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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 1-11893
GUESS ?, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3679695
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
1444 SOUTH ALAMEDA STREET
LOS ANGELES, CALIFORNIA 90021
(213) 765-3100
(Address, including zip code, and telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $0.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of the close of business on March 22, 2000, the aggregate market value of
the voting and non-voting common equity stock held by non-affiliates of the
registrant was $214,459,553.
As of the close of business on March 22, 2000, the registrant had 43,398,885
shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement for the registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III herein.
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TABLE OF CONTENTS
ITEM DESCRIPTION PAGE
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PART I
1 Business.................................................... 1
2 Properties.................................................. 12
3 Legal Proceedings........................................... 13
4 Submission of Matters to a Vote of Security Holders......... 14
PART II
5 Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 14
6 Selected Financial Data..................................... 15
7 Management's Discussion and Analysis of Financial Condition
and
Results of Operations..................................... 16
7A Quantitative and Qualitative Disclosures About Market
Risks..................................................... 22
8 Financial Statements and Supplementary Data................. 23
9 Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure...................................... 23
PART III
10 Directors and Executive Officers of the Registrant.......... 23
11 Executive Compensation...................................... 23
12 Security Ownership of Certain Beneficial Owners and
Management................................................ 23
13 Certain Relationships and Related Transactions.............. 23
PART IV
14 Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K....................................... 23
PART I
ITEM 1. BUSINESS
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-K.
Forward-looking statements may also be in the Company's other reports filed
under the Securities Exchange Act of 1934, in its press releases and in other
documents. In addition, from time to time, the Company, through its management,
may make oral forward-looking statements.
Forward-looking statements are only expectations, and involve known and
unknown risks and uncertainties, which may cause actual results in future
periods and other future events to differ materially from what is currently
anticipated. Certain statements in this Form 10-K, including those relating to
the Company's expected results, the accuracy of data relating to, and
anticipated levels of, its future inventory and gross margins, its anticipated
cash requirements and sources, the relocation of its distribution center, its
cost containment efforts, its plans regarding store openings and closings and
its business seasonality, are forward-looking statements. Such statements
involve risks and uncertainties, which may cause results to differ materially
from those set forth in these statements. Factors which may cause actual results
in future periods to differ from its current expectations include, among other
things, the continued availability of sufficient working capital, the
availability of adequate sources of capital, the successful integration of new
stores into existing operations, the continued desirability and customer
acceptance of existing and future product lines, possible cancellations of
wholesale orders, the success of competitive products, the success of the
Company's programs to strengthen its inventory cost accounting controls and
procedures and the success of technology being used in the Company's new
distribution center. In addition to these factors, the economic and other
factors identified in this Form 10-K, including but not limited to the risk
factors discussed herein and in the Company's previously filed public documents
could affect the forward-looking statements contained in herein and therein.
Forward-looking statements generally refer to future plans and performance,
and are identified by the words "believe," "expect," "anticipate," "optimistic,"
"intend," "aim," "will" or the negative thereof and similar expressions. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of which they are made. The Company undertakes
no obligation to update publicly or revise any forward-looking statements.
For additional information regarding forward-looking statements, refer to
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" contained herein.
GENERAL
Unless the context indicates otherwise, when we refer to "we," "us" or the
"Company" in this Form 10-K, we are referring to Guess?, Inc. ("GUESS?") and its
subsidiaries on a consolidated basis.
We design, market, distribute and license one of the world's leading
lifestyle collections of casual apparel and accessories for men, women and
children that reflect the American lifestyle and European fashion sensibilities.
Our apparel is marketed under numerous trademarks including GUESS, GUESS?, GUESS
U.S.A., GUESS Jeans, GUESS? and Triangle Design, Question Mark and Triangle
Design, GUESS Kids, and GUESS Collection. The 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 eyewear, watches, footwear, infant apparel and
other fashion accessories.
Our products are sold through three distribution channels: in our own
stores, to a network of wholesale accounts 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. Our core
customer is a style-conscious consumer between the ages of 15 and 25. These
consumers are part of a highly desirable demographic group that we believe is
growing rapidly and has significant disposable
1
income. We also appeal to customers outside this group through specialty product
lines that include GUESS Collection, a more sophisticated fashion line targeted
to women, and GUESS Kids, targeted to boys and girls ages 6 through 12.
We were founded in 1981 by Maurice Marciano, Paul Marciano and Armand
Marciano and we currently operate as a Delaware corporation.
BUSINESS SEGMENTS
Our business consists of three reportable business segments: retail
operations, wholesale operations and licensing operations. Financial information
about each segment for the fiscal years ended December 31, 1997, 1998 and 1999
are included under Note 11 to the Consolidated Financial Statements contained
herein.
In 1999, 50.0% of our net revenue came from retail operations, 43.4% from
wholesale operations and 6.6% from licensing operations. Our total net revenue
in 1999 was $599.7 million and net earnings were $51.9 million.
BUSINESS STRENGTHS
We believe we possess a foundation of business strengths necessary for the
execution of our business strategies. These business strengths include:
BRAND EQUITY. We believe that our name has become one of the most familiar
in fashion and is one of our most valuable assets. We believe the enduring
strength of the GUESS? brand name and image is due mainly to our consistent
emphasis on innovative and distinctive product designs that stand for
exceptional styling and quality. Our industry is highly competitive and subject
to rapidly changing consumer preferences and tastes. The success of our brand
depends on our ability to anticipate the fashion preferences of our customers.
We have a team of designers who, under the direction of Maurice Marciano, seek
to identify global fashion trends and interpret them for the style-conscious
consumer while retaining the distinctive GUESS? image. Through our award-winning
advertising, under the creative leadership and vision of Paul Marciano, we have
achieved worldwide recognition of the GUESS? brand name. By retaining control
over advertising and marketing activities from our headquarters in Los Angeles,
we maintain the integrity, consistency and direction of the GUESS? brand image
worldwide, while realizing substantial cost savings when compared to the use of
outside advertising agencies.
We have developed the "GUESS? signature image" and "GUESS? lifestyle
concept," through the use of our strong and distinctive images, merchandising
display themes, logos, and trademarks which are registered in over 170
countries.
ADVERTISING AND MARKETING. All worldwide advertising, marketing activities
and promotional materials are controlled from our headquarters in Los Angeles.
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 worldwide. Our advertising campaigns promote the GUESS? image with
our award winning advertising and a consistent emphasis on innovative and
distinctive designs.
We communicate this message through the use of our signature black and white
print advertisements, as well as color print advertisements, designed by our
in-house advertising department. Led by Paul Marciano, this team has won
numerous awards and contributed to making the GUESS? brand one of the most
recognizable fashion brands. We have maintained a high degree of consistency in
our advertisements, by using similar themes and images. We require our licensees
and distributors to invest a percentage of their net sales of licensed products
and net purchases of GUESS? products, respectively, in Company-approved
advertising, promotion and marketing.
RETAIL DISTRIBUTION. At December 31, 1999, we operated 92 full-price retail
and 54 factory outlet stores in the United States and a retail store in
Florence, Italy that is an integral part of our European design activities. Our
60% owned subsidiary, GUESS? Canada Corporation ("GUESS Canada"), operates
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13 retail stores in Canada. Our retail network creates an upscale and inviting
shopping environment and enhances our image. Distribution through our retail
stores allows us to influence the merchandising and presentation of our
products, increase consumer awareness and build brand equity. Our retail stores
carry a full assortment of men's and women's merchandise, including most of the
GUESS? licensed products. Our factory outlet stores are primarily located in
outlet malls, generally operating outside the shopping radius of our wholesale
customers and our own retail stores. They appeal to value-conscious customers
with a product line that is approximately 70% unique to that venue.
LICENSEE STORES. Our licensees and distributors also operate 229
international GUESS? stores. These stores carry apparel and accessories that are
similar to those sold in the United States, including some that are tailored for
local fashion sensibilities. We work closely with international licensees and
distributors to ensure that their store designs and merchandise programs protect
the reputation of the GUESS? trademarks. Our international licenses and
distribution agreements also allow for the sale of GUESS? brand goods in better
department stores and upscale specialty retail stores.
