UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(MARK ONE)
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended April 1, 2000
OR
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number 1-11893
GUESS?, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3679695
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1444 South Alameda Street
Los Angeles, California, 90021
(Address of principal executive offices)
(213) 765-3100
(Company's telephone number, including area code)
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 [ ]
As of March 12, 2001 the registrant had 43,623,827 shares of Common Stock, $.01
par value per share, outstanding.
GUESS?, INC.
FORM 10-Q/A
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
as of April 1, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Earnings (Unaudited) - First Quarters
ended April 1, 2000 and March 27, 1999 2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
First Quarters ended April 1, 2000 and March 27, 1999 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures about Market Risks 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
The Company is filing this Amendment to its Quarterly Report on Form 10-Q for
the period ended April 1, 2000 filed with the Securities and Exchange
Commission on May 16, 2000 in order to revise the Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations sections in that Report. The Company has determined that certain
inventory accruals, related costs of goods sold and certain rent expenses
should have been recognized in the first quarter. Accordingly, the Company is
restating its 2000 first quarter results. Recognizing these items in the
first quarter resulted in a reduction of previously reported net earnings.
The applicable segment data has also been adjusted. Pursuant to Rule 12b-15
under the Securities Exchange Act of 1934, the Company is including the
complete text of the Quarterly Report as revised. The Company has also
updated its legal proceedings section to reflect developments subsequent to
the filing of the Form 10-Q.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
ASSETS
APR 1, DEC 31,
2000 1999
---------- ----------
(RESTATED)
Current assets:
Cash $ 5,843 $ 6,139
Investments 3,737 27,059
Receivables:
Trade receivables, net of reserves 58,163 26,829
Royalties, net of reserves 8,516 8,528
Other 6,339 4,316
---------- ----------
Total receivables 73,018 39,673
Inventories, net of reserves (note 3) 135,522 106,624
Prepaid expenses and other current assets 10,177 8,861
Prepaid income taxes 40 3,004
Deferred tax assets 9,619 9,619
---------- ----------
Total current assets 237,956 200,979
Property and equipment, at cost, less accumulated
depreciation and amortization 131,596 125,688
Other assets, at cost, less accumulated amortization 36,578 42,369
---------- ----------
$ 406,130 $ 369,036
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of bank debt and long term debt $ 9,439 $ 7,475
Accounts payable 60,638 61,736
Accrued expenses 26,093 33,824
Income taxes payable (note 5) 3,947 --
---------- ----------
Total current liabilities 100,117 103,035
Notes payable and long-term debt, less current installments 117,805 83,363
Other liabilities 9,458 14,236
---------- ----------
Total liabilities 227,380 200,634
Minority interest 698 1,047
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000
shares; no shares issued and outstanding -- --
Common stock, $.01 par value. Authorized 150,000,000
shares; issued 63,437,752 and 63,335,743 shares,
outstanding 43,406,960 and 43,304,951 shares at
April 1, 2000 and December 31, 1999, respectively 142 141
Additional paid-in capital 163,940 163,300
Retained earnings 158,851 144,443
Accumulated other comprehensive income 5,895 10,247
Treasury stock, 20,030,792 shares repurchased (150,776) (150,776)
---------- ----------
Net stockholders' equity 178,052 167,355
---------- ----------
$ 406,130 $ 369,036
========== ==========
See accompanying notes to condensed consolidated financial statements.
1
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(Unaudited)
FIRST QUARTER ENDED
--------------------------------
APR 1, MAR 27
2000 1999
---------- ----------
(RESTATED)
Net revenue (note 6):
Product sales $ 178,411 $ 119,941
Net royalties 10,433 9,111
---------- ----------
188,844 129,052
Cost of sales 109,698 75,024
---------- ----------
Gross profit 79,146 54,028
Selling, general and administrative expenses 52,461 32,280
---------- ----------
Earnings from operations 26,685 21,748
Other income (expense):
Interest expense, net (2,653) (2,333)
Other, net (24) (112)
---------- ----------
(2,677) (2,445)
Earnings before income taxes 24,008 19,303
Income taxes (note 5) 9,600 7,817
---------- ----------
Net earnings $ 14,408 $ 11,486
========== ==========
NET EARNINGS PER SHARE:
Basic $ 0.33 $ 0.27
========== ==========
Diluted $ 0.33 $ 0.27
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 43,352 42,919
========== ==========
Diluted 44,210 43,177
========== ==========
See accompanying notes to condensed consolidated financial statements.
