SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1996
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 33-69236
-------------------------------
GUESS ?, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-3679695
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1444 South Alameda Street
Los Angeles, California 90021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(213) 765-3100
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
As of August 13, 1996, the registrant had 42,681,819 shares of Common Stock,
$.01 par value, outstanding.
GUESS ?, INC.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited) -
June 30, 1996 and December 31, 1995.............................. 2
Condensed Consolidated Statements of Earnings (Unaudited) - Second
Quarter and Six Months ended June 30, 1996 and July 2, 1995...... 3
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months ended June 30, 1996 and July 2, 1995.................. 4
Notes to Condensed Consolidated Financial Statements (Unaudited)... 5
Item 2. Management's discussion and analysis of financial condition
and results of operations................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
1
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
June 30, December 31,
1996 1995*
ASSETS
Current assets:
Cash............................................ $5,442 $6,417
Receivables:
Trade receivables, net of reserves........ 31,403 22,886
Royalties................................. 10,875 9,975
Other..................................... 3,427 4,040
-------- --------
45,705 36,901
Inventories..................................... 92,340 72,889
Prepaid expenses................................ 6,845 5,557
-------- --------
Total current assets................ 150,332 121,764
Property and equipment, at cost, net of accumulated
depreciation and amortization..................... 67,346 68,199
Long-term investments................................. 3,408 3,394
Other assets, at cost, net of accumulated
amortization...................................... 8,649 9,278
-------- --------
$229,735 $202,635
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of notes payable and
long-term debt............................. $4,056 $4,123
Accounts payable............................... 37,221 40,701
Accrued expenses............................... 23,865 18,332
Income taxes payable........................... 775 1,036
-------- --------
Total current liabilities.......... 65,917 64,192
Notes payable and long-term debt, net of current
installments..................................... 148,712 119,212
Minority interest.................................... 247 75
Other liabilities.................................... 8,535 8,159
-------- --------
223,411 191,638
Stockholders' equity:
Preferred stock. Authorized 10,000,000 shares;
no shares issued and outstanding........... - -
Common stock, $.01 par value. Authorized
150,000,000 shares; issued 52,712,611 and
issued and outstanding 32,681,819,
including 20,030,792 shares in Treasury.... 35 35
Paid-in capital................................ 181 181
Retained earnings.............................. 156,836 161,567
Foreign currency translation adjustment........ 48 (10)
Treasury stock, 20,030,792 shares repurchased.. (150,776) (150,776)
-------- --------
Net stockholders' equity........... 6,324 10,997
-------- --------
$229,735 $202,635
-------- --------
-------- --------
See accompanying notes to condensed consolidated financial statements
*Condensed from Audited Balance Sheet
2
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands)
(unaudited)
Second Quarter Ended Six Months Ended
-------------------- -------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
-------- -------- -------- -------
Net revenue:
Product sales............................ $108,836 $92,933 $232,111 $206,579
Net royalties............................ 13,672 11,816 25,295 23,073
-------- ------- -------- --------
122,508 104,749 257,406 229,652
Cost of sales.................................. 66,634 55,542 137,113 120,809
-------- ------- -------- --------
Gross profit................................... 55,874 49,207 120,293 108,843
Selling, general and administrative expenses... 37,597 32,308 72,829 66,468
Reorganization charge (note 5)................. 3,559 - 3,559 -
-------- ------- -------- --------
Earnings from operations........... 14,718 16,899 43,905 42,375
-------- ------- -------- --------
Non-operating income (expense):
Interest, net............................ (3,742) (3,885) (7,291) (7,926)
Other, net............................... 173 (16) (147) (180)
-------- ------- -------- --------
(3,569) (3,901) (7,438) (8,106)
Earnings before income taxes....... 11,149 12,998 36,467 34,269
Income taxes................................... 327 716 1,598 1,275
-------- ------- -------- --------
Net earnings....................... $10,822 $12,282 $34,869 $32,994
-------- ------- -------- --------
-------- ------- -------- --------
Supplemental pro forma financial
information (note 2):
Earnings before income taxes, as presented.... $11,149 $12,998 $36,467 $34,269
Pro forma provision for income taxes.......... 4,426 5,199 14,477 13,708
-------- ------- -------- --------
Pro forma net earnings........................ $6,723 $7,799 $21,990 $20,561
-------- ------- -------- --------
-------- ------- -------- --------
Pro forma net earnings per share............. $ .16 $ .53
Weighted average common shares outstanding... 41,412 41,412
-------- --------
-------- --------
See accompanying notes to condensed consolidated financial statements
3
GUESS ?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended
----------------
June 30, July 2,
1996 1995
---- -----
Cash flows from operating activities:
Net earnings................................................ $34,869 $32,994
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization of property and
equipment....................................... 8,379 6,822
Amortization of deferred charges...................... 669 801
Loss on disposition of property and equipment......... 100 259
Foreign translation adjustment........................ 33 17
Minority interest..................................... 172 (51)
Undistributed equity method earnings.................. (9) (21)
(Increase) decrease in:
Receivables..................................... (8,803) (12,119)
Inventories..................................... (19,451) 6,097
Prepaid expenses................................ (1,288) (309)
Other assets.................................... 234 428
Increase (decrease) in:
Accounts payable................................ (3,479) 2,294
Accrued expenses................................ 5,367 1,728
Income taxes payable............................ (261) (191)
-------- -------
Net cash provided by operating
activities.......................... 16,532 38,749
Cash flows from investing activities:
Purchases of property and equipment......................... (7,986) (12,527)
Proceeds from the disposition of property and equipment..... 360 127
Lease incentives granted.................................... 261 1,248
Purchases of long-term investments.......................... - (122)
-------- -------
Net cash used by investing activities..... (7,365) (11,274)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt.............. 105,943 75,254
Repayments of notes payable and long-term debt.............. (76,510) (63,861)
Distributions to stockholders............................... (39,600) (41,800)
-------- -------
Net cash used by financing activities..... (10,167) (30,407)
Effect of exchange rates changes on cash:......................... 25 (10)
Net decrease in cash.............................................. (975) (2,942)
Cash, beginning of period......................................... 6,417 5,994
-------- -------
Cash, end of period............................................... $5,442 $3,052
-------- -------
-------- -------
Supplemental disclosures:
Cash paid during the period for:
Interest.............................................. $6,926 $7,627
Income taxes.......................................... 1,856 1,467
See accompanying notes to condensed consolidated financial statements.