WHOLESALE DISTRIBUTION. We have both domestic and international wholesale
distribution channels. Domestic wholesale customers consist primarily of better
department stores and select specialty retailers and upscale boutiques, which
have the image and merchandising expertise that we require for the effective
presentation of our products. Leading domestic wholesale customers include
Federated Department Stores, Inc., The May Department Stores Company,
Dillard's, Inc. and Dayton Hudson Corporation. During 1999, our products were
sold directly to consumers from approximately 2,800 retail store locations in
the United States. These locations include approximately 1,200 shop-in-shops, an
exclusive selling area within a department store that offers a wide array of our
products and incorporates GUESS? signage and fixture designs. These
shop-in-shops allow us to reinforce our GUESS? brand image with our customers.
Many department stores have more than one shop-in-shop, with each one featuring
women's, men's or girls' apparel. Through our foreign subsidiaries and our
network of international distributors, our products are also found in major
cities throughout Asia, Europe, South America and the Middle East.
LICENSING OPERATIONS. The desirability of the GUESS? brand name among
consumers has allowed us to selectively expand our product offerings and global
markets through trademark licensing arrangements, with minimal capital
investment or on-going operating expenses. We carefully select our trademark
licensees and approve in advance all product design, advertising and packaging
materials of all licensed products in order to maintain a consistent GUESS?
image. We currently have 28 licenses that include watches, eyewear, shoes,
handbags, leather apparel, jewelry and related accessories. We have granted
licenses for the manufacture and sale of GUESS? branded products in markets
which include Europe, Asia, South America, Australia and Africa.
BUSINESS GROWTH STRATEGIES
We regularly evaluate and implement initiatives that we believe will build
brand equity, grow our business and enhance profitability. Our key growth
strategies are as follows:
LEVERAGING THE GUESS? BRAND. We believe the GUESS? brand is an integral
part of our business, a significant strategic asset and a primary source of
sustainable competitive advantage. It communicates a distinctive image that is
fun, fashionable and sexy. Brand loyalty, name awareness, perceived quality,
strong brand images, public relations, publicity, promotional events and
trademarks all contribute to brand equity. Our design teams visit the world's
premier fashion locations in order to identify important style trends and to
discover new fabrics. We will continue this practice while promoting our
innovative designs through stylish advertising campaigns that advance the GUESS?
image. Our marketing programs are designed to convey a uniform style image for
the brand, aimed at increasing the desire of the target group to join our GUESS?
customer group.
RETAIL STORE STRATEGY AND EXPANSION PLANS. We plan that our retail division
will be our primary growth initiative over the next three to five years. We plan
to achieve this growth by adding a significant number of
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new stores, increasing the average size of our new stores and further increasing
the sales productivity of all stores. During 1999, we opened 19 new stores in
the United States and improved our operating base by closing 5 under performing
stores. In 1999, we also increased our ownership in our Canadian licensee, GUESS
Canada, which operates 13 retail stores in Canada, to 60%. We have an option to
acquire the remaining 40% of our Canadian subsidiary commencing December 31,
2001.
We currently plan to more than double our retail square footage in the
United States and Canada during the next three years. We plan to open 25 new
retail stores and 10 new factory outlet stores in the United States in 2000. We
also plan to open 10 GUESS Kids stores in the United States, which will carry
girls', boys' and Baby GUESS apparel. We also expect that our Canadian licensee,
GUESS Canada, will open 15 new retail stores in Canada in 2000. It has been our
experience that our retail locations build brand awareness and contribute to the
growth of our wholesale operations.
In 1999, our retail stores open a minimum of one year realized comparable
store sales gains averaging 28% over 1998 and our factory outlet stores realized
net gains averaging 24%. We believe this growth reflects the re-emergence of the
GUESS? brand nationally, and among other things, the effect of several ongoing
initiatives, including:
- being a leader in new product development,
- producing a more fashion-focused product mix,
- improvements in merchandising and visual presentation,
- the remodeling of select stores to promote a consistent brand message and
- the development of a motivated team of sales professionals so that our
customers have a favorable shopping experience.
The look and feel of GUESS? retail and factory outlet stores play an
important role in building our brand equity. To enhance the quality of our
presentation, we remodeled 14 stores during 1999 and plan to remodel an
additional 25 stores during 2000.
EXPAND SHOP-IN-SHOP PROGRAMS. We are continuing to selectively expand our
use of "shop-in-shops," which are exclusive selling areas within wholesale
customers' department stores that use GUESS? signage and fixture designs. The
GUESS? "shop-in-shop" concept is designed to enhance the presence and brand
awareness of GUESS? products in department stores. The strategic product
presentation, theme-based fixtures, displays, strong and distinctive images and
point-of-sale materials in these premium department store locations are designed
to reinforce and capitalize on the "GUESS? lifestyle" concept. These shops also
facilitate consumer shopping by featuring a comprehensive presentation of our
merchandise. In our wholesale business in 1998 and 1999, we focused on the
department stores with the greatest sales potential while increasing our
shop-in-shop presence in those stores. At the end of 1999, we had approximately
1,200 GUESS? shop-in-shops in the United States. We expect to continue to grow
our domestic wholesale operations in 2000, and plan to add or remodel up to 500
additional shop-in-shops this year. We also plan to selectively increase our
presence in department stores, specialty retail chains and upscale boutiques.
REPOSITION LICENSEE PORTFOLIO. A primary objective as a company is to
maintain the quality and reputation of the GUESS? brand. In order to maintain
quality and control of the GUESS? brand, we will continue to strategically
reposition our licensing portfolio by bringing in-house apparel licenses, where
appropriate. To maintain brand integrity and image, we aggressively monitor the
performance of our licensees. If we determine that licensees are performing
inadequately, we sometimes discontinue the existing relationship and seek out a
stronger replacement licensee or if appropriate, produce the product line
in-house. Over the past few years, we have converted our women's knits and
girls' product lines from licenses to our own products, and we recently
reacquired our boys' line. Our girls' and boys' apparel lines will both be
prominently featured in our new GUESS Kids stores and a planned series of girls'
and boys' shop-in-shops. We terminated our licensee for Baby GUESS in 1999 and
have a new licensee producing the Baby GUESS line in 2000.
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IMPROVED PRODUCT SOURCING. We have refocused our product sourcing
strategies to increase efficiencies, reduce costs and improve quality. We
currently purchase approximately 75% of our finished products from international
vendors. This is a significant change from several years ago when we purchased
the majority of our goods from domestic sources. We have increased our
utilization of lower-cost, offshore "packaged purchases." in which we supply the
product design and fabric selection, and the vendor manufacturers and delivers
the finished product. We have strategically aligned ourselves with sourcing
vendors worldwide, who will take full responsibility for delivering a quality,
finished product in a timely manner. We have substantially reduced our average
cost per unit at the same time as we have lowered the price of many of our
items. We also retain a close relationship with a number of domestic vendors
located primarily in Los Angeles as it is important to react to last minute
trends, as well as respond to rush reorders. By continuing to use packaged
programs, we believe we can continue to achieve improved product gross margins,
reduce carry costs of raw materials and improve deliveries and quality.
RELOCATE DISTRIBUTION CENTER. We have opened a new, automated distribution
center in Louisville, Kentucky, to replace our distribution center in Los
Angeles. Our new, 500,000 square-foot facility is near United Parcel Service's
national transit hub and, when fully operational in the second quarter of fiscal
year 2000, is expected to reduce our shipping time to the majority of our stores
and wholesale accounts that are east. We expect the new distribution center, in
addition to enabling us to get our products to market more rapidly, will allow
us to reduce distribution operating costs per unit, reduce our shipping costs
and provide better service to our customers.