2
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
FIRST QUARTER ENDED
-----------------------------
APR 1, MAR 27,
2000 1999
---------- ----------
(RESTATED)
Cash flows from operating activities:
Net earnings $ 14,408 $ 11,486
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and equipment 7,021 5,517
Amortization of other assets (51) 220
Loss on disposition of property and equipment (25) 15
Decrease in minority interest (349) --
Foreign currency translation adjustment 126 9
Undistributed equity method (loss) (24) (2)
(Increase) decrease in:
Receivables (33,345) (20,439)
Inventories (28,898) 18,618
Prepaid expenses 1,648 2,573
Other assets (3,709) (229)
Increase (decrease) in:
Accounts payable (1,099) (9,693)
Accrued expenses (8,147) (4,011)
Income taxes payable 3,947 4,453
---------- ----------
Net cash provided by (used in) operating activities (48,497) 8,517
Cash flows from investing activities:
Net proceeds from the sale of short-term investments 25,456 --
Purchases of property and equipment (12,728) (2,292)
Proceeds from the disposition of property and equipment 25 6
Acquisition of license (158) (125)
Purchase of investment securities available for sale (1,478) (2,100)
Increase in long-term investments -- (2,500)
---------- ----------
Net cash provided by (used in) investing activities 11,117 (7,011)
Cash flows from financing activities:
Repayment of senior subordinated notes -- (4,000)
Proceeds from notes payable and long-term debt 42,302 --
Repayments of notes payable and long-term debt (5,896) --
Proceeds from issuance of common stock 641 98
---------- ----------
Net cash provided by (used in) financing activities 37,047 (3,902)
Effect of exchange rates on cash 37 (16)
Net decrease in cash (296) (2,412)
Cash, beginning of period 6,139 5,853
---------- ----------
Cash, end of period $ 5,843 $ 3,441
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 6,657 $ 6,274
Income taxes 1,263 610
See accompanying notes to condensed consolidated financial statements.
3
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 1, 2000-RESTATED
(in thousands)
(unaudited)
(1) BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements of Guess?, Inc. and its subsidiaries (the "Company")
contain all adjustments, consisting of normal recurring adjustments, considered
necessary for a fair presentation of the condensed consolidated balance sheets
as of April 1, 2000 and December 31, 1999, the consolidated statements of
earnings for the quarters ended April 1, 2000 and March 27, 1999, and the
statements of cash flows for the quarters ended April 1, 2000 and March 27,
1999. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with Rule 10-01 of Regulation S-X of the
Securities and Exchange Commission ("SEC"). Accordingly, they have been
condensed and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
results of operations for the quarter ended April 1, 2000 are not necessarily
indicative of the results of operations for the full fiscal year. For further
information, refer to the consolidated financial statements and footnotes
thereto include in the Company's annual report on Form 10-K for the year ended
December 31, 1999.
Effective January 1, 2000, the Company changed its quarterly reporting period to
end on the Saturday nearest the calendar quarter end. Previously, the Company's
quarterly reporting period ended on the last Saturday of the quarter, which
resulted in six more calendar days in the current quarter.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the April 1, 2000 presentation.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EARNINGS PER SHARE
Basic earnings per share represents net earnings divided by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
represents net earnings divided by the weighted average number of shares
outstanding, inclusive of the dilutive impact of common stock equivalents.
During the quarters ended April 1, 2000 and March 27, 1999, the difference
between basic and diluted earnings per share was due to the dilutive impact of
options to purchase common stock. Options to purchase 326,725 shares of common
stock at $27.31 per share during the three month period ended April 1, 2000 and
options to purchase 1,055,075 shares of common stock at prices ranging from
$7.50 to $11.00 during the three month period ended March 27, 1999 were not
included in the computation of diluted earnings per share because the exercise
prices were greater than the average market price of the common stock.
Therefore, the options are antidilutive.
BUSINESS SEGMENT REPORTING
The Company reports segment information under Statement of Financial Accounting
Standards No. 131 "SFAS 131", "Disclosures About Segments of an Enterprise and
Related Information." The business segments of the Company are wholesale, retail
and licensing operations. Information relating to these segments is summarized
in note 6.