4
GUESS ?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring adjustments, necessary to present fairly the financial
position as of June 30, 1996, and the results of operations and cash flows
for the six months ended June 30, 1996. Operating results for the
second quarter and six months ended June 30, 1996, are not necessarily
indicative of the results that may be expected for the year ending
December 31, 1996. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with Rule 10-01 of
Regulation S-X and accordingly, they have been condensed and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1995 and in the Company's Registration Statement Form S-1
(File No. 333-4419) effective August 7, 1996.
(2) Summary of Significant Accounting Policies
Pro Forma Net Earnings
Pro forma net earnings represent the results of operations adjusted to
reflect a provision for income taxes on historical earnings before income
taxes, which gives effect to the change in the Company's income tax status to
a C corporation as a result of the public sale of its common stock. Upon
termination of the Company's S corporation status on August 12, 1996, it
recorded an earnings benefit resulting from the establishment of net deferred
tax assets (approximately $7.4 million), which was based upon temporary book to
tax differences existing at the date of termination of the Company's S
Corporation status. The principal difference between the pro forma income
tax rate and Federal statutory rate of 35% relates primarily to state income
taxes.
Pro forma net earnings per share have been computed by dividing pro forma net
earnings by the weighted average number of shares of common stock outstanding
during the period. The pro forma net earnings per share gives effect to the
issuance of shares of common stock to generate sufficient cash to pay (i) a
distribution to stockholders in an amount equal to the previously earned and
undistributed taxable S corporation earnings (the "S Corporation
Distribution") aggregating approximately $176.9 million through the date of
termination as if such distribution had been made at June 30, 1996 and the
Company's S corporation status had been terminated at such date, and (ii) the
$300,000 to be paid by the Company to the trusts for the respective benefit
of Maurice Marciano, Paul Marciano and Armand Marciano (the "Marciano
Trusts") in connection with the merger of Marciano International, Inc.
("Marciano International"), a Company which is wholly owned by the Marciano
Trusts, with and into the Company (See also note 6).
Recently Issued Pronouncements
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of,"
in March 1995 which is effective for fiscal years beginning after December
15, 1995. SFAS No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related
to these assets and certain identifiable intangibles to be disposed of. The
Company adopted the provisions of SFAS No. 121 effective April 1, 1996 and
has, accordingly, recorded a write-down aggregating $2.4 million in the
second quarter of 1996 related to certain operating assets to be disposed of
and is included as a component of the $3.6 million Reorganization Charge in
the Company's statement of earnings. The Company does not anticipate that
SFAS No. 121 will have a material impact on its financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to
5
measure compensation costs using the principles of Accounting Principles
Board pronouncement 25 if certain pro forma disclosures are made. SFAS 123
is effective for fiscal years beginning after December 15, 1995. The Company
intends to adopt the provisions for pro forma disclosure requirements of SFAS
123 in fiscal 1996 and anticipates that SFAS 123 will not have a material
impact on its financial statements. As of June 30, 1996, the Company had not
issued any stock options or other instruments under which SFAS 123 would
apply.
(3) Inventories
The components of inventory consist of the following:
June 30, December 31,
1996 1995
-------- ------------
(in thousands)
Raw materials......................................... $13,125 $9,788
Work in Progress...................................... 10,517 11,264
Finished Goods........................................ 68,698 51,837
-------- -------
$92,340 $72,889
-------- -------
-------- -------
(4) Reclassifications
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 presentation.
(5) Reorganization Charge
In the second quarter of 1996, the Company recorded a provision of $3.6
million for certain non-recurring charges relating to the writedown to net
realizable value of operating assets associated with the (i) disposal of two
currently active remote warehouse and production facilities, in contemplation
of the public offering of 7,000,000 shares of the Company's common stock (the
"Offering"), which are not expected to be used in the Company's operations
after the Offering, and (ii) the net book loss incurred by the Company in
connection with the sale of one of its aircraft in contemplation of the
Offering; such aircraft sale was recorded in June 1996 and completed in July
1996.
The writedown to net realizable value related to the disposal of the
warehouse and production facilities of $2.4 million is based upon the
difference between the asset carrying value of $5.7 million and its appraisal
value of $3.9 million and the inclusion of a provision of $.6 million for
estimated disposal costs, comprised primarily of commissions, title fees and
other customary real estate closing costs. The writedown related to the sale
of the aircraft of $1.2 million is based upon the difference between the
asset carrying value of $7.2 million and the sale price of $6.0 million. The
estimated costs of disposal of the aircraft were immaterial. The above
assets are included in property and equipment at June 30, 1996 and the
Company has not recorded any depreciation expense on these assets from the
date the dispositions were contemplated.
The Company has not recorded the charge related to the warehouse and
production facilities to be disposed of as a cumulative effect from the
implementation of SFAS No. 121 recorded net of tax, because the effect of
such implementation is immaterial to the consolidated financial statements.
(6) Subsequent Events
On August 13, 1996, the Company completed the Offering, resulting in net
proceeds to the Company of approximately $116.3 million.
Prior to the consummation of the Offering, (i) Marciano International, which
is owned by the Marciano Trusts and currently holds an interest in the
subsidiaries of the Company, was merged with and into Guess, (ii) all of the
capital stock of Guess Italia was contributed
6
to Guess? Europe, B.V., (iii) the Company effected a 32.66 to 1 split of the
common stock and (iv) as part of the S Corporation Distribution, the Company
distributed to its stockholders $54.0 million of Common Stock valued at
$18.00 per share (the "S Distribution Shares") with the balance of between
$126.0 million and $136.0 million being distributed in the form of promissory
notes bearing interest at 8% per annum (the "S Distribution Notes"). The
Company paid the Marciano Trusts an aggregate of $300,000 in connection with
the merger of Marciano International, Inc. with and into the Company. Such
$300,000 payment was not included in the aggregate principal amount of the S
Distribution Notes. All of such transactions are referred to as the
"Reorganization." All references to the number of shares have been restated
to give effect to the above referenced stock split.
