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 July 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
(Registrant'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 July 1, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Earnings (Unaudited) - Second Quarter and
Six Months Ended July 1, 2000 and June 26, 1999 2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended July 1, 2000 and June 26, 1999 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
The Company is filing this Amendment to its Quarterly Report on Form 10-Q for
the period ended July 1, 2000 filed with the Securities and Exchange
Commission on August 14, 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 second quarter. Accordingly, the Company
is restating its 2000 second quarter results. Recognizing these items in the
second 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
JUL 1, DEC 31,
2000 1999
---------- ----------
(RESTATED)
Current assets:
Cash $ 7,666 $ 6,139
Investments 2,752 27,059
Receivables:
Trade receivables, net of reserves 52,468 26,829
Royalties, net of reserves 9,225 8,528
Other 4,449 4,316
---------- ----------
Total receivables 66,142 39,673
Inventories (note 3) 173,711 106,624
Prepaid expenses and other current assets 11,262 8,861
Prepaid income taxes (note 6) 4,025 3,004
Deferred tax assets 9,619 9,619
---------- ----------
Total current assets 275,177 200,979
Property and equipment, at cost, less accumulated
depreciation and amortization 146,929 125,688
Other assets, at cost, less accumulated amortization 25,914 42,369
---------- ----------
$ 448,020 $ 369,036
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of bank debt and long-term debt $ 14,004 $ 7,475
Accounts payable 75,232 61,736
Accrued expenses 24,315 33,824
---------- ----------
Total current liabilities 113,551 103,035
Notes payable and long-term debt, less current installments 146,289 83,363
Other liabilities 9,253 14,236
---------- ----------
Total liabilities 269,093 200,634
Minority interest 380 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 63,477,235 and 63,335,743 shares,
Outstanding 43,446,443 and 43,304,951 shares at
July 1, 2000 and December 31, 1999, respectively 143 141
Paid-in capital 164,202 163,300
Retained earnings 165,662 144,443
Accumulated other comprehensive income (loss) (684) 10,247
Treasury stock, 20,030,792 shares repurchased (150,776) (150,776)
---------- ----------
Net stockholders' equity 178,547 167,355
---------- ----------
$ 448,020 $ 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)
SECOND QUARTER ENDED SIX MONTHS ENDED
---------------------------- ---------------------------
JUL 1, JUN 26, JUL 1, JUN 26,
2000 1999 2000 1999
--------- --------- --------- ---------
(RESTATED) (RESTATED)
Net revenue (note 7):
Product sales $ 168,661 $ 110,181 $ 347,072 $ 230,122
Net royalties 9,020 9,376 19,453 18,487
--------- --------- --------- ---------
177,681 119,557 366,525 248,609
Cost of sales 108,302 64,522 218,000 139,546
--------- --------- --------- ---------
Gross profit 69,379 55,035 148,525 109,063
Selling, general and administrative expenses 56,045 38,260 108,506 70,540
Severance recovery (costs) relating to
distribution facility relocation (note 5) 1,545 (3,200) 1,545 (3,200)
--------- --------- --------- ---------
Earnings from operations 14,879 13,575 41,564 35,323
Other income (expense):
Interest expense, net (3,493) (2,205) (6,146) (4,538)
Other, net (75) 430 (99) 318
---------- --------- ---------- ---------
(3,568) (1,775) (6,245) (4,220)
Earnings before income taxes 11,311 11,800 35,319 31,103
Income taxes (note 6) 4,500 4,783 14,100 12,600
--------- --------- --------- ---------
Net earnings $ 6,811 $ 7,017 $ 21,219 $ 18,503
========= ========= ========= =========
NET EARNINGS PER SHARE:
Basic $ 0.16 $ 0.16 $ 0.49 $ 0.43
========= ========= ========= =========
Diluted $ 0.16 $ 0.16 $ 0.48 $ 0.43
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 43,423 42,939 43,387 42,927
========= ========= ========= =========
Diluted 43,865 43,286 43,872 43,237
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
2
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
SIX MONTHS ENDED
-------------------------------
JUL 1, JUN 26,
2000 1999
---------- ----------
(RESTATED)
Cash flows from operating activities:
Net earnings $ 21,219 $ 18,503
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 15,483 11,534
Loss on disposition of property and equipment 792 (211)
Minority interest (667) --
Foreign currency translation adjustment 248 (16)
Undistributed equity method (loss) (106) (71)
(Increase) decrease in:
Receivables (26,470) (10,719)
Inventories (67,087) 9,604
Prepaid expenses (3,422) (4,944)
Other assets (4,899) (307)
Increase (decrease) in:
Accounts payable 13,498 3,687
Accrued expenses (9,930) 5,707
Income taxes payable 0 (210)
---------- ----------
Net cash provided by (used in) operating activities (61,341) 32,557
Cash flows from investing activities:
Net proceeds from the sale of short-term investments 30,999 --
Purchases of property and equipment (36,719) (8,527)
Proceeds from the disposition of property and equipment 25 252
Acquisition of license (357) (250)
Purchase of investment securities (1,478) (17,910)
