-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HnCn7aHcwDTrcJQtQyMFb7WYApy6ZCoULdJ8XjOvE834VoVRU/8haG742++92bgM yJuQLtYTSC8l8wRiDAoRGQ== 0000891618-99-005671.txt : 19991215 0000891618-99-005671.hdr.sgml : 19991215 ACCESSION NUMBER: 0000891618-99-005671 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991030 FILED AS OF DATE: 19991214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GYMBOREE CORP CENTRAL INDEX KEY: 0000786110 STANDARD INDUSTRIAL CLASSIFICATION: APPAREL & OTHER FINISHED PRODS OF FABRICS & SIMILAR MATERIAL [2300] IRS NUMBER: 942615258 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21250 FILM NUMBER: 99774133 BUSINESS ADDRESS: STREET 1: 700 AIRPORT BLVD STE 200 CITY: BURLINGAME STATE: CA ZIP: 94010 BUSINESS PHONE: 4155790600 MAIL ADDRESS: STREET 2: 700 AIRPORT BLVD #200 CITY: BURLINGAME STATE: CA ZIP: 94010 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED OCTOBER 30, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED OCTOBER 30, 1999 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 000-21250 THE GYMBOREE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2615258 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 700 AIRPORT BOULEVARD, BURLINGAME, CALIFORNIA 94010-1912 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(650) 579-0600 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 [ ] Number of shares of common stock outstanding at November 27, 1999: 24,345,532 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE NUMBER ------ PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Operations... 3 Condensed Consolidated Balance Sheets............. 4 Condensed Consolidated Statements of Cash Flows... 5 Notes to Condensed Consolidated Financial Statements................................................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................... 13 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................... 14 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 Signatures.................................................. 15 Exhibit Index............................................... 16
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE GYMBOREE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA) (UNAUDITED)
13 WEEKS ENDED 39 WEEKS ENDED -------------------------- -------------------------- OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net sales...................................... $107,235 $113,991 $332,868 $316,886 Cost of goods sold, including buying and occupancy expenses............................. (66,124) (72,897) (212,878) (200,979) -------- -------- -------- -------- Gross profit................................. 41,111 41,094 119,990 115,907 Selling, general and administrative expenses... (41,777) (41,816) (135,992) (112,631) Play and music income, net..................... 600 608 1,759 1,369 -------- -------- -------- -------- Operating income (loss)...................... (66) (114) (14,243) 4,645 Foreign exchange gains (loss), net............. (97) (113) (50) 32 Net interest income (expense).................. 180 (202) 389 154 -------- -------- -------- -------- Income (loss) before income taxes............ 17 (429) (13,904) 4,831 Income tax (expense) benefit................... (7) 156 5,144 (1,787) -------- -------- -------- -------- Net income (loss)............................ $ 10 $ (273) $ (8,760) $ 3,044 ======== ======== ======== ======== Income (loss) per share: Basic........................................ $ 0.00 $ (0.01) $ (0.36) $ 0.13 Diluted...................................... 0.00 (0.01) (0.36) 0.13 Weighted average shares outstanding: Basic........................................ 24,345 24,172 24,299 24,153 Diluted...................................... 24,370 24,172 24,299 24,213 Number of stores at end of period.............. 602 548 602 548
See notes to condensed consolidated financial statements. 3 4 THE GYMBOREE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) ASSETS
OCTOBER 30, JANUARY 30, OCTOBER 31, 1999 1999 1998 ----------- ----------- ----------- Current Assets Cash and cash equivalents................................. $ 32,744 $ 27,810 $ 2,170 Accounts receivable....................................... 5,699 7,811 11,095 Merchandise inventories................................... 47,283 74,396 95,037 Prepaid expenses and other................................ 7,732 8,068 6,214 -------- -------- -------- Total current assets.............................. 93,458 118,085 114,516 -------- -------- -------- Property and Equipment Land and buildings........................................ 9,943 9,943 9,969 Leasehold improvements.................................... 88,968 79,832 76,379 Furniture, fixtures and equipment......................... 101,337 91,551 85,630 -------- -------- -------- 200,248 181,326 171,978 Less accumulated depreciation and amortization............ (62,115) (46,886) (42,038) -------- -------- -------- 138,133 134,440 129,940 Lease Rights and Other Assets............................... 4,840 4,180 3,864 -------- -------- -------- Total Assets...................................... $236,431 $256,705 $248,320 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long term debt, short-term borrowings............................................. $ 572 $ 540 $ 17,450 Accounts payable.......................................... 