Concurrent with the consummation of the transaction related to the Offerings
(the "Closing Date"), the Company's S corporation status was terminated (the
"S Termination Date"). Prior to the S Termination Date, the Company declared
a distribution to its stockholders that included all of its previously earned
and undistributed S corporation earnings through the date of termination of
the Company's S corporation status. The S Corporation Distribution occurred
prior to the S Termination Date and was comprised of the S Distribution
Shares and the S Distribution Notes. As a result of S Corporation Termination
the Company is no longer treated as an S Corporation and, accordingly, is
fully subject to federal and state income taxes.
Pursuant to the above transactions, the Company previously disclosed certain
pro forma financial information in the June 30, 1996 consolidated financial
statements included in the Company's Registration Statement on Form S-1 on
file with the Securities and Exchange Commission, effective August 7, 1996
(file no. 333-4419). The pro forma operating results reflect adjustments to
historical operating results for (a) the elimination of salaries and bonuses
paid to the principal executive officers in excess of the salaries and
bonuses to be paid to such officers under their respective employment
agreements following the Offering, (b) the decreases in depreciation and
operating costs associated with an aircraft owned by the Company which was
sold prior to the Offering, (c) the elimination of the minority interest in
GEBV and Guess Italia through the merger of Marciano International with and
into the Company in connection with the Reorganization (such
amounts had previously been recorded as minority interest in the Company
statements of earnings) and (d) adjustments for Federal and state income
taxes as if the Company had been taxed as a C corporation rather than an S
corporation. Summarized below is the pro forma financial information for the
six month periods ended June 30, 1996 and July 2, 1995:
Six months ended
June 30, July 2,
1996 1995
-------- --------
Earnings from operations $47,271 $45,817
Earnings before income taxes 39,993 37,912
Income taxes 15,877 15,165
-------- -------
Net earnings $24,116 $22,747
-------- -------
-------- -------
Net Earnings per share .58
Weighted average common shares
outstanding 41,412
Pursuant to SEC rules and regulations, the pro forma net earnings per share
gives effect to the issuance of shares of common stock to generate sufficient
cash to pay (a) S corporation distribution in an amount equal to retained
earnings at June 30, 1996 and (b) the $300,000 paid by the by the Company in
connection with the merger of Marciano International with and into the
Company.
For comparison purposes only, the following information for the six months
ended June 30, 1996 is presented to show the net earnings per share and
weighted average common shares
7
outstanding as calculated on a full dilution basis, whereby all of the shares
outstanding after the completion of the Offering and after giving effect to
the S corporation distribution were considered to be outstanding for the
entire period.
Net earnings per share .57
Weighted average common shares Outstanding 42,682
Immediately prior to the Offering, the Company was granted options to
purchase 1,203,905 shares pursuant to the Company's 1996 Equity Incentive
Plan with an exercise price equal to the initial public price of $18.00 per
share.
8
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following information should be read in conjunction with the condensed
consolidated financial statements and notes thereto included herein. Except
for historical information contained herein, the statements set forth in this
Item 2 are forward looking and involve risks and uncertainties. For
information regarding potential factors that could affect the Company's
financial results, refer to pages 8-12 of the prospectus contained in the
Company's registration statement on Form S-1 (file no. 333-4419) on file with
the United States Securities and Exchange Commission, as declared effective
on August 7, 1996, which information is incorporated by reference herein.
OVERVIEW
The Company derives its revenue from the sale of Guess brand products through
its wholesale, retail and licensing operations.
RESULTS OF OPERATIONS
NET REVENUE. Net revenue increased $17.8 million or 17.0% to $122.5 million
in the quarter ended June 30, 1996 from $104.7 million in the quarter ended
July 2, 1995. Net revenue from wholesale operations increased $4.6 million
to $61.6 million from $57.0 million, due principally to increased sales
outside the United States of $3.9 million. Net revenue from retail
operations increased $11.3 million to $47.2 million from $35.9 million,
primarily attributable to an increase of 12.5% in comparable store net
revenue and from volume generated by 13 new store openings, offset by the
closing of five stores. The increase in comparable store net revenue was
primarily attributable to a more favorable merchandise mix and the
implementation of improved inventory management systems. Net royalties
increased 15.7% in the quarter ended June 30, 1996 to $13.7 million from
$11.8 million in the quarter ended July 2, 1995. Revenue from international
operations comprised 8.6% and 6.3% of the Company's net revenue during the
second quarter of 1996 and 1995, respectively.
Net revenue increased $27.7 million or 12.1% to $257.4 million in the six
months ended June 30, 1996 from $229.7 million in the six months ended July
2, 1995. Net revenue from wholesale operations increased $2.4 million to
$144.8 million from $142.4 million, due principally to increased sales
outside the United States of $12.1 million, partially offset by a $9.7
million decline in domestic wholesale sales. The decline in domestic
wholesale sales resulted primarily from a $3.1 million decline due to closing
certain accounts and a $1.2 million decline due to the licensing out of
certain apparel lines. Net revenue from retail operations increased $23.1
million to $87.3 million from $64.2 million, primarily attributable to an
increase of 14.4% in comparable store net revenue and from volume generated
by 13 new store openings, offset by the closing of five stores. The increase
in comparable store net revenue was primarily attributable to a more
favorable merchandise mix and the implementation of improved inventory
management systems. Net royalties increased 9.6% in the six months ended
June 30, 1996, to $25.3 million from $23.1 million in the six months ended
July 2, 1995. Net revenue from international operations comprised 11.3% and
6.8% of the Company's net revenue during the first six months of 1996 and
1995, respectively.
GROSS PROFIT. Gross profit increased 13.5% to $55.9 million in the quarter
ended June 30, 1996 from $49.2 million in the quarter ended July 2, 1995.