Increase in long-term investments -- (2,611)
---------- ----------
Net cash used in investing activities (7,530) (29,046)
Cash flows from financing activities:
Repayment of senior subordinated notes -- (5,438)
Proceeds from notes payable and long-term debt 116,379 --
Repayments of notes payable and long-term debt (46,922) --
Proceeds from issuance of common stock 904 392
---------- ----------
Net cash provided by (used in) financing activities 70,361 (5,046)
Effect of exchange rates on cash 37 (26)
Net increase (decrease) in cash 1,527 (1,561)
Cash, beginning of period 6,139 5,853
---------- ----------
Cash, end of period $ 7,666 $ 4,292
========== ==========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 5,587 $ 6,367
Income taxes 16,577 12,022
See accompanying notes to condensed consolidated financial statements.
3
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 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 July 1, 2000 and December 31, 1999, the consolidated statements of
earnings for the quarter ended and six months ended July 1, 2000 and June 26,
1999, and the statements of cash flows for the six months ended July 1, 2000 and
June 26, 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 and six months ended July 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 included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
Effective January 1, 2000, we changed our quarterly reporting period to end on
the Saturday nearest the calendar quarter end. Previously, our quarterly
reporting period ended on the last Saturday of the quarter. This change in
reporting period did not have an impact for the second quarter of 2000 and 1999;
however, this change resulted in six more calendar days for the six months ended
July 1, 2000.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the July 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 potential common stock. During
the quarter and six month periods ended July 1, 2000 and June 26, 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 373,176 shares
of common stock at $27.31 per share during the six month period ended July 1,
2000 and options to purchase 812,936 shares of common stock at prices ranging
from $8.93 to $13.13 during the six month period ended June 26, 1999 were not
included in the computation of diluted earnings per share because the exercise
prices were greater that 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
retail, wholesale and licensing operations. Information relating to these
segments is summarized in note 7.
4
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 quarter and six month periods ended July 1, 2000
and June 26, 1999 is as follows (in thousands):
SECOND QUARTER ENDED SIX MONTHS ENDED
----------------------------- ---------------------------
JUL 1, JUN 26, JUL 1, JUN 26,
2000 1999 2000 1999
---------- ---------- ----------- -----------
Net earnings $ 6,811 $ 7,017 $ 21,219 $ 18,503
Unrealized loss on investments, net of taxes (6,900) -- (11,415) --
Foreign currency
translation adjustment 320 25 484 16
---------- ---------- ----------- ----------
Comprehensive income $ 231 $ 7,042 $ 10,288 $ 18,519
========== ========== =========== ==========
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, as amended by SFAS 137,
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 July 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 second quarter. The
following accounts are adjusted as a result of the restatement (in thousands,
except per share data):
QUARTER ENDED SIX MONTHS ENDED
JUL 1, 2000 JUL 1, 2000
-------------------------- -------------------------
As Previously As As Previously As
Reported Restated Reported Restated
- -------------------------------------------------------------------------------------------------------------
Balance sheet:
Prepaid income taxes $ -- $ 4,025 $ -- $ 4,025
Property and equipment, at cost, net
of accumulated depreciation and amortization 147,750 146,929 147,750 146,929
Accounts payable 65,559 75,232 65,559 75,232
Income taxes payable 174 0 174 --
Retained earnings 171,957 165,662 171,957 165,662
Statement of earnings:
Cost of sales 100,080 108,302 208,375 218,000
Selling, general and administrative expenses 55,387 56,045 107,636 108,506
Earnings from operations 23,759 14,879 52,059 41,564
Income taxes 8,100 4,500 18,300 14,100
Net earnings $ 12,091 $ 6,811 $ 27,514 $ 21,219
Net earnings per diluted share $ 0.28 $ 0.16 $ 0.63 $ 0.48
- -------------------------------------------------------------------------------------------------------------
(3) INVENTORIES
The components of inventories consist of the following (in thousands):
JUL 1, DEC 31,
2000 1999
---------- ----------
Raw materials $ 9,202 $ 8,514
Work in progress 13,387 6,740
Finished goods - retail 63,566 45,750
Finished goods - wholesale 87,556 45,620
---------- ----------
$ 173,711 $ 106,624
========== ==========
At July 1, 2000 and December 31, 1999, total inventories included $14.2 million
and $9.4 million of inventories from Guess? Canada Corporation, the Company's
licensee for retail and wholesale operations in Canada, respectively. The
Company holds a 60% ownership interest in Guess? Canada Corporation.