8,425 21,842 18,314 Accrued liabilities....................................... 24,703 17,424 16,757 Income taxes payable...................................... 1,626 1,965 2,028 -------- -------- -------- Total current liabilities......................... 35,326 41,771 54,549 -------- -------- -------- Long Term Liabilities Long term debt, net of current portion.................... 11,028 11,460 -- Deferred rent and other liabilities....................... 29,783 35,102 30,336 -------- -------- -------- Total Liabilities................................. 76,137 88,333 84,885 -------- -------- -------- Stockholders' Equity Common stock, including excess paid-in capital ($.001 par value: 100,000,000 shares authorized 24,345,428, 24,240,763 and 24,172,134 shares outstanding at October 30, 1999, January 30, 1999 and October 31, 1998, respectively).......................................... 27,542 26,855 25,115 Retained earnings......................................... 132,752 141,517 138,320 -------- -------- -------- Total stockholders' equity........................ 160,294 168,372 163,435 -------- -------- -------- Total Liabilities and Stockholders' Equity........ $236,431 $256,705 $248,320 ======== ======== ========
See notes to condensed consolidated financial statements. 4 5 THE GYMBOREE CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
39 WEEKS ENDED ------------------------------------ OCTOBER 30, 1999 OCTOBER 31, 1998 ---------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................... $ (8,760) $ 3,044 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 17,294 13,755 Impairment reserve and other write offs................ 7,000 -- Provision for deferred income tax...................... (4,225) 204 Tax benefit from exercise of stock options............. -- 240 Loss on disposal of property and equipment............. 949 1,238 Change in assets and liabilities: Accounts receivable.................................. 2,112 (5,911) Merchandise inventories.............................. 27,108 (19,378) Prepaid expenses and other assets.................... 1,136 (2,181) Accounts payable..................................... (13,417) (7,733) Income tax payable................................... (338) (6,010) Other liabilities.................................... (262) 8,777 Accrued liabilities.................................. 4,986 649 -------- -------- Net cash provided by (used in) operating activities.... 33,583 (13,306) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures........................................ (28,935) (40,585) Proceeds from sale of assets................................ -- 24 Proceeds from sale of investments........................... -- 18,614 -------- -------- Net cash used in investing activities.................. (28,935) (21,947) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock...................... 687 2,103 Proceeds from (payments on) debt borrowings................. (401) 17,450 -------- -------- Net cash provided by financing activities.............. 286 19,553 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 4,934 (15,700) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 27,810 17,870 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 32,744 $ 2,170 ======== ======== OTHER CASH FLOW INFORMATION: Cash paid during the year for income taxes................ $ 466 $ 8,051 Cash paid during the year for interest expense............ $ 814 $ 336
See notes to condensed consolidated financial statements. 5 6 THE GYMBOREE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The unaudited interim condensed consolidated financial statements of The Gymboree Corporation and our wholly-owned subsidiaries as of and for the periods ended October 30, 1999 and October 31, 1998 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended January 30, 1999. The accompanying interim condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented and necessary to present fairly the results of operations, the financial position and cash flows for the periods presented. All such adjustments are of a normal and recurring nature except as discussed in Notes 3 and 8. Certain prior year amounts have been reclassified to conform with the current year presentation. 2. MERCHANDISE INVENTORIES Merchandise inventories are recorded under the retail method of accounting and are stated at the lower of cost or market. 3. IMPAIRMENT OF LONG-LIVED ASSETS During 1999, management identified a group of 12 underperforming stores and established an impairment reserve equal to the carrying value of the leasehold improvements and fixtures used in the stores. Additionally in 1999, we wrote off a software application that was not Year 2000 compliant and did not meet our current needs. The total charge related to these items was $3.9 million and is included in selling, general and administrative expenses within the Statements of Operations for the thirty-nine weeks ended October 30, 1999. 4. INCOME TAXES Our effective tax rate in the third quarters of fiscal 1999 and 1998 was 37%. 5. COMPREHENSIVE INCOME Comprehensive income and its components are as follows:
