<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 2000
REGISTRATION NO. 333-35768
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GUESS ?, INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 2345 95-3679695
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
1444 SOUTH ALAMEDA STREET
LOS ANGELES, CALIFORNIA 90021
(213) 765-3100
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
BRIAN L. FLEMING
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
GUESS ?, INC.
1444 SOUTH ALAMEDA STREET
LOS ANGELES, CALIFORNIA 90021
(213) 765-3100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
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<S> <C>
Jerome L. Coben, Esq. Jonathan K. Layne, Esq.
Jeffrey H. Cohen, Esq. Gibson, Dunn & Crutcher LLP
Skadden, Arps, Slate, Meagher & Flom LLP 333 South Grand Avenue
300 South Grand Avenue Los Angeles, California 90071
Los Angeles, California 90071
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this registration statement becomes effective.
------------------------------
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE FEE(1)(2)
<S> <C> <C>
Common Stock, par value $0.01 per share..................... $200,000,000 $52,800
</TABLE>
(1) Calculated pursuant to Rule 457 of the rules and regulations under the
Securities Act of 1933, as amended.
(2) A filing fee of $39,600 was paid previously in connection with the initial
filing of this registration statement for these shares of common stock and
is being carried forward.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED MAY 24, 2000
PROSPECTUS
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
GUESS ?, INC.
[LOGO]
COMMON STOCK
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From time to time, we may sell shares of our common stock. You should read this
prospectus and any prospectus supplement carefully before you invest.
Our common stock is traded on the New York Stock Exchange under the symbol
"GES." The applicable prospectus supplement will contain information, where
applicable, as to any listing on any other securities exchange of the shares of
common stock covered by the prospectus supplement.
The shares of common stock may be sold directly by us to investors, through
agents designated from time to time or to or through underwriters or dealers.
See "Plan of Distribution." If any underwriters are involved in the sale of any
shares of common stock in respect of which this prospectus is being delivered,
the names of such underwriters and any applicable commissions or discounts will
be set forth in a prospectus supplement. The net proceeds we expect to receive
from such sale also will be set forth in a prospectus supplement.
This prospectus may not be used to offer or sell any shares of common stock
unless accompanied by a prospectus supplement. We urge you to read carefully
this prospectus and the accompanying prospectus supplement before you make your
investment decision.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 2000.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 4
Risk Factors................................................ 8
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 16
Price Range of Common Stock................................. 17
Dividend Policy............................................. 17
Selected Consolidated Financial Data........................ 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 28
Management.................................................. 44
Principal Stockholders...................................... 48
Certain Relationships and Related Transactions.............. 50
Description of Capital Stock................................ 51
Plan of Distribution........................................ 52
Legal Matters............................................... 53
Experts..................................................... 53
About This Prospectus....................................... 53
Where You Can Find More Information......................... 53
Index to Consolidated Financial Statements.................. F-1
</TABLE>
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Our executive offices are located at 1444 South Alameda Street, Los Angeles,
California 90021, and our telephone number is (213) 765-3100. We maintain a
World Wide Web site at WWW.GUESS.COM. Information contained on our web site is
not part of this prospectus or any accompanying prospectus supplement.
You should rely only on the information contained in this prospectus and any
accompanying prospectus supplement or to which we have referred you. We have not
authorized anyone to provide you with any information that is different. This
prospectus and any accompanying prospectus supplement may only be used in
jurisdictions where it is legal to sell our common stock. The information in
this prospectus and any accompanying prospectus supplement may only be accurate
on the date of this prospectus and any accompanying prospectus supplement,
regardless of the time of its delivery or of any sale of our common stock. In
this prospectus and any accompanying prospectus supplement, "GUESS?," "Guess?,"
"we," "us," and "our" refer to Guess ?, Inc. and its consolidated subsidiaries.
Guess, Guess?, GUESS?, Guess U.S.A., Guess Jeans, Guess? and Triangle Design,
Guess Kids, Guess Collection and Baby Guess are registered trademarks of
Guess ?, Inc. Other product, company or organization names used in this
prospectus and any accompanying prospectus supplement may be trademarks of their
respective companies or organizations.
3
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED IN OTHER PARTS OF THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE INVESTING IN THE SHARES. YOU SHOULD READ THE ENTIRE
PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS SUPPLEMENT CAREFULLY.
OUR COMPANY
GUESS? is one of the most widely recognized brands in the fashion world. We
design, market and license a lifestyle collection of casual apparel and
accessories, and we are known for trendsetting styles and marketing creativity.
We distribute our products through a growing network of GUESS? stores, selected
wholesale accounts, international distributors and a new e-commerce site. This
multi-channel network provides us with flexibility in marketing our products and
significant opportunities for growth.
Our core customer is a style-conscious consumer between the ages of 15 and 25.
This customer is attracted to our brand image, distinctive styling and
innovative fabrics that we incorporate in our fashion-forward designs. We also
appeal to other customers through product lines that include the contemporary
and upscale GUESS? Collection and our GUESS? Kids and Baby GUESS? brands.
In 1999, we generated net revenue of $599.7 million, a 27.1% increase from 1998.
In addition, in the first quarter of 2000, we generated net revenue of $188.8
million, a 46.2% increase from the same period in 1999. This growth resulted
from several initiatives, including implementation of the first phase of our
planned retail store expansion program and the concentration of our wholesale
distribution efforts on our most profitable accounts. Our gross profit as a
percentage of total net revenue increased to 44.7% in 1999 from 42.3% in 1998,
while our net earnings grew to $51.9 million from $25.1 million. Our gross
profit as a percentage of total net revenue increased to 42.7% for the first
quarter of 2000 from 41.9% in the same quarter in 1999, while our net earnings
grew to $15.4 million from $11.5 million. This improved profitability resulted
from several factors, including increases in our comparable store sales in the
United States of 26.9% and 19.2% for 1999 and the first quarter of 2000,
respectively, greater "sell through" of full price merchandise and our
transition to international vendors to lower product costs.
GUESS? STORES
We operate both full price retail stores and factory outlet stores. As of
April 1, 2000, we operated 108 retail and 59 factory outlet stores in the United
States and Canada and a retail store in Florence, Italy. Our retail stores
create an upscale and inviting shopping environment which we believe enhances
our image. These stores allow us to influence the merchandising and presentation
of our products, increase customer awareness and strengthen brand equity. GUESS?
retail stores are located primarily in better regional malls and street oriented
retail districts, while our factory outlet stores are principally located in
major outlet shopping centers and appeal to value-conscious customers. In Summer
2000, we intend to open our first in a series of GUESS? Kids stores, a new
retail format that will sell GUESS? Kids and Baby GUESS? apparel and
accessories. We generated net revenue of $299.4 million in 1999 from our network
of retail and factory outlet stores, a 34.5% increase from 1998. In addition,
these stores generated net revenue of $77.8 million in the first quarter of
2000, a 51.1% increase from the same period in 1999.
WHOLESALE DISTRIBUTION
As of April 1, 2000, our wholesale division distributed products through
approximately 2,800 retail stores in the United States, including better
department stores and selected specialty retailers. These store locations
included approximately 1,200 shop-in-shops, which are exclusive selling areas
within department stores that offer a wide array of our products and incorporate
GUESS? signage and fixture designs. The shop-in-shop concept enhances brand
recognition and ensures the consistent presentation
4
<PAGE>
of GUESS? merchandise. We added or remodeled 138 shop-in-shops in 1999 and
currently plan to add or remodel approximately 500 shop-in-shops during 2000. We
generated net revenue of $260.6 million in 1999 from our wholesale operations, a
22.6% increase from 1998. In addition, our wholesale operations generated net
revenue of $100.6 million in the first quarter of 2000, a 46.9% increase from
the first quarter of 1999.
LICENSING AND INTERNATIONAL DISTRIBUTION
The strength and awareness of the GUESS? brand has permitted us to expand our
product offerings selectively through trademark licensing agreements. As of
April 1, 2000, we had 19 product licenses that cover such fashion accessories as
watches, eyewear, handbags and footwear, and seven international trademark
licensees authorized to produce and sell various GUESS? products in specific
geographic territories. We also sell our products through international
distributors who operate GUESS? retail stores and who sell to select department
stores and boutiques. As of April 1, 2000, we had a network of 213 international
GUESS? stores operated by licensees and distributors. These stores generally
carry apparel and accessories that are similar to what we sell in the United
States and Canada, and in some instances, may carry products tailored for local
fashion preferences. We meet regularly with our licensees and distributors to
ensure the quality and consistency of the GUESS? image and to maintain our
overall merchandising and design strategies. In 1999, worldwide sales of all
licensed products approximated $525 million and generated net royalty revenue of
$39.6 million.
OUR GROWTH AND OPERATING STRATEGIES
LEVERAGE THE GUESS? BRAND
We believe the GUESS? brand is an integral part of our business and a source of
sustainable competitive advantage. The enduring strength of our brand name and
image results from our constant emphasis on innovative and distinctive product
designs that stand for exceptional styling and quality. Under the direction of
Maurice Marciano, our designers continue to show an ability to interpret global
fashion trends and translate them into products that our customers desire. Our
advertising department, which is led by Paul Marciano, communicates our fashion
and brand image through the use of high-impact print and outdoor advertising. We
have spent over $110 million from 1995 through 1999 promoting and strengthening
our brand name. Additionally, our licensees and international distributors have
spent approximately $100 million supporting the GUESS? brand over this same
period.
GROW RETAIL STORE BASE
Our retail division represents our primary growth initiative. It is our current
plan to more than double our retail square footage in the United States and
Canada over the next three years. This expansion will capitalize on favorable
customer demographics and a number of merchandising, employee and operating
initiatives. We intend to open 45 new stores in the United States and 15 new
stores in Canada during 2000. Our new United States stores will include 25
retail stores, ten factory outlet stores and our first ten GUESS? Kids stores,
while our new Canadian stores will consist of ten retail and five factory outlet
stores. We are also introducing a larger format in our full price retail stores.
In 1999, our United States retail and factory outlet stores achieved comparable
store sales gains of 28.2% and 23.8%, respectively, over 1998. In the first
quarter of 2000, our United States retail and factory outlet stores achieved
comparable store sales gains of 21.5% and 13.1%, respectively, over the same
period in 1999. In addition, our retail stores generated sales per square foot
of $434 in 1999 compared to $336 in 1998 and our factory outlet stores generated
sales per square foot of $351 in 1999 compared to $255 in 1998. We attribute the
strong sales performance in the retail stores to a more fashion-focused product
assortment, improved merchandising efforts, the remodeling of select stores and
faster replenishment. Factory outlet stores benefitted from deeper product
assortments combined with an emphasis on top selling products and key selling
periods. When we use the term comparable
5
<PAGE>
store sales in this prospectus, we mean sales generated by stores which were
open a minimum of one year prior to the period indicated. When we use the term
sales per square foot in this prospectus, we mean net sales divided by the time
weighted average of the gross square footage of all stores.
EXPAND WHOLESALE CHANNEL
As of May 6, 2000, we had unfilled wholesale orders from department and
specialty store customers, consisting primarily of orders for seasonal fashion
apparel, of $158.9 million, a 74.4% increase from May 2, 1999. We believe these
orders, which exclude replenishment orders of basic products, reflect the
positive contributions of our program to expand our wholesale business.
Beginning two years ago, we instituted a strategy to narrow selectively the
number of items offered in our lifestyle collections and to focus our
shop-in-shop program on those department stores with the greatest sales
potential. In 1999 and the first quarter of 2000, these efforts contributed to a
22.6% and a 46.9% increase, respectively, in wholesale net revenue over the
prior period.
ENHANCE LICENSING ACTIVITIES
We selectively license our trademarks to enhance our brand equity and generate
high margin net revenue. We regularly evaluate opportunities to license our
trademarks and expand the range of available GUESS? products. For example, we
recently awarded the license for Baby GUESS?, a product line which, starting in
Summer 2000, will be sold through our new GUESS? Kids stores, upscale department
stores and other select wholesale and specialty store accounts.
IMPROVE PRODUCT SOURCING
Our product sourcing strategy is designed to increase efficiencies, reduce costs
and improve quality. We currently purchase approximately 60% of our finished
products from international vendors. In 1998, we purchased approximately 50% of
our products overseas. Starting in 1998, we also began to rely largely on
"packaged purchases," a sourcing strategy under which we supply a vendor with a
product design and fabric selection and the vendor delivers a finished product.
We believe these strategies have enabled us to reduce our average cost per unit
which, in turn, has allowed us to selectively lower our prices while maintaining
or expanding our gross margins. We also retain a close relationship with a
number of domestic vendors located primarily in Los Angeles who manufacture our
GUESS? Collection line and who supplement production of high demand products.
RELOCATE DISTRIBUTION CENTER
We have opened a new distribution center in Louisville, Kentucky, to replace our
distribution center in Los Angeles, California. This approximately 500,000
square foot facility is near United Parcel Service's national transit hub and is
centrally located to our major wholesale customers and our own retail stores.
This new distribution center will enable us to deliver our products to market
more rapidly and will result in reduced shipping costs, lower product handling
costs and improved customer service. The facility is equipped with advanced
product handling equipment and systems, and has the capacity to accommodate the
anticipated growth of our existing businesses.
PURSUE E-COMMERCE INITIATIVES
We are pursuing both business-to-consumer and business-to-business e-commerce
initiatives. In April 1999, we introduced WWW.GUESS.COM, a virtual storefront
that promotes the GUESS? brand and customer loyalty, represents an additional
retail distribution channel and enhances our image through interactive content.
In April 2000, we introduced the first phase of our business-to-business
solution to facilitate our interaction with specialty retailers and indirect
suppliers. Later this year, we intend to extend this solution to other wholesale
customers and to licensees and suppliers. We expect this initiative will
eventually reduce our operating costs, increase our sourcing efficiencies and
improve customer service. We intend to ultimately expand our
business-to-business initiative into an electronic marketplace that will
facilitate various levels of interaction between buyers and sellers in the
textile and apparel industries.
6
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
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<CAPTION>
YEARS ENDED DECEMBER 31, QUARTERS ENDED
---------------------------------------------------- --------------------------------
1995 1996 1997 1998 1999 MARCH 27, 1999 APRIL 1, 2000
-------- -------- -------- -------- -------- --------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net revenue.................. $486,733 $551,162 $515,372 $471,931 $599,650 $129,052 $188,844
Cost of sales................ 262,142 298,631 288,408 272,079 331,660 75,024 108,295
-------- -------- -------- -------- -------- -------- --------
Gross profit................. 224,591 252,531 226,964 199,852 267,990 54,028 80,549
Selling, general and
administrative expenses.... 141,663 150,877 156,318 142,806 171,014 32,280 52,249
Severance costs related to
distribution facility...... -- -- -- -- 3,200 -- --
-------- -------- -------- -------- -------- -------- --------
Earnings from operations..... 82,928 98,095 70,646 57,046 93,776 21,748 28,300
Gain on disposition of
property and equipment..... -- -- -- -- 3,849 -- --
Interest expense, net........ (15,957) (14,539) (13,718) (12,892) (9,385) (2,333) (2,653)
Other expense, net........... (157) (989) (2,041) (863) (1,140) (112) (24)
-------- -------- -------- -------- -------- -------- --------
Earnings before income taxes
and cumulative effect of
change in accounting
principle(1)............... 66,814 82,567 54,887 43,291 87,100 19,303 25,623
Income taxes(2).............. 26,726 33,241 21,337 18,180 35,200 7,817 10,200
-------- -------- -------- -------- -------- -------- --------
Net earnings................. $ 40,088 $ 49,326 $ 37,511 $ 25,111 $ 51,900 $ 11,486 $ 15,423
======== ======== ======== ======== ======== ======== ========
Earnings per share(1):
Basic........................ $ 0.96 $ 1.18 $ 0.87 $ 0.59 $ 1.21 $ 0.27 $ 0.36
======== ======== ======== ======== ======== ======== ========
Diluted...................... $ 0.96 $ 1.18 $ 0.87 $ 0.59 $ 1.20 $ 0.27 $ 0.35
======== ======== ======== ======== ======== ======== ========
Weighted number of shares
outstanding:
Basic........................ 41,675 41,906 42,898 42,904 43,005 42,919 43,352
======== ======== ======== ======== ======== ======== ========
Diluted...................... 41,675 41,908 42,902 42,919 43,366 43,177 44,210
======== ======== ======== ======== ======== ======== ========
SELECTED OPERATING DATA:
RETAIL STORES--UNITED STATES
ONLY
Number of stores open at end
of period.................. 62 69 87 84 92 84 94
Comparable store sales
increase (decrease)(3)..... 0.3% 8.2% (7.5)% 0.8% 28.2% 34.3% 21.5%
Sales per square foot(4)..... $ 340 $ 362 $ 333 $ 336 $ 434 $ 81 $ 105
FACTORY OUTLET STORES--UNITED STATES ONLY
Number of stores open at end
of period.................. 47 46 49 48 54 45 56
Comparable store sales
increase (decrease)(3)..... (12.6)% 10.7% (9.6)% (15.2)% 23.8% 16.7% 13.1%
Sales per square foot(4)..... $ 282 $ 317 $ 291 $ 255 $ 351 $ 54 $ 68
</TABLE>
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DECEMBER 31, 1999 APRIL 1, 2000
----------------- -------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 97,944 $138,658
Total assets.............................................. 369,036 406,326
Long-term debt and notes payable.......................... 83,363 117,805
Net stockholders' equity.................................. 167,355 179,067
</TABLE>
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(1) Effective January 1, 1997, we changed our method of accounting for product
display fixtures. (See Note 13 to Consolidated Financial Statements.)
(2) We terminated our S Corporation election in August 1996. This reflects
adjustments for Federal and state income taxes as if we had been taxed as a
C Corporation rather than as an S Corporation in 1995 and 1996.
(3) Our comparable store sales percentages are based on net revenue, and stores
are considered comparable which were open a minimum of one year prior to the
year of sales.
(4) Our sales per square foot consists of net sales divided by the time weighted
average of the gross square footage of all stores.
7
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AND OTHER INFORMATION IN
THIS PROSPECTUS AND ANY ACCOMPANYING PROSPECTUS SUPPLEMENT BEFORE DECIDING TO
INVEST IN THE SHARES.
RISKS OF OUR BUSINESS
DEMAND FOR OUR MERCHANDISE MAY DECREASE AND THE APPEAL OF OUR BRAND IMAGE MAY
DIMINISH IF WE FAIL TO IDENTIFY AND RAPIDLY RESPOND TO CONSUMERS' FASHION
TASTES.
The apparel industry is subject to rapidly evolving fashion trends and shifting
consumer demands. Accordingly, our brand image and our profitability are heavily
dependent upon both the priority our target customers place on fashion and on
our ability to anticipate, identify and capitalize upon emerging fashion trends.
Current fashion tastes place significant emphasis on a fashionable look. In the
past this emphasis has increased and decreased through fashion cycles. If we
fail to anticipate, identify or react appropriately, or in a timely manner, to
fashion trends, we could experience reduced consumer acceptance of our products,
a diminished brand image and higher markdowns. These factors could result in
lower selling prices and sales volumes for our products and could have a
material adverse effect on our results of operations and financial condition.
WE COULD FIND THAT WE ARE CARRYING EXCESS INVENTORIES IF WE FAIL TO ANTICIPATE
CONSUMER DEMAND, IF OUR INTERNATIONAL VENDORS DO NOT SUPPLY QUALITY PRODUCTS ON
A TIMELY BASIS, IF OUR MERCHANDISING STRATEGIES FAIL OR IF WE FAIL TO OPEN NEW
AND REMODEL EXISTING STORES ON SCHEDULE.
We currently source approximately 60% of our products from international
vendors. Consequently, we must commit to styles and fabrics well in advance of
the applicable fashion season. Because of this commitment, the products we
eventually receive might not be consistent with constantly changing consumer
tastes. Further, even if we correctly anticipate consumer fashion trends, our
vendors could fail to supply the quality products and materials we require at
the time we need them. Moreover, we could fail to effectively market or
merchandise these products once we receive them. Lastly, we could fail to open
new or remodeled stores on schedule, and inventory purchases made in
anticipation of such store openings could remain unsold. Any of the above
factors could cause us to experience excess inventories and higher markdowns,
which in turn could have a material adverse effect on our results of operations
and financial condition.
THE APPAREL INDUSTRY IS HIGHLY COMPETITIVE, AND WE MAY FACE DIFFICULTIES
COMPETING SUCCESSFULLY IN THE FUTURE.
We operate in a highly competitive industry with low barriers to entry. We
compete with many apparel manufacturers and distributors and many well-known
designers, some of whom have substantially greater resources than we do and some
of whose products are priced lower than ours. Our retail and factory outlet
stores compete with many other retailers, including department stores, some of
whom are our major wholesale customers. Our licensed apparel and accessories
compete with many designer and non-designer lines and well-known brands. Within
each of our geographic markets, we also face significant competition from global
and regional branded apparel companies, as well as retailers that market apparel
under their own labels. These and other competitors pose significant challenges
to our market share in our existing major United States and foreign markets. In
addition, our larger competitors may be better able than we to adapt to changing
conditions that affect the competitive market. Any of these factors could result
in reductions in sales or prices of GUESS? products and could have a material
adverse effect on our results of operations and financial condition.
8
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OUR PLAN TO OPEN NEW RETAIL STORES MORE RAPIDLY THAN IN THE PAST COULD STRAIN
OUR RESOURCES AND CAUSE US TO EXECUTE OUR BUSINESS LESS EFFECTIVELY.
During 1999, we opened 17 net new stores in the United States and Canada, which
represents an increase of approximately 12% from the number of stores open at
the end of fiscal 1998. We plan to open 60 stores in the United States and
Canada in 2000, which represents an increase of approximately 38% from the
number of stores open at the end of 1999. We plan to continue rapid retail store
expansion in 2001 and 2002, significantly increasing our retail square footage.
This effort will place increased demands on our managerial, operational and
administrative resources that could prevent or delay the successful opening of
new stores as well as adversely impact the performance of our existing stores.
WE MAY BE UNSUCCESSFUL IN IMPLEMENTING OUR PLANNED RETAIL EXPANSION, WHICH COULD
HARM OUR BUSINESS AND NEGATIVELY AFFECT OUR RESULTS OF OPERATIONS.
To open and operate new stores successfully, we must:
- identify desirable locations, the availability of which is out of our
control;
- negotiate acceptable lease terms, including desired tenant improvement
allowances;
- build and equip the new stores;
- source sufficient levels of inventory to meet the needs of the new stores;
- hire, train and retain competent store personnel;
- successfully integrate the new stores into our existing operations; and
- satisfy the fashion preferences of customers in the new geographic areas.
Any of these challenges could delay our store openings, prevent us from
completing our store opening plans or hinder the operations of stores we do
open. We cannot be sure that we can successfully complete our planned expansion
or that our new stores will be profitable. Such things as unfavorable economic
and business conditions and changing consumer preferences could also interfere
with our plans to expand.
WE RELY ON THIRD PARTIES AND OUR OWN PERSONNEL FOR UPGRADING AND MAINTAINING OUR
MANAGEMENT INFORMATION AND ACCOUNTING SYSTEMS. IF THESE PARTIES DO NOT PERFORM
THESE FUNCTIONS APPROPRIATELY, OUR BUSINESS COULD BE DISRUPTED.
The efficient operation of our business is very dependent on our information and
accounting systems. In particular, we rely heavily on the automated sortation
system used in our distribution center and the merchandise management system
used to track sales and inventory. We depend on our vendors to maintain and
periodically upgrade these systems for the continued ability of these systems to
support our business as we expand. The software programs supporting our
automated sorting equipment and processing our inventory management information
were licensed to us by independent software developers. The inability of these
developers to continue to maintain and upgrade our software programs could
result in incorrect information being supplied to management, inefficient
ordering and replenishment of products and disruption of our operations if we
are unable to convert to alternate systems in an efficient and timely manner.
Due to our recent rapid growth and increased international sourcing, we have
experienced some difficulties with our current management information and
accounting systems. In addition, segments of our current information and
accounting systems are manually intensive. We have in the past and may in the
future experience errors in entering and processing information. While we are
taking additional action to reduce the risks associated with these situations,
including seeking to purchase a new
9
<PAGE>
enterprise-wide information system that could integrate all of our business
functions, we can give no assurances that these risks will not have a material
adverse effect on our results of operations and financial condition. You should
refer to the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more information.
THE PRICE OF OUR COMMON STOCK COULD DECLINE SUBSTANTIALLY IF OUR QUARTERLY
RESULTS OF OPERATIONS, COMPARABLE STORE SALES, SALES PER SQUARE FOOT, WHOLESALE
OPERATIONS OR ROYALTY NET REVENUE DECLINE OR DO NOT MEET THE EXPECTATIONS OF
RESEARCH ANALYSTS OR INVESTORS.
Our quarterly results of operations for our individual stores, our wholesale
operations and our royalty net revenue have fluctuated in the past and can be
expected to fluctuate in the future. Further, if our retail store expansion plan
fails to meet our expected results, our overhead and other related expansion
costs would increase without an offsetting increase in sales and net revenue.
This could have a material adverse effect on our results of operations and
financial condition.
Our net revenue and operating results are typically lower in the second quarter
of our fiscal year due to general seasonal trends in the apparel and retail
industries. Our comparable store sales and quarterly results of operations are
affected by a variety of factors, including:
- shifts in consumer tastes and fashion trends;
- the timing of new store openings and the relative proportion of new stores
to mature stores;
- calendar shifts of holiday or seasonal periods;
- changes in our merchandise mix;
- the timing of promotional events;
- actions by competitors;
- weather conditions;
- changes in style;
- changes in the business environment;
- population trends;
- changes in patterns of commerce such as the expansion of electronic
commerce; and
- the level of pre-operating expenses associated with new stores.
An unfavorable change in any of the above factors could have a material adverse
effect on our results of operations and financial condition. You should refer to
the section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for more information.
OUR OPERATIONS MAY BE ADVERSELY AFFECTED IF OUR NEW KENTUCKY DISTRIBUTION CENTER
DOES NOT OPERATE AS PLANNED.
As part of our expansion and enhanced efficiency efforts, we opened a new
approximately 500,000 square foot, fully automated distribution center in
Louisville, Kentucky in January 2000. Currently, three of our five product lines
are being distributed from this new facility. We intend to complete the transfer
of our remaining product lines and our e-commerce operations in the second
quarter of 2000. Risks related to this facility include:
- our failure to timely implement and effectively coordinate distribution
activities;
- performance that may not meet expectations; and
10
<PAGE>
- concentration of our distribution network at a single site, which would
delay our distribution of products in case of local workplace stoppages or
damage due to fires, floods and other natural disasters.
