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 September 30, 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 September 30, 2000 and December 31, 1999 1
Condensed Consolidated Statements of Earnings (Unaudited) - Third Quarter and
Nine Months Ended September 30, 2000 and September 25, 1999 2
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2000 and September 25, 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 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
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 September 30, 2000 filed with the Securities and Exchange
Commission on November 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 and related costs of goods sold were incorrectly
reported in the third quarter and certain rent expenses should have been
recognized in the third quarter. Accordingly, the Company is restating its
2000 third quarter and nine-months results. Recognizing these items in the
third quarter resulted in an increase 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
SEP 30, DEC 31,
2000 1999
--------- ---------
(RESTATED)
Current assets:
Cash $ 9,158 $ 6,139
Investments 2,408 27,059
Accounts receivable, net of reserves 77,670 39,673
Inventories 164,214 106,624
Prepaid expenses and other current assets 9,931 8,861
Prepaid income taxes 7,765 3,004
Deferred tax assets 9,619 9,619
--------- ---------
Total current assets 280,765 200,979
Property and equipment, at cost, net of accumulated
depreciation and amortization 158,226 125,688
Other assets, at cost, net of accumulated amortization 21,790 42,369
--------- ---------
$ 460,781 $ 369,036
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of bank debt and long-term debt $ 14,659 $ 7,475
Accounts payable 70,711 61,736
Accrued expenses 24,437 33,824
--------- ---------
Total current liabilities 109,807 103,035
Notes payable and long-term debt, less current installments 155,300 83,363
Other liabilities 10,572 14,236
--------- ---------
Total liabilities 275,679 200,634
Minority interest 182 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 63,569,119 and 63,335,743 shares,
outstanding 43,538,327 and 43,304,951 shares at
September 30, 2000 and December 31, 1999, respectively 144 141
Paid-in capital 164,907 163,300
Retained earnings 174,025 144,443
Accumulated other comprehensive income (loss) (3,380) 10,247
Treasury stock, 20,030,792 shares repurchased (150,776) (150,776)
--------- ---------
Net stockholders' equity 184,920 167,355
--------- ---------
$ 460,781 $ 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)
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEP 30, SEP 25, SEP 30, SEP 25,
2000 1999 2000 1999
--------- --------- --------- ---------
(RESTATED) (RESTATED)
Net revenue:
Product sales $ 206,831 $ 144,142 $ 553,903 $ 374,264
Net royalties 9,532 11,405 28,985 29,892
--------- --------- --------- ---------
216,363 155,547 582,888 404,156
Cost of sales 139,206 90,286 357,206 229,832
--------- --------- --------- ---------
Gross profit 77,157 65,261 225,682 174,324
Selling, general and administrative expenses 58,935 42,911 167,540 113,133
Severance recovery (costs) relating to
distribution facility relocation -- -- 1,545 (3,200)
--------- --------- --------- ---------
Earnings from operations 18,222 22,350 59,687 57,991
Other income (expense):
Gain on disposal of property
and equipment -- 3,849 -- 3,849
Interest expense (4,159) (2,364) (10,305) (6,902)
--------- --------- --------- ---------
(4,159) 1,485 (10,305) (3,053)
Earnings before income taxes 14,063 23,835 49,382 54,938
Income taxes 5,700 9,600 19,800 22,200
--------- --------- --------- ---------
Net earnings $ 8,363 $ 14,235 $ 29,582 $ 32,738
========= ========= ========= =========
NET EARNINGS PER SHARE:
Basic $ 0.19 $ 0.33 $ 0.68 $ 0.76
========= ========= ========= =========
Diluted $ 0.19 $ 0.33 $ 0.67 $ 0.76
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 43,492 43,015 43,422 42,958
========= ========= ========= =========
Diluted 43,828 43,482 43,857 43,315
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
2
GUESS?, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
NINE MONTHS ENDED
----------------------
SEP 30, SEP 25,
2000 1999
--------- ---------
(RESTATED)
Cash flows from operating activities:
Net earnings $ 29,582 $ 32,738
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Depreciation and amortization 24,685 17,317
Gain on disposition of property and equipment -- (4,564)