COMPREHENSIVE INCOME
The Company reports comprehensive income under Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Comprehensive
income consists of net earnings, unrealized gains on investments available
for sale and foreign currency translation adjustments. A reconciliation of
comprehensive income for the quarters ended April 1, 2000 and March 27, 1999
is as follows (in thousands):
FIRST QUARTER ENDED
----------------------------
APR 1, MAR 27,
2000 1999
--------- ---------
Net earnings $ 14,408 $ 11,486
Unrealized loss on investments, net of taxes (4,515) --
Foreign currency
translation adjustment 163 (9)
--------- ---------
Comprehensive income $ 10,056 $ 11,477
========= =========
4
As of April 1, 2000, the remaining accumulated other comprehensive income
included in stockholders' equity was $5.9 million.
FUTURE ACCOUNTING CHANGE
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 all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company believes the adoption
of SFAS 133 will not have a material impact on our financial reporting.
RESTATED FINANCIAL STATEMENTS
The Company's financial statements as of April 1, 2000, have been restated to
reflect certain inventory accruals, related cost of goods sold and certain
rent expenses that should have been recognized in the first quarter. The
following accounts are adjusted as a result of the restatement (in thousands,
except per share data):
First quarter ended As Previously As
April 1, 2000 Reported Restated
- --------------------------------------------------------------------------------------------------------
Balance sheet:
Property and equipment, at cost, net
Of accumulated depreciation and amortization $ 131,792 $ 131,596
Accounts payable 59,219 60,638
Income taxes payable 4,547 3,947
Retained earnings 159,866 158,851
Statement of earnings:
Cost of sales 108,295 109,698
Selling, general and administrative expenses 52,249 52,461
Earnings from operations 28,300 26,685
Income taxes 10,200 9,600
Net earnings $ 15,423 $ 14,408
Net earnings per diluted share $ 0.35 $ 0.33
- --------------------------------------------------------------------------------------------------------
(3) INVENTORIES
The components of inventories consist of the following (in thousands):
FIRST QUARTER ENDED
-----------------------------
APR 1, DEC 31,
2000 1999
---------- ----------
Raw materials $ 8,628 $ 8,514
Work in progress 12,302 6,740
Finished goods - retail 57,255 45,750
Finished goods - wholesale 57,337 45,620
---------- ----------
$ 135,522 $ 106,624
========== ==========
At April 1, 2000 and December 31, 1999, total inventories included $13.8 million
and $9.4 million, respectively, of inventories from Guess? Canada Corporation,
the Company's licensee for wholesale and retail operations in Canada. The
Company holds a 60% ownership interest in Guess? Canada Corporation.
(4) INVESTMENTS
At April 1, 2000, short-term investments consisted of marketable securities
available for sale. At December 31, 1999, short-term investments consisted
primarily of interest bearing deposit accounts.
(5) INCOME TAXES
Income taxes for the interim periods were computed using the effective tax rate
estimated to be applicable for the full fiscal year, which is subject to ongoing
review and evaluation by management.
5
(6) SEGMENT INFORMATION
In accordance with the requirements of SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," the Company's reportable business
segments and respective accounting policies of the segments are the same as
those described in note 2. Management evaluates segment performance based
primarily on revenue and earnings from operations. Interest income and expense
are evaluated on a consolidated basis and are not allocated to the Company's
business segments.
Net revenue and earnings from operations are summarized as follows for the first
quarters ended April 1, 2000 and March 27, 1999 (in thousands):
FIRST QUARTER ENDED
----------------------------
APR 1, MAR 27,
2000 1999
--------- --------
Net revenue:
Retail operations $ 77,772 $ 51,474
Wholesale operations 100,639 68,467
Licensing operations 10,433 9,111
--------- ---------
$ 188,844 $ 129,052
========= =========
Earnings from operations:
Retail operations $ (1,317) $ 7
Wholesale operations 19,333 14,031
Licensing operations 8,669 7,710
--------- ---------
$ 26,685 $ 21,748
========= =========
Due to the seasonal nature of these business segments, especially retail
operations, the above net revenue and operating results for the first quarter
ended April 1, 2000, are not necessarily indicative of the results that may be
expected for the full fiscal year.