In addition, our new distribution center will rely heavily on PKMS, a relatively
new integrated receiving, inventory management and shipping system. Some other
apparel companies which have used PKMS have reported that they have experienced
problems transferring information from PKMS to their own systems. In testing our
system, we have identified problems transferring and classifying inventory data
from PKMS to our other systems. Also, we need to recruit, train and retain
qualified personnel to operate PKMS. It is too soon to tell whether we will
experience any serious problems with our new distribution center. Such problems,
whether because of PKMS, difficulty in recruiting, training and retaining the
necessary personnel, or any other reason, could disrupt our operations and have
a material adverse effect on our results of operations and financial condition.
OUR THREE MOST SENIOR EXECUTIVE OFFICERS OWN A MAJORITY OF OUR COMMON STOCK, AND
THEIR INTERESTS MAY DIFFER FROM THE INTERESTS OF OUR OTHER STOCKHOLDERS.
As of March 31, 2000, Maurice, Paul and Armand Marciano, our three most senior
executive officers, collectively beneficially owned 81.7% of our outstanding
shares of common stock. These officers may have different interests than our
other stockholders and, accordingly, they may direct the operations of our
business or use the proceeds of this offering in a manner contrary to the
interests of our other stockholders. As long as these officers own a majority of
our common stock, they will effectively be able to:
- elect our directors;
- amend or prevent amendment of our Restated Certificate of Incorporation or
Bylaws;
- effect or prevent a merger, sale of assets or other corporate transaction;
and
- control the outcome of any other matter submitted to our stockholders for
vote.
Their stock ownership, together with the anti-takeover effects of certain
provisions of applicable Delaware law and our Restated Certificate of
Incorporation or Bylaws, may allow them to delay or prevent a change in control
that may be favored by our other stockholders, which in turn could reduce our
stock price or prevent our stockholders from realizing a premium over our common
stock price. You should refer to the section entitled "Principal Stockholders"
for more information.
OUR FAILURE TO ATTRACT AND RETAIN OUR EXISTING SENIOR MANAGEMENT TEAM AND OTHER
KEY PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our business requires disciplined execution at all levels of our organization in
order to ensure the timely delivery of merchandise in appropriate quantities to
our stores and our wholesalers' stores. This execution requires experienced and
talented management in design, production, merchandising and advertising. Our
success depends upon the personal efforts and abilities of our senior
management, particularly Maurice, Paul and Armand Marciano, and other key
personnel. Although we have recently recruited several key executives with
relevant industry expertise, the extended loss of the services of one or more of
the Marcianos or other key personnel could materially harm our business.
Further, we do not have "key man" insurance with respect to any of the Marcianos
or other key employees, and any of them may leave us at any time, which could
severely disrupt our business and future operating results.
11
<PAGE>
OUR WHOLESALE BUSINESS IS HIGHLY CONCENTRATED; THE DECISION BY ANY OF OUR LARGE
CUSTOMERS TO DECREASE THEIR PURCHASES OF OUR PRODUCTS OR STOP CARRYING OUR
PRODUCTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
In 1999, 25.2% of our net revenue came from our three largest wholesale
customers: 12.4% from Bloomingdale's, Macy's and other affiliated stores owned
by Federated Department Stores, 6.5% from The May Company and 6.3% from
Dillard's stores. No other single customer or group of related customers
accounted for more than 5% of our net revenue in 1999. Continued consolidation
in the retail industry could further decrease the number of, or concentrate the
ownership of, stores that carry our and our licensees' products. Also, as we
expand the number of our retail stores, we run the risk that our wholesale
customers will perceive that we are increasingly competing directly with them,
which may lead them to reduce or terminate purchases of our products. In
addition, in recent years there has been a significant increase in the number of
designer brands seeking placement in department stores, which makes any one
brand potentially less attractive to department stores. If any one of our major
customers decides to decrease purchases from us, to stop carrying GUESS?
products or to carry our products only on terms less favorable to us, our sales
and profitability could significantly decrease. This could have a material
adverse effect on our results of operations and financial condition.
SINCE WE DO NOT CONTROL OUR LICENSEES' ACTIONS AND WE DEPEND ON OUR LICENSEES
FOR A SUBSTANTIAL PORTION OF OUR EARNINGS FROM OPERATIONS, THEIR CONDUCT COULD
HARM OUR BUSINESS.
We license others to produce and market products which are sold with our
trademarks. During 1999, approximately 34% of our earnings from operations were
derived from our 14 domestic and 14 international licensees. If the quality,
focus, image or distribution of our licensed products diminish, consumer
acceptance of the GUESS? brand and products could decline. This could materially
and adversely affect our business and results of operations. In 1999,
approximately 43% of our net royalties was derived from our top four licensed
product lines: GUESS? Watches, GUESS? Handbags and Small Leather Goods, GUESS?
Eyewear and GUESS? Footwear. A decrease in customer demand for any of these
product lines could have a material adverse effect on our results of operations
and financial condition.
CHANGES IN THE ECONOMY AND THE LOCAL ENVIRONMENT OF OUR STORES MAY ADVERSELY
AFFECT OUR ABILITY TO GENERATE REVENUES.
The industry in which we operate is cyclical. Purchases of apparel and related
merchandise tend to decline during recessionary periods and also may decline at
other times. We cannot provide any assurance that we will be able to maintain
our recent growth in revenues or earnings, or remain profitable in the future.
Further, a recession in the general economy or fears about future economic
conditions could decrease consumer spending habits and have a material adverse
effect on our results of operations and financial condition.
OUR INVOLVEMENT IN LAWSUITS, BOTH NOW AND IN THE FUTURE, COULD NEGATIVELY IMPACT
OUR BUSINESS.
We currently are a defendant in several lawsuits and have been involved in a
variety of other legal proceedings in the past. See the section entitled
"Business--Legal Proceedings." Although we intend to vigorously defend the
claims against us, if any of the claims in these lawsuits or a future lawsuit
are resolved unfavorably to us, we may be required to pay substantial monetary
damages or pursue alternative business strategies. This could have a material
adverse effect on our business. In addition, our defense of these actions has
resulted, and may continue to result, in substantial costs to us as well as
require the significant dedication of management resources. If we choose to
settle any of these lawsuits, the settlement costs could have a material adverse
effect on our cash resources and financial condition.
12
<PAGE>
VIOLATION OF LABOR LAWS AND PRACTICES BY US OR OUR LICENSEES, CONTRACTORS OR
SUPPLIERS COULD HARM OUR BUSINESS.
We promote and follow applicable legal and ethical business practices through
our internal and vendor operating guidelines. However, we do not control our
licensees', contractors' or suppliers' labor practices. The violation of labor
or other laws by us or any of our licensees, contractors or suppliers, or
divergence of a licensee's, contractor's or supplier's labor practices from
those generally accepted as ethical in the United States, could have a material
adverse effect on our business. See the section entitled "Business--Legal
Proceedings."
OUR SUCCESS DEPENDS ON MAINTAINING GOOD WORKING RELATIONSHIPS WITH OUR SUPPLIERS
AND MANUFACTURERS.
We do not own or operate most of our production equipment, and we depend on
independent contractors to supply our fabrics and to manufacture our products to
our specifications. We do not have long-term contracts with any suppliers or
manufacturers, and our business is dependent on continued good relations with
our vendors. In addition, none of our suppliers or manufacturers supplies or
manufactures our products exclusively. As a result, we compete with other
companies for the production capacity of independent manufacturers and
international import quota capacity. If our vendors or manufacturers fail to
ship our fabrics or products on time or to meet our quality standards or are
unable to fill our orders, we might not be able to deliver products to our
retail stores and wholesale customers on time or at all.
Moreover, our manufacturers have at times been unable to deliver finished
products in a timely fashion. This has led to an increase in our inventory,
causing a decrease in our profitability. As there are a limited number of
qualified, offshore manufacturers, it could take significant time to find
alternative manufacturers, which could result in our missing retailing seasons
or our wholesale customers' cancelling orders, refusing to accept deliveries or
requiring that we lower selling prices. Since we cannot return merchandise to
our manufacturers, we could also have a significant amount of unsold
merchandise. Any of these problems could harm our financial condition and
results of operations.
MUCH OF OUR BUSINESS IS INTERNATIONAL AND CAN BE DISRUPTED BY FACTORS BEYOND OUR
CONTROL.
We have been reducing our reliance on domestic contractors and expanding our use
of offshore manufacturers as a cost-effective means to produce our products.
During 1999, approximately 47% of our international finished apparel purchases
was made in the Middle East and Asia and approximately 50% was made in Mexico
and South America. In addition, we have been increasing our international sales
and, in 1999, 6.7% of our net revenue was from product sales to customers in
international markets and 2.1% of our net revenue was from net royalties paid by
international licensees, as compared to 5.6% and 2.8%, respectively, during
1998. We have also been increasing our purchases of fabrics outside of the
United States.
As a result of our increasing international operations, we face the possibility
of greater losses from a number of risks inherent in doing business in
international markets and from a number of factors which are beyond our control.
Such factors that could harm our results of operations and financial condition
include, among other things:
- political instability which disrupts trade with the countries in which our
contractors, suppliers or customers are located;
- local business practices that do not conform to legal or ethical guidelines;
- adoption of additional or revised quotas, restrictions or regulations
relating to imports or exports;
13
<PAGE>
- additional or increased customs duties, tariffs, taxes and other charges on
imports;
- significant fluctuations in the value of the dollar against foreign
currencies;
- economic instability in the foreign markets in which we do business, which
could influence our ability to sell our products in these international
markets; and
- restrictions on the transfer of funds between the United States and foreign
jurisdictions.
Our imports are limited by textile agreements between the United States and a
number of foreign jurisdictions, including Hong Kong, China, Taiwan and South
Korea. These agreements impose quotas on the amounts and types of merchandise
that may be imported into the United States from these countries. These
agreements also allow the United States to limit the importation of categories
of merchandise that are not now subject to specified limits. The United States
and the countries in which our products are produced or sold may also, from time
to time, impose new quotas, duties, tariffs or other restrictions, or adversely
adjust prevailing quota, duty or tariff levels. In addition, none of our
international suppliers or international manufacturers supplies or manufactures
our products exclusively. As a result, we compete with other companies for the
production capacity of independent manufacturers and import quota capacity. If
we were unable to obtain our raw materials and finished apparel from the
countries where we wish to purchase them, either because room or space under the
necessary quotas was unavailable or for any other reason, or if the cost of
doing so should increase, it could have a material adverse effect on our results
of operations and financial condition.
WE DEPEND ON OUR INTELLECTUAL PROPERTY, AND OUR METHODS OF PROTECTING IT MAY NOT
BE ADEQUATE.
Our success and competitive position depend significantly upon our trademarks
and other proprietary rights. We take steps to establish and protect our
trademarks worldwide. Despite any precautions we may take to protect our
intellectual property, policing unauthorized use of our intellectual property is
difficult, expensive and time consuming, and we may be unable to determine the
extent of any unauthorized use. We also place significant value on our trade
dress and the overall appearance and image of our products. However, we cannot
assure you that we can prevent imitation of our products by others or prevent
others from seeking to block sales of GUESS? products for violating their
trademarks and proprietary rights. We also cannot assure you that others will
not assert rights in, or ownership of, trademarks and other proprietary rights
of GUESS?, that our proprietary rights would be upheld if challenged or that we
would, in that event, not be prevented from using our trademarks, any of which
could have a material adverse effect on our financial condition and results of
operations. Further, we could incur substantial costs in legal actions relating
to our use of intellectual property or the use of our intellectual property by
others; even if we are successful, the costs we incur could have a material
adverse effect on us. In addition, the laws of certain foreign countries do not
protect proprietary rights to the same extent as do the laws of the United
States.
RISKS OF THIS OFFERING
OUR THREE MOST SENIOR EXECUTIVE OFFICERS COULD SELL A LARGE AMOUNT OF OUR COMMON
STOCK AND LOWER ITS PRICE.
As of March 31, 2000, Maurice, Paul and Armand Marciano, our three most senior
executive officers, collectively beneficially owned 81.7% of our outstanding
shares of common stock. Subject to applicable securities laws, our policies and
contractual lock ups, they are free to sell these shares from time to time for
any reason. Sales of substantial amounts of stock in the public market, or the
belief that these sales may occur, could reduce the market price of our stock.
14
<PAGE>
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE.
Since our common stock began publicly trading in 1996, our stock price has
ranged from $3.63 to $33.00. The market price of our common stock is likely to
fluctuate, both because of actual and perceived changes in our operating results
and prospects and because of general volatility in the stock market. The market
price could continue to fluctuate widely in response to factors such as:
- actual or anticipated variations in our results of operations;
- the addition or loss of suppliers, customers and other business
relationships;
- changes in financial estimates of, and recommendations by, securities
analysts;
- conditions or trends in the apparel and consumer products industries;
- additions or departures of key personnel;
- sales of our common stock;
- general market and economic conditions; and
- other events or factors, many of which are beyond our control.
Fluctuations in price and trading volume of our stock in response to factors
like these could be unrelated or disproportionate to our actual operating
performance.
FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus and any accompanying prospectus
supplement contains forward-looking statements within the meaning of the federal
securities laws. These statements include, among others, those relating to our
use of proceeds, liquidity, our expected results, the accuracy of data relating
to, and anticipated levels of, our future inventory and gross margins, our
anticipated cash requirements and sources, the relocation of our distribution
center, our cost containment efforts, our plans regarding store openings and
closings and our business seasonality. These statements may be found under
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and in any accompanying prospectus supplement. Forward-looking
statements typically are identified by use of terms such as "may," "will,"
"intend," "expect," "anticipate," "predict," "estimate" and similar words,
although some forward-looking statements are expressed differently. You should
be aware that GUESS?' actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including consumer acceptance of existing and future product lines, excess
inventory levels, the success of our products in a competitive business
environment, successfully opening and integrating new stores into existing
operations, the quality of our management information systems and other
technology, meeting the expectations of research analysts or investors,
improving our distribution system through our new distribution center, aligning
senior management's interests with our interests, retaining our management team
and other key personnel, maintaining our sales levels and business relationships
with our large customers and licensees, our ability to monitor our licensees'
actions, changes in the economy and the local environments of our stores,
obtaining favorable outcomes in pending and future lawsuits, preventing
violations of labor laws, maintaining good working relationships with our
suppliers and manufacturers, the success of our international operations and
protecting our intellectual property rights. You should also consider carefully
the statements under "Risk Factors" and other sections of this prospectus and in
any accompanying prospectus supplement, which address additional factors that
could cause GUESS?' actual results to differ from those set forth in the
forward-looking statements.
15
<PAGE>
USE OF PROCEEDS
Unless otherwise described in the applicable prospectus supplement, we intend to
use the net proceeds for general corporate purposes, which may include the
repayment or refinancing of our outstanding indebtedness, working capital and
the funding of our retail expansion and remodeling program.
Until we use the net proceeds of any offering pursuant to this prospectus and
any accompanying prospectus supplement, we will invest the net proceeds in
short-term, investment grade interest-bearing securities.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
Since August 8, 1996, our common stock has been listed on the New York Stock
Exchange under the symbol "GES." The following table sets forth, for the period
indicated, the high and low sales prices of our common stock, as reported on the
New York Stock Exchange Composite Tape.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
YEAR ENDING DECEMBER 31, 1998
First Quarter............................................... $ 8.38 $ 5.00
Second Quarter.............................................. 7.13 3.75
Third Quarter............................................... 4.94 3.75
Fourth Quarter.............................................. 7.88 3.63
YEAR ENDING DECEMBER 31, 1999
First Quarter............................................... $ 9.50 $ 4.88
Second Quarter.............................................. 14.25 6.13
Third Quarter............................................... 16.63 10.38
Fourth Quarter.............................................. 22.94 11.13
YEAR ENDING DECEMBER 31, 2000
First Quarter............................................... $33.00 $18.63
Second Quarter through May 23............................... 32.44 15.50
</TABLE>
On May 23, 2000, the last reported sale price of our common stock on the New
York Stock Exchange was $17.25 per share.
DIVIDEND POLICY
Since our initial public offering, we have never paid any cash dividends on our
capital stock. We anticipate that we will retain earnings to support operations
and to finance the growth and development of our business. Therefore, we do not
expect to pay cash dividends in the foreseeable future. In addition, our bank
credit agreement contains covenants which limit our ability to pay dividends.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of Earnings
Data" and "Balance Sheet Data" for, and as of the end of, each of the years in
the five-year period ended December 31, 1999, are derived from our consolidated
financial statements that have been audited by KPMG LLP, independent certified
public accountants. The consolidated financial statements as of December 31,
1999 and 1998, and for each of the years in the three-year period ended
December 31, 1999, and the report on these statements, are included in this
prospectus. The consolidated financial statements as of December 31, 1995, 1996
and 1997, and for each of the years in the two-year period ended December 31,
1996 are not included in this prospectus. The "Statement of Earnings Data" for
the quarters ended March 27, 1999 and April 1, 2000 and "Balance Sheet Data" as
of April 1, 2000, are derived from unaudited condensed consolidated financial
statements included in this prospectus and, in our opinion, include all
adjustments, consisting of normal recurring accruals, that are necessary to
present fairly the data for these periods. Results for interim periods are not
necessarily indicative of results to be expected for the entire year. You should
read the selected consolidated financial data together with our historical
financial statements and related notes to our financial statements, as well as
the section included in this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, QUARTERS ENDED
---------------------------------------------------- ------------------------------
1995 1996 1997 1998 1999 MARCH 27, 1999 APRIL 1, 2000
-------- -------- -------- -------- -------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net revenue............................. $486,733 $551,162 $515,372 $471,931 $599,650 $129,052 $188,844
-------- -------- -------- -------- -------- -------- --------
Earnings from operations................ 82,928 98,095 70,646 57,046 93,776 21,748 28,300
-------- -------- -------- -------- -------- -------- --------
Earnings before interest and income
taxes................................. 82,771 97,106 68,605 56,183 96,485 21,636 28,276
-------- -------- -------- -------- -------- -------- --------
Net earnings............................ $ 63,919 $ 66,741 $ 37,511 $ 25,111 $ 51,900 $ 11,486 15,423
======== ======== ======== ======== ======== ======== ========
Supplemental statements of earnings
data(1):
Earnings before income taxes and change
in accounting principle(2)............ $ 66,814 $ 82,567 $ 54,887 $ 43,291 $ 87,100 $ 19,303 $ 25,623
Income taxes............................ 26,726 33,241 21,337 18,180 35,200 7,817 10,200
-------- -------- -------- -------- -------- -------- --------
Net earnings............................ $ 40,088 $ 49,326 $ 37,511 $ 25,111 $ 51,900 $ 11,486 $ 15,423
======== ======== ======== ======== ======== ======== ========
Earnings per share(2):
Basic................................... $ 0.96 $ 1.18 $ 0.87 $ 0.59 $ 1.21 $ 0.27 $ 0.36
======== ======== ======== ======== ======== ======== ========
Diluted................................. $ 0.96 $ 1.18 $ 0.87 $ 0.59 $ 1.20 $ 0.27 $ 0.35
======== ======== ======== ======== ======== ======== ========
Weighted number of shares outstanding:
Basic................................... 41,675 41,906 42,898 42,904 43,005 42,919 43,352
======== ======== ======== ======== ======== ======== ========
Diluted................................. 41,675 41,908 42,902 42,919 43,366 43,177 44,210
======== ======== ======== ======== ======== ======== ========
SELECTED OPERATING DATA:
RETAIL STORES--UNITED STATES ONLY
Number of stores open at end of
period................................ 62 69 87 84 92 84 94
Comparable store sales increase
(decrease)(3)......................... 0.3% 8.2% (7.5)% 0.8% 28.2% 34.3% 21.5%
Sales per square foot(4)................ $ 340 $ 362 $ 333 $ 336 $ 434 $ 81 $ 105
FACTORY OUTLET STORES--UNITED STATES ONLY
Number of stores open at end of
period................................ 47 46 49 48 54 45 56
Comparable store sales increase
(decrease)(3)......................... (12.6)% 10.7% (9.6)% (15.2)% 23.8% 16.7% 13.1%
Sales per square foot(4)................ $ 282 $ 317 $ 291 $ 255 $ 351 $ 54 $ 68
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 1,
---------------------------------------------------- -----------
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 57,572 $ 76,821 $106,670 $101,310 $ 97,944 $138,658
Total assets................................................ 202,635 239,306 287,814 263,772 369,036 406,326
Long-term debt and notes payable............................ 123,335 127,316 141,517 99,000 83,363 117,805
Net stockholders' equity.................................... 10,997 34,928 75,330 100,409 167,355 179,067
</TABLE>
- ---------------------------
(1) Reflects pro forma adjustments for Federal and state income taxes as if the
Company had been taxed as a C corporation rather than an S corporation in
1995 and 1996.
(2) Effective January 1, 1997, the Company changed its method of accounting for
product display fixtures. (See Note 13 to Consolidated Financial
Statements.)
(3) Our comparable store sales percentages are based on net revenue, and stores
are considered comparable which were open a minimum of one year prior to the
year of sales.
(4) Our sales per square foot consists of net sales divided by the time weighted
average of gross square footage of all stores.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
GUESS? was founded in December 1981 as a designer and marketer of apparel and
accessories for men, women and children. Through internal operations and in
conjunction with the licensing of our trademarks, we have grown by the increased
sales of existing product lines, the introduction of new brands and products,
our expansion into international markets and the development of our retail
operations. Net revenue increased 27.1% to $599.7 million in 1999 from
$471.9 million in 1998. Net earnings increased 106.8% to $51.9 million in 1999
from $25.1 million in 1998. Net revenue increased 46.2% to $188.8 million from
$129.1 million for the same period in 1999. In addition, net earnings increased
33.9% to $15.4 million for the first quarter of 2000 from $11.5 million for the
same period in 1999.
Our net revenues are generated from three integrated operations: our retail and
factory outlet stores, our wholesale customers and distributors and our
licensing activities.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Retail operations..... $215,873 41.9% $222,624 47.2% $299,384 49.9%
Wholesale
operations.......... 250,040 48.5 212,504 45.0 260,628 43.5
-------- ----- -------- ----- -------- -----
Product sales........... 465,913 90.4 435,128 92.2 560,012 93.4
Net royalties........... 49,459 9.6 36,803 7.8 39,638 6.6
-------- ----- -------- ----- -------- -----
Total net revenue....... $515,372 100.0% $471,931 100.0% $599,650 100.0%
======== ======== ========
<CAPTION>
QUARTERS ENDED
-----------------------------------------
MARCH 27, 1999 APRIL 1, 2000
------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenue:
Retail operations..... $ 51,474 39.9% $ 77,772 41.2%
Wholesale
operations.......... 68,467 53.1 100,639 53.3
-------- ----- -------- -----
Product sales........... 119,941 93.0 178,411 94.5
Net royalties........... 9,111 7.0 10,433 5.5
-------- ----- -------- -----
Total net revenue....... $129,052 100.0% $188,844 100.0%
======== ========
</TABLE>
GUESS? retail sales are generated from the sale of our men's, women's and girls'
apparel and our licensees' products through our networks of retail and factory
outlet stores. As of April 1, 2000, we operated 108 retail stores primarily
located in better regional malls and street oriented retail districts and 59
factory outlet stores principally located in major outlet shopping centers. Our
strategy is to increase domestic sales by selectively expanding our network of
retail stores, increasing the size of our new retail stores, increasing the
sales productivity of our existing stores and closing stores which do not meet
our financial objectives. Consistent with this strategy, in 1999 we opened 22
new stores in the United States and Canada and improved our operating base by
closing five under-performing stores, resulting in total retail square footage
of approximately 834,000 square feet. We intend to open approximately 25 new
retail stores and ten new factory outlet stores in the United States in 2000. We
also plan to open ten GUESS? Kids stores in the United States, which will carry
GUESS? Kids and Baby GUESS? apparel. Retail sales grew to $299.4 million in
1999, a 34.5% increase from 1998. In addition, retail sales grew to
$77.8 million in the first quarter of 2000, a 51.1% increase from the same
period in 1999. This increase is primarily a result of our expansion of the
number of our stores and an increase in average sales per square foot.
As part of our retail expansion, we increased our ownership of our Canadian
licensee, GUESS? Canada Corporation, to 60% on August 4, 1999. We have an option
to acquire the remaining 40% of GUESS? Canada commencing December 31, 2001.
GUESS? Canada currently operates a total of 14 retail stores and three factory
outlet stores. We intend to open approximately ten new retail stores and five
new factory outlet stores in Canada in 2000. GUESS? Canada is remodeling most of
its existing stores and plans to open up to 35 new stores over the next three
years.
Wholesale net sales result from the sale of our men's, women's, boys' and girls'
apparel to wholesale customers in the United States and Canada, which consist of
better department stores, selected specialty retailers and upscale boutiques. As
of April 1, 2000, products distributed by our wholesale
19
<PAGE>
division were sold in approximately 2,800 retail store locations in the United
States, including approximately 1,200 shop-in-shops. Wholesale sales grew to
$260.6 million and $100.6 million in 1999 and the first quarter of 2000,
respectively, representing increases of 22.6% and 46.9%, respectively, from 1998
and the first quarter of 1999. This increase is primarily a result of the
strength of our GUESS? brand and product, our strategic decision to focus on
higher volume accounts, the addition of new or remodeled shop-in-shops and the
addition of Canadian wholesale operations. We currently plan to add or remodel
approximately 500 shop-in-shops during 2000.
Our strategy is to increase net royalties by selectively licensing the GUESS?
name. Licensing enables us to broaden the spectrum of available GUESS? brand
products and expand distribution into new territories. As of April 1, 2000, we
had 26 trademark licenses that cover such fashion accessories as watches,
eyewear, handbags and footwear, and allow the manufacture and sale of GUESS?
brand products in markets such as Europe, Asia, South America and Africa. GUESS?
brand products are also sold through a network of 213 international GUESS?
stores operated by licensees and distributors. These stores generally carry
apparel and accessories that are similar to what we sell through our own stores.
To protect the GUESS? trademark and brand, our licensing department meets
regularly with licensees to ensure consistency with our overall merchandising
and design strategies and to ensure uniformity and quality control. The
licensing department approves in advance all GUESS? brand products, advertising,
promotional and packaging materials.