Other items, net (1,004) (402)
Changes in operating assets and liabilities:
Accounts receivable (37,997) (12,353)
Inventories (57,590) 3,275
Prepaid expenses and other current assets (10,760) 1,304
Accounts payable 8,976 7,134
Accrued expenses (10,934) 4,816
Income taxes payable -- (252)
--------- ---------
Net cash (used in) provided by operating activities (55,042) 49,013
Cash flows from investing activities:
Purchases of property and equipment (57,327) (20,384)
Proceeds from the disposition of property and equipment 3,133 6,372
Net proceeds from the sale of short-term investments 33,274 --
Increase in short-term investments (1,843) (30,150)
Acquisition of interest in GUESS? Canada -- (2,027)
Increase in long-term investments -- (2,232)
--------- ---------
Net cash used in investing activities (22,763) (48,421)
Cash flows from financing activities:
Proceeds from notes payable and long-term debt 182,131 3,015
Repayment of notes payable and long-term debt (103,010) (7,702)
Issuance of common stock 1,610 1,146
--------- ---------
Net cash provided by (used in) financing activities 80,731 (3,541)
Effect of exchange rates on cash 93 (27)
Net increase (decrease) in cash 3,019 (2,976)
Cash, beginning of period 6,139 5,853
--------- ---------
Cash, end of period $ 9,158 $ 2,877
========= =========
Supplemental disclosures:
Cash paid during the period for:
Interest $ 11,195 $ 12,911
Income taxes 23,758 15,158
See accompanying notes to condensed consolidated financial statements.
3
GUESS?, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30, 2000 and December 31, 1999, the consolidated statements of
earnings for the quarter ended and nine months ended September 30, 2000 and
September 25, 1999, and the statements of cash flows for the nine months ended
September 30, 2000 and September 25, 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 nine
months ended September 30, 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 third quarter of 2000; however,
this change resulted in six more calendar days for the nine months ended
September 30, 2000.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the September 30, 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 nine month periods ended September 30, 2000 and September 25,
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 535,404
shares of common stock at prices ranging from $21.06 to $27.31 per share during
the nine month period ended September 30, 2000 and options to purchase 767,436
shares of common stock at prices ranging from $10.50 to $13.13 during the nine
month period ended September 25, 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 retail, wholesale
and licensing operations. Information relating to these segments is summarized
in note 8.
4
COMPREHENSIVE INCOME
The Company reports comprehensive income under SFAS No. 130, "Reporting
Comprehensive Income." Comprehensive income consists of net earnings, unrealized
gains (losses) on investments available for sale and foreign currency
translation adjustments. A reconciliation of comprehensive income for the
quarter and nine-month periods ended September 30, 2000 and September 25, 1999
is as follows (in thousands):
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------- --------------------
SEP 30, SEP 25, SEP 30, SEP 25,
2000 1999 2000 1999
-------- -------- -------- --------
Net earnings $ 8,363 $ 14,235 $ 29,582 $ 32,738
Unrealized loss on investments, net of taxes (2,469) -- (13,883) --
Foreign currency
translation adjustment (227) 25 256 67
-------- -------- -------- --------
Comprehensive income $ 5,667 $ 14,260 $ 15,955 $ 32,805
======== ======== ======== ========
RECENTLY ISSUED ACCOUNTING STANDARDS
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 its
financial reporting.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation,"
which is an interpretation of APB Opinion No. 25. Interpretation No. 44 became
effective on July 1, 2000, but certain elements of interpretation apply to
events occurring after December 15, 1998 and January 12, 2000. Interpretation
No. 44 clarifies the application of APB Opinion No. 25 for certain issues,
including (a) the definition of employee for purposes of applying APB Opinion
No. 25, (b) the criteria for determining whether a stock option plan qualifies
as a non-compensation plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of Interpretation No. 44 did not have a material
impact on the Company's financial statements.