5
(4) INVESTMENTS
At July 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) SEVERANCE COSTS
In accordance with the requirements of EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," the Company recorded a
$3.2 million charge, in the second quarter ended June 26, 1999, for future
severance costs related to the relocation of its distribution operations from
Los Angeles to Louisville, Kentucky. As a result of employee transfers and
attrition, the severance costs actually incurred for Los Angeles-based
employees were $1.7 million which has resulted in a recovery of $1.5 million of
the severance charge in the second quarter ended July 1, 2000.
(6) 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.
(7) 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
quarters and six months ended July 1, 2000 and June 26, 1999 (in thousands):
SECOND QUARTER ENDED SIX MONTHS ENDED
----------------------------- ---------------------------
JUL 1, JUN 26, JUL 1, JUN 26,
2000 1999 2000 1999
---------- ---------- --------- ---------
Net revenue:
Retail operations $ 84,793 $ 61,049 $ 162,565 $ 112,523
Wholesale operations 83,868 49,132 184,507 117,599
Licensing operations 9,020 9,376 19,453 18,487
---------- ---------- --------- ---------
177,681 119,557 $ 366,525 $ 248,609
========== ========== ========= =========
Earnings from operations:
Retail operations $ 7,098 $ 6,791 $ 5,781 $ 6,798
Wholesale operations 837 (882) 20,170 13,149
Licensing operations 6,944 7,666 15,613 15,376
--------- ---------- --------- ---------
$ 14,879 $ 13,575 $ 41,564 $ 35,323
========= ========== ========= =========
Due to the seasonal nature of these business segments, especially retail
operations, the above net revenue and operating results for the quarter ended
and six months ended July 1, 2000, are not necessarily indicative of the results
that may be expected for the full fiscal year.
6
(8) 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. The 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 July 1, 2000, the Company has $63.8 million outstanding
borrowings under the Credit Facility, $4.4 million in outstanding standby
letters of credit and $28.6 million in outstanding documentary letters of
credit. At July 1, 2000, the Company had $28.2 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 July 1, 2000, the Company was in compliance
with all such covenants.
(9) COMMON STOCK
On May 24, 2000, the Company filed an amended registration statement to sell up
to $200 million of shares of common stock at any time and from time to time. To
date, no shares have been sold under this registration statement.
7
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 contained 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 operations of its
new 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, and 10Q/A for the
quarter ended April 1, 2000, 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. This change in
reporting period did not have an impact for the second quarter of 2000 and 1999;
however, this change resulted in six more calendar days for the six months ended
July 1, 2000.
RESULTS OF OPERATIONS
Second Quarters and Six Months Ended July 1, 2000 and June 26, 1999.
NET REVENUE. Net revenue for the second quarter ended July 1, 2000 increased
$58.1 million or 48.6% to $177.7 million from $119.6 million in the quarter
ended June 26, 1999. Net revenue from retail operations increased $23.8 million
or 39.0% to $84.8 million in the second quarter ended July 1, 2000 from $61.0
million for the same period in 1999. This increase is primarily attributable to
the opening of 40 new stores since the second quarter of 1999 and a 10.1%
increase in combined comparable store sales resulting from the continued
strength of the retail business by having a smart, fashion-focused product mix,
strong visual merchandising and quicker replenishment.