Worldwide sales of GUESS? licensed products approximated $525 million,
$577 million and $669 million in 1999, 1998 and 1997, respectively. Aggregate
sales of GUESS? brand products generated by our licensees decreased during this
time period due to our discontinuing certain licenses, some of which were
brought in-house and continuing economic turmoil and currency devaluation in
Asian and Latin American markets. These sales generated net revenue of
$39.6 million, $36.8 million and $49.5 million in 1999, 1998 and 1997,
respectively. In 1998, our net royalty revenue was adversely impacted by the
financial difficulties of certain licensees and the termination of various
under-performing licensees.
While we have not completed a material or significant investment in, or
acquisition of, another company since our initial public offering in 1996, we
believe there may be opportunities in the future when we could enhance our
business or improve our operations through one or more of such transactions.
While we are not currently negotiating any investment or acquisition, we intend
to consider these types of opportunities when appropriate.
On February 16, 2000, we filed an amendment to our quarterly report on
Form 10-Q for the three and nine month periods ended September 25, 1999 in order
to restate the Financial Statements and revise the Management's Discussion and
Analysis of Financial Condition and Results of Operations sections. We filed
this amendment because we learned during our 1999 year-end closing that certain
inventory costs and related cost of sales should have been recognized in the
third quarter. Recognizing these costs in the third quarter resulted in a
reduction in our previously reported net earnings for the three and nine month
periods ended September 25, 1999.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth actual operating results for the years ended
1997, 1998 and 1999 and for the quarters ended March 27, 1999 and April 1, 2000
as a percentage of net revenue.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, QUARTERS ENDED
------------------------------------ ---------------------------------
1997 1998 1999 MARCH 27, 1999 APRIL 1, 2000
-------- -------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenue:
Product sales.................... 90.4% 92.2% 93.4% 93.0% 94.5%
Net royalties.................... 9.6 7.8 6.6 7.0 5.5
----- ----- ----- ------ ------
100.0 100.0 100.0 100.00 100.00
Cost of sales...................... 56.0 57.7 55.3 58.1 57.3
----- ----- ----- ------ ------
Gross profit....................... 44.0 42.3 44.7 41.9 42.7
Selling, general and administrative
expenses......................... 30.3 30.2 28.5 25.0 27.7
Severance costs related to
distribution facility............ -- -- 0.5 -- --
----- ----- ----- ------ ------
Earnings from operations......... 13.7 12.1 15.7 16.9 15.0
Other income/(expense):
Gain on disposition of property
and equipment.................. -- -- 0.6 -- --
Interest, net.................... (2.7) (2.7) (1.6) (1.8) (1.4)
Other, net....................... (0.4) (0.2) (0.2) -- --
----- ----- ----- ------ ------
(3.1) (2.9) (1.2) (1.8) (1.4)
Earnings before income taxes and
cumulative effect of change in
accounting principle............. 10.6 9.2 14.5 15.1 13.6
Income taxes....................... 4.1 3.9 5.9 6.1 5.4
----- ----- ----- ------ ------
Earnings before cumulative effect
of change
in accounting principle.......... 6.5 5.3 8.6 9.0 8.2
Cumulative effect of change in
accounting principle............. 0.8 -- -- -- --
----- ----- ----- ------ ------
Net earnings....................... 7.3% 5.3% 8.6% 9.0% 8.2%
===== ===== ===== ====== ======
</TABLE>
QUARTER ENDED APRIL 1, 2000 COMPARED TO QUARTER ENDED MARCH 27, 1999
Effective January 1, 2000, we changed our quarterly reporting period to end on
the Saturday nearest the calendar quarter end. Previously, our quarterly
reporting period ended on the last Saturday prior to the quarter end, which
resulted in six more calendar days in the current quarter. This change did not
have a material impact on the consolidated financial statements.
NET REVENUE. Net revenue increased $59.7 million or 46.2% to $188.8 million for
the quarter ended April 1, 2000 from $129.1 million for the quarter ended
March 27, 1999. Net revenue from retail operations increased $26.3 million or
51.1% to $77.8 million for the quarter ended April 1, 2000 from $51.5 million
for the quarter ended March 27, 1999. This increase is primarily attributable to
a 19.2% increase in comparable store sales resulting from the continued strength
of the retail business by having more fashion-focused product assortment,
improved merchandising efforts and faster replenishment.
Net revenue from wholesale operations increased $32.1 million or 46.9% to
$100.6 million for the quarter ended April 1, 2000 from $68.5 million for the
quarter ended March 27, 1999. Domestic and international wholesale operations
net revenue increased, for the quarter ended April 1, 2000, by
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$22.7 million to $84.2 million and by $9.5 million to $16.4 million,
respectively. Our domestic wholesale net revenue increased primarily due to a
stronger domestic demand for our women's and girls' product lines. International
wholesale operations net revenue increased as a result of increased demand in
the European, Asian and South American markets.
Net royalties increased $1.3 million, or 14.5%, to $10.4 million for the quarter
ended April 1, 2000 from $9.1 million for the quarter ended March 27, 1999. The
increase in net royalties was primarily due to strong performance in the watch,
eyewear and footwear product lines, which was partially offset by our
discontinuing certain licenses that were brought back in-house in the prior
year.
GROSS PROFIT. Gross profit increased 49.1% to $80.5 million for the quarter
ended April 1, 2000 from $54.0 million for the quarter ended March 27, 1999. The
increase in gross profit resulted from increased net revenue from product sales.
Gross margin from product sales increased 56.1% to $70.1 million for the quarter
ended April 1, 2000 from $44.9 million for the quarter ended March 27, 1999.
Gross profit as a percentage of total net revenue increased to 42.7% for the
quarter ended April 1, 2000 as compared to 41.9% for the quarter ended
March 27, 1999. Gross margin from product sales increased to 39.3% for the
quarter ended April 1, 2000 compared to 37.4% for the quarter ended March 27,
1999.
The increase in our gross margin from product sales for the quarter was
primarily due to improved retail margins, lower off-price sales and the effect
of spreading retail occupancy costs over a higher sales base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative, or SG&A, expenses of $52.2 million for the quarter ended
April 1, 2000 increased to 27.7% of net revenue, from 25.0% of net revenue or
$32.3 million, in the quarter ended March 27, 1999. The increase in SG&A
expenses for the quarter ended April 1, 2000 reflects the expansion of our
organizational infrastructure needed to facilitate our growth initiatives.
During the quarter ended April 1, 2000, we also incurred start-up and other
non-recurring pre-tax costs of $3.1 million relating to the relocation of our
distribution operation to Kentucky. Additionally, at the beginning of the
quarter ended April 1, 2000, we revised our vacation pay policies to enhance
employee benefits, which resulted in a one-time pre-tax charge of $1.3 million.
EARNINGS FROM OPERATIONS. Earnings from operations increased 30.4% to
$28.3 million for the quarter ended April 1, 2000 from $21.7 million for the
quarter ended March 27, 1999. This increase was primarily due to higher revenue.
INTEREST EXPENSE, NET. Net interest expense increased 17.4% to $2.7 million for
the quarter ended April 1, 2000 from $2.3 million for the quarter ended
March 27, 1999. The increase is due to higher outstanding debt in the quarter
ended April 1, 2000. For the quarter ended April 1, 2000, the average debt
balance, excluding GUESS? Canada, was $92.8 million, with an average effective
interest rate of 9.2%. For the quarter ended March 27, 1999, the average debt
balance was $96.8 million, with an average effective interest rate of 9.5%.
INCOME TAXES. The income tax provision for the quarter ended April 1, 2000 was
$10.2 million, or a 40.0% effective tax rate. The income tax provision for the
quarter ended March 27, 1999 was $7.8 million, or a 40.5% effective tax rate.
Income taxes for the interim periods were computed using the effective tax rate
estimated to be applicable for the full year, which is subject to our ongoing
review and evaluation.
NET EARNINGS. Net earnings increased to $15.4 million for the quarter ended
April 1, 2000, from $11.5 million in the quarter ended March 27, 1999.
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<PAGE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUE. Net revenue increased $127.8 million or 27.1% to $599.7 million
for the year ended December 31, 1999 from $471.9 million for the year ended
December 31, 1998. Net revenue from retail operations increased $76.8 million or
34.5% to $299.4 million for the year ended December 31, 1999 from
$222.6 million for the year ended December 31, 1998. The primary reasons for
this growth were that our United States retail and factory outlet stores
achieved comparable store sales gains of 28.2% and 23.8%, respectively, over
1998 and sales volume generated by our new store openings. The strong increase
in comparable store net revenue was primarily attributable to our improved
merchandising and our fashion-focused product mix. The retail segment is
benefitting from our improved customer service levels resulting from our
enhanced personnel training and incentive programs that have been offered to our
employees.
Net revenue from wholesale operations increased $48.1 million or 22.6% to
$260.6 million for the year ended December 31, 1999 from $212.5 million for the
year ended December 31, 1998. Our wholesale operations generate revenue from
domestic accounts and a select number of international accounts. Domestic and
international wholesale operations net revenue increased, for the year ended
December 31, 1999, by $40.6 million to $228.7 million and by $7.4 million to
$31.9 million, respectively. Our domestic wholesale net revenue increased
primarily as a result of the increased demand for fashion products in both of
our women's and men's lines. International wholesale operations net revenue
increased due primarily to increased sales in the European market, partially
offset by soft performance in the Asian and South American markets. GUESS?
Canada contributed $7.4 million in wholesale net revenue during the second half
of the year ended December 31, 1999.
Net royalties increased $2.8 million, or 7.6%, to $39.6 million for the year
ended December 31, 1999 from $36.8 million for the year ended December 31, 1998.
The increase in net royalties was primarily due to settlements and adjustments
related to our terminating licensees, partially offset by our discontinuing
certain licenses that were brought in-house, continuing economic turmoil and
currency devaluation in Asian markets.
Net revenue from international operations comprised 6.7% and 5.6% of net product
sales during 1999 and 1998, respectively.
GROSS PROFIT. Gross profit increased 34.1% to $268.0 million for the year ended
December 31, 1999 from $199.9 million for the year ended December 31, 1998. The
increase in gross profit resulted from higher net revenue from product sales.
Gross margin from product sales increased 40.1% to $228.4 million for the year
ended December 31, 1999 from $163.0 million for the year ended December 31,
1998. Gross profit as a percentage of total net revenue increased to 44.7% for
the year ended December 31, 1999 as compared to 42.3% for the year ended
December 31, 1998. Gross margin from product sales increased to 40.8% for the
year ended December 31, 1999 compared to 37.5% for the year ended December 31,
1998.
The increase in our gross margin from product sales was primarily the result of
fixed store occupancy costs being spread over a larger comparable store revenue
base, a favorable mix in retail net revenue, which generally carries a higher
gross margin rate, lower off-price sales and a decrease in wholesale markdowns
and allowances as a percentage of wholesale net revenue.
Furthermore, during the fourth quarter of 1999, we enhanced our ability to
estimate reserves through improved processes and more current and accurate data.
As a result, we revised our estimate of certain reserves. This resulted in a
reduction of cost of sales of $2.3 million and an increase of gross profit of
$2.3 million or 2.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses of $171.0 million
for the year ended December 31, 1999 decreased to 28.5% of net revenue, from
30.2% of net revenue or $142.8 million, in the year ended December 31, 1998. The
decrease in SG&A expenses as a percentage of net revenue
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<PAGE>
was due to our ability to leverage certain expenses against a higher revenue
base, as well as the success of our ongoing cost containment programs.
SEVERANCE COSTS RELATED TO DISTRIBUTION FACILITY. In accordance with the
requirements of EITF 94-3, "Liability for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)", we recorded a $3.2 million charge for future severance costs
related to the relocation of our distribution operations from Los Angeles,
California to Louisville, Kentucky. We anticipate the payment of these severance
costs to occur in the second quarter of fiscal year 2000.
EARNINGS FROM OPERATIONS. Earnings from operations increased 64.6% to
$93.8 million for the year ended December 31, 1999 from $57.0 million for the
year ended December 31, 1998. The increase was primarily due to higher net
revenue, higher gross profit rates and reduced SG&A rates.
GAIN ON DISPOSITION OF PROPERTY. We realized a non-recurring pre-tax gain of
$3.8 million on the disposition of property and equipment in 1999.
INTEREST EXPENSE, NET. Net interest expense decreased 27.1% to $9.4 million for
the year ended December 31, 1999 from $12.9 million for the year ended
December 31, 1998. This decrease resulted primarily from a lower outstanding
average debt. For the year ended December 31, 1999, the average debt balance was
$93.1 million, with an average effective interest rate of 9.5%. For the year
ended December 31, 1998, the average debt balance was $135.5 million, with an
average effective interest rate of 9.0%.
INCOME TAXES. The income tax provision for the year ended December 31, 1999 was
$35.2 million, or a 40.4% effective tax rate. The income tax provision for the
year ended December 31, 1998 was $18.2 million, or a 42% effective tax rate. The
effective tax rate for 1998 was adversely impacted by Federal and state income
taxes related to a dividend declared to us by one of our foreign subsidiaries.
NET EARNINGS. Net earnings increased to $51.9 million for the year ended
December 31, 1999, from $25.1 million for the year ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUE. Net revenue decreased $43.5 million or 8.4% to $471.9 million for
the year ended December 31, 1998 from $515.4 million for the year ended
December 31, 1997. Net revenue from retail operations increased $6.7 million or
3.1% to $222.6 million for the year ended December 31, 1998 from $215.9 million
for the year ended December 31, 1997, as a result of the volume generated by our
new store openings, partially offset by a $10.7 million, or 5.6%, decrease in
comparable store net revenue. The decrease in comparable store net revenue was
primarily due to product assortment changes in our outlet stores and softening
Pacific Rim tourism, which significantly impacted West Coast business during the
first half of 1998. During the second half of 1998, our retail stores
experienced positive comparable store net revenue, primarily due to our improved
merchandising and store operating initiatives implemented by a new retail
management team.
Net revenue from wholesale operations decreased $37.5 million or 15% to
$212.5 million for the year ended December 31, 1998 from $250.0 million for the
year ended December 31, 1997. Domestic and international wholesale operations
net revenue decreased, for the year ended December 31, 1998, by $18.2 million to
$188.0 million and by $19.3 million to $24.5 million, respectively. Our domestic
wholesale operations net revenue declined primarily as a result of increased
competition in branded basic denim apparel. International wholesale operations
net revenue decreased due primarily to the sale of the GUESS? Italia wholesale
operations in June 1997, which had contributed $13.5 million during the first
five months of 1997, as well as soft performance in the Asian and South American
markets.
24
<PAGE>
Net royalties decreased $12.7 million, or 25.6% to $36.8 million for the year
ended December 31, 1998, from $49.5 million for the year ended December 31,
1997. The decline in net royalties was primarily the result of our terminating
various under-performing licenses, discontinuing certain licenses which we
brought back in-house, continuing economic turmoil and currency devaluation in
the Asian markets and the financial difficulty of one of our domestic licensees.
Net revenue from our international operations comprised 5.6% and 11.5% of our
net product revenue during 1998 and 1997, respectively.
GROSS PROFIT. Gross profit decreased 11.9% to $199.9 million for the year ended
December 31, 1998 from $227.0 million for the year ended December 31, 1997. The
decline in gross profit resulted from lower net royalties, as well as decreased
net revenue from product sales. Gross profit from product sales decreased 8.1%
to $163.0 million for the year ended December 31, 1998 from $177.5 million for
the year ended December 31, 1997. Gross margin decreased to 42.3% for the year
ended December 31, 1998 as compared to 44% for the year ended December 31, 1997.
Gross margin from product sales decreased to 37.5% for the year ended
December 31, 1998 compared to 38.1% for the year ended December 31, 1997. The
decrease in gross margin from product sales was primarily the result of our
fixed store occupancy costs being spread over a lower comparable store revenue
base, partially offset by a favorable mix in retail net revenue, which generally
carries a higher gross margin rate, and lower wholesale markdowns and
allowances.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A expenses decreased 8.6% to
$142.8 million, or 30.2% of net revenue, for the year ended December 31, 1998,
from $156.3 million, or 30.3% of net revenue, for the year ended December 31,
1997. The decrease in SG&A expenses was primarily due to our cost reduction
initiatives implemented in the fourth quarter of 1997.
EARNINGS FROM OPERATIONS. Earnings from operations decreased 19.3% to
$57.0 million for the year ended December 31, 1998, from $70.6 million for the
year ended December 31, 1997. The decrease was primarily due to lower revenue.
INTEREST EXPENSE, NET. Net interest expense decreased 5.8% to $12.9 million for
the year ended December 31, 1998 from $13.7 million for the year ended
December 31, 1997. This decrease resulted primarily from a lower outstanding
average debt, partially offset by a slightly higher average effective interest
rate. For the year ended December 31, 1998, the average debt balance was
$135.5 million, with an average effective interest rate of 9%. For the year
ended December 31, 1997, the average debt balance was $148.4 million, with an
average effective interest rate of 8.8%.
OTHER EXPENSES. Other non-operating expenses were $0.9 million for the year
ended December 1998 as compared to $2.0 million for the year ended December 31,
1997. The decrease was primarily due to a $1.4 million write-down in 1997 of an
equity investment to the lower of cost or market.
INCOME TAXES. The income tax provision for the year ended December 31, 1998 was
$18.2 million, or a 42% effective tax rate. The income tax provision for the
year ended December 31, 1997 was $21.3 million, or a 38.9% effective tax rate.
The effective tax rate for 1998 was adversely impacted primarily by Federal and
state income taxes related to a dividend declared to us by one of our foreign
subsidiaries.
NET EARNINGS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Net
earnings before cumulative effect of a change in accounting principle decreased
by 25.2% to $25.1 million, or 5.3% of net revenue, for the year ended
December 31, 1998 from $33.6 million, or 6.5% of net revenue, for the year ended
December 31, 1997.
NET EARNINGS. Net earnings decreased to $25.1 million for the year ended
December 31, 1998, from $37.5 million for the year ended December 31, 1997.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In the quarter ended April 1, 2000 and during 1999, we relied primarily on
internally generated funds and trade credit to finance our operations and
expansion. At April 1, 2000, we had working capital of $138.7 million compared
to $97.9 million at December 31, 1999. The increase was primarily due to
increases of $33.3 million in net receivables and $28.9 million in inventories,
which were partially offset by a $23.3 million decrease in short-term
investments. The increase in receivables is primarily due to a 29.6% increase in
wholesale sales in the first quarter of 2000 from the fourth quarter of 1999.
Inventories at April 1, 2000 were $135.5 million compared to $106.6 million at
December 31, 1999 and $70.9 million at March 27, 1999. Inventory of GUESS?
Canada of $13.8 million and $9.4 million was included at April 1, 2000 and
December 31, 1999, respectively. Excluding GUESS? Canada, inventories at
April 1, 2000 increased 25.1% and 71.7% from December 31, 1999 and March 27,
1999, respectively. These higher inventory levels of finished goods inventory
were primarily the result of significantly increased product sales,
substantially higher wholesale backlog and our retail expansion program, and
resulted in higher than anticipated inventory levels at April 1, 2000. We have
undertaken steps to reduce the excess inventory levels of finished goods
inventory over the next several months by better management of the timing of
product deliveries and increased distribution and clearance through our factory
outlet stores. Also included in the net cash flow for the first quarter of 2000
was the funding of approximately $7.5 million of distribution center and new
store construction costs that were accrued in accounts payable at December 31,
1999.
On December 3, 1999, we entered into a $125 million credit facility with The
Chase Manhattan Bank that replaced our $100 million revolving credit facility
entered into in March 1997. The credit facility permits borrowings up to
$125 million including a $50 million sub-limit for letters of credit. Our credit
facility accrues interest at LIBOR plus 100 basis points or the Fed Fund rate
plus 50 basis points depending on the duration and type of loan facility. The
new credit facility expires on October 31, 2002. At April 1, 2000, we had
$29.3 million in outstanding borrowings under the credit facility, $5.2 million
in outstanding commercial letters of credit and $33.1 million in standby letters
of credit. At April 1, 2000, we had $57.4 million available for future
borrowings under the credit facility. The credit facility contains restrictive
covenants requiring among other things, the maintenance of certain financial
ratios. We were in compliance with all such covenants as of April 1, 2000.
Capital expenditures totaled $63.5 million for 1999 and $13.7 million for 1998.
The increase in capital expenditures was due primarily to our increase in store
openings, costs associated with our new distribution facility in Louisville,
Kentucky, the launching of our online store in April 1999, and the retail
expansion of GUESS? Canada. We estimate that our capital expenditures for 2000
will be approximately $80 million primarily for retail store expansion and
remodeling and shop-in-shop expansion and enhancements.
We anticipate we will be able to satisfy our ongoing cash requirements through
2000, including retail expansion plans and interest payments on our senior
subordinated notes due 2003 (such interest payments paid by us during 1999
amounted to $9.2 million), primarily with cash flow from operations,
supplemented by borrowings under our credit facility.
SEASONALITY
Our business is impacted by general seasonal trends characteristic of the
apparel and retail industries. Our retail operations are generally stronger in
the third and fourth quarters of our fiscal year, while our wholesale operations
generally experience stronger performance in the first and third quarters of our
fiscal year. 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. We have not had significant overhead and other costs generally
associated with large seasonal variations. See Note 10 to Consolidated Financial
Statements on page F-17.
26
<PAGE>
INFLATION
We do not believe the relatively moderate rates of inflation experienced in the
United States over the last three years have had a significant effect on our net
revenue or profitability. Although higher rates of inflation have been
experienced in a number of foreign countries in which our products are
manufactured, we do not believe inflation rates in these countries have had a
material adverse effect on our net revenue or profitability.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued.
SFAS 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It is effective for fiscal years
beginning after June 15, 2000. We believe the adoption of SFAS 133 will not have
a material impact on our financial reporting.
27
<PAGE>
BUSINESS
OVERVIEW
GUESS? is one of the most widely recognized brands in the fashion world. We
design, market and license a lifestyle collection of casual apparel and
accessories, and are known for trendsetting styles and marketing creativity. Our
core customer is a style-conscious consumer between the ages of 15 and 25. This
customer is attracted to our brand image and the distinctive styling and
innovative fabrics that we incorporate in our fashion-forward designs. We also
appeal to other customers through product lines that include the contemporary
and upscale GUESS? Collection and our GUESS? Kids and Baby GUESS? brands.
We distribute our products through a growing network of GUESS? stores, selected
wholesale accounts, international distributors and a new e-commerce site. This
multi-channel network provides us with flexibility in marketing products and
significant opportunities for growth. We market our apparel under numerous
trademarks including GUESS?, Guess, Guess ?, Guess U.S.A., Guess Jeans, Guess?
and Triangle Design, Guess Kids, Guess Collection and Baby Guess. Our apparel
lines include full collections of denim and cotton clothing, including jeans,
pants, overalls, skirts, dresses, shorts, blouses, shirts, jackets and knitwear.
We also selectively grant licenses to manufacture and distribute a broad range
of products that complement our apparel lines, including watches, eyewear,
handbags and footwear.
Since our founding in 1981, our name has become one of the most familiar in
fashion through a consistent emphasis on innovative and distinctive designs. We
have a large team of designers who, under the direction of Maurice Marciano,
have demonstrated the ability to interpret global fashion trends and translate
them into products that our customers desire. Our award-winning advertising
department, which is led by Paul Marciano, communicates our fashion and brand
image through the use of high-impact print and outdoor advertising.
In 1999, we generated net revenue of $599.7 million, a 27.1% increase from 1998.
In addition, in the first quarter of 2000, we generated net revenue of $188.8
million, a 46.2% increase from the same period in 1999. This growth resulted
from several initiatives, including implementation of the first phase of our
planned retail store expansion and the concentration of our wholesale
distribution efforts on our most profitable accounts. Further, our gross profit
as a percentage of total net revenue increased to 44.7% in 1999 from 42.3% in
1998, while our net earnings grew to $51.9 million from $25.1 million. Our gross
profit increased to 42.7% for the first quarter of 2000 from 41.9% in the same
quarter in 1999, while our net earnings grew to $15.4 million from $11.5
million. This profitability resulted from several factors, including increases
in our comparable store sales in the United States of 26.9% and 19.2% for 1999
and the first quarter of 2000, respectively, greater "sell through" of full
price merchandise and our transition to international vendors to lower product
costs.
Over the next three to five years, we anticipate that our retail division will
represent our primary growth initiative. We expect to achieve growth by adding a
significant number of new stores, increasing the average size of new stores and
continuing to increase sales productivity for all stores. In 1999, we opened 17
net new stores and expect to open an additional 60 new stores in the United
States and Canada in 2000. It is our current plan to more than double our retail
square footage in the United States and Canada over the next three years.
We also intend to grow our wholesale net revenue. In 1999, we added or remodeled
138 shop-in-shops. These exclusive selling areas within department stores
enhance brand recognition and ensure the consistent presentation of GUESS?
merchandise. We plan to add or remodel approximately 500 shop-in-shops in 2000.
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OUR INDUSTRY
With the large "baby boom" generation maturing and having children, the younger
segments of the U.S. population have been increasing in recent years. According
to the U.S. Census Bureau, Generation Y (ages 10 to 24) will grow from
56.3 million in 1998 to 63.1 million in 2010, a growth rate that outpaces that
of the general population by nearly 20%. This group is more than three times the
size of Generation X (ages 25 to 35) and is the largest demographic group in the
United States since the baby boomer generation. Teenage Research Unlimited, an
independent consumer research firm, estimates that total teen spending in 1999
was approximately $153 billion.
WE HAVE A DISTINCTIVE BRAND IMAGE
We are known for our unique style and believe the GUESS? brand communicates a
distinctive image that is fun, fashionable and sexy--and always at the forefront
of fashion. Since the beginning of 1995, we have spent over $110 million
promoting and strengthening our brand name in the United States and Canada. In
addition our licensees and international distributors have spent approximately
$100 million advertising the GUESS? brand over this same period.
WE OFFER CUTTING-EDGE DESIGNS
Under the direction of Maurice Marciano, GUESS? apparel is designed by an
in-house staff of five teams (men's, women's, girls', boys' and GUESS?
Collection) based in Los Angeles, California. Our design teams travel throughout
the world in order to discover new fabrics and monitor fashion trends. Fabric
shows in Europe, Asia and the United States provide additional opportunities to
discover and sample new fabrics. These fabrics, together with the trends
observed by our designers, serve as the primary source of inspiration for our
lines and collections. We also maintain a fashion library consisting of antique
and contemporary garments as an additional source for creative concepts. In
addition, design teams regularly meet with members of the sales, merchandising
and retail operations to further refine our products in order to meet the
particular needs of our markets.