(7) BANK CREDIT FACILITY
On December 3, 1999, the Company entered into a $125 million Credit Agreement
("Credit Facility") with The Chase Manhattan Bank. The Credit Facility
provides the Company with a revolving credit facility, which includes a $50
million sub-limit for letters of credit. Our Credit Facility accrues interest
at LIBOR plus 100 basis points, the Prime rate, the base CD rate plus 100
basis points or the Fed Funds rate plus 50 basis points depending on the
duration and type of loan facility. The Credit Facility expires on October
31, 2002. At April 1, 2000, the Company has $29.3 million in outstanding
borrowings under the Credit Facility, $5.2 million in outstanding standby
letters of credit and $33.1 million in outstanding documentary letters of
credit. At April 1, 2000, the Company had $57.4 million available for future
borrowings under such facility. The Credit Facility contains various
restrictive covenants requiring, among other things, the maintenance of
certain financial ratios. As of April 1, 2000, the Company was in compliance
with all such covenants.
(8) COMMON STOCK
On April 27, 2000, the Company filed a registration statement to sell 4,500,000
shares of common stock.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IMPORTANT NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q/A contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act").
Forward-looking statements may also be in the Company's other reports filed
under the Exchange Act, 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 generally relate to future events or future financial
performance, and include statements dealing with current plans, intentions,
objectives, beliefs and expectations. Some forward-looking statements can be
identified by terminology such as "may," "will," "should," "expects," "plans,"
"intends," "anticipates," "believes," "estimates," "predicts," "potential,"
"optimistic," "aims," or "continue" or the negative of such terms or other
comparable terminology. Certain statements in this Form 10-Q/A, including but
not limited to 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 and its business seasonality, are 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.
Factors which may cause actual results in future periods to differ from current
expectations include, among other things, the continued availability of
sufficient working 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, the success of
technology to be used in the Company's new distribution center and the
availability of adequate sources of capital. In addition to these factors, the
economic and other factors identified in the Company's most recent Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, including but not
limited to the risk factors discussed therein, could affect the forward-looking
statements contained herein and in the Company's other public documents.
OVERVIEW
We derive our net revenue from the sale of Guess men's, women's, girls' and
boys' apparel and our licensees' products through our network of retail and
factory outlet stores located primarily in the United States; from the sale of
Guess men's, women's, girls' and boys' apparel worldwide to wholesale customers
and distributors; and from net royalties via worldwide licensing activities.
Unless the context indicates otherwise, when we refer to "we," "us" or the
"Company" in this Form 10-Q/A, we are referring to Guess?, Inc. and its
subsidiaries on a consolidated basis.
Effective January 1, 2000, we changed our quarterly reporting period to end on
the Saturday nearest the calendar quarter end. Previously, our quarterly
reporting period ended on the last Saturday of the quarter, which resulted in
six more calendar days in the current quarter. This change did not have a
material impact on the financial statements.
RESULTS OF OPERATIONS
First Quarters Ended April 1, 2000 and March 27, 1999.
NET REVENUE. Net revenue for the first quarter increased $59.7 million or 46.2%
to $188.8 million from $129.1 million in the quarter ended March 27, 1999. Net
revenue from retail operations increased $26.3 million or 51.1% to $77.8 million
in the first quarter from $51.5 million for the same period in 1999. This
increase is primarily attributable to a 19.2% increase in comparable store sales
resulting from the continued strength of the retail business by having more
fashion-focused product assortment, improved merchandising efforts and faster
replenishment.
7
Net revenue from wholesale operations increased $32.1 million or 46.9% to $100.6
million in the quarter ended April 1, 2000 from $68.5 million for the comparable
period in 1999. Domestic and international wholesale operations revenue
increased, for the first quarter ended April 1, 2000, by $22.7 million to $84.2
million and by $9.5 million to $16.4 million, respectively. Domestic wholesale
increased primarily due to a stronger domestic demand for our women's and girls'
product lines. International wholesale operations net revenue increased as a
result of increased demand in the European, Asian and South American markets.
Net royalty revenue increased $1.3 million or 14.5% to $10.4 million in the
first quarter ended April 1, 2000 from $9.1 million for the comparable period in
1999. The increase in net royalties was primarily due to strong performance in
the watch, eyewear and footwear product lines, which was partially offset by us
discontinuing certain licenses that were brought back in-house in the prior
year.