E-COMMERCE. We are pursuing both business-to-consumer and
business-to-business initiatives. Our web site, www.guess.com, a virtual
storefront that promotes the GUESS? brand, became fully operational in
April 1999. Designed as a customer center, the site showcases GUESS? products in
an easy-to-navigate format, allowing customers to see and purchase our
collections of casual apparel and accessories. This virtual store is designed to
develop an additional retail distribution channel, improve customer service
levels and create a fun and entertaining alternative-shopping environment. The
site also provides fashion information, provides a mechanism for customer
feedback, promotes customer loyalty and enhances our brand identity through
interactive content. This site generates net revenue consistent with an average
GUESS? retail store.
During 2000, we intend to introduce a business-to-business concept that will
facilitate our interaction with wholesale customers, licensees and suppliers.
The site, which will utilize Commerce One's MarketSite with PeopleSoft's
eProcurement software, is designed to permit the purchase of both indirect items
such as office and maintenance supplies and direct items such as trims, fabric,
and finished goods. Our site has the potential to become an electronic
marketplace that will facilitate various levels of interaction between buyers
and sellers in the textile and apparel industries, and to reduce our operating
costs, increase our sourcing efficiencies and improve customer service.
GUESS? PRODUCTS
We derive net revenue from three primary sources:
- the sale of GUESS? men's, women's, girls' and boys' apparel,
- the sale of our licensees' products through our network of retail and
factory outlet stores primarily in the United States and
- the sale of GUESS? men's, women's, girls' and boys' apparel worldwide to
wholesale customers and distributors and net royalties from worldwide
licensing activities.
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The following table sets forth our net revenue from our channels of
distribution.
YEAR ENDED DECEMBER 31,
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1997 1998 1999
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(DOLLARS IN THOUSANDS)
Net Revenue:
Retail operations...................... $215,873 41.9% $222,624 47.2% $299,384 50.0%
Wholesale operations................... 250,040 48.5 212,504 45.0 260,628 43.4
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Net revenue from 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
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Total net revenue.................. $515,372 100% $471,931 100% $599,650 100%
======== ===== ======== ===== ======== =====
PRODUCTS. Our product line is organized into four primary categories:
men's, women's, girls' and boys' apparel. In 1999, we reacquired our boys'
apparel line from a former licensee and now produce the line in-house. The
product assortment was refocused with a more narrow and deep buying strategy
using fewer stock keeping units ("SKUs") to be able to give our customers more
depth of the styles they want. New fashioned-oriented product is offered
monthly. To take advantage of the contemporary trends, we complement our core
basic styles with more fashion-oriented items. Within our basic denim
assortment, we have added new denim fabrics and washes. In addition, we have
also been successful in adding "immediates" to our merchandise assortment. These
are fashion forward styles that compliment our current product that continue to
keep GUESS? as the fashion leader and trend setter in the industry.
Our line of women's apparel also includes the GUESS Collection product line,
a better collection of women's skirts, dresses, tops, jackets, blazers and
blouses incorporating a sophisticated, high fashion combination of colors and
styles. These products are currently sold exclusively through our retail stores
and the Internet and our primarily designed to appeal to the contemporary
segment of the apparel market.
LICENSED PRODUCTS. The high level of desirability of the GUESS? brand name
among consumers has allowed us to selectively expand our product offerings and
distribution channels worldwide through trademark licensing arrangements. We
currently have 28 trademark licenses. Worldwide sales of licensed products (as
reported to us by our licensees) were approximately $525 million in 1999. Our
net royalties from these sales, including fees from new licensees, were
$39.6 million in 1999. Approximately 40% of our net royalties were derived from
our top 3 licensed product lines in 1999.
DESIGN
Under the direction of Maurice Marciano, GUESS? apparel is designed by an
in-house staff of five design teams (men's, women's, girls', boys' and GUESS
Collection) located in Los Angeles, California. GUESS? design teams travel
throughout the world in order to monitor fashion trends and discover new
fabrics. Fabric shows in Europe, Asia and the United States provide additional
opportunities to discover and sample new fabrics. These fabrics, together with
the trends 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 of 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.
DOMESTIC RETAIL OPERATIONS
At December 31, 1999, our domestic retail operations consisted of 92
full-price retail and 54 factory outlet stores in the United States that we
owned and operated directly, which sell GUESS?-label products. Since the
beginning of 1996 through December 31, 1999, we have opened a total of 39 retail
stores and 17 factory outlet stores and have closed or consolidated 9 retail and
10 factory outlet stores in the United
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States. The percentage of net revenue generated by the retail network has
increased from 47.2% to 50.0% of our net revenue from product sales from the
beginning of 1996 through December 31, 1999.
RETAIL STORES. Our 92 domestic retail stores occupy 494,000 square feet and
range in size from approximately 3,000 to 10,000 square feet. Our retail stores
carry a full assortment of men's and women's GUESS? merchandise, including most
of our licensed products. In 1999, our retail division introduced its own
fragrance line. During 1999, we opened 9 retail stores, remodeled another 10
retail stores and closed one retail store as a result of a store consolidation.
We plan to open 25 new retail stores in the United States during 2000. During
2000, we also plan to launch our first 10 GUESS Kids stores to sell our girls'
line and our boys' line as well as infant's clothing, which will be supplied by
one of our licensees.
In 1999, our domestic retail stores achieved a 28% comparable store increase
in net revenue. Every domestic retail store increased its sales over those in
1998. Our domestic retail stores open at the beginning of 1998 increased sales
per square foot from $346 in 1998 to $434 in 1999.
FACTORY OUTLET STORES. Our 54 domestic factory outlet stores occupy
approximately 300,000 square feet and range in size from approximately 3,500 to
8,900 square feet. They are primarily located in outlet malls generally
operating outside the shopping radius of our wholesale customers and our retail
stores. These stores sell selected styles of GUESS? apparel and licensed
products at a discount to value-conscious customers. We also use the factory
outlet stores to assist us to distribute excess inventory effectively, thereby
protecting the GUESS? image. Approximately 70% of the products sold in our
factory outlet stores are unique to those stores. During 1999, we opened 10 new
factory stores and closed 4 under-performing stores. We plan to open another 10
factory outlet stores in 2000. In 1999, our domestic factory outlet stores
achieved a 24% comparable store sales increase in net revenue. Our domestic
factory outlet stores open at the beginning of 1998 increased sales per square
foot from $258 in 1998 to $335 in 1999.
DOMESTIC WHOLESALE CUSTOMERS
Our domestic wholesale customers consist primarily of better department
stores and select upscale specialty stores, which have the image and
merchandising expertise that we require for the effective presentation of our
products. Leading wholesale customers include Federated Department
Stores, Inc., The May Department Stores Company and Dillard's, Inc., among
others. During 1999, we sold our products directly to approximately 2,800 retail
doors in the United States.
A key element of our merchandising strategy is the shop-in-shop
merchandising format, an exclusive selling area within a department store that
presents a full array of GUESS? products using GUESS? signage and fixture
designs. At December 31, 1999, there were approximately 1,200 shop-in-shops
(excluding shop-in-shops installed by licensees and distributors) that feature
GUESS? products (other than the GUESS Collection). We added or remodeled
approximately 135 shop-in-shops in 1999 and intend to add or remodel up to 500
shop-in-shops by the end of 2000.
We have sales representatives in our showrooms in New York, Los Angeles,
Dallas, Chicago, Milan and Florence, Italy and Hong Kong. They coordinate with
customers to determine the inventory level and product mix that should be
carried in each store to maximize retail sell-through and enhance the customers'
profit margins. The inventory level and product mix are then used as the basis
for developing sales projections and product needs for each wholesale customer
and for scheduling production. Additionally, we use merchandise coordinators,
who work with the store to ensure that our products are appropriately displayed.
A few of our domestic wholesale customers, including some under common
ownership, have accounted for significant portions of our 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 our net
revenue.
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INTERNATIONAL BUSINESS
We derive net revenue and earnings outside the United States from two
principal sources:
- sales of GUESS? brand apparel directly to 5 foreign distributors who
distribute it to better department stores, upscale specialty retail stores
and GUESS? licensed retail stores operated by our international
distributors, and
- royalties from licensees who manufacture and distribute GUESS? brand
products outside the United States. We sell products through distributors
and licensees throughout Asia, South America, Europe, South Africa,
Australia and the Middle East.