The GUESS? products within each of our apparel and accessories lines generally
fall into one of three categories: "core basics," which includes such items as
our traditional denim and cotton clothing; "fashion basics," which includes such
items as jeans made from more unusual fabrics and with more intricate
top-stitching; and "fashion fashion," which includes trendy and cutting-edge
fashion apparel and accessories. In addition, we divide the year into four
three-month merchandising seasons: spring, summer, fall and holiday. We
typically introduce new merchandise within each of our apparel and accessories
lines in each season in order to continually generate freshness in our product
lines. Each line is built around a central seasonal theme and includes a stylish
assortment of coordinated basic and fashion apparel with complementary
accessories designed to encourage multiple item purchases and wardrobe building.
WE CREATE AWARD-WINNING ADVERTISING
Our advertising strategy promotes the GUESS? image and products, with an
emphasis on creating an image that is fun, fashionable and sexy. GUESS? Jeans,
GUESS? U.S.A. and GUESS ?, Inc. images have been showcased in dozens of major
publications and outdoor and broadcast media throughout the United States and
the world. Led by Paul Marciano, our advertising department has contributed to
making the GUESS? brand a fashion icon. Our signature black and white print
advertisements as well as color print advertisements designed by our advertising
department have garnered prestigious awards, including Clio, Belding and Mobius
awards for creativity and excellence.
We have maintained a high degree of consistency in our advertisements by
projecting similar global themes and images of the GUESS? brand. Portraying core
lifestyle themes more often than a particular product, our distinctive
advertising builds on the GUESS? brand and image, season after season. We
launched a new marketing and advertising campaign in 1999, which included strong
and consistent
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images featured in all of our print, outdoor and Internet advertising and in our
enhanced point-of-sale materials.
We further strengthen communications with customers through our WWW.GUESS.COM
web site. This global medium provides consumers with information about our
history, GUESS? products and store locations and allows us to receive and
respond directly to customer feedback.
OUR CUSTOMERS ARE VERY STYLE CONSCIOUS
Our core customer is a style-conscious consumer between the ages of 15 and 25.
These consumers are part of the highly desirable Generation Y demographic group
that we believe is growing rapidly and has significant disposable income. We
believe that our success in targeting our core customer reflects the enduring
strength of the GUESS? brand name. Our image results from our constant emphasis
on innovative and distinctive product designs that stand for exceptional styling
and unparalleled quality.
We also seek opportunities to diversify into new product categories and reach
other style-conscious demographic groups. For example, the GUESS? Collection
line of women's apparel targets a style-conscious, discerning customer seeking
superior style and quality. This higher-end collection of women's skirts,
dresses, tops, jackets and blouses incorporates a contemporary high fashion
combination of colors and styles. This apparel line is currently sold
exclusively through our retail stores and the Internet.
We are also seeking to grow our GUESS? Kids and Baby GUESS? collections. We
believe these collections will appeal to parents who enjoyed GUESS? products in
the 1980s and 1990s and now desire to expand their relationship with us by
purchasing a more stylish line of children's apparel and accessories. In 1998,
we acquired our girls' line from a licensee and in 1999 we acquired our boys'
line. We also recently selected the licensee for Baby GUESS?. Both the GUESS?
Kids and Baby GUESS? collections of apparel and accessories will be featured in
a series of new GUESS? Kids stores, the first of which is scheduled to open in
Summer 2000. We also intend to sell these lines in selected department stores,
including through a series of shop-in-shops.
WE ARE CURRENTLY IMPLEMENTING A MULTI-CHANNEL RETAIL EXPANSION PROGRAM
Our retail division has been a catalyst driving our growth in the marketplace.
Retail operations produced our strongest growth in 1999, as substantially all of
our stores were profitable. As we implement our retail expansion program, we
expect the retail division will continue to support our future growth.
As of April 1, 2000, we operated 108 retail and 59 factory outlet stores in the
United States and Canada and a retail store in Florence, Italy. Our retail
stores create an upscale and inviting shopping environment which we believe
enhances our image. These stores allow us to influence the merchandising and
presentation of our products, increase customer awareness and strengthen brand
equity. GUESS? retail stores are located primarily in better regional malls and
street oriented retail districts, while our factory outlet stores are
principally located in major outlet shopping centers. To distinguish our retail
stores, we command attractive locations and utilize distinctive architectural
features such as high ceilings to create a visually appealing and enticing
environment. We believe that our stylistic presentation of apparel and
accessories helps create a differentiated store environment unique within our
industry.
Our network of GUESS? stores generated net revenue of $299.4 million in 1999, a
34.5% increase from 1998. Operating profit as a percentage of net revenue is
generally higher for retail operations than for wholesale operations. It has
been our experience that our retail locations complement our wholesale
operations by building brand awareness and contributing to the growth of our
wholesale division. Based on our recent successful retail operating performance,
an expanded infrastructure and
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favorable customer demographics, we believe we are well positioned for store
expansion over the next several years.
Our retail stores are generally located in better regional shopping malls. We
also operate a select number of stores in street oriented retail districts in
major metropolitan cities. This group includes three flagship stores in Beverly
Hills, New York City (Soho) and Boston. We plan to open three additional
flagship stores in 2000. These stores will be located in Chicago, San Francisco
and our second New York flagship located in the Flatiron District.
We operated 59 factory outlet stores as of April 1, 2000. These stores offer a
unique product line targeted to the value-conscious consumer and facilitate the
clearance of past season merchandise. Geographically positioned to minimize
potential overlap with our primary customers, our factory outlet stores also add
sales in regions where GUESS? products may not be readily available.
UNITED STATES AND CANADIAN STORE LOCATIONS
The following map and table identifies our full price retail and factory outlet
stores in the United States and Canada. As of April 1, 2000, our 108 retail
stores were located in 25 states and five provinces and our 59 factory outlet
stores were located in 27 states, Puerto Rico and two provinces.
[LOGO]
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UNITED STATES (150)
ALABAMA (1)
FACTORY OUTLET (1)
Foley (Foley)
ARIZONA (7)
RETAIL (5)
Fiesta Mall (Mesa)
Metrocenter (Phoenix)
Scottsdale Fashion Center (Scottsdale)
Park Place Mall (Tucson)
Tucson Mall (Tucson)
FACTORY OUTLET (2)
Casa Grande (Casa Grande)
Arizona Mills (Tempe)
CALIFORNIA (30)
RETAIL (22)
Rodeo Drive (Beverly Hills)
Brea Mall (Brea)
Los Cerritos (Cerritos)
South Coast Plaza (Costa Mesa)
Glendale Galleria (Glendale)
Beverly Center (Los Angeles)
Century City Mall (Los Angeles)
Fashion Square (Los Angeles)
Northridge Fashion (Los Angeles)
Topanga Mall (Los Angeles)
Westside Pavilion (Los Angeles)
Stoneridge Mall (Pleasonton)
Tyler Mall (Riverside)
Downtown Plaza (Sacramento)
Fashion Valley (San Diego)
Horton Plaza (San Diego)
University Town Center (San Diego)
San Francisco Shopping Center (San Francisco)
Stonestown Galleria (San Francisco)
Valley Fair (Santa Clara)
Third Street Promendade (Santa Monica)
Del Amo (Torrance)
FACTORY OUTLET (8)
Barstow (Barstow)
Cabazon (Cabazon)
Camarillo (Camarillo)
Gilroy (Gilroy)
Cooper Building (Los Angeles)
Great Mall of Bay Area (Milpitas)
Ontario Mills (Ontario)
San Ysidro (San Diego)
COLORADO (3)
RETAIL (2)
Cherry Cheek (Denver)
Park Meadows (Littleton)
FACTORY OUTLET (1)
Castle Rock (Castle Rock)
CONECTICUT(2)
RETAIL (2)
Stamford Town Center (Stamford)
Westfarms (West Hartford)
DELAWARE (1)
FACTORY OUTLET (1)
Rehoboth Beach (Rehoboth Beach)
FLORIDA (12)
RETAIL (8)
Aventura Mall (Aventura)
Town Center at Boca Raton (Boca Raton)
Brandon Town Center (Brandon)
Bayside Marketplace (Miami)
Dadeland Mall (Miami)
South Beach (Miami Beach)
Florida Mall (Orlando)
Palm Beach Gardens (Palm Beach Gardens)
FACTORY OUTLET (4)
Orlando (Orlando)
Orlando 2 (Orlando)
St. Augustine (St. Augustine)
Sawgrass Mills (Sunrise)
GEORGIA (5)
RETAIL (3)
Lenox Square (Atlanta)
Perimeter Mall (Atlanta)
Mall of Georgia (Buford)
FACTORY OUTLET (2)
Commerce (Commerce)
Dawsonville (Dawsonville)
HAWAII (2)
RETAIL (1)
Ala Moana (Honolulu)
FACTORY OUTLET (1)
Waikele (Waipahu)
ILLINOIS (4)
RETAIL (3)
Oakbrook Mall (Oak Brook)
Woodfield Mall (Schaumburg)
Old Orchard (Skokie)
FACTORY OUTLET (1)
Gurnee Mills (Gurnee)
INDIANA (1)
FACTORY OUTLET (1)
Lighthouse Place (Michigan City)
IOWA (1)
FACTORY OUTLET (1)
Williamsburg (Williamsburg)
KANSAS (1)
RETAIL (1)
Oak Park Mall (Overland Park)
KENTUCKY (2)
RETAIL (2)
Fayette Mall (Lexington)
Mall at St. Matthews (St. Matthews)
LOUISIANA (1)
FACTORY OUTLET (1)
Gonzales (Gonzales)
MARYLAND (3)
RETAIL (1)
Montgomery Mall (Bethesda)
FACTORY OUTLET (2)
Hagerstown (Hagerstown)
Queenstown (Queenstown)
MASSACHUSETTS (4)
RETAIL (3)
Newbury Street (Boston)
Cambridgeside (Cambridge)
Emerald Square (North Attleborough)
FACTORY OUTLET(1)
Wrentham (Wrentham)
MICHIGAN (8)
RETAIL (5)
Fairlane Town Center (Dearborn)
Eastland Mall (Harper Woods)
Woodland Mall (Kentwood)
Twelve Oaks (Novi)
Somerset (Troy)
FACTORY OUTLET (3)
Birch Run (Birch Run)
Kensington (Howell)
West Branch (West Branch)
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MINNESOTA (2)
RETAIL (1)
Mall of America (Minneapolis)
FACTORY OUTLET (1)
Medford (Medford)
MISSOURI (2)
FACTORY OUTLET (2)
Branson (Branson)
Osage Beach (Osage Beach)
NEVADA (3)
RETAIL (2)
Ceasar's Forum Shops (Las Vegas)
Meadowood Mall (Reno)
FACTORY OUTLET (1)
Fashion Outlet (Primm)
NEW JERSEY (4)
RETAIL (3)
Garden State Plaza (Paramus)
Mall at Short Hills (Short Hills)
Willowbrook Mall (Wayne)
FACTORY OUTLET (1)
Jersey Gardens (Elizabeth)
NEW YORK (13)
RETAIL (10)
Walden Galleria (Buffalo)
Roosevelt Field Mall (Garden City)
Walt Whitman Mall (Huntington)
Smith Haven (Lake Grove)
Nanuet Mall (Nanuet)
SoHo (New York City)
South Street Seaport (New York City)
Staten Island (New York City)
Eastview Mall (Victor)
Westchester (White Plains)
FACTORY OUTLET (3)
Niagara Falls (Niagara Falls)
Riverhead (Riverhead)
Woodbury Commons (Woodbury)
NORTH CAROLINA (3)
RETAIL (3)
South Park Mall (Charlotte)
Crabtree Valley Mall (Raleigh)
Hanes Mall (Winston-Salem)
OHIO (3)
RETAIL (2)
Beachwood Place (Cleveland)
Columbus City Center (Columbus)
FACTORY OUTLET (1)
Jeffersonville (Jeffersonville)
OREGON (1)
RETAIL (1)
Pioneer Place (Portland)
PENNSYLVANIA (6)
RETAIL (1)
King of Prussia (King of Prussia)
FACTORY OUTLET (5)
Grove City (Grove City)
Lancaster (Lancaster)
Franklin Mills (Philadelphia)
Reading (Reading)
Tannersville (Tannersville)
PUERTO RICO (1)
FACTORY OUTLET (1)
Old San Juan (San Juan)
RHODE ISLAND (1)
RETAIL (1)
Providence Place (Providence)
SOUTH CAROLINA (1)
FACTORY OUTLET (1)
Myrtle Beach (Myrtle Beach)
TENNESSEE (1)
FACTORY OUTLET (1)
Five Oaks (Sevierville)
TEXAS (13)
RETAIL (7)
Highland Mall (Austin)
Dallas Galleria (Dallas)
North Park (Dallas)
Cielo Vista Mall (El Paso)
Huelen Mall (Forth Worth)
Houston Galleria (Houston)
North Star Mall (San Antonio)
FACTORY OUTLET (6)
Conroe (Conroe)
Gainesville (Gainesville)
Grapevine Mills (Grapevine)
Hillsboro (Hillsboro)
Katy Mills (Katy)
San Marcos (San Marcos)
UTAH (1)
FACTORY OUTLET (1)
Park City (Park City)
VIRGINA (5)
RETAIL (3)
Fair Oaks Mall (Fairfax)
Tysons Corner (McLean)
Regency Square (Richmond)
FACTORY OUTLET (2)
Potomac Mills (Prince William)
Berkeley Commons (Williamsburg)
WASHINGTON (2)
RETAIL (2)
Bellevue Square (Bellevue)
Southcenter (Seattle)
CANADA (17)
ALBERTA (2)
RETAIL (2)
South Center Mall (Calgary)
West Edmonton Mall (Edmonton)
BRITISH COLUMBIA (2)
RETAIL (2)
Robson Street (Vancouver)
Whistler Center Village (Whistler)
MANITOBA (1)
RETAIL (1)
Polo Park Mall (Winnipeg)
ONTARIO (8)
RETAIL (6)
Sherway Gardens (Etobicoke)
Square One (Mississauga)
Upper Canada Mall (Newmarket)
Bayview Village (Toronto)
Queen Street (Toronto)
Yorkdale Shopping Center (Toronto)
FACTORY OUTLET (2)
Niagara Falls (Niagara Falls)
Windsor Crossing Premium Outlets (Windsor)
QUEBEC (4)
RETAIL (3)
St. Catherine St. West (Montreal)
Rockland (Mount Royal)
Fairview Centre (Pointe-Claire)
FACTORY OUTLET (1)
Saint Sauveur Place du Cinema (Saint Sauveur)
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INTERNATIONAL STORE LOCATIONS
The following map identifies the location of the 201 full price retail and 12
factory outlet international GUESS? stores, which are located in 38 countries.
These stores are owned and operated by GUESS? licensees and distributors.
[LOGO]
WE ARE PURSUING A THREE-PART GROWTH PLAN FOR OUR RETAIL DIVISION
We plan that our retail division will be our primary growth initiative over the
next three to five years. Accordingly, during 1999, we initiated a program to:
- increase the number of new GUESS? stores;
- increase the productivity of all GUESS? stores; and
- increase the average size of new GUESS? full price retail stores.
NEW STORE EXPANSION
We plan to more than double our retail square footage in the United States and
Canada during the next three years. We intend to open 60 new stores during 2000
consisting of 25 retail, ten factory outlet and ten GUESS? Kids stores in the
United States and ten retail and five factory outlet stores in Canada. We expect
to open a significant number of new stores in these markets during the next
several years.
<TABLE>
<CAPTION>
NEW STORE OPENINGS
------------------------------------------------------------------
RETAIL FACTORY OUTLET
------------------- -------------------
U.S. CANADA U.S. CANADA GUESS? KIDS TOTAL
-------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
1999............................ 9 3 10 0 0 22
2000............................ 25 10 10 5 10 60
</TABLE>
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ENHANCE RETAIL PRODUCTIVITY
During 1998, we instituted several initiatives to improve the performance of our
retail and factory outlet stores. These ongoing initiatives include:
- achieving better inventory management so that we have the right products in
stock;
- remodeling select stores to promote a consistent brand message; and
- developing a motivated team of sales professionals so that our customers
have a favorable shopping experience.
We have been pleased with the results of these initiatives. In 1999, our retail
and factory outlet stores achieved comparable store sales gains of 28.2% and
23.8%, respectively, over 1998. Our retail stores generated sales per square
foot of $434 in 1999 compared to $336 in 1998 and our factory outlet stores
generated sales per square foot of $351 in 1999 compared to $255 in 1998. In the
first quarter of 2000, our United States retail and factory outlet stores
achieved comparable store sales gains of 21.5% and 13.1%, respectively, over the
same period in 1999.
As part of our retail expansion, we increased our ownership of our Canadian
licensee, GUESS? Canada, to 60% on August 4, 1999. We have an option to acquire
the remaining 40% of GUESS? Canada commencing December 31, 2001. As of April 1,
2000, GUESS? Canada operated a total of 14 retail stores and three factory
outlet stores. We intend to open approximately ten new retail stores and five
new factory outlet stores in Canada in 2000. GUESS? Canada is remodeling most of
its existing stores and plans to open up to 35 new stores over the next three
years.
LARGER STORE FORMAT
The average size of our full price retail stores in the United States is
approximately 5,400 square feet. Over the next several years, we intend to
increase the size of our new full price retail stores to accommodate the full
line of GUESS? apparel and accessories. We plan to open three additional
flagship stores in 2000. These flagship stores will be located in Chicago, San
Francisco and our second New York flagship located in the Flatiron District.
These stores will average approximately 11,000 square feet. The average size of
our factory outlet stores in the United States is approximately 5,500 square
feet. New GUESS? Kids' stores are expected to average approximately 2,800 square
feet.
THE LOOK AND FEEL OF GUESS? STORES AND SHOP-IN-SHOPS IS IMPORTANT IN BUILDING
OUR BRAND EQUITY
Our full price retail and factory outlet stores present GUESS? apparel and
accessories in a stylish and fun environment. We have developed prototype
designs for both store formats. Our full price retail stores utilize design
elements such as light colored wood, chrome and modern lighting fixtures to
create an appealing sense of openness. Recognizable GUESS? advertising prints
are placed throughout each store to highlight selected fashions and reinforce
our brand image. We also utilize modular display units to allow us to handle
varying levels of merchandise. Our factory outlet stores incorporate many of
these same design themes, as well as exposed ceilings and warehouse style
lighting. Our new series of GUESS? Kids stores will incorporate many of the same
themes as our full price stores with an emphasis on youth and fun.
Our prototype designs will be used in our new stores and in those previously
opened stores that we elect to remodel. In 1999, we remodeled 14 stores and we
intend to remodel another 25 stores in 2000.
Our wholesale operations utilize a series of shop-in-shop designs that reflect
the same open and inviting themes used in our retail stores. Our shop-in-shops,
for example, incorporate GUESS? signage and display fixtures that are similar to
those used in our retail stores. The size of our shop-in-shops
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(excluding significantly larger shop-in-shops in key department store locations)
average approximately 450 square feet.
WE HAVE BENEFITTED THROUGH OUR CAREFUL SELECTION OF WHOLESALE CUSTOMERS
Our wholesale division sells GUESS? products primarily to leading department
stores and selected specialty retailers. These stores provide the high quality
shopping environment that the GUESS? brand deserves. We have implemented a
strategy to focus our efforts on the top performing department store locations
of our wholesale customers. Our analysis has determined that these stores
represent the greatest opportunity for sales growth of our product.
OUR WHOLESALE CUSTOMERS
We currently sell our products to wholesale accounts that operate approximately
2,800 retail store locations in the United States. Department stores represent
our largest customer group. In 1999, Bloomingdale's, Macy's and other affiliated
stores owned by Federated Department Stores, The May Company and Dillard's
stores represented 12.4%, 6.5% and 6.3%, respectively, of our net revenue.
As a critical element of our wholesale distribution to department stores, we
utilize shop-in-shops within department stores to enhance GUESS? brand
recognition and ensure the consistent presentation of GUESS? products. As of
April 1, 2000, these department store locations collectively contained
approximately 1,200 GUESS? shop-in-shops. In some cases, in order to promote
brand awareness and attract customers, we may have multiple shop-in-shops that
sell more than one line of GUESS? apparel within a department store. In 1999, we
added or remodeled 138 shop-in-shops. As part of our continued growth strategy,
during 2000 we currently plan to add or remodel approximately 500 shop-in-shops.
We believe shop-in-shops encourage our department store customers to carry a
representative cross-section of GUESS? apparel and accessories.
OUR BACKLOG
We generally receive wholesale orders for fashion apparel approximately 90 to
120 days prior to the time the products are delivered to stores. Under certain
circumstances, some orders may be cancelled by the customer. Our backlog depends
upon a number of factors, including seasonality and the scheduling of
manufacturing and shipment of products. As of May 6, 2000, we had unfilled
wholesale orders from department and specialty store customers, consisting
primarily of orders for seasonal fashion apparel, of $158.9 million, a 74.4%
increase from May 2, 1999. We believe that these orders, which exclude
replenishment orders of basic products, reflect the positive contributions of
our program to expand our wholesale business. In 1999, these efforts contributed
to a 22.6% increase in wholesale net revenue over the prior year.
WE HAVE EXPANDED OUR PRODUCT OFFERINGS AND GLOBAL MARKETS THROUGH OUR LICENSEES
Consumer desire for GUESS? brand goods has permitted us to expand our product
offerings selectively through trademark licensing agreements. In addition, a key
aspect of the development of GUESS? as a worldwide brand is attributable to our
trademark licensing activities. Early on, we recognized the importance of
forming relationships with select licensees who could enhance the GUESS? brand
by expanding the range of available GUESS? products and by utilizing their
skills in specialized areas and in specific geographic markets.
OUR LICENSEES
Product and international licensees are granted the right to manufacture and
sell at wholesale prices specified products under one or more of our trademarks.
Generally, product licenses encompass the production and sale of some products
or a complete product line, such as our Baby GUESS? line, for
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sale in the United States and may also include provisions for international
sales, either directly or through our international licensees and distributors.
We meet regularly with our product licensees to ensure consistency with our
overall merchandising and design strategies and to ensure that the finished
products meet our high quality standards. Under our international trademark
licenses, we typically grant the licensee the right to produce and distribute a
broad range of GUESS? products within a defined international market. These
agreements are generally for three years with an option to renew prior to
expiration for an additional multi-year period. These international licensees
distribute the finished products directly to better department stores, upscale
specialty retail stores and GUESS? licensed retail stores. International
licensees generally produce and source products independently of us.
As compensation for the use of our trademark under these agreements, each
licensee pays us royalties, based upon its wholesale sales of GUESS? products,
subject generally to payment of a minimum royalty. These payments generally
range from 5% to 7% of their wholesale sales of licensed products. In addition,
it is customary for us to include advertising provisions in our license
agreements which require our licensees to allocate between 2% and 3% of their
sales to advertise and promote GUESS? products. Further, certain licensees are
required to contribute toward the protection of our trademarks within the
territories granted to such licensees, thereby assisting us in our efforts to
prevent counterfeiting and other trademark infringement in those territories.
In order to maintain control of the GUESS? trademarks and ensure the quality of
the GUESS? brand, over the past five years we have strategically brought
in-house certain apparel licenses, such as the girls' line in 1998 and the boys'
line in 1999. Our girls' and boys' apparel lines will both be prominently
featured in our new GUESS? Kids retail stores and a planned series of girls' and
boys' shop-in-shops with our wholesale customers. In addition, on August 4, 1999
we increased to 60% our ownership of our Canadian licensee, GUESS? Canada. We
have an option to acquire the remaining 40% of GUESS? Canada commencing
December 31, 2001.
In 1999, worldwide sales of all licensed products approximated $525 million and
generated net royalty revenue of $39.6 million. We continuously evaluate
opportunities to license our trademarks and expand the range of available GUESS?
products. For example, we recently awarded a new license for Baby GUESS?, a
product line which, starting in Summer 2000, will be sold through our new GUESS?
Kids stores and select wholesale and specialty store accounts.
GUESS? apparel and accessories are produced by us and by a series of product
licensees. As of April 1, 2000, we had 19 product licenses that cover such
fashion accessories as watches, eyewear, handbags and footwear. A number of our
licensee relationships, including those that include GUESS? Watches, GUESS?
Eyewear and GUESS? Footwear, have existed for several years. Baby GUESS?, which
is targeted at children up to six years of age, is currently being produced
under trademark license with Designer Classics LLC.
Internationally, we have been able to develop new markets with minimal capital
investment and operating expenses through trademark licensing arrangements. We
also sell our products through international distributors who sell GUESS? brand
goods to select department stores and boutiques. In addition, GUESS? brand
products are sold through international licensees who operate GUESS? retail
stores in their respective territories. As of April 1, 2000, we had a network of
213 international GUESS? stores operated by licensees and distributors. These
stores generally carry apparel and accessories that are similar to what we sell
in the United States and Canada, and in some instances, may carry products
tailored for local fashion preferences. Through our international licensees,
GUESS? products are produced and distributed in major cities throughout Asia,
Europe, South America and the Middle East.
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WE HAVE A HIGHLY EXPERIENCED AND CREATIVE MANAGEMENT TEAM
We believe our senior management team combines a valuable blend of individuals
with the relevant industry expertise and creative insight necessary to
continually generate freshness into our product lines. Since our inception in
1981, we have been guided by a management team that has included Maurice, Paul
and Armand Marciano. The Marcianos grew up in the South of France, a region
which cultivated their deep understanding of French design and the essence of
style. Maurice Marciano oversees several of our departments including design,
sales and merchandising, manufacturing and finance. Paul Marciano oversees our
global advertising and image campaigns, retail store, licensing, legal and
management information system departments and our international expansion
initiatives. Armand Marciano's direct responsibilities include distribution,
real estate and construction, customer service and European exports. In addition
to the Marcianos, our current executive officers, several of whom have joined us
within the past two years, offer an array of relevant industry expertise, as
well as fresh and valuable insight into our industry. The successful integration
of these distinct skill sets has produced a unique corporate culture that
leverages the talents of each group. We believe our management team is well
positioned to capitalize on the strong economics of the GUESS? concept.
WE EXPECT TO ACHIEVE SIGNIFICANT BENEFITS FROM OUR GLOBAL SOURCING PLATFORM
Our product sourcing strategy is designed to increase efficiencies, reduce costs
and improve quality. In order to achieve our objectives, we have:
- increased the percentage of our finished products purchased from
international vendors; and
- started to rely almost exclusively on "packaged purchases," a purchasing
method under which we supply a vendor with a design and fabric selection and
the vendor delivers a finished product.