GROSS PROFIT. Gross profit increased 46.5% to $79.1 million in the first quarter
ended April 1, 2000 from $54.0 million, in the first quarter ended March 27,
1999. The increase in gross profit resulted from increased net revenue from
product sales. Gross profit rate was 41.9% in the quarter ended April 1, 2000
compared to 41.9% in the quarter ended March 27, 1999. Gross margin from product
sales increased 53.0% to $68.7 million in the quarter from $44.9 million in
1999. Gross profit rate from product sales for the quarter ended April 1, 2000
was 38.5% compared to 37.4% for the same period in 1999. The increase in gross
margin from product sales for the quarter is primarily due to improved retail
margins, lower off-price sales and the effect of spreading retail occupancy
costs over a higher sales base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses of $52.5 million increased to 27.8% of net
revenue in the quarter ended April 1, 2000 compared to $32.3 million or 25.0% of
net revenue in the first quarter ended March 27, 1999. The increase in the SG&A
rate for the first quarter 2000 reflects the expansion of our organizational
infrastructure needed to facilitate our growth initiatives. During the first
quarter of 2000, we also incurred start-up and other non-recurring pre-tax costs
of $3.1 million relating to the relocation of our distribution operation to
Kentucky. Additionally, at the beginning of the first quarter 2000, we revised
our vacation pay policies to enhance employee benefits, which resulted in a
one-time pre-tax charge of $1.3 million.
EARNINGS FROM OPERATIONS. Earnings from operations increased 23.0% to $26.7
million, or 14.1% of net revenue, in the first quarter ended April 1, 2000 from
$21.7 million, or 16.9% of net revenue, in the first quarter ended March 27,
1999. This increase was primarily due to higher revenue.
INTEREST EXPENSE, NET. Net interest expense increased 17.4% to $2.7 million in
the first quarter ended April 1, 2000, from $2.3 million for the comparable
period in 1999. The increase is due to higher outstanding debt in the first
quarter of 2000. Total debt at April 1, 2000 was $127.2 million, which included
$79.6 million of our senior subordinated notes due 2003, $29.3 million of
borrowings under our revolving credit agreement due in October 2002, and $18.2
million of bank debt related to Guess Canada. On a comparable basis and
excluding Guess Canada, the average debt balance for the first quarter of 2000
was $92.8 million, with an average effective interest rate of 9.2%, versus an
average debt balance of $96.8 million, with an average effective interest rate
of 9.5% for the comparable 1999 quarter.
INCOME TAXES. Income taxes for the first quarter ended April 1, 2000 was $9.6
million, or a 40.0% effective tax rate, compared to $7.8 million, or a 40.5%
effective tax rate, in the quarter ended March 27, 1999. Income taxes for the
interim periods were computed using the effective tax rate estimated to be
applicable for the full fiscal year, which is subject to ongoing review and
evaluation by us.
NET EARNINGS. Net earnings increased 25.2% to $14.4 million, or 7.6% of net
revenue, in the first quarter ended April 1, 2000, from $11.5 million, or 8.9%
of net revenue, in the same period in 1999.
8
LIQUIDITY AND CAPITAL RESOURCES
In the quarter ended April 1, 2000, we relied primarily on internally generated
funds, trade credit and bank borrowings to finance our operations and expansion.
At April 1, 2000, we had working capital of $137.8 million compared to $97.9
million at December 31, 1999. The increase was primarily due to a $33.3 million
increase in net receivables, and a $28.9 million increase in inventories, which
was partially offset by a $23.3 million decrease in short-term investments. The
increase in receivables is primarily due to a 29.6% increase in wholesale sales
in the first quarter of 2000 from the fourth quarter of 1999. The majority of
the increase in inventory is the result of significantly increased product
sales, substantially higher wholesale backlog and our retail expansion program.
Included in the net cash flow for the first quarter of 2000 was the funding of
approximately $7.5 million of distribution center and new store construction
costs that were accrued in accounts payable at December 31, 1999.
On December 3, 1999, we entered into a $125 million Credit Agreement ("Credit
Facility") with The Chase Manhattan Bank. The Credit Facility provides us with a
revolving credit facility, which includes a $50 million sub-limit for letters of
credit. The Credit Facility expires in October 31, 2002. At April 1, 2000, we
had $29.3 million outstanding borrowings under the revolving credit facility,
$5.2 million in outstanding standby letters of credit and $33.1 million in
outstanding documentary letters of credit. At April 1, 2000, we had $57.4
million available for future borrowings under the Credit Facility. The Credit
Facility contains various restrictive covenants requiring, among other things,
the maintenance of certain financial ratios. As of April 1, 2000, we were in
compliance with all such covenants.