13 WEEKS ENDED 39 WEEKS ENDED ------------------------- ------------------------- OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (IN 000'S) Net income (loss)........................... $10 $(273) $(8,760) $3,044 Other comprehensive income (loss)........... 75 51 (5) 338 --- ----- ------- ------ Total comprehensive income (loss)........... $85 $(222) $(8,765) $3,382 === ===== ======= ======
6 7 THE GYMBOREE CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 6. FOREIGN CURRENCIES As of October 30, 1999, we had forward foreign contracts of $0.7 million, $15.0 million and $12.4 million to hedge Japanese yen, Canadian dollars and British pound sterling, respectively. The amounts represent the U.S. dollar equivalent to buy or sell foreign currencies. 7. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities at fair value and is effective for financial statements for fiscal years beginning after June 15, 2000. Management does not believe that the adoption of this statement will have a significant effect on the consolidated financial statements of Gymboree. 8. SPECIAL CHARGES During 1999, Gymboree incurred special charges of $13.5 million, $2.0 million of which is included in cost of goods sold for the thirty-nine weeks ended October 30, 1999. These charges, which primarily resulted from the implementation of a brand improvement strategy, include the write off and expense for the modifications of all store interiors and removal of proprietary signage bearing the old trademark, the impairment reserve for store assets and software write off discussed in Note 3, and the disposal of inventory which does not meet Gymboree's new fashion direction. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, (i) selected statement of operations data expressed as a percentage of net sales, (ii) the percentage change from the same period of the prior year in such selected statement of operations data and (iii) the number of stores open at the end of each such period:
AS A PERCENTAGE OF NET SALES ----------------------------------------------------- THIRTEEN THIRTY-NINE PERCENTAGE CHANGE WEEKS ENDED WEEKS ENDED IN DOLLAR AMOUNTS ------------------------- ------------------------- FROM 1998 TO 1999 OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31, ------------------- 1999 1998 1999 1998 13 WEEKS 39 WEEKS ----------- ----------- ----------- ----------- -------- -------- Net sales................................ 100.0% 100.0% 100.0% 100.0% (6)% 5% Cost of goods sold, including buying and occupancy expenses....................... (61.7) (63.9) (64.0) (63.4) (9) 6 ----- ----- ----- ----- Gross profit........................... 38.3 36.1 36.0 36.6 0 4 Selling, general and administrative expenses............................... (39.0) (36.7) (40.8) (35.6) (0) 21 Play and music income, net............... 0.6 0.5 0.5 0.4 (1) 28 ----- ----- ----- ----- Operating income (loss)................ (0.1) (0.1) (4.3) 1.4 (42) (407) Foreign exchange gains (loss), net....... (0.1) (0.1) (0.0) 0.0 (14) (256) Net interest income (expense)............ 0.2 (0.2) 0.1 0.2 189 153 ----- ----- ----- ----- Income (loss) before income taxes...... 0.0 (0.4) (4.2) 1.6 104 (388) Income tax (expense) benefit............. 0.0 0.1 1.6 (0.6) (104) 388 ----- ----- ----- ----- Net income (loss)...................... 0.0% (0.3)% (2.6)% 1.0% 104% (388)% ===== ===== ===== ===== Number of stores at end of period........ 602 548 602 548
THIRTEEN WEEKS ENDED OCTOBER 30, 1999 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER 31, 1998 NET SALES Net sales for the third quarter of 1999 totaled $107.2 million as compared to $114.0 million for the same period last year. The 40 stores opened in 1999, in addition to the 20 stores that have relocated or expanded in 1999, provided incremental sales of $5.5 million. Sales for stores opened, relocated or expanded in 1998, but not qualifying as comparable stores, increased $3.7 million from the prior year. Comparable store sales decreased 16% or $16.0 million in the third quarter. The decline in comparable store sales was primarily due to lower average store inventory in 1999 and the transition associated with our brand improvement. GROSS PROFIT Gross profit for the thirteen weeks ended October 30, 1999 was $41.1 million and flat as compared to the same period last year. As a percentage of net sales, the third quarter gross profit increased to 38.3% vs. 36.1% in the same period last year. This increase reflected a higher level of full price selling accompanied by fewer markdowns, and was slightly offset by the increase in European stores, which have a lower gross profit than the U.S. due to higher occupancy expense, and the buying expense associated with opening our Zutopia stores. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") principally consists of non-occupancy store expenses, corporate overhead and distribution expenses. For the third quarter of 1999, SG&A expenses increased to 39.0% of net sales from 36.7% of net sales in 1998. The increase in total SG&A expenses, as a percentage of net sales, was primarily attributable to the loss of leverage caused by lower average store sales related to the comparable sales decline as well as increased selling expenses associated with the opening of the Zutopia stores and the new initiatives. 