The increase in gross profit resulted from increased net royalties and
increased net revenue from product sales. Gross profit from product sales
increased 12.9% to $42.2 million in the quarter ended June 30, 1996 from
$37.4 million in the quarter ended July 2, 1995. Gross profit as a
percentage of net revenue decreased to 45.6% in the quarter ended June 30,
1996 as compared to 47.0% in the quarter ended July 2, 1995. Gross profit
from product sales as a percentage of net revenue decreased to 38.8% from
40.2% in the comparable 1995 period primarily due to higher offprice revenue
and higher retail revenue (which generally has a relatively lower gross
profit margin) as percentages of total revenue in the quarter ended June 30,
1996.
Gross profit increased 10.5% to $120.3 million in the six months ended June
30, 1996 from $108.8 million in the six months ended July 2, 1995. The
increase in gross profit resulted from increased net royalties and increased
net revenue from product sales. Gross profit from product sales increased
10.7% to $95.0 million in the six months ended June 30, 1996 from $85.8
million in the six months ended July 2, 1995. Gross profit as a percentage
of net revenue decreased to 46.7% in the six months ended June 30, 1996 as
compared to 47.4% in the six months ended July 2, 1995. Gross profit from
product sales as a percentage of net revenue decreased to 40.9% from 41.5% in
the comparable 1995 period primarily as a result of growth in net revenue
derived from both international and retail operations, both of which
generally have relatively lower gross profit margins.
9
SG&A EXPENSES. Selling, general and administrative ("SG&A") expenses
increased 16.4% in the quarter ended June 30, 1996 to $37.6 million, or 30.7%
of net revenue, from $32.3 million, or 30.8% of net revenue, in the quarter
ended July 2, 1995. SG&A expenses increased 9.6% in the six months ended June
30, 1996 to $72.8 million, or 28.3% of net revenue, from $66.5 million, or
28.9% of net revenue, in the six months ended July 2, 1995. These increases
were primarily the result of increased store expenses related to the
expansion of the retail operation. The decrease in SG&A expenses as a
percentage of net revenue was the result of fixed expenses being spread over
a larger revenue base in the 1996 period.
REORGANIZATION CHARGE. In anticipation of the Offering, in the second
quarter of 1996 the Company recorded reserves totaling $3.6 million for
certain non-recurring charges related to the writedowns of operating assets
to be disposed of, which included:(i) the disposal of two currently active
remote warehouse and production facilities not expected to be used in the
Company's operations after the Offering, resulting in a net book loss of $2.4
million, and (ii) the net book loss of $1.2 million incurred by the Company
in connection with the sale of one of its aircraft. The above charges are
based upon the net book value of the related assets as of June 30, 1996. The
Company intends to relocate the warehouse and production operations located
at the remote facilities to its central facility in Los Angeles in an effort
to centralize its operations and improve operating efficiencies.
EARNINGS FROM OPERATIONS. Earnings from operations, including the
Reorganization Charge discussed above, decreased 12.9% to $14.7 million, or
12.0% of net revenue in the quarter ended June 30, 1996, from $16.9 million,
or 16.1% of net revenue, in the quarter ended July 2, 1995. Earnings from
operations increased 3.6% to $43.9 million, or 17.1% of net revenue in the
six months ended June 30, 1996, from $42.4 million, or 18.5% of net revenue,
in the six months ended July 2, 1995. Excluding the aforementioned
reorganization charge, earnings from operations would have increased 8.2% or
$1.4 million to $18.3 million in the quarter ended June 30, 1996, from $16.9
million in the comparable quarter. For the six month months ended June 30,
1996, excluding the aforementioned reorganization charge, earnings from
operations would have increased 12.0% or $5.1 million to $47.5 million, from
$42.4 million in the comparable period. These increases are primarily related
to increases in revenue.
INTEREST EXPENSE, NET. Net interest expense decreased 3.7% to $3.7 million in
the quarter ended June 30, 1996 from $3.9 million in the quarter ended July
2, 1995. For the quarter ending June 30, 1996, the average debt balance was
$154.6 million, with an average effective interest rate of 9.2%. For the
quarter ending July 2, 1995, the average debt balance was $164.9 million,
with an average effective interest rate of 9.4%. Net interest expense
decreased 8.0% to $7.3 million in the six months ended June 30, 1996 from
$7.9 million in the six months ended July 2, 1995. These decreases resulted
primarily from lower outstanding debt. For the first six months of 1996, the
average debt balance was $149.3 million, with an average effective interest
rate of 9.3%. For the first six months of 1995, the average debt balance was
$164.8 million, with an average effective interest rate of 9.4%.
NET EARNINGS. Net earnings decreased 11.9% to $10.8 million, or 8.8% of net
revenue, in the quarter ended June 30, 1996, from $12.3 million, or 11.7% of
net revenue, in the quarter ended July 2, 1995. Net earnings increased 5.7%
to $34.9 million, or 13.5% of net revenue, in the six months ended June 30,
1996, from $33.0 million, or 14.4% of net revenue, in the six months ended
July 2, 1995. Excluding the aforementioned reorganization charge, net
earnings would have increased 16.3% or $2.1 million to $14.4 million in the
quarter ended June 30, 1996, from $12.3 million in the comparable quarter.
For the six month ended June 30, 1996, excluding the aforementioned
reorganization charge, net earnings would have increased 16.2% or $5.3
million to $38.3 million, from $33.0 million in the comparable period. These
increases are primarily related to increases in revenue.
10
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied primarily upon internally generated funds, trade
credit and bank borrowings to finance its operations and expansion and to
make periodic distributions to stockholders. At June 30, 1996, the Company
had working capital of $84.4 million compared to $57.6 million at December
31, 1995. The $26.8 million increase in working capital primarily resulted
from a $19.5 million increase in inventories, an $8.8 million increase in
receivables and a $3.5 million decrease in payables, partially offset by a
$5.4 million increase in accrued liabilities. The increase in inventory
relates to seasonal requirements and the buildup of initial inventory of the
Company's Bare Basics line.