We believe these strategies have enabled us to reduce our average cost per unit.
This has allowed us to lower the prices of many of our items while continuing to
maintain or expand our gross margins. In addition, we have maintained a close
relationship with a number of domestic vendors located primarily in Los Angeles
who manufacture our GUESS? Collection line and who supplement production of high
demand products.
GREATER USE OF INTERNATIONAL VENDORS
We have strategically aligned ourselves with sourcing vendors worldwide who have
taken the responsibility for delivering a high quality, finished product in a
timely manner. We currently purchase approximately 60% of our finished products
from international vendors. This is a significant change from several years ago,
when we purchased the vast majority of our goods from domestic sources. We
believe our management has a thorough understanding of the economics of apparel
manufacturing, including costs of materials and components. This enables us to
identify and select those vendors that can produce the high quality goods we
require at favorable prices.
In 1999, the majority of our merchandise was produced in Asia and the Middle
East. The remainder of our merchandise was produced in Mexico, Peru, Bolivia and
the United States. We continue to explore countries which may offer better
sourcing opportunities, such as a higher quality finished product, better quota
capacity, lower tariffs and a wider variety of new types of fabric.
Our manufacturing department closely supervises our international vendor
operations. All products are produced according to our specifications and we
commission independent agents to oversee this production and to ensure timely
delivery of the merchandise. In addition, our manufacturing team makes on-site
visits to our independent agents and various manufacturers to negotiate product
costs, finalize technical specifications of each product and confirm delivery of
merchandise manufactured to our specifications. Our manufacturing team also
provides quality control training to our international vendors. After the
merchandise has been manufactured and shipped to our United States distribution
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center, our manufacturing team also performs a quality and assurance control
evaluation of all merchandise received in order to ensure the high quality of
the finished product.
GREATER USE OF "PACKAGED PURCHASES"
Starting in 1998, we began to rely almost exclusively on "packaged purchases," a
sourcing strategy under which we supply a vendor with a product design and
fabric selection and the vendor delivers a finished product. We use packaged
purchase arrangements with a majority of our international vendors and with
approximately 25% of our domestic vendors. Packaged purchase arrangements result
in:
- greater ability to estimate the costs associated with a finished product;
- lower materials costs, due to our ability to negotiate favorable fabric
prices for acquisition by our vendors;
- a shift of the risk of fabric loss to the vendor during the time the fabric
is in the vendor's possession;
- a reduction of our inventory handling costs; and
- an increase in available inventory storage space at our distribution center.
WE EXPECT TO REALIZE SEVERAL BENEFITS FROM OUR NEW DISTRIBUTION CENTER
We have opened a new distribution center in Louisville, Kentucky, to replace our
distribution center in Los Angeles, California. This approximately 500,000
square foot facility is near United Parcel Service's national transit hub. We
have been transitioning our product lines over the last several months.
Currently, the Kentucky facility handles three of our five product lines, and we
expect to complete the transition of all lines in Summer 2000. The new center is
centrally located to our major wholesale customers and our own retail stores.
The facility is equipped with advanced product handling equipment and systems,
and has the capacity to accommodate the anticipated growth of our existing
businesses. This new distribution center will enable us to deliver our products
to market more rapidly and will result in reduced shipping costs, lower product
handling costs and improved customer service.
We can expand the operating capacity of our current facility by approximately
100,000 square feet. We also have an option to lease adjacent land on which we
could expand our distribution center by approximately 300,000 square feet.
OUR EMPLOYEES ARE CENTRAL TO OUR CONTINUED SUCCESS
Over the past several years, we have made a concerted effort to provide our
employees with better training and incentive programs, as well as a better work
environment. In return, we believe we are rewarded with better trained employees
who are happier and more productive.
CORPORATE CULTURE
We believe that our employees are one of our most valuable resources. As a
result, our corporate culture and management philosophy is employee focused. We
facilitate communication through an open-door policy and encourage our employees
to voice their suggestions and concerns to management. We believe this policy
promotes resolution of problems at an early stage, prevents problems from
affecting employee morale, decreases our recruiting costs and increases employee
length of service. Moreover, we have also focused on succession planning, in
which we provide valuable feedback to our employees regarding their professional
development.
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RECRUITMENT
In 1998, we implemented a recruitment program in order to improve our ability to
locate and hire well-qualified individuals for managerial positions at our
stores and to encourage a teamwork focus among our sales employees.
INCENTIVES
In 1999, we instituted an executive bonus plan to provide motivation for
selected key employees to attain and maintain the highest standards of
performance, to attract and retain executives of outstanding competence and to
direct the energies of executives toward the achievement of specified business
goals. Participation in the bonus plan is limited to key employees who are in a
position to have a significant impact on our performance and who are selected by
a compensation committee that establishes the performance goals for the plan
year. Approximately 90 individuals will participate in the bonus plan for the
2000 plan year.
TRAINING
We have incorporated a multifaceted training and development regimen at our
stores using a combination of technologies including video/CD-ROM instruction
and shopper tracking software and interactive group training exercises. We have
specially designed the video training modules to appeal to our employees whose
average age is 18 to 25 years old by making them fun and brief, yet full of
necessary content. Our employees view customized video training modules as a
group and then head out to the sales floor to demonstrate the techniques they
have learned. Using store tracking software and point-of-sale systems, our store
managers are able to calculate each employee's sales transactions per hour. We
utilize "power hour coaching"--a management technique in which managers
encourage sales employees to increase their sales transactions per hour by
devoting all of their time to customers during peak selling periods. We believe
that our extensive training programs benefit both us and our employees. By
incorporating the techniques learned in training, our employees increase their
sales transactions per hour which results in increased incentive compensation
and greater revenue.
We are not a party to any labor agreements and none of our employees are
represented by a labor union. We consider our relationship with our employees to
be good. In addition, we were among the first in the apparel industry to
implement a program to monitor the compliance of subcontractors with Federal
minimum wage and overtime pay requirements.
WE LEASE SUBSTANTIALLY ALL OF OUR PROPERTIES
As of April 1, 2000, we operated 108 retail stores and 59 factory outlet stores
in the United States and Canada and one store in Florence, Italy. We currently
lease all of our store locations. Most leases have a term of at least ten years,
either through the initial term or a combination of the initial term and options
to extend the lease. These non-cancellable operating leases expire on various
dates through May 2016.
We lease seven adjacent buildings totaling approximately 515,000 square feet for
our corporate, wholesale and retail headquarters and our production facilities
in Los Angeles, California. These buildings are leased under four separate
leases, the first of which expires in June 2000 and the last of which expires in
July 2008. We believe these facilities are adequate for our operations over the
next several years.
We also lease space containing approximately 500,000 square feet for our
distribution center in Louisville, Kentucky. The initial term is for ten years
expiring December 31, 2009. The lease contains two five year option periods.
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WE ARE PURSUING E-COMMERCE INITIATIVES
We are pursuing both business-to-consumer and business-to-business e-commerce
initiatives. In April 1999, we introduced WWW.GUESS.COM, a virtual storefront
that promotes the GUESS? brand, promotes customer loyalty and enhances brand
identity through interactive content. Our web site sales volume is equivalent to
that of an average GUESS? retail store.
In April 2000, we introduced the first phase of our business-to-business
vertical marketplace, the Apparel Buying Network. This has allowed us to process
purchasing transactions with our specialty retailers through the use of the
Plumtree Corporate Portal, Commerce One's Market Site and Peoplesoft
e-Procurement. In place of the traditional procurement process of browsing a
paper catalog and telephoning a call center during business hours, our specialty
store retailers will now be able to visit a web site that will allow them to
purchase our products, check order status and review sales performance reports.
As an added benefit, we intend to allow specialty stores to access our system
for procuring computers and other office equipment from our suppliers. We expect
this initiative, which we intend to expand to include our wholesale customers,
licensees and suppliers, will eventually reduce our operating costs, increase
our sourcing efficiencies and improve customer service. We intend to expand this
solution into an electronic marketplace that will facilitate various levels of
interaction between buyers and sellers in the textile and apparel industries.
TRADEMARKS
We own numerous trademarks, including Guess, Guess?, Guess U.S.A., Guess Jeans,
Guess? and Triangle Design, Question Mark and Triangle Design, Guess Kids, Guess
Collection and Baby Guess. At December 31, 1999, we had more than 2,100 U.S. and
international registered trademarks or trademark applications pending with the
trademark offices of the United States and in over 170 countries around the
world. From time to time, we adopt new trademarks in connection with the
marketing of new product lines. We consider our trademarks to have significant
value in the marketing of our products and act aggressively to register and
protect our trademarks worldwide.
Like many well-known brands, our trademarks are subject to infringement. We have
a staff devoted to the monitoring and aggressive protection of our trademarks
worldwide.
ENVIRONMENTAL MATTERS
We are subject to federal, state and local laws, regulations and ordinances that
govern activities or operations that may have adverse environmental effects such
as emissions to air, discharges to water, and the generation, handling, storage
and disposal of solid and hazardous wastes. We are also subject to laws,
regulations and ordinances that impose liability for the costs of clean up or
other remediation of contaminated property, including damages from spills,
disposals or other releases of hazardous substances or wastes, in some cases
without regard to fault. Some of our operations routinely involve the handling
of chemicals and wastes, some of which are or may become regulated as hazardous
substances. We have not incurred, and do not expect to incur, any significant
expenditures or liabilities for environmental matters. As a result, we believe
that our environmental obligations will not have a material adverse effect on
our financial condition or results of operations.
LEGAL PROCEEDINGS
On February 24, 1998, we and Maurice Marciano, Paul Marciano and Armand
Marciano, as individuals, were named as defendants in a class action entitled
John N. Robinson v. Guess ?, Inc., Maurice Marciano, Paul Marciano and Armand
Marciano filed in the Los Angeles Superior Court (the "Robinson Class Action").
The complaint, as amended, purported to state claims under Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933 for alleged misrepresentations in
connection with our initial public offering in August 1996. Mr. Robinson
purported to represent a class of all purchasers of
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our stock in the initial public offering and sought unspecified damages. On
January 10, 2000, the complaint was dismissed in its entirety. However, the time
for Mr. Robinson to appeal the dismissal has not expired.
On October 26, 1998, Maurice Marciano, Paul Marciano and Armand Marciano, as
individuals, as well as us, were named as defendants in a stockholder's
derivative complaint entitled John N. Robinson v. Maurice Marciano, Paul
Marciano and Armand Marciano and Guess ?, Inc. filed in the Los Angeles Superior
Court (the "Robinson Derivative Action"). The complaint purports to state a
claim for intentional breach of fiduciary duty, negligent breach of fiduciary
duty, constructive fraud and abuse of control in connection with the Marcianos'
management of us since our initial public offering. On July 26, 1999, the court
entered an order that allows the case to proceed past the pleadings stage. While
it is too soon to predict the outcome of the case with any certainty, the
defendants believe they have meritorious defenses to each of the claims asserted
and intend to vigorously defend themselves.
The parties have agreed in principle on the terms of a settlement pursuant to
which both the Robinson Class Action and the Robinson Derivative Action will be
settled. The parties hope to submit the settlement for preliminary approval by
the Superior Court by the end of June 2000. The settlement is subject to the
Superior Court's final court approval and execution of final settlement
documents.
On approximately January 15, 1999, UNITE filed an unfair labor pratice charge
against us, alleging that attorney Dennis Hershewe violated Section 8(a)(1) of
the National Labor Relations Act ("the Act") by questioning our employee Maria
Perez about her union activities at the deposition he conducted in her workers'
compensation case. Mr. Hershewe represents Fireman's Fund Insurance Company, our
workers' compensation insurance carrier. GUESS?, through this firm, investigated
the charge and responded to it on March 10, 1999. The NLRB issued a complaint on
part of the charge on October 14, 1999, and we filed an answer on October 21,
1999. The hearing in this matter, originally set for May 1, 2000, has been
continued.
On May 21, 1999, we filed a demand for arbitration against Pour le Bebe, Inc.
and Pour la Maison, Inc. (collectively, "PLB") seeking damages and injunctive
relief in connection with four written license agreements between the parties.
We alleged that PLB defaulted under the license agreements, that the license
agreements properly were terminated and that PLB breached the license
agreements. On July 19, 1999, PLB filed a counterdemand for arbitration against
us. PLB sought damages and injunctive relief against us alleging breach of
contract, violation of the California Franchise Relations Act, interference with
prospective economic advantage, unlawful business practices, statutory unfair
competition and fraud. The arbitration was conducted before the American
Arbitration Association pursuant to arbitration clauses in the license
agreements.
On March 3, 2000, the arbitrators issued an interim award in our favor and
rejected each of PLB's counterclaims. The amount of the interim award was in
excess of $6 million. As the prevailing party, we are entitled to, and we have
applied for, an award of our attorneys' fees, costs, and expenses. Because of
the uncertainty of the ultimate realization of the award, no recognition has
been given to it in our consolidated financial statements. We are informed that
PLB may be attempting to raise before the California Department of Corporations
and the Federal Trade Commission the same franchise issues rejected by the
arbitrators in the interim award.
On June 9, 1999, we commenced a lawsuit in the Los Angeles County Superior Court
against Kyle Kirkland, Kirkland Messina LLC, and CKM Securities (collectively
"Kirkland") for tortious interference, unfair competition, fraud and related
claims. This action arises out of alleged misrepresentations and omissions of
material fact made by Kirkland in connection with the operations and financial
performance of PLB. Kirkland filed a motion to compel arbitration with the
Superior Court on October 1, 1999. The Superior Court granted Kirkland's motion.
Subsequently, we filed a writ with the California Court of Appeal. On March 29,
2000, the Court of Appeal issued a writ and directed the Superior Court to hear
the case and denied arbitration. Kirkland subsequently filed a
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petition with the California Supreme Court to review the Court of Appeal's
determination. The petition is still pending.
On March 28, 2000 a complaint was filed against us in San Diego County Superior
Court entitled Snodgrass v. Guess?, Inc. and GUESS? Retail, Inc. The complaint
purports to be a class action filed on behalf of current and former store
management employees in California. Plaintiffs seek overtime wages and a
preliminary and permament injunction. No trial or hearing has been set.
On May 4, 2000, a complaint was filed against us and Paul Marciano in the Los
Angeles Superior Court entitled Michael Benasra v. Paul Marciano and Guess ?,
Inc. The complaint grows out of the arbitration between us and PLB, discussed
above. The plaintiff, the president of PLB, alleges that defendants made
defamatory statements about him during the arbitration. Plaintiff seeks general
damages and punitive damages.
We cannot predict the outcome of these matters. We believe the outcome of one or
more of the above cases could have a material adverse effect on our results of
operations or financial condition.
Most major corporations, particularly those operating retail businesses, become
involved from time to time in a variety of employment-related claims and other
matters incidental to their business in addition to those described above. In
the opinion of our management, the resolution of any of these pending incidental
matters is not expected to have a material adverse effect on our results of
operations or financial condition.
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MANAGEMENT
The following table sets forth certain information concerning our executive
officers, directors and other key employees as of April 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- -------------------- ---------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
Maurice Marciano(2)....... 51 Director, Co-Chairman of the Board and Co-Chief
Executive Officer
Paul Marciano(3).......... 48 Director, Co-Chairman of the Board, Co-Chief
Executive Officer, President and Chief Operating
Officer
Armand Marciano(1)........ 55 Director, Senior Executive Vice President and
Assistant Secretary
Nancy Shachtman........... 43 President of Wholesale
Brian Fleming............. 56 Executive Vice President and Chief Financial
Officer
Robert Davis(3)(4)(5)..... 52 Director
Alice Kane(1)(4)(5)....... 52 Director
Howard Socol(2)(4)(5)..... 54 Director
Bryan Isaacs(2)(4)(5)..... 61 Director
OTHER KEY EMPLOYEES:
Dan Sawall................ 45 Vice President and General Merchandise Manager
Vincent Dell'Osa.......... 37 Vice President of Stores
Brian Dwan................ 41 Vice President of Real Estate
Bryan Timm................ 33 Vice President and Chief Information Officer
Andrew Romeo.............. 40 Vice President of Training and Development
Robert Higgins............ 39 Vice President of Retail Development and
Merchandising
Mark Kinney............... 43 Vice President of Finance and Treasurer
</TABLE>
- ---------------------
(1) Member of Class I of the directors whose terms expire at our 2003 annual
meeting of stockholders.
(2) Member of Class III of the directors whose terms expire at our 2002 annual
meeting of stockholders.
(3) Member of Class II of the directors whose terms expire at our 2001 annual
meeting of stockholders.
(4) Member of our Audit Committee.
(5) Member of our Compensation Committee.
Pursuant to the Stockholders' Agreement described herein under "Certain
Relationships and Related Transactions," the Principal Stockholders have agreed
to vote their shares of our common stock to elect each of Maurice, Paul and
Armand Marciano, or one designee of any such person (if such designee shall be
reasonably acceptable to the other Principal Stockholders), to the Board of
Directors.
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MAURICE MARCIANO founded GUESS? in 1981 and has served as Co-Chairman of the
Board and Co-Chief Executive Officer since November 15, 1999. Mr. Marciano
served as Chairman of the Board and Chief Executive Officer from August 1993 to
November 15, 1999. Mr. Marciano served as President from June 1990 to September
1992 and as Executive Vice President from 1981 until June 1990. Mr. Marciano's
direct supervisory responsibilities include overseeing the design, sales and
merchandising, manufacturing and finance departments. Additionally,
Mr. Marciano, along with Paul Marciano, is responsible for our corporate
marketing. From February 1993 to May 1993, Mr. Marciano was Chairman, Chief
Executive Officer and Director of Pepe Clothing USA, Inc. Mr. Marciano has
served as a director of GUESS? since 1981 (except for the period from January
1993 to May 1993).
PAUL MARCIANO joined GUESS? in 1981 and has served as creative director for our
worldwide advertising since joining GUESS?. Mr. Marciano has served as President
since September 1992 and has served as Co-Chairman and Co-Chief Executive
Officer since November 15, 1999. Mr. Marciano's responsibilities include direct
supervisory responsibility for the Company's global advertising and image
campaigns, retail store licensing, legal and management information systems
departments and our international expansion intiatives. Additionally,
Mr. Marciano, along with Maurice Marciano, is responsible for our corporate
marketing. Mr. Marciano served as Senior Executive Vice President from August
1990 to September 1992. Mr. Marciano has served as a director of GUESS? since
1990.
ARMAND MARCIANO joined GUESS? in 1981 and has served as Senior Executive Vice
President since November 1992. Mr. Marciano has direct supervisory
responsibility for our domestic outlet stores. In addition, Mr. Marciano is
responsible for distribution, real estate and construction, customer service and
European exports. Mr. Marciano served as Secretary from 1983 to August 1997, as
Executive Vice President from July 1988 to 1992, and as Assistant Secretary
since August 1997. Mr. Marciano has served as a director of GUESS? since 1983.
NANCY SHACHTMAN joined GUESS? in October 1986 and has served as President of
Wholesale since November 1998. From January 1998 through November 1998,
Ms. Shachtman served as President of Sales. From October 1986 through January
1998, Ms. Shachtman served in various sales and merchandising positions
including Vice President of Sales and Marketing.
BRIAN FLEMING joined GUESS? in July 1998 and has served as Executive Vice
President and Chief Financial Officer since July 1998. From 1994 to July 1998,
Mr. Fleming served as Executive Vice President and Chief Financial Officer of
The Santa Anita Companies, which included a self-administered real-estate trust
that owned the Santa Anita Racetrack, interests in major regional shopping
centers and other real-estate investments. From 1973 to 1994, Mr. Fleming held
finance and accounting positions of increasing responsibility with Carter Hawley
Hale Stores, Inc., a full-line department store company. Mr. Fleming began his
career in 1968 with Price Waterhouse & Co.
ROBERT DAVIS has served as a director of GUESS? since May 1997. Mr. Davis is the
former President and Chief Operating Officer of St. John. Following his
resignation in April 1996, Mr. Davis has remained active at St. John and is
currently a consultant to its Chairman and Founder, Bob Gray. Mr. Davis, a
director of St. John since 1984, became President of St. John in 1992 and served
as Chief Operating Officer and Secretary from 1988 to 1996. From 1980 to 1988,
Mr. Davis held various other administrative positions at St. John ending with
Vice President--Operations. Prior to that, Mr. Davis was a partner in a Chicago
area law firm, where he advised on corporate, labor and litigation matters from
1973 to 1980.
ALICE T. KANE has served as a director of GUESS? since June 1998. Ms. Kane is
the President of American General Fund Group and Chairman of VALIC Group Annuity
Funds with over $18 billion in assets under management. Ms. Kane joined American
General Corporation as Executive Vice President of their investments advisory
subsidiary, American General Investment Management L.P., in June 1998. American
General Corporation is one of the nation's largest diversified financial
organizations with
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assets of approximately $98 billion. Prior to joining American General
Corporation on June 1, 1998, Ms. Kane served her entire financial services
industry career at New York Life Insurance Company where she joined the company
in 1972. Up until her departure from New York Life, she was Executive Vice
President and Chief Marketing Officer after serving as Executive Vice President
with responsibility for managing the company's asset management division from
1994 to 1997. Ms. Kane was also Chairman of New York Life's MainStay Mutual
Funds, and served as General Counsel of New York Life from 1986 to 1995.
HOWARD SOCOL has served as a director of GUESS? since September 1999. Mr. Socol
is the former Chief Executive Officer of J. Crew Group Inc. Following his
resignation from J. Crew Group Inc., Mr. Socol established Socol Consulting
Group, a consulting firm that provides retail and Internet consulting services.
Mr. Socol spent the majority of his career rising through the ranks of Burdines
Department Stores, a division of Federated Department Stores, to become
Burdines' Chairman and Chief Executive Officer. Mr. Socol served as Chairman and
Chief Executive Officer of Burdines from 1984 to 1997. Mr. Socol joined Burdines
in 1969 as an assistant buyer and held various positions over a twelve-year
period, resulting in his appointment as the youngest division president in
Federated's history.
BRYAN ISAACS has served as a director of GUESS? since January 2000. Mr. Isaacs
has spent the majority of his career with KPMG LLP, an international accounting,
tax and consulting firm. Mr. Isaacs was admitted to the KPMG partnership in 1972
and, until his retirement in June 1999, led the expansion of KPMG's
international corporate services practice in the firm's Western Region.
Mr. Isaacs also served on a number of KPMG's global tax committees and, from
1996 to 1999, chaired the firm's global information, communication and
entertainment tax committee.
DAN SAWALL joined GUESS? in April 1998 and has served as the Vice-President,
General Merchandise Manager of GUESS? Retail Stores since April 1998. Prior to
joining GUESS? Mr. Sawall served in various capacities at Dillard's, including
Divisional Merchandise Manager of Mens Sportswear from 1983 to 1998 and
Corporate DM Sponsor of Mens Designs and Contemporary Collections from April
1994 to April 1998. While at Dillard's, Mr. Sawall was also a store manager from
February 1989 to April 1993 and a Buyer from November 1983 to April 1998. Prior
to his experience at Dillard's, Mr. Sawall held positions with Federated
Department Stores in Milwaukee, Wisconsin, as Executive Trainee and Buyer of
Mens Better Sportswear & Designer Collections from June 1979 to November 1983.
VINCENT DELL'OSA joined GUESS? in April 1996 and has served as Vice
President/Director of Stores of the Retail, Factory and Kids divisions since
December 1999. Mr. Dell'Osa's responsibilities also include helping to oversee
GUESS? Canada. During his tenure with GUESS?, Mr. Dell'Osa has also held
positions as Director of Stores and Regional Director of Stores. From 1974 to
1995, Mr. Dell'Osa held several management positions at Merry-Go-Round,
including Vice President/Director of Stores at Cignal, an upscale unisex
division of Merry-Go-Round Enterprises.
BRIAN DWAN joined GUESS? in November 1999 and has served as Vice President of
Real Estate since November 1999. From March of 1998 to October 1999, Mr. Dwan
served as Vice President of Real Estate & Construction for Relax The Back. Prior
to joining GUESS?, Mr. Dwan was Director of Real Estate and Store Construction
of the U.S., Canada and South America with Swatch, the U.S. division of the
$3 billion Swiss watch manufacturer and retailer. Prior to joining Swatch,
Mr. Dwan was responsible for real estate, construction and development of the
new store design at The Body Shop USA for eight years. Mr. Dwan started in the
retail industry approximately twenty years ago with the British retailer Laura
Ashley.
BRYAN TIMM joined GUESS? in January 1995 and has served as Chief Information
Officer since March 1999. From January 1995 to March 1999, Mr. Timm served in
various information systems positions, including Director of Applications. From
July 1989 to January 1995, Mr. Timm held positions as a
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<PAGE>
consultant and manager with Kurt Salmon Associates, where he specialized in
Logistics and Operations improvement.
ANDREW ROMEO joined GUESS? in 1997 and has served as Vice President of Training
Operations. Mr. Romeo is responsible for developing our training programs,
performance incentive programs and succession planning for management
development. Mr. Romeo has worked in the retail industry since 1982. Prior to
joining us, he has held positions in Operations, Marketing and Total Quality
Management at Saks Fifth Avenue, Macy's and Brooks Brothers, Inc.
ROBERT HIGGINS joined GUESS? in April 1999 and has served as Vice President of
Retail Development and Merchandising since April 1999. Mr. Higgins is
responsible for the Retail Development department which he helped to create.
Retail Development includes all aspects of Design, Construction and
Merchandising for Retail, Factory and Wholesale. From 1996 to March 1999,
Mr. Higgins served as Vice President of Retail Development at Tommy Hilfiger
USA. From 1985 to 1996, Mr. Higgins held store management and merchandising
positions of increasing responsibility with Brooks Brothers, Inc. At the time of
his departure from Brooks Brothers, Inc., Mr. Higgins was Vice President of
Visual Merchandising and Sales Management.
MARK KINNEY joined GUESS? in May 1999 and has served as Vice President of
Finance and Treasurer since May 1999. From 1993 to 1999, Mr. Kinney was
Executive Director of Finance for The Walt Disney Company and was responsible
for overseeing the corporate finance and accounting operations for its
International Division. Prior to joining the Walt Disney Company, Mr. Kinney was
the Controller and National Finance Manager for Isuzu Truck of America.
