . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,903 42,912
-------- --------
-------- --------
See accompanying notes to condensed consolidated financial statements
2
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
First Quarter Ended
-----------------------
March 29, March 30,
1998 1997
--------- ---------
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . $7,951 $18,013
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization of property and
equipment. . . . . . . . . . . . . . . . . . . . . . . . 5,693 4,690
Amortization of goodwill. . . . . . . . . . . . . . . . . . 199 82
Cumulative effect of change in accounting principle . . . . --- (3,961)
Foreign currency translation adjustment . . . . . . . . . . 65 (85)
Undistributed equity method earnings. . . . . . . . . . . . 128 (119)
(Increase) decrease in:
Receivables. . . . . . . . . . . . . . . . . . . . . . . (16,873) (22,608)
Inventories. . . . . . . . . . . . . . . . . . . . . . . 7,114 (7,150)
Prepaid taxes. . . . . . . . . . . . . . . . . . . . . . 4,421 249
Prepaid expenses and other current assets. . . . . . . . (713) (117)
Other assets . . . . . . . . . . . . . . . . . . . . . . 147 528
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . (6,131) 3,935
Accrued expenses . . . . . . . . . . . . . . . . . . . . (7,744) (8,931)
Income taxes payable . . . . . . . . . . . . . . . . . . (64) 9,052
-------- --------
Net cash used in operating activities. . . . . . . . . . . . (5,807) (6,422)
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . (1,334) (6,866)
Proceeds from the disposition of property and equipment. . . . --- 2
Lease incentives granted . . . . . . . . . . . . . . . . . . . 154 55
Acquisition of license . . . . . . . . . . . . . . . . . . . . 94 (2,023)
Decrease in short-term investments . . . . . . . . . . . . . . --- 4,401
Increase in long-term investments. . . . . . . . . . . . . . . --- (1,420)
-------- --------
Net cash used in investing activities. . . . . . . . . . . (1,086) (5,851)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt . . . . . . . . 40,400 31,114
Repayments of notes payable and long-term debt . . . . . . . . (34,000) (21,737)
-------- --------
Net cash provided by financing activities. . . . . . . . . 6,400 9,377
Effect of exchange rates on cash. . . . . . . . . . . . . . . . . (15) (141)
Net decrease in cash. . . . . . . . . . . . . . . . . . . . . . . (508) (3,037)
Cash, beginning of period . . . . . . . . . . . . . . . . . . . . 8,204 8,800
-------- --------
Cash, end of period . . . . . . . . . . . . . . . . . . . . . . . $7,696 $5,763
-------- --------
-------- --------
3
First Quarter Ended
------------------------
March 29, March 30,
1998 1997
--------- ---------
Supplemental disclosures:
Cash paid during the period for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . $6,951 $6,551
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . 303 1,328
Supplemental disclosure of noncash 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
4
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 29, 1998
(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 29,
1998 and December 31, 1997, and the results of operations and cash flows for the
three months ended March 29, 1998 and March 30, 1997. Operating results for the
first quarter ended March 29, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998. 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, 1997.
(2) Summary of Significant Accounting Policies
Earnings Per Share
Basic earnings per share represents net earnings divided by the weighted-
average number of common shares outstanding for the period. Diluted earnings
per share represents net earnings divided by the weighted-average number of
shares outstanding, inclusive of the dilutive impact of common stock
equivalents. During the first quarters ended March 29, 1998 and March 30, 1997,
the difference between basic and diluted earnings per share was due to the
dilutive impact of options to purchase common stock.
Recently Issued Pronouncements
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 be reported in a financial statement
displayed with the same prominence as other financial statements. SFAS 130 does
not require a specific financial statement format but requires an enterprise to
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.
5
The Company adopted SFAS 130 on January 1, 1998. The only difference between
"net earnings" and "comprehensive income" is the impact from foreign currency
translation adjustments. Accordingly, a reconciliation of comprehensive income
for the first quarters ended March 29, 1998 and March 30, 1997 is as follows (in
thousands):
March 29, March 30,
1998 1997
--------- ---------
Net earnings . . . . . . . . . . . . . . . . . . $7,951 $18,013
Foreign currency translation adjustment. . . . . (65) 85
--------- ---------
Comprehensive income . . . . . . . . . . . . . . $7,886 $18,098
--------- ---------
--------- ---------
In June 1997, 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
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established 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 the enterprise
report descriptive information about the way 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 believes the adoption of SFAS 131 will not have a
material impact on the Company's financial reporting.