Capital expenditures, net of lease incentives granted, totaled $12.7 million in
the quarter ended April 1, 2000. We estimate our capital expenditures for fiscal
2000 will be approximately $80.0 million, primarily for the retail store
expansion and remodeling, shop-in-shop programs, and operations.
We anticipate that we will be able to satisfy our ongoing cash requirements for
the next twelve months for working capital, capital expenditures and interest on
our senior subordinated notes, primarily with cash flow from operations,
supplemented, if necessary, by borrowings under our Credit Facility.
WHOLESALE BACKLOG
We generally receive wholesale orders approximately 90 to 120 days prior to the
time the products are to be delivered to department and specialty stores. As of
May 6, 2000, unfilled wholesale orders increased 74.4% to $158.9 million from
$91.1 million at May 2, 1999. The backlog of wholesale orders at any given time,
affected by various factors, including seasonality and the scheduling of
manufacturing and shipment of product. Accordingly, a comparison of backlogs of
wholesale orders from period to period may not be indicative of eventual actual
shipments.
SEASONALITY
Our business is impacted by the general seasonal trends characteristic of the
apparel and retail industries. Our retail operations are generally stronger in
the third and fourth quarters, while 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 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.
9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
We receive United States dollars ("USD") for substantially all of our product
sales and our licensing revenues. Inventory purchases from offshore contract
manufacturers are primarily denominated in USD; however, purchase prices for our
products may be impacted by fluctuations in the exchange rate between the USD
and the local currencies of the contract manufacturers, which may have the
effect of increasing 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 USD. 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 APRIL 1, 2000
--------- ---------- ------------- ----------------
Canadian dollars $750,000 April 3 to April 28, 2000 $759,521
Canadian dollars 500,000 April 17 to May 15, 2000 498,448
Canadian dollars 750,000 April 17 to May 15, 2000 750,155
Based upon the rates at April 1, 2000, the cost to buy the equivalent U.S.
dollars discussed above was approximately $2.9 million Canadian currency.
10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On approximately January 15, 1999, UNITE filed an unfair labor practice charge
against us, alleging that attorney Dennis Hershewe violated Section 8(a)(1) of
the National Labor Relations Act ("the Act") by questioning our employee Maria
Perez about her union activities at the deposition he conducted in her workers'
compensation case. Mr. Hershewe represents Fireman's Fund Insurance Company, our
workers' compensation insurance carrier. GUESS? investigated the charge and
responded to it on March 10, 1999. The NLRB issued a complaint on part of the
charge on October 14, 1999, and we filed an answer on October 21, 1999. On July
6, 2000, the complaint was dismissed in its entirety. The NLRB appealed the
decision and both sides submitted briefs in September of 2000. We are awaiting a
decision on the appeal.
On May 21, 1999, we filed a demand for arbitration against Pour le Bebe, Inc.
and Pour la Maison, Inc. (collectively, "PLB") seeking damages and injunctive
relief in connection with four written license agreements between the parties.
We alleged that PLB defaulted under the license agreements, that the license
agreements properly were terminated and that PLB breached the license
agreements. On July 19, 1999, PLB filed a counterdemand for arbitration against
us. PLB sought damages and injunctive relief against us alleging breach of
contract, violation of the California Franchise Relations Act, interference with
prospective economic advantage, unlawful business practices, statutory unfair
competition and fraud. The arbitration was conducted before the American
Arbitration Association pursuant to arbitration clauses in the license
agreements.
On June 9, 2000, the arbitrators issued a final award in our favor and rejected
each of PLB's counterclaims. The amount of this award was $7,659,677. Because of
the uncertainty of the ultimate realization of the award, no recognition has
been given to it in our consolidated financial statements. Thereafter, the
Company filed a petition to confirm the arbitration award and PLB filed a
petition to vacate the award. On September 29, 2000, the court confirmed the
final award and denied PLB's petition to vacate. On October 23, 2000, the court
entered judgment confirming the final arbitration award and the case has been
resolved.
On June 9, 1999, we commenced a lawsuit in the Los Angeles County Superior Court
against Kyle Kirkland, Kirkland Messina LLC, and CKM Securities (collectively
"Kirkland") for tortious interference, unfair competition, fraud and related
claims. This action arises out of alleged misrepresentations and omissions of
material fact made by Kirkland in connection with the operations and financial
performance of PLB. On March 29, 2000, the California Court of Appeal determined
that the action will proceed in court. Kirkland's petition for review to the
California Supreme Court was denied on July 12, 2000. No trial date has been
set.