8 9 PLAY AND MUSIC INCOME Play and music income totaled $600,000 during the third quarter of 1999 as compared to $608,000 for the same period last year. FOREIGN EXCHANGE LOSSES Net foreign exchange losses decreased to $97,000 for the third quarter of 1999 compared to a loss of $113,000 in the third quarter of 1998. These losses resulted from currency fluctuations in intercompany transactions between our U.S. operations and foreign subsidiaries. NET INTEREST INCOME (EXPENSE) Interest income increased to $427,000 for the third quarter of 1999 from $114,000 for the third quarter of 1998. Interest expense totaled $247,000 for the third quarter of 1999 as compared to interest expense of $316,000 for the same period last year. The interest expense for the third quarter 1999 relates to long term debt incurred in 1998, and the third quarter 1998 interest expense relates to short-term borrowings. INCOME TAX Our effective tax rate for the third quarters of fiscal 1999 and 1998 was 37%. THIRTY-NINE WEEKS ENDED OCTOBER 30, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998 NET SALES Net sales for the thirty-nine weeks ended October 30, 1999 increased 5% to $332.9 million compared to $316.9 million in the same period last year. The 40 stores opened in 1999, in addition to the 20 stores that have relocated or expanded in 1999, provided incremental sales of $11.6 million. Sales for stores opened, relocated or expanded in 1998, but not qualifying as comparable stores, increased $33.2 million from the prior year. Comparable store sales decreased 10% or $28.8 million in the thirty-nine weeks ended October 30, 1999. The decline in comparable store sales was primarily due to lower average store inventory and the transition associated with our brand improvement. GROSS PROFIT Gross profit for the thirty-nine weeks ended October 30, 1999 increased 4% to $120.0 million from $115.9 million in the same period last year. As a percentage of net sales, gross profit was 36.0% through the end of the third quarter of 1999 compared to 36.6% for the same period last year. Included in cost of goods sold for the thirty-nine week period ended October 30, 1999 was $2 million relating to disposal of inventory which does not meet Gymboree's new fashion direction. Additionally, the decrease in gross profit as a percentage of net sales was due to the increase in the number of European stores, which have a lower gross profit than the U.S. due to higher occupancy expense, and the buying expense associated with opening our Zutopia stores. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses ("SG&A") principally consists of non-occupancy store expenses, corporate overhead and distribution expenses. For the thirty-nine weeks ended October 30, 1999, SG&A expenses increased to 37.4% of net sales (excluding the special charges), compared to 35.6% of net sales in the same period last year. Special charges totaled $11.5 million including the write off and expense for the modifications of all store interiors and removal of proprietary signage bearing the old trademark and the impairment reserve for store assets and software write off discussed in note 3 of the Notes to Condensed Consolidated Financial Statements. Excluding the special charges, the increase in total SG&A expenses, as a percentage of net sales, was primarily attributable to the loss of leverage caused by lower average store sales related to the comparable sales decline as well as increased selling expenses associated with the opening of the Zutopia stores and the new initiatives. 9 10 PLAY AND MUSIC INCOME Play and music income increased 28% to $1,759,000 for the thirty-nine weeks ended October 30, 1999 from $1,369,000 for the same period last year. The increase is largely due to new franchise sales, enrollment growth in both franchised and corporate centers and increased play product sales. FOREIGN EXCHANGE GAINS (LOSSES) The net foreign exchange loss totaled $50,000 for the first nine months of 1999 compared to a net gain of $32,000 for the same period last year. These gains and losses resulted from currency fluctuations in intercompany transactions between our U.S. operations and foreign subsidiaries. NET INTEREST INCOME (EXPENSE) Interest income was $1,203,000 for the thirty-nine weeks ended October 30, 1999 vs. $490,000 for the same period last year. Interest expense totaled $814,000 for the thirty-nine weeks ended October 30, 1999, compared to $336,000 for the same period last year. The interest expense for 1999 relates to long term debt incurred in 1998, and the 1998 interest expense relates to short-term borrowings. INCOME TAX Our effective tax rate for the first nine months of 1999 and 1998 was 37%. FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $33.6 million compared to a cash outflow of $13.3 million in the prior year. The increase in cash provided by operating activities was primarily due to a decrease in inventory levels. Cash used in investing activities increased to $28.9 million in 1999 as compared to $21.9 million in 1998. This increase resulted from the liquidation of securities in 1998, offset by a decrease in capital expenditures in 1999. Consistent with second quarter projections, Gymboree expects to incur incremental capital expenditures related to the brand improvement strategy of approximately $10.3 million over the next 9 to 12 months, which will be funded through internally generated funds. Including the brand improvement strategy, we estimate that capital expenditures for fiscal 1999 will be between $30.0 and $35.0 million, and will primarily be used to open 40 to 45 new domestic and international stores and to expand approximately 20 to 25 existing stores. Cash and cash equivalents were $32.7 million at October 30, 1999, an increase of $4.9 million from January 30, 1999. Working capital as of October 30, 1999 was $58.1 million compared to $76.3 million at January 30, 1999. As of July 30, 1999, Gymboree and its primary bank had agreed to the terms for a new unsecured credit facility. The new agreement extends the facility to May 31, 2000. The revised terms provide for an overall credit line of $60 million, reducing to $50 million on January 1, 2000 to the facility's expiration that may be used for issuance of commercial letters of credit, cash advances up to $15 million and standby letters of credit up to $8 million. Included within these terms is a continuation of the foreign exchange facility. The interest rate will be based on the bank's Reference Rate or LIBOR (London Interbank Offered Rate) plus a pre-determined spread. The credit facility contains quarterly and annual financial covenants, which requires us to maintain minimum tangible net worth, meet certain ratios and restricts capital expenditures. We anticipate that cash generated from operations, together with our existing cash resources and funds available from our current letters of credit and line of credit facilities, will be sufficient to satisfy our cash needs through at least fiscal 1999. 10 11 OTHER FACTORS THAT MAY AFFECT FUTURE PERFORMANCE This Form 10-Q contains certain forward-looking statements reflecting our current expectations, including statements regarding anticipated store openings, and future comparable store net sales, inventory, expense, earnings and liquidity levels. There can be no assurance that actual results will not vary materially from results projected in such forward-looking statements as a result of a number of factors, including competitive market conditions, levels of discretionary consumer spending, general economic conditions, the degree of promotional pricing activity by Gymboree, inventory levels, and our ability to successfully identify and respond to emerging children's fashion trends, to effectively monitor and control costs, and to effectively manage anticipated international and domestic growth. Other factors that may cause actual results to differ materially include those set forth in the reports that we file from time to time with the Securities and Exchange Commission. Other factors that may affect future performance include the following: COMPETITION The children's apparel segment of the specialty retail business is highly competitive. We compete on a national level with GapKids (a division of The Gap, Inc.) and certain leading department stores as well as certain discount retail chains such as Kids 'R' Us (a division of Toys 'R' Us, Inc.). We also compete with a wide variety of local and regional specialty stores and with certain other retail chains. Many of these competitors are larger and have substantially greater financial, marketing and other resources than we do. Increased competition may reduce sales and gross margins, increase operating expenses and decrease profit margins. We may not be able to compete successfully in the future. INVENTORY LEVELS The inventory level at the end of the third quarter of 1999 was down from the prior year. We believe that with tight inventory management we will be able to mitigate the risk that inventory overages will result in markdown activity exceeding our plan. However, a substantial decline in our sales or in business conditions in general could negatively impact our ability to move merchandise through our stores and result in excess inventory on hand. FOREIGN OPERATIONS During the third quarter of 1999, we continued to expand our operations by opening one additional store in the UK and one store in Canada. This brings the total number of stores in Canada and Europe to 19 and 29, respectively. As a result, our business is subject to the risks generally associated with doing business abroad, such as foreign governmental regulations, foreign consumer preferences, currency fluctuations, political unrest, disruptions or delays in shipments and changes in economic conditions in countries in which we operate our stores. These factors, among others, could influence our ability to sell our products in these international markets. If any such factors were to render the conduct of business in a particular country undesirable or impractical, there could be a material and adverse effect on our results of operations and financial condition. ZUTOPIA During 1999, Gymboree launched a new retail concept, Zutopia, which introduced certain new products, and is targeted for children ages 6 to 12 years. Zutopia represents a significant shift in concept, design and target market demographics from our traditional products. These products may have shorter life cycles, thereby requiring more frequent product introductions than Gymboree's traditional product line. Further, these products and the introduction of more products could dilute Gymboree's image as a leading supplier of children's apparel in the newborn to 7 years age range and lead to a reduced demand for our existing products. 