8
Net revenue from wholesale operations increased $34.8 million or 70.9% to $83.9
million in the quarter ended July 1, 2000 from $49.1 million for the comparable
period in 1999. Excluding Guess Canada, domestic and international wholesale
operations revenue increased, for the second quarter ended July 1, 2000 from the
comparable period in 1999, by $30.3 million to $75.4 million and by $2.0 million
to $6.3 million, respectively. Domestic wholesale operations net revenue
increased primarily due to a stronger domestic demand for our women's and men's
product lines. In addition to the strong demand in our full priced product
lines, off price sales increased to $12.0 million from $2.6 million from the
comparable period in 1999, in order to clear excess inventory. International
wholesale operations net revenue increased as a result of strong product
acceptance in Asian, South American, and European markets, coupled with
increased merchandising training and adding better performing distributors,
which have remodeled their stores to be consistent with our global branding
initiative. Guess Canada contributed an increase in net revenues of $2.7 million
during the second quarter of 2000. Net royalty revenue decreased $0.4 million or
4.3% to $9.0 million in the second quarter ended July 1, 2000 from $9.4 million
for the comparable period in 1999. The decrease in net royalty revenue was
primarily due to prior year's settlements and adjustments of $1.9 million for
licensees that were brought back in-house, which was partially offset by an
increase in royalty revenue earned from sales by our licensees in the watch,
footwear and small leather goods product lines.
Net revenue increased $117.9 million or 47.4% to $366.5 million for the six
months ended July 1, 2000 from $248.6 million for the six months ended June 26,
1999. Net revenue from retail operations increased $50.1 million or 44.5% to
$162.6 million for the six months from $112.5 million for the same period in
1999. This increase is primarily attributable to the opening of 40 new stores
since the second quarter of 1999 and a 14.2% increase in combined comparable
store sales resulting from the continued strength of the retail business by
having a smart, fashion-focused product mix, strong visual merchandising and
quicker replenishment. Net revenue from wholesale operations increased $66.9
million or 56.9% to $184.5 million for the six months ended July 1, 2000 from
$117.6 million for the comparable period in 1999. Excluding Guess Canada,
domestic and international wholesale operations revenue increased, for the six
months ended July 1, 2000, by $53.1 million to $159.5 million and by $7.0
million to $18.2 million, respectively. Domestic wholesale net revenue increased
primarily due to a stronger domestic demand for our women's and men's product
lines. International wholesale operations net revenue increased as a result of
strong product acceptance in Asian, South American, and European markets,
coupled with increased merchandising training and adding better performing
distributors, which have remodeled their stores to be consistent with our global
branding initiative. Guess Canada contributed an increase in net revenues of
$7.2 million during the six months ended July 1, 2000. Net royalty revenue
increased $1.0 million or 5.4% to $19.5 million in the six months ended July 1,
2000 from $18.5 million for the comparable period in 1999. The increase in net
royalty revenue was primarily due to an increase in royalty revenue earned from
increased sales by our licensees in the watch, eyewear, footwear and small
leather goods 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 26.2% to $69.4 million in the second
quarter ended July 1, 2000 from $55.0 million in the second quarter ended June
26, 1999. Gross profit rate was 39.1% in the quarter ended July 1, 2000 compared
to 46.0% in the quarter ended June 26, 1999. The decrease in gross profit rate
resulted from higher off-price sales and lower licensing income. Gross profit
from product sales increased 32.2% to $60.4 million in the quarter ended July 1,
2000 from $45.7 million for the comparable period in 1999. Gross margin rate
from product sales for the quarter ended July 1, 2000 was 35.8% compared to
41.4% for the same period in 1999. The decrease in gross margin rate from
product sales for the quarter is primarily due to higher off-price sales.