At December 31, 1999, 229 GUESS? retail and outlet stores were owned and
operated internationally by licensees and distributors, including 13 retail
stores in Canada that our 60% owned subsidiary operates. We have an option to
acquire the remaining 40% of our Canadian subsidiary commencing December 31,
2001. Our retail store license agreements generally provide detailed guidelines
for store fixtures and merchandising programs. The appearance, merchandising and
service standards of these stores are closely monitored to ensure that our image
is maintained. We have been advised by our distributors and licensees that they
plan to open approximately 45 new stores, including 15 stores in Canada, in
2000. We also own and operate a flagship GUESS? retail store located in
Florence, Italy.
LICENSE AGREEMENTS AND TERMS
Our trademark license agreements customarily provide for a three- to
five-year initial term with a possible option to renew prior to expiration for
an additional multi-year period. In addition to licensing trademarks for
products which complement our apparel products, we have granted trademark
licenses for the manufacture and sale of GUESS? branded products similar to
ours, including men's and women's denim and knitwear, in markets such as the
Philippines, Canada, Mexico, Chile, South Africa, South Korea, Europe and Japan.
Licenses granted to certain licensees that have produced high-quality products
and otherwise have demonstrated solid operating performance, such as GUESS?
Watches and GUESS? Eyewear, have been renewed and in some cases expanded to
include new products or markets. In other cases, products that were formerly
licensed, such as our women's knits, girls' and boys' lines, are now being
produced in-house. The typical license agreement requires that the licensee pay
us the greater of a royalty based on a percentage of the licensee's net sales of
licensed products or a guaranteed annual minimum royalty that typically
increases over the term of the license agreement. Generally, licensees are
required to spend a percentage of the net sales of licensed products for
advertising and promotion of the licensed products. In addition, certain
licensees are required to contribute toward the protection of 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.
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.
ADVERTISING AND MARKETING
Our advertising, public relations and marketing strategy is to promote a
consistent high impact image which endures regardless of changing consumer
trends. Since our inception, Paul Marciano has had principal responsibility for
the GUESS? brand image and creative vision. All worldwide advertising and
promotional material is controlled through our Advertising Department based in
Los Angeles. 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.
8
Our advertising strategy promotes the GUESS? image and products, with an
emphasis on image. Our signature black and white print advertisements, as well
as color print advertisements, have garnered prestigious awards, including Clio,
Belding and Mobius awards for creativity and excellence. These awards, which we
have received on numerous occasions, are generally awarded based on the judgment
of prominent members of the advertising industry. We have maintained a high
degree of consistency in our advertisements, using similar themes and images. We
require our licensees and distributors to invest a percentage of their net sales
of licensed products and net purchases of GUESS? products in approved
advertising, promotion and marketing. We launched a new marketing campaign in
1999, which included Internet advertising sponsors and television commercials,
strong and consistent images used in all media forms, fresh merchandising
presentation themes and enhanced point-of-sale materials.
Our in-house advertising department is responsible for media placement of
all advertising worldwide, which includes approval of all advertising campaigns
from our licensees and distributors. We use a variety of media which emphasizes
print and outdoor advertising. We have focused advertisement placement in
national and international contemporary fashion/beauty and lifestyle magazines
including Vanity Fair, Harpers Bazaar, Elle, W and Details. By retaining control
over our advertising programs, we are able to maintain the integrity of the
GUESS? brand image while realizing substantial cost savings when compared to the
use of outside agencies.
We further strengthen communications with customers through our Web site
(www.guess.com). This global medium enables us to provide timely information in
an entertaining fashion to consumers about our history, GUESS? products and
store locations and allows us to receive and respond directly to customer
feedback.
SOURCING AND PRODUCT DEVELOPMENT
We source products through numerous suppliers, many of whom have established
relationships with us. We seek to achieve the most efficient means for timely
delivery of our high quality products. Our fabric specialists work with fabric
mills in the United States, Europe and Asia to develop woven and knitted fabrics
that enhance the products' comfort, design and appearance. For a substantial
portion of our apparel products, production planning takes place generally four
to five months prior to the corresponding selling season. Delivery of certain
basic products is accomplished through our Quick Response EDI (Electronic Data
Interchange) replenishment system which ensures shipment of such products
generally within 48 hours of receipt of customer orders.
We do not own any production equipment other than cutting machinery. To
remain competitive, in recent years we have increasingly been sourcing our
finished products globally. During 1999, we sourced approximately 80% of our
finished products from third-party suppliers located outside the United States.
Most of these finished products are acquired as package purchases where we
supply the design and fabric selection and the vendor supplies the finished
product. Although we have long-term relationships with many of our vendors, we
do not have long-term written agreements with them. The production and sourcing
staff in Los Angeles oversee aspects of apparel manufacturing, quality control
and production, as well as research and develop new sources of supply.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Our products use a variety of raw materials, principally consisting of woven
denim, woven cotton and knitted fabrics and yarns. Historically, we have had to
make commitments for a significant portion of our fabric well in advance of
sales. By increasing the use of packaged purchases, we have been able to reduce
our raw materials inventory.
9
QUALITY CONTROL
Our quality control program is designed to ensure that products meet our
high quality standards. We monitor the quality of our fabrics prior to the
production of garments and inspect prototypes of each product before production
runs commence. We also perform random in-line quality control checks during and
after production before the garments leave the contractor. Final random
inspections occur when the garments are received in our distribution centers. We
believe that our policy of inspecting our products at our distribution centers
and at the vendors' facilities is important in maintaining the quality and
reputation of our products.
DISTRIBUTION CENTER
We utilize distribution centers at strategically located sites. During 1999,
distribution of our products in the United States was centralized in our Los
Angeles, California facility, which we lease from a related party and operate.
In January 2000, we opened a new, automated distribution center in Louisville,
Kentucky, to replace the distribution center in Los Angeles. We expect the new
facility, which we lease, to be fully operational in the second quarter of
fiscal year 2000. We also hold a ten percent ownership interest in a licensee
which operates a distribution center in Florence, Italy and services Europe.
Additionally, we utilize a contract warehouse in Hong Kong which services the
Pacific Rim.
At our distribution centers in the United States, we use fully integrated
and automated distribution systems. The bar code scanning of merchandise,
picking tickets and distribution cartons, together with radio frequency
communications, provide timely, controlled, accurate and instantaneous updates
to the distribution information systems.
COMPETITION
The apparel industry is highly competitive and fragmented, and is subject to
rapidly changing consumer demands and preferences. We believe that our success
depends in large part upon our ability to anticipate, gauge and respond to
changing consumer demands and fashion trends in a timely manner and upon the
continued appeal to consumers of the GUESS? image. We compete with numerous
apparel manufacturers and distributors and several well-known designers which
have recently entered or re-entered the designer denim market. Our retail and
factory outlet stores face competition from other retailers, including some of
our major wholesale customers. Our licensed apparel and accessories also compete
with a substantial number of designer and non-designer lines and various other
well-known brands. Many of our competitors have greater financial resources than
we do. Although the level and nature of competition differ among our product
categories, we believe that we compete on the basis of our brand image, quality
of design, workmanship and product assortment.
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, and GUESS Collection. 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.
10
WHOLESALE BACKLOG
We maintain a model stock program in our basic denim products which allows
us generally to replenish a customer's inventory within 48 hours. We typically
receive orders for our fashion apparel 90 to 120 days prior to the time the
products are delivered to stores. At February 29, 2000, we had unfilled
wholesale orders, consisting primarily of orders for fashion apparel, of
approximately $167.7 million, compared to $93.9 million for such orders at
February 28, 1999. We expect to fill substantially all of these orders in 2000.