On April 3, 1998, the American Institute of Certified Public Accountants
("AICPA") Accounting Standards Executive Committee issued Statement of Position
98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up Activities." SOP 98-5
requires that costs of start-up activities, including organization costs and
retail store openings, be expensed as incurred. SOP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998.
Earlier application is encouraged. Restatement of previously issued financial
statements is not permitted. In the fiscal year in which the SOP 98-5 is first
adopted, the application should be reported as a cumulative effect of a change
in accounting principle. The Company has not yet determined whether the
application of SOP 98-5 will have a material impact upon the Company's financial
position or results of operations.
6
(3) Inventories
The components of inventory consist of the following (in thousands):
Mar 29 Dec 31,
1998 1997
--------- ---------
Raw materials . . . . . . . . . . . . . . . . . $10,073 $12,988
Work in progress. . . . . . . . . . . . . . . . 13,385 8,059
Finished goods. . . . . . . . . . . . . . . . . 61,509 71,034
--------- ---------
$84,967 $92,081
--------- ---------
--------- ---------
(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 depreciated over
five years using the straight-line method. In prior years, these costs had been
expensed as incurred. The Company believes this 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
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 of income tax expense of $2.7
million) is included in earnings for the quarter ended March 30, 1997.
7
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 refer only as of
the date of which they are made. The registrant undertakes no obligation to
update publicly or revise any forward-looking statements. Reference is hereby
made to the registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 for a discussion of important factors that could cause actual
results to differ materially from the forward-looking statements.
OVERVIEW
The Company derives its net revenue from the sale of Guess men's, women's and
girl'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 located primarily in the
United States; and from net royalties via worldwide licensing activities.
RESULTS OF OPERATIONS
NET REVENUE. Net revenue decreased $24.9 million or 18.4% to $110.8 million in
the first quarter ended March 29, 1998 from $135.7 million in the first quarter
ended March 30, 1997.
Net revenue from wholesale operations decreased $19.6 million or 24.5% to $60.7
million from $80.3 million. Domestic and international wholesale operations net
revenue decreased $6.7 million and $12.9 million, respectively. International
wholesale operations decreased due to the sale of the Guess? Italia operations
in June 1997, which reflects the absence of $13.0 million recorded in the prior
year. The Company's domestic wholesale net revenue declined primarily due to
increased competition in branded basic denim apparel.
Net revenue from retail operations decreased $2.8 million or 6.6% to $39.5
million from $42.3 million, primarily attributable to a 21.6% decrease in
comparable store net revenue, partially offset by increased volume generated by
new store openings. The decrease in comparable store net revenue was primarily
due to product assortment changes in the Factory Stores, softening Pacific Rim
tourism and the impact of El Nino adversely affecting west coast stores.
Net royalties decreased $2.5 million or 19.2% in the first quarter ended March
29, 1998 to $10.6 million from $13.1 million in the first quarter ended March
30, 1997. The decline in net royalties was primarily due to the adverse affects
of lower royalties from Asian markets and certain discontinued licenses.
Net revenue from international operations comprised 10.0% and 17.3% of the
Company's net revenue during the first quarters of 1998 and 1997, respectively.
The decrease in the percentage of revenue from international
8
operations was primarily due to the aforementioned sale of the Guess? Italia
operations in June 1997.
GROSS PROFIT. Gross profit decreased 24.6% to $46.5 million in the first
quarter ended March 29, 1998 from $61.6 million in the first quarter ended March
30, 1997. The decline in gross profit was due to lower net royalties and net
revenue from product sales. Gross margin decreased to 41.9% in the quarter
ended March 29, 1998 compared to 45.4% in the quarter ended March 30, 1997.