RESTATED FINANCIAL STATEMENTS
The Company's financial statements as of September 30, 2000, have been restated
to reflect certain inventory accruals and related cost of goods sold that were
incorrectly reported in the third quarter and certain rent expenses that should
have been recognized in the third quarter. The following accounts are adjusted
as a result of the restatement (in thousands, except per share data):
QUARTER ENDED NINE MONTHS ENDED
SEP 30, 2000 SEP 30, 2000
-------------------------- ---------------------------
As Previously As As Previously As
Reported Restated Reported Restated
- -------------------------------------------------------------------------------------------------------------
Balance sheet:
Prepaid income taxes $ 5,765 $ 7,765 $ 5,765 $ 7,765
Property and equipment, at cost, net
of accumulated depreciation and amortization 159,527 158,226 159,527 158,226
Accounts payable 66,440 70,711 66,440 70,711
Retained earnings 177,597 174,025 177,597 174,025
Statement of earnings:
Cost of sales 144,566 139,206 352,941 357,206
Selling, general and administrative expenses 58,498 58,935 166,233 167,540
Earnings from operations 13,299 18,222 65,259 59,687
Income taxes 3,500 5,700 21,800 19,800
Net earnings $ 5,640 $ 8,363 $ 33,154 $ 29,582
Net earnings per diluted share $ 0.13 $ 0.19 $ 0.76 $ 0.67
- -------------------------------------------------------------------------------------------------------------
5
(3) ACCOUNTS RECEIVABLE
Accounts receivable consists of trade receivables, less reserves aggregating
$7,094,000 at September 30, 2000 and $8,863,000 at December 31, 1999, royalty
receivables, less allowance for doubtful accounts of $972,000 at September 30,
2000 and $1,258,000 at December 31, 1999, and other receivables.
(4) INVENTORIES
The components of inventories consist of the following (in thousands):
SEP 30, DEC 31,
2000 1999
-------- --------
Raw materials $ 10,590 $ 8,514
Work in progress 8,750 6,740
Finished goods - retail 69,552 45,750
Finished goods - wholesale 75,322 45,620
-------- --------
$164,214 $106,624
======== ========
(5) INVESTMENTS
At September 30, 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.
(6) 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, California 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.
(7) 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.
(8) 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
quarter and nine months ended September 30, 2000 and September 25, 1999 (in
thousands):
THIRD QUARTER ENDED NINE MONTHS ENDED
---------------------------- --------------------------
SEP 30, SEP 25, SEP 30, SEP 25,
2000 1999 2000 1999
----------- ----------- ------------- ----------
Net revenue:
Retail operations $ 103,518 $ 73,963 $ 266,083 $ 186,486
Wholesale operations 103,313 70,179 287,820 187,778
Licensing operations 9,532 11,405 28,985 29,892
---------- ---------- ---------- -----------
$ 216,363 $ 155,547 $ 582,888 $ 404,156
=========== =========== ========= =========
Earnings from operations:
Retail operations $ 7,983 $ 11,514 $ 13,763 $ 18,312
Wholesale operations 2,900 2,028 22,972 15,495
Licensing operations 7,339 8,808 22,952 24,184
----------- ----------- ---------- ----------
$ 18,222 $ 22,350 $ 59,687 $ 57,991
=========== ========== =========== =========
6
Due to the seasonal nature of these business segments, especially retail
operations, the above net revenue and operating results for the quarter ended
and nine months ended September 30, 2000, are not necessarily indicative of the
results that may be expected for the full fiscal year.
(9) 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 September 30, 2000, the Company had $73.4 million in outstanding
borrowings under the Credit Facility, $4.0 million in outstanding standby
letters of credit and $23.6 million in outstanding documentary letters of
credit. At September 30, 2000, the Company had $24.0 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 a result of the restatement of its financial
results, the Company was in technical non-compliance with the terms of the
Credit Facility regarding the fixed charge coverage ratio required for the
twelve-month period ended September 30, 2000. On March 27, 2001 the Company's
bank lenders agreed to amend the Credit Facility to cure all past
non-compliance and revise certain terms of the agreement. Accordingly, the
Company is presently in compliance with all the terms of the Credit
Facility, as amended.
(10) COMMON STOCK
On May 24, 2000, the Company filed an amended registration statement to sell up
to $200 million of common stock at any time and from time to time. To date, no
shares during the third quarter of 2000 have been sold under this registration
statement, and all costs related to the registration have been expensed and are
included in selling, general and administrative expenses.