The backlog of wholesale orders at any given time is affected by various
factors, including seasonality and the scheduling of manufacturing and shipment
of products. Accordingly, a comparison of backlogs of wholesale orders from
period to period is not necessarily meaningful and may not be indicative of
eventual actual shipments.
EMPLOYEES
We believe that our employees ("associates") are one of our most valuable
resources. At December 31, 1999, there were approximately 3,600 associates.
Associates include approximately 1,100 in wholesale operations and 2,500 in
retail operations.
We are not a party to any labor agreements and none of our associates is
represented by a labor union. We consider our relationship with our associates
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.
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 certain
circumstances without regard to fault. Certain 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.
FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See Note 11 to the Notes to the Consolidated Financial Statements for a
discussion regarding our domestic and foreign operations.
11
ITEM 2. PROPERTIES
Certain information concerning our principal facilities, all of which are
leased at December 31, 1999, is set forth below:
APPROXIMATE
AREA IN
LOCATION USE SQUARE FEET
- ------------------------- ------------------------------------------------------ -----------
1444 South Alameda Street Principal executive and administrative offices, design 565,000
Los Angeles, California facilities, sales offices, distribution and warehouse
facilities, production control, and sourcing
1610 Freeport Drive Distribution and warehousing facility 500,000
Louisville, Kentucky
1385 Broadway Administrative offices, public relations, and 30,000
New York, New York showrooms
Kowloon, Hong Kong Distribution and licensing coordination control 3,000
Florence, Italy Administrative office and retail store 4,100
Our corporate, wholesale and retail headquarters and our production,
distribution and warehousing facilities are located in Los Angeles, California
and consist of seven adjacent buildings totaling approximately 565,000 square
feet. All of these properties are leased by us, and certain of these facilities
are leased from limited partnerships in which the sole partners are trusts
controlled by and for the benefit of Maurice Marciano, Paul Marciano and Armand
Marciano and their families (the "Principal Stockholders") pursuant to leases
that expire in July 2008. The total lease payments to these limited partnerships
are $225,000 per month with aggregate minimum lease commitments to these
partnerships at December 31, 1999 totaling approximately $23.4 million. See
"Item 13. Certain Relationships and Related Transactions."
During 1999, distribution of our products in the United States was
centralized in our Los Angeles, California facility. We have opened a new,
automated distribution center in Louisville, Kentucky, which is leased by us, to
replace the distribution center in Los Angeles. We also hold a ten-percent
ownership interest in a licensee, which leases and operates a distribution
center in Florence, Italy and services Europe. Additionally, we lease a contract
warehouse in Hong Kong which services the Pacific Rim.
We lease our showrooms, advertising, licensing, sales and merchandising
offices, remote distribution and warehousing facility and retail and factory
outlet store locations under non-cancelable operating lease agreements expiring
on various dates through May 2012. These facilities are located principally in
the United States, with aggregate minimum lease commitments, at December 31,
1999, totaling approximately $212.1 million.
The current terms of our store leases, excluding renewal options, expire as
follows:
YEARS LEASE TERMS EXPIRE NUMBER OF STORES
- ------------------------ ----------------
2000-2002................................................... 29
2003-2005................................................... 61
2006-2008................................................... 44
2009-2011................................................... 11
Thereafter.................................................. 2
We believe our existing facilities are well maintained, in good operating
condition and are adequate to support our present level of operations. See Notes
7 and 8 of the Notes to Consolidated Financial Statements for further
information regarding current lease obligations.
12
ITEM 3. LEGAL PROCEEDINGS
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.
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 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. Mr. 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 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 complaint (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.
On March 3, 2000, the Arbitrators issued an interim award in favor of the
Company and rejected each of PLB's counterclaims. 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.
13
Because of the uncertainty of the ultimate realization of the award, no
recognition has been given to it in the accompanying consolidated financial
statements.
On June 9, 1999, the Company commenced a lawsuit in the Los Angeles County
Superior Court against Mr. 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. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote during the fourth quarter of fiscal year
1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since August 8, 1996, the Company's Common Stock has been listed on the New
York Stock Exchange under the symbol 'GES.' The following table sets forth, for
the periods indicated, the high and low sales prices of the Company's Common
Stock, as reported on the New York Stock Exchange Composite Tape.
HIGH LOW
------------ ------------
Year ending December 31, 1998
First Quarter 1998.......................................... $ 8 $ 5 3/16
Second Quarter 1998......................................... 7 3/16 4
Third Quarter 1998.......................................... 5 3 3/4
Fourth Quarter 1998......................................... 7 1/8 3 5/8
Year ending December 31, 1999
First Quarter 1999.......................................... 8 1/2 5 1/16
Second Quarter 1999......................................... 14 6 1/8
Third Quarter 1999.......................................... 16 1/16 10 9/16
Fourth Quarter 1999......................................... 21 7/8 11 1/2
On March 22, 2000, the closing sales price per share of the Company's Common
Stock, as reported on the New York Stock Exchange Composite Tape, was 27 5/16.
On March 22, 2000, there were 180 holders of record of the Company's Common
Stock.
DIVIDEND POLICY
We intend to use our cash flow from operations in 2000 principally to
finance the expansion and remodel of our retail stores, shop-in-shop programs
and operations. Any future determination as to the payment of dividends will be
at the discretion of the Company's Board of Directors and will depend upon our
results of operations, financial condition, contractual restrictions and other
factors deemed relevant by the Board of Directors. The agreement governing our
revolving credit facility and the indenture pursuant to which the Company's
Senior Subordinated Notes, due 2003, were issued restrict the payment of
dividends by the Company.
Since our IPO on August 8, 1996, we have not declared any dividends on our
Common Stock.
14
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below have been derived from the
audited consolidated financial statements of the Company and the related notes
thereto. The following selected financial data should be read in conjunction
with the Company's Consolidated Financial Statements and the related Notes
contained herein and with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statement of earnings data:
Net revenue...................................... $486,733 $551,162 $515,372 $471,931 $599,650
Earnings from operations......................... 82,928 98,095 70,646 57,046 93,776
Earnings before interest and income taxes........ 82,771 97,106 68,605 56,183 96,485
Net earnings..................................... 63,919 66,741 37,511 25,111 51,900
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
Income taxes..................................... 26,726 33,241 21,337 18,180 35,200
Net earnings..................................... 40,088 49,326 37,511 25,111 51,900
Earnings per share(3):
Basic............................................ 0.96 1.18 0.87 0.59 1.21
Diluted.......................................... 0.96 1.18 0.87 0.59 1.20
Weighted number of shares outstanding--basic (3)... 41,675 41,906 42,898 42,904 43,005
Weighted number of shares outstanding--diluted
(3).............................................. 41,675 41,908 42,902 42,919 43,366
DECEMBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Balance sheet data:
Working capital........................... $ 57,572 $ 76,821 $106,670 $101,310 $ 97,944
Total assets.............................. 202,635 239,306 287,814 263,772 369,036
Notes payable and long-term debt.......... 123,335 127,316 141,517 99,000 83,363
Net stockholder's equity.................. 10,997 34,928 75,330 100,409 167,355
(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.
Prior to the Company's IPO in August 1996, the Company had elected to be
taxed as an S corporation for Federal income tax purposes. In certain
states, the Company was taxed as an S corporation; in other states, the
Company was taxed as a C corporation. Effective January 1, 1991, the
Company elected to be treated as an S corporation for California tax
purposes. As a result of the Company's IPO, all S corporation elections
were terminated.
(2) Effective January 1, 1997, the Company changed its method of accounting for
product display fixtures located in its wholesale customers' retail stores,
whereby the costs for such fixtures 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 ($0.09 per
share) (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
15
effect of the change during 1997 was to increase net earnings by
approximately $6.2 million or $0.14 per share.