The Company's revolving credit agreement provides for a $100.0 million
revolving credit facility which includes a $20.0 million sublimit for letters
of credit. As of June 30, 1996, the Company had $43.0 million in outstanding
borrowings under the revolving credit facility and outstanding letters of
credit of $8.6 million. As of June 30, 1996, the Company had $48.4 million
available for future borrowings under such facility. The revolving credit
facility will expire in December 1997. In addition to this revolving credit
facility, the Company has a $25.0 million letter of credit facility. As of
June 30, 1996, the Company had $15.3 million outstanding under this facility.
After application of net proceeds of the Offering to repay a substantial
portion of the S Distribution Notes, approximately $16.0 million of S
Distribution Notes will remain outstanding. The S Distribution Notes will
bear interest at 8% per annum and will mature on January 1, 1997.
Capital expenditures, net of lease incentives granted, totaled $7.7 million
in the six months ended June 30, 1996. The Company estimates that its
capital expenditures for fiscal 1996 will be approximately $20.0 million,
primarily for the expansion of its retail stores and operations.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements through 1997, including retail and international expansion plans
and interest on the Senior Subordinated Notes, primarily with cash flow from
operations, supplemented, if necessary, by borrowing under its revolving
credit agreement.
SEASONALITY
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. The Company's wholesale
operations generally experience stronger performance in the first and third
quarters, while retail operations are generally stronger in the third and
fourth quarters. As the timing of the shipment of products may vary from
year to year, the results for any particular quarter may not be indicative of
results for the full year. The Company has not had significant overhead and
other costs generally associated with large seasonal variations.
INFLATION
The Company does not believe that the relatively moderate rates of inflation
experienced in the United States over the last three years have had a
significant effect on its net revenue or profitability. Although higher
rates of inflation have been experienced in a number of foreign countries in
which the Company's products are manufactured, the Company does not believe
that they have had a material effect on the Company's net revenue of
profitability.
IMPACT OF RECENTLY ISSUED PRONOUNCEMENTS
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of,"
in March 1995 which is effective for fiscal years beginning after December
15, 1995. SFAS No. 121 establishes accounting standards for the impairment
of long-lived assets, certain identifiable intangibles and goodwill related
to these assets and certain identifiable intangibles to be disposed of. The
Company adopted the provisions of SFAS No. 121 effective April 1, 1996 and
has, accordingly, recorded a write-down aggregating $2.4 million in the
second quarter of 1996 related to certain operating assets to be disposed of
and is included as a component of the $3.6 million Reorganization Charge in
the Company's statement of earnings. The Company does not anticipate that
SFAS No. 121 will have a material impact on its financial statements.
11
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
established a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to measure compensation costs
using the principles of Accounting Principles Board pronouncement 25 if
certain pro forma disclosures are made. SFAS 123 is effective for fiscal
years beginning after December 15, 1995. The Company intends to adopt the
provisions for pro forma disclosure requirements of SFAS 123 in fiscal 1996
and anticipates that SFAS 123 will not have a material impact on its
financial statements. As of June 30, 1996, the Company had not issued any
stock options or other instruments under which SFAS 133 would apply.
12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Litigation
On August 7, 1996, a purported 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, styled as Brenda Figueroa
et. al. v. Guess ?, Inc. et al. (Dist. Ct. Case No. 96-5485HLH(JGx)). The
complaint, which seeks damages and injunctive relief, alleges, among other
things, that the defendants' practices with respect to the employees of such
independent contractors have violated various federal and state labor laws
and regulations. Based upon the information available to the Company at this
time, the Company does not believe that the outcome of such purported class
action will have a material adverse effect on the Company's financial
condition or results of operations.
Guess is also a party to various other claims, complaints and other legal
actions that have arisen in the ordinary course of business from time to
time. The Company believes that the outcome of such pending legal
proceedings, in the aggregate, will not have a material adverse effect on the
Company's financial condition or results of operations.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (1)
4.1 Specimen stock certificate (1)
10.1 Amended and Restated Stockholders' Agreement (1)
10.2 Letter of Agreement, dated January 22, 1996, between the
Registrant and Andrea Weiss (1)
10.3 Employment Agreement, dated as of May 14, 1996, between the
Registrant and Francis K. Duane. (1)
10.4 Amendment No. 8 to the Revolving Credit Agreement, dated February
13, 1996, among the parties thereto (1)
10.5 1996 Equity Incentive Plan. (2)
10.6 1996 Non-Employee Directors' Stock Option Plan (1)
10.7 Annual Incentive Bonus Plan. (1)
10.8 Employment Agreement between the Registrant and Maurice
Marciano. (1)
10.9 Employment Agreement between the Registrant and Paul Marciano. (1)
10.10 Employment Agreement between the Registrant and Armand Marciano. (1)
10.11 Registration Rights Agreement among the Registrant and certain
stockholders of the Registrant. (1)
10.12 Indemnification Agreement among the Registrant and certain
stockholders of the Registrant. (1)
10.13 Form of Indemnification Agreement. (1)
27.1 Financial Data Schedule
99.1 Pages 8-12 from the prospectus included in the Company's
Registration Statement on Form S-1 (File No. 333-4419) as filed
by the Company on August 9, 1996 pursuant to Rule 424(b).
- ------------------
(1) Incorporated by reference from Amendment No. 3 to the Registration
Statement on Form S-1 (File No. 333-4419) filed by the Company on July 30,
1996.
(2) Incorporated by reference from Amendment No. 4 to the Registration
Statement on Form S-1 (File No. 333-4419) filed by the Company on July 31,
1996.
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the second
quarter ended June 30, 1996.
13
SIGNATURES
Pursuant to the requirements of Rule 12b-15 of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
GUESS ?, INC.
