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