(3) The weighted number of shares outstanding at December 31, 1996 reflects
(i) 32,681,819 shares of Common Stock outstanding prior to the IPO price
and the assumed issuance of 8,730,000 shares of Common Stock at the IPO
price ($18.00 per share) to generate sufficient cash to pay a distribution
of retained earnings to its then existing stockholders as part of the
termination of its S corporation status in an amount equal to retained
earnings as of the IPO date and (ii) an average of 42,682,000 shares
outstanding subsequent to the IPO, representing the actual shares
outstanding.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
GENERAL
We derive our net revenue from the sale of GUESS? men's, women's, boys and
girls' apparel and our licensees' products through our network of retail and
factory outlet stores primarily in the United States, from the sale of GUESS
men's, women's, boys' and girls' apparel worldwide to wholesale customers and
distributors, from net royalties from worldwide licensing activities, from the
sale of GUESS? apparel through the retail and wholesale channels of our 60%
owned Canadian subsidiary, GUESS? Canada Corporation ("GUESS Canada"), and from
the sale of GUESS? men's, women's, boys' and girls' apparel and our licensee
products through our on-line store at www.guess.com.
RESULTS OF OPERATIONS
The following table sets forth actual operating results for the 1997 and
1998 and 1999 periods as a percentage of net revenue.
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Product sales............................................... 90.4% 92.2% 93.4%
Net royalties............................................... 9.6 7.8 6.6
----- ----- -----
Total net revenue......................................... 100.0 100.0 100.0
Cost of sales............................................... 56.0 57.7 55.3
----- ----- -----
Gross profit................................................ 44.0 42.3 44.7
Selling, general and administrative expenses................ 30.3 30.2 28.5
Severance costs related to distribution facility............ -- -- 0.5
----- ----- -----
Earnings from operations.................................. 13.7 12.1 15.7
Other income/(expense):
Gain on disposition of property and equipment............. -- -- 0.6
Interest, net............................................. 2.7 2.7 1.6
Other (expense), net...................................... 0.4 0.2 0.2
----- ----- -----
3.1 2.9 1.2
Earnings before income taxes and cumulative effect of change
in accounting principle................................... 10.6 9.2 14.5
Income taxes................................................ 4.1 3.9 5.9
----- ----- -----
Earnings before cumulative effect of change in accounting
principle................................................. 6.5 5.3 8.6
Cumulative effect of change in accounting for product
display fixtures, net of income taxes of $2,707........... 0.8 -- --
----- ----- -----
Net earnings................................................ 7.3% 5.3% 8.6%
===== ===== =====
16
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 decrease or 5.6%
decrease in comparable store net revenue. The decrease in comparable store net
revenue was primarily due to product assortment changes in the 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
full-priced stores experienced positive comparable store net revenue, primarily
due to our improved merchandising and store operational initiatives implemented
by a new retail management team. Net revenue from wholesale operations decreased
$37.5 million or 15.0% 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 for the year ended December 31,
1998 decreased by $18.2 million and $19.3 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. 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 us
terminating our 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
8.0% 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 (gross profit
as a percentage of total net revenue) decreased to 42.3% for the year ended
December 31, 1998 as compared to 44.0% 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 for 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. Selling, general and
administrative ("SG&A") expenses decreased 8.6% to $142.8 million, or 30.3% 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 6.0% 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 9.0%. For
the year ended December 31, 1997, the average debt balance was $148.4 million,
with an average effective interest rate of 8.8%.
17
OTHER EXPENSES. Other non-operating expenses were $0.9 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 to the lower cost or
market of an equity investment during 1997.
INCOME TAXES. The income tax provision for the year ended December 31, 1998
was $18.2 million, or a 42.0% 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 $33.5 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET REVENUE. Net revenue increased $127.7 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
$76.7 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, from a 26.8% increase
in comparable store net revenue and from the volume generated by our new store
openings. The strong increase in comparable store net revenue was primarily
attributable to our improved merchandising and our fashioned-focused product
mix. The retail segment is benefiting from our improved customer service levels
resulting from our enhanced personnel training and incentive programs that have
been offered to our associates.
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. 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 from
the European market, partially offset by soft performance in the Asian and South
American markets. GUESS Canada contributed $12.1 million in international net
revenues during the second half for the year ended December 31, 1999. Net
royalties increased $2.8 million or 7.7%, 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 us terminating licensees, partially offset by us discontinuing
certain licenses that were brought back 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 revenue 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 profit 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 margin (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,
18
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
revenues.
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 increase of gross margin of
$2.3 million or 2.4%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses of $171.0 million for the year ended
December 31, 1999 decreased to 28.5% of net revenue, from 30.3% 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 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.
GAIN ON DISPOSITION OF PROPERTY AND EQUIPMENT. We realized a non-recurring
pre-tax gain of $3.8 million on the disposition of property and equipment.
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 64.4% 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 revenue.
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 42.0% effective tax
rate. The effective tax 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.
LIQUIDITY AND CAPITAL RESOURCES
During 1999, we relied primarily on internally generated funds and trade
credit to finance our operations and expansion. At December 31, 1999, we had
working capital of $97.9 million compared to $101.3 million at December 31,
1998. The $3.4 million decrease in working capital is due primarily to a
$15.2 million increase in short-term investments, a $17.1 million increase in
inventories, a $3.2 million increase in prepaid expenses offset by a
$40.8 million increase in accounts payable and accrued expenses. With the
acquisition of the additional interest in GUESS Canada, our current portion of
notes payable and long-term debt increase $7.5 million
On December 3, 1999, we entered into a $125,000,000 Credit Agreement
("Credit Facility") with Chase Manhattan Bank that replaced our $100.0 million
revolving credit facility entered into in March 1997. The Credit Facility
provides us with a $125.0 million revolving credit facility including a
19
$50.0 million sub-limit for letters of credit. The Credit Facility expires on
October 31, 2000. At December 31, 1999, we 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. At December 31, 1999, we had
$77.8 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 December 31, 1999.
Capital expenditures, net of lease incentives granted, 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 on-line store in April 1999, and the retail expansion of GUESS
Canada. We estimate that our capital expenditures for 2000 will be approximately
$80.0 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.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Various forward-looking statements have been made in this Form 10-K.
Forward-looking statements may also be in our other reports filed under the
Securities Exchange Act of 1934, in our press releases and in other documents.
In addition, from time to time, we, through our management, may make oral
forward-looking statements.
Forward-looking statements are only expectations, and involve known and
unknown risks and uncertainties, which may cause actual results in future
periods and other future events to differ materially from what is currently
anticipated. Certain statements in this Form 10-K, including those relating to
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, are forward-looking statements. Such statements involve risks and
uncertainties, which may cause results to differ materially from those set forth
in these statements. In addition to the factors discussed below, the economic
and other factors identified elsewhere in this Form 10-K, as well as the risk
factors discussed in our previously filed public documents, could affect the
forward-looking statements contained herein and therein.
Forward-looking statements generally refer to future plans and performance,
and are identified by the words "believe," "expect," "anticipate," "optimistic,"
"intend," "aim," "will" or the negative thereof and similar expressions. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of which they are made. We undertake no
obligation to update publicly or revise any forward-looking statements.
Important factors that could cause actual results in future periods to
differ materially from our forward-looking statements, as well as affect our
ability to achieve our financial and other goals, include, but are not limited
to, the following:
- The continued availability of sufficient working capital, which could have
a material adverse effect on our financial condition and results of
operations.
- Our successful integration of new stores into existing operations, which
could have a material adverse effect on our financial condition and
results of operations.
20
- The continued desirability and customer acceptance of our existing and
future products, which could have a material adverse effect on our
financial condition and results of operations.
- Possible cancellation of wholesale orders, which could have a material
adverse effect on our financial condition and results of operations.
- The success of our competitive products, which could have a material
adverse effect on our financial condition and results of operations.
- The success of our programs to strengthen our inventory cost accounting
controls and procedures, which could have a material adverse effect on our
financial condition and results of operations.
- The success of technology to be used in our new distribution center, which
could have a material adverse effect on our financial condition and
results of operation.
- The availability of adequate sources of capital, which could have a
material adverse effect on our financial condition and results of
operations.
- Our inability to identify and respond appropriately to changing consumer
demands and fashion trends, which could have a material adverse effect on
consumer acceptance of GUESS? products.