Mr. Kinney has over 17 years of experience in finance, accounting and
international business.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of March 31, 2000, with
respect to the beneficial ownership of our common stock held by:
- each person who is known by us to own more than five percent of our common
stock,
- each named executive officer,
- each director who beneficially owns shares of our common stock, and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules and regulations
of the Securities and Exchange Commission. Shares subject to options that are
exercisable currently or within 60 days following March 31, 2000 are deemed to
be outstanding and beneficially owned by the optionee for the purpose of
computing share and percentage ownership of that optionee. They are not deemed
to be outstanding for the purpose of computing percentage ownership of any other
person. Except as indicated in the footnotes of this table and subject to the
Amended and Restated Stockholders' Agreement, dated as of August 7, 1996, and as
affected by applicable community property laws and similar laws, all persons
listed have sole voting and dispositive power for all shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF SHARES
OF SHARES BENEFICIALLY
EXECUTIVE OFFICERS AND DIRECTORS(1) BENEFICIALLY OWNED OWNED
- ----------------------------------- ------------------ ------------
<S> <C> <C>
Maurice Marciano(2).................................. 16,318,281 37.6%
Paul Marciano(3)..................................... 12,924,981 29.8%
Armand Marciano(4)................................... 6,303,557 14.3%
Robert Davis(5)...................................... 36,697 *
Alice Kane(6)........................................ 28,106 *
Howard Socol(7)...................................... 3,602 *
Bryan Isaacs(8)...................................... 2,074 *
Nancy Shachtman(9)................................... 142,017 *
Brian Fleming(10).................................... 60,000 *
All executive officers and directors
as a group (9 persons)(11)......................... 35,819,315 82.5%
</TABLE>
- ---------------------------
* Less than 1.0%
(1) The address of the beneficial owner is c/o Guess ?, Inc., 1444 South
Alameda Street, Los Angeles, California 90021.
(2) Includes shares of our common stock beneficially owned by Maurice Marciano
as follows: 15,456,395 shares as trustee of the Maurice Marciano Trust
(1995 Restatement), 10,000 shares owned by Mr. Marciano's wife for which he
disclaims beneficial ownership, 90,000 shares as president of the Maurice
Marciano Family Foundation and 30,000 shares as trustee of the Maurice
Marciano 1990 Children's Trust with respect to which he has sole voting and
dispositive power; and 462,351 shares as co-trustee of the Paul Marciano
1996 Grantor Retained Annuity Trust and 269,535 shares as co-trustee of the
Armand Marciano 1996 Grantor Retained Annuity Trust with respect to which
he shares voting and dispositive power.
(3) Includes shares of our common stock beneficially owned by Paul Marciano as
follows: 12,287,947 shares as sole trustee of the Paul Marciano Trust dated
February 20, 1986 with respect to which he has sole voting and dispositive
power; and 637,034 shares as co-trustee of the Maurice Marciano 1996
Grantor Retained Annuity Trust with respect to which he shares voting and
dispositive power.
(4) Includes shares of our common stock beneficially owned by Armand Marciano
as follows: 6,298,557 shares as sole trustee of the Armand Marciano Trust
dated February 20, 1986, 1,000 shares held indirectly as sole trustee of
the Armand Marciano Gift Trust-Anastasia, 1,000 shares held indirectly as
sole trustee of the Armand Marciano Gift Trust-Francisca, 1,000 shares held
indirectly as sole trustee of the Armand Marciano Gift Trust-Harrison,
1,000 shares held indirectly as sole trustee of
48
<PAGE>
the Armand Marciano Gift Trust-Dominique, and 1,000 shares held indirectly
as sole trustee of the Armand Marciano Gift Trust-Julien with respect to
which he has sole voting and dispositive power.
(5) Includes 32,197 shares of our common stock that may be acquired upon the
exercise of options exercisable within 60 days of March 31, 2000, pursuant
to our Amended and Restated 1996 Non-Employee Directors' Stock Option Plan.
(6) Includes 23,606 shares of our common stock that may be acquired upon the
exercise of options exercisable within 60 days of March 31, 2000, pursuant
to our Amended and Restated 1996 Non-Employee Directors' Stock Option Plan.
(7) Includes 602 shares of our common stock that may be acquired upon the
exercise of options exercisable within 60 days of March 31, 2000, pursuant
to our Amended and Restated 1996 Non-Employee Directors' Stock Option Plan.
(8) Includes 574 shares of our common stock that may be acquired upon the
exercise of options exercisable within 60 days of March 31, 2000, pursuant
to our Amended and Restated 1996 Non-Employee Directors' Stock Option Plan.
(9) Includes 141,667 shares of our common stock that may be acquired upon the
exercise of options exercisable within 60 days of March 31, 2000, pursuant
to our 1996 Equity Incentive Plan.
(10) Includes 50,000 shares of our common stock that may be acquired upon the
exercise of options exercisable within 60 days of March 31, 2000, pursuant
to our 1996 Equity Incentive Plan.
(11) Includes 248,626 shares of our common stock that may be acquired upon the
exercise of options exercisable within 60 days of March 31, 2000.
49
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are engaged in various transactions with entities affiliated with trusts for
the respective benefit of Maurice, Paul and Armand Marciano (the "Marciano
Trusts"). We believe that the arrangements involving each of the companies in
which these trusts have an investment, and related party transactions discussed
below, were entered into on terms no less favorable to us than could have been
obtained from an unaffiliated third party. Further, we will continue to abide by
the New York Stock Exchange's rules with respect to any future related party
transactions between us and our officers, directors or principal stockholders.
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
Upon consummation of our initial public offering of common stock, we and the
Marciano Trusts entered into an Amended and Restated Stockholders' Agreement.
Pursuant to this agreement, the Marcianos have agreed to vote their shares of
common stock to elect each of them, or one designee of any of them (if the
designee is reasonably acceptable to the other Marcianos) to our board of
directors. This agreement provides that, with limited exceptions, each of the
Marcianos has granted to each other and to us rights of first refusal with
respect to the sale of any shares of our common stock held by each of them.
LICENSE AGREEMENTS AND LICENSEE TRANSACTIONS
On September 28, 1990, we entered into a license agreement with Charles David of
California. Charles David of California is controlled by the father-in-law of
Maurice Marciano. The Marciano Trusts and Nathalie Marciano (the spouse of
Maurice Marciano) together own 50% of Charles David, and the remaining 50% is
owned by the father-in-law of Maurice Marciano. The license agreement grants
Charles David the rights to manufacture worldwide and distribute worldwide
(except Japan and certain European countries) for men, women and some children,
leather and rubber footwear which bear the GUESS? trademark. The license also
includes related shoe care products and accessories. Gross royalties earned by
us under this license agreement for the fiscal years ended December 31, 1997,
1998 and 1999 were $1.2 million, $1.4 million and $1.9 million, respectively.
Additionally, we purchased $6.1 million, $6.1 million and $8.4 million of
products from Charles David for resale in our retail stores during the same
periods.
LEASES
We lease manufacturing, warehouse and administrative facilities from
partnerships affiliated with the Marciano Trusts and certain of its affiliates.
There are two leases in effect at December 31, 1999, both of which expire in
July 2008. The total lease payments to these limited partnerships are currently
$225,000 per month. Aggregate lease payments under leases in effect for the
fiscal years ended December 31, 1997, 1998 and 1999 were $2.6 million,
$2.7 million, and $2.7 million, respectively.
REGISTRATION RIGHTS AGREEMENT
Pursuant to a Registration Rights Agreement, the Marciano Trusts have the right
to require us to register shares of their common stock under the Securities Act
of 1933 until either (i) a registration statement covering the shares of common
stock has been declared effective and the shares of common stock have been
disposed of pursuant to an effective registration statement or (ii) the shares
of common stock are sold or distributed pursuant to Rule 144 under the
Securities Act of 1933. The Marciano Trusts have the right to have their shares
included in registration statements relating to some offerings of our common
stock, including the offering pursuant to this prospectus. In the event of any
registration by us, the agreement contains customary provisions relating to
holdback and indemnification arrangements. The agreement also provides that we
will bear the cost of all expenses,
50
<PAGE>
excluding underwriters' discounts and commissions, incurred in connection with
each registration under this agreement.
The Marciano Trusts have agreed to waive their rights to require the
registration of any of their shares of common stock in connection with our
offering of shares pursuant to this prospectus.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 150,000,000 shares of common stock, par
value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01
per share.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders, including the election of
directors. Our Restated Certificate of Incorporation does not provide for
cumulative voting in the election of directors. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Subject to
preferences that may be applicable to any preferred stock outstanding at the
time, holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by our board of directors out of
legally available funds. In the event of a liquidation, dissolution or winding
up of GUESS?, holders of common stock are entitled to share ratably in all
assets remaining after payment of our liabilities and the liquidation
preference, if any, of any outstanding shares of preferred stock. Holders of
common stock have no preemptive rights and no rights to convert their common
stock into any other securities and there are no redemption provisions with
respect to such shares. All of the outstanding shares of common stock are fully
paid and non-assessable. The rights, preferences and privileges of holders of
common stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which we may designate and
issue in the future.
Certain stockholders have the right in certain circumstances to require us to
register shares of common stock under the Securities Act of 1933. See "Certain
Relationships and Related Transactions--Registration Rights Agreement".
Our common stock currently trades on the New York Stock Exchange under the
symbol "GES."
The transfer agent and registrar for our common stock is Fleet National Bank.
PREFERRED STOCK
Our Restated Certificate of Incorporation provides that our board of directors,
without further action by the stockholders, may issue shares of the preferred
stock in one or more series and may fix or alter the relative, participating,
optional or other rights, preferences, privileges and restrictions, including
the voting rights, redemption provisions (including sinking fund provisions),
dividend rights, dividend rates, liquidation preferences and conversion rights,
and the description of and number of shares constituting any wholly unissued
series of preferred stock. The board of directors, without further stockholder
approval, can issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of common stock. No
shares of preferred stock presently are outstanding, and we currently have no
plans to issue shares of preferred stock. The issuance of preferred stock in
certain circumstances may have the effect of delaying or preventing a change of
control of us without further action by the stockholders, may discourage bids
for our common stock at a premium over the market price of the common stock and
may adversely affect the market price and the voting and other rights of the
holders of common stock.
51
<PAGE>
PLAN OF DISTRIBUTION
The distribution of the shares of common stock may be effected from time to time
in one or more transactions at a fixed price or prices (which may be changed
from time to time), at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices. Each
prospectus supplement will describe the method of distribution of the shares of
common stock offered therein.
We may sell shares of common stock directly, through agents designated from time
to time, through underwriting syndicates led by one or more managing
underwriters or through one or more underwriters acting alone. Each prospectus
supplement will describe the name or names of any underwriters or agents with
whom we have entered into arrangements with respect to the sale of the shares of
common stock, the public offering or purchase price of the shares of common
stock and the net proceeds we will receive from the sale. In addition, each
prospectus supplement will describe any underwriting discounts and other items
constituting underwriters' compensation, any discounts and commissions allowed
or paid to dealers, if any, any commissions allowed or paid to agents, and any
securities exchange, other than the New York Stock Exchange, on which the shares
of common stock will be listed. Dealer trading may take place in the shares of
common stock.
If so indicated in the applicable prospectus supplement, we will authorize
underwriters or agents to solicit offers by certain institutions to purchase the
shares of common stock from us, pursuant to delayed delivery contracts providing
for payment and delivery at a future date. Institutions with which the contracts
may be made include, among others:
1. commercial and savings banks;
2. insurance companies;
3. pension funds;
4. investment companies; and
5. educational and charitable institutions.
In all cases, the institutions must be approved by us. Unless otherwise set
forth in the applicable prospectus supplement, the obligations of any purchaser
under any contract will not be subject to any conditions except that (i) the
purchase of the shares of common stock will not at the time of delivery be
prohibited under the laws of the jurisdiction to which the purchaser is subject
and (ii) if the shares of common stock are also being sold to underwriters
acting as principals for their own account, the underwriters will have purchased
the shares of common stock not sold for delayed delivery. The underwriters will
not have any responsibility in respect of the validity or performance of such
contracts.
Any underwriter or agent participating in the distribution of the shares of
common stock may be deemed to be an underwriter, as that term is defined in the
Securities Act, of the shares of common stock so offered and sold and any
discounts or commissions received by them, and any profit realized by them on
the same or resale of the shares of common stock may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
Certain of any such underwriters and agents including their associates, may be
customers of, engage in transactions with and perform services for us and our
subsidiaries in the ordinary course of business.
Under agreements which may be entered into by us, the underwriters, dealers and
agents who participate in the distribution of the shares of common stock may be
entitled to indemnification by us against or contribution toward some
liabilities, including liabilities under the Securities Act of 1933.
We have entered into an agreement with CIBC World Markets ("CIBC") which grants
CIBC a right of first refusal to act as the lead manager for the first
underwritten distribution of equity pursuant to this registration statement.
This right of first refusal allows CIBC a reasonable amount of time in which to
exercise its right.
Except as indicated in the applicable prospectus supplement, the shares of
common stock are listed on the New York Stock Exchange. We cannot predict the
activity or liquidity of any trading in the shares of common stock.
52
<PAGE>
LEGAL MATTERS
Certain legal matters relating to the validity of the securities offered hereby
will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Los
Angeles, California. Certain legal matters will be passed on for the
underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements and schedule of Guess ?, Inc. as of
December 31, 1999 and 1998, and for each of the years in the three-year period
ended December 31, 1999, have been included in the prospectus and elsewhere in
the registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere in the registration statement,
and upon their authority as experts in accounting and auditing.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the SEC
utilizing a "shelf" registration process. Under this shelf process, we may sell
shares of our common stock described in this prospectus in one or more
offerings.
This prospectus provides you with a general description of the shares of common
stock we may offer. Each time we sell shares of common stock, we will provide a
prospectus supplement that will contain specific information about the terms of
that offering. The prospectus supplement may also add, update or change
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with additional information described
below under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the SEC located in New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference room. Our SEC filings are also available to the public
from commercial document retrieval services and from the SEC's web site at
http://www.sec.gov.
We have filed a registration statement to register with the SEC the common stock
offered by this prospectus and any accompanying prospectus supplement. This
prospectus and any accompanying prospectus supplement are part of that
registration statement. As allowed by SEC rules, this prospectus and any
accompanying prospectus supplement do not contain all of the information you can
find in the registration statement and its exhibits. The SEC allows us to
"incorporate by reference" into this prospectus and any accompanying prospectus
supplement the information we file with them, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is considered to be part of this
prospectus and any accompanying prospectus supplement, and later information
filed with the SEC will update and supersede this information. Statements in
this prospectus and any accompanying prospectus supplement as to the contents of
any contract or other document are not necessarily complete, and in each
instance we refer you to the full text of such contract or document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by this reference. We incorporate by reference the documents listed
below.
(1) Our Annual Report on Form 10-K for the year ended December 31, 1999;
53
<PAGE>
(2) Our Quarterly Report on Form 10-Q for the quarter ended April 1, 2000;
(3) Our Current Report on Form 8-K dated May 8, 2000; and
(4) All documents filed by us with the SEC under Sections 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934 after the date of this
prospectus and before the termination of this offering.
You may request a copy of these filings, at no cost, by writing or telephoning
us at the following address:
Guess ?, Inc.
Attn: Corporate Secretary
1444 South Alameda Street
Los Angeles, California 90021
(213) 765-3100
54
<PAGE>
GUESS ?, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at December 31, 1998 and
1999................................................... F-3
Consolidated Statements of Earnings for the Years ended
December 31, 1997, 1998 and 1999....................... F-4
Consolidated Statements of Stockholders' Equity and
Comprehensive Income (Loss) for the Years ended
December 31, 1997, 1998 and 1999....................... F-5
Consolidated Statements of Cash Flows for the Years
ended December 31, 1997, 1998 and 1999................. F-6
Notes to Consolidated Financial Statements.............. F-7
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Condensed Consolidated Balance Sheet at April 1, 2000... F-22
Condensed Consolidated Statements of Earnings for the
Quarters ended March 27, 1999 and April 1, 2000........ F-23
Condensed Consolidated Statements of Cash Flows for the
Quarters ended March 27, 1999 and April 1, 2000........ F-24
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Guess ?, Inc.:
We have audited the accompanying consolidated balance sheets of Guess
?, Inc. and Subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income (loss) and cash flows for each of the years in the three year period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Guess ?,
Inc. and Subsidiaries at December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
As discussed in Note 13, the Company changed its method of accounting for
its product display fixtures in 1997.
KPMG LLP
Los Angeles, California
February 10, 2000, except
for note 15, which is as of
March 3, 2000
F-2
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
ASSETS
1998 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash...................................................... $ 5,853 $ 6,139
Investments (note 2)...................................... 11,900 27,059
Receivables:
Trade receivables, less reserves aggregating $7,837 and
$8,863 at December 31, 1998 and 1999, respectively.... 19,685 26,829
Royalties, less allowance for doubtful accounts of
$3,667 and $1,258 at December 31, 1998 and 1999,
respectively.......................................... 10,780 8,528
Other................................................... 3,673 4,316
--------- ---------
34,138 39,673
Inventories (note 3)...................................... 89,499 106,624
Prepaid expenses.......................................... 5,640 8,861
Prepaid income taxes...................................... 2,566 3,004
Deferred tax assets (note 6).............................. 6,496 9,619
--------- ---------
Total current assets.................................. 156,092 200,979
Property and equipment, at cost, net of accumulated
depreciation and amortization
(note 4).................................................. 86,453 125,688
Investments (note 2)........................................ 1,118 21,771
Deferred tax assets (note 6)................................ 4,110 --
Other assets, at cost, net of accumulated amortization of
$2,293 and $3,589 at December 31, 1998 and 1999,
respectively (note 14).................................... 15,999 20,598
--------- ---------
$ 263,772 $ 369,036
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and long-term debt
(note 5)................................................ $ -- $ 7,475
Accounts payable.......................................... 32,802 61,736
Accrued expenses.......................................... 21,980 33,824
--------- ---------
Total current liabilities............................. 54,782 103,035
Notes payable and long-term debt, excluding current
installments (note 5)..................................... 99,000 83,363
Deferred tax liabilities (note 6)........................... -- 4,562
Other liabilities........................................... 9,581 9,674
--------- ---------
163,363 200,634
Minority interest (note 7).................................. -- 1,047
Commitments and contingencies (notes 5 and 8)
Stockholders' equity (note 12):
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 62,937,327 and 63,335,743 shares at 1998
and 1999, outstanding 42,906,535 and 43,304,951 shares,
respectively............................................ 137 141
Paid-in capital........................................... 158,589 163,300
Retained earnings......................................... 92,543 144,443
Accumulated other comprehensive income (loss)............. (84) 10,247
Treasury stock, 20,030,792 shares repurchased............. (150,776) (150,776)
--------- ---------
Net stockholders' equity................................ 100,409 167,355
--------- ---------
$ 263,772 $ 369,036
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenue (note 11)
Product sales............................................. $465,913 $435,128 $560,012
Net royalties............................................. 49,459 36,803 39,638
-------- -------- --------
515,372 471,931 599,650
Cost of sales............................................... 288,408 272,079 331,660
-------- -------- --------
Gross profit................................................ 226,964 199,852 267,990
Selling, general and administrative expenses................ 156,318 142,806 171,014
Severance costs related to distribution facility (notes 10
and 14)................................................... -- -- 3,200
-------- -------- --------
Earnings from operations.................................. 70,646 57,046 93,776
Other income/(expense):
Gain on disposition of property and equipment
(note 10)............................................... -- -- 3,849
Interest, net............................................. (13,718) (12,892) (9,385)
Other, net................................................ (2,041) (863) (1,140)
-------- -------- --------
(15,759) (13,755) (6,676)
Earnings before income taxes and cumulative effect of
change in accounting principle.......................... 54,887 43,291 87,100
Income taxes (note 6)....................................... 21,337 18,180 35,200
-------- -------- --------
Earnings before cumulative effect of change in accounting
principle............................................... 33,550 25,111 51,900
Cumulative effect of change in accounting for product
display fixtures, net of income taxes of $2,707
(note 13)................................................. 3,961 -- --
-------- -------- --------
Net earnings.............................................. $ 37,511 $ 25,111 $ 51,900
======== ======== ========
Basic earnings per share:
Earnings before cumulative effect of change in accounting
principle................................................. $ 0.78 $ 0.59 $ 1.21
Cumulative effect of change in accounting for product
display fixtures, net of income taxes of $2,707
(note 13)................................................. 0.09 -- --
-------- -------- --------
Net earnings.............................................. $ 0.87 $ 0.59 $ 1.21
======== ======== ========
Diluted earnings per share:
Earnings before cumulative effect of change in accounting
principle................................................. $ 0.78 $ 0.59 $ 1.20
Cumulative effect of change in accounting for product
display fixtures, net of income taxes of $2,707
(note 13)................................................. 0.09 -- --
-------- -------- --------
Net earnings.............................................. $ 0.87 $ 0.59 $ 1.20
======== ======== ========
Weighted number of shares outstanding--basic................ 42,898 42,904 43,005
======== ======== ========
Weighted number of shares outstanding--diluted.............. 42,902 42,919 43,366
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
INCOME STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
------------- -------- -------- -------- ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996..... $135 $155,591 $ 29,921 $ 57 $(150,776) $ 34,928
Comprehensive income:
Net earnings................... $37,511 -- -- 37,511 -- -- 37,511
Foreign currency translation
adjustment................... (109) -- -- -- (109) -- (109)
-------
Total comprehensive income..... $37,402
=======
Issuance of common stock......... 2 2,998 -- -- -- 3,000
---- -------- -------- ------- --------- --------
Balance at December 31, 1997..... 137 158,589 67,432 (52) (150,776) 75,330
Comprehensive income:
Net earnings................... $25,111 -- -- 25,111 -- -- 25,111
Foreign currency translation
adjustment................... (32) -- -- -- (32) -- (32)
-------
Total comprehensive income..... $25,079
======= ---- -------- -------- ------- --------- --------
Balance at December 31, 1998..... 137 158,589 92,543 (84) (150,776) 100,409
Comprehensive income:
Net earnings................... $51,900 -- -- 51,900 -- -- 51,900
Foreign currency translation
adjustment................... (114) -- -- -- (114) -- (114)
Unrealized gain on investment,
net of tax effect of
$7,632....................... 10,445 -- -- -- 10,445 -- 10,445
-------
Total comprehensive income..... $62,231
=======
Issuance of common stock under
stock option plan.............. 4 4,711 -- -- -- 4,715
---- -------- -------- ------- --------- --------
Balance at December 31, 1999..... $141 $163,300 $144,443 $10,247 $(150,776) $167,355
==== ======== ======== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 37,511 $ 25,111 $ 51,900
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and
equipment.............................................. 20,071 22,571 25,589
Amortization of other assets............................ 369 931 1,296
Deferred income taxes................................... 1,783 (834) (2,150)
Amortization of deferred royalty income................. (2,623) -- --
Cumulative effect of change in accounting principle..... (3,961) -- --
Loss (gain) on disposition of property and equipment.... 120 1,483 (5,037)
Minority interest....................................... -- -- 1,047
Foreign currency translation adjustment................. 91 (89) (80)
Equity method losses.................................... 603 87 (98)
(Increase) decrease in:
Receivables........................................... 8,988 3,637 558
Inventories........................................... (12,591) 2,582 (9,155)
Prepaid expenses and other current assets............. (4,972) 3,553 (9,340)
Prepaid income taxes.................................. (14,511) 12,141 (2,849)
Other assets.......................................... 8,105 (324) 5,820
Increase (decrease) in:
Accounts payable...................................... (964) (5,520) 19,393
Accrued expenses...................................... (993) (241) 10,662
Income taxes payable.................................. (6,784) 112 (252)
--------- --------- --------
Net cash provided by operating activities........... 30,242 65,200 87,304
Cash flows from investing activities:
Net (purchases of) proceeds from the sale of short-term
investments............................................. 4,401 (11,900) (10,600)
Purchase of property and equipment........................ (48,836) (13,738) (63,501)
Proceeds from the disposition of property and equipment... 1,445 14 7,106
Lease incentives granted.................................. 2,561 432 1,544
Acquisition of interest in GUESS? Canada.................. (2,027)
--- ---
Acquisition of license.................................... (2,975) (741) (1,443)
Purchase of investment securities available for sale...... -- -- (8,979)
Proceeds of investment securities available for sales..... -- -- 4,868
Increase of long-term investments......................... (1,435) 842 (2,357)
--------- --------- --------
Net cash used by investing activities............... (44,839) (25,091) (75,389)
Cash flows from financing activities:
Repayment of senior subordinated notes.................... -- (6,000) (19,400)
Proceeds from notes payable and long-term debt............ 163,935 102,300 5,529
Repayment of notes payable and long-term debt............. (149,734) (138,817) (1,258)
Proceeds from issuance of common stock.................... -- -- 3,534
--------- --------- --------
Net cash provided (used) by financing activities.... 14,201 (42,517) (11,595)
Effect of exchange rates on cash............................ (200) 57 (34)
Net increase (decrease) in cash............................. (596) (2,351) 286
Cash at beginning of year................................... 8,800 8,204 5,853
--------- --------- --------
Cash at end of year......................................... $ 8,204 $ 5,853 $ 6,139
========= ========= ========
Supplemental disclosures
Cash paid during the year for:
Interest.............................................. $ 15,185 $ 15,095 $ 10,358
Income taxes.......................................... $ 39,558 $ 3,704 $ 37,236
========= ========= ========
</TABLE>
On January 2, 1997, in connection with the acquisition of a license, the
Company issued 216,216 shares of Common Stock aggregating $3.0 million.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Guess ?, Inc. (the "Company" or "GUESS?") designs, markets, distributes and
licenses leading lifestyle collections of casual apparel and accessories for
men, women and children that reflect the American lifestyle and European
fashions sensibilities. The Company's designs are sold in GUESS? owned stores,
to a network of wholesale accounts that include primarily better department
stores, selected specialty retailers and upscale boutiques and through the
Internet. GUESS? branded products, some of which are produced under license, are
also sold internationally through a series of licensees and distributors.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Guess ?, Inc. and its wholly-owned foreign subsidiary, Guess
Europe, B.V., a Netherlands corporation ("GEBV"), and its majority-owned
subsidiary GUESS? Canada Corporation, a Canadian corporation. GEBV holds two
wholly-owned subsidiaries: Ranche, Limited, a Hong Kong corporation ("Ranche"),
and Guess Italia, s.r.l., an Italian corporation ("GUESS? Italia"). The Company
holds a 60% interest in GUESS? Canada and the results of GUESS? Canada are
included in the consolidated Financial Statements. Accordingly, all references
herein to "GUESS?" include the consolidated results of the Company and its
subsidiaries. All intercompany accounts and transactions are eliminated during
the consolidation process.