Gross profit increased 36.1% to $148.5 million in the six months ended July 1,
2000 from $109.1 million in the six months ended June 26, 1999. The increase in
gross profit resulted from increased net revenue from product sales. Gross
profit rate was 40.5% in the six months ended July 1, 2000 compared to 43.9% in
the six months ended June 26, 1999. Gross profit from product sales increased
42.5% to $129.1 million in the six months from $90.6 million in 1999. Gross
profit rate from product sales for the six months ended July 1, 2000 was 37.2%
compared to 39.4% for the same period in 1999. The decrease in gross profit rate
from product sales for the six months ended July 1, 2000 was primarily due to
higher off-price sales at low prices to liquidate excess inventory partially
offset by improved retail margins 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 $56.0 million decreased to 31.5% of net
revenue in the quarter ended July 1, 2000 compared to $38.3 million or 32.0%
of net revenue in the second quarter ended June 26, 1999. The decrease in the
SG&A as a percentage of net revenue for the second quarter is due to our cost
containment programs and a $1.1 million sales and use tax refund partially
offset by the expansion of our organizational infrastructure needed to
facilitate our growth initiatives. During the second quarter of 2000, we also
incurred start-up and other non-recurring pre-tax costs of $2.2 million
relating to the relocation of our distribution operation to Kentucky.
Selling, general and administrative ("SG&A") expenses of $108.5 million
increased to 29.6% of net revenue in the six months ended July 1, 2000 compared
to $70.5 million or 28.4% of net revenue in the six months ended June 26, 1999.
The increase in SG&A as a percentage of net revenue for the six months ended
July 1, 2000 is due to the expansion of our organizational infrastructure needed
to facilitate our growth initiatives offset by our cost containment programs.
During the
9
first six months of 2000, we also incurred start-up and other non-recurring
pre-tax costs of $5.3 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.
SEVERANCE COSTS RELATING TO DISTRIBUTION FACILITY RELOCATION. In accordance with
the requirements of EITF 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," the Company recorded a $3.2 million charge,
in the second quarter ended June 26, 1999, for future severance costs related to
the relocation of its distribution operations from Los Angeles to Louisville,
Kentucky. As a result of employee transfers and attrition, the severance costs
actually incurred for Los Angeles-based employees was $1.7 million which has
resulted in a reversal of $1.5 million of the severance charge in the second
quarter of 2000. The Company successfully completed the transition of all
product lines to the new distribution center during the second quarter of 2000.
EARNINGS FROM OPERATIONS. Earnings from operations increased 9.6% to $14.9
million, or 8.4% of net revenue, in the second quarter ended July 1, 2000 from
$13.6 million, or 11.4% of net revenue, in the second quarter ended June 26,
1999. This increase was primarily due to higher revenue and the inclusion of the
severance cost recovery in the second quarter ended July 1, 2000 and the
recording of $3.2 million charge for severance costs in the second quarter ended
June 26, 1999. Earnings from operations increased 17.9% to $41.6 million, or
11.4% of net revenue, in the six months ended July 1, 2000 from $35.3 million,
or 14.2% of net revenue, in the six months ended June 26, 1999. This increase
was primarily due to higher revenue and the inclusion of the severance cost
recovery in the six months ended July 1, 2000 and the recording of $3.2 million
charge for severance costs in the six months ended June 26, 1999.
INTEREST EXPENSE, NET. Net interest expense increased 58.4% to $3.5 million in
the second quarter ended July 1, 2000, from $2.2 million for the comparable
period in 1999. The increase is due to higher outstanding debt in the second
quarter of 2000. Total debt at July 1, 2000 was $156.1 million, which included
$79.6 million of our senior subordinated notes due 2003, $63.8 million of
borrowings under our revolving credit agreement due in October 2002, and $12.7
million of bank debt related to Guess Canada. On a comparable basis and
excluding Guess Canada, the average debt balance for the second quarter of 2000
was $128.9 million, with an average effective interest rate of 9.2%, versus an
average debt balance of $94.7 million, with an average effective interest rate
of 9.1% for the comparable 1999 quarter.
Net interest expense increased 35.5% to $6.1 million in the six months ended
July 1, 2000, from $4.5 million for the comparable period in 1999. The increase
is due to higher outstanding debt in the six months of 2000. On a comparable
basis and excluding Guess Canada, the average debt balance for the first six
months of 2000 was $110.7 million, with an average effective interest rate of
9.3%, versus an average debt balance of $95.7 million, with an average effective
interest rate of 9.7% for the comparable 1999 period.