- A decision by the controlling owner of a group of department stores or any
other significant customer to decrease the amount purchased from us or to
cease carrying GUESS? products, which could have a material adverse effect
on our financial condition and results of operations.
- Our inability to control the quality, focus, image, financial stability or
distribution of our licensed products, which could impact consumer
receptivity to our products generally and, therefore, could have a
material adverse effect on our financial condition and results of
operations.
- Our failure to continue to enhance operating control systems, which could
have a material adverse effect on our financial condition and results of
operations.
- Factors beyond our control, such as which could have a material adverse
effect on our ability to expand our network of retail stores. Our general
failure to maintain and control our existing distribution and licensing
arrangements or to procure additional distribution and licensing
relationships could have a material adverse effect on our growth strategy,
which could have a material adverse effect on our financial condition and
results of operations.
- The extended loss of the services of one or more of our principal
executive officers, which could have a material adverse effect on our
financial condition and results of operations.
- Political instability resulting in the disruption of trade with the
countries in which our contractors, suppliers or customers are located,
the imposition of additional regulations relating to imports, the
imposition of additional duties, taxes and other charges on imports,
significant fluctuations in the value of the dollar against foreign
currencies or restrictions on the transfer of funds, which could have a
material adverse effect on our financial condition and results of
operations. Also, a substantial increase in customs duties, which could
have an adverse effect on our financial condition or results of
operations. These factors may be exacerbated by our increasing use of
packaged purchase sourcing from non-United States vendors.
- The inability of a manufacturer to ship our products in a timely manner or
to meet our quality standards, which could have a material adverse effect
on our ability to deliver products to our customers in a timely manner.
- No assurance can be given that others will not assert rights in, or
ownership of, trademarks and other proprietary rights of GUESS?. In
addition, the laws of certain foreign countries do not protect proprietary
rights to the same extent as do the laws of the United States.
21
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, while our wholesale operations generally
experience stronger performance in the first and third quarters. As the timing
of the shipment of products may vary from year to year, the result for any
particular quarter may not be indicative of results for the full year. We have
not had significant overhead and other costs generally associated with large
seasonal variations.
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 they 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We receive United States dollars for substantially all of our product sales
and our licensing revenues. Inventory purchases from offshore contract
manufacturers are primarily denominated in United States dollars; however,
purchase prices for the products may be impacted by fluctuations in the exchange
rate between the United States dollar and the local currencies of the contract
manufacturers, which may have the effect of increasing our cost of goods in the
future. In addition, royalties received from our international licensees are
subject to foreign currency translation fluctuations as a result of the net
sales of the licensee being denominated in local currency and royalties being
paid to us in United States dollars. During the last three fiscal years,
exchange rate fluctuations have not had a material impact on our inventory
costs.
We may enter into derivative financial instruments, including forward
exchange contracts, to manage foreign exchange risk on foreign currency
transactions. These financial instruments can be used to protect us from the
risk that the eventual net cash inflows from the foreign currency transactions
will be adversely affected by changes in exchange rates. 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.
FORWARD EXCHANGE U.S. DOLLAR FAIR VALUE IN U.S. $
CONTRACTS EQUIVALENT MATURITY DATE AT DECEMBER 31, 1999
- ----------------------- ----------- ----------------------- --------------------
Canadian dollars $500,000 January 10 to 31, 2000 346,740
Canadian dollars 500,000 January 10 to 31, 2000 346,740
Canadian dollars 500,000 January 14, 2000 346,740
to February 15, 2000
Based upon the rates at December 31, 1999, the cost to buy the equivalent
U.S. dollars discussed above was approximately $2.2 million Canadian currency.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by reference to
the Consolidated Financial Statements and Supplementary Data listed in Item 14
of Part IV of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item can be found under the caption
"Directors and Executive Officers" of the Company's Proxy Statement (the "Proxy
Statement") dated March 31, 2000, for the 2000 Annual Meeting of Stockholders to
be held on May 15, 2000. Such information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION AND OTHER INFORMATION
The information in the Proxy Statement set forth under the caption
"Executive Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership and Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON
FORM 8-K
(a) Documents Filed with Report
(1) Consolidated Financial Statements
The financial statements listed on the accompanying Index to
Consolidated Financial Statements and Financial Statement Schedule is
filed as part of this report.
(2) Consolidated Financial Statement Schedule
The financial statement schedule listed on the accompanying Index to
Consolidated Financial Statements and Financial Statement Schedule are
filed as part of this report.
(3) Exhibits
The exhibits listed on the accompanying Index to Exhibits is filed as
part of this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by us during the last fiscal year ended
December 31, 1999.
23
GUESS ?, INC.
FORM 10-K
ITEMS 8, AND 14(A) AND 14(D)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
1 Consolidated Financial Statements
Independent Auditors' Report................................ F-2
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
2 Consolidated Financial Statement Schedule Valuation and
Qualifying Accounts......................................... F-23
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Guess ?, Inc.:
We have audited the accompanying consolidated financial statements of Guess
?, Inc. and Subsidiaries as listed in the accompanying index. In connection with
our audits of the consolidated financial statements, we also have audited the
consolidated financial statement schedule, as listed in the accompanying index.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Guess ?,
Inc. and Subsidiaries at December 31, 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. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 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
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1998 1999
--------- ---------
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
========= =========
See accompanying notes to consolidated financial statements
F-3
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1998 1999
-------- -------- --------
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
======== ======== ========
See accompanying notes to consolidated financial statements
F-4
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
ACCUMULATED
OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
INCOME STOCK CAPITAL EARNINGS INCOME (LOSS) STOCK TOTAL
------------- -------- -------- -------- ------------- --------- --------
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
======== ======== ======== ========= ========= ========
See accompanying notes to consolidated financial statements
F-5
GUESS ?, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
1997 1998 1999
--------- --------- --------
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 Strandel Inc................... (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............ 63,935 102,300 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
========= ========= ========
On January 2, 1997, in connection with 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
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 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 (formerly named Strandel Inc.), 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 ?, Inc." 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):
1997 1998 1999
-------- -------- --------
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
======= ======= =======
F-7
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)
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.
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:
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
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.
F-8
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)
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 or historical rates, while income and
expenses are translated at the weighted-average exchange rates for the year. The
related translation adjustments are reflected as a foreign currency translation
adjustment in the consolidated balance sheet.
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 (loss).
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.
F-9
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)
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 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. '
F-10
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(3) INVENTORIES
Inventories are summarized as follows (in thousands):
1998 1999
-------- --------
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
======= ========
(4) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows (in thousands):
1998 1999
-------- --------
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
======== ========
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-11
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(5) NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt are summarized as follows (in thousands):
1998 1999
-------- --------
(IN THOUSANDS)
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
======= =======
In December 1999, the Company entered into a credit agreement with a bank
permitting borrowings up to $125 million (the "Credit Facility"). The Credit
Facility replaced the Company's $100 million revolving credit facility entered
into in March 1997. The Credit Facility provides for a $125 million revolving
credit facility including a $50 million sub-limit for letters of credit. The
Credit Facility expires on October 31, 2000. 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.
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-12
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(6) INCOME TAXES
Income taxes are summarized as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
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
======= ======= =======
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):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
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
======= ======= =======
Total income taxes were allocated as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Operations....................................... $24,044 $18,180 $35,200
Stockholders' equity............................. -- -- 6,451
------- ------- -------
Total income taxes............................... $24,044 $18,180 $41,651
======= ======= =======
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-13
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 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):
1998 1999
-------- --------
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................................. 11,005 14,697
Deferred tax liabilities.............................. 400 9,640
------- -------
Net deferred tax assets............................... $10,606 $ 5,057
======= =======
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"). Charles David is controlled by
the father-in-law of Maurice Marciano. The Marciano Trusts and Nathalie Marciano
(the spouse of Maurice Marciano) together own 50% of Charles David, and the
remaining 50% is owned by the father-in-law of Maurice Marciano. The license
agreement grants Charles David the rights to manufacture worldwide and
distribute worldwide (except Japan and certain European countries) for men,
women and some children, leather and rubber footwear which bear the GUESS?
trademark. The license also includes related shoe care products and accessories.