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 "continues" or the negative of such terms or other
comparable terminology. Certain statements contained 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, the cooperation
of the Company's lenders, 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 the Company's Form 10-Q/A for the quarters ended April 1,
2000 and July 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 third quarter of 2000 and 1999;
however, this change resulted in six more calendar days for the nine months
ended September 30, 2000.
RESULTS OF OPERATIONS
Third Quarter and Nine Months Ended September 30, 2000 and September 25, 1999.
NET REVENUE. Net revenue for the third quarter ended September 30, 2000
increased $60.9 million or 39.2% to $216.4 million from $155.5 million in the
quarter ended September 25, 1999. Net revenue from retail operations
increased $29.5 million or 39.9% to $103.5 million in the current year third
quarter from $74.0 million for the same period in 1999. This increase is
primarily attributable to a net increase of 55 new stores, which includes 59
new stores, 3 store closures and 1 store consolidation, since September 25,
1999 and a 4.8% increase in combined comparable store sales. There were 129
full priced stores, 6 kids stores and 63 factory outlet stores at September
30, 2000. During the third quarter, comparable store sales for July increased
11.9% and for August increased 4.9%, however, September same store sales did
not materialize as expected, due to softness in the retail environment, and
declined by 3.6%.
Net revenue from wholesale operations increased $33.1 million or 47.2% to
$103.3 million in the quarter ended September 30, 2000 from $70.2 million for
the comparable period in 1999. Domestic wholesale operations net revenue
increased by $29.4 million or 51.3% to $86.7 million in the third quarter
ended September 30, 2000 from $57.3 million in the comparable period in 1999.
Domestic wholesale operations net revenue increased primarily due to a strong
demand for our men's and
8
women's product lines and the addition of our boys' product line. Also
contributing to higher net revenues was the increase in off-price sales of $12.0
million compared with $3.6 million in the same 1999 period. International
wholesale operations net revenues increased $3.7 million or 28.7% to $16.6
million in the third quarter of 2000 compared to $12.9 million in the same 1999
period.
Net royalty revenue was $9.5 million in the current quarter compared to $11.4
million in the 1999 third quarter, which included income from a one-time
settlement of $1.9 million. Excluding the one-time income, net royalty revenue
was consistent with the prior year.
Net revenue increased $178.7 million or 44.2% to $582.9 million for the nine
months ended September 30, 2000 from $404.2 million for the nine months ended
September 25, 1999. Net revenue from retail operations increased $79.6
million or 42.7% to $266.1 million in the nine months ended September 30,
2000 from $186.5 million for the same period in 1999. This increase is
primarily attributable to a net increase of 55 new stores since September 25,
1999 and a 10.5% increase in combined comparable store sales resulting from a
fashion-forward product mix, strong visual merchandising and quick
replenishment.
Net revenue from wholesale operations increased $100.0 million or 53.2% to
$287.8 million for the nine months ended September 30, 2000 from $187.8
million for the comparable period in 1999. Domestic wholesale operations net
revenue increased $82.4 million or 50.3% to $246.1 million in the nine months
ended September 30, 2000 from $163.7 million in the nine months ended
September 25, 1999. Domestic wholesale net revenue increased primarily due to
a strong demand for our women's and men's product lines and the addition of
our boys' product line. International wholesale operations net revenue
increased $17.6 million or 73.0% to $41.7 million in the nine months ended
September 30, 2000 from $24.1 million in the same 1999 period. The increase
in the current year period is due to a nine-month inclusion of Guess Canada
as compared to the prior year, which included only a three-month inclusion.
Excluding Guess Canada, international wholesale net revenues increased 56.3%
to $29.4 million in the nine months ended September 30, 2000 from $18.8
million in the nine months ended September 25, 1999.
Net royalty revenue was $29.0 million for the nine months ended September 30,
2000 compared to $29.9 million for the comparable 1999 period which included
income from one-time net settlements of $3.8 million. Excluding the prior year
income from settlements, net royalty revenue increased by $2.9 million in the
current year nine-month period ended September 30, 2000.