11 12 E-COMMERCE Gymboree sells products over the Internet, at www.gymboree.com. We devote management and systems resources to support and expand this business. Our success depends on our ability to offer desirable products and to fulfill web orders efficiently. Failure on our part to conduct this business efficiently could result in missed sales or consumer complaints. YEAR 2000 Most companies could face a potentially serious information systems problem because many software applications and operational programs written in the past were designed to handle date formats with two-digit years and thus may not properly recognize calendar dates beginning in the Year 2000. This problem could result in computers either outputting incorrect data or shutting down altogether when attempting to process a date such as "01/01/00". Our Year 2000 initiative extends throughout our entire organization and includes all operating functions. Managing this effort on a regular basis is our Year 2000 Project Office, which reports to a member of the Executive Committee. It is through this office that various roles and accountabilities regarding Year 2000 readiness have been established. Each of Gymboree's business units has been directed to work on Year 2000 projects and assemble teams to identify and implement plans to help mitigate potential problems. STATE OF READINESS All of Gymboree's mission critical information technology and non-information technology systems have been inventoried, ranked in terms of risk, and analyzed as to their Year 2000 readiness. We have completed an Enterprise Master Plan, Enterprise Test Plan, Configuration Management Plan, and Quality Assurance Plan. A Test Data Center has been constructed and is being used to remediate and test all mission critical systems. Our business processes are organized into eighteen groups of applications. As planned we have completed all remediation and testing of all critical systems for all groups. COSTS Based on best estimates, the total cost of the Year 2000 readiness initiative which covers fiscal years 1998 and 1999 is approximately $2.0 - $3.0 million, of which $2.4 million has been expensed to date. $0.3 million was expensed for the third quarter ended October 30, 1999. All costs will be paid from Gymboree's operating funds. RISKS OF YEAR 2000 ISSUES The area of greatest risk to our business operations is ensuring the readiness of our critical trading partners. We have surveyed all of our critical trading partners to ascertain their Year 2000 readiness. To date, a majority of our trading partners have responded with a formal plan to be Year 2000 compliant. Failure of Year 2000 compliance by our trading partners could result in the termination of their services. There can be no assurance that the Year 2000 problem will not have a material adverse effect on our business, operating results or financial condition. CONTINGENCY PLANS Contingency plans have been developed for each mission critical application. The contingency plan for trading partners that were not Year 2000 compliant by January 1999 was to obtain alternate suppliers that are Year 2000 compliant. This plan was communicated to our trading partners during the surveying process. As of the end of the third quarter of fiscal 1999, we have continued implementation of our contingency plan for trading partners that are not Year 2000 compliant. Further, we have developed Risk Management plans for calendar and fiscal 2000 year end processing to ensure uninterrupted business flow. However, there can be no assurance that such contingency plans will remediate all Year 2000 issues which we might ultimately encounter. 12 13 ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Gymboree enters into forward foreign exchange contracts to hedge certain inter-company loans denominated in foreign currencies (principally Japanese yen, Canadian dollars and British pounds sterling). The term of the forward exchange contracts is generally less than 90 days. The purpose of our foreign currency hedging activities is to protect us from the risk that the eventual dollar net cash inflow resulting from the repayment of certain inter-company loans from our foreign subsidiaries will be adversely affected by changes in exchange rates. The table below summarizes by major currency the contractual amounts of our forward exchange contracts in U.S. dollars. Foreign currency amounts are translated at rates current at the reported date. The amounts represent the U.S. dollar equivalent of commitments to buy or sell foreign currencies.