F-14
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 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 owns 50% of Newtimes. Pursuant
to such agreement, the Company pays Newtimes a commission based on the cost of
finished garments purchased for the Company. Commissions earned by Newtimes from
the Company during the fiscal 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, as well as severed its equity
interest. 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 is also on a month to
month lease for another
F-15
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
storage facility. 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.
(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):
NON
RELATED RELATED
PARTIES PARTIES TOTAL
-------- -------- --------
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 $23,405 $235,536
======== ======= ========
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
F-16
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
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 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. Mr. 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 (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 Mr. 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
F-17
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(8) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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):
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1998 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- -------- -------- -------- --------
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
FIRST SECOND THIRD FOURTH
YEAR ENDED DECEMBER 31, 1999 QUARTER QUARTER QUARTER QUARTER
- ---------------------------- -------- -------- -------- --------
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
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. 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 Company
revised its estimate of certain reserves. This resulted in a reduction of cost
of sales of $2.3 million.
F-18
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(11) SEGMENT INFORMATION
In accordance with the requirements of SFAS 131, "Disclosures about Segments
of and 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):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
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......................................... $ 5,008 $ 12,034 $ 37,072
Wholesale operations...................................... 16,179 8,209 25,101
Licensing operations...................................... 49,459 36,803 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
======== ========
F-19
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(11) SEGMENT INFORMATION (CONTINUED)
The table below presents information related to geographic areas in which
the Company operated in during 1997, 1998 and 1999 (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Net sales:
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
======== ======== ========
(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 109,082 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-20
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 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):
1997 1998 1999
-------- -------- --------
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
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:
NUMBER OF WEIGHTED-AVERAGE
SHARE EXERCISE PRICE
---------- ----------------
Balance at December 31, 1996...................... 1,287,105 $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
========== ======
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-21
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(12) STOCK OPTION PLAN (CONTINUED)
The following table summarizes information about stock options outstanding
and exercisable at December 31, 1999:
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
- --------------------- ----------------- ---------------- -------- ----------------- --------
$ 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
========= =======
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-22
SCHEDULE II
GUESS ?, INC. & SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND AND END
DESCRIPTION OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
- ----------- ---------- ---------- ---------- ----------
As of December 31, 1997
Allowance for obsolescence........................ $ 3,257 $ 3,764 $ (3,456) $ 3,565
Accounts receivable............................... 9,720 12,746 (11,270) 11,196
Royalties......................................... -- -- -- --
As of December 31, 1998
Allowance for obsolescence........................ 3,565 3,512 (3,217) 3,860
Accounts receivable............................... 11,196 8,542 (11,901) 7,837
Royalties......................................... -- 3,667 -- 3,667
As of December 31, 1999
Allowance for obsolescence........................ 3,860 583 (2,079) 2,364
Accounts receivable............................... 7,837 1,398 (372) 8,863
Royalties......................................... 3,667 1,657 (4,066) 1,258
F-23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on March 29, 2000.
GUESS ?, INC.
By: /s/ MAURICE MARCIANO
-----------------------------------------
Maurice Marciano
CO-CHAIRMAN OF THE BOARD,
CO-CHIEF EXECUTIVE OFFICER AND DIRECTOR
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
Co-Chairman of the Board,
/s/ MAURICE MARCIANO Co-Chief Executive
------------------------------------------- Officer and Director March 29, 2000
Maurice Marciano (Principal Executive
Officer)
President, Co-Chairman of
/s/ PAUL MARCIANO the Board, Co-Chief
------------------------------------------- Executive Officer and March 29, 2000
Paul Marciano Director
/s/ ARMAND MARCIANO Senior Executive Vice
------------------------------------------- President, Assistant March 29, 2000
Armand Marciano Secretary and Director
Executive Vice President
/s/ BRIAN FLEMING and Chief Financial
------------------------------------------- Officer (Principal March 29, 2000
Brian Fleming Financial Officer and
Chief Accounting Officer)
/s/ ROBERT DAVIS
------------------------------------------- Director March 29, 2000
Robert Davis
/s/ ALICE KANE
------------------------------------------- Director March 29, 2000
Alice Kane
/s/ HOWARD SOCOL
------------------------------------------- Director March 29, 2000
Howard Socol
/s/ BRYAN ISAACS
------------------------------------------- Director March 29, 2000
Bryan Isaacs
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
3.1 Restated Certificate of Incorporation of the Registrant. (1)
3.2 Bylaws of the Registrant. (1)
4.3 Specimen stock certificate. (1)
10.1 Amended and Restated Stockholders' Agreement. (2)
10.20 Amended and Restated Revolving Credit Agreement, dated as of
March 28, 1997. (2)
10.22 1996 Equity Incentive Plan. (1)
10.23 1996 Non-Employee Directors' Stock Option Plan. (1)
10.24 Annual Incentive Plan. (1)
10.25 Employment Agreement between the Registrant and Maurice
Marciano. (2)
10.26 Employment Agreement between the Registrant and Paul
Marciano. (2)
10.27 Employment Agreement between the Registrant and Armand
Marciano. (2)
10.28 Registration Rights Agreement among the Registrant and
certain stockholders of the Registrant. (2)
10.29 Indemnification Agreement among the Registrant and certain
stockholders of the Registrant. (2)
10.30 Indemnification Agreements between the Registrant and
certain executives and directors. (2)
10.31 First Amendment to Amended and Restated Shareholders'
Agreement. (3)
10.32 First Amendment and Waiver to Amended and Restated Revolving
Credit Agreement by and between the Registrant and
BankBoston, NA, F/K/A The First National Bank of Boston,
Sanwa Bank California and the Financial Institutions Party
hereto. (4)
10.33 Amended and Restated 1996 Non-Employee Directors' Stock
Option Plan, as amended through March 3, 1997. (5)
10.34 Second Amendment and Consent to the Amended and Restated
Revolving Credit Agreement by and between Guess ?, Inc. And
BankBoston, N.A.,F/K/A The First National Bank of Boston,
Sanwa Bank California and the Financial Institutions Party
Hereto. (6)
10.35 Third Amendment and Consent to the Amended and Restated
Revolving Credit Agreement by and between Guess ?, Inc. And
BankBoston, N.A., F/K/A The First National Bank of Boston,
Sanwa Bank California and the Financial Institutions Party
Hereto. (6)
10.36 Amendment No. 1 to The Guess ?, Inc. Amended and Restated
1996 Non- Employee Directors' Stock Option Plan. (7)
10.37 Employment Agreement dated July 6, 1998 between Guess
?, Inc. and Brian L. Fleming. (7)
10.38 Fourth Amendment and Consent to the Amended and Restated
Revolving Credit Agreement by and between Guess ?, Inc. And
BankBoston, N.A., F/K/A The First National Bank of Boston,
Sanwa Bank California and the Financial Institutions Party
Hereto. (8)
*10.39 Credit Agreement by and between Guess?, Inc. and Sanwa Bank
of California, and the Chase Manhattan Bank.
*10.40 Lease Agreement between Guess?, Inc. and Robert Pattillo
Properties, Inc.
*10.41 Subscription Agreement between Freemark Entertainment
Corporation and Guess?, Inc.
18.0 Letter regarding change in accounting principles. (5)
*21.1 List of Subsidiaries.
*23.0 Independent Accountants' Consent.
*27.1 Financial Data Schedule.
- ------------------------
* Filed herewith
(b) Financial Statement Schedule:
Schedule II--Description Valuation and Qualifying Accounts
- ------------------------
(1) Incorporated by reference from the Registration Statement on Form S-1
(Registration No. 333-4419) filed by the Company on June 24, 1996, as
amended.
(2) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(3) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 30, 1997.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 29, 1997.
(5) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 29, 1998.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 28, 1998.
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 27, 1998.