INVESTMENT SECURITIES. The Company accounts for its investment securities
in accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires
investments to be classified into one of three categories based on management's
intent: held-to-maturity securities, available-for-sale securities and trading
securities. Held-to-maturity securities are recorded at amortized cost.
Available-for-sale securities are recorded at fair value with unrealized gains
and losses reported as a separate component of stockholders' equity. Trading
securities are recorded at market value with unrealized gains and losses
reported in operations. The Company accounts for its short-term investment
securities as available-for-sale.
EARNINGS PER SHARE. Basic earnings per share represents net earnings
divided by the weighted-average number of shares of common stock, par value
$0.01 per share (the "Common Stock"), 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.
The reconciliation of basic to diluted weighted average shares is as follows
(in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net earnings..................................... $37,511 $25,111 $51,900
======= ======= =======
Weighted average shares used in basic
computations................................... 42,898 42,904 43,005
Dilutive stock options........................... 4 15 361
------- ------- -------
Weighted average shares used in diluted
computation.................................... 42,902 42,919 43,366
======= ======= =======
</TABLE>
Options to purchase 1,421,000, 1,036,000 and 467,000 shares of Common Stock
at prices ranging from $10.50 to $18.00, $5.50 to $11.00 and $10.88 to $16.38
were outstanding during 1997, 1998 and 1999, respectively, but were not included
in the computation of diluted earnings per share because the options exercise
prices were greater than the average market price of the shares of Common Stock.
F-7
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
CONCENTRATION OF CREDIT RISK. The Company's financial instruments that are
exposed to concentrations of credit risk consist primarily of accounts
receivable. The Company maintains cash with various major financial institutions
and performs evaluations of the relative credit standing of these financial
institutions in order to limit the amount of credit exposure with any
institution. The Company extends credit to corporate customers based upon an
evaluation of the customer's financial condition and credit history and
generally requires no collateral. The Company's customers are principally
located throughout North America, and their ability to pay amounts due to the
Company may be dependent on the prevailing economic conditions of their
geographic region. However, such credit risk is considered limited due to the
Company's large customer base. Management performs regular evaluations
concerning the ability of its customers to satisfy their obligations and records
a provision for doubtful accounts based on these evaluations. The Company's
credit losses for the periods presented are insignificant and have not exceeded
management's estimates. A few of the Company's domestic wholesale customers,
including some under common ownership, have accounted for significant portions
of its net revenue. During 1999, Bloomingdale's, Macy's and other affiliated
stores owned by Federated Department Stores, Inc. together accounted for
approximately 12.4% of the Company's net revenue.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out and weighted average) or market.
REVENUE RECOGNITION. The Company recognizes retail operations revenue at
the point of sale, and wholesale operations revenue from the sale of merchandise
upon shipment. Royalty income is based upon a percentage, as defined in the
underlying agreement, of the licensees' net revenue. The Company accrues for
estimated sales returns and allowances in the period in which the related
revenue is recognized.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of property
and equipment are provided using the straight-line and declining balance methods
over the following useful lives:
<TABLE>
<S> <C>
Building and building improvements.......................... 10 to 31 years
Land improvements........................................... 5 years
Machinery and equipment..................................... 3 to 5 years
Corporate aircraft.......................................... 10 years
Corporate vehicles.......................................... 3 years
Shop fixtures............................................... 5 years
</TABLE>
Leasehold improvements are amortized over the lesser of the estimated useful
life of the asset or the term of the lease. Construction in progress is not
depreciated until the related asset is completed.
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 10 to 15 years.
FOREIGN CURRENCY TRANSLATION. In accordance with SFAS No. 52, "Foreign
Currency Translation," balance sheet accounts of the Company's foreign
operations are translated from foreign currencies into U.S. dollars at year-end
at historical rates, while income and expenses are translated at the weighted-
average exchange rates for the year. The related translation adjustments are
reflected as a foreign currency translation adjustment in the consolidated
balance sheets.
F-8
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
HEDGING ACTIVITIES. At December 31, 1999, the Company had forward exchange
contracts to purchase $1.5 million U.S. currency for approximately $2.2 million
Canadian currency. Based on rates at December 31, 1999, the cost to buy the
equivalent U.S. dollars was approximately $2.2 million Canadian currency.
Unrealized gains and losses on outstanding foreign currency exchange
contracts, used to hedge future revenues and purchases, are not recorded in the
financial statements but are included in the measurement of the related hedged
transaction when realized.
INCOME TAXES. The Company uses the asset and liability method of accounting
for income taxes. Under this method, deferred income taxes are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to be applied to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
COMPREHENSIVE INCOME. The Company reports comprehensive income under SFAS
No. 130, "Reporting Comprehensive Income." Comprehensive income consists of net
earnings, unrealized gains on investments and foreign currency translation
adjustments and is presented in the consolidated statements of stockholders'
equity and comprehensive income.
BUSINESS SEGMENT REPORTING. The Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"), effective
in 1998. SFAS 131 establishes new standards for reporting information about
business segments and related disclosures about products and services,
geographic areas and major customers. The business segments of the Company are
wholesale, retail and licensing operations. Information regarding these segments
is summarized in Note 11.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amount of the Company's
financial instruments, which principally include cash, short and long-term
investments, trade receivables, accounts payable and accrued expenses,
approximates fair value due to the relatively short maturity of such
instruments.
The fair value of the Company's debt instruments are based on the amount of
future cash flows associated with each instrument discounted using the Company's
borrowing rate. At December 31, 1998 and 1999, the carrying value of all
financial instruments was not materially different from fair value.
USE OF ESTIMATES. Management of the Company has made a number of estimates
and assumptions relating to the reporting of assets, liabilities, revenues and
expenses and the disclosure of contingent assets and liabilities to prepare
these consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
LONG-LIVED ASSETS. The Company reports long-lived assets, including
intangibles, at amortized cost. Long-lived assets and certain identifiable
intangibles are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If this assessment indicates that the intangibles will not be
recoverable, as determined by a
F-9
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (CONTINUED)
non-discounted cash flow generated by the asset, the carrying value of the
Company's long-lived assets would be reduced to its estimated fair market value
based on the discounted cash flows.
ADVERTISING COSTS. The Company expenses the cost of advertising as
incurred. Advertising expenses charged to operations for the years ended
December 31, 1997, 1998 and 1999 were $22.5 million, $18.0 million, and
$24.5 million, respectively.
RECLASSIFICATIONS. Certain reclassifications have been made to the 1997 and
1998 consolidated financial statements to conform with the 1999 presentation.
2. INVESTMENTS
Short-term investments consist mostly of overnight interest bearing deposit
accounts aggregating $11.9 million at December 31, 1998 and $27.1 million at
December 31, 1999.
Long-term investments consist of certain marketable equity securities
aggregating $1.1 million and $21.8 million at December 31, 1998 and 1999,
respectively. Unrealized gains related to marketable equity securities at
December 31, 1999 amounted to $11.2 million, net of deferred taxes of
$7.6 million and are included as a component of stockholders' equity.
3. INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Raw materials............................................ $ 9,400 $ 8,514
Work in process.......................................... 7,922 6,740
Finished goods--retail................................... 36,712 45,750
Finished goods--wholesale................................ 35,465 45,620
------- --------
$89,499 $106,624
======= ========
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Land and land improvements.............................. $ 5,729 $ 5,734
Building and building improvements...................... 8,462 8,462
Leasehold improvements.................................. 59,218 67,821
Machinery and equipment................................. 71,975 86,790
Corporate aircraft...................................... 5,973 6,601
Shop fixtures........................................... 28,895 31,347
Construction in progress................................ 1,321 23,842
-------- --------
181,573 230,597
Less accumulated depreciation and amortization.......... 95,120 104,909
-------- --------
$ 86,453 $125,688
======== ========
</TABLE>
Construction in progress at December 31, 1998 and 1999 represents the costs
associated with the construction of buildings and improvements used in the
Company's operations and other capitalizable expenses in progress.
F-10
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
9 1/2% Senior Subordinated Notes due 2003................... $99,000 $79,562
Revolving bank loan bearing interest at 1.75% above the
Canadian prime rate plus an amount equal to 0.5% per month
of the average outstanding balance, payable on demand, but
commencing January 1, 2001 by way of 24 equal consecutive
minimum payments.......................................... -- 2,770
Advances under a demand line of credit of $15,926 with
advances thereon bearing interest at the Canadian prime
rate plus 1%.............................................. -- 6,818
Other obligations, maturing in varying amounts through
2004...................................................... -- 1,688
------- -------
99,000 90,838
Less current installments................................... -- 7,475
------- -------
Long-term debt, excluding current installments.............. $99,000 $83,363
======= =======
</TABLE>
In December 1999, the Company entered into a credit agreement with a bank
permitting borrowings up to $125.0 million (the "Credit Facility"). The Credit
Facility replaced the Company's $100.0 million revolving credit facility entered
into in March 1997. The Credit Facility provides for a $125.0 million revolving
credit facility including a $50.0 million sub-limit for letters of credit. The
Credit Facility expires on October 31, 2002. At December 31, 1999, the Company
had no outstanding borrowings under the Credit Facility, $15.2 million in
outstanding commercial letters of credit and $32.0 million in standby letters of
credit. The Credit Facility 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 December 31, 1999. In addition, the
arrangements governing the Company's Credit Facility and the indenture pursuant
to which the Company's Senior Subordinated Notes due 2003 were issued restrict
the payments of dividends by the Company. Our outstanding borrowings currently
bear interest at LIBOR plus 100 basis points.
The Senior Subordinated Notes are redeemable at the option of the Company,
in whole or in part, at any time at various redemption prices. The Company
repurchased $6.0 million and $19.4 million in 1998 and 1999, respectively, of
its Senior Subordinated Notes.
F-11
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
6. INCOME TAXES
Income taxes are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current........................................ $17,487 $14,477 $32,508
Deferred....................................... 2,995 793 (2,464)
State:
Current........................................ 3,973 2,459 5,202
Deferred....................................... (1,212) 41 314
Foreign:
Current........................................ 801 410 (360)
------- ------- -------
$24,044 $18,180 $35,200
======= ======= =======
</TABLE>
Actual income taxes differ from expected income taxes obtained by applying
the statutory Federal income tax rate to earnings before income taxes as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense.................. $21,544 $15,152 $30,485
State taxes, net of Federal benefit.............. 2,928 1,625 3,586
Foreign (benefit)................................ (157) (14) (273)
U.S. tax and foreign withholding tax on Foreign
distributions.................................. -- 739 --
Other............................................ (271) 678 1,402
------- ------- -------
$24,044 $18,180 $35,200
======= ======= =======
</TABLE>
Total income taxes were allocated as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operations....................................... $24,044 $18,180 $35,200
Stockholders' equity............................. -- -- 6,451
------- ------- -------
Total income taxes............................... $24,044 $18,180 $41,651
======= ======= =======
</TABLE>
The income tax expense for the year ended December 31, 1997 includes taxes
of $2.7 million related to a one-time change in accounting (see Note 13). The
Company's consolidated statement of earnings has presented the change in
accounting, net of this income tax expense.
F-12
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
6. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of current and non-current deferred tax assets and deferred tax
liabilities at December 31, 1998 and 1999 are presented below (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Retail store closure reserves........................... $ 467 $ 269
Deferred lease incentives............................... 1,648 1,718
Rent expense............................................ 2,158 2,161
Uniform capitalization adjustment....................... 1,987 2,194
State income taxes...................................... 870 1,471
Bad debt and other reserves............................. 1,810 2,904
Severance reserve....................................... -- 1,378
Other................................................... 2,066 2,602
------- -------
Total deferred assets................................. 11,006 14,697
Deferred tax liabilities-principally related to
unrealized gain on investment......................... 400 9,640
------- -------
Net deferred tax assets............................... $10,606 $ 5,057
======= =======
</TABLE>
Included above at December 31, 1998 and 1999 are $6.5 million and
$9.6 million for current deferred tax assets, respectively, and $4.1 million
non-current deferred tax assets and $4.5 million non-current deferred tax
liabilities.
Prepaid income taxes of $2.6 million and $3.4 million at December 31, 1998
and 1999, respectively, arise from the overpayment of estimated income taxes.
Based on the historical earnings of the Company, management believes it is
more likely than not that the results of operations will generate sufficient
taxable earnings to realize net deferred tax assets.
7. RELATED PARTY TRANSACTIONS
The Company is engaged in various transactions with entities affiliated with
trusts for the respective benefit of Maurice, Paul and Armand Marciano (the
"Marciano Trusts"). The Company believes that the arrangements involving each of
the companies in which the Marciano Trusts have an investment, and related party
transactions discussed below were entered into on terms no less favorable to the
Company than could have been obtained from an unaffiliated third party.
LICENSE AGREEMENTS AND LICENSEE TRANSACTIONS. On September 28, 1990, the
Company entered into a license agreement with Charles David of California
("Charles David"). The Marciano Trusts and Nathalie Marciano (the spouse of
Maurice Marciano) together own 50% of Charles David, and the remaining 50% is
owned by the father-in-law of Maurice Marciano. The license agreement grants
Charles David the rights to manufacture worldwide and distribute worldwide
(except Japan and certain European countries) for men, women and some children,
leather and rubber footwear which bear the GUESS? trademark. The license also
includes related shoe care products and accessories.
F-13
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
7. RELATED PARTY TRANSACTIONS (CONTINUED)
Gross royalties earned by the Company under such license agreement for the
fiscal years ended December 31, 1997, 1998 and 1999 were $1.2 million,
$1.4 million and $1.9 million, respectively. Additionally, the Company purchased
$6.1 million, $6.1 million and $8.4 million of products from Charles David for
resale in the Company's retail stores during the same periods.
In May 1997, the Company sold substantially all of the assets and
liabilities of GUESS? Italia to Maco Apparel, S.p.a. ("Maco"). The effect of the
net asset disposal was immaterial to the Company's results of operations. In
connection with this sale, the Company also purchased a 10% ownership interest
in Maco and entered into an approximate 10-year license agreement with Maco
granting it the right to manufacture and distribute certain men's and women's
jeanswear apparel, which bear the GUESS? trademark, in certain parts of Europe.
In addition to royalty fees, the Company will also receive $14.1 million over a
four-year period in consideration of the grant of the license rights for men's
and women's jeanswear apparel. During 1998 and 1999, the Company recorded
$2.8 million and $2.8 million, respectively, in revenue in connection with the
grant of such license rights. Additionally, the Company also recorded
$2.3 million and $3.2 million in royalty fees related to product sales in 1998
and 1999, respectively. Effective as of March 1, 1998, the Company also entered
into an approximate nine-year license agreement with Maco granting it the right
to manufacture and distribute kid's jeanswear, which bear the GUESS? trademark,
in certain parts of Europe.
On August 4, 1999, the Company completed its purchase of an additional 40%
of GUESS? Canada, whereby the Company's ownership has been increased to 60%. As
part of the transaction, the Company paid $2.2 million and will provide
long-term financing of up to $13.4 million to GUESS? Canada to expand its
Canadian retail operations. The Company has an option to acquire the remaining
40% of GUESS? Canada that becomes exercisable commencing December 31, 2001. The
acquisition was accounted for as a purchase and the results of GUESS? Canada are
included in the Company's consolidated financial statements from the date of
acquisition. The excess of the purchase price over the fair value of net assets
acquired amounting to $1.1 million is allocated to goodwill and is being
amortized over 15 years. The operating results of GUESS? Canada are immaterial
to the Company's consolidated financial statements.
AGENCY AGREEMENT. In February 1996, the Company entered into a buying
agency agreement with Newtimes Guess?, Ltd. ("Newtimes"). The Company owned 50%
of Newtimes. Pursuant to such agreement, the Company pays Newtimes a commission
based on the cost of finished garments purchased for the Company. Commissions
earned by Newtimes from the Company during the fiscal years ended December 31,
1997 and 1998 were $1.7, and $1.0 million, respectively. Additionally, with
respect to Newtimes, the Company recorded $0.1 million in equity losses during
the fiscal year ended December 31, 1997. During 1998, Newtimes was dissolved
after the Company terminated its buying agency agreement with them, and severed
its equity interest in Newtimes. Accordingly, the Company has discontinued
recording equity income during 1998.
LEASES. The Company leases manufacturing, warehouse and administrative
facilities from partnerships affiliated with the Marciano Trusts and certain of
its affiliates. There are two leases in effect at December 31, 1999, both of
which expire in July 2008. The total lease payments to these limited
partnerships are currently $225,000 per month. Additionally, the Company was on
a month to month lease for another storage facility. Aggregate lease payments
under leases in effect for the fiscal
F-14
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
7. RELATED PARTY TRANSACTIONS (CONTINUED)
years ended December 31, 1997, 1998 and 1999 were $2.6 million, $2.7 million,
and $2.7 million, respectively.
8. COMMITMENTS AND CONTINGENCIES
LEASES. The Company leases its showrooms and retail store locations under
operating lease agreements expiring on various dates through 2016. Some of these
leases require the Company to make periodic payments for property taxes and
common area operating expenses. Certain leases include rent abatements and
scheduled rent escalations, for which the effects are being amortized and
recorded over the lease term. The Company also leases some of its equipment
under operating lease agreements expiring at various dates through 2003.
Future minimum rental payments under non-cancelable operating leases at
December 31, 1999 are as follows:
Year ending December 31, (in thousands):
<TABLE>
<CAPTION>
NON
RELATED RELATED
PARTIES PARTIES TOTAL
-------- -------- --------
<S> <C> <C> <C>
2000........................................... $ 30,251 $ 2,727 $ 32,978
2001........................................... 30,380 2,727 33,107
2002........................................... 28,975 2,727 31,702
2003........................................... 27,552 2,727 30,279
2004........................................... 23,727 2,727 26,454
Thereafter..................................... 71,245 9,771 81,016
-------- ------- --------
$212,130 $23,406 $235,536
======== ======= ========
</TABLE>
Rental expense for all operating leases during the years ended December 31,
1997, 1998, and 1999 aggregated $30.8 million, $32.6 million, and
$41.2 million, respectively.
INCENTIVE BONUSES. Certain officers and key employees of the Company are
entitled to incentive bonuses, primarily based on the Company's profits.
LITIGATION. On August 7, 1996, a class action complaint naming the Company
and certain of its independent contractors was filed in the Superior Court of
the State of California for the County of Los Angeles, titled as Brenda Figueroa
et al. v. Guess?, Inc. et al. The plaintiffs asserted 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 them with respect to their employees. The plaintiffs also alleged that the
Company breached its agreement with the United States Department of Labor
regarding the monitoring of its independent contractors. The Court has held two
hearings on certifying the alleged class. The parties have agreed to settle the
case. On March 1, 2000, the Court gave final approval to the parties'
settlement. If no class member appeals within 60 days thereafter, the case will
be finally resolved.
F-15
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
On July 7, 1998, the Union of Needletrades Industrial and Textile Employees
("UNITE") filed with the National Labor Relations Board ("NLRB") charges against
the Company alleging that the Company violated the National Labor Relations Act
by failing to uphold certain obligations under a prior settlement agreement with
the NLRB, by denying pro-union employees access to the Company's facilities, by
conferring new benefits to employees, by making false accusations against UNITE,
by conducting video surveillance of UNITE's offices, and by assisting and
organizing an anti-union demonstration. These allegations were dismissed by the
NLRB. UNITE appealed, and, on October 15, 1999, the NLRB dismissed the appeal.
On February 24, 1998, the Company and Maurice Marciano, Paul Marciano and
Armand Marciano, as individuals, were named as defendants in a class action
entitled John N. Robinson v. Guess ?, Inc., Maurice Marciano, Paul Marciano and
Armand Marciano and GUESS? Inc., filed in the Los Angeles Superior Court. The
complaint as amended, purported to state claims under Sections 11, 12(a)(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.
John Robinson purported to represent a class of all purchasers of the Company's
stock in the IPO and sought unspecified damages. On January 10, 2000, the
complaint was dismissed in its entirety. However, Robinson has the right to
appeal the dismissal.
On October 26, 1998, Maurice Marciano, Paul Marciano and Armand Marciano, as
individuals (the "Marcianos"), as well as the Company, were named as defendants
in a shareholders' derivative complaint entitled John N. Robinson v. Maurice
Marciano, Paul Marciano and Armand Marciano and Guess ?, Inc., filed in the Los
Angeles Superior Court. The complaint, as amended, (the "Derivative Complaint")
purports to state a claim for intentional breach of fiduciary duty, negligent
breach of fiduciary duty, constructive fraud and abuse of control in connection
with the Marcianos' management of the Company since its IPO. On July 26, 1999,
the Court entered an Order that allows the case to proceed past the pleadings
stage. While it is too soon to predict the outcome of the case with any
certainty, the defendants believe they have meritorious defenses to each of the
claims asserted and intend to vigorously defend themselves.
On May 21, 1999, the Company filed a demand for arbitration against Pour le
Bebe, Inc. and Pour la Maison, Inc. (collectively, "PLB") seeking damages and
injunctive relief in connection with four written license agreements between the
parties. The Company alleged that PLB defaulted under the license agreements,
that the license agreements properly were terminated and that PLB breached the
license agreements. On July 19, 1999, PLB filed a counterdemand for arbitration
against the Company. PLB sought damages and injunctive relief against the
Company alleging breach of contract, violation of the California Franchise
Relations Act, interference with prospective economic advantage, unlawful
business practices, statutory unfair competition and fraud. The arbitration was
conducted before the American Arbitration Association pursuant to arbitration
clauses in the license agreements. (See Note 15.)
On June 9, 1999, the Company commenced a lawsuit in the Los Angeles County
Superior Court against Kyle Kirkland, Kirkland Messina LLC, and CKM Securities
(collectively "Kirkland") for tortious interference, unfair competition, fraud
and related claims. This action arises out of alleged misrepresentations and
omissions of material fact made by Kirkland in connection with the operations
F-16
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
and financial performance of PLB. Currently, there are proceedings in the
California Court of Appeal to determine if the action will proceed in court or
by way of arbitration. No trial or hearing date has been set.
The Company cannot predict the outcome of these matters. 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.
9. SAVINGS PLAN
The Company established the Guess ?, Inc. Savings Plan (the "Savings Plan")
under Section 401(k) of the Internal Revenue Code. Under the Savings Plan,
employees ("associates") may contribute up to 15% of their compensation per
year, subject to the elective limits as defined by IRS guidelines, and the
Company may make matching contributions in amounts not to exceed 1.5% of the
associates' annual compensation. The Company's contributions to the Savings Plan
for each of the three years ended December 31, 1997, 1998 and 1999 aggregated
$0.3 million.
10. QUARTERLY INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly financial information
for the years ended December 31, 1998 and 1999 (in thousands, except per share
data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue.......................................... $110,768 $98,068 $130,138 $132,957
Gross profit......................................... 46,452 44,235 54,782 54,383
Net earnings......................................... 7,951 3,440 9,639 4,081
Basic and diluted earnings per share................. $ 0.19 $ 0.08 $ 0.22 $ 0.10
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1999 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenue......................................... $129,052 $119,557 $155,547 $195,494
Gross profit........................................ 54,028 55,035 65,261 93,666
Net earnings........................................ 11,486 7,017 14,235 19,162
Earnings per share:
Basic............................................. $ 0.27 $ 0.16 $ 0.33 $ 0.45
Diluted........................................... $ 0.27 $ 0.16 $ 0.33 $ 0.44
</TABLE>
During the second quarter of 1999, in accordance with the requirements of
EITF 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring"), the Company recorded a $3.2 million charge for future severance
costs related to the relocation of distribution operations to Louisville,
Kentucky. In the third quarter of 1999, the Company realized a non-recurring
pretax gain of $3.8 million on the disposition of property and equipment. During
the fourth quarter of 1999, the Company enhanced its ability to estimate
reserves through improved processes and more current and accurate data. As a
result, the
F-17
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
10. QUARTERLY INFORMATION (UNAUDITED) (CONTINUED)
Company revised its estimate of certain reserves. This resulted in a reduction
of cost of sales of $2.3 million.
11. SEGMENT INFORMATION
In accordance with the requirements of SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information", the Company's reportable business
segments and respective accounting policies, policies of the segments are the
same as those described in Note 1. Management evaluates segment performance
based primarily on revenue and earnings from operations. Interest income and
expense is evaluated on a consolidated basis and not allocated to the Company's
business segments.
Segment information is summarized as follows for the years ended
December 31, 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenue:
Retail operations......................................... $215,873 $222,624 $299,384
Wholesale operations...................................... 250,040 212,504 260,628
Licensing operations...................................... 49,459 36,803 39,638
-------- -------- --------
$515,372 $471,931 $599,650
======== ======== ========
Earnings from operations:
Retail operations......................................... $ 12,118 $ 19,943 $ 37,072
Wholesale operations...................................... 18,962 7,971 25,101
Licensing operations...................................... 39,566 29,132 31,603
-------- -------- --------
$ 70,646 $ 57,046 $ 93,776
======== ======== ========
Capital expenditures:
Retail operations......................................... $ 5,602 $ 28,030
Wholesale operations...................................... 8,136 35,471
Licensing operations...................................... -- --
-------- --------
$ 13,738 $ 63,501
======== ========
Total assets:
Retail operations......................................... $ 93,140 $114,152
Wholesale operations...................................... 159,069 245,162
Licensing operations...................................... 11,563 9,722
-------- --------
$263,772 $369,036
======== ========
</TABLE>
Certain expense items in the 1998 and 1997 amounts have been reclassified to
conform with the 1999 presentation.
F-18
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
11. SEGMENT INFORMATION (CONTINUED)
The table below presents information related to geographic areas in which
the Company operated during 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenue:
United States....................................... $455,969 $434,207 $548,179
Asia................................................ 22,277 13,859 13,279
Europe.............................................. 19,812 10,600 13,464
Canada.............................................. 1,649 1,644 12,073
South America....................................... 7,965 5,066 3,973
Mexico.............................................. 2,774 2,406 3,337
Other............................................... 4,926 4,149 5,345
-------- -------- --------
$515,372 $471,931 $599,650
======== ======== ========
</TABLE>
12. STOCK OPTION PLAN
On July 30, 1996, the Board of Directors adopted the Guess ?, Inc. 1996
Non-Employee Directors' Stock Option Plan pursuant to which the Board of
Directors may grant stock options to non-employee directors. This plan
authorizes grants of options to purchase up to 500,000 authorized but unissued
shares of Common Stock. At December 31, 1997, 1998 and 1999, there were 28,886,
70,451 and 80,599 options issued under this plan, respectively. Stock options
are granted with an exercise price equal to the stock's fair market value at the
date of grant. Stock options have ten-year terms and vest and become fully
exercisable in increments of one-fourth of the shares granted on each
anniversary from the date of grant.