Gross margin from product sales decreased to 35.8% in the quarter ended March
29, 1998 compared to 39.6% in the quarter ended March 30, 1997. The decline in
gross margin was primarily attributable to fixed store occupancy costs being
spread over a lower revenue base as well as an increase in retail store
markdowns in the 1998 period.
SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses decreased
13.5% in the quarter ended March 29, 1998 to $30.0 million, or 27.1% of net
revenue, from $34.7 million, or 25.6% of net revenue, in the first quarter ended
March 30, 1997. The decrease was due to cost reduction initiatives implemented
in the fourth quarter of 1997, partially offset by higher legal costs associated
with UNITE activities (see "Legal Proceedings"). As a percentage of net revenue,
the increase in SG&A costs was the result of fixed expenses being spread over a
lower revenue base in the 1998 period.
EARNINGS FROM OPERATIONS. Earnings from operations decreased 38.8% to $16.4
million, or 14.8% of net revenue, in the first quarter ended March 29, 1998 from
$26.9 million, or 19.8% of net revenue, in the first quarter ended March 30,
1997. The decrease in earnings from operations was primarily due to lower
revenue.
INTEREST EXPENSE, NET. Net interest expense remained flat as compared to the
prior year at $3.2 million. The interest related to higher outstanding debt in
the first quarter ended March 29, 1998 was offset by a slightly lower net
effective interest rate. For the first quarter ended March 29, 1998, the
average debt balance was $146.9 million, with an average effective interest rate
of 8.8%. For the first quarter ended March 30, 1997, the average debt balance
was $131.3 million, with an average effective interest rate of 8.9%.
NET EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Net
earnings before the net cumulative effect of a change in accounting principle
decreased 43.4% to $8.0 million, or 7.2% of net revenue, in the first quarter
ended March 29, 1998, from $14.1 million, or 10.4% of net revenue, in the first
quarter ended March 30, 1997.
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 depreciated over five years using the
straight-line method. In prior years, these costs had been expensed as
incurred. The Company believes this 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 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 quarter ended March 30, 1997.
NET EARNINGS. Net earnings decreased 55.9% to $8.0 million, or 7.2% of net
revenue, in the first quarter ended March 29, 1998, from $18.0 million, or 13.3%
of net revenue, in the first quarter ended March 30, 1997.
9
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily on internally generated funds, trade credit and
bank borrowings to finance its operations and expansion. At March 29, 1998, the
Company had working capital of $126.8 million compared to $106.7 million at
December 31, 1997. The increase was primarily due to a $16.9 million increase
in receivables and a $14.0 million decrease in payables and accrued expenses,
which were partially offset by a $7.1 million decrease in inventory. The
increase in net receivables was primarily due to seasonal changes in volume.
The Company's Credit Agreement originally provided for a $100.0 million line of
credit facility. During the quarter ended March 29, 1998, this amount was
reduced to $86.9 million, which resulted from a certain Asian bank which fell
out of the bank group due to a restructuring of its U.S. portfolio. The current
revolving credit facility includes a $25.0 million sublimit for letters of
credit. At March 29, 1998, the Company had $42.7 million in outstanding
borrowings under the revolving credit facility, $1.0 million in outstanding
standby letters of credit and $9.4 million in outstanding commercial letters of
credit. At March 29, 1998, the Company had $33.8 million available for future
borrowings under such facility. The revolving credit facility will expire in
December 1999. The Credit Agreement contains various restrictive covenants
requiring, among other things, the maintenance of certain financial ratios. The
Company was in compliance with all such covenants as of March 29, 1998.
Capital expenditures, net of lease incentives granted, totaled $1.1 million in
the quarter ended March 29, 1998. The Company estimates its capital
expenditures for fiscal 1998 will be approximately $20.0 million, primarily for
the retail store expansion and remodeling, shop-in-shop programs and operations.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements through 1998 for working capital 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 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.