Date: August 14, 1996 By: /s/ Maurice Marciano
----------------------------------
Maurice Marciano
Chairman of the Board, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: August 14, 1996 By: /s/ Roger Williams
----------------------------------
Roger Williams
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
14
5
1,000
6-MOS
DEC-31-1996
JAN-01-1996
JUN-30-1996
5,442
0
39,625
8,222
92,340
150,332
126,811
59,465
229,735
65,917
148,712
0
0
35
6,289
229,735
232,111
257,406
137,113
213,501
147
59
7,291
36,467
1,598
34,869
0
0
0
34,869
0.00
0.00
INCLUDES NET ROYALTIES OF $25.3 MILLION
INCLUDES NON-RECURRING CHARGES RELATED TO THE WRITEDOWN OF OPERATING ASSETS
TO BE DISPOSED OF IN CONTEMPLATION OF THE OFFERINGS AGGREGATING $3.6 MILLION
RELATING TO (A) DISPOSAL OF TWO CURRENTLY ACTIVE REMOVE WAREHOUSE
AND PRODUCTION FACILITIES, WHICH ARE NOT EXPECTED TO BE USED IN THE COMPANY'S
OPERATIONS AFTER THE OFFERINGS, RESULTING IN A NET BOOK LOSS OF $2.4 MILLION,
AND (B) THE NET BOOK LOSS OF $1.2 MILLION INCURRED BY THE COMPANY IN CONNECTION
WITH THE SALE OF ONE OF ITS AIRCRAFT TO AN UNAFFILIATED THIRD PARTY FOR $6.0
MILLION IN CONTEMPLATION OF THE OFFERINGS.
EXHIBIT 99.1
PROSPECTUS
7,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
Of the 7,000,000 shares of Common Stock of Guess ?, Inc. offered hereby,
5,600,000 shares are initially being offered in the United States and Canada by
the U.S. Underwriters and 1,400,000 shares are initially being offered outside
the United States and Canada by the International Managers. The initial public
offering price and the aggregate underwriting discount per share are identical
for each of the Offerings. See "Underwriting."
Prior to the Offerings, there has been no public market for the Common
Stock. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price of the Common Stock.
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "GES," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
Per Share........................... $18.00 $1.10 $16.90
Total (3)........................... $126,000,000 $7,700,000 $118,300,000
(1) The Company and certain Principal Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including certain
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $2,000,000.
(3) The Company has granted to the U.S. Underwriters and the International
Managers options, exercisable within 30 days after the date of this
Prospectus, to purchase up to an additional 840,000 and 210,000 shares of
Common Stock, respectively, to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $144,900,000, $8,855,000 and
$136,045,000, respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, and subject to
the approval of certain legal matters by counsel for the Underwriters and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject orders in whole or in part. It is expected
that delivery of the shares of Common Stock will be made in New York, New York
on or about August 13, 1996.
------------------------
MERRILL LYNCH & CO. MORGAN STANLEY & CO.
INCORPORATED
----------------------------------
The date of this Prospectus is August 7, 1996.
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER
CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS OTHER INFORMATION SET FORTH IN
THIS PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE COMMON STOCK. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF CERTAIN FACTORS DISCUSSED IN THIS PROSPECTUS,
INCLUDING THE FACTORS SET FORTH BELOW AND IN "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
COMPETITION AND OTHER FACTORS AFFECTING THE APPAREL AND RETAILING INDUSTRIES
The apparel industry is highly competitive, fragmented and subject to
rapidly changing consumer demands and preferences. The Company believes that its
success depends in large part upon its ability to anticipate, gauge and respond
to changing consumer demands and fashion trends in a timely manner and upon the
continued appeal to consumers of the Guess image. Failure by the Company to
identify and respond appropriately to changing consumer demands and fashion
trends could adversely affect consumer acceptance of Guess products and may have
a material adverse effect on the Company's financial condition and results of
operations. Guess competes with numerous apparel manufacturers and distributors
(including Calvin Klein, Ralph Lauren, DKNY, Tommy Hilfiger and Nautica).
Moreover, several well-known designers have recently entered or re-entered the
designer denim market with products generally priced lower than the Company's
designer jeans products. Guess's retail and factory outlet stores face
competition from other retailers. Additionally, the Company encounters
substantial competition from department stores, including some of the Company's
major retail customers. Many of the Company's competitors have greater financial
resources than Guess. The Company's licensed apparel and accessories also
compete with a substantial number of designer and non-designer lines. Although
the level and nature of competition differ among its product categories, Guess
believes that it competes primarily on the basis of its brand image, quality of
design and workmanship and product assortment. Increased competition by existing
and future competitors could result in reductions in sales or prices of Guess
products that could have a material adverse effect on the Company's financial
condition and results of operations. In addition, the apparel industry
historically has been subject to substantial cyclical variations, and a
recession in the general economy or uncertainties regarding future economic
prospects that affect consumer spending habits could have a material adverse
effect on the Company's financial condition and results of operations.
DEPENDENCE UPON CERTAIN CUSTOMERS AND LICENSEES
The Company's department store customers include major United States
retailers. The Company's three largest customers accounted for approximately
26.0% of net revenue in 1995. During 1995, Bloomingdale's, Macy's and affiliated
stores owned by Federated Department Stores together accounted for approximately
11.0% of the Company's net revenue; The May Company accounted for approximately
7.7% of the Company's net revenue; and Dillard's stores accounted for
approximately 7.3% of the Company's net revenue. Although several of the
Company's department store customers are under common ownership, no other single
customer or group of related customers accounted for more than 3.0% of the
Company's net revenue in this period. While the Company believes that purchasing
decisions in many cases are made independently by each department store chain
under common ownership, the trend may be toward more centralized purchasing
decisions. A decision by the controlling owner of a group of department stores
or any other significant customer to decrease the amount purchased from the
Company or to cease carrying Guess products could have a material adverse effect
on the Company's financial condition and results of operations. The retail
industry has periodically experienced consolidation and other ownership changes.
In the future, the Company's wholesale customers may consolidate, undergo
restructurings or reorganizations, or realign these affiliations, any of which
could decrease the number of stores that carry the Company's or its licensees'
products or increase the ownership concentration within the retail industry.
Approximately 48.1% of the Company's net royalties was derived from its top four
licensed product lines, GUESS WATCHES (18.9% of 1995 net royalties), BABY GUESS
(12.3%), GUESS KIDS (9.2%) and GUESS EYEWEAR (7.7%). The BABY GUESS and GUESS
KIDS lines are licensed to the same entity. A substantial portion of sales of
GUESS brand products by its licensees are also made to the Company's three
largest customers. The inability of the Company to control
8
the quality, focus, image or distribution of its licensed products could impact
consumer receptivity to the Company's products generally and, therefore,
adversely affect the Company's financial condition and results of operations.
