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