INCOME TAXES. Income taxes for the second quarter ended July 1, 2000 were $4.5
million, or a 39.8% effective tax rate, compared to $4.8 million, or a 40.5%
effective tax rate, in the quarter ended June 26, 1999. Income taxes for the six
months ended July 1, 2000 were $14.1 million, or a 39.9% effective tax rate,
compared to $12.6 million, or a 40.5% effective tax rate, in the six months
ended June 26, 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 decreased 2.9% to $6.8 million, or 3.8% of net
revenue, in the second quarter ended July 1, 2000, from $7.0 million, or 5.9% of
net revenue, in the same period in 1999. Net earnings increased 14.6% to $21.2
million, or 5.8% of net revenue, in the six months ended July 1, 2000, from
$18.5 million, or 7.4% of net revenue, in the same period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
In the quarter ended July 1, 2000, we relied primarily on internally generated
funds, trade credit and bank borrowings to finance our operations and expansion.
At July 1, 2000, we had working capital of $161.6 million compared to $97.9
million at December 31, 1999. The increase was primarily due to a $26.5 million
increase in net receivables, and a $67.1 million increase in inventories, which
was partially offset by a $24.3 million decrease in short-term investments. The
increase in receivables is primarily due to a 12% increase in wholesale
operations sales in the second quarter of 2000 from the fourth quarter of 1999
and a high level of back to school shipments occurring in June 2000. The
majority of the increase in inventory is the result of significantly increased
product sales, substantially higher wholesale backlog and our retail expansion
program, coupled with an accelerated supply chain associated with global
sourcing. Included in the net cash flow for six months ended July 1, 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 July 1, 2000, we had
$63.8 million outstanding borrowings under the revolving credit facility, $4.4
million in outstanding standby letters of credit and $28.6 million in
outstanding
10
documentary letters of credit. At July 1, 2000, we had $27.5 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 July 1, 2000, we were in compliance with all
such covenants.
Capital expenditures, net of lease incentives granted, totaled $36.7 million in
the six months ended July 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, information systems and general
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 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
July 2, 2000, unfilled wholesale orders increased 61.4% to $162.4 million from
$100.6 million a year ago. The backlog of wholesale orders is affected by
various factors, including seasonality and the scheduling of manufacturing and
shipment of product which varies at any given time. 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 incurred
excessive 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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 JULY 1, 2000
--------- ---------- ------------- ----------------
Canadian dollars $1,000,000 July 5 to August 7, 2000 $1,012,369
Canadian dollars 750,000 July 5 to August 7, 2000 744,525
Canadian dollars 1,000,000 July 17 to August 17, 2000 1,017,100
Canadian dollars 1,000,000 July 5 to September 18, 2000 993,444
Based upon the rates at July 1, 2000, the cost to buy the equivalent U.S.
dollars discussed above was approximately $5.5 million Canadian currency.
11
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 until 45 days after a lead plaintiff has
been appointed and has filed a consolidated amended complaint.
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
12
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
(a) The Registrant's Annual Meeting of Stockholders was held on May 15,
2000.
(b) Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934, as amended. There was no
solicitation in opposition to management's nominees as listed in the
Proxy Statement. All nominees were elected.
(c) The matters voted upon at the Annual Meeting and the results thereof
were as follows:
I. To elect two Class I Directors to hold office for a three-year term and
until their successors are duly elected and qualified.
FOR WITHHELD
-------------- -------------
Armand Marciano 42,049,209 601,927
Alice Kane 42,051,304 599,832
II. To ratify the selection of KPMG LLP to serve as our independent
certified public accountants for the year ending December 31, 2000.
FOR AGAINST ABSTAINED
-------------- -------------- -------------
41,064,246 2,475 8,265
III. To approve the GUESS?, Inc. 1996 Equity Incentive Plan.
FOR AGAINST ABSTAINED
-------------- -------------- -------------
41,064,246 1,569,693 17,197
IV. To approve the GUESS?, Inc. Annual Incentive Bonus Plan.
FOR AGAINST ABSTAINED
-------------- -------------- -------------
42,103,501 530,082 17,553
ITEM 5. OTHER INFORMATION
None.
13
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)
4.1. Specimen stock certificate.(1)
* filed herewith.
(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:
Our current report on Form 8-K dated May 8, 2000.
14
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)
15