On July 30, 1996, the Board of Directors adopted the Guess ?, Inc. 1996
Equity Incentive Plan (the "Plan") pursuant to which the Board of Directors may
grant stock options to officers, key associates and consultants. The Plan
authorizes grants of options to purchase up to 4,500,000 authorized but unissued
shares of Common Stock. Stock options are granted with an exercise price equal
to the stock's fair market value at the date of grant. Stock options have
ten-year terms (five years in the case of an incentive stock option granted to a
ten-percent stockholder) and vest and become fully exercisable after varying
time periods from the date of grant based on length of service or specified
performance goals.
At December 31, 1997, 1998 and 1999, there were 3,208,645, 2,841,825 and
2,763,397 additional shares available for grant under the Plan, respectively.
The per share weighted-average fair value of stock options granted during 1997,
1998 and 1999 was $9.75, $4.24, and $12.46, respectively, on the dates of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions: 1997, 1998 and 1999 expected dividend yields of 0.0%, 0.0% and
0.0%, respectively; 1997, 1998 and 1999 risk-free interest rates of 6.50%, 4.87%
and 6.51%, respectively; 1997, 1998 and 1999 volatility factors of 30%, 63% and
65%, respectively; and 1997, 1998 and 1999 expected lives of four years.
F-19
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
12. STOCK OPTION PLAN (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying consolidated financial statements. Had the Company determined
compensation based on the fair value at the grant date for its stock options
under SFAS No. 123 ("SFAS 123"), the Company's pro forma net earnings and net
earnings per share for the years ended December 31, 1997, 1998 and 1999 would
have been reduced to the pro forma amounts indicated below (in thousands, except
per share data):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Pro forma net earnings........................... $35,222 $24,574 $51,300
Pro forma earnings per share--basic.............. $ 0.82 $ 0.57 $ 1.19
Pro forma earnings per share--diluted............ $ 0.82 $ 0.57 $ 1.18
</TABLE>
Pro forma net earnings reflect only options granted since the inception of
the Plan on July 30, 1996. The full impact of calculating compensation cost for
stock options under SFAS 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the options'
vesting period of four years.
Stock option activity during the period indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance at December 31, 1996...................... 1,251,105 $17.74
Granted......................................... 1,406,105 10.78
Forfeited....................................... (1,365,855) (16.88)
---------- ------
Balance at December 31, 1997...................... 1,291,355 11.05
Granted......................................... 1,035,600 4.24
Forfeited....................................... (668,780) (10.92)
---------- ------
Balance at December 31, 1998...................... 1,658,175 6.86
Granted......................................... 343,650 12.46
Exercised....................................... (373,090) (8.56)
Forfeited....................................... (265,222) (7.68)
---------- ------
Balance at December 31, 1999...................... 1,363,513 $ 7.64
========== ======
</TABLE>
At December 31, 1997, 1998 and 1999, the weighted-average exercise price was
$11.05, $6.86 and $7.64, respectively, and the weighted-average remaining
contractual lives of outstanding options were 8.85, 9.0 and 8.53 years,
respectively.
F-20
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
12. STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE AT EXERCISE
PRICE DECEMBER 31, 1999 CONTRACTUAL LIFE PRICE DECEMBER 31, 1999 PRICE
- --------------------- ----------------- ---------------- -------- ----------------- --------
<S> <C> <C> <C> <C> <C>
$ 3.94 to $ 5.50 750,463 8.81 years $ 4.17 126,644 $ 4.26
$ 7.03 to $ 9.38 105,100 8.56 years 8.33 34,350 8.09
$10.50 to $13.13 391,350 7.60 years 11.16 177,290 10.93
$16.38 to $21.06 116,600 9.90 years 17.51 -- --
--------- ------ ------- ------
1,363,513.... 8.54 years $ 7.64 338,284 $ 8.14
========= =======
</TABLE>
At December 31, 1998 and 1999, the number of options exercisable for each
year was 315,875 and 338,284, respectively. The weighted-average exercise price
of those options was $10.84 and $8.14, respectively.
13. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR PRODUCT DISPLAY FIXTURES
Effective January 1, 1997, the Company changed its method of accounting for
product display fixtures located in its wholesale customers' retail stores,
whereby the costs for such fixtures are capitalized and amortized over five
years using the straight-line method. In prior years, these costs had been
expensed as incurred. The Company believes that this new method will more
closely match the long-term benefit that the product display fixtures provide
with the expected future revenue from such fixtures. The cumulative effect of
the change in accounting principle, recorded in the first quarter of 1997, is
calculated based upon the retroactive effect of applying the new accounting
method to prior year fixture acquisitions. The cumulative effect of the change
in accounting principle of $4.0 million (after reduction for income tax expense
of $2.7 million) is included in earnings for the year ended December 31, 1997.
Excluding the cumulative effect of the change in accounting principle, the
effect of the change during 1997 was to increase net earnings by approximately
$6.2 million, or $0.14 per share.
14. SEVERANCE COSTS RELATED TO DISTRIBUTION FACILITY
In accordance with the requirements of EITF 94-3, "Liability for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)," the Company recorded a
$3.2 million charge for future severance costs related to the relocation of its
distribution operations from Los Angeles, California to Louisville, Kentucky.
The Company anticipates the payment of these severance costs to occur in the
second quarter of fiscal 2000.
15. SUBSEQUENT EVENT
On March 3, 2000, the Arbitrators issued an interim award in favor of the
Company and rejected each of PLB's counterclaims (see Note 8). The amount of the
interim award was in excess of $6 million. As the prevailing party, the Company
is entitled to, and has applied for, an award of its attorneys' fees, costs and
expenses. Because of the uncertainty of the ultimate realization of the award,
no recognition has been given to it in the accompanying consolidated financial
statements.
F-21
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 1, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.................................................... $ 5,843
Investments............................................. 3,737
Receivables:
Trade receivables, net of reserves.................. 58,163
Royalties, net of reserves.......................... 8,516
Other............................................... 6,339
---------
Total receivables............................... 73,018
---------
Inventories (note 3).................................... 135,522
Prepaid expenses and other current assets............... 10,177
Prepaid income taxes.................................... 40
Deferred tax assets (note 5)............................ 9,619
---------
Total current assets................................ 237,956
Property and equipment, at cost, less accumulated
depreciation and amortization............................. 131,792
Other assets, at cost, less accumulated amortization........ 36,578
---------
$ 406,326
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of bank debt and long term debt.... $ 9,439
Accounts payable........................................ 59,219
Accrued expenses........................................ 26,093
Income taxes payable (note 5)........................... 4,547
---------
Total current liabilities........................... 99,298
Notes payable and long-term debt, less current
installments.............................................. 117,805
Other liabilities........................................... 9,458
---------
Total liabilities................................... 226,561
Minority interest........................................... 698
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 63,437,752 shares and outstanding
43,406,960 shares..................................... 142
Paid-in capital......................................... 163,940
Retained earnings....................................... 159,866
Accumulated other comprehensive income.................. 5,895
Treasury stock, 20,030,792 shares repurchased........... (150,776)
---------
Net stockholders' equity............................ 179,067
---------
$ 406,326
=========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-22
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
QUARTERS ENDED MARCH 27, 1999 AND APRIL 1, 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 27, APRIL 1,
1999 2000
--------- --------
<S> <C> <C>
Net revenue (note 6):
Product sales........................................... $119,941 $178,411
Net royalties........................................... 9,111 10,433
-------- --------
129,052 188,844
Cost of sales............................................... 75,024 108,295
-------- --------
Gross profit................................................ 54,028 80,549
Selling, general and administrative expenses................ 32,280 52,249
-------- --------
Earnings from operations.................................... 21,748 28,300
Other income (expense):
Interest expense, net................................... (2,333) (2,653)
Other, net.............................................. (112) (24)
-------- --------
(2,445) (2,677)
Earnings before income taxes................................ 19,303 25,623
Income taxes (note 5)....................................... 7,817 10,200
-------- --------
Net earnings................................................ $ 11,486 $ 15,423
======== ========
Net earnings per share:
Basic................................................... $ 0.27 $ 0.36
======== ========
Diluted................................................. $ 0.27 $ 0.35
======== ========
Weighted average number of shares outstanding -- basic...... 42,919 43,352
======== ========
Weighted average number of shares outstanding -- diluted.... 43,177 44,210
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-23
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTERS ENDED MARCH 27, 1999 AND APRIL 1, 2000
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 27, APRIL 1,
1999 2000
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings............................................ $ 11,486 $ 15,423
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment......................................... 5,517 7,037
Amortization of other assets........................ 220 (51)
(Gain) loss on disposition of property and
equipment......................................... 15 (25)
Decrease in minority interest....................... -- (349)
Foreign currency translation adjustment............. 9 126
Undistributed equity method (loss).................. (2) (24)
(Increase) decrease in:
Receivables..................................... (20,439) (33,345)
Inventories..................................... 18,618 (28,898)
Prepaid expenses................................ 2,573 1,648
Other assets.................................... (229) (3,709)
Increase (decrease) in:
Accounts payable................................ (9,693) (2,517)
Accrued expenses................................ (4,011) (8,147)
Income taxes payable............................ 4,453 4,547
-------- --------
Net cash provided by (used in) operating
activities.................................... 8,517 (48,284)
Cash flows from investing activities:
Net (purchases of) proceeds from the sale of short-term
investments........................................... -- 25,456
Purchases of property and equipment..................... (2,292) (12,941)
Proceeds from the disposition of property and
equipment............................................. 6 25
Acquisition of license.................................. (125) (158)
Purchase of investment securities available for sale.... (2,100) (1,478)
Increase in long-term investments....................... (2,500) --
-------- --------
Net cash provided by (used in) investing
activities........................................ (7,011) 10,904
Cash flows from financing activities:
Repayment of senior subordinated notes.................. (4,000) --
Proceeds from notes payable and long-term debt.......... -- 42,302
Repayments of notes payable and long-term debt.......... -- (5,896)
Proceeds from issuance of common stock.................. 98 641
-------- --------
Net cash provided by (used in) financing
activities........................................ (3,902) 37,047
Effect of exchange rates on cash............................ (16) 37
Net decrease in cash........................................ (2,412) (296)
Cash, beginning of period................................... 5,853 6,139
-------- --------
Cash, end of period......................................... $ 3,441 $ 5,843
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest............................................ $ 6,274 $ 6,657
Income taxes........................................ 610 1,263
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-24
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MARCH 27, 1999 AND APRIL 1, 2000
(UNAUDITED)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of Guess ?, Inc. and its subsidiaries (the
"Company") contain all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation of the condensed consolidated
balance sheet as of April 1, 2000, the consolidated statements of earnings for
the quarters ended March 27, 1999 and April 1, 2000, and the statements of cash
flows for the quarters ended March 27, 1999 and April 1, 2000. 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. The results of operations for the
quarter ended April 1, 2000 are not necessarily indicative of the results of
operations for the full fiscal year.
Effective January 1, 2000, the Company changed its quarterly reporting
period to end on the Saturday nearest the calendar quarter end. Previously, the
Company's quarterly reporting period ended on the last Saturday of the quarter,
which resulted in six more calendar days in the current quarter. This change did
not have a material impact on the consolidated financial statements.
(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 quarters ended March 27, 1999 and April 1, 2000, the
difference between basic and diluted earnings per share was due to the dilutive
impact of options to purchase common stock. Options to purchase 326,725 shares
of common stock at $27.31 per share during the three month period ended April 1,
2000 and options to purchase 1,055,075 shares of common stock at prices ranging
from $7.50 to $11.00 during the three month period ended March 27, 1999 were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the common stock.
Therefore, the options are antidiluted.
BUSINESS SEGMENT REPORTING
The Company reports segment information under Statement of Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures About Segments of an
Enterprise and Related Information." The business segments of the Company are
wholesale, retail and licensing operations. Information relating to these
segments is summarized in note 6.
COMPREHENSIVE INCOME
The Company reports comprehensive income under SFAS No. 130, "Reporting
Comprehensive Income". Comprehensive income consists of net earnings, unrealized
gains on investments available for
F-25
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTERS ENDED MARCH 27, 1999 AND APRIL 1, 2000
(UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
sale and foreign currency translation adjustments. A reconciliation of
comprehensive income for the quarters ended March 27, 1999 and April 1, 2000 is
as follows (in thousands):
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------
MARCH 27, APRIL 1,
1999 2000
--------- --------
<S> <C> <C>
Net earnings............................................. $11,486 $15,423
Unrealized loss on investments, net of taxes............. -- (4,515)
Foreign currency translation adjustment.................. (9) 163
------- -------
Comprehensive income..................................... $11,477 $11,071
======= =======
</TABLE>
As of April 1, 2000, the remaining accumulated other comprehensive income
included in stockholders' equity was $5.9 million.
(3) INVENTORIES
The components of inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
APRIL 1,
2000
--------
<S> <C>
Raw materials............................................... $ 8,628
Work in progress............................................ 12,302
Finished goods -- retail.................................... 57,255
Finished goods -- wholesale................................. 57,337
--------
$135,522
========
</TABLE>
At April 1, 2000, total inventories included $13.8 million of inventories
from Guess? Canada Corporation, the Company's licensee for wholesale and retail
operations in Canada. The Company holds a 60% ownership interest in Guess?
Canada Corporation.
(4) INVESTMENTS
At April 1, 2000, short-term investments consisted of marketable securities
available for sale.
(5) INCOME TAXES
Income taxes for the interim periods were computed using the effective tax
rate estimated to be applicable for the full fiscal year, which is subject to
ongoing review and evaluation by management.
(6) SEGMENT INFORMATION
In accordance with the requirements of SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information," the Company's reportable business
segments and respective accounting policies of the segments are the same as
those described in note 2. Management evaluates segment
F-26
<PAGE>
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTERS ENDED MARCH 27, 1999 AND APRIL 1, 2000
(UNAUDITED)
(6) SEGMENT INFORMATION (CONTINUED)
performance based primarily on revenue and earnings from operations. Interest
income and expense are evaluated on a consolidated basis and are not allocated
to the Company's business segments.
Net revenue and earnings from operations are summarized as follows for the
quarters ended March 27, 1999 and April 1, 2000 (in thousands):
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------
MARCH 27, APRIL 1,
1999 2000
--------- --------
<S> <C> <C>
Net revenue:
Retail operations................................... $ 51,474 $ 77,772
Wholesale operations................................ 68,467 100,639
Licensing operations................................ 9,111 10,433
-------- --------
$129,052 $188,844
======== ========
Earnings from operations:
Retail operations................................... $ 7 $ (1,121)
Wholesale operations................................ 14,031 20,752
Licensing operations................................ 7,710 8,669
-------- --------
$ 21,748 $ 28,300
======== ========
</TABLE>
Due to the seasonal nature of these business segments, especially retail
operations, the above net revenue and operating results for the first quarter
ended April 1, 2000, are not necessarily indicative of the results that may be
expected for the full fiscal year.
(7) BANK CREDIT FACILITY
On December 3, 1999, the Company entered into a $125 million Credit
Agreement ("Credit Facility") with The Chase Manhattan Bank. The Credit Facility
provides the Company with a revolving credit facility, which includes a $50
million sub-limit for letters of credit. Our Credit Facility accrues interest at
LIBOR plus 100 basis points, the Prime rate, the base CD Rate plus 100 basis
points or the Fed Funds rate plus 50 basis points depending on the duration and
type of loan facility. The Credit Facility expires on October 31, 2002. At April
1, 2000, the Company has $29.3 million outstanding borrowings under the Credit
Facility, $5.2 million in outstanding standby letters of credit and $33.1
million in outstanding documentary letters of credit. At April 1, 2000, the
Company had $57.4 million available for future borrowings under such facility.
The Credit Facility contains various restrictive covenants requiring, among
other things, the maintenance of certain financial ratios. As of April 1, 2000,
the Company was in compliance with all such covenants.
(8) COMMON STOCK
On April 27, 2000, the Company filed a registration statement to sell 4.5
million shares of common stock. On May 24, 2000, the Company amended its
registration statement to sell up to a maximum aggregate offering price of $200
million of shares of common stock under a shelf registration statement.
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR IN ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT. NO DEALER, SALESPERSON OR OTHER PERSON IS
AUTHORIZED TO GIVE INFORMATION THAT IS NOT CONTAINED IN THIS PROSPECTUS OR IN
ANY ACCOMPANYING PROSPECTUS SUPPLEMENT. NEITHER THIS PROSPECTUS NOR ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT IS AN OFFER TO SELL NOR IS IT SEEKING AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS AND IN ANY ACCOMPANYING
PROSPECTUS SUPPLEMENT IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS AND ANY
ACCOMPANYING PROSPECTUS SUPPLEMENT, REGARDLESS OF THE TIME OF THE DELIVERY OF
THIS PROSPECTUS OR ANY ACCOMPANYING PROSPECTUS SUPPLEMENT OR ANY SALE OF THESE
SECURITIES.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth costs and expenses of the sale and distribution
of the securities being registered. All amounts except SEC fees are estimates.
<TABLE>
<S> <C>
SEC registration fee........................................ $52,800
NASD Filing fee.............................................
Listing fee.................................................
Accounting fees and expenses................................
Legal fees and expenses.....................................
Printing expenses...........................................
Miscellaneous...............................................
Total....................................................... $
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL"), Article IX of the Bylaws of the Registrant provides that the
Registrant shall indemnify any person in connection with any threatened, pending
or completed legal proceeding (other than a legal proceeding by or in the right
of the Registrant) by reason of the fact that he is or was a director or officer
of the Registrant or is or was serving at the request of the Registrant as a
director, officer, employee or agent of another corporation, partnership or
other enterprise against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such legal proceeding if he acted in good faith and in a manner that he
reasonably believed to be in or not opposed to the best interests of the
Registrant, and, with respect to any criminal action or proceeding, if he had no
reasonable cause to believe that his conduct was unlawful. If the legal
proceeding is by or in the right of the Registrant, the director or officer may
he indemnified by the Registrant against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such legal proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Registrant and
except that he may not be indemnified in respect of any claim, issue or matter
as to which he shall have been adjudged to be liable to the Registrant unless a
court determines otherwise.
Article IX of the Registrant's Bylaws allows the Registrant to maintain director
and officer liability insurance on behalf of any person who is or was a director
or officer of the Registrant or such person who serves or served as director,
officer, employee or agent of another corporation, partnership or other
enterprise at the request of the Registrant.
Pursuant to Section 102(b)(7) of the DGCL, Article VII of the Restated
Certificate of Incorporation of the Registrant, which is Exhibit 3.1 to this
Registration Statement, provides that no director of the Registrant shall be
personally liable to the Registrant or its stockholders for monetary damages for
any breach of his fiduciary duty as a director; provided, however, that such
clause shall not apply to any liability of a director (1) for any breach of his
duty of loyalty to the Registrant or its stockholders, (2) for acts or omissions
that are not in good faith or involve intentional misconduct or a knowing
violation of the law, (3) under Section 174 of the DGCL, or (4) for any
transaction from which the director derived an improper personal benefit.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.***
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Bylaws of the Registrant.*
4.1 Specimen certificate for shares of common stock.*
5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
23.1 Consent of KPMG LLP, independent auditors.
23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).
24.1 Power of Attorney.**
99.1 Valuation and Qualifying Accounts
</TABLE>
- ---------------------
* Incorporated by reference from the exhibit of the same number to the
Company's Registration Statement on Form S-1 (File No. 333-4419), as
amended.
** Previously filed.
*** Document previously filed removed. To be filed by amendment or as an
exhibit to a document to be incorporated or deemed to be incorporated by
reference in the Registration Statement.
ITEM 17. UNDERTAKINGS.
A. Undertaking Involving Rule 415 Offering
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (A)(1)(i) and (A)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-2
<PAGE>
B. Undertaking Regarding Filings Incorporating Subsequent Exchange Act
Documents by Reference
The undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
C. Undertaking in Respect of Indemnification
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
D. Undertaking Pursuant to Rule 430A
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
Rule 497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, State of California, on
the 24th day of May, 2000.
<TABLE>
<S> <C> <C>
GUESS ?, INC.
By: /s/ MAURICE MARCIANO
-----------------------------------------
Maurice Marciano
CO-CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement on Form S-3 has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Co-Chairman of the Board,
/s/ MAURICE MARCIANO Co-Chief Executive Officer and
--------------------------------------- Director (Co-Principal May 24, 2000
Maurice Marciano Executive Officer)
Co-Chairman of the Board,
* Co-Chief Executive Officer,
--------------------------------------- President and Director May 24, 2000
Paul Marciano (Co-Principal Executive
Officer)
* Senior Executive Vice
--------------------------------------- President, Assistant Secretary May 24, 2000
Armand Marciano and Director
Executive Vice President and
* Chief Financial Officer
--------------------------------------- (Principal Financial and May 24, 2000
Brian L. Fleming Accounting Officer)
*
--------------------------------------- Director May 24, 2000
Robert C. Davis
*
--------------------------------------- Director May 24, 2000
Bryan Isaacs
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
--------------------------------------- Director May 24, 2000
Alice T. Kane
*
--------------------------------------- Director May 24, 2000
Howard Socol
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ MAURICE MARCIANO
--------------------------------------
Maurice Marciano
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- --------------------- ------------------------------------------------------------ ------------
<C> <S> <C>
1.1......... Form of Underwriting Agreement.***
3.1......... Restated Certificate of Incorporation of the Registrant.*
3.2......... Bylaws of the Registrant. *
4.1......... Specimen certificate for shares of common stock.*
5.1......... Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
23.1........ Consent of KPMG LLP, independent auditors.
23.2........ Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(included in Exhibit 5.1).
24.1........ Power of Attorney.**
99.1........ Valuation and Qualifying Accounts
</TABLE>
- ---------------------
* Incorporated by reference from the exhibit of the same number to the
Company's Registration Statement on Form S-1 (File No. 333-4419), as
amended.
** Previously filed.
*** Document previously filed removed. To be filed by amendment or as an
exhibit to a document to be incorporated or deemed to be incorporated by
reference in the Registration Statement.
<PAGE>
Exhibit 5.1
[Letterhead of Skadden, Arps, Slate, Meagher & Flom LLP]
May 24, 2000
Guess ?, Inc.
1444 South Alameda Street
Los Angeles, California 90021
Re: Guess ?, Inc.
Registration on Form S-3
------------------------
Ladies and Gentlemen:
We have acted as special counsel to Guess ?, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-3 (File No. 333-35768) filed by the Company
with the Securities and Exchange Commission (the "Commission") on April 27,
2000 under the Securities Act of 1933, as amended (the "Act"), and Amendment
No. 1 thereto, filed with the Commission on May 24, 2000 (such Registration
Statement, as so amended, being hereinafter referred to as the "Registration
Statement") with respect to registration of up to a maximum aggregate
offering price of $200,000,000 shares of common stock, par value $0.01 per
share (the "Common Stock") of the Company. The Common Stock is being
registered for offering and sale from time to time pursuant to Rule 415 under
the Securities Act.
This opinion is being furnished in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the
Registration Statement; (ii) a specimen certificate representing the Common
Stock; (iii) the Restated Certificate of Incorporation of the Company, as
presently in effect; (iv) the Bylaws of the Company, as presently in effect;
and (v) certain resolutions of the Board of Directors of the Company relating
to the transactions contemplated by the Registration Statement (the "Board
Resolutions"). We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers
or other representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a
basis for the opinions set forth herein.
<PAGE>
Guess ?, Inc.
May 24, 2000
Page 2
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and
the authenticity of the originals of such latter documents. In making our
examination of documents executed or to be executed by parties other than the
Company, we have assumed that such parties had or will have the power,
corporate or other, to enter into and perform all obligations thereunder and
have also assumed the due authorization by all requisite action, corporate or
other, and execution and delivery by such parties of such documents and the
validity and binding effect thereof. As to any facts material to the
opinions expressed herein which we have not independently established or
verified, we have relied upon statements and representations of officers and
other representatives of the Company and others.
Members of our firm are admitted to the bar in the State of Delaware and
we do not express any opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that, when
(i) the Registration Statement becomes effective; (ii) the Board of Directors
of the Company or an authorized committee thereof has taken all necessary
corporate action to authorize the issuance and sale of the Common Stock in
accordance with the Board Resolutions; (iii) certificates representing the
Common Stock in the form of the specimen certificates examined by us have
been manually signed by an authorized officer of the transfer agent and
registrar for the Common Stock and registered by such transfer agent and
registrar and delivered to the purchasers thereof; and (iv) the Company
receives consideration per share for the Common Stock in a form legally valid
under Section 152 of the Delaware General Corporation Law, the issuance and
sale of the Common Stock will have been duly authorized, and the Common Stock
will be validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement. We also consent to the reference
to our firm under the caption "Legal Matters" in the Registration Statement.
In giving this consent, we do not thereby admit that we are included in the
category of persons whose consent is required under Section 7 of the Act or
the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
2
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Guess ?, Inc.
The audits referenced to in our report dated February 10, 2000, except for
note 15, which is as of March 3, 2000, included the related financial statement
schedule as of December 31, 1999, and for each of the years in the three-year
period ended December 31, 1999, included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the use of our report incorporated herein by reference and to the
references to our firm under the headings "Selected Consolidated Financial Data"
and "Experts" in the prospectus.
Our report refers to a change in the method of accounting for product display
fixtures in 1997.
KPMG LLP
Los Angeles, California
May 24, 2000
<PAGE>
EXHIBIT 99.1
GUESS ?, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND AND END
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
As of December 31, 1997
Allowance for obsolescence........................ $ 3,257 $ 3,764 $ (3,456) $ 3,565
Reserves for accounts receivable.................. 9,720 12,746 (11,270) 11,196
Allowance for doubtful royalties.................. -- -- -- --
As of December 31, 1998
Allowance for obsolescence........................ 3,565 3,512 (3,217) 3,860
Reserves for accounts receivable.................. 11,196 8,542 (11,901) 7,837
Allowance for doubtful royalties.................. -- 3,667 -- 3,667
As of December 31, 1999
Allowance for obsolescence........................ 3,860 583 (2,079) 2,364
Reserves for accounts receivable.................. 7,837 1,398 (372) 8,863
Allowance for doubtful royalties.................. 3,667 1,657 (4,066) 1,258
</TABLE>