GROSS PROFIT. Gross profit increased 18.2% to $77.2 million, or 35.7% of net
revenue, in the third quarter ended September 30, 2000 from $65.3 million, or
42.0% of net revenue in the third quarter ended September 25, 1999. The decline
in the gross profit rate in the current year third quarter was due to losses
incurred on off-price sales, higher markdowns on product sales, a $5.4 million
reserve for the disposition of excess inventory and slightly lower licensing
revenue. These lower margin elements were due to softness in the retail
environment and higher than expected levels of prior season inventory.
Gross profit for the nine months ended September 30, 2000 was $225.7 million, or
38.7% of net revenue, compared to $174.3 million, or 43.1% of net revenue, for
the nine months ended September 25, 1999. The decrease in the gross profit rate
for the first nine months of 2000 compared to the same prior year period was
primarily attributable to higher markdowns on product sales together with losses
on the sales of excess inventory through off-price channels. These off-price
sales were necessary to reduce higher levels of inventory and were primarily
concentrated in the third quarter of 2000. Additional reserves of $5.4 million
to lower the value of excess inventory also contributed to the decrease in the
gross profit rate for the nine months ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses of $58.9 million decreased to 27.2% of net
revenue in the quarter ended September 30, 2000 compared to $42.9 million, or
27.6% of net revenue, in the third quarter ended September 25, 1999. The
improvement of SG&A expenses as a percentage of net revenue was primarily
generated through economies of scale on our overhead.
SG&A expenses were $167.5 million, or 28.7% of net revenue, in the nine months
ended September 30, 2000 compared to $113.1 million, or 28.0% of net revenue, in
the nine months ended September 25, 1999. The current year nine-month period
includes $5.3 million of start-up and other non-recurring costs relating to the
relocation of our distribution facility to Kentucky and a $1.3 million one-time
pre-tax charge as a result of a revision to our vacation pay policies to enhance
employee benefits. Excluding these expenses totaling $6.6 million, SG&A expenses
as a percentage of net revenue decreased to 27.6% in the nine months ended
September 30, 2000.
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
9
Angeles, California to Louisville, Kentucky. As a result of employee transfers
and attrition, the severance cost 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 decreased to $18.2 million,
or 8.4% of net revenue, in the third quarter ended September 30, 2000 from $22.4
million, or 14.4% of net revenue, in the third quarter ended September 25, 1999.
The $4.2 million or 18.8% decrease in the current quarter is primarily due to
the lower gross profit rate. Earnings from operations increased slightly to
$59.7 million, or 10.2% of net revenue, in the nine months ended September 30,
2000 from $58.0 million, or 14.3% of net revenue, in the nine months ended
September 25, 1999. The decrease as a percentage of net revenue in the current
year nine-month period is primarily attributable to the lower gross profit rate.
GAIN ON DISPOSITION OF PROPERTY AND EQUIPMENT. In the quarter ended September
25, 1999, the Company realized a non-recurring pre-tax gain of $3.8 million on
the disposition of property and equipment.
INTEREST EXPENSE, NET. Net interest expense increased 75.0% to $4.2 million in
the third quarter ended September 30, 2000, from $2.4 million for the comparable
period in 1999. The increase is due to higher outstanding debt in the third
quarter of 2000. Total debt at September 30, 2000 was $170.0 million, which
included $79.6 million of our senior subordinated notes due 2003, $73.4 million
of borrowings under our revolving credit agreement due in October 2002, and
$16.8 million of bank debt related to Guess Canada. On a comparable basis and
excluding Guess Canada, the average debt balance for the third quarter of 2000
was $154.9 million, with an average effective interest rate of 8.9%, versus an
average debt balance of $92.8 million, with an average effective interest rate
of 9.5% for the 1999 third quarter.
Net interest expense increased 49.3% to $10.3 million in the nine months ended
September 30, 2000, from $6.9 million for the comparable period in 1999. The
increase is due to higher outstanding debt in the nine months of 2000. On a
comparable basis and excluding Guess Canada, the average debt balance for the
first nine months of 2000 was $125.4 million, with an average effective interest
rate of 9.0%, versus an average debt balance of $94.7 million, with an average
effective interest rate of 9.6%, for the 1999 period.