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 ("USD") for substantially all of its
product sales and its licensing revenues. Inventory purchases from
10
offshore contract manufacturers are primarily denominated in USD; however,
purchase prices for the Company's products may be impacted by fluctuations in
the exchange rate between the USD 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 USD. 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
In June 1997, 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 be reported in
a financial statement displayed with the same prominence as other financial
statements. SFAS 130 does not require a specific financial statement format but
requires 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. The Company
adopted the provisions of SFAS 130 effective January 1, 1998. The effect of the
adoption was immaterial to the Company's financial position and results of
operations for the quarter ended March 29, 1998.
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
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also established 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 the enterprise
report descriptive information about the way 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 believes that the adoption of SFAS 131 will not have a
material impact on the Company's financial reporting.
11
On April 3, 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires that costs of start-up activities, including
organization costs and retail store openings, be expensed as incurred. SOP 98-5
is effective for financial statements for fiscal years beginning after December
15, 1998. Earlier application is encouraged. Restatement of previously issued
financial statements is not permitted. In the fiscal year in which the SOP 98-5
is first adopted, the application should be reported as a cumulative effect of a
change in accounting principle. The Company has not yet determined whether the
application of SOP 98-5 will have a material impact upon the Company's financial
position or results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risks.
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Litigation
On August 7, 1996, a class action complaint naming the Company and certain of
its independent contractors was filed in the Superior Court of the State of
California for the County of Los Angeles, titled as Brenda Figueroa et. al. v.
Guess ?, Inc. et. al. (Case No. BC 155 165). 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.
The Union of Needletrades, Industrial & Textile Employees ("UNITE") has filed
with the National Labor Relations Board ("NLRB") various charges that the
Company has engaged and is engaging in unfair labor practices within the meaning
of the National Labor Relations Act ("NLRA"). In Cases No. 21-CA-31524, No.
21-CA-31565 and No. 21-CA-31648, UNITE has alleged that the Company unlawfully
discharged certain employees because of certain union activities and unlawfully
threatened and coerced employees in the exercise of their rights under Section 7
of the NLRA. In 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. On April 6, 1998,
the NLRB determined that it would not proceed with Case No. 21-CA-31807. UNITE
has indicated to the Company that it will appeal the NLRB's decision to
discharge Case No. 21-CA-31807.
On November 12,1997 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
complaint with respect to certain of the Company's state law claims.
On December 15, 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'
13
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. The administrative hearing on this charge
is scheduled to begin in July, 1998.
In Case No. 21-CA-32131 filed on June 30, 1997 and subsequently amended, UNITE
filed with the NLRB charges alleging 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 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.
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 April 22, 1998, the Company entered into a "Settlement Stipulation" with
UNITE and the NLRB settling the charges in Cases 21-CA-31524, 21-CA-31565,
21-CA-32131, 21-CA-32136, and 21-CA-32427. Under the Settlement Stipulation,
the Company has agreed to reinstate 13 "laid-off" former employees of the
Company and pay back wages and other costs to approximately 20 current and/or
former employees of the Company amounting to approximately $113,000.
In connection with its campaign against the company, UNITE has accused the
Company's independent contractors of engaging in illegal industrial homework
14
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 a 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 sixteen months ended April 30, 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 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 1998.
ITEM 5. Other Information
None.
15
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
- ------- -----------
10.32. Second Amendment and Consent to the Amended and Restated Revolving
Credit Agreement by and between Guess ?, Inc. And BankBoston, N.A.,
F/K/A The First National Bank of Boston, Sanwa Bank California and the
Financial Institutions Party Hereto.
10.33. Third Amendment and Consent to the Amended and Restated Revolving
Credit Agreement by and between Guess ?, Inc. And BankBoston, N.A.,
F/K/A The First National Bank of Boston, Sanwa Bank California and the
Financial Institutions Party Hereto.
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
29, 1998.
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SIGNATURES
Pursuant to the requirements of Rule 12b-15 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
GUESS ?, INC.
Date: May 12, 1998 By: /s/ MAURICE MARCIANO
------------------------------------
Maurice Marciano
Chairman of the Board, Chief Executive
Officer and Director (Principal Executive
Officer)
Date: May 12, 1998 By: /s/ TERENCE TSANG
------------------------------------
Terence Tsang
Vice President-Finance, Treasurer &
Corporate Controller (Principal
Financial Officer and Chief Accounting
Officer)
17