On March 28, 2000 a complaint was filed against us in San Diego County Superior
Court entitled Snodgrass v. Guess?, Inc. and GUESS? Retail, Inc. The complaint
purports to be a class action filed on behalf of current and former store
management employees in California. Plaintiffs seek overtime wages and a
preliminary and permanent injunction. The parties have stipulated that a limited
class composed only of visual co-managers and co-managers should be certified.
The Court certified this limited class on March 16, 2001. The trial date has
been set for November 9, 2001.
On May 4, 2000, a complaint was filed against the Company and Mr. Paul Marciano
in the Los Angeles Superior Court - Michel Benasra v. Paul Marciano and Guess?,
Inc. The complaint grows out of the arbitration between the Company and PLB,
discussed above. The plaintiff, the President of PLB, alleges that defendants
made defamatory statements about him during the arbitration. Plaintiff seeks
general damages of $50,000,000 and unspecified punitive damages. Defendants
moved to compel arbitration of this matter, or alternatively, to strike the
action under the state's anti-SLAPP (Strategic Litigation Against Public
Participation) statute. The motion to compel arbitration was denied and the
decision has been appealed. Pending resolution on appeal, this matter has been
stayed. No trial date has been set.
On January 30, 2001, Guess?, Inc. Maurice Marciano, Armand Marciano, Paul
Marciano, and Brian Fleming were named as defendants in a securities class
action entitled David Osher v. Guess?, Inc., et al., filed in the United
States District Court for the Central District of California. Seven
additional class actions have been filed in the Central District, naming the
same defendants: Robert M. Nuckols v. Guess?, Inc. et al., Brett Dreyfuss v.
Guess?, Inc. et al., both filed February 1, 2001; Jerry Sloan v. Guess?,
Inc., et al., filed February 6, 2001; Jerry Byrd v. Guess?, Inc., et al;
filed February 13, 2001; Patrick and Kristine Liska v. Guess?, Inc., et al,
filed February 14, 2001; Darrin Wegman v. Guess?, Inc., et al., filed
February 22, 2001; and Rosie Gindi v. Guess?, Inc., et al., filed February
22, 2001. All eight complaints purport to state claims under Section 10(b)
and 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934 and allege
that defendants made materially false and misleading statements relating to
the Company's inventory and financial condition during the class period. In
Osher, Nuckols, Byrd, Wegman and Sloan, the class period is February 14
through January 26, 2001; in Dreyfuss, Liska and Gindi the class period is
February 14, 2000 through November 9, 2000. We are awaiting court approval
of a stipulation to extend our time to respond until 45 days after a lead
plaintiff has been appointed and has filed a consolidated amended complaint.
11
On March 15, 2001, a complaint was filed by Susan Goldman, derivatively on
behalf of nominal defendant Guess?, Inc. against Bryan Isaacs, Alice Kane,
Robert Davis, Armand Marciano, Paul Marciano, Maurice Marciano, Howard Socol and
Guess?, Inc. in the Court of Chancery for the State of Delaware. The complaint
alleges misappropriation of corporate information, insider trading and other
breaches of fiduciary duty by the Company and its Board of Directors. Our
response is due April 10, 2001.
We cannot predict the outcome of these matters. We believe the outcome of one or
more of the above cases could have a material adverse effect on our results of
operations or financial condition.
Most major corporations, particularly those operating retail businesses, become
involved from time to time in a variety of employment-related claims and other
matters incidental to their business in addition to those described above. In
the opinion of our management, the resolution of any of these pending incidental
matters is not expected to have a material adverse effect on our results of
operations or financial condition.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- ---------------------------------------------------------
3.1. Restated Certificate of Incorporation of the Company. (1)
3.2. Bylaws of the Company. (1)
4.3. Specimen stock certificate.(1)
(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.
- -----------------------
b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the quarter ended April
1, 2000.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
GUESS?, INC.
Date: April 2, 2001 By: /s/ MAURICE MARCIANO
--------------------------
Maurice Marciano
Co-Chairman of the Board, Co-Chief
Executive Officer and Director
(Principal Executive Officer)
Date: April 2, 2001 By: /s/ CARLOS ALBERINI
--------------------------
Carlos Alberini
President, Chief Operating Officer
and Director
(Principal Financial Officer)
13