OCTOBER 30, 1999 ---------------- (IN MILLIONS) Japanese yen.......................................... $ 0.7 Canadian dollars...................................... 15.0 British pounds sterling............................... 12.4 ----- Total....................................... $28.1 =====
13 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Gymboree has agreed to settle two lawsuits brought against us relating to sourcing of products from Saipan (Commonwealth of Northern Mariana Islands). The settlement is subject to court approval, which has not yet been granted. Under the terms of the settlement, Gymboree will make payments for several purposes, including to class members, and to fund an independent monitoring program in Saipan. The new monitoring program includes the implementation of an independent monitoring organization to ensure that factories comply with all applicable laws. Gymboree's payment to establish the monitoring fund is partially covered by insurance, and is not expected to have an adverse material effect on our business. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11 Computation of Net Income (Loss) per Share 27 Financial Data Schedule
(b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended October 30, 1999. 14 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE GYMBOREE CORPORATION (Registrant) Date: December 14, 1999 By: /s/ LAWRENCE H. MEYER ------------------------------------ Lawrence H. Meyer Chief Financial Officer (Principal financial and accounting officer of the registrant) 15 16 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 11 Computation of Net Income (Loss) per Share 27 Financial Data Schedule
16 EX-11 2 COMPUTATION OF NET INCOME (LOSS) PER SHARE 1 EXHIBIT 11 THE GYMBOREE CORPORATION COMPUTATION OF NET INCOME (LOSS) PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
13 WEEKS ENDED 39 WEEKS ENDED ------------------------ ------------------------- OCT. 30 OCT. 31 OCT. 30 OCT. 31 1999 1998 1999 1998 -------- -------- -------- -------- NET INCOME (LOSS) $ 10 $ (273) $ (8,760) $ 3,044 ======== ======== ======== ======== Weighted average number of shares outstanding during the period: Common Stock 24,345 24,172 24,299 24,153 Add incremental shares from assumed exercise of stock options (1) 25 - - 60 -------- -------- -------- -------- Weighted average common and common equivalent shares outstanding 24,370 24,172 24,299 24,213 ======== ======== ======== ======== BASIC NET INCOME (LOSS) PER SHARE $ 0.00 $ (0.01) $ (0.36) $ 0.13 ======== ======== ======== ======== DILUTED NET INCOME (LOSS) PER SHARE $ 0.00 $ (0.01) $ (0.36) $ 0.13 -------- -------- -------- --------
(1) Options to purchase weighted average shares totaling 15 and 88 for the 13 weeks ended October 31, 1998 and the 39 weeks ended October 30, 1999, respectively, were not included in the computation of diluted income per share because to do so would have been antidilutive. EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JAN-29-2000 JAN-31-1999 OCT-30-1999 32,744 0 5,699 0 47,283 93,458 200,248 (62,115) 236,431 35,326 0 0 0 27,542 132,752 236,431 107,235 107,235 66,124 107,901 0 0 0 17 7 10 0 0 0 10 0 0
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