RISKS ASSOCIATED WITH ACHIEVING AND MANAGING GROWTH
To manage growth effectively, Guess will be required to continue to
implement changes in certain aspects of its business, continue to expand its
information systems and operations to respond to increased demand, attract and
retain qualified personnel (including management), and develop, train and manage
an increasing number of management-level and other employees. Failure to
continue to enhance operating control systems or unexpected difficulties
encountered during expansion could adversely affect the Company's financial
condition and results of operations.
As part of its operating strategy, Guess intends to continue to expand its
network of retail stores. Factors beyond the Company's control may affect the
Company's ability to expand, including general economic and business conditions
affecting consumer spending. The actual number and type of such stores to be
opened and their success will depend on various factors, including the
performance of the Company's wholesale and retail operations, the acceptance by
consumers of the Company's retail concepts, the ability of the Company to manage
such expansion and hire and train personnel, the availability of desirable
locations and the negotiation of acceptable lease terms for new locations.
Certain of these factors are also beyond the Company's control.
In addition, Guess's strategy relies heavily upon its ability to align
itself with effective distributors and licensees that are able to deliver
high-quality products consistent with the GUESS brand image in a timely fashion
and to successfully integrate such distributors and licensees into its global
distribution channels. A general failure by the Company to maintain and control
its existing distribution and licensing arrangements or to procure additional
distribution and licensing relationships could adversely affect the Company's
growth strategy, which could adversely affect the Company's financial condition
and results of operations.
The Company's strategic plan for its wholesale division depends in part on
its ability to expand its sales to international distributors, deepen its
product offerings and expand and upgrade its shop-in-shop program. This strategy
is subject to a number of factors beyond the Company's control including general
economic conditions and changing consumer preferences. Between 1992 and 1995,
net revenue from wholesale operations decreased 32%. There can be no assurance
that the Company's business strategy will be successful in halting or reversing
this decline in net revenue.
DEPENDENCE UPON KEY PERSONNEL
The success of Guess is largely dependent upon the personal efforts and
abilities of its senior management, particularly Mr. Maurice Marciano, Chairman
of the Board and Chief Executive Officer, Mr. Paul Marciano, President and Chief
Operating Officer, and Mr. Armand Marciano, Senior Executive Vice President and
Secretary. Effective upon consummation of the Offerings, Maurice, Paul and
Armand Marciano will continue to beneficially own an aggregate of 83.6% of the
Company's outstanding Common Stock and each will enter into employment
agreements with the Company. Although the Company has recently recruited several
key executives with substantial industry expertise, the extended loss of the
services of one or more of the Principal Executive Officers could have a
material adverse effect on the Company's operations. The Company does not
currently have "key man" insurance with respect to any of such individuals. See
"Management -- Employment Agreements."
FOREIGN OPERATIONS AND SOURCING; IMPORT RESTRICTIONS
During 1995, approximately 18% of the Company's purchases of raw materials,
labor and finished goods for its apparel were made in Hong Kong and other Asian
countries; approximately 4% were made in Europe; approximately 1% were made
elsewhere outside the United States; and the balance of 77% were made in the
United States, all through arrangements with independent contractors. In recent
years, Guess has been increasing its sourcing of fabrics outside of the United
States. In addition, Guess has been increasing its international sales and, in
1995, approximately 5.0% and 1.9% of the Company's net revenue was from product
sales to customers in international markets and from net royalties paid by
international
9
licensees, respectively. As a result, the Company's operations may be affected
adversely by political instability resulting in the disruption of trade with the
countries in which the Company's contractors, suppliers or customers are
located, the imposition of additional regulations relating to imports, the
imposition of additional duties, taxes and other charges on imports, significant
fluctuations in the value of the dollar against foreign currencies or
restrictions on the transfer of funds. The inability of a contractor to ship
orders in a timely manner could cause the Company to miss the delivery date
requirements of its customers for those items, which could result in
cancellation of orders, refusal to accept deliveries or a reduction in sales
prices. Further, since Guess is unable to return merchandise to its suppliers,
it could be faced with a significant amount of unsold merchandise, which could
have a material adverse effect on the Company's financial condition and results
of operations.
Sovereignty over Hong Kong is scheduled to be transferred from the United
Kingdom to The People's Republic of China effective July 1, 1997. If the
business climate in Hong Kong were to experience an adverse change as a result
of the transfer, the Company believes it could relocate its production and
sourcing facilities outside Hong Kong and replace the merchandise currently
produced in Hong Kong with merchandise produced elsewhere without a material
adverse effect on the Company's financial condition or results of operations.
Nevertheless, there can be no assurance that the Company would be able to do so.
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries, including Hong Kong, China, Taiwan and South Korea. These agreements,
which have been negotiated bilaterally either under the framework established by
the Arrangement Regarding International Trade in Textiles, known as the
Multifiber Agreement, or other applicable statutes, impose quotas on the amounts
and types of merchandise which may be imported into the United States from these
countries. These agreements also allow the United States to impose restraints at
any time and on very short notice on the importation of categories of
merchandise that, under the terms of the agreements, are not currently subject
to specified limits. Imported products are also subject to United States customs
duties which comprise a material portion of the cost of the merchandise. A
substantial increase in customs duties could have an adverse effect on the
Company's financial condition or results of operations. The United States and
the countries in which the Company's products are produced or sold may, from
time to time, impose new quotas, duties, tariffs or other restrictions, or
adversely adjust prevailing quota, duty or tariff levels, any of which could
have a material adverse effect on the Company's financial condition or results
of operations.
DEPENDENCE ON UNAFFILIATED MANUFACTURERS
The Company does not own or operate any manufacturing facilities other than
cutting, silk-screen and embroidery machinery, and is therefore dependent upon
independent contractors for the manufacture of its products. The Company's
products are manufactured to its specifications by both domestic and
international manufacturers. The inability of a manufacturer to ship the
Company's products in a timely manner or to meet the Company's quality standards
could adversely affect the Company's ability to deliver products to its
customers in a timely manner. Delays in delivery could result in missing certain
retailing seasons with respect to some or all of the Company's products or could
otherwise have an adverse effect on the Company's financial condition and
results of operations. The Company does not have long-term contracts with any
manufacturers.
The Company conducts a program to monitor the labor practices of its
independent contractors; however, the Company does not control such contractors
or their labor practices. This program was implemented in 1992 pursuant to an
agreement with the federal Department of Labor (the "DOL") in response to
concerns regarding minimum wage and overtime payments by certain of the
Company's contractors. In connection with such agreement, the Company paid
approximately $559,000 to the DOL in settlement of a minimum wage and overtime
claim on behalf of the workers of two of the Company's contractors. The
California Labor Commissioner (the "CLC") and the DOL regularly investigate the
labor practices of apparel manufacturers. Recently, the Company has become aware
of a CLC investigation of a number of clothing contractors located in
California, some of whom may be producing goods for the Company. Although the
Company has not received a report from the CLC identifying any of the Company's
10
contractors involved in such investigation, the Company believes that several of
the approximately seventy contractors used by the Company are subjects in such
investigation. If it is determined that one or more of the Company's contractors
has engaged in labor practices that violate the Company's policies, the Company
would expect to terminate its relationship with such contractors under
appropriate circumstances. No assurance can be given that any terminations
resulting from investigations of this type would not adversely affect the
Company's ability to deliver products to its customers in a timely manner. Over
the past three years, the Company has terminated contractors due to violations
of the Company's policies. Violations of state or federal labor standards by
contractors engaged by the Company can result in the Company becoming subject to
monetary and/or injunctive sanctions. Based upon the information available to
the Company at this time with respect to the aforementioned investigation by the
CLC, the Company does not believe that such investigation will result in the
imposition of any sanctions that would have a material adverse effect upon the
Company.
PROTECTION OF TRADEMARKS
Guess believes that its trademarks and other proprietary rights are
important to its success and its competitive position. Accordingly, Guess
devotes substantial resources to the establishment and protection of its
trademarks on a worldwide basis. Nevertheless, there can be no assurance that
the actions taken by the Company to establish and protect its trademarks and
other proprietary rights will be adequate to prevent imitation of its products
by others or to prevent others from seeking to block sales of Guess products as
violative of the trademarks and proprietary rights of others. 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. See "Business -- Trademarks."
FUTURE SALES BY PRINCIPAL STOCKHOLDERS; SHARES ELIGIBLE FOR FUTURE SALE
The Common Stock offered hereby will be freely tradeable (other than by an
"affiliate" of the Company as such term is defined in the Securities Act of
1933, as amended (the "Securities Act")) without restriction or registration
under the Securities Act. Immediately after the Offerings, Maurice Marciano,
Paul Marciano and Armand Marciano will beneficially own approximately 38.4%,
31.3% and 13.9%, respectively, of the outstanding Common Stock. Subject to the
restrictions set forth below, the Principal Stockholders will be free to sell
such shares from time to time to take advantage of favorable market conditions
or for any other reason. Future sales of shares of Common Stock by the Company
and its stockholders could adversely affect the prevailing market price of the
Common Stock. Guess and the Principal Stockholders have entered into lock-up
agreements with Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and Morgan Stanley & Co. Incorporated, as representatives of the U.S.
Underwriters (the "U.S. Representatives"), and with Merrill Lynch International
and Morgan Stanley & Co. International Limited, as representatives of the
International Managers (the "International Representatives" and, together with
the U.S. Representatives, the "Representatives"), pursuant to which the Company
and the Principal Stockholders have agreed, subject to certain exceptions, not
to, directly or indirectly, (i) sell, grant any option to purchase or otherwise
transfer or dispose of any Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock or file a registration statement
under the Securities Act with respect to the foregoing or (ii) enter into any
swap or other agreement or transaction that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock, without the prior written
consent of Merrill Lynch, for a period of 180 days after the date of this
Prospectus. After such time, approximately 35,681,819 shares of Common Stock
will be eligible for sale pursuant to Rule 144 promulgated under the Securities
Act. In addition, the Principal Stockholders have rights to demand or
participate in future registrations of shares of Common Stock under the
Securities Act. Sales of substantial amounts of Common Stock in the public
market, or the perception that such sales may occur, could have a material
adverse effect on the market price of the Common Stock. See "Shares Eligible for
Future Sale" and "Underwriting."
CONTROL BY PRINCIPAL STOCKHOLDERS
Following the consummation of the Offerings, the Principal Stockholders will
have majority control of the Company and the ability to control the election of
directors and the results of other matters submitted to a vote of stockholders.
Such concentration of ownership, together with the anti-takeover effects of
certain
11
provisions in the Delaware General Corporation Law and in the Company's
Certificate of Incorporation and Bylaws, may have the effect of delaying or
preventing a change in control of the Company. See "Description of Capital
Stock." The Board of Directors of the Company is expected to be comprised
entirely of designees of the Principal Stockholders. See "Management" and
"Principal Stockholders."
ABSENCE OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained. The initial public offering price of the Common Stock offered
hereby will be determined through negotiations among the Company, the Principal
Stockholders and the Representatives and may bear no relationship to the market
price for the Common Stock after the Offerings. Subsequent to the Offerings,
prices for the Common Stock will be determined by the market and may be
influenced by a number of factors, including depth and liquidity of the market
for the Common Stock, investor perceptions of the Company, changes in conditions
or trends in the Company's industry or in the industry of the Company's
significant customers, publicly traded comparable companies and general economic
and other conditions. See "Underwriting."
DILUTION
The initial public offering price is substantially higher than the book
value per share of Common Stock. Investors purchasing shares of Common Stock in
the Offerings will therefore incur immediate and substantial dilution of $17.86
per share. See "Dilution."
FORWARD-LOOKING STATEMENTS
When used in this Prospectus and the documents incorporated herein by
reference, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify in certain circumstances, forward-looking
statements. Such statements are subject to a number of risks and uncertainties
that could cause actual results to differ materially from those projected,
including the risks described in this "Risk Factors" section. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such statements. The Company also undertakes no obligation to update these
forward-looking statements.
12