INCOME TAXES. Income taxes for the third quarter ended September 30, 2000 were
$5.7 million, or a 40.5% effective tax rate, compared to $9.6 million, or a
40.3% effective tax rate, in the quarter ended September 25, 1999. Income taxes
for the nine months ended September 30, 2000 were $19.8 million, or a 40.1%
effective tax rate, compared to $22.2 million, or a 40.4% effective tax rate, in
the nine months ended September 25, 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 40.8% to $8.4 million, or 3.9% of net
revenue, in the third quarter ended September 30, 2000, from $14.2 million, or
9.1% of net revenue, in the same period in 1999. Net earnings decreased 9.5% to
$29.6 million, or 5.1% of net revenue, in the nine months ended September 30,
2000, from $32.7 million, or 8.1% of net revenue, in the same period in 1999.
OTHER. At the end of the 2000 third quarter, the Company was evaluating certain
under-performing stores and at the time it expected to take certain charges to
operations of up to $10.0 million for store closures beginning in the fourth
quarter of fiscal year 2000.
LIQUIDITY AND CAPITAL RESOURCES
In the quarter ended September 30, 2000, we relied primarily on internally
generated funds, trade credit and bank borrowings to finance our operations and
expansion. At September 30, 2000, we had working capital of $161.0 million
compared to $97.9 million at December 31, 1999. The increase was primarily due
to a $38.0 million increase in net receivables, a $57.6 million increase in
inventories, a $5.8 million increase in prepaid and other current assets and a
$9.4 million decrease in accrued expenses, which was partially offset by a $24.7
million decrease in short-term investments, a $7.2 million increase of current
installments of bank debt and long-term debt and a $9.0 million increase in
accounts payable. The increase in receivables is primarily due to a 36.2%
increase in wholesale operations sales in the third quarter of 2000 from the
fourth quarter of 1999. The increase in inventory is the result of higher
anticipated product sales, higher wholesale backlog and our retail expansion
program. Included in the net cash flow for the nine months ended September 30,
2000 was the funding of approximately $7.5 million of construction costs for the
distribution center and new stores that was 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 September 30, 2000,
we had $73.4 million outstanding borrowings under the revolving credit facility,
$4.0 million in outstanding standby letters of credit and $23.6 million in
10
outstanding documentary letters of credit. At September 30, 2000, we had
$24.0 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 a result of the
restatement of its financial results, the Company was in technical
non-compliance with the terms of the Credit Facility regarding the fixed
charge coverage ratio required for the twelve-month period ended September
30, 2000. On March 27, 2001 the Company's bank lenders agreed to amend the
Credit Facility Agreement to cure all past non-compliance and revise certain
terms of the agreement. Accordingly, the Company is presently in full
compliance with the terms of the Credit Facility, as amended.
Capital expenditures, net of lease incentives granted, totaled $57.3 million in
the nine months ended September 30, 2000. We estimate our capital expenditures
for fiscal 2000 will be approximately $76.5 million, primarily for the retail
store expansion and remodeling, shop-in-shop programs, information systems and
general operations. At the end of the 2000 third quarter, the Company expected
to report charges of up to $10.0 million, in the fourth quarter of 2000 for
closing certain under-performing stores.
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. At
September 30, 2000, unfilled orders increased 13.2% to $133.3 million from
$117.7 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 vary at any given time. Accordingly, a comparison on
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 are generally stronger
in the first and third quarters. As product shipment timing may vary from year
to year, the results for any particular quarter may not be indicative of results
for the full year. During the third quarter ended September 30, 2000, 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.
11
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 SEPTEMBER 30, 2000
--------- ---------- ------------- ---------------------
Canadian dollars $700,000 September 18 to October 18, 2000 $690,451
Canadian dollars 500,000 September 15 to October 16, 2000 492,347
Canadian dollars 500,000 October 16 to November 15, 2000 493,112
Canadian dollars 750,000 October 16 to November 15, 2000 742,114
Based upon the rates at September 30, 2000, the cost to buy the equivalent U.S.
dollars discussed above was approximately $3.7 million Canadian currency.
12
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.
13
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